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Chapter 7 — Step 4: Allocate the Transaction Price to the Performance Obligations

7.4 Allocation of a Discount

7.4 Allocation of a Discount

It is not uncommon for contracts containing multiple goods and services to include a discounted bundled price rather than the sum of the individual goods’ or services’ respective stand-alone selling prices (see the Codification example in Section 7.2). In accordance with the general allocation principle discussed in Section 7.2, the discounted transaction price is allocated proportionately to each distinct good and service on the basis of its relative stand-alone selling price. However, there may be instances in which the result of this allocation approach does not faithfully depict the amount of consideration to which the entity expects to be entitled in exchange for the underlying goods or services. That is, the allocation approach may result in revenue recognition that is inconsistent with the core principle in the revenue standard. This may occur, for example, if certain goods or services are routinely sold at a very low margin while others are routinely sold at a very high margin. An entity may routinely discount the high-margin goods or services but not discount the low-margin goods or services. Allocating a discount proportionately to these goods or services may result in an allocated amount that does not accurately depict the amount of consideration to which the entity expects to be entitled in exchange for the goods or services. Consequently, ASC 606-10-32-37 provides an exception for allocating a discount to one or more, but not all, distinct goods or services in a contract if certain criteria are met.