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AASB 15: Allocating the transaction price to performance obligations in a contract

October 2019

Step 4 of the revenue recognition model in AASB 15 Revenue from Contracts with Customers
is about allocating the transaction price determined in step 3 to the performance obligations
identified in step 2. We discussed step 2 and step 3 in the March and June editions of The
Bottom Line respectively. This article takes a closer look as what step 4 entails.

Graph 1

The superseded revenue standard, AASB 118, did not contain any guidance as to how to allocate revenue to
the separately identifiable elements of a transaction. In contrast, AASB 15 contains explicit guidance in
this regard, requiring that the transaction price be allocated to each performance obligation – each distinct good or service – in the contract to depict the amount of consideration an entity expects to be entitled to in exchange for transferring the promised good or services to the customer. Generally, the transaction price is allocated to each performance obligation in proportion to its standalone selling price. Exceptions apply when allocating discounts and when allocating consideration that includes variable amounts.

Determining stand-alone selling price

The stand-alone selling price of each distinct good or service underlying each performance obligation
in a contract is determined at contract inception. The transaction price (as determined in step 3)
is allocated to each performance obligation in proportion to those stand-alone selling prices.
The stand-alone selling price is the price at which an entity would sell a promised good or service
separately to a customer. The best indication of this is an observable price from stand-alone sales of the
good or service in similar circumstances to similar customers. The stand-alone selling price may be, but
is not always, a contractually stated price or a list price. If the stand-alone selling price is not directly
observable, the entity is required to estimate the amount by using an approach that maximises the use
of observable inputs. Chosen estimation methods must be applied consistently to similar circumstances.
While the standard does not prescribe any specific method for estimating stand-alone selling prices, it
does describe the following estimation methods as potential approaches:

6

The residual approach can only be used if the standalone selling price of one or more goods or services
is either highly variable or uncertain. Additionally, observable stand-alone selling prices must be capable
of being determined for the other goods or services promised in the contract. 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 the performance obligations in the contract. However, if there is observable evidence that the entire discount relates to only one or more, but not all, the performance obligations in a contract, the discount is allocated only to those performance obligations to which the discount relates.

Let’s look at an example to illustrate the above principles

Liam’s Loudspeakers Pty Ltd enters into a contract with a customer for a total consideration of $1,500 with the following performance obligations:
• 1. Sale of a loudspeaker – regularly sold by the company to customers for $1,000;
• 2. Training on use of the loudspeaker – not regularly sold separately but staff time is expected to be 10 hours
and actual wage cost is $50 per hour. A reasonable margin for specialised training in a similar industry is 20%;
• 3. Certification in ‘responsible service of loudspeaking’ – this has never been sold to a customer however the company’s competitor sells this certification for $250.

How would the transaction price be allocated to the three performance obligations in the contract?

Analysis

The stand-alone selling prices for the training and certification are not directly observable, hence the company must estimate
them. To do this, the company uses the expected cost plus a margin approach for the training, and the adjusted market
assessment approach for the certification. The company estimates the stand-alone selling prices as follows:

3

The customer receives a discount for purchasing the bundle of goods and services because the sum of the
stand-alone selling prices of $1,850 is greater than the promised consideration of $1,500. If the company concludes that the discount of $350 belongs to all the performance obligations in the contract, it is allocated proportionately as follows:

4

If the company has observable evidence that the discount relates only to the sale of a loudspeaker and training, the discount is only allocated to these performance obligations. The allocation of the transaction price would then be as follows:

5

Credit: Michelle Warren, Director of Financial Reporting, HLB Mann Judd

 

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Cutcher & Neale Audit and Assurance Services is a representative firm of the HLB Mann Judd Australasian Association.

Topics: Audit, Financial Reporting

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