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( ASC 606 ) Step 4 : ALLOCATE THE TRANSACTION PRICE

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

Lets take a quick look on Step 4 which is Allocation of Transaction Price

ALLOCATE THE TRANSACTION PRICE

Step 4 allocates the transaction price to the distinct POBs in a contract. An entity typically allocates the transaction price to each POB based on the relative standalone selling prices of each distinct good or service promised in the contract.

If a contract has more than one performance obligation, the business needs to provide an accurate estimation as to that obligation’s standalone selling price versus the total agreed upon amount.

ASC 606 allows for includes three methods of figuring this amount—adjustment market assessment, expected cost plus margin, and residual.

To be continued