Financial Reporting · Revenue

Transaction Price and Allocation under IFRS 15 for ACCA FR

Updated 11 October 2026 · Fact-checked

The transaction price is the amount a seller expects to be entitled to from a customer, after estimating variable consideration, adjusting for significant financing and ignoring amounts collected for third parties. You then allocate it to each performance obligation in proportion to stand-alone selling prices, and recognise revenue as each is satisfied.

Understand Transaction Price and Allocation

Steps 3 and 4 of the IFRS 15 model answer two questions. How much will the entity get (step 3)? How is that amount split between the promises in the contract (step 4)?

The transaction price is the amount of consideration the entity expects to be entitled to in exchange for transferring goods or services. It excludes amounts collected on behalf of third parties, such as sales tax. It may be fixed, or it may be variable consideration: discounts, rebates, refunds, bonuses, penalties and similar items. You estimate variable consideration using either the expected value (a probability-weighted amount, suited to many similar contracts) or the most likely amount (suited to two possible outcomes). You include it only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur later. This is the constraint. It stops revenue being overstated.

Money has a time value. If payment is due much earlier or later than delivery, and the timing gives a significant financing benefit, the contract has a significant financing component. You adjust the price to the cash selling price, that is, the amount discounted at the rate the customer would pay in a separate financing transaction. The difference is interest income or interest expense, recognised over the financing period. As a practical expedient, you need not adjust if the gap between transfer and payment is expected to be one year or less.

Other items matter too. Consideration payable to the customer is normally deducted from the price. Non-cash consideration is measured at fair value.

Once the price is fixed, split it across the performance obligations in proportion to their stand-alone selling prices (SSP). The SSP is the price at which the entity would sell the item separately. Use the observable price if there is one. If not, estimate it, for example using the adjusted market assessment approach, expected cost plus a margin, or the residual approach where it is allowed. A bundle discount is normally spread across all obligations in proportion to SSP.

Key rules to remember

Transaction price: Transaction price = fixed consideration + constrained variable consideration ± financing adjustment − consideration payable to customer; Exclude amounts collected for third parties, such as sales tax.
Expected value: Expected value = Σ (amount × probability); Use when there are many possible outcomes or many similar contracts.
Most likely amount: Most likely amount = single outcome with the highest probability; Use when the contract has only two possible outcomes.
Allocation to a performance obligation: Allocated price = (SSP of the obligation ÷ total SSP of all obligations) × transaction price; Applies to a bundle discount unless it clearly relates to only some obligations.
Significant financing component: Revenue = present value of the payment = payment ÷ (1 + r)ⁿ; Unwind the discount as interest over the financing period. Not required if the gap is one year or less.
Variable consideration constraint: Include only if a significant reversal of cumulative revenue is highly probable not to occur; Reassess the estimate at each reporting date.

How to solve Transaction Price and Allocation questions

Use this order for any transaction price and allocation question.

1List the performance obligations already identified in step 2 and note when each is satisfied.
2Find the fixed price. Strip out any sales tax or other amounts collected for third parties.
3Estimate variable consideration using expected value or most likely amount, then apply the constraint.
4Check the timing of payment. If the gap between transfer and payment is more than a year and financing is significant, discount to present value.
5Find the SSP of each obligation. Estimate any that are not sold separately.
6Allocate the transaction price in proportion to SSP: SSP ÷ total SSP × price.
7Recognise each amount when or as the obligation is satisfied, and record any interest separately from revenue.

Quickest way: Price first, then proportion

When to use it: Use in Section A and OT case questions where you need one number fast.

Write the transaction price as one figure before you touch allocation.
Write each SSP in a column and add them up.
Compute each fraction as SSP ÷ total, then multiply by the price.
Check that the allocated amounts add back to the transaction price.
Only then decide how much revenue falls into the current year.

Common mistakes in Transaction Price and Allocation

Allocating the list price instead of the discounted transaction price.
Students allocate using the prices on the invoice and forget that the bundle discount must be spread.
Fix: Always start from the total price the customer pays, then split it using SSP ratios.
Including all variable consideration without applying the constraint.
Students treat the expected bonus as certain once it is estimated.
Fix: Include variable consideration only to the extent a significant reversal is highly probable not to occur. Reassess each year.
Ignoring a significant financing component when payment is delayed by more than one year.
The cash receipt is a round number, so students recognise it as revenue straight away.
Fix: Discount to present value. Revenue is the present value and the unwinding is finance income (or finance cost if the customer pays in advance).
Using expected value when there are only two outcomes.
Students apply probability weighting by habit.
Fix: With two possible outcomes, the most likely amount is usually the better predictor. Read the question for which method it suggests.
Including sales tax in the transaction price.
The customer pays the tax along with the price.
Fix: Sales tax is collected for the tax authority. Exclude it from revenue.
Recognising all allocated revenue at the date of sale.
Allocation is confused with recognition.
Fix: Allocation decides how much each obligation is worth. Timing then depends on when each obligation is satisfied.

Worked examples

Example 1

Ridge sells a machine and one year of servicing to a customer for a total of $90,000. Ridge sells the machine separately for $80,000 and the servicing separately for $20,000. The machine is delivered on 1 October 20X1 and servicing runs evenly for 12 months from that date. Ridge's year end is 31 December. How much revenue is recognised in the year to 31 December 20X1?

Show the solution

Transaction price = $90,000.
Total SSP = $80,000 + $20,000 = $100,000.
Machine allocation = 80,000 ÷ 100,000 × 90,000 = $72,000.
Servicing allocation = 20,000 ÷ 100,000 × 90,000 = $18,000.
Machine is a point in time obligation: $72,000 is recognised on delivery.
Servicing is over time: 3 months ÷ 12 × $18,000 = $4,500.
Total revenue for the year = $72,000 + $4,500 = $76,500.

Answer: Revenue for the year to 31 December 20X1 is $76,500. The remaining $13,500 of servicing revenue is recognised in 20X2.

Example 2

On 1 January 20X1 Tarn delivers equipment to a customer. The customer will pay $121,000 on 31 December 20X2. Tarn's cash selling price is not stated, so discount the payment at the 10% a year rate that would apply in a separate financing arrangement with this customer. Control passes on 1 January 20X1. Calculate revenue on 1 January 20X1 and the finance income for the year to 31 December 20X1.

Show the solution

Payment is deferred two years, which is more than one year, so the financing component is significant.
Revenue = present value = 121,000 ÷ (1.10)² = 121,000 ÷ 1.21 = $100,000.
Finance income for 20X1 = 100,000 × 10% = $10,000.
Receivable at 31 December 20X1 = 100,000 + 10,000 = $110,000.
Finance income for 20X2 would be $11,000, taking the receivable to $121,000.

Answer: Revenue of $100,000 is recognised on 1 January 20X1, and finance income for 20X1 is $10,000.

Exam tips

In OT cases, read the whole scenario before calculating. Variable consideration and financing are often tested in the same contract.
Show the SSP ratio in constructed response answers. Marks go for the method even when the arithmetic slips.
Always check that the allocated amounts total the transaction price.
Quote the constraint in your written answer when you include only part of a bonus or refund estimate.
Separate revenue from interest in your journals and in the statement of profit or loss.

Practice questions from Revenue

Transaction Price and Allocation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Transaction Price and Allocation: frequently asked questions

How do you allocate the transaction price to performance obligations?

Divide each obligation's stand-alone selling price by the total of all SSPs, then multiply by the transaction price. A bundle discount is spread across all obligations in this way unless it clearly relates to only some of them.

What is the constraint on variable consideration in IFRS 15?

You include variable consideration in the transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur. This prevents revenue being overstated early. You reassess the estimate at each reporting date.

When do you adjust for a significant financing component?

When the timing of payment gives the customer or the entity a significant financing benefit. A practical expedient lets you ignore it if the gap between transfer and payment is expected to be one year or less.

What if a good is not sold separately, so there is no observable SSP?

You estimate the SSP. Acceptable approaches include adjusted market assessment and expected cost plus a margin. The residual approach is used only in limited cases, such as when the price is highly variable or uncertain.