ASC 606 Revenue Recognition: Allocating Transaction Price to Performance Obligations

Author: Lynn Fountain

Once transaction price is determined under the updated revenue recognition standard, it is allocated to performance obligations (PO’s) based on relative stand-alone selling price (SSP).

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. 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.

For a contract that has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in the amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations. Any subsequent changes in the transaction price should be allocated on the same basis as at contract inception.

Publication Date: February 2021

Designed For
Accountants and Finance professionals, Internal auditors/Professionals considering the role of internal audit, and Legal and Compliance professionals

Topics Covered

• Allocate
• Estimation Methods
• Adjusted Market Assessment
• Example Adjusted Market
• Example Two Adjusted Market
• Allocating VC Using Adjusted Market
• Expected Cost Plus Margin
• Example Two Expected Cost Plus Margin
• Residual Approach
• Example Residual Approach
• When Residual Approach Can Be Used
• How To Allocate
• Discount Example One
• Discount Example Two
• Comparison to AS 605
• Variable Consideration
• COVID Impact on Topic 606
• Summary
• Appendix Example Three — Adjusted Market Assessment

Learning Objectives

• Describe step four of the revenue recognition model: Allocate the Transaction Price
• Recognize how to evaluate examples of estimation approaches for stand-alone selling price (SSP)
• Identify the adjusted market assessment estimation approach and examine examples
• Identify the expected cost-plus margin approach and examine examples
• Identify the residual estimation approach and examine examples
• Identify how to allocate discounts
• Differentiate between Accounting Standards Codification (ASC) 605 and ASC 606
• Recognize how to allocate variable consideration (VC)
• Describe COVID impact

Level
Basic

Instructional Method
Self-Study

NASBA Field of Study
Accounting (2 hours)

Program Prerequisites
None

Advance Preparation
None