Skip to content

Corporate Financial Reporting · Revenue from Contracts with Customers (Ind AS 115)

Allocating Transaction Price to Performance Obligations under Ind AS 115

Updated 11 October 2026 · Fact-checked

Under Ind AS 115, when a contract has several performance obligations, you split the transaction price in proportion to the stand-alone selling price (SSP) of each distinct good or service, fixed at contract inception. Any discount is spread proportionately unless observable evidence shows it belongs to specific obligations. Variable amounts follow separate rules.

Understand Allocating Transaction Price to Performance Obligations

A contract often bundles several things: a machine, its installation and a maintenance plan. Each distinct item is a performance obligation. Revenue is recognised when each one is satisfied, and that may happen at different times. So you must first decide how much of the total price belongs to each obligation.

The allocation objective (para 73) is to allocate to each performance obligation the amount of consideration the entity expects to be entitled to in exchange for transferring the promised goods or services. The standard achieves this with the relative stand-alone selling price method (para 74 and 76). You find the SSP of each distinct item at contract inception and allocate the transaction price in proportion to those SSPs. The SSP is fixed at inception. You do not update it for later price changes.

If an SSP is not directly observable, you estimate it (para 78). You consider all reasonably available information, such as market conditions, entity-specific factors and customer information. You maximise the use of observable inputs and apply methods consistently. Para 79 lists suitable methods, and the list is not exhaustive: adjusted market assessment, expected cost plus a margin, and the residual approach. The residual approach is allowed only in two cases. Either the same item is sold to different customers at about the same time for a broad range of amounts (highly variable price), or the entity has not yet set a price and has never sold it stand-alone (uncertain price). Para 80 allows a combination of methods where two or more items have highly variable or uncertain SSPs.

A discount arises when the sum of the SSPs exceeds the promised consideration (para 81). The default is to allocate the discount proportionately to all performance obligations. This is a natural result of the relative SSP method. The exception is when the entity has observable evidence (para 82) that the whole discount relates to only one or some obligations. In that case the discount is allocated first, before the residual approach is used for any item (para 83).

If the price includes variable amounts, paras 84 to 86 apply. Variable consideration may be allocated entirely to one or more, but not all, obligations only when the criteria in para 85 are met. The remaining amount is allocated under the normal rules (para 86). These allocation rules do not apply to a contract with only one performance obligation (para 75), although paras 84 to 86 may still apply to a series of distinct goods or services treated as a single obligation with variable consideration. Later changes in the transaction price are also allocated entirely to some obligations only if the para 85 criteria are met (para 89).

Key rules to remember

Relative SSP allocation
Amount allocated to an obligation = Transaction price × (SSP of that obligation ÷ Sum of SSPs of all obligations)
Para 74 and 76. SSP is determined at contract inception for each distinct good or service.
Discount in a bundle
Discount = Sum of SSPs − Promised consideration
Para 81. If positive, the customer has received a bundle discount. Spread it proportionately unless para 82 evidence exists.
Residual approach
Estimated SSP = Total transaction price − Sum of observable SSPs of the other items
Para 79(c). Allowed only if the price is highly variable or uncertain (not yet established and never sold stand-alone).
Estimation methods for SSP
Adjusted market assessment | Expected cost plus a margin | Residual approach
Para 79. The list is illustrative, not exhaustive. Combinations can be used (para 80).
Single performance obligation
No allocation needed
Para 75. Paras 76 to 86 do not apply, except that paras 84 to 86 may apply to a series with variable amounts.

How to solve Allocating Transaction Price to Performance Obligations questions

Use this order for any allocation question. It keeps the discount and the residual in the right sequence.

  1. 1List the distinct performance obligations in the contract. If there is only one, no allocation is needed.
  2. 2Find the transaction price, including any variable consideration that is included after the constraint.
  3. 3Write down the SSP of each obligation at contract inception. Use observable prices first. Estimate the rest by adjusted market assessment, cost plus margin or residual, as the facts allow.
  4. 4Check the residual approach conditions before using it. Price must be highly variable or uncertain.
  5. 5Add the SSPs and compare with the transaction price. If the sum is higher, there is a discount.
  6. 6Check for observable evidence that the discount relates to specific obligations. If there is none, allocate it proportionately. If there is, allocate the discount to those items first, then use the residual for any item that qualifies.
  7. 7Compute each allocation as Transaction price × SSP ÷ Total SSP. Check that the allocations add up to the transaction price.
  8. 8State when revenue is recognised for each obligation (point in time or over time) and link the amounts to that timing.

Quickest way: Ratio shortcut for a bundle discount

When to use it: Use when all SSPs are observable and the discount is spread proportionately across all obligations.

  1. Total the SSPs and divide the transaction price by that total to get one ratio, for example 7,20,000 ÷ 8,00,000 = 0.90.
  2. Multiply each SSP by the ratio to get its allocation.
  3. Add the allocations and confirm the total equals the transaction price.
  4. Write one line on timing of revenue for each obligation, since marks are often given for it.

Common mistakes in Allocating Transaction Price to Performance Obligations

  • Allocating the entire discount to the main product, or to the item easiest to discount.

    Students think the discount was given to win the sale of the big item.

    Fix: Allocate proportionately to all obligations unless the question gives observable evidence that the whole discount relates to specific items (para 81 and 82).

  • Allocating the price based on cost or on the invoice split in the contract.

    The contract or invoice shows separate prices, so they look usable.

    Fix: Allocate on relative stand-alone selling prices. Contract prices are used only if they equal the SSP.

  • Using the residual approach whenever one price is missing.

    It is the quickest way to get a number.

    Fix: Use it only if the price is highly variable or uncertain as per para 79(c). Otherwise use adjusted market assessment or cost plus a margin.

  • Using SSPs on the delivery date or the latest price list rather than at contract inception.

    Students use whatever price the question states last.

    Fix: SSP is determined at contract inception (para 76). Do not update it for later changes.

  • Doing the allocation for a contract with only one performance obligation.

    The question lists several activities, but they are not distinct.

    Fix: Test distinctness first. If it is a single obligation, there is nothing to allocate (para 75).

  • Allocating the allocated amount to the wrong period, for example recognising the whole maintenance amount at delivery.

    Allocation and recognition are mixed up.

    Fix: Allocation decides the amount. Satisfaction of the obligation decides the timing. Recognise a service amount over the service period.

Worked examples

Example 1

Sunrise Engineering Ltd sells a machine, its installation and a 2-year maintenance service to a customer for a single price of ₹7,20,000. The stand-alone selling prices are: machine ₹6,00,000, installation ₹1,00,000 and 2-year maintenance ₹1,00,000. There is no observable evidence that the discount relates to any particular item. Allocate the transaction price and state the revenue pattern.

Show the solution
  1. Identify the obligations: machine, installation and maintenance. Assume all three are distinct.
  2. Sum of SSPs = 6,00,000 + 1,00,000 + 1,00,000 = ₹8,00,000.
  3. Discount = 8,00,000 − 7,20,000 = ₹80,000.
  4. With no observable evidence, spread the discount proportionately. This is the same as relative SSP allocation. Ratio = 7,20,000 ÷ 8,00,000 = 0.90.
  5. Machine = 6,00,000 × 0.90 = ₹5,40,000.
  6. Installation = 1,00,000 × 0.90 = ₹90,000.
  7. Maintenance = 1,00,000 × 0.90 = ₹90,000.
  8. Check: 5,40,000 + 90,000 + 90,000 = ₹7,20,000.
  9. Timing: recognise the machine amount when control passes to the customer. Recognise installation as it is performed or on completion, depending on how that obligation is satisfied. Recognise the maintenance amount over the 2 years, which is ₹45,000 per year if the service is provided evenly.

Answer: Machine ₹5,40,000, installation ₹90,000 and maintenance ₹90,000, totalling ₹7,20,000. Maintenance revenue is recognised over the 2-year service period.

Example 2

Harbour Tech Ltd enters into a contract for ₹10,00,000 covering hardware, staff training and a new software licence. The hardware is regularly sold stand-alone at ₹4,00,000 and the training at ₹1,00,000. The licence has never been sold stand-alone and its price has not yet been established. Estimate the allocation.

Show the solution
  1. The licence has no observable SSP. It has never been sold stand-alone and its price is not yet set, so the price is uncertain. This meets para 79(c)(ii), so the residual approach may be used.
  2. Sum of observable SSPs = 4,00,000 + 1,00,000 = ₹5,00,000.
  3. Residual SSP of the licence = 10,00,000 − 5,00,000 = ₹5,00,000.
  4. Check that the result is consistent with the allocation objective in para 73 and with para 78. The result must be a reasonable estimate of what the entity expects to be entitled to for the licence.
  5. Allocation: hardware ₹4,00,000, training ₹1,00,000, licence ₹5,00,000. The total is ₹10,00,000, so there is no discount to spread.

Answer: Hardware ₹4,00,000, training ₹1,00,000 and licence ₹5,00,000 (by the residual approach). The residual approach is used only because the licence price is uncertain.

Exam tips

  • Always show the SSP total and the ratio or fraction. Examiners give marks for the method even if arithmetic slips.
  • Check that the allocated amounts add up to the transaction price. This catches most errors in seconds.
  • When the question mentions a missing price, name the para 79 method you use and the condition that allows it. This earns theory marks.
  • Read the case for any statement that a discount relates to specific items. Without it, the default is proportionate allocation.
  • In MCQs, watch for traps: SSP at inception, discount allocation, and a single obligation needing no allocation.

Practice questions from Revenue from Contracts with Customers (Ind AS 115)

Allocating Transaction Price to Performance Obligations in other exams

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

Allocating Transaction Price to Performance Obligations: frequently asked questions

What is the relative stand-alone selling price method?

It is the method in Ind AS 115 for splitting the transaction price among performance obligations. You determine the SSP of each distinct good or service at contract inception and allocate the price in proportion to those SSPs.

How is a discount allocated under Ind AS 115?

A discount exists when the sum of SSPs exceeds the promised consideration. It is allocated proportionately to all performance obligations. The exception is when the entity has observable evidence that the whole discount relates to one or more, but not all, obligations.

When can I use the residual approach?

Only when the selling price of the item is highly variable or uncertain. That means the entity sells it to different customers at about the same time for a broad range of amounts, or has not yet set a price and has never sold it stand-alone.

What if the contract has only one performance obligation?

Then the SSP allocation rules in paras 76 to 86 do not apply. The only exception is that the variable consideration rules (paras 84 to 86) may apply to a series of distinct goods or services treated as a single obligation.