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Establishing standalone selling price for tech companies
Determining SSP for revenue recognition purposes
As revenue recognition becomes increasingly complicated for many software companies, applying the standard (ASC 606) may be challenging. Our Technology Alert series address a broad range of questions that may arise regarding one especially complex area: establishing standalone selling price (SSP).
Highly variable or uncertain pricing
ASC 606 generally requires entities to allocate a contract’s transaction price among distinct performance obligations by using the relative standalone selling price of each distinct performance obligation. However, certain goods or services can be sold for a wide range of prices, which may make it difficult to establish the SSPs. To address this challenge, the FASB established the residual approach as a means of determining the SSP.
Challenges associated with the residual approach include:
- Determining when its use is appropriate
- Deciding whether an entity must reassess the appropriateness of its use in each reporting period
- Identifying material rights in contracts that include highly variable or uncertain pricing for optional future goods or services
This Technology Alert offers interpretive guidance and examples for ways to address these challenges when using the residual approach.
Establishing the standalone selling price as a range
Step four of the five-step process under ASC 606 requires entities to determine the standalone selling price for each performance obligation in a contract so that the appropriate amount of revenue may be recognized. When pricing is steady and standalone sales of a good or service are common, the determination of the SSP is likely to be straightforward and involve little to no estimation.
This exercise becomes more complex, however, when the pricing of a good or service varies from one transaction to another or when the standalone sales of a particular good or service are rare or nonexistent. In such cases, we believe entities may establish SSP as a range.
This Technology Alert offers guidance and answers to questions on establishing the SSP as a range, determining the appropriate range, and allocation considerations.
Estimating standalone selling prices for term-based licenses and post-contract customer support
Estimating the standalone selling prices of performance obligations is one area of increased complexity and challenge for software companies under ASC 606, particularly for term-based licenses and postcontract customer support (PCS). This is because, in some cases, observable pricing from standalone sales or contractually stated prices may not exist for one or more performance obligations. We believe that in many such cases, reasonably available observable data other than standalone sales or contractually stated prices may nonetheless exist and may be used to determine the SSP.
For technology and software companies applying the revenue recognition standard, this Technology Alert offers a series of examples to illustrate this point, showing how the SSPs for term-based licenses and PCS may be estimated in various scenarios.
Residual approach to estimating standalone selling prices and allocating the transaction price when a value relationship exists
As discussed in previous Technology Alerts, establishing the SSP is an area of increased complexity for software companies as they implement the requirements of the revenue recognition standard.
Various factors contribute to this challenge such as:
- Highly variable or uncertain pricing
- Lack of standalone sales for one or more goods or services
- Pricing interdependencies such that the selling price of one good or service is used to determine the selling price of another good or service in the same contract
This Technology Alert delves into the specifics of using the residual approach to determine the SSPs for software licenses and post-contract customer support when pricing is highly variable or uncertain and a “value relationship” exists.
Deloitte Accounting Research Tool (DART)
Deloitte also provides the Deloitte Accounting Research Tool (DART), a comprehensive online library of accounting and financial disclosure literature to clients. Updated every business day, DART contains material from the FASB, Emerging Issues Task Force (EITF), American Institute of Certified Public Accountants (AICPA), Public Company Accounting Oversight Board (PCAOB), International Accounting Standards Board (IASB), and Securities and Exchange Commission (SEC), in addition to Deloitte’s own accounting manuals and other interpretive guidance and publications.
The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.
Financial accounting and reporting-related implications
Applying ASC 606 - SaaS and software revenue recognition