Step 4 Allocate the transaction price to each specific performance obligation

Step 4 Allocate the transaction price

– to each specific performance obligation is the fourth step in the process required by IFRS 14 Revenue from contracts with customers in order to properly recognise revenue.

IFRS 15 The revenue recognition standard provides a single comprehensive standard that applies to nearly all industries and has changed revenue recognition quite significant.

IFRS 15 introduced a five step process for recognising revenue, as follows:Step 4 Allocate the transaction price

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to each specific performance obligation
  5. Recognise the revenue when the entity satisfies each performance obligation

After determining the transaction price in Step 3, companies in step 4 need to allocate that transaction price to the specific performance obligations identified in the contract. The transaction price is allocated to the performance obligations based on its relative standalone selling price. The standalone selling price for each good or service representing a performance obligation should be determined at the contract inception. [IFRS 15 74]

The standalone selling price is defined as the price that an entity would sell the good or service for if they sold it separately to a customer. The best evidence of that price is if the entity has separate actual sales to customers of a similar good or service.

Many times this easily observable selling price is not available, so an entity has to estimate it using observable inputs where possible. Some of these inputs include market conditions, entity-specific factors, and customer information. The methodology to estimate stand-alone selling price should be applied consistently in like circumstances. [IFRS 15 76 – 78] Step 4 Allocate the transaction price

In overview:

Step 4 Allocate the transaction price

At contract inception, the transaction price is generally allocated to each performance obligation on the basis of relative stand-alone selling prices.

However, variable consideration may be attributable to:

  • all of the performance obligations in a contract;
  • one or more, but not all, of the performance obligations in a contract; or
  • one or more, but not all, of the distinct goods or services promised in a series of distinct goods or services that form part of a single performance obligation.

An entity allocates a variable amount – and subsequent changes to that amount – entirely to a performance obligation, or to a distinct good or service that forms part of a single performance obligation, only if both of the following criteria are met:

  • the variable payment terms relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome of satisfying the performance obligation or transferring the distinct good or service); and
  • allocating the variable amount of consideration entirely to the performance obligation or distinct good or service is consistent with the new standard’s overall allocation principle when considering all of the performance obligations and payment terms in the contract.

1. Estimating stand-alone selling prices

An entity considers all information that is reasonably available when estimating a stand- alone selling price – e.g. market conditions, entity-specific factors, and information about the customer or class of customer. It also maximizes the use of observable inputs and applies consistent methods to estimate the stand-alone selling price of other goods or services with similar characteristics. [IFRS 15.78]

The new standard does not preclude or prescribe any particular method for estimating the stand-alone selling price for a good or service when observable prices are not available, but describes the following estimation methods as possible approaches. [IFRS 15.79]

Adjusted market assessment approach Evaluate the market in which goods or services are sold and estimate the price that customers in the market would be willing to pay
Expected cost plus a margin approach Forecast the expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service
Residual approach (limited application) Subtract the sum of the observable stand-alone selling prices of other goods or services promised in the contract from the total transaction price

After contract inception, an entity does not reallocate the transaction price to reflect subsequent changes in stand-alone selling prices. For a discussion of changes in a transaction price as a result of a contract modification, see contract modification. [IFRS 15.88]

Judgment will often be required
Often, there will not be observable selling prices for all of the goods or services in a contract with a customer. As a result, significant judgment will often be involved in estimating a stand-alone selling price. While some entities may already have robust processes in place, others will need to develop new processes with appropriate internal controls for estimating stand-alone selling prices of goods or services that are not typically sold separately.

Reasonably available information that may be considered in developing these processes might include:

  • reasonably available data points: e.g. costs incurred to manufacture or provide the good or service, profit margins, supporting documentation to establish price lists, third party or industry pricing, and contractually stated prices; Step 4 Allocate the transaction price
  • market conditions: e.g. market demand, competition, market constraints, awareness of the product, and market trends; Step 4 Allocate the transaction price
  • entity-specific factors: e.g. pricing strategies and objectives, market share, and pricing practices for bundled arrangements; and Step 4 Allocate the transaction price
  • information about the customer or class of customer: e.g. type of customer, geography, or distribution channels. Step 4 Allocate the transaction price

The following framework may be a useful tool for estimating and documenting the stand-alone selling price and for establishing internal controls over the estimation process. Step 4 Allocate the transaction price

Step 4 Allocate the transaction price

Estimated stand-alone selling prices for a particular good or service may change over time due to changes in market conditions and entity-specific factors. Although the estimated stand-alone selling prices for previously allocated arrangements are not revised, new arrangements should reflect current reasonably available information, including shifts in pricing, customer base, or product offerings. Step 4 Allocate the transaction price

The extent of the monitoring process and the frequency of necessary changes to estimated stand-alone selling prices will vary based on the nature of the performance obligations, the markets in which they are being sold, and various entity-specific factors. For example, a new product offering or sales in a new geographical market may require more frequent updates to the estimated stand- alone selling price as market awareness and demand change.

If there is a range of observable prices, then a stated contract price within the range may be an acceptable stand-alone selling price

In some cases, an entity may sell a good or service separately for a range of observable prices. When this is the case and the stated contract price is within a sufficiently narrow range of observable selling prices, it may be appropriate to use a stated contract price as the estimated stand-alone selling price of a good or service.

To determine whether this is appropriate, an entity assesses whether an allocation of the transaction price based on such an estimate would meet the allocation objective (see Allocate the transaction price below). As part of this assessment, an entity considers all information that is reasonably available (including market conditions, entity- specific factors, information about the customer or class of customer, how wide the range of observable selling prices is, and where the stated price falls within the observable range).

For example, Company D sells a license plus post-contract customer support (PCS) for 450. The stated price for PCS in the contract is 206. The same PCS is regularly sold separately for observable prices ranging from 200 to 210.

In this example, the stated price is within a reasonably narrow range of observable prices, and assuming that there are no other indicators that using the stated price would not meet the allocation objective, it may be appropriate to conclude that 206 is a reasonable estimate of the stand-alone selling price for the PCS that can be used in determining how to allocate the contract consideration of 450 between the license and PCS.

Using a range to estimate stand-alone selling prices

When estimating stand-alone selling prices, it may be acceptable to select from a range of prices, particularly when stand-alone selling prices would be expected to vary for similar types for customers. A range has to be narrow and based on an analysis that maximizes observable inputs and supports an assertion that any price within that range would be a valid pricing point if the performance obligation were sold on a stand-alone basis.

It would not be appropriate to establish a range by determining an estimated stand-alone selling price and then arbitrarily adding a range of a certain percentage on either side of the point estimate to create a reasonable range of estimated selling prices.

2. Using the residual approach to estimate stand-alone selling prices

The residual approach is appropriate only if the stand-alone selling price of one or more goods or services is highly variable or uncertain, and observable stand-alone selling prices can be established for the other goods or services promised in the contract. [IFRS 15.79(c)]

Something else -   Step 5 Recognise the revenue when the entity satisfies each performance obligation
Highly variable selling price The entity sells the same good or service to different customers at or near the same time for a broad range of prices
Uncertain selling price The entity has not yet established the price for a good or service and the good or service has not previously been sold on a stand-alone basis

Under the residual approach, an entity estimates the stand-alone selling price of a good or service on the basis of the difference between the total transaction price and the observable stand-alone selling prices of other goods or services in the contract.

If two or more goods or services in a contract have highly variable or uncertain stand- alone selling prices, then an entity may need to use a combination of methods to estimate the stand-alone selling prices of the performance obligations in the contract. For example, an entity may use:

  • the residual approach to estimate the aggregate stand-alone selling prices for all of the promised goods or services with highly variable or uncertain stand-alone selling prices; and then
  • another technique to estimate the stand-alone selling prices of the individual goods or services relative to the estimated aggregate stand-alone selling price that was determined by the residual approach. [IFRS 15.80]
Worked example – Estimating stand-alone selling price – Residual approach

Software Vendor M enters into a contract to provide rights to use Licenses S and T for three years, as well as PCS services for both licenses. The contract price is 100,000.

The PCS services comprise telephone technical support for each license. Software Vendor M has identified four performance obligations in the contract: License S, technical support for License S, License T, technical support for License T.

The stand-alone observable price of 12,500 is available for technical support for each of the licences, based on renewals that are sold separately.

However, the prices for which Software Vendor M has sold licenses similar to Licenses S and T have been in a broad range of amounts – i.e. selling prices of the licenses are highly variable and not directly observable.

Also, the level of discounting in the bundled arrangements varies based on negotiations with individual customers.

Software Vendor M estimates the stand-alone selling prices of the performance obligations in the contract as follows:

Product Stand-alone selling price Approach
Technical support for License S 12,500 Directly observable price
Technical support for License T 12,500 Directly observable price
Licenses S and T 75,000 Residual approach (100,000 – 12,500
– 12,500)
Total contract price 100,000

The residual approach is used to estimate the stand-alone selling price for the bundle of products (Licenses S and T) with highly variable selling prices. Because the licenses will transfer to the customer at different points in time, Software Vendor M then estimates the stand-alone selling price of each license. It does this by allocating the 75,000 to Licenses S and T based on its average residual selling price over the past year, as follows:

Product Average residual selling price Average residual price ratio Price allocated Calculation
License S 40,000 40% 30,000 75,000 x 40%
License T 60,000 60% 45,000 75,000 x 60%
Total 100,000 75,000

The residual approach is an estimation technique, not an allocation method

The residual approach under the new standard is used for estimating the stand- alone selling price of a promised good or service. This contrasts with current revenue recognition guidance, in which the residual approach is generally used to allocate consideration between deliverables – e.g. the consideration allocated to a delivered item is often calculated as the total consideration less the fair value of the undelivered item. [IFRS 15.BC271]

In contracts for intellectual property or other intangible products, a residual approach may be appropriate for determining a stand-alone selling price

Determining stand-alone selling prices may be particularly challenging for contracts for intellectual property or intangible assets if they are infrequently sold separately but are often sold in a wide range of differently priced bundles.

They often have little or no incremental cost to the entity providing those goods or services to a customer (so a cost plus a margin approach would be inappropriate) and may not have substantially similar market equivalents from which to derive a market assessment.

In these circumstances, the residual approach may be the most appropriate approach for estimating the stand-alone selling price.

The assessment of whether it is appropriate to use a residual approach should be made separately for each good or service

In some contracts, the price of one good or service may be calculated by reference to the price of another good or service. For example, in a contract containing intellectual property and PCS, the price of PCS may be established as a fixed percentage of the stated contract price of the license fee.

If this is the case and the stand-alone selling price of intellectual property is determined to be highly variable or uncertain, then an entity needs to consider all available data and evidence in determining the stand-alone selling price of the PCS rather than assuming that the fixed percentage of the contract price represents the stand-alone selling price of the PCS.

The entity considers, among other evidence, the price charged for actual renewals of PCS and stated renewal rates in other contracts with similar customers.

Consideration allocated is unlikely to be zero or close to zero

If applying the residual approach under the new standard results in no or very little consideration being allocated to a good or service, or to a bundle of goods or services, then this outcome may not be reasonable unless the contract is only partially in the scope of the new standard and another standard also applies to the contract (see IFRS 15 Partially in scope).

If an entity has determined in applying Step 2 of the model that a good or service is distinct, then by definition it has value to the customer on a stand-alone basis. In this case, an entity considers all reasonably available data and whether the stand-alone selling price of that good or service should be estimated using another method.

This contrasts with the use of the residual method to allocate consideration under current revenue recognition guidance, which may result in little or no consideration being allocated to the residual (delivered) item.

Conditions need to be met to use the residual approach, but its application is not restricted to delivered items
Unlike current guidance, the new standard requires specific conditions to be met for an entity to use the residual approach. In addition, under the new standard the residual approach is used as a technique to estimate the stand-alone selling price of a good or service rather than as an allocation method.

An entity in certain industries that use the residual approach may conclude that these conditions are not met, and therefore will need to estimate the stand-alone selling prices of goods or services using alternative methods. This will generally result in accelerated revenue recognition for the delivered good or service (e.g. a handset).

If it is appropriate to apply the residual approach under IFRS 15, then an entity is permitted to use it to estimate the stand-alone selling price of any promised goods or services in the contract, including undelivered items.

If it is appropriate to apply the residual approach under the new standard, then an entity is permitted to use it to estimate the stand-alone selling price of any promised goods or services in the contract, including undelivered items.

3. Allocate the transaction price

At contract inception, the transaction price is generally allocated to each performance obligation on the basis of relative stand-alone selling prices. However, when specified criteria are met, a discount (see Allocating a discount below) or variable consideration (see Allocating variable consideration below) is allocated to one or more, but not all, of the performance obligations in the contract. [IFRS 15.76]

After initial allocation, changes in the transaction price are allocated to satisfied and unsatisfied performance obligations on the same basis as at contract inception, subject to certain limited exceptions (see Changes in the transaction price below). [IFRS 15.88–89]

Worked example – Allocating the transaction price

Telco T enters into a 12-month phone contract in which a customer is provided with a handset and a data/calls/texts plan (the wireless plan) for a price of 35 per month. Telco T has identified the handset and the wireless plan as separate performance obligations.

Telco T sells the handset separately for a price of 200, which provides observable evidence of a stand-alone selling price. Telco T also offers a 12-month service plan without a phone that includes the same level of data/calls/texts for a price of 25 per month. This pricing is used to determine the stand-alone selling price of the wireless plan as 300 (25 x 12 months).

The transaction price of 420 (35 x 12 months)(a) is allocated to the performance obligations based on their relative stand-alone selling prices as follows.

Performance obligation Stand-alone selling prices Stand-alone selling price ratio Price allocated Calculation
Handset 200 40% 168 420 x 40%
Wireless plan 300 60% 252 420 x 60%
Total 500 100% 420

Note: a. In this example, the entity does not adjust the consideration to reflect the time value of money. This could happen if the entity concludes that the transaction price does not include a significant financing component, or if the entity elects to use the practical expedient (see significant financing component from Step 3 in the link).

Allocating the transaction price may be simple if the stated contract price is an acceptable estimate of the stand-alone selling price for all performance obligations in a contract

In some cases, an entity may determine that a stated contract price is an acceptable estimate of the stand-alone selling price for its performance obligations – e.g. if the stated contract price is within a narrow range of observable selling prices (see Estimating stand-alone selling prices below). If this is the case for all of the performance obligations in a contract, and there is no allocation of variable consideration or discounts, then this will simplify allocation of the transaction price.

Something else -   Identify the performance obligations in the contract

For example, Medical Device Company (MDC) sells a medical imaging device bundled with one year of PCS and 10 days of training to a customer for a total fee of 564,900. MDC determines that the medical imaging device, PCS, and training are separate performance obligations.

There is no variable consideration or discounts that are required to be allocated entirely to some but not all performance obligations.

The stated contract prices for the goods and services are as follows.

Goods and services Step 4 Allocate the transaction price Contract prices
Medical imaging device Step 4 Allocate the transaction price 506,000
One year PCS Step 4 Allocate the transaction price 50,000
Training Step 4 Allocate the transaction price 9,900
Total Step 4 Allocate the transaction price
564,900

MDC has established a narrow range of stand-alone selling prices for each of the goods and service identified as separate performance obligations.

Performance obligations Range of stand-alone selling prices
Medical imaging device Step 4 Allocate the transaction price 500,000 – 525,000
One year PCS Step 4 Allocate the transaction price 50,000 – 52,500
Training Step 4 Allocate the transaction price 960 – 990 per day

Because all of the stated contract prices fall within the narrow ranges, the stated contract price may be used to allocate the transaction price to the performance obligations. No further allocation is required.

Additional calculations are necessary if the stand-alone selling price of one or more performance obligations differs from its stated contract price

If the stated contract price for any of the performance obligations in the arrangement is not an appropriate estimate of stand-alone selling price, then it will be necessary for the entity to perform a relative selling price allocation of the transaction price.

This will be the case if, for example, the stated contract price falls outside the narrow range of stand-alone selling prices established for that performance obligation. When this is the case, an entity should apply a consistent policy to determine which price in the range of stand-alone selling prices should be used as the stand-alone selling price.

For example, an entity may consider a policy of using either (1) the midpoint of the range or (2) the outer limit of the range nearest to the stated contract price for that performance obligation. The appropriateness of the policy will be determined by whether the resulting allocation of the transaction price would meet the allocation objective.

This can be illustrated by varying the facts in the previous example. For example, assume that the total fee for the arrangement is 551,000, with stated contract prices of 520,000 for the medical imaging device, 26,000 for the PCS, and 5,000 for the training.

The company’s policy is to estimate stand-alone selling prices using the midpoint of its narrow range of observable selling prices for performance obligations whose stated contract prices fall outside the established ranges when performing the relative selling price allocation.

Because the stated prices for PCS and training fall outside their respective estimated selling price ranges, consistent with its policy, the company allocates the transaction price using the midpoint of the ranges, as follows.

Step 4 Allocate the transaction price

Notes
a. Stated contract price is used because it falls within the narrow range.
b. Mid-point of range 50,000 – 52,500 is used because stated contract price is outside the narrow range.
c. Mid-point of range 960 – 990 per day x 10 days is used because stated price is outside the narrow range.

4. Allocating a discount

If the sum of the stand-alone selling prices of a bundle of goods or services exceeds the promised consideration in a contract, then the discount is generally allocated proportionately to all of the performance obligations in the contract. However, this does not apply if there is observable evidence that the entire discount relates to only one or more but not all of the performance obligations. [IFRS 15.81]

This evidence exists, and a discount is allocated entirely to one or more, but not all, of the performance obligations, if the following criteria are met:

  • the entity regularly sells each distinct good or service, or each bundle of distinct goods or services, in the contract on a stand-alone basis;
  • the entity also regularly sells, on a stand-alone basis, a bundle (or bundles) of some of those distinct goods or services at a discount to the stand-alone selling prices of the goods or services in each bundle; and
  • the discount attributable to each bundle of goods or services is substantially the same as the discount in the contract, and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation(s) to which the entire discount in the contract belongs. [IFRS 15.82]

Before using the residual approach, an entity applies the guidance on allocating a discount. [IFRS 15.83]

Worked example – Allocating a discount – Transaction involving a customer loyalty program

Retailer R has a customer loyalty program that rewards a customer with 1 customer loyalty point for every 10 of purchases. Each point is redeemable for a 1 discount on any future purchases of the Retailer R’s products. During a reporting period, Customer C purchases products and gift cards for 1,200 and earns 100 points that are redeemable on future purchases.

The consideration is fixed, and the stand-alone selling price of the purchased products is 1,200 (1,000 for products and 200 for gift cards). Retailer R expects 95 points to be redeemed. Retailer R estimates a stand-alone selling price of 0.95 per point (totaling 95) on the basis of the likelihood of redemption.

The loyalty points provide a material right to Customer C that it would not receive without entering into the contract. Therefore, Retailer R concludes that the promise to provide the loyalty points is a performance obligation.

The sum of the stand-alone prices of 1,295 (1,000 in products, 200 in gift cards, and 95 in loyalty points) exceeds the promised consideration of 1,200. Retailer R needs to determine whether to allocate the discount to all or only some of the performance obligations. [IFRS 15.82–85]

Retailer R regularly sells both the gift cards and the products with loyalty points on a stand-alone basis. The amounts paid for the gift cards are equal to the stand-alone selling price.

Retailer R also regularly sells, on a stand-alone basis, the products and loyalty points in a bundle at substantially the same discount as under the contract being evaluated. As a result, Retailer R has evidence that the entire discount should be allocated to the promise to transfer the products and loyalty points, and not the gift card.

As a result, Retailer R determines that the discount relates entirely to the products and loyalty points. Retailer R allocates the transaction price to the products, gift cards, and loyalty points as follows.

Performance obligation Stand-alone selling price Price allocation Calculation
Gift cards 200 200
Products 1,000 913 1,000 x (1,000 / 1.095)
Loyalty points 95 87 1,000 x (95 / 1.095)
Total 1,295 1,200

Analysis required when a large number of goods or services are bundled in various ways

Some arrangements involve several different goods or services that may be sold in various bundles. In this case, an entity may need to consider numerous possible combinations of products to determine whether the entire discount in the contract can be allocated to a particular bundle.

This raises the question of how much analysis needs to be performed by an entity that sells a large number of goods or services that are bundled in various ways and for which the discount varies based on the particular bundle.

This analysis is required only if the entity regularly sells each good or service – or bundle of goods or services – on a stand-alone basis.

Therefore, if the entity regularly sells only some of the goods or services in the contract on a stand-alone basis, then the criteria for allocating the discount entirely to one or more, but not all, of the performance obligations are not met and further analysis is not required.

Determination of ‘regularly sells’ will be a key judgment

Under the guidance on allocating a discount entirely to one or more performance obligations, a bundle of goods or services has to be regularly sold on a stand- alone basis. An entity may need to establish a policy to define ‘regularly sells’.

The entity will need processes and related controls to monitor sales transactions and determine which bundles are regularly sold.

Something else -   Performance obligations software contracts

Analysis required when a large number of goods or services are bundled in various ways

Some arrangements involve several different goods or services that may be sold in various bundles. In this case, an entity may need to consider numerous possible combinations of products to determine whether the entire discount in the contract can be allocated to a particular bundle.

This raises the question of how much analysis needs to be performed by an entity that sells a large number of goods or services that are bundled in various ways and for which the discount varies based on the particular bundle.

This analysis is required only if the entity regularly sells each good or service – or bundle of goods or services – on a stand-alone basis.

Therefore, if the entity regularly sells only some of the goods or services in the contract on a stand-alone basis, then the criteria for allocating the discount entirely to one or more, but not all, of the performance obligations are not met and further analysis is not required.

Determination of ‘regularly sells’ will be a key judgment

Under the guidance on allocating a discount entirely to one or more performance obligations, a bundle of goods or services has to be regularly sold on a stand- alone basis. An entity may need to establish a policy to define ‘regularly sells’.

The entity will need processes and related controls to monitor sales transactions and determine which bundles are regularly sold.

5. Allocating variable consideration

Variable consideration (see Variable consideration and constraint in link) may be attributable to:

  • all of the performance obligations in a contract;
  • one or more, but not all, of the performance obligations in a contract – e.g. a bonus that is contingent on transferring a promised good or service within a specified time period; or
  • one or more, but not all, of the distinct goods or services promised in a series of distinct goods or services that form part of a single performance obligation – e.g. an annual increase in the price of cleaning services linked to an inflation index within a facilities management contract. [IFRS 15.84]

An entity allocates a variable amount – and subsequent changes to that amount – entirely to a performance obligation, or to a distinct good or service that forms part of a single performance obligation, only if both of the following criteria are met:

  • the variable payment terms relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome of satisfying the performance obligation or transferring the distinct good or service); and
  • allocating the variable amount of consideration entirely to the performance obligation or distinct good or service is consistent with the new standard’s overall allocation principle when considering all of the performance obligations and payment terms in the contract. [IFRS 15.85]
Worked example – Variable consideration allocated entirely to one performance obligation in the contract [IFRS 15.IE179-IE182 – Example 35 Case A]
Step 4 Allocate the transaction price

Company M enters into a contract with Customer N for two pieces of equipment, Equipment X and Equipment Y. Company M determines that Equipment X and Equipment Y represent two performance obligations, each satisfied at a point in time. The stand-alone selling prices of Equipment X and Equipment Y are 800 and 1,000, respectively.

The price stated in the contract for Equipment X is a fixed amount of 800. For Equipment Y, the price is 800 if the equipment is used by Customer N to produce 1,000 products or less in Year 1 and 1,000 if it’s used to produce more than 1,000 products in Year 1. Company M estimates that it will be entitled to variable consideration of 1,000 and that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

Company M allocates the estimated 1,000 in variable consideration entirely to Equipment Y because:

  • the variable payment relates specifically to Equipment Y; and
  • the estimated amount of variable consideration and the fixed amount for Equipment X approximate the stand-along selling prices of each product.

Company M recognizes revenue for Equipment X and Equipment Y of 800 and 1,000, respectively, when control of the good is transferred to the customer.

Variable consideration allocation guidance is applied before the guidance on allocating discounts

In some cases, a contract may contain both variable consideration and a discount. For example, an entity may sell products in a bundle at a discount to the aggregate stand-alone selling prices of the products in the bundle. In addition, the transaction price may include a variable element.

In these cases, an entity applies the guidance on allocating variable consideration before it applies the guidance on allocating discounts. That is, the standard includes an allocation hierarchy. When a contract contains both variable consideration and a discount, applying the respective allocation guidance in the reverse order may result in an incorrect allocation of the transaction price.

Some contracts contain features that may be variable consideration and/or a discount – e.g. a rebate. In these cases, an entity evaluates the nature of the feature. If the rebate causes the transaction price to be variable – e.g. the amount of the rebate depends on the number of purchases that a customer makes then the entity follows the hierarchy and applies the guidance on allocating variable consideration first.

Conversely, if a rebate is fixed and not contingent e.g. the rebate is simply a fixed discount against the aggregate stand-alone selling prices of the items in a bundle – then an entity applies the guidance on allocating discounts and does not consider the guidance on allocating variable consideration.

6. Changes in the transaction price

After contract inception, the transaction price may change for various reasons – including the resolution of uncertain events or other changes in circumstances that affect the amount of consideration to which an entity expects to be entitled.

In most cases, these changes are allocated to performance obligations on the same basis as at contract inception; however, changes in the transaction price resulting from a contract modification are accounted for under the new standard’s contract modifications guidance (see Contract modifications in link).

If a change in the transaction price occurs after a contract modification, then it is allocated to the performance obligations in the modified contract – i.e. those that were unsatisfied or partially unsatisfied immediately after the modification – unless the:

  • change is attributable to an amount of variable consideration that was promised before the modification; and
  • modification was accounted for as a termination of the existing contract and creation of a new contract. [IFRS 15.87–90]

A change in the transaction price is allocated to one or more distinct goods or services only if specified criteria are met (see Allocate the transaction price above). [IFRS 15.89]

Any portion of a change in transaction price that is allocated to a satisfied performance obligation is recognized as revenue – or as a reduction in revenue – in the period of the transaction price change. [IFRS 15.88]

Continue with Step 5 Recognise the revenue when the entity satisfies each performance obligation

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Something else -   Identify the performance obligations in the contract

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