Residual approach
The residual approach estimates a good or service's standalone selling price as the total transaction price less the observable standalone selling prices of the other promised goods or services. It is permitted only if that item's selling price is highly variable or uncertain, not as a general shortcut for absorbing a bundle discount.
Standard references
- ASC 606606-10-32-34(c)
- IFRS 15paragraph 79(c)
- Ind AS 115paragraph 79(c)
Worked example
Illustrative: a $150,000 contract for a licence, hosting and support. Hosting ($50,000) and support ($20,000) have observable SSPs. The licence has been sold for anywhere from $40,000 to $140,000, with no representative price.
- Confirm the licence price is highly variable: the range is broad and no discernible SSP exists.
- Residual licence SSP = $150,000 − $50,000 − $20,000 = $80,000.
- Sanity check: $80,000 sits inside the observed range and is not nil, so the result is plausible.
Result: Licence SSP $80,000, documented with the evidence that its price is highly variable.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Using the residual approach for an item that has an observable standalone price.
- Accepting a residual of zero or an implausibly small amount, which signals the approach does not fit the facts.
- Confusing the residual approach (an SSP estimation method) with the residual cent left by rounding.
- Not documenting why the price is highly variable or uncertain.