SFRS(I) 15: Multiple Methods for SSP Estimation

In applying the revenue from contracts with customers standard, a company may sometimes need to use more than one method to estimate the stand-alone selling prices  (SSP) of goods or services within a contract, particularly when two or more items have highly variable or uncertain prices.

1. Allocation Objective Remains Paramount

• Impact: Any combination of estimation methods (e.g., residual approach plus adjusted market assessment) must still achieve the allocation objective in paragraph 73: the transaction price allocated to each performance obligation should represent the consideration the entity expects to receive in exchange for satisfying that obligation.

• Practical Issue: When mixing methods, there is a risk that the resulting SSPs become internally inconsistent or fail to reflect a rational stand-alone price for each distinct good or service. Entities must document how the combined approach meets the objective, not merely produce a mathematical split.

2. Residual Approach – Strict Conditions Apply

• Guidance: The residual approach (deducting observable SSPs of other items from total transaction price) is permitted only if:

  • The entity sells the same good/service to different customers at widely varying prices (no clear SSP), or

  • The price has not yet been established and the good/service has never been sold on a stand-alone basis.

• Practical Issue: Entities frequently attempt to use the residual approach as a default when SSPs are simply “difficult” to determine. This is not allowed. The conditions are restrictive. Auditors will challenge residual approach usage unless clear evidence of highly variable pricing or no historical stand-alone sales exists.

3. Sequential Application of Methods (Para 80 Example)

• Scenario: Two or more items have highly variable or uncertain SSPs. The entity first uses the residual approach to determine a combined SSP for those items, then applies another method (e.g., expected cost plus margin) to allocate that combined amount among the individual items.

• Impact: This is explicitly permitted, but it introduces estimation complexity and potential circularity.

• Practical Issue: The combined SSP derived via the residual approach is itself an estimate. Applying a second method to split that estimate does not create two independent SSPs. Entities must ensure the second method is applied consistently and does not override the residual logic. Disclosure of the multi-step process is critical.

4. Verification of Consistency (Para 80)

• Requirement: When using a mix of methods, the entity must verify that the resulting allocation is consistent with:

  • The allocation objective (para 73), and

  • The estimation principles for stand-alone selling prices (para 78), which require that the estimate be maximised using observable inputs and reflect the price the entity would charge for that good/service on a stand-alone basis.

• Practical Issue: This verification is often overlooked in practice. Many entities simply allocate without performing a reasonableness check. Accountants should design a formal validation step (e.g., comparing estimated SSPs to recent transactions or internal pricing guidelines) and document the conclusion.

5. Disclosure Implications

• Impact: Under SFRS(I) 15.126–129, entities must disclose the methods used to estimate SSPs and whether those methods (including any combination) involve significant judgements.

• Practical Issue: When multiple methods are used, the disclosure should explain:

  • Which items were grouped for residual estimation,

  • Which secondary method was applied to allocate the residual amount, and

  • Why that combination was necessary and appropriate.

  • Failure to provide such disclosure may lead to regulatory scrutiny or audit qualification.

6. Audit and Internal Control Considerations

• Risk Area: Using multiple methods increases the risk of management bias, particularly when residual approach is applied to high-margin or unique items.

• Control Recommendation: Establish a policy that requires:

  • Approval of any use of residual approach by a designated senior financial officer,

  • Pre-approval of the secondary allocation method,

  • Periodic back-testing of estimated SSPs against actual stand-alone sales when such sales subsequently occur.

Summary for Professional Accountants