Revenue recognition under ASC 606 and IFRS 15 requires companies to allocate transaction prices across performance obligations and track how those amounts flow into financial reporting. This process involves several key amounts—such as Selling Amount, Obligation Amount, Revenue Recognized, and Billed Amount—each of which plays a critical role in compliance and reporting accuracy.
This blog explains these amounts, how they are derived, how they interact, and how Satisfaction Status determines when revenue can be recognized.
🔹 1. Selling Amount
- Definition: The price directly associated with an item or service as entered on the sales order or invoice.
- Derivation: Taken from the contract/order at line level. It is the list price or negotiated sales price for that obligation.
- Usage: Serves as the starting point for determining allocation to performance obligations.
- Example: A software license is sold for $1,000. The Selling Amount is $1,000.
🔹 2. Obligation Amount
- Definition: The portion of the Total Transaction Price allocated to a specific Performance Obligation.
- Derivation: Based on Standalone Selling Price (SSP) allocation.
- Usage: Represents the contractual revenue that should be recognized for that obligation once satisfied.
- Dependency: Selling Amount may differ from Obligation Amount if discounts or bundles exist.
- Example: A $1,000 software license and $200 support are sold together for $1,050. Obligation Amounts are allocated (e.g., $875 license, $175 support) using relative SSP allocation.
🔹 3. Extended SSP
- Definition: The standalone selling price multiplied by the quantity ordered.
- Derivation: SSP (per unit) × Quantity.
- Usage: Provides the reference value for allocating discounts proportionally.
- Example: SSP for support = $200. Customer buys 2 support packages. Extended SSP = $400.
🔹 4. Total Transaction Price
- Definition: The total consideration promised in the contract (after discounts, rebates, incentives, variable consideration adjustments).
- Derivation: Sum of all Selling Amounts (adjusted for discounts and variable considerations).
- Usage: This is the amount to be allocated across all performance obligations.
- Example: Customer agrees to $1,050 total for software + support bundle.
🔹 5. Revenue Recognized
- Definition: The portion of the Obligation Amount that has been recognized as revenue, based on Satisfaction Status (point-in-time or over-time).
- Derivation:
- Point-in-Time: Recognize 100% once delivered.
- Over-Time: Recognize proportionally using input/output measures (percentage complete, time elapsed, units delivered).
- Usage: Recorded in financial statements to show earned revenue.
- Example: If $175 support obligation is recognized ratably over 12 months, after 3 months revenue recognized = $43.75.
🔹 6. Billed Amount
- Definition: The amount invoiced to the customer (may differ from recognized revenue).
- Derivation: Comes from Billing / Receivables system once invoice is generated.
- Usage: Determines contract asset/liability position:
- Revenue > Billing → Contract Asset.
- Billing > Revenue → Contract Liability (Deferred Revenue).
- Example: Customer billed $1,050 upfront for software + support.
🔹 7. Total Revenue Recognized
- Definition: The sum of Revenue Recognized across all obligations within the contract.
- Usage: Provides cumulative recognized revenue balance for reporting and disclosures.
- Dependency: Tied directly to Satisfaction Status of each obligation.
- Example: License $875 recognized at delivery + support $43.75 recognized after 3 months = $918.75 Total Revenue Recognized.
🔹 8. Total Billed Amount
- Definition: The sum of all amounts invoiced (Billed Amounts) within the contract.
- Usage: Shows cumulative billings versus revenue recognized to assess unbilled receivables or deferred revenue.
- Example: If full $1,050 was invoiced on day one, Total Billed Amount = $1,050.
🔗 Relationships & Dependencies
- Selling Amount → Total Transaction Price
- Selling Amounts (adjusted for discounts/variable consideration) roll up into the Total Transaction Price.
- Extended SSP → Obligation Amount
- Extended SSPs establish the relative weight for allocating Total Transaction Price to performance obligations.
- Obligation Amount ↔ Revenue Recognized
- Revenue Recognized depends on how much of the Obligation Amount has been satisfied (driven by Satisfaction Status).
- Billed Amount ↔ Revenue Recognized
- May diverge:
- If billed upfront, revenue recognized lags.
- If revenue recognized ahead of billing (e.g., milestones), results in unbilled receivables.
- May diverge:
- Total Revenue Recognized vs. Total Billed Amount
- Key to determining contract assets/liabilities for balance sheet reporting.
🔑 Role of Satisfaction Status
Satisfaction Status is the trigger that determines when and how much revenue is recognized:
- Point-in-Time: 100% revenue recognized upon delivery/transfer of control.
- Over-Time: Revenue recognized progressively (based on percentage completion, time passage, or output).
- Impact:
- If satisfied → Obligation Amount becomes Revenue Recognized.
- If partially satisfied → Proportional recognition occurs.
- If not yet satisfied → No revenue recognized, even if billed.
📊 Example Contract Walkthrough
- Contract: Software License ($1,000 SSP), Support ($200 SSP).
- Bundle sold for $1,050.
- Allocation: License $875, Support $175.
| Amount Type | License (PO 1) | Support (PO 2) | Total |
| Selling Amount | $1,000 | $50 (discounted) | $1,050 |
| Extended SSP | $1,000 | $200 | $1,200 |
| Obligation Amount | $875 | $175 | $1,050 |
| Revenue Recognized (after 3 months) | $875 (point-in-time) | $43.75 (time-based) | $918.75 |
| Billed Amount | $875 | $175 | $1,050 |
| Total Revenue Recognized | $918.75 | ||
| Total Billed Amount | $1,050 |
➡️ After 3 months:
- Revenue recognized = $918.75.
- Billed amount = $1,050.
- Balance sheet impact = $131.25 deferred revenue (liability).
🏁 Final Thoughts
Understanding how these amounts interact—from Selling Amount to Total Billed Amount—is essential for both compliance and financial transparency. With Satisfaction Status driving recognition, organizations can:
- Stay compliant with ASC 606 and IFRS 15.
- Avoid misstatements in revenue reporting.
- Manage contract assets and liabilities effectively.
- Gain clear insight into profitability and timing of revenue flows.
By mastering these concepts, finance teams can ensure both accurate accounting and business confidence in revenue reporting.
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