Step 4: standalone selling price and allocating the transaction price

• Determine standalone selling price from observable prices or an estimation method
• Identify when the residual approach is permitted
• Allocate a discount or variable consideration to fewer than all performance obligations
• Allocate later changes in the transaction price

The allocation objective

The objective is to allocate the transaction price to each performance obligation in an amount that depicts the consideration the entity expects for transferring that good or service. The default is the relative standalone selling price method: determine the SSP at contract inception of each distinct good or service and allocate in proportion (606-10-32-31).

Determining SSP

The SSP is the price at which the entity would sell the good or service separately to a customer. The best evidence is an observable price when the entity sells it separately in similar circumstances to similar customers. A list price can be a starting point, but if the entity routinely discounts from list, list is not the SSP.

When SSP is not directly observable, 606-10-32-33 requires an estimate that maximizes observable inputs and is applied consistently. 606-10-32-34 names suitable methods:

• Adjusted market assessment. Estimate what customers in the market would pay, including by reference to competitor prices adjusted for the entity's costs and margins.
• Expected cost plus a margin. Forecast costs to satisfy the obligation and add an appropriate margin.
• Residual. Total transaction price less the sum of observable SSPs of the other goods or services. Allowed only if the SSP is highly variable (sold to different customers for a broad range of amounts, so no representative price is discernible) or uncertain (not yet priced and never sold separately).

A combination of methods may be needed when two or more items have highly variable or uncertain SSPs. If the residual leaves zero or a token amount for an item the entity would never give away, test the result against the allocation objective in 606-10-32-28 before booking it.

SSP ranges and documentation

Many entities set SSP as a range based on a band around the median of standalone sales. If the contractual price for an item falls inside the band, it is used. If it falls outside, the entity uses a point in the band (such as the nearest end or the midpoint) as a consistent policy. Document the population, period, band width and how outliers were handled. An auditor tests the underlying sales data as well as the arithmetic.

Allocating a discount to some obligations

A discount exists when the sum of SSPs exceeds the transaction price. By default it is spread proportionately. Under 606-10-32-37, the entire discount goes to one or more, but not all, obligations only if all three criteria are met:

• the entity regularly sells each distinct good or service (or bundle) on a standalone basis;
• it also regularly sells a bundle of some of those items at a discount to their SSPs; and
• the discount on that bundle is substantially the same as the contract discount, and observable evidence shows which obligations the discount belongs to.

If the discount is allocated entirely to some obligations, do that before using the residual approach for any remaining item.

Allocating variable consideration

Under 606-10-32-40, a variable amount (and later changes to it) goes entirely to one performance obligation, or to one distinct good or service in a series, when both conditions are met:

• the variable payment terms relate specifically to the entity's efforts for that obligation or item (or a specific outcome of it); and
• allocating the amount entirely there is consistent with the allocation objective, considering all obligations and payment terms.

This is how a monthly usage fee in a multi-year service contract ends up in the month the usage occurs.

Changes in transaction price

After inception, changes in the transaction price are allocated on the same basis as at inception (606-10-32-43). SSP is not re-estimated for an existing contract. Amounts allocated to satisfied obligations are recognized as revenue (or a reduction) in the period of change.

The allocation calculator and the SSP allocation workbook apply these rules.

Bundle discount allocated to two items