Once transaction price is determined under the updated revenue recognition standard, it is allocated to performance obligations (PO’s) based on relative stand-alone selling price (SSP).
Transaction price is the basis for measuring revenue. It is the amount of consideration the entity expects to be entitled to in exchange for transferring promised goods or services. The standard identifies three separate estimation methods that can be used to estimate stand-alone selling price. These include:
• Adjusted market assessment approach;
• expected cost-plus margin approach and
• residual approach.
These approaches can also be utilized when considering how to allocate discounts and variable consideration. Within this segment, we cover the aspects of allocating the transaction price for revenue recognition.
For a contract that has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in the amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations. Any subsequent changes in the transaction price should be allocated on the same basis as at contract inception.
Publication Date: February 2021
Designed For
Accountants and Finance professionals, Internal auditors/Professionals considering the role of internal audit, and Legal and Compliance professionals
Topics Covered
- Allocate
- Estimation Methods
- Adjusted Market Assessment
- Example Adjusted Market
- Example Two Adjusted Market
- Allocating VC Using Adjusted Market
- Expected Cost Plus Margin
- Example Two Expected Cost Plus Margin
- Residual Approach
- Example Residual Approach
- When Residual Approach Can Be Used
- How To Allocate
- Discount Example One
- Discount Example Two
- Comparison to AS 605
- Variable Consideration
- COVID Impact on Topic 606
- Summary
- Appendix Example Three — Adjusted Market Assessment
Learning Objectives
- Describe step four of the revenue recognition model: Allocate the Transaction Price
- Recognize how to evaluate examples of estimation approaches for stand-alone selling price (SSP)
- Identify the adjusted market assessment estimation approach and examine examples
- Identify the expected cost-plus margin approach and examine examples
- Identify the residual estimation approach and examine examples
- Identify how to allocate discounts
- Differentiate between Accounting Standards Codification (ASC) 605 and ASC 606
- Recognize how to allocate variable consideration (VC)
- Describe COVID impact
Level
Basic
Instructional Method
Self-Study
NASBA Field of Study
Accounting (2 hours)
Program Prerequisites
None
Advance Preparation
None
Instructor
Lynn Fountain
Lynn Fountain has over 38 years of experience spanning public accounting, corporate accounting and consulting. 20 years of her experience has been working in the areas of internal and external auditing and risk management. She is a subject matter expert in multiple fields including internal audit, ethics, fraud evaluations, Sarbanes-Oxley, enterprise risk management, governance, financial management and compliance. Lynn has held two Chief Audit Executive (CAE) positions for international companies. In one of her roles as CAE, she assisted in the investigation of a multi-million-dollar fraud scheme perpetrated by a vendor that spanned 7 years and implicated 20 employees. The fraud was formally investigation by the FBI and resulted in 5 indictments estimating a $13M fraud loss.
Ms. Fountain is currently engaged in her own consulting and training practice. She is a highly sought-after trainer and international speaker. In addition, Ms. Fountain has assisted numerous companies with enterprise risk management frameworks, internal audit processes and financial accounting. She also serves as a discussion leader for the AICPA for numerous classes finance, accounting and risk management topics.
Ms. Fountain is the author of three separate technical books. Her first book released in 2015 by the Institute of Internal Auditors Foundation is entitled “Raise the Red Flag – The Internal Auditors Guide to Fraud Evaluations”. Her second book “Leading the Internal Audit Function” was released in October 2015 by Taylor & Francis Publications. This book serves as the initial launch for a series of leading practice internal audit and information technology publications. Her third book “Ethics and the Internal Auditor’s Dilemma” was released in December 2016.
Ms. Fountain obtained her BSBA from Pittsburg State University and her MBA from Washburn University in Kansas. She has her CPA, CGMA, CRMA credentials.