Allocation on relative stand-alone selling prices

Learning objectives

• Explain the allocation objective: allocate to each performance obligation the amount that depicts the consideration expected in exchange for its transfer.L1, L2
• Allocate the transaction price on a relative stand-alone selling price basis at contract inception.L1, L2, L3
• Determine a stand-alone selling price that is not observable using the adjusted market assessment approach, the expected cost plus a margin approach or, in the limited cases specified, the residual approach.L2, L3, L4

Normative references

• IFRS 15 §73The allocation objective is to allocate to each performance obligation (or distinct good or service) the amount of consideration to which the entity expects to be entitled in exchange for transferring it to the customer.
• IFRS 15 §74To meet that objective, the entity allocates the transaction price to the performance obligations on a relative stand-alone selling price basis (paras. 76-80), except as specified for discounts (paras. 81-83) and variable consideration (paras. 84-86).
• IFRS 15 §75Paragraphs 76 to 86 do not apply to a contract with only one performance obligation. Paragraphs 84 to 86 may nevertheless apply when the entity promises a series of distinct goods or services forming a single obligation (para. 22(b)) and the consideration includes variable amounts.
• IFRS 15 §76To allocate on a relative basis, the entity determines at contract inception the stand-alone selling price of the distinct good or service underlying each performance obligation and allocates the transaction price in proportion to those prices.
• IFRS 15 §77The stand-alone selling price is the price at which the entity would sell the good or service separately to a customer. The best evidence of it is the observable price of the good or service when sold separately in similar circumstances and to similar customers; a contractually stated price or a list price may be, but is not presumed to be, that price.
• IFRS 15 §78If a stand-alone selling price is not directly observable, the entity estimates it in a way that meets the allocation objective, considering all information that is reasonably available (market conditions, entity-specific factors, information about the customer), maximising the use of observable inputs and applying estimation methods consistently in similar circumstances.
• IFRS 15 §79Suitable methods include, but are not limited to: the adjusted market assessment approach, the expected cost plus a margin approach, and the residual approach (total transaction price less the sum of the observable stand-alone selling prices of other goods or services). The residual approach may be used only if the stand-alone selling price of the item is highly variable, or uncertain because the entity has not yet established a price and has not previously sold it on a stand-alone basis.
• IFRS 15 §80A combination of methods may be needed when two or more goods or services in the contract have highly variable or uncertain stand-alone selling prices: the entity may estimate their aggregate price using the residual approach and then use another method to estimate the price of each of them.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

25 questions

• In what order does the five-step teaching approach apply the core principle of IFRS 15?L1
• The objective of allocating the transaction price is to attribute to each performance obligation the amount of consideration to which the entity expects to be entitled in exchange for transferring the related good or service.L1
• The list price of a good is presumed to be its stand-alone selling price.L1
• For a promised good or service, which item of data is the best evidence of its stand-alone selling price?L1
• Arvelle enters into a contract with two performance obligations. At what date does it determine the stand-alone selling prices used to allocate the transaction price?L2
• Corvane sells a single monthly security service identified as one performance obligation, for a fixed price. It must allocate that fixed price on the basis of relative stand-alone selling prices before recognising revenue.L2
• Halvène must estimate the stand-alone selling price of a service it never sells separately. Which of the following methods are cited by the standard as suitable (subject, for one of them, to restrictive conditions)?L2
• Velorine sells a customer a sorting machine and a two-year maintenance contract for a total price of {contract_price}. The two items are distinct performance obligations. Velorine regularly sells the machine on its own to similar customers at {ssp_equipment} and the maintenance on its own at {ssp_maintenance}; the list price of the machine is {list_price_equipment}. Compute the amount of the transaction price allocated to the machine.L2
• A sports equipment supplier, Tonalis, delivers a set of machines to a gym and assembles them at the customer's premises, for {bundle_price} in total. Machines and assembly are two performance obligations. Tonalis usually sells the machines on their own for {ssp_equipment} and the assembly on its own for {ssp_installation}. What share of the transaction price relates to the assembly?L2
• The Mirabel group sells a printing company a digital press, the supply of spare parts for three years and operator training, for {contract_price}. The three items are distinct performance obligations, and no evidence shows that the discount granted relates to any one of them in particular. Observed stand-alone selling prices: press {ssp_press}, spare parts {ssp_parts}, training {ssp_training}. Compute the transaction price allocated to the spare parts and to the training.L3
• Pléiade sells an industrial oven and a maintenance service tailored to this customer, for {contract_price}. The oven is regularly sold on its own at {ssp_machine}. The maintenance service is never sold separately; management uses the expected cost plus a margin approach, with an expected cost of {expected_cost} and a margin of {margin_on_cost}% on cost, which (case data) is Pléiade's usual margin on comparable services. Compute the estimated stand-alone selling price of the service, then the transaction price allocated to it.L3
• The engineering firm Quartane charges {fee} for a design study, commonly sold on its own at {ssp_study}, and for the supervision of the related site work, a service it has never sold separately. It estimates the stand-alone selling price of the supervision at the expected cost of {supervision_cost} plus a margin of {markup}% on cost (assumption chosen by management). The two services are distinct performance obligations. Determine the estimated stand-alone selling price of the supervision and the transaction price allocated to it.L3
• The publisher Sorbaline launches new software that it has never yet sold separately and for which it has not yet set a price. It sells it to a first customer together with installation and one year of support, for {contract_price}. The three items are distinct performance obligations. Installation and support are regularly sold on their own, at {ssp_installation} and {ssp_support} respectively. Sorbaline estimates the stand-alone selling price of the software using the residual approach. Compute that estimated price.L4
• Ivrane designs exhibition spaces. Its exhibition design services are sold separately at prices that vary widely from one customer to another, with no representative range (documented finding of management). A museum entrusts it, for {total_price}, with the design of a room, the supply of display cases and staff training, three distinct performance obligations. The display cases and the training are regularly sold on their own, at {ssp_hardware} and {ssp_training} respectively. Estimate the stand-alone selling price of the exhibition design using the residual approach.L4
• Néroval sells a sensor kit and a calibration service. Calibration is not sold separately, but several competitors offer an equivalent service at stable, known prices; Néroval also tracks its costs accurately. The controller proposes estimating the price of calibration using the residual approach, as it is the simplest method. What do you conclude?L3
• Talmaride sells two ranges of energy audit services that are never sold separately, in comparable conditions. For the Habitat range, it estimates the stand-alone selling price using the adjusted market assessment approach based on observable competitor prices. For the Tertiaire range, where the same market data exist, it uses an undocumented internal cost that is more favourable to revenue for the period. What is your assessment?L4
• In a single contract, Ombrelune sells equipment with an observable, stable price and two consulting services whose stand-alone selling prices are both highly variable. How can it estimate the stand-alone selling prices of the two services?L4
• A contract includes a discount when the sum of the stand-alone selling prices of the promised goods or services exceeds the promised consideration; unless there is observable evidence to the contrary, that discount is allocated proportionately to all the performance obligations in the contract.L2
• Brumaire sells three products A, B and C in a single contract for {contract_price}. It regularly sells each of them separately, at {ssp_a}, {ssp_b} and {ssp_c} respectively, but never sells a bundle of some of these products at a discount. Each product is a distinct performance obligation. Compute the amount of the discount and the transaction price allocated to product C.L3
• Fennelor sells three items A, B and C, distinct performance obligations, for 100,000. A and B are regularly sold on their own, at 40,000 and 30,000, and regularly together at 60,000; the conditions for allocating that discount of 10,000 to the bundle A + B alone are met (case data). The stand-alone selling price of C, sold to different customers for highly variable amounts, is estimated using the residual approach. What is the estimated stand-alone selling price of C?L4
• Thermaline sells a restaurant, for a total price of {total_price}, a professional coffee machine and a three-year extended warranty including quarterly preventive maintenance. After analysing the relevant factors, Thermaline concluded (conclusion given by the case) that the extension provides a service in addition to the assurance of compliance and is a performance obligation separate from the machine. The observed stand-alone selling prices are {machine_ssp} for the machine and {warranty_ssp} for the extended warranty. Allocate the transaction price.L3
• Orbelle sells a robot vacuum cleaner at a price of {price}, which matches its stand-alone selling price of {product_ssp}. With each vacuum cleaner, it gives a voucher providing a material right on its accessories, whose stand-alone selling price has been estimated at {option_ssp}. Allocate the transaction price between the vacuum cleaner and the voucher, and state when the amount allocated to the voucher will be recognised as revenue.L4
• During a December 20X2 promotion, the retailer Sonalis sells {units} headsets at a unit price of {unit_price}, equal to their stand-alone selling price. Each buyer receives a purchase voucher which, according to the analysis given by the case, provides a material right; the stand-alone selling price of all the vouchers, which is not observable, is estimated at {vouchers_ssp} after taking into account the likelihood of use. Allocate the total transaction price between the headsets and the vouchers.L4
• Torréfacteur Brun sells a professional coffee machine with a 3-year extended warranty for a total price of EUR {contract_price}. It also sells the machine separately, at a stand-alone selling price of EUR {machine_ssp}, and the extended warranty, at a stand-alone selling price of EUR {warranty_ssp} (case data). Calculate the share of the transaction price allocated to the extended warranty and the share allocated to the machine.L2
• Imprimerie Lagune buys from Encre Vive an industrial printer for a total price of EUR {contract_price}. The price covers: the printer, with the 1-year statutory warranty of conformity, which cannot be purchased separately and only provides assurance that the printer complies with agreed specifications; and a 2-year extended warranty, which Encre Vive also sells separately. The stand-alone selling prices are EUR {printer_ssp} for the printer and EUR {extension_ssp} for the extension (case data). Calculate the share of the transaction price allocated to the extended warranty and the share allocated to the printer.L3