refundable upfront fee represents an option to renew the contract at a lower price and
must assesses whether the option to renew represents a material right.
Significant judgement may be needed to determine whether the customer has a material
right. However, the fact that the customer remains connected to the network and does
not to pay the connection fee again while in the same property, for example, might
indicate that a material right exists.
If the renewal option represents a material right, the period over which the upfront fee
is recognised is longer than the initial contract period. It is likely that significant
judgement will be needed to determine the appropriate period over which to recognise
the upfront fee in such circumstances (see 6.8.1.A above).
6.9
Changes in the transaction price
Changes in the transaction price can occur for various reasons, including ‘the resolution
of uncertain events or other changes in circumstances that change the amount of
consideration to which an entity expects to be entitled in exchange for the promised
goods or services’. [IFRS 15.87]. See 7.5 below for additional requirements on accounting
for a change in transaction price.
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7
IFRS 15 – ALLOCATE THE TRANSACTION PRICE TO THE
PERFORMANCE OBLIGATIONS
The standard’s allocation objective is to allocate the transaction price to each
performance obligation (or distinct good or service) in an amount that depicts the
amount of consideration to which the entity expects to be entitled in exchange for
transferring the promised goods or services to the customer. [IFRS 15.73]. As noted above,
the allocation is generally done in proportion to the stand-alone selling prices (i.e. on a
relative stand-alone selling price basis). [IFRS 15.74].
Once the separate performance obligations are identified and the transaction price has
been determined, the standard generally requires an entity to allocate the transaction
price to the performance obligations in proportion to their stand-alone selling prices
(i.e. on a relative stand-alone selling price basis). The Board noted in the Basis for
Conclusions that, in most cases, an allocation based on stand-alone selling prices will
faithfully depict the different margins that may apply to promised goods or services.
[IFRS 15.BC266].
When allocating on a relative stand-alone selling price basis, any discount within the
contract is generally allocated proportionately to all of the performance obligations
in the contract. However, as discussed further below, there are some exceptions.
For example, an entity could allocate variable consideration to a single performance
obligation in some situations. IFRS 15 also contemplates the allocation of any
discount in a contract only to certain performance obligations, if specified criteria
are met. [IFRS 15.74]. An entity would not apply the allocation requirements if the
contract has only one performance obligation (except for a single performance
obligation that is made up of a series of distinct goods or services and includes
variable consideration). [IFRS 15.75].
7.1
Determining stand-alone selling prices
To allocate the transaction price on a relative stand-alone selling price basis, an entity
must first determine the stand-alone selling price of the distinct good or service
underlying each performance obligation. [IFRS 15.76]. Under the standard, this is the price
at which an entity would sell a good or service on a stand-alone (or separate) basis at
contract inception. [IFRS 15.77].
IFRS 15 indicates the observable price of a good or service sold separately provides the
best evidence of stand-alone selling price. [IFRS 15.77]. However, in many situations,
stand-alone selling prices will not be readily observable. In those cases, the entity must
estimate the stand-alone selling price. [IFRS 15.78].
When estimating a stand-alone selling price, an entity is required to consider all
information (including market conditions, entity-specific factors and information about
the customer or class of customer) that is reasonably available to the entity. In doing so,
an entity maximises the use of observable inputs and applies estimation methods
consistently in similar circumstances. [IFRS 15.78].
Figure 28.13 illustrates how an entity might determine the stand-alone selling price of a
good or service, which may include estimation:
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Figure 28.13:
Determining the stand-alone selling price of a good or service
Yes
Is the stand-alone selling
No
price directly observable?
Estimate the stand-alone selling
price by maximising the use of
Use the observable price
observable inputs. Possible
estimation approaches include:
Residual
Other reasonable
Adjusted market
Expected cost
approach
estimation
assessment
plus a margin
(in limited
approaches that
approach*
approach*
circumstances)*
maximise
observable inputs
See 7.1.2 below for further discussion of these estimation approaches, including when it might be appropriate
* to use a combination of approaches.
Stand-alone selling prices are determined at contract inception and are not updated to
reflect changes between contract inception and when performance is complete.
[IFRS 15.88]. For example, assume an entity determines the stand-alone selling price for a
promised good and, before it can finish manufacturing and deliver that good, the
underlying cost of the materials doubles. In such a situation, the entity would not revise
its stand-alone selling price used for this contract. However, for future contracts
involving the same good, the entity would need to determine whether the change in
circumstances (i.e. the significant increase in the cost to produce the good) warrants a
revision of the stand-alone selling price. If so, the entity would use that revised price for
allocations in future contracts (see 7.1.3 below).
Furthermore, if the contract is modified and that modification is treated as a termination
of the existing contract and the creation of a new contract (see 4.4.2 above), the entity
would update its estimate of the stand-alone selling price at the time of the modification.
If the contract is modified and the modification is treated as a separate contract
(see 4.4.1 above), the accounting for the original contact would not be affected (and the
stand-alone selling prices of the underlying goods or services would not be updated),
but the stand-alone selling prices of the distinct goods or services of the new, separate
contract would have to be determined at the time of the modification.
The requirements in IFRS 15 for the allocation of the transaction price to performance
obligations could result in a change in practice for many entities.
IAS 18 did not prescribe an allocation method for arrangements involving multiple
goods or services. IFRIC 13 mentioned two allocation methodologies: alloca
tion based
on relative fair value; and allocation using the residual method. However, IFRIC 13 did
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not prescribe a hierarchy. Therefore, previously an entity had to use its judgement to
select the most appropriate methodology, taking into consideration all relevant facts
and circumstances and ensuring the resulting allocation was consistent with IAS 18’s
objective to measure revenue at the fair value of the consideration.
Given the limited guidance in legacy IFRS on arrangements involving multiple goods or
services, some entities had looked to legacy US GAAP to develop their accounting
policies. The requirement to estimate a stand-alone selling price if a directly observable
selling price is not available is not a new concept for entities that had developed their
accounting policies by reference to the multiple-element arrangements requirements in
ASC 605-25. The requirements in IFRS 15 for estimating a stand-alone selling price are
generally consistent with the legacy guidance in ASC 605-25, except that they do not
require an entity to consider a hierarchy of evidence to make this estimate.
Some entities had looked to the provisions of ASC 605-25 by developing estimates of
selling prices for elements within an arrangement that exhibited ‘highly variable’ pricing, as
described at 7.1.2 below. IFRS 15 may allow those entities to revert to a residual approach.
The requirement to estimate a stand-alone selling price may be a significant change for
entities reporting under IFRS that had looked to other legacy US GAAP requirements
to develop their accounting policies for revenue recognition, such as the software
revenue recognition requirements in ASC 985-605. Those requirements had a different
threshold for determining the stand-alone selling price, requiring observable evidence
and not management estimates. Some of these entities may find it difficult to determine
a stand-alone selling price, particularly for goods or services that are never sold
separately (e.g. specified upgrade rights for software). In certain circumstances, an entity
may be able to estimate the stand-alone selling price of a performance obligation using
a ‘residual approach’ (see 7.1.2 below).
7.1.1
Factors to consider when estimating the stand-alone selling price
To estimate the stand-alone selling price (if not readily observable), an entity may
consider the stated prices in the contract, but the standard says an entity cannot
presume that a contractually stated price or a list price for a good or service is the stand-
alone selling price. [IFRS 15.77]. The standard states that an ‘entity shall consider all
information (including market conditions, entity-specific factors and information about
the customer or class of customer) that is reasonably available to the entity’ to estimate
a stand-alone selling price. [IFRS 15.78]. An entity also needs to maximise the use of
observable inputs in its estimate. This is a very broad requirement for which an entity
needs to consider a variety of data sources.
The following list, which is not all-inclusive, provides examples of market conditions
to consider:
• potential limits on the selling price of the product;
• competitor pricing for a similar or identical product;
• market awareness and perception of the product;
• current market trends that are likely to affect the pricing;
• the entity’s market share and position (e.g. the entity’s ability to dictate pricing);
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• effects of the geographic area on pricing;
• effects of customisation on pricing; and
• expected life of the product, including whether significant technological advances
are expected in the market in the near future.
Examples of entity-specific factors include:
• profit objectives and internal cost structure;
• pricing practices and pricing objectives (including desired gross profit margin);
• effects of customisation on pricing;
• pricing practices used to establish pricing of bundled products;
• effects of a proposed transaction on pricing (e.g. the size of the deal, the
characteristics of the targeted customer); and
• expected life of the product, including whether significant entity-specific
technological advances are expected in the near future.
To document its estimated stand-alone selling price, an entity should consider
describing the information that it has considered (e.g. the factors listed above),
especially if there is limited observable data or none at all.
7.1.2
Possible estimation approaches
Paragraph 79 of IFRS 15 discusses three estimation approaches: (1) the adjusted market
assessment approach; (2) the expected cost plus a margin approach; and (3) a residual
approach. [IFRS 15.79]. All of these are discussed further below. When applying IFRS 15,
an entity may need to use a different estimation approach for each of the distinct goods
or services underlying the performance obligations in a contract. In addition, an entity
may need to use a combination of approaches to estimate the stand-alone selling prices
of goods or services promised in a contract if two or more of those goods or services
have highly variable or uncertain stand-alone selling prices.
Furthermore, these are not the only estimation approaches permitted. IFRS 15 allows
any reasonable estimation approach: as long as it is consistent with the notion of a stand-
alone selling price; maximises the use of observable inputs and is applied on a consistent
basis for similar goods or services and customers. [IFRS 15.80].
In some cases, an entity may have sufficient observable data to determine the stand-
alone selling price. For example, an entity may have sufficient stand-alone sales of a
particular good or service that provide persuasive evidence of the stand-alone selling
price of a particular good or service. In such situations, no estimation would be
necessary. [IFRS 15.77].
In many instances, an entity may not have sufficient stand-alone sales data to determine
the stand-alone selling price based solely on those sales. In those instances, it must
maximise the use of whatever observable inputs it has available in order to make its
estimate. That is, an entity would not disregard any observable inputs when estimating
the stand-alone selling price of a good or service. [IFRS 15.78]. An entity should consider
all factors contemplated in negotiating the contract with the customer and the entity’s
normal pricing practices factoring in the most objective and reliable information that is
available. While some entities may have robust practices in place regarding the pricing
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of goods or services, some may need to improve their processes to develop estimates of
stand-alone selling prices.
The standard includes the following estimation approaches. [IFRS 15.79].
• Adjusted market assessment approach – this approach focuses on the amount that
the entity believes the market in which it sells goods or services is willing to pay for a
good or service. For example, an entity might refer to competitors’ prices for similar
goods or services and adjust those prices, as nec
essary, to reflect the entity’s costs and
margins. When using the adjusted market assessment approach, an entity considers
market conditions, such as those listed at 7.1.1 above. Applying this approach is likely
to be easiest when an entity has sold the good or service for a period of time (such
that it has data about customer demand), or a competitor offers similar goods or
services that the entity can use as a basis for its analysis. Applying this approach may
be difficult when an entity is selling an entirely new good or service because it may
be difficult to anticipate market demand. In these situations, entities may want to use
the market assessment approach, with adjustments as necessary, to reflect the entity’s
costs and margins, in combination with other approaches to maximise the use of
observable inputs (e.g. using competitors’ pricing, adjusted based on the market
assessment approach in combination with an entity’s planned internal pricing
strategies if the performance obligation has never been sold separately).
• Expected cost plus margin approach – this approach focuses more on internal
factors (e.g. the entity’s cost basis), but has an external component as well. That is,
the margin included in this approach must reflect the margin the market would be
willing to pay, not just the entity’s desired margin. The margin may have to be
adjusted for differences in products, geographies, customers and other factors. The
expected cost plus margin approach may be useful in many situations, especially
when the performance obligation has a determinable direct fulfilment cost (e.g. a
tangible product or an hourly service). However, this approach may be less helpful
when there are no clearly identifiable direct fulfilment costs or the amount of those
costs is unknown (e.g. a new software licence or specified upgrade rights).
• Residual approach – this approach allows an entity to estimate the stand-alone
selling price of a promised good or service as the difference between the total
transaction price and the observable (i.e. not estimated) stand-alone selling prices
of other promised goods or services in the contract, provided one of two criteria
are met. Because the standard indicates that this approach can only be used for
contracts with multiple promised goods or services when the selling price of one
or more goods or services is unknown (either because the historical selling price is
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 426
