performance obligations or distinct goods or services in a series is a requirement, not a
policy choice. If the above criteria are met, the entity must allocate the variable
consideration to the related performance obligation(s). [IFRS 15.85].
The standard provides the following example to illustrate when an entity may or may
not be able to allocate variable consideration to a specific part of a contract. Note that
the example focuses on licences of intellectual property, which are discussed at 9
below. [IFRS 15.IE178-IE187].
Revenue
2165
Example 28.55: Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y),
which the entity determines to represent two performance obligations each satisfied at a point in time. The
stand-alone selling prices of Licences X and Y are CU800 and CU1,000, respectively.
Case A – Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence X is a fixed amount of CU800 and for Licence Y the consideration
is three per cent of the customer’s future sales of products that use Licence Y. For purposes of allocation, the
entity estimates its sales-based royalties (i.e. the variable consideration) to be CU1,000, in accordance with
paragraph 53 of IFRS 15.
To allocate the transaction price, the entity considers the criteria in paragraph 85 of IFRS 15 and concludes
that the variable consideration (i.e. the sales-based royalties) should be allocated entirely to Licence Y. The
entity concludes that the criteria in paragraph 85 of IFRS 15 are met for the following reasons:
(a) the variable payment relates specifically to an outcome from the performance obligation to transfer
Licence Y (i.e. the customer’s subsequent sales of products that use Licence Y); and
(b) allocating the expected royalty amounts of CU1,000 entirely to Licence Y is consistent with the
allocation objective in paragraph 73 of IFRS 15. This is because the entity’s estimate of the amount of
sales-based royalties (CU1,000) approximates the stand-alone selling price of Licence Y and the fixed
amount of CU800 approximates the stand-alone selling price of Licence X. The entity allocates CU800
to Licence X in accordance with paragraph 86 of IFRS 15. This is because, based on an assessment of
the facts and circumstances relating to both licences, allocating to Licence Y some of the fixed
consideration in addition to all of the variable consideration would not meet the allocation objective in
paragraph 73 of IFRS 15.
The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the
transfer of Licence Y, the entity does not recognise revenue because the consideration allocated to Licence Y
is in the form of a sales-based royalty. Therefore, in accordance with paragraph B63 of IFRS 15, the entity
recognises revenue for the sales-based royalty when those subsequent sales occur.
When Licence X is transferred, the entity recognises as revenue the CU800 allocated to Licence X.
Case B – Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence X is a fixed amount of CU300 and for Licence Y the consideration
is five per cent of the customer’s future sales of products that use Licence Y. The entity’s estimate of the
sales-based royalties (i.e. the variable consideration) is CU1,500 in accordance with paragraph 53 of IFRS 15.
To allocate the transaction price, the entity applies the criteria in paragraph 85 of IFRS 15 to determine
whether to allocate the variable consideration (i.e. the sales-based royalties) entirely to Licence Y. In applying
the criteria, the entity concludes that even though the variable payments relate specifically to an outcome
from the performance obligation to transfer Licence Y (i.e. the customer’s subsequent sales of products that
use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the
principle for allocating the transaction price. Allocating CU300 to Licence X and CU1,500 to Licence Y does
not reflect a reasonable allocation of the transaction price on the basis of the stand-alone selling prices of
Licences X and Y of CU800 and CU1,000, respectively. Consequently, the entity applies the general
allocation requirements in paragraphs 76-80 of IFRS 15.
The entity allocates the transaction price of CU300 to Licences X and Y on the basis of relative stand-alone
selling prices of CU800 and CU1,000, respectively. The entity also allocates the consideration related to the
sales-based royalty on a relative stand-alone selling price basis. However, in accordance with paragraph B63
of IFRS 15, when an entity licenses intellectual property in which the consideration is in the form of a sales-
based royalty, the entity cannot recognise revenue until the later of the following events: the subsequent sales
occur; or the performance obligation is satisfied (or partially satisfied).
Licence Y is transferred to the customer at the inception of the contract and Licence X is transferred three
months later. When Licence Y is transferred, the entity recognises as revenue the CU167 (CU1,000 ÷
CU1,800 × CU300) allocated to Licence Y. When Licence X is transferred, the entity recognises as revenue
the CU133 (CU800 ÷ CU1,800 × CU300) allocated to Licence X.
2166 Chapter 28
In the first month, the royalty due from the customer’s first month of sales is CU200. Consequently, in
accordance with paragraph B63 of IFRS 15, the entity recognises as revenue the CU111 (CU1,000 ÷ CU1,800
× CU200) allocated to Licence Y (which has been transferred to the customer and is therefore a satisfied
performance obligation). The entity recognises a contract liability for the CU89 (CU800 ÷ CU1,800 × CU200)
allocated to Licence X. This is because although the subsequent sale by the entity’s customer has occurred,
the performance obligation to which the royalty has been allocated has not been satisfied.
7.3.1
Implementation questions on the variable consideration allocation
exception
7.3.1.A
In order to meet the criteria to allocate variable consideration entirely to
a specific part of a contract, must the allocation be made on a relative
stand-alone selling price basis?
The TRG members generally agreed that a relative stand-alone selling price allocation
is not required to meet the allocation objective when it relates to the allocation of
variable consideration to a specific part of a contract (e.g. a distinct good or service in a
series). The Basis for Conclusions notes that stand-alone selling price is the default
method for meeting the allocation objective, but other methods could be used in certain
instances (e.g. in allocating variable consideration). [IFRS 15.BC279-BC280].
Stakeholders had questioned whether the variable consideration exception would have
limited application to a series of distinct goods or services (see 5.2.2 above). That is, they
wanted to know whether the standard would require that each distinct service that is
substantially the same be allocated the same amount (absolute value) of variable
consideration.96 While the standard does not state what other allocation methods could
be used beyond the relative stand-alone selling price basis, the TRG membe
rs generally
agreed that an entity would apply reasonable judgement to determine whether the
allocation results in a reasonable outcome (and, therefore, meets the allocation
objective in the standard), as discussed above at 7.3 above.
7.4 Allocating
a
discount
The second exception to the relative stand-alone selling price allocation (see 7.3 above
for the first exception) relates to discounts inherent in contracts. When an entity sells a
bundle of goods or services, the selling price of the bundle is often less than the sum of
the stand-alone selling prices of the individual elements. Under the relative stand-alone
selling price allocation method, this discount would be allocated proportionately to all
of the separate performance obligations. [IFRS 15.81].
However, the standard states that if an entity determines that a discount in a contract is
not related to all of the promised goods or services in the contract, the entity allocates
the contract’s entire discount only to the goods or services to which it relates. An entity
would make this determination when the price of certain goods or services is largely
independent of other goods or services in the contract. In these situations, an entity
would be able to effectively ‘carve out’ an individual performance obligation, or some
of the performance obligations in the contract, and allocate the contract’s entire
discount to that performance obligation or group of performance obligations, provided
the criteria below are met. However, an entity could not use this exception to allocate
only a portion of the discount to one or more, but not all, performance obligations in
the contract.
Revenue
2167
The standard requires an entity to allocate a discount entirely to one or more, but not
all, performance obligations in the contract if all of the following criteria are met:
[IFRS 15.82]
(a) the entity regularly sells each distinct good or service (or each bundle of distinct
goods or services) on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some
of those distinct goods or services at a discount to the stand-alone selling prices of
the goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in (b) is
substantially the same as the discount in the contract and an analysis of the goods or
services in each bundle provides observable evidence of the performance obligation
(or performance obligations) to which the entire discount in the contract belongs.
The IASB noted in the Basis for Conclusions that it believes the requirements in
paragraph 82 of IFRS 15 generally applies to contracts that include at least three
performance obligations. While the standard contemplates that an entity may allocate
the entire discount to as few as one performance obligation, the Board further clarified
that it believes such a situation would be rare. [IFRS 15.BC283]. Instead, the Board believes
it is more likely that an entity will be able to demonstrate that a discount relates to two
or more performance obligations. This is because an entity is likely to have observable
information that the stand-alone selling price of a group of promised goods or services
is lower than the price of those items when sold separately. It may be more difficult for
an entity to have sufficient evidence to demonstrate that a discount is associated with a
single performance obligation. When an entity applies a discount to one or more
performance obligations in accordance with the above criteria, the standard states that
the discount is allocated first before using the residual approach to estimate the stand-
alone selling price of a good or service (see 7.1.2 above). [IFRS 15.83].
The standard includes the following example to illustrate this exception and when the
use of the residual approach for estimating stand-alone selling prices may or may not be
appropriate. [IFRS 15.IE167-IE177].
Example 28.56: Allocating a discount
An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone
selling prices:
Product
Stand-alone selling price
£
Product A
40
Product B
55
Product C
45
Total 140
In addition, the entity regularly sells Products B and C together for £60.
Case A – Allocating a discount to one or more performance obligations
The 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.
2168 Chapter 28
The contract includes a discount of CU40 on the overall transaction, which would be allocated proportionately
to all three performance obligations when allocating the transaction price using the relative stand-alone selling
price method (in accordance with paragraph 81 of IFRS 15). However, because the entity regularly sells
Products B and C together for CU60 and Product A for CU40, it has evidence that the entire discount should
be allocated to the promises to transfer Products B and C in accordance with paragraph 82 of IFRS 15.
If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical
matter, account for the transfer of those products as a single performance obligation. That is, the entity could
allocate CU60 of the transaction price to the single performance obligation and recognise revenue of CU60
when Products B and C simultaneously transfer to the customer.
If the contract requires the entity to transfer control of Products B and C at different points in time, then the
allocated amount of CU60 is individually allocated to the promises to transfer Product B (stand-alone selling
price of CU55) and Product C (stand-alone selling price of CU45) as follows:
Product Allocated
transaction
price
CU
Product B
33
(CU55 ÷ CU100 total stand-alone selling price × CU60)
Product C
27
(CU45 ÷ CU100 total stand-alone selling price × CU60)
Total 60
Case B – Residual approach is appropriate
The entity enters into a contract with a customer to sell Products A, B and C as described in Case A. The
contract also includes a promise to transfer Product D. Total consideration in the contract is CU130. The
stand-alone selling price for Product D is highly variable (see paragraph 79(c) of IFRS 15) because the entity
sells Product D to different customers for a broad range of amounts (CU15-CU45). Consequently, the entity
decides to estimate the stand-alone selling price of Product D using the residual approach.
Before estimating the stand-alone selling price of Product D using the residual approach, the entity determines
whether any discount should be allocated to the other performance obligations in the contract in accordance
with paragraphs 82 and 83 of IFRS 15.
As in Case A, because the entity regularly sells Products B and C together for CU60 and Product A for CU40,
it has observable evidence that CU100
should be allocated to those three products and a CU40 discount should
be allocated to the promises to transfer Products B and C in accordance with paragraph 82 of IFRS 15. Using
the residual approach, the entity estimates the stand-alone selling price of Product D to be CU30 as follows:
Stand-alone
Product
Method
selling price
CU
Product A
40
Directly observable (see paragraph 77 of IFRS 15)
Products B and C
60
Directly observable with discount (see Paragraph 82 of IFRS 15)
Product D
30
Residual approach (see paragraph 79(c) of IFRS 15)
Total 130
The entity observes that the resulting CU30 allocated to Product D is within the range of its observable selling
prices (CU15-CU45). Therefore, the resulting allocation (see above table) is consistent with the allocation
objective in paragraph 73 of IFRS 15 and the requirements in paragraph 78 of IFRS 15.
Case C – Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is CU105 instead of CU130.
Consequently, the application of the residual approach would result in a stand-alone selling price of CU5 for
Product D (CU105 transaction price less CU100 allocated to Products A, B and C). The entity concludes that
CU5 would not faithfully depict the amount of consideration to which the entity expects to be entitled in
exchange for satisfying its performance obligation to transfer Product D, because CU5 does not approximate the
stand-alone selling price of Product D, which ranges from CU15-CU45. Consequently, the entity reviews its
Revenue
2169
observable data, including sales and margin reports, to estimate the stand-alone selling price of Product D using
another suitable method. The entity allocates the transaction price of CU105 to Products A, B, C and D using
the relative stand-alone selling prices of those products in accordance with paragraphs 73-80 of IFRS 15.
The ability to allocate a discount to some, but not all, performance obligations within a
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 430
