For example, adopt the same hardware distributor and sign a contract with a customer from above. If, based on history, management determined that it could sell the server and printer together at a discounted price of $3,850 ($350 off), the breakdown of the purchase price would look like this: The adjusted market valuation approach involves the company evaluating the market in which it sells goods or services and estimating the price, that a customer in that market would be willing to pay for those goods or services. This may also include referring to the prices of the company`s competitors for similar goods or services and adjusting those prices as necessary to reflect the company`s costs and margins. Company C also sells product X, but the standalone selling price ranges from $15 to $45, depending on the customer to whom it is sold. The stand-alone selling price is defined as the price at which a company would sell the good or service if it sold them separately to a customer. The best evidence of this price is when the company has separate actual sales of a similar good or service to customers. Often, this easily observable selling price is not available, so an entity should estimate it with observable inputs if possible. Some of these inputs include market conditions, company-specific factors and customer information. The method of estimating the stand-alone selling price should be applied consistently in similar circumstances.

The objective behind the assignment of the transaction price to each performance obligation is to establish a fair distribution of the amount of the performance obligation, which reflects the amount of consideration to which the company expects to be entitled in exchange for the transfer of the goods or services promised to the customer. A company sells two licenses to a customer, X and Y. The company notes that these are different performance bonds. Standalone retail prices are $800 for X and $1,000 for Y. The agreement provides for a fixed price of $800 for X and for Y, the sale price is a royalty of 3% of future revenues associated with the use of license Y. The Company estimates that the variable consideration associated with licence Y will be $1,000. 2. The company also regularly sells, on an autonomous basis, a set (or set) of some of these different goods or services at a discount to the autonomous selling prices of the goods or services in each lot. Variable consideration in a contract may relate to the entire contract or to a specific part of the contract. The variable amount of consideration should be fully allocated to a performance obligation or to a single good or service that is part of a single performance obligation if both of the following criteria are met: The stand-alone selling price for the three products is $140 ($40 + $55 + $45). After determining the transaction price in Step 3, companies must assign that transaction price to the specific performance obligations set out in the contract. The transaction price is divided among the performance obligations according to its relative autonomous selling price.

The independent selling price of each good or service constituting a performance obligation should be determined at the beginning of the contract. According to CSA 606-10-32-32, the stand-alone selling price is the price at which a company would sell a separately promised good or service to a customer. The best evidence of a stand-alone selling price is the observable price of a good or service if the company sells that good or service separately in similar circumstances and to similar customers. A contractually agreed price or list price for a good or service may be (but is not presumed) the independent selling price of that good or service. A company signs a contract to sell three products for $100. Independent selling prices are as follows: Before applying the residual approach, all discounts must be applied to other performance obligations, as required by the standard. Based on observable evidence for products A, B and C, it is determined that $100 of the selling price should be allocated to these items. This leaves $30 in consideration for product D, which is within the selling price range that the company used for product D alone. Once the sale prices have been determined, the company will apply the values relating to the entire contract consideration and estimate the amount of the transaction price to be recorded when each promise is kept. 1 ASC 606-10-32-342 Derived from ASC 606-10-55-(256-258)3 ASC 606-10-32-374 ASC 606-10-55-(261-264)5 ASC 606-10-55-(265-268)6 As described in the previous article, Accounting for variable consideration is limited to the amount that is unlikely to result in a significant reversal in sales.7 ASC 606-10-32-408 ASC Derivative 606-10-55-(271-274)9 ASC Derivative 606-10-55-(275-279)10 Discussed in a previous article to identify a contract11 ASC 606-10-32-45 R1 RCM showed an interesting advantage of the exception for the allocation of the variable consideration. It indicates that the use of the exception has made it easier to estimate the inclusion of variables.

Customer contracts typically last three to ten years and the consideration expected towards the end of the contract is more difficult to predict. However, since the company`s contracts meet both criteria of CSA 606-10-32-40, R1 RCM can focus on the consideration to be received for the next part of the commitment. The Company is able to estimate the transaction price over these shorter periods, thereby limiting the material valuations necessary to estimate the uncertainty associated with incentive fees. (June 2018 letter to the SEC) However, if there is recognisable evidence that the entire discount concerns only one or more, but not all, the performance obligations of a contract, the discount shall be allocated to those performance obligations. According to CSA 606-10-32-33, if a stand-alone selling price is not directly observable, a company must estimate the stand-alone selling price by an amount that would allow the transaction price allocation to meet the allocation target. When estimating a stand-alone selling price, a company must take into account all information (including market conditions, company-specific factors, and customer or class of customer information) that is reasonably available to the company. In doing so, a company must maximize the use of observable inputs and consistently apply estimation methods in similar circumstances. A company can estimate the price of goods or services based on the market, which customers are willing to pay in the market for those goods or services. The company may also refer to the prices charged by competitors for similar goods or services. This method is suitable for situations where several competitors offer similar goods or services. The essential requirement of step 4 is to assign the transaction price to each performance obligation so that the correct amount of revenue can be recorded in step 5 (i.e.

if or when the performance obligation is fulfilled). It is expected that the market-adjusted approach will be applied most often when sales of the good or service or a similar good or service have occurred in the market in the past. The use of a different approach may be appropriate in cases where a new product is developed and placed on the market for the first time or where the good or service constituting a performance obligation is not sold separately in the past. Variable consideration may relate to an entire contract or to specific parts of a contract. Variable consideration is assigned to certain components if the following criteria are met: An entity enters into a contract with Customer U for two intellectual property licenses (X and Y licenses). Each licence is considered to be a separate performance obligation. The stand-alone selling prices for the X and Y licenses are $800 and $1,000, respectively. Suppose a contractor signs a contract with a client to construct two buildings that are separate performance obligations. The contract price is $4,000,000, but the contractor is entitled to a premium of $250,000 if the first building is completed in less than six months.

The contractor determines that the transaction price is $4,250,000 because he expects to earn the premium. The contractor estimates that the stand-alone selling price of the first building is $2,750,000 and the stand-alone selling price of the second building is $1,500,000. Based on an analysis of the contract, the contractor determines that the variable payment relates specifically to the first building and, by allocating the variable consideration to the first building, it can obtain an allocation representative of the amount of the expected consideration. .