Question

what is Allocate the transaction price to the performance obligation in the contract--See ASC 606-10-32-28 through 31

Answer 1

The ASC 606 Revenue from Contracts with Customers, provides a five-step process for recognizing revenue, as follows:

Step 1: Identify a contract with customer

Step 2: Identify separate performance obligations in the contract (i.e. promise to transfer a distinct good or service to a customer)

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when the performance obligation is satisfied

After determining the transaction price in Step 3, companies need to allocate that transaction price to the specific performance obligations identified in the contract. The transaction price is allocated to the performance obligations based on its relative standalone selling price.  The standalone selling price for each good or service representing a performance obligation should be determined at the contract inception.

The standalone selling price is defined as the price that an entity would sell the good or service for if they sold it separately to a customer.  The best evidence of that price is if the entity has separate actual sales to customers of a similar good or service. Many times this easily observable selling price is not available, so an entity has to estimate it using observable inputs where possible. Some of these inputs include market conditions, entity-specific factors, and customer information. The methodology to estimate standalone selling price should be applied consistently in like circumstances.