Company A sells a product to Company B. Company B makes a claim against Company A, using a performance clause in the original product contract signed. Company A disputes the claim and disagrees with the contractual interpretation, but agrees to provide a future discount in the amount of the claim. Company B agrees to the concession and signs an order that reflects the discount agreed upon. No products or services have been delivered against the agreed upon claim.

Should this agreement be reflected as a liability offset to income and reversed as revenue is taken on the future product/service revenue?

"Should this agreement be reflected as a liability offset to income and reversed as revenue is taken on the future product/service revenue?"

I'm not sure what you mean by that - offsetting is usually only allowed under certain circumstances, but it depends on the Accounting standards you're using. Depending on the timescale for Company B using up the agreed discount I'd say that Company A needs to create a provision for the amount it has agreed to pay, and Company B creates a deferred Debtor for the same amount.

"Should this agreement be reflected as a liability offset to income and reversed as revenue is taken on the future product/service revenue?"

I'm not sure what you mean by that - offsetting is usually only allowed under certain circumstances, but it depends on the Accounting standards you're using. Depending on the timescale for Company B using up the agreed discount I'd say that Company A needs to create a provision for the amount it has agreed to pay, and Company B creates a deferred Debtor for the same amount.

Thank you for your response. I was being imprecise, I should have written, "credit liability, debit income"

Ah, I see what you mean. Company A should create a provision for the amount of the claim as it hasn't been used yet but a liability to honour it exists. It's not a debit to income though. It would be:

Dr: Compensation claim (in the I&E)
Cr: Provision for compensation claim (balance sheet)

As it's used:

Dr: Provision for compensation claim
Cr: Receivables: Company B