As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fourth step of the new revenue recognition standard is to allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in the amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation.
To allocate an appropriate amount of consideration to each performance obligation, an entity should determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations.
Any subsequent changes in the transaction price should be allocated on the same basis as at contract inception. Read other articles in our “Revenue Recognition” Series: