Revenue recognition under ASC 606 and IFRS 15 requires companies to allocate the transaction price in a customer contract to each performance obligation based on its Standalone Selling Price (SSP).
But not all goods or services are sold separately, and not every contract explicitly shows standalone pricing. That’s why standards define two approaches: Observed SSP (OSSP) and Estimated SSP (ESSP).
🔹 What is Standalone Selling Price (SSP)?
Standalone Selling Price (SSP) is the price at which an entity would sell a promised good or service separately to a customer under similar terms and circumstances.
- If the price can be directly observed from market transactions, then Observed SSP (OSSP) is used.
- If it is not directly observable, then the company must determine an Estimated SSP (ESSP) using estimation methods.
Correct SSP determination ensures fair allocation of contract revenue, accurate financial reporting, and compliance with accounting standards.
🔹 Observed Standalone Selling Price (OSSP)
Definition
OSSP is the actual price a company charges when it sells a good or service separately under comparable terms and conditions.
Industry Guidelines for OSSP
- Use Historical Transaction Data
- Collect data from past standalone sales of the same or similar product/service.
- Example: A SaaS company sells add-on licenses separately; prior deals establish the OSSP range.
- Segment by Markets and Customers
- Recognize that SSP may differ across customer types (SMBs vs. enterprises), geographies, or sales channels.
- Example: A cloud provider may charge $100/user in the U.S. but $80/user in India due to market differences.
- Exclude Anomalies
- Remove one-off promotions, clearance sales, or bundled discounts that don’t reflect normal standalone pricing.
- Example: A retail store sells a $400 TV at $250 during Black Friday—this is excluded from OSSP analysis.
- Update Regularly
- Markets evolve, so SSP must be refreshed periodically (quarterly, semi-annual, or annual depending on industry).
- Example: A software vendor introduces tiered pricing; SSP must be recalibrated accordingly.
- Document Evidence
- Auditors expect a clear trail of how OSSP was derived (pricing data, assumptions, rationale).
- Example: A telecom provider maintains reports of standalone SIM-only sales to justify OSSP.
OSSP Examples
- Technology/SaaS: A CRM vendor sells additional API calls at $0.05 per call separately—this becomes OSSP.
- Telecom: A phone without a plan sells for $600. This standalone sale provides the OSSP for the handset.
- Retail: A gaming console always retails at $400 when sold separately; even if bundled with free games, $400 is used as OSSP.
🔹 Estimated Standalone Selling Price (ESSP)
Definition
When no observable standalone pricing exists, entities must estimate the SSP using consistent and rational methods.
Common Estimation Methods
- Adjusted Market Assessment Approach
- Research competitors’ pricing for comparable offerings.
- Adjust for brand strength, feature differentiation, or regional cost structures.
- Example: A cybersecurity firm launches a new feature that isn’t sold separately. Competitors charge $2,000; the firm adjusts upward to $2,500 due to better analytics.
- Expected Cost Plus Margin Approach
- Determine the internal cost of delivering the good/service.
- Add a reasonable profit margin aligned with industry standards.
- Example: Providing premium support costs $50/hour. Adding a 30% margin results in an ESSP of $65/hour.
- Residual Approach(use is restricted under ASC 606)
- Applied only when SSPs are highly variable or uncertain.
- Compute SSP by subtracting the sum of observable SSPs of other obligations from the total contract price.
- Example: A SaaS contract is $1,200. Module A has OSSP = $700, Module B = $300. Remaining $200 is allocated to new Module C with no standalone sales.
ESSP Examples
- SaaS: A new AI-powered add-on is only bundled with enterprise subscriptions—no standalone price exists, so ESSP is derived via cost-plus.
- Manufacturing: A custom engineering service offered only with large equipment—cost estimation + margin is used for ESSP.
- Healthcare: A bundled medical device with a training program. Training is not sold separately, so ESSP is estimated based on competitor programs.
🔹 OSSP vs. ESSP: Key Differences
| Aspect | Observed SSP (OSSP) | Estimated SSP (ESSP) |
| Definition | Actual standalone price from sales data. | Estimated price when no standalone sales exist. |
| Source | Historical data, list prices, normal standalone transactions. | Market research, cost-plus models, or residual method. |
| Reliability | High—grounded in actual transactions. | Moderate—requires judgment and assumptions. |
| Complexity | Low—straightforward if data is available. | High—requires financial modeling and management estimates. |
| Examples | SaaS license sold standalone; smartphone retail price; subscription renewal fees. | Free support bundled with software; custom services; new features not yet sold separately. |
🔹 Why SSP Matters
- Compliance: Both ASC 606 and IFRS 15 require proper allocation of transaction price based on SSP.
- Accuracy in Revenue Recognition: Prevents premature or overstated revenue by correctly attributing value.
- Profitability Insights: Proper SSP allocation improves margin analysis at product/service level.
- Audit Transparency: OSSP/ESSP documentation provides defensible evidence for regulators and auditors.
- Strategic Pricing: SSP analysis highlights which offerings drive true profitability, guiding pricing strategies.
🔹 Final Thoughts
- Use OSSP whenever possible, since it’s objective, auditable, and based on real customer transactions.
- Use ESSP cautiously, with clear methodology and documentation.
- Regularly review, validate, and adjust SSPs to reflect market conditions, competitive dynamics, and cost changes.
- A robust SSP framework not only ensures compliance with ASC 606 / IFRS 15 but also enhances pricing intelligence, financial reporting accuracy, and strategic decision-making.
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