highly variable or because the goods or services have not yet been sold), we
anticipate that the use of this approach is likely to be limited. However, allowing
entities to use a residual technique provides relief to entities that rarely, or never,
sell goods or services on a stand-alone basis, such as entities that sell intellectual
property only with physical goods or services.
The Board noted in the Basis for Conclusions that the use of the residual approach
cannot result in a stand-alone selling price of zero if the good or service is distinct.
[IFRS 15.BC273]. This is because a good or service must have value on a stand-alone
basis to be distinct. The Board also stated that, if use of the residual approach
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results in very little, or no, consideration being allocated to a good or service or a
bundle of goods or services, an entity should re-evaluate whether the use of the
residual approach is appropriate.
An example of an appropriate use of the residual approach would be an entity that
frequently sells software, professional services and maintenance, bundled together,
at prices that vary widely. The entity also sells the professional services and
maintenance individually at relatively stable prices. The Board indicated that it may
be appropriate to estimate the stand-alone selling price for the software as the
difference between the total transaction price and the observable selling prices of
the professional services and maintenance. See Example 28.56, at 7.4 below Cases B
and C, for examples of when the residual approach may or may not be appropriate.
The Board clarified in the Basis for Conclusions that an entity could also use the
residual approach if there are two or more goods or services in the contract with
highly variable or uncertain stand-alone selling prices, provided that at least one
of the other promised goods or services in the contract has an observable stand-
alone selling price. The Board observed that, in such an instance, an entity may
need to use a combination of techniques to estimate the stand-alone selling prices.
[IFRS 15.BC272]. For example, an entity may apply the residual approach to estimate
the aggregate of the stand-alone selling prices for all of the promised goods or
services with highly variable or uncertain stand-alone selling prices, but then use
another approach (e.g. adjusted market assessment, expected cost plus margin) to
estimate the stand-alone selling prices of each of those promised goods or services
with highly variable or uncertain stand-alone selling prices.
The standard includes the following example in which two estimation approaches are
used to estimate stand-alone selling prices of two different goods in a contract.
[IFRS 15.IE164-IE166].
Example 28.51: Allocation methodology
An entity enters into a contract with a customer to sell Products A, B and C in exchange for CU100. The
entity will satisfy the performance obligations for each of the products at different points in time. The entity
regularly sells Product A separately and therefore the stand-alone selling price is directly observable. The
stand-alone selling prices of Products B and C are not directly observable.
Because the stand-alone selling prices for Products B and C are not directly observable, the entity must
estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market assessment
approach for Product B and the expected cost plus a margin approach for Product C. In making those
estimates, the entity maximises the use of observable inputs (in accordance with paragraph 78 of IFRS 15).
The entity estimates the stand-alone selling prices as follows:
Stand-alone
Product
selling price Method
CU
Product A
50 Directly observable (see paragraph 77 of IFRS 15)
Product B
25 Adjusted market assessment approach (see paragraph 79(a) of IFRS 15)
Product C
75 Expected cost plus a margin approach (see paragraph 79(b) of IFRS 15)
Total 150
The customer receives a discount for purchasing the bundle of goods because the sum of the stand-alone
selling prices (CU150) exceeds the promised consideration (CU100). The entity considers whether it has
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observable evidence about the performance obligation to which the entire discount belongs (in accordance
with paragraph 82 of IFRS 15) and concludes that it does not. Consequently, in accordance with
paragraphs 76 and 81 of IFRS 15, the discount is allocated proportionately across Products A, B and C. The
discount, and therefore the transaction price, is allocated as follows:
Product Allocated
transaction
price
CU
Product A
33
(CU50 ÷ CU150 × CU100)
Product B
17
(CU25 ÷ CU150 × CU100)
Product C
50
(CU75 ÷ CU150 × CU100)
Total 100
Given the flexibility provided by the standard, it is both appropriate and necessary for
entities to tailor the approach(es) used to estimate the stand-alone selling prices to their
specific facts and circumstances. Regardless of whether the entity uses a single approach
or a combination of approaches to estimate the stand-alone selling price, the entity
would evaluate whether the resulting allocation of the transaction price is consistent
with the overall allocation objective in paragraph 73 of IFRS 15 and the requirements
for estimating stand-alone selling prices above. [IFRS 15.80].
In accordance with IFRS 15, an entity must make a reasonable estimate of the stand-
alone selling price for the distinct good or service underlying each performance
obligation if an observable selling price is not readily available. In developing this
requirement, the Board believed that, even in instances in which limited information is
available, entities should have sufficient information to develop a reasonable estimate.
Estimating stand-alone selling prices may require a change in practice. IAS 18 did not
prescribe an allocation method for arrangements involving multiple goods or services.
As a result, entities have used a variety of approaches, which may not be based on
current selling prices.
In addition, entities that had developed their accounting policies by reference to the
legacy US GAAP requirements in ASC 605-25 should note that there is no longer a
hierarchy such as there was in that standard, which required them to first consider
vendor-specific objective evidence (VSOE), then third-party evidence and, finally, best
estimate of selling price. In addition, entities that had looked to legacy requirements in
ASC 985-605 to develop their accounting policies no longer need to establish VSOE
based on a significant majority of their transactions.
As a result, we expect that many entities will need to establish approaches to estimate
their stand-alone selling prices. However, as these estimates may have limited
underlying observable data, it is important for entities to have robust documentation to
demonstrate the reasonableness of the calculations they make in estimating stand-alone
selling prices.
&nb
sp; 7.1.3
Updating estimated stand-alone selling prices
IFRS 15 does not specifically address how frequently estimated stand-alone selling
prices must be updated. Instead, it indicates that an entity must make this estimate for
each distinct good or service underlying each performance obligation in a contract with
a customer, which suggests constantly updating prices.
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In practice, we anticipate that entities will be able to consider their own facts and
circumstances in order to determine how frequently they will need to update their
estimates. If, for example, the information used to estimate the stand-alone selling price
for similar transactions has not changed, an entity may determine that it is reasonable
to use the previously determined stand-alone selling price. However, in order for the
changes in circumstances to be reflected in the estimate in a timely manner, we
anticipate that an entity would formally update the estimate on a regular basis (e.g.
monthly, quarterly, semi-annually).
The frequency of updates should be based on the facts and circumstances of the distinct
good or service underlying each performance obligation for which the estimate is made.
An entity uses current information each time it develops or updates its estimate. While
the estimates may be updated, the approach used to estimate a stand-alone selling price
does not change (i.e. an entity must use a consistent approach), unless facts and
circumstances change. [IFRS 15.78].
7.1.4
Additional considerations for determining the stand-alone selling
price
While this is not explicitly stated in IFRS 15, we anticipate that a single good or service
could have more than one stand-alone selling price. That is, the entity may be willing to
sell goods or services at different prices to different customers. Furthermore, an entity
may use different prices in different geographies or in markets where it uses different
methods to distribute its products (e.g. it may use a distributor or reseller, rather than
selling directly to the end-customer) or for other reasons (e.g. different cost structures
or strategies in different markets). Accordingly, an entity may need to stratify its analysis
to determine its stand-alone selling price for each class of customer, geography and/or
market, as applicable.
7.1.4.A
When estimating the stand-alone selling price, does an entity have to
consider its historical pricing for the sale of the good or service involved?
We believe that an entity should consider its historical pricing in all circumstances, but
it may not be determinative. Historical pricing is likely to be an important input as it
may reflect both market conditions and entity-specific factors and can provide
supporting evidence about the reasonableness of management’s estimate. For example,
if management determines, based on its pricing policies and competition in the market,
that the stand-alone selling price of its good or service is X, historical transactions within
a reasonable range of X would provide supporting evidence for management’s estimate.
However, if historical pricing was only 50% of X, this may indicate that historical pricing
is no longer relevant due to changes in the market, for example, or that management’s
estimate is flawed.
Depending on the facts and circumstances, an entity may conclude that other factors
such as internal pricing policies are more relevant to its determination of a stand-alone
selling price. When historical pricing has been established using the entity’s normal
pricing policies and procedures, it is more likely that this information will be relevant in
the estimation.
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If the entity has sold the product separately or has information on competitors’ pricing
for a similar product, it is likely that the entity would find historical data relevant to its
estimate of stand-alone selling prices, among other factors. In addition, we believe it
may be appropriate for entities to stratify stand-alone selling prices based on: the type
or size of customer; the amount of product or services purchased; the distribution
channel; the geographic location; or other factors.
7.1.4.B
When using an expected cost plus margin approach to estimate a stand-
alone selling price, how would an entity determine an appropriate
margin?
When an entity elects to use the expected cost plus margin approach, it is important for
the entity to use an appropriate margin. Determining an appropriate margin may require
the use of significant judgement and involve the consideration of many market
conditions and entity-specific factors, discussed at 7.1.1 above. For example, it would
not be appropriate to determine that the entity’s estimate of stand-alone selling price is
equivalent to cost plus a 30% margin if a review of market conditions demonstrates that
customers are only willing to pay the equivalent of cost plus a 12% margin for a
comparable product. Similarly, it would be inappropriate to determine that cost plus a
specified margin represents the stand-alone selling price if competitors are selling a
comparable product at twice the determined estimate. Furthermore, the determined
margin may have to be adjusted for differences in products, geographic locations,
customers and other factors.
7.1.4.C
Estimating the stand-alone selling price of a good or service: estimating a
range of prices versus identifying a point estimate
Entities might use a range of prices to help estimate the stand-alone selling price of a
good or service. We believe it is reasonable for an entity to use such a range for the
purpose of assessing whether a stand-alone selling price (i.e. a single price) that the
entity intends to use is reasonably within that range. That is, we do not believe that an
entity is required to determine a point estimate for each estimated stand-alone selling
price if a range is a more practical means of estimating the stand-alone selling price for
a good or service.
The objective of the standard is to allocate the transaction price to each performance
obligation in ‘an amount that depicts the amount of consideration for which the entity
expects to be entitled in exchange for transferring the promised good or service to the
customer’. While the standard does not address ranges of estimates, using a range of
prices would not be inconsistent with the objective of the standard. The only
requirements in the standard are that an entity maximise its use of observable inputs
and apply the estimation approaches consistently. Therefore, the use of a range would
also be consistent with these principles.
Practices we have observed include an entity establishing that a large portion of the
stand-alone selling prices falls within a narrow range (e.g. by reference to historical
pricing). We believe the use of a narrow range is acceptable for determining estimates
of stand-alone selling prices under the standard because it is consistent with the
standard’s principle that an entity must maximise its use of observable inputs.
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While the use of a range may be appropr
iate for estimating stand-alone selling price, we
believe that some approaches to identifying this range do not meet the requirements of
IFRS 15. For example, it would not be appropriate for an entity to determine a range by
estimating a single price point for stand-alone selling price and then adding an arbitrary
range on either side of that point estimate, nor would it be appropriate to take the
historical prices and expand the range around the midpoint until a significant portion of
the historical transactions fall within that band. The wider the range necessary to
capture a high proportion of historical transactions, the less relevant it is in terms of
providing a useful data point for estimating stand-alone selling prices.
Management’s analysis of market conditions and entity-specific factors could support it
in determining the best estimate of the stand-alone selling price. The historical pricing
data from transactions, while not necessarily determinative, could be used as supporting
evidence for management’s conclusion. This is because it is consistent with the
standard’s principle that an entity must maximise its use of observable inputs. However,
management would need to analyse the transactions that fall outside the range to
determine whether they have similar characteristics and, therefore, need to be
evaluated as a separate class of transactions with a different estimated selling price.
If the entity has established a reasonable range for the estimated stand-alone selling
prices and the stated contractual price fell within that range, it may be appropriate to
use the stated contractual price as the stand-alone selling price in the allocation
calculation. However, if the stated contractual price for the good or service was outside
of the range, the stand-alone selling price would need to be adjusted to a point within
the established range in order to allocate the transaction price on a relative stand-alone
selling price basis. In these situations, the entity would need to determine which point
in the range is most appropriate to use (e.g. the midpoint of the range or the outer limit
nearest to the stated contractual price) when performing the allocation calculation.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 427
