IFRS 15, Revenue from contracts with customers – Boutique treats on performance obligations and revenue recognition, Part IV

Athens, June 2018

Chris Ragkavas, BA, MA, FCCA, CGMA
IFRS technical expert, financial consultant.

Allocating the transaction price among the POs

When a contract includes more than one POs, the total agreed consideration may be different to the sum of the considerations that would have been agreed, for each individual PO.

Proper allocation of the TP to different POs is essential, especially when some POs are satisfied over time and some at a point in time, affecting the amount of revenue to be recognized in different accounting periods.

Moreover, entities must allocate part of the TP to POs that are contractually satisfied free of charge, as practically no PO is taken to be satisfied under this standard, for no consideration.

Entities must allocate the TP to the POs, based on the stand-alone selling price of each PO. In our examples below, we assume that the SSPs are the price at which the entity would sell each good/service separately to a customer, as alternative methods are beyond the scope of this article.

Example 1 – Allocate the TP to POs
Impitech enters into a contract to deliver the following goods/services to Global Merchant bank. Total consideration agreed: $ 3.4 million.

  • 2,000 Lenovo ThinkPad X1 Carbon laptops, in July 2019.

  • Install the new SAP version, in December 2019.

  • Provide after sales service for 36 months, between January 2020 and December 2022.

The SSP for each PO is as follows:

$ million
2,000 Lenovo ThinkPad laptops: 3.2
SAP 0.4
After sales service 0.6
Total 4.2

So the bundle is offered at a discount of $ 0.8 million. 

Option 1 – Allocate the TP to all POs, proportionately to their SSP.

That is the standard’s primary approach.

Impitech allocates TP to each PO as follows:

$ million                            $ million
2,000 Lenovo ThinkPad laptops: 3.2 (3.2/4.2) x 3.4 = 2.590
SAP 0.4 (0.4/4.2) x 3.4 = 0.324
After sales service 0.6 (0.6/4.2) x 3.4 = 0.486
Total 4.2                            3.400

Discount is therefore applied proportionately to all POs.

Revenue for the laptops will be recognized in July 2019, for SAP in December 2019 (both at a point in time) and for after sales service, over time, in the 36 months starting from January 2020, in a manner that depicts Impitech’s performance in rendering these services, e.g. in 36 equal installments.

Option 2 – Allocate the TP to some but not all POs.

Assuming Impitech regularly sells the laptops and SAP as a bundle, called “2 in 1”, without the after sales service being necessarily part of that bundle. The regular offer price of “2 in 1”, is  $ 2.8 million. The difference between the SSPs of the two POs and “2 in 1” price, is $(3.2 + 0.4) = $ 3.6 – $2.8 = $0.8 million, equal to the discount of the bundle including the after sales service.

Impitech should then allocate the $ 0.8 million discount to those two POs only.

 $ Million  $ Million
2,000 Lenovo ThinkPad laptops: 3.2 (3.2/3.6) x 2.8 = 2.490
SAP 0.4 (0.4/3.6) x 2.8 = 0.310
After sales service 0.6                            0.600
Total 4.2                            3.400

Example 2 – Allocate the TP to a PO that is satisfied free of charge

An individual subscribes to Easymobile’s network for 28 months.  Her package contains the following (all amounts per month):

  • 600 call minutes to all mobile networks, at £ 10

  • 10 GB of data, at  £ 12.

  • 200 SMSs, at £ 6.

  • iPhone 8, free of charge.  SSP £ 600.

We will prorate the consideration to each PO, based on its SSP for the total contract duration, as it is not allowed to recognize zero revenue for the mobile device. Total consideration to be received during the 28 month subscription period is, 28 x £ 28 = £ 784.

£ £
600’ voice 280 (280/1,384) x 784 = 158.61
10 GB 336 (336/1,384) x 784 = 190.34
200 SMSs 168 (168/1,384) x 784 =    95.16
Mobile device 600 (600/1,384) x 784 = 339.89
Total 1,384                                  784.00

Revenue for the mobile device will be recognized at a point in time, on delivery. Revenue for the remaining POs, will be recognized over time, on a monthly basis.

PO: performance obligation.
TP: transaction price.
SSP: stand-alone selling price.

Queries, comments, are welcome at [email protected]

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