Allocating Transaction Price to Performance Obligations (Ind AS 115)

Understand Allocating Transaction Price to Performance Obligations

Key rules to remember

Relative SSP allocation

Allocated price of PO = Transaction price × (SSP of that PO ÷ Sum of SSPs of all POs)

Default method. Allocated amounts must add up to the transaction price.

Discount in the contract

Discount = Sum of standalone selling prices − Contract transaction price

Spread proportionately across all POs unless all the criteria of para 82 are met, in which case it is allocated to the specific POs only.

Residual approach

Estimated SSP = Total transaction price − Sum of observable SSPs of other goods or services

Use only if the SSP is highly variable (the item is sold to different customers for a broad range of amounts) or uncertain (price not yet established and the item not previously sold standalone). Check the result is not zero or a very small amount and is reasonable.

Expected cost plus margin

Estimated SSP = Expected cost of satisfying the PO + Appropriate margin

Use when no observable price exists and cost data is reliable.

Allocation of variable consideration

Allocate wholly to a PO (or distinct service in a series) if (a) it relates specifically to the entity's efforts to satisfy that PO, and (b) the result is consistent with the allocation objective

Both conditions must be met. Otherwise allocate on the relative SSP basis.

Changes in transaction price

Subsequent change in price is allocated on the same basis as at contract inception

SSPs are not updated after inception. Amounts allocated to a satisfied PO are recognised as revenue (or reduction of revenue) in the period of change.

How to solve Allocating Transaction Price to Performance Obligations questions

1. 1List the distinct performance obligations identified in Step 2. Do not allocate to items that are not distinct.
2. 2Confirm the transaction price from Step 3, including any variable consideration estimate and the effect of financing or non-cash items.
3. 3Find the SSP of each obligation. Use observable standalone prices first. If none, estimate using adjusted market assessment, expected cost plus margin or, in limited cases, the residual approach.
4. 4Add the SSPs and compare to the transaction price. If the total is higher, there is a discount.
5. 5Check whether observable evidence shows the discount belongs to only some obligations. If not, allocate it proportionately.
6. 6Check whether any variable consideration meets the conditions to be allocated to a specific obligation. If not, include it in the price and allocate proportionately.
7. 7Compute each allocation as price × SSP ÷ total SSP, and verify the totals equal the transaction price.
8. 8State when each amount is recognised as revenue, based on whether the obligation is satisfied over time or at a point in time.

Quickest way: Ratio and check method

Common mistakes in Allocating Transaction Price to Performance Obligations

• Allocating the contract price in proportion to the invoiced or stated prices instead of SSPs.

  The contract shows prices for each item and they look like the obvious split.

  Fix: Always base the split on SSPs. Stated contract prices matter only if they equal SSPs.

• Treating list price as SSP without checking.

  List price is easy to find in the question.

  Fix: Use list price only if it reflects the price actually charged when sold separately. Look for actual standalone sale data first.

• Using the residual approach whenever one SSP is missing.

  It is the quickest calculation.

  Fix: The residual approach is allowed only if the item's SSP is highly variable (the entity sells it to different customers for a broad range of amounts) or uncertain (the price is not yet established and the item has not been sold standalone before). Otherwise use adjusted market assessment or cost plus margin.

• Spreading a discount across all obligations when the question gives evidence it belongs to some.

  Proportionate allocation is the default and students stop reading.

  Fix: Check all the criteria of Ind AS 115 para 82. (a) The entity regularly sells each distinct good or service (or each bundle of them) on a standalone basis. (b) It also regularly sells a bundle of some of those items at a discount to their standalone prices. (c) The discount in that bundle is substantially the same as the discount in the contract, and observable evidence supports this. Allocate the discount entirely to those items only if all the criteria are met. If not, spread it proportionately. If they are met, the residual approach can then be used (para 83) to estimate the SSP of items in that group with highly variable or uncertain prices, after the discount has been allocated.

• Updating SSPs after inception when prices change later.

  Students think current prices should be used.

  Fix: SSPs are determined at contract inception and are not revised. Later changes in transaction price use the original allocation basis.

• Allocating variable consideration to one obligation without checking both conditions.

  The variable amount seems linked to one item.

  Fix: Check that it relates specifically to the effort to satisfy that obligation and that the result is consistent with the allocation objective.

Worked examples