1.7 Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract (Chapter 7 of the Roadmap)
Step 4 requires an entity to allocate the transaction price determined in step 3 to the performance
obligations identified in step 2 by using the following approaches:
- Allocating the transaction price to the performance obligations on the basis of the stand-alone selling price (see Section 7.2).
- Allocating a discount to one or more, but not all, of the performance obligations in the contract (see Section 7.4).
- Allocating variable consideration to one or more, but not all, of the distinct goods or services in the contract (see Section 7.5).
- Allocating changes in the transaction price to the performance obligations in the contract (see Section 7.6).
Under the guidance, when a contract contains more than one performance
obligation, an entity would generally allocate the transaction price
to each performance obligation on a relative stand-alone selling
price basis. The guidance states that the “best evidence of a
standalone selling price is the observable price of a good or
service when the entity sells that good or service separately in
similar circumstances and to similar customers.” If the good or
service is not sold separately, an entity must estimate the
stand-alone selling price by using an approach that maximizes the
use of observable inputs. Acceptable estimation methods include, but
are not limited to, (1) adjusted market assessment, (2) expected
cost plus a margin, and (3) a residual approach (when the
stand-alone selling price is not directly observable and is either
highly variable or uncertain). An entity would determine the
stand-alone selling price for a good or service at contract
inception and would not reassess or update its determination of the
stand-alone selling price thereafter unless the contract is
modified.
The guidance indicates that if certain conditions are met, there are limited
exceptions to this general allocation requirement. When those conditions are met, a
discount or variable consideration must be allocated to one or more, but not all, of
the performance obligations in a contract.
Changes in the transaction price (e.g., changes in an estimate of variable consideration) after contract
inception would be allocated to all performance obligations in the contract on the same basis (unless
the terms of the contract meet certain criteria that allow for allocation of variable
consideration to one or more, but not all, of the performance obligations).
The guidance allows entities to use a residual approach in allocating contract
consideration, but only when the stand-alone selling price of a good
or service is not directly observable and is either “highly variable
or uncertain.” An entity will need to use judgment in determining
whether these criteria are met.