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5.2 Determining standalone selling price
Publication date: 31 Mar 2024
us Revenue guide 5.2
The transaction price should be allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer.
To allocate the transaction price to each performance obligation on a relative standalone selling price basis, an entity shall determine the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those standalone selling prices.
Management should determine the standalone selling price for each item and allocate the transaction price based on each item's relative value to the total value of the goods and services in the arrangement.
The best evidence of standalone selling price is the price a reporting entity charges for that good or service when the reporting entity sells it separately in similar circumstances to similar customers. However, goods or services are not always sold separately in which case the standalone selling price needs to be estimated or derived by other means. This estimate often requires judgment, such as when specialized goods or services are sold only as part of a bundled arrangement.
The relative standalone selling price of each performance obligation is determined at contract inception. The transaction price is not reallocated after contract inception to reflect subsequent changes in standalone selling prices.
A contractually stated price or list price for a good or service may be, but should not be presumed to be, the standalone selling price of the good or service. Reporting entities often provide discounts or other adjustments to list prices to customers. A reporting entity's customary business practices should be considered, including adjustments to list prices, when determining the standalone selling price of an item.
Question RR 5-1 addresses whether the standalone selling price can be based on a range of prices.
Question RR 5-1
Can a reporting entity use a range of prices when determining the standalone selling prices of individual goods or services?
Can a reporting entity use a range of prices when determining the standalone selling prices of individual goods or services?
PwC response
We believe it would be acceptable for a reporting entity to use a range of prices when determining the standalone selling prices of individual goods or services, provided that the range reflects reasonable pricing of each product or service as if it were priced on a standalone basis for similar customers.
The allocation guidance does not specifically refer to the use of a range, but we believe using a range of standalone selling prices is consistent with the overall allocation objective. Reporting entities will need to apply judgment to determine an appropriate range of standalone selling prices.
If a reporting entity decides to use a range to determine standalone selling prices, the contractual price can be considered the standalone selling price if it falls within the range. There may, however, be situations in which the contractual price of a good or service is outside of that range. In those cases, reporting entities should apply a consistent method to determine the standalone selling price within the range for that good or service (for example, the midpoint of the range or the outer limit closest to the stated contractual price).
Example RR 5-1 and Example RR 5-2 illustrate the allocation of transaction price when the goods and services are also sold separately. These concepts are also illustrated in Example 33 of the revenue standard (ASC 606-10-55-256 through ASC 606-10-55-258).
EXAMPLE RR 5-1
Allocating transaction price – standalone selling prices are directly observable
Marine sells boats and provides mooring facilities for its customers. Marine sells the boats for $30,000 each and provides mooring facilities for $5,000 per year. Marine concludes that the goods and services are distinct and accounts for them as separate performance obligations. Marine enters into a contract to sell a boat and one year of mooring services to a customer for $32,500.
How should Marine allocate the transaction price of $32,500 to the performance obligations?
Analysis
Marine should allocate the transaction price of $32,500 to the boat and the mooring services based on their relative standalone selling prices as follows:
Boat: | $27,857 | ($32,500 x ($30,000 / $35,000)) |
Mooring services: | $4,643 | ($32,500 x ($5,000 / $35,000)) |
The allocation results in the $2,500 discount being allocated proportionately to the two performance obligations.
EXAMPLE RR 5-2
Allocating transaction price – use of a range when estimating standalone selling prices
Marine sells boats and provides mooring facilities for its customers. Marine sells the boats on a standalone basis for $29,000 - $32,000 each and provides mooring facilities for $5,000 per year. Marine concludes that the goods and services are distinct and accounts for them as separate performance obligations.
Marine enters into a contract to sell a boat and one year of mooring services to a customer. The stated contract prices for the boat and the mooring services are $31,000 and $1,500, respectively.
How should Marine allocate the total transaction price of $32,500 to each performance obligation?
Analysis
The contract price for the boat ($31,000) falls within the range Marine established for standalone selling prices; therefore, Marine could use the stated contract price for the boat as the standalone selling price in the allocation:
Boat: | $27,986 | ($32,500 x ($31,000 / $36,000)) |
Mooring services: | $4,514 | ($32,500 x ($5,000 / $36,000)) |
If the contract price for the boat did not fall within the range (for example, the boat was priced at $28,000), Marine would need to determine a price within the range to use as the standalone selling price of the boat in the allocation, such as the midpoint. Marine should apply a consistent method for determining the price within the range to use as the standalone selling price.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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