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The New Revenue Recognition Model – Step 4: Allocating the Transaction Price

Written by Michelle Sanchez on February 25, 2020

Standalone Selling Price

The transaction price of a contract must consider performance obligations and their standalone selling prices.

Standalone selling price – the price a business sells a promised good or service to a customer.


So the standalone selling price is the observable price of a good or service to customers. But, what do you do when the standalone selling price is not directly observable? In that case, the standalone selling price will need to be estimated. ASC 606 includes the following methods for estimating the standalone selling price:

  • Adjusted market assessment approach – Involves evaluation of the market and estimation of the price that customers are willing to pay.
  • Expected cost plus a margin approach – Involves forecasting expected costs and adding an appropriate margin for that good or service.
  • Residual Approach – Involves estimating the total transaction price less the sum of the other standalone selling prices of goods or services promised in the contract. This method can be used only if one of the following two criteria is met:
  1. The selling price fluctuates, and a representative standalone selling price is not discernible; or
  2. The seller has not yet established a price for the good or service.

Don’t navigate revenue recognition alone. Connect with a Warren Averett advisor who can help.

Allocation of Discounts

Discounts exist when the sum of the standalone selling prices exceeds the promised consideration in contracts. The discount should be allocated proportionately to all performance obligations in the contract unless the discount applies to specific performance obligations.

Discounts apply to specific performance obligations if the following criteria are met:

  • There are regular sales for each distinct good or service (or bundle of goods or services);
  • A bundle of goods or services are regularly priced at a discount; and
  • The discount attributable to each bundle is substantially the same as the discount in the contract.

The discount allocated to one or more performance obligations should be allocated before the use of the residual approach to estimate the standalone selling price. That way, the discount is not erroneously allocated to any of the residual elements. The following is an example of the allocation of discounts:

  • A seller enters into a contract to sell products A, B and C for $100.
  • The seller regularly sells products A, B and C individually at the following standalone selling prices: A – $40, B – $55 and C – $45 (total of $140).
  • The seller regularly bundles B and C for $60.
  • The contract includes a discount of $40 (total standalone selling price of $140 compared to the contract price of $100).
  • Because the seller regularly sells B and C together for $60 and A for $40, there is evidence that the discount should be allocated to B and C.
  • Assuming all products are transferred at different times, the allocation is as follows:
  1. A – $40 ($40 standalone price);
  2. B – $33 ($55 standalone/$100 contract x $60 bundled price); and
  3. C – $27 ($45 standalone/$100 contract x $60 bundled price).
  • In this case, the entire discount was allocated to products B and C.

Allocation of Variable Consideration

Variable consideration may apply to an entire contract or specific parts of a contract. Variable consideration is allocated to specific components if the following criteria are met:

  1. Variable consideration applies to a particular performance obligation. For example, a bonus may be contingent on transferring a promised good within a specified period of time.
  2. Variable consideration is consistent with the overall objective of allocating the transaction price to performance obligations. In other words, it should not result in allocating more or less revenue compared to relative standalone selling prices.

Changes in the Transaction Price

Transaction price can change due to uncertainty that affects payment terms. When changes occur, they should be allocated consistently as at contract inception. If a performance obligation has already been satisfied, additional amounts should be recognized as revenue (or reduction) in the period in which the transaction price changes.

In Summary

As with other steps of the model, these processes require a significant amount of managerial judgement, which inherently increases risk. This process may pose a greater burden on smaller entities with limited resources.

Read more about revenue recognition Step 1, Step 2, Step 3 and Step 5.

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This article was originally written and published in November, 2017 and was most recently updated and revised on February 25, 2020.

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