1. The Pro-Rata Allocation Principle
For a contract with multiple performance obligations, the entity must allocate the transaction price to each performance obligation in an amount that depicts the consideration to which the entity expects to be entitled. This allocation must be made based on the relative standalone selling prices of the distinct goods or services at contract inception.
2. Estimation Hierarchies for Standalone Selling Prices (SSP)
If a standalone selling price is not directly observable, the entity must estimate it using one of three acceptable methods:
┌────────────────────────────────────────────────────────────────────────┐
│                 SSP Estimation Methods Hierarchy                       │
├───────────────────────────┬───────────────────────────┬────────────────┤
│ Adjusted Market Assessment│ Expected Cost Plus Margin │ Residual       │
├───────────────────────────┼───────────────────────────┼────────────────┤
│ Evaluate competitor market│ Forecast contract costs   │ Total price    │
│ pricing and adjust for    │ and add an appropriate    │ minus known    │
│ entity costs/margins.     │ profit margin.            │ observable SSP│
└───────────────────────────┴───────────────────────────┴────────────────┘

  • The Residual Approach constraint: Can only be used if the entity sells the same good or service to different customers for a broad range of amounts (highly variable), or if the entity has not yet established a price for that item because it hasn’t been sold before.

 
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