Determining stand-alone selling prices

Determining stand-alone selling prices is a logical step in determining the correct pricing of a contract under IFRS 15. To allocate the transaction price on a relative stand-alone selling price basis, an entity must first determine the stand-alone selling price of the distinct good or service underlying each performance obligation. Under the standard, this is the price at which an entity would sell a good or service on a stand-alone (or separate) basis at contract inception.

IFRS 15 indicates the observable price of a good or service sold separately provides the best evidence of stand-alone selling price. However, in many situations, stand-alone selling prices will not be readily observable. In those cases, the entity must estimate the stand-alone selling price. The standard includes the requirements on estimating stand-alone selling prices in IFRS 15 78 – 80. Determining stand-alone selling prices Determining stand-alone selling prices Determining stand-alone selling prices Determining stand-alone selling prices

The following block diagram illustrates how an entity might determine the standalone selling price of a good or service, which may include estimation:

Is the stand-alone selling price directly observable?

YES

NO

Use the observable price

Estimate the stand-alone selling price by maximising the use of observable inputs.

Possible estimation approaches include:

Adjusted market assessment approach

Expected cost plus a margin approach

Residual approach (in limited

circumstances)

Other reasonable estimation approaches that maximise observable inputs

It might be appropriate to use a combination

of these three approaches

Determining stand-alone selling prices Stand-alone selling prices are determined at contract inception and are not updated to reflect changes between contract inception and when performance is complete. For example, assume an entity determines the stand-alone selling price for a promised good and, before it can finish manufacturing and deliver that good, the underlying cost of the materials doubles. In such a situation, the entity would not revise its stand-alone selling price used for this contract. Determining stand-alone selling prices

However, for future contracts involving the same good, the entity would need to determine whether the change in circumstances (i.e., the significant increase in the cost to produce the good) warrants a revision of the stand-alone selling price. If so, the entity would use that revised price for allocations in future contracts. Determining stand-alone selling prices

Furthermore, if the contract is modified and that modification is treated as a termination of the existing contract and the creation of a new contract, the entity would update its estimate of the stand-alone selling price at the time of the modification. If the contract is modified and the modification is treated as a separate contract, the accounting for the original contact would not be affected (and the stand-alone selling prices of the underlying goods or services would not be updated), but the stand-alone selling prices of the distinct goods or services of the new, separate contract would have to be determined at the time of the modification. Determining stand-alone selling prices

How to

The best evidence of standalone selling price is the price that the entity charges for the good or service in a separate transaction with a customer. However, in many cases goods or services are sold exclusively as a package with other goods or services rather than on an individual basis (e.g. nonrenewable customer support).  In these cases, the standalone selling price must be estimated. The revenue standard does not prohibit any method for estimating the standalone selling price, as long as the estimation results in an accurate representation of what price would be charged in a separate transaction. Determining stand-alone selling prices

However, the standard does include the following three examples of suitable estimation methods: Determining stand-alone selling prices

  • Adjusted market assessment approach- considers the market in which the goods or services are sold and estimates the price that a customer of that market would be willing to pay. This method is suitable in situations where a competitor offers similar goods or services to use as a basis in the analysis.
  • Expected cost plus margin approach- considers the forecasted costs of fulfilling the performance obligation and adds margin at the amount the market would be willing to pay. This method may be most suitable in situations where (1) the demand for the good or service is unknown and information on the demand for similar goods or services from competitors is not available and/or (2) the direct fulfillment costs are clearly identifiable. Determining stand-alone selling prices
  • Residual approach- allows an entity that has observable standalone selling prices for one or more of the performance obligations to allocate the remaining transaction price to the goods or services that do not have observable standalone selling prices. The sum of the observable standalone selling prices are deducted from the total transaction price to find the residual estimated standalone selling price for the goods or services that do not have observable standalone selling prices. The residual approach can only be used if (1) the entity sells the same good or service to multiple customers for a wide variety of prices (highly variable) or (2) the entity has not established a price for that good or service and the good or service has not been sold previously on a standalone basis. The residual approach is intentionally limited to ensure that companies first attempt to utilize another acceptable method to reach a reasonable estimation.

Regardless of the approach used, the standalone selling price must be determined at the outset of the contract and should not be updated to reflect changes between contract inception and when performance is completed, with the exception of contract modifications (for more information see Construction Contract Modifications). Management needs to consider all information and maximize observable inputs in determining which approach to use. For example, although an entity may not sell an item on a standalone basis or have a price for that item, it should first consider any available information from competitors to make an estimate before relying on the residual approach.

Determining stand-alone selling prices

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