Stand-alone selling price

Exact wording: Stand-alone selling price of a good or a service.

The price at which an entity would sell a promised good or service separately to a customer.

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. non-renewable 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.

However, the standard does include the following three examples of suitable estimation methods:IAS 1 The best and proven breached loan accounting

  • 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.
  • 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.

Example – Allocation of variable consideration (IFRS 15 IE178-IE187)

An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y), which the entity determines to represent two performance obligations each satisfied at a point in time. The stand-alone selling prices of Licences X and Y are CU800 and CU1,000, respectively.

Case A—Variable consideration allocated entirely to one performance obligation

The price stated in the contract for Licence X is a fixed amount of CU800 and for Licence Y the consideration is three per cent of the customer’s future sales of products that use Licence Y. For purposes of allocation, the entity estimates its sales-based royalties (ie the variable consideration) to be CU1,000, in accordance with IFRS 15 53.

To allocate the transaction price, the entity considers the criteria in IFRS 15 85  and concludes that the variable consideration (ie the sales-based royalties) should be allocated entirely to Licence Y.

The entity concludes that the criteria in IFRS 15 85 are met for the following reasons:

  1. The variable payment relates specifically to an outcome from the performance obligation to transfer Licence Y (ie the customer’s subsequent sales of products that use Licence Y).
  2. Allocating the expected royalty amounts of CU1,000 entirely to Licence Y is consistent with the allocation objective in IFRS 15 73. This is because the entity’s estimate of the amount of salesbased royalties (CU1,000) approximates the stand-alone selling price of Licence Y and the fixed amount of CU800 approximates the stand-alone selling price of Licence X. The entity allocates CU800 to Licence X in accordance with IFRS 15 86. This is because, based on an assessment of the facts and circumstances relating to both licences, allocating to Licence Y some of the fixed consideration in addition to all of the variable consideration would not meet the allocation objective in IFRS 15 73.

The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the transfer of Licence Y, the entity does not recognise revenue because the consideration allocated to Licence Y is in the form of a sales-based royalty. Therefore, in accordance with IFRS 15 B63, the entity recognises revenue for the sales based royalty when those subsequent sales occur.

When Licence X is transferred, the entity recognises as revenue the CU800 allocated to Licence X.

Case B—Variable consideration allocated on the basis of stand-alone selling prices

The price stated in the contract for Licence X is a fixed amount of CU300 and for Licence Y the consideration is five per cent of the customer’s future sales of products that use Licence Y. The entity’s estimate of the sales-based royalties (ie the variable consideration) is CU1,500 in accordance with IFRS 15 53.

To allocate the transaction price, the entity applies the criteria in IFRS 15 85 to determine whether to allocate the variable consideration (ie the sales-based royalties) entirely to Licence Y. In applying the criteria, the entity concludes that even though the variable payments relate specifically to an outcome from the performance obligation to transfer Licence Y (ie the customer’s subsequent sales of products that use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the principle for allocating the transaction price.

Allocating CU300 to Licence X and CU1,500 to Licence Y does not reflect a reasonable allocation of the transaction price on the basis of the stand-alone selling prices of Licences X and Y of CU800 and CU1,000, respectively. Consequently, the entity applies the general allocation requirements in IFRS 15 76-80.

The entity allocates the transaction price of CU300 to Licences X and Y on the basis of relative stand-alone selling prices of CU800 and CU1,000, respectively. The entity also allocates the consideration related to the sales based royalty on a relative stand-alone selling price basis.

However, in accordance with IFRS 15 B63, when an entity licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity cannot recogniseRoyalty income intellectual propertyrevenue until the later of the following events: the subsequent sales occur or the performance obligation is satisfied (or partially satisfied).

Licence Y is transferred to the customer at the inception of the contract and Licence X is transferred three months later. When Licence Y is transferred, the entity recognises as revenue the CU167 (CU1,000 ÷ CU1,800 × CU300) allocated to Licence Y. When Licence X is transferred, the entity recognises as revenue the CU133 (CU800 ÷ CU1,800 × CU300) allocated to Licence X.

In the first month, the royalty due from the customer’s first month of sales is CU200. Consequently, in accordance with IFRS 15 B63, the entity recognises as revenue the CU111 (CU1,000 ÷ CU1,800 × CU200) allocated to Licence Y (which has been transferred to the customer and is therefore a satisfied performance obligation).

The entity recognises a contract liability for the CU89 (CU800 ÷ CU1,800 × CU200) allocated to Licence X. This is because although the subsequent sale by the entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been satisfied.

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Significant financing component

Some contracts contain a financing component when payment by a customer occurs either significantly before or after the performance obligations. This can, in effect, provide the customer or the seller with a significant financing benefit. Stand-alone selling price

Where there is a significant financing component, IFRS 15 requires: Stand-alone selling price

In separating out a financing component, the objective is to recognise revenue that reflects the cash selling price as if the customer had paid the consideration at the same time the goods or services are transferred (IFRS 15 61). Stand-alone selling price Stand-alone selling price Stand-alone selling price

All relevant facts and circumstances should be considered in assessing whether a contract contains a significant financing component, including (IFRS 15 61):

  • the difference, if any, between the promised consideration and cash selling price of the promised goods or services Stand-alone selling price
  • the combined effect of the expected length of time to receive payment and prevailing relevant market interest rates. Stand-alone selling price

A contract does not have a significant financing component if (IFRS 15 62): Stand-alone selling price

  • payment is received in advance and the timing of the transfer of those goods or services is at the discretion of the customer (e.g. customer loyalty points);
  • a substantial amount of the consideration is variable and the amount or timing varies on the basis of a future event not substantially within the control of the customer or the entity (e.g. sales-based royalty); or Stand-alone selling price Stand-alone selling price Stand-alone selling price
  • the difference between the promised consideration and the cash selling price of the good or service, arises from non-finance reasons (e.g. retention payments held back to protect against either party not completing its obligations under the contract) Stand-alone selling price

When adjusting the transaction price, an entity should use a discount rate that would be used in a separate financing transaction between the entity and the customer at contract inception (IFRS 15 64). This applies to payments received both in advance (i.e. interest revenue) and in arrears (i.e. interest expense). Stand-alone selling price

The discount rate should reflect the credit characteristics of the party that receives financing, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. Further, the discount rate should not be updated for changes in circumstances (e.g. interest rate changes, change in the customer’s credit risk assessment etc.) (IFRS 15 64).

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Significant financing component – customer pays in arrears

Entity B contracts to provide a machine with payments from the customer over 2 years in monthly instalments of $4,500 totalling $108,000. The cash selling price of the machine would be $100,000 where payment is on delivery.

Analysis
There is a difference of $8,000 between the cash selling price of $100,000 and the promised consideration (total of monthly instalments) of $108,000. Entity B assesses this is the combined effect of the expected length of time to receive the full consideration and prevailing relevant market interest rates. Therefore Entity B determines the contract includes a financing component, though the contract does not explicitly refer to an interest charge.

The implicit rate is computed as 7.5% based on the cumulative interest ($8,000) and the settlement period. Entity B determines that the financing component is significant as it represents 8% of the selling price. Therefore an adjustment is required to adjust the time value of money.

Entity B recognises:

As a practical expedient, an entity need not adjust the transaction price if it expects to receive payment within 12 months of transferring the promised good or service (IFRS 15 63).

Non-cash consideration

Non-cash consideration (e.g. property, plant and equipment or a financial instrument) should be measured at fair value (IFRS 15 66). If an entity cannot reasonably estimate the fair value of non-cash consideration, it measures the non-cash consideration indirectly by reference to the stand-alone selling price of the promised goods or services (IFRS 15 67).

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Non-cash consideration received from a customer to facilitate fulfilment of the contract (e.g. materials or equipment) is recognised as revenue when the seller obtains control of the contributed goods or services (IFRS 15 69).

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Stand-alone selling price

Stand-alone selling price

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