How do auditors test SSP allocation?

When an auditor challenges an SSP allocation, the question is rarely "is this arithmetic right?". It is "show me why these SSPs are reasonable and that you applied them the same way every time." This post walks through what external auditors usually request, how they test SSP estimates, how they re-perform an allocation (with a $120,000.00 example), and how to respond when a figure is questioned. It is general guidance; your auditor's procedures decide the scope.

What are auditors trying to conclude about SSP?

Auditors want to conclude that revenue is allocated in a way that meets the objective in ASC 606-10-32-28: each obligation gets the consideration the entity expects for it. To get there they check three things: the SSPs are supported, the method is appropriate and consistent, and the allocation and schedule are calculated correctly and agree to the ledger.

SSP is a judgement area, so it tends to get more attention than the arithmetic. Expect questions on the evidence behind each figure and on contracts where the result looks unusual, such as a large discount or a service allocated far less than its usual price.

What do auditors request for SSP testing?

Auditors usually request your SSP policy, the SSP study or table in use for the period, the data behind each SSP, the allocation for each sampled contract, the signed contracts, and evidence of who reviewed and approved the SSPs. A request list is easier to answer when every SSP already sits next to its source.

How do auditors test the SSP estimates?

Auditors test SSP estimates by tracing each figure to its data, checking the method against ASC 606-10-32-33 and 32-34, and testing the data itself. For observable SSPs they look at the spread of actual standalone prices; for estimates they test the inputs, such as hours, rates and margins, and check the residual approach is used only where allowed.

Common procedures:

1. Trace to source. Pick an SSP and follow it to the standalone sales or the cost build it came from.
2. Test the data. Agree a sample of standalone sales to invoices; agree hours and rates in a cost build to time-tracking and payroll.
3. Check consistency. Confirm the same SSP or method was used on similar contracts in the period.
4. Look at the range. If SSPs are set as a range, check where contract prices fall and how outliers were handled. See SSP range.
5. Check the refresh. Confirm the SSP table was reviewed recently enough to reflect current pricing.

For cost-based SSPs, see how to use the expected cost plus margin approach.

How do auditors re-perform the allocation?

Auditors re-perform the allocation by taking the confirmed contract price and SSPs, computing each obligation's share of the total SSPs, multiplying by the price, and comparing the result, line by line and to the cent, with your allocation and schedule. Any difference has to be explained, so a written rounding rule and exact ratios make re-performance straightforward.

Example: a $120,000.00, 12-month contract with three obligations whose SSPs total $130,000.00, so the $10,000.00 discount is spread pro rata under ASC 606-10-32-36.

Each line except the last is rounded half-up to the cent, and the last line takes the remainder, so the total ties to $120,000.00. The subscription is then scheduled at $7,692.30 a month for 11 months and $7,692.39 in month 12, ending at $0.00 deferred.

An auditor re-performing this will check the same three numbers and the same rounding rule. If your file uses rounded weights (for example 76.92%) instead of exact ratios, the amounts can differ by a few cents, and you will be asked to explain why. Our post on where the rounding cent goes covers the edge cases. For the wider audit file, see how to prepare for an ASC 606 revenue audit. You can re-perform this example in the SSP allocation calculator.

How should you respond to an SSP challenge?

Respond with evidence, not a new number. Show the source data for the SSP, the method and why it fits under ASC 606-10-32-33, the consistency of its use across similar contracts, and a sensitivity check showing whether a reasonable alternative SSP would change the allocation materially. If the challenge is valid, correct the method for new contracts and assess the effect on existing ones.

A response pack usually includes:

• The SSP, its method and the data extract behind it.
• Two or three similar contracts using the same SSP.
• A sensitivity table: allocation under your SSP and under the auditor's alternative.
• The approval trail for the SSP table.

Remember that existing contracts are not reallocated for later SSP changes (ASC 606-10-32-43). A changed SSP applies to new contracts unless the original estimate was an error. For a preparer's checklist of what usually goes wrong, see what SSP allocation mistakes auditors flag.

How does Soluqube help you defend an SSP allocation?

Soluqube produces the part of the file an auditor re-performs. After you confirm the obligations, stated prices and SSPs, it allocates by relative SSP in integer arithmetic, rounds to the cent with a named residual line, builds a schedule that ends at $0.00 deferred, records the SSP basis, and exports a SHA-256-hashed workbook so the auditor can confirm nothing changed after review.

• Re-performable: deterministic engine; the same inputs give the same allocation, schedule and hash.
• Evidence per obligation: the contract page and verbatim excerpt; on uploaded text-layer PDFs, the cited line is highlighted. Scanned PDFs without a text layer are refused.
• You stay in control of judgement: Soluqube does not choose SSPs or margins. Extracted contract terms are heuristic and must be confirmed.
• Scope: ASC 606, and Ind AS 115 with 18% GST kept out of the transaction price on INR contracts. Contract modifications are flagged for manual review, not accounted for.

Send three contracts through the design partner programme for a free 3-contract workpaper, or look at the sample SSP workpaper. Founding prices for the first 10 customers are on pricing.