ASC 606 Standalone Selling Price and Allocation: Audit Procedures and a Worked Example

When a contract has more than one performance obligation, ASC 606 requires the transaction price to be split across them on a relative standalone selling price basis (606-10-32-29). The audit risk sits in the standalone selling prices (SSPs) themselves: a small shift in one input moves revenue between a point-in-time obligation and an over-time one, and so between periods. This post walks through the rules, one allocation with the arithmetic shown, and the evidence to collect. For the five-step model overall, start with ASC 606 revenue recognition.

When does allocation apply at all?

Only when the contract has more than one performance obligation. Paragraph 606-10-32-30 says the allocation paragraphs 32-31 through 32-41 do not apply to a contract with a single performance obligation, except that the variable consideration allocation paragraphs (32-39 through 32-41) can apply to a series of distinct goods or services treated as one obligation. Confirm first that management's identification of performance obligations is right, because an extra or missing obligation changes every number below.

What counts as evidence of a standalone selling price?

Paragraph 606-10-32-32 defines SSP as the price at which the entity would sell the promised good or service separately to a customer. The best evidence is the observable price when the entity sells that item separately in similar circumstances to similar customers. A contractually stated price or list price "may be (but shall not be presumed to be)" the SSP.

That last phrase drives the audit test. A price list is a starting point. Compare it to actual standalone invoices.

How is SSP estimated when it is not observable?

Paragraph 32-33 requires the entity to estimate SSP at an amount that meets the allocation objective, considering all reasonably available information (market conditions, entity-specific factors, customer or class of customer), maximizing observable inputs and applying methods consistently in similar circumstances. Paragraph 32-34 lists suitable methods, and the list is not exhaustive:

• Adjusted market assessment: estimate what customers in the market would pay, which can include competitor prices adjusted for the entity's costs and margins.
• Expected cost plus a margin: forecast the cost of satisfying the obligation and add an appropriate margin.
• Residual: total transaction price less the observable SSPs of the other items. It is allowed only if the same item is sold to different customers at or near the same time for a broad range of amounts, or the item has not been priced and has never been sold standalone (32-34(c)).

Paragraph 32-35 allows a combination of methods when two or more items have highly variable or uncertain SSPs, and requires the entity to check that the resulting allocation still meets the objective in 32-28.

Worked example: license, installation and support

A customer signs one contract for $100,000 covering a software license, installation, and one year of support. Management's SSPs:

The sum of the SSPs ($120,000) exceeds the promised consideration ($100,000), so the customer received a $20,000 discount. Under 606-10-32-36 the discount is allocated proportionately to all obligations unless observable evidence shows it belongs to some of them. Proportionate allocation is the arithmetic above: each item receives $100,000 x its SSP / $120,000. The license, recognized at a point in time, gets $58,333.33; support is recognized over the year; installation as performed.

What if the discount belongs to only part of the contract?

Paragraph 32-37 allows the whole discount to go to one or more, but not all, obligations only if all three conditions hold: the entity regularly sells each item standalone; it also regularly sells a bundle of some of the items at a discount; and the bundle discount is substantially the same as the contract discount, with the bundle analysis giving observable evidence of where the discount belongs.

Suppose installation and support are regularly sold together for $30,000 (their SSPs total $50,000, a $20,000 discount), and the license is regularly sold alone at $70,000. The bundle discount equals the contract discount, so the license is allocated $70,000 and the $30,000 for the bundle is split by relative SSP: installation $12,000 ($30,000 x 20/50) and support $18,000 ($30,000 x 30/50). Paragraph 32-38 says this discount allocation comes before any use of the residual approach.

How sensitive is the result?

If support's SSP is revised from $30,000 to $36,000, total SSP becomes $126,000 and the license allocation falls to $55,555.56, support rises to $28,571.43 and installation falls to $15,873.02. A $6,000 change in one estimate moved $2,777.78 out of point-in-time revenue. Put this sensitivity in the file for any estimate-driven SSP.

Audit procedures for the allocation

Treat the SSP as an accounting estimate and apply AU-C 540. The steps below fit that framework.

1. Test the identification of obligations. Read the contract and tie each promised item to management's list.
2. Test observable SSPs. Select standalone sales of each item in the period, from invoices rather than the price list, and recompute the range and median. Check that the customers and circumstances are comparable to the contract being tested.
3. Evaluate the estimation method. Confirm it is one of the 32-34 methods or a reasoned combination, applied consistently across similar contracts and from prior years. Recompute cost-plus inputs from cost records.
4. Test the residual approach. If used, obtain evidence that one of the two 32-34(c) criteria is met. Residual used by habit is a finding.
5. Test discount treatment. If management allocated a discount to part of the contract, obtain the standalone and bundle sales that satisfy 32-37(a) to (c).
6. Recalculate the allocation and agree allocated amounts to the revenue schedule and the deferred revenue rollforward.
7. Evaluate bias. Compare SSPs to prior years and to other contracts. Movements that consistently pull revenue forward are a bias indicator under AU-C 540.32. See point estimate, range and management bias.

Frequently asked questions

Do SSPs have to be updated each period?

Paragraph 32-31 sets SSP at contract inception, and 32-43 says subsequent changes in the transaction price are allocated on the same basis as at inception. SSPs are not remeasured for allocation of existing contracts; the policy for setting new SSPs should be reviewed regularly for new contracts.

Can the contract price be the SSP?

Only if observable evidence supports it. The standard says a stated price may be, but is not presumed to be, the SSP.

What documentation should the file hold?

The SSP memo, the standalone sales data behind it, the allocation recomputation for each tested contract, and the conclusion on bias. A SaaS multi-element example shows the same steps applied to subscription and services bundles.

Sources

• FASB, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), paragraphs 606-10-32-28 to 32-43: https://viewpoint.pwc.com/dt/us/en/fasb_financial_accou/asus_fulltext/2014/asu_201409revenue_fr/asu_201409revenue_fr_US/asu_201409revenue_fr_US.html
• AICPA, AU-C Section 540, Auditing Accounting Estimates and Related Disclosures (paragraphs .21 to .26 and .32): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards

CORAA prepares ready-to-review audit files for US CPA firms from client books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error