Customers often receive a discount for purchasing multiple goods and/or services as a bundle. Discounts are typically allocated to all of the performance obligations in an arrangement based on their relative standalone selling prices, so that the discount is allocated proportionately to all performance obligations.
A customer receives a discount for purchasing a bundle of goods or services if the sum of the standalone selling prices of those promised goods or services in the contract exceeds the promised consideration in a contract. Except when an entity has observable evidence … that the entire discount relates to only one or more, but not all, performance obligations in a contract, the entity shall allocate a discount proportionately to all performance obligations in the contract. The proportionate allocation of the discount in those circumstances is a consequence of the entity allocating the transaction price to each performance obligation on the basis of the relative standalone selling prices of the underlying distinct goods or services.
It may be appropriate in some instances to allocate the discount to only one or more performance obligations in the contract rather than all performance obligations. This could occur when a reporting entity has observable evidence that the discount relates to one or more, but not all, of the performance obligations in the contract.
All of the following conditions must be met for a reporting entity to allocate a discount to one or more, but not all, performance obligations.
An entity shall allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following criteria are met:
a. The entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a standalone basis.
b. The entity also regularly sells on a standalone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the standalone selling prices of the goods or services in each bundle.
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 above criteria indicate that a discount will typically be allocated only to bundles of two or more performance obligations in an arrangement. Allocation of an entire discount to a single item is therefore expected to be rare.
Example RR 5-6 and Example RR 5-7 illustrate the allocation of a discount. These concepts are also illustrated in Example 34 of the revenue standard (ASC 606-10-55-259
through ASC 606-10-55-269
EXAMPLE RR 5-6
Allocating transaction price – allocating a discount
Retailer enters into an arrangement with its customer to sell a chair, a couch, and a table for $5,400. Retailer regularly sells each product on a standalone basis: the chair for $2,000, the couch for $3,000, and the table for $1,000. The customer receives a $600 discount ($6,000 sum of standalone selling prices less $5,400 transaction price) for buying the bundle of products. The chair and couch will be delivered on March 28 and the table on April 3. Retailer regularly sells the chair and couch together as a bundle for $4,400 (that is, at a $600 discount to the standalone selling prices of the two items). The table is not normally discounted.
How should Retailer allocate the transaction price to the products?
Retailer has observable evidence that the $600 discount should be allocated to only the chair and couch. The chair and couch are regularly sold together for $4,400, and the table is regularly sold for $1,000. Retailer therefore would allocate the $5,400 transaction price as follows:
If, however, the table and the couch in the above example were also regularly discounted when sold as a pair, it would not be appropriate to allocate the discount to any combination of two products. The discount would instead be allocated proportionately to all three products.
EXAMPLE RR 5-7
Allocating transaction price – allocating a discount and applying the residual approach
Seller enters into a contract with a customer to sell Products A, B, and C for a total transaction price of $100,000. On a standalone basis, Seller regularly sells Product A for $25,000 and Product B for $45,000. Product C is a new product that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and B are regularly sold as a bundle for $60,000 (that is, at a $10,000 discount). Seller concludes the residual approach is appropriate for determining the standalone selling price of Product C.
How should Seller allocate the transaction price between Products A, B, and C?
Seller regularly sells Products A and B together for $60,000, so it has observable evidence that the $10,000 discount relates entirely to Products A and B. Therefore, Seller would allocate $60,000 to Products A and B. Using the residual approach, $40,000 would be allocated to Product C ($100,000 total transaction price less $60,000).