Revenue Recognition: Allocating Transaction Price

The new revenue recognition standard (ASC 606) outlines five steps for proper compliance.  At the surface, these steps seem simplistic.  However, there are many components that should be considered within each step based on your process and industry.  Previous courses in this series have covered the standard at a high level and evaluated step one and two of the standard.  They are:

• Complying with the Revenue Recognition Standard
• Revenue Recognition:  Considerations for Identifying the Contract – Part One and Part Two
• Revenue Recognition:  Considerations for Performance Obligations – Part One and Part Two
• Revenue Recognition:  Determine the Transaction Price – Part One and Part Two

This segment is designed to evaluate Step Four of the new model dealing with allocating the transaction price.  Transaction price is the basis for measuring revenue. It is the amount of consideration the entity expects to be entitled to in exchange for transferring promised goods or services. Transaction price is allocated to performance obligations (PO’s) based on relative stand-alone selling price (SSP).  The standard identifies three separate estimation methods that can be used to estimate stand-alone selling price. These include: Adjusted market assessment approach; expected cost-plus margin approach and residual approach.   These approaches can also be utilized when considering how to allocate discounts and variable consideration. 

Within this segment, we cover the aspects of allocating the transaction price for revenue recognition.