Breaking Down the Proposed New Revenue Recognition Standard: Step 4
In my previous blogs I have previously outlined the steps an entity would take to determine when and how much revenue to recognize for a contract under the proposed new standard and introduced steps one through three an entity would use in that process. Below I further our discussion by outlining step four.
Step 4: Allocate the transaction price to the separate performance obligations in the contract
If an entity has determined that a contract contains separate performance obligations, then the transaction price must be allocated among the separate performance obligations based on the consideration the entity would expect to receive if each performance obligation were to stand alone. If an entity is not able to determine what the standalone selling price would be for each performance obligation then it would estimate. The determination of the allocation of transaction price would be made at the inception of the contract and any subsequent changes in the transaction price would be allocated accordingly as was done for the initial transaction price. Revenue would be recognized as each performance obligation is satisfied.
If the transaction price is less than the standalone selling price of each performance obligation, then the discount would be allocated to each separate performance obligation based on the relative standalone selling price except for certain situations listed below. Both criteria must be met to allocate the discount to only one or some of the performance obligations in a contract.
- The entity regularly sells each good or service in the contract on a standalone basis.
- The observable selling prices from those standalone sales provide evidence of the performance obligation(s) to which the entire discount in the contract belongs.
Contact your Anders trusted advisor to learn more about how the proposed standard could affect your company, and stay tuned to www.graymatterblog.com for an outline of step five.