Technology Highlights — Challenges Associated With Applying the New Revenue Standard: Establishing the Stand-Alone Selling Price as a Range
For public entities, the new revenue standard (ASC 6061) became effective for annual reporting periods beginning after December 15, 2017.
The standard is effective for all other entities for annual reporting periods beginning
after December 15, 2018. Early adoption is permitted for annual reporting periods
beginning after December 15, 2016.
While ASC 606 will affect organizations differently depending on their facts and
circumstances, we have identified certain aspects of its application that are especially
challenging for technology companies. The questions and answers (Q&As) below on
establishing the stand-alone selling price (SSP) as a range are the second installment
in a series intended to help technology entities better understand the new guidance,
particularly private organizations that are currently adopting the standard’s
requirements. (See Deloitte’s July 24, 2018, Technology
Alert for Q&As on termination rights.)
Executive Summary
Step 4 of the five-step process for recognizing revenue under ASC 606 requires
entities to determine the SSP for each performance obligation in a contract (to the
extent that there is more than one obligation) so that revenue may be allocated and
recognized in accordance with the allocation objective in ASC 606-10-32-28. When
pricing is steady and stand-alone sales of a good or service are common, the
determination of the SSP is likely to be straightforward and involve little to no
estimation. This exercise becomes more complex, however, when pricing of a good or
service varies from one transaction to another or when the stand-alone sales of a
particular good or service are rare or nonexistent.
Despite the level of complexity involved, ASC 606 requires entities to determine the
SSP for each performance obligation in a contract by considering all reasonably
available information and maximizing the use of observable inputs.
ASC 606 provides guidance on suitable methods for estimating the SSP. However, as
noted in paragraph BC268 of ASU
2014-09,2 the FASB “decided not to preclude or prescribe any particular method for
estimating [the SSP] so long as the estimate is a faithful representation of the
price at which the entity would sell the distinct good or service if it were sold
separately to the customer.”
Entities in the technology industry frequently use a range (as opposed to a
single-point estimate) when establishing the SSP. If a range is used, an entity must
assess the appropriateness of the range and how to allocate the transaction price.
If the stated selling prices for goods and services sold are outside the range, the
entity must apply a consistent accounting policy when allocating the transaction
price.
Guidance and Q&As
The FASB defines “standalone selling price” in ASC 606-10-20 and the ASC master
glossary as the “price at which an entity would sell a promised good or service
separately to a customer.” In the Codification’s definition, the FASB refers to the
term in the singular rather than the plural. In ASC 606, this word choice is further
emphasized in illustrative examples in which the SSP is always expressed as a
single-point observation or estimate of value (e.g., in Example 33 (ASC
606-10-55-256 through 55-258), the directly observable SSP of Product A is $50, the
estimated SSP of Product B under an adjusted market assessment approach is $25, and
the estimated SSP of Product C under an expected cost plus a margin approach is
$75).
Given the Codification’s definition of “standalone selling price,” some have
questioned whether an entity would be precluded from using anything other than a
single-point observation or estimate as the SSP (i.e., whether the guidance in ASC
606 precludes an entity from using a range of observations or estimates to establish
the SSP).3
Q&A 1-1 — Establishing the SSP as a Range
Question
Is it acceptable to establish the SSP of a promised good or service as a
range of amounts rather than as a singlepoint observation or estimate?
Answer
Yes. We believe that the SSP for a performance obligation does not need to be
a single amount and can be a range of amounts if the range is sufficiently
narrow (see Q&A 1-2 below) and the allocation of the transaction price
that results from the identified SSP is consistent with the general
allocation objective in ASC 606-10-32-28. That guidance states:
The objective when allocating the transaction price is for an entity
to allocate the transaction price to each performance obligation (or
distinct good or service) in an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange
for transferring the promised goods or services to the customer.
Q&A 1-2 — Determining the Appropriate Range
When a range is used to estimate the SSP, questions have arisen about how to
determine whether the range is truly indicative of the SSP.
The software industry has developed a practice of estimating the SSP as a
range by demonstrating that a certain number of observable transactions are
sufficiently clustered around a midpoint. For example, on the basis of an
analysis of historical data (i.e., observable pricing), an entity may use a
bell-shaped curve approach and determine that 75 percent of the sales of a
particular good are priced within 15 percent of $54 (the midpoint) in either direction. Therefore, the SSP range is $4.25
to $5.75. Both the distribution (i.e., width) of the range and the
percentage of transactions clustered around the midpoint within that
distribution (i.e., concentration) are important factors to consider in the
determination of whether a range is truly indicative of the SSP for a
particular good or service.5
Question
When a range is used to estimate the SSP, is there a maximum width or minimum
concentration that is considered to be indicative of the SSP?
Answer
No. ASC 606 does not prescribe or preclude any method for estimating the SSP.
Likewise, ASC 606 does not establish any bright lines regarding which values
or ranges are indicative of the SSP, including the width and concentration
of a given range. Instead, ASC 606 states that the SSP of each distinct good
or service should be a value “that depicts the amount of consideration to
which the entity expects to be entitled in exchange for transferring the
promised goods or services.”
Since the SSP determined by using a range must meet the allocation objective
in ASC 606-10-32-28, we believe that a particular range may not be
appropriate if the concentration is too low, the width is too great, or
both. For example, an SSP range in which 60 percent of transactions fall
within plus or minus 40 percent of a midpoint would most likely be too wide
to meet the allocation objective. Likewise, an SSP range in which 10 percent
of transactions fall within plus or minus 15 percent of a midpoint would
most likely be insufficient to meet the allocation objective. Entities must
balance the narrowness of distribution with the adequacy of the
concentration. That is, for an entity to establish the SSP by using a range,
both the concentration of transactions around the midpoint and the width
thereof must be reasonable. For example, we believe that if an entity has
maximized the use of observable inputs and has considered all reasonably
available information, the entity would most likely meet the allocation
objective in ASC 606-10-32-28 when using an SSP range that (1) encompasses
the majority of the relevant transactions (i.e., greater than 50 percent)
and (2) has a width extending no greater than 20 percent from the midpoint
in either direction. We also believe that if there are not enough
transactions within a reasonably narrow range, further disaggregation of the
data (e.g., by contract value and geography in addition to product type) may
be appropriate for determining reasonable SSP ranges.6
If the resulting range does not meet the allocation objective after an entity
has disaggregated the population of transactions, maximized the use of
observable inputs, and considered all reasonably available information, the
entity may need to apply other methods to establish the SSP.
Q&A 1-3 — Allocation Considerations
Question
How should an entity allocate the transaction price to multiple performance
obligations when the SSP is established as a range?
Answer
An entity that establishes the SSP as a range for a particular good or
service will need to implement and consistently apply a policy related to
when a contractually stated price does not represent the SSP (i.e., it is
not within the established SSP range) and reallocation is required. If a
contractually stated price falls within the established SSP range, it is
considered “at SSP,” and reallocation is therefore not necessary. By
contrast, if a contractually stated price is outside the SSP range,
reallocation is required. Accordingly, an entity will need to make a policy
election regarding the point in the range that it will use for allocating
the transaction price to each performance obligation on the basis of the
SSP. The following points are possible alternatives (not all-inclusive):
- The midpoint in the range.
- The outer point in the range, which would be:
- The high point in the range when the contractually stated price is greater than the high point in the range.
- The low point in the range when the contractually stated price is less than the low point in the range.
- The low point in the range.
- The high point in the range.
Once an entity elects a policy, the entity must ensure that the policy is
consistently applied and that the resulting allocation meets the allocation
objective in ASC 606-10-32-28.
Contacts
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Sandie Kim
Audit & Assurance Partner
National Office Accounting and
Reporting Services
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Jeff Jenkins
Audit and Assurance Senior Manager
National Office Accounting and
Reporting Services
|
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Mohana Dissanayake
Audit & Assurance Partner
U.S. Technology, Media &
Telecommunications Industry Leader
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Footnotes
1
FASB Accounting Standards Codification (ASC) Topic No. 606, Revenue From
Contracts With Customers.
2
FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts
With Customers (Topic 606).
3
For additional discussion about establishing the SSP as a range, see the
AICPA’s Audit and Accounting Guide Revenue Recognition.
4
Some entities may instead establish the SSP by using historical data
on discounts off the list price. For example, if an entity
consistently priced a particular good or service at 40 percent off
the list price, the entity may establish the midpoint as 60 percent
of the list price (100 percent less the 40 percent discount),
assuming that a sufficient number of transactions were discounted
within a reasonable range of that midpoint. This publication does
not address (1) the use of a discount off the list price to
establish the SSP range or (2) the determination of whether the use
of historical discounting data is sufficient and appropriate for
establishing the SSP
5
Some entities may instead apply a method similar to a bell-shaped
curve approach to determine a single-point estimate of the SSP of a
performance obligation (e.g., by using the midpoint within the
distribution as the SSP). This publication addresses only
circumstances in which the SSP is determined as a range.
6
The level of disaggregation may depend, in part, on an entity’s
pricing policies and practices.