Accounting: The Language of Business - Vol. 2 (Intermediate: Part 123)

The father of modern accounting is Italian Franciscan Friar Luca Pacioli, who in 1494 first described the system of double-entry bookkeeping used by Venetian merchants in his Summa de Arithmetica, Geometria, Proportioni et Proportionalita. While he was not the inventor of accounting, Pacioli was the first to describe the system of debits and credits in journals and ledgers that is still the basis of today's accounting systems.

 Revenue Recognition (Part J)

by

Charles Lamson

Step 4: Allocate the Transaction Price to the Performance Obligations (continued from Part 122)

Recall from Exhibit 8.1 from Part 114 and reintroduced below, the five steps in revenue recognition. In this post, we discuss Step 4.

Standalone Selling Price Exceptions

Whereas the general rule is that the transaction price should be allocated to the performance obligations based on the relative standalone selling prices (discussed in Part 122), there are two possible exceptions.

• When the contract includes variable consideration.

• When the discount is not related to all of the contracts' performance obligations.

Related to the first exception, the seller should allocate variable consideration to one or more, but not all, performance obligations if two criteria are met:

1. The terms of the variable amount relate to one or more, but not all, of the specific performance obligations.

2. Allocating the variable amount entirely to one or more, but not all, of the specific performance obligations is consistent with the objective of performing the allocation in a way that reflects a reasonable allocation of the transaction price on the basis of the standalone selling prices.

Example 8.14 demonstrates a situation in which variable consideration is allocated entirely to one performance obligation. 

Example 8.15 illustrates a contract whose variable consideration cannot be allocated to just one performance obligation.

The second exception to the relative standalone selling price allocation method involves the allocation of a discount measured as the difference between the sum of the standalone selling prices and the transaction price. Typically, any discount should be allocated proportionately to the performance obligations based on the relative standalone selling prices. However, if an entity determines that the discount is not related to all of the performance obligations, it should allocate only the discount to the performance obligations to which it relates. Specifically, if the following three criteria are met, then the seller should allocate the discount to one or more, but not all, of the performance obligations.

1. The entity regularly sells the goods/services in the contract on a standalone basis.

2. The entity regularly sells a bundle of some of these goods/services at a discount to the sum of the standalone selling prices of the separate goods/services.

3. The discount in the bundle of goods/services described in (2) is basically the same as the discount in this contract.

Example 8.16 provides an illustration of a discount that is not proportionally allocated to the performance obligations (that is, the discount does not relate to all performance obligations).

Exhibit 8.5 provides a summary of allocating the transaction price.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 389-392*

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