Estimating Standalone Selling Price Using the Residual Approach (ASC 606 & IFRS 15)

One of the most challenging aspects of revenue recognition under ASC 606 and IFRS 15 is estimating the Standalone Selling Price (SSP) for goods and services that are not sold frequently, have a wide range of selling prices, or do not yet have an established market price.

In such scenarios, accounting standards permit the use of the Residual Approach to estimate SSP. This method ensures compliance while providing flexibility for organizations that offer complex or innovative products and services.

When to Use the Residual Approach

The residual approach is appropriate only when:

  • A promised good or service is sold at a broad range of prices.
  • A promised good or service does not yet have an established SSP.

For example:

  • A software company sells licenses at widely varying prices due to deal size, customer category, or bundling strategy.
  • A new digital product has just been launched and does not yet have sufficient standalone sales history to determine an SSP.

Key Features of the Residual Approach

This feature provides the ability to:

  • Identify performance obligations for which SSP must be estimated using the residual method. Performance obligations can be created using either:
    • A Performance Obligation Identification Rule, or
    • A Performance Obligation Template.
  • View computed residual SSP directly within the Manage Customer Contracts UI.(Specific to Oracle RMCS)
  • Allow Revenue Management to estimate SSP whenever an order line has a Use Residual Approach designation.

How the Residual Approach Works

When the Use Residual Approach attribute is set to Y(Specific to Oracle RMCS), the following rules apply:

  1. The SSP is estimated using the residual approach.
  2. The order line is excluded from existing SSP validations.
  3. Any unit SSP on the transaction line is ignored.

Residual Approach in Action

When the residual approach is enabled:

  • SSP is estimated by subtracting the sum of known SSPs for other goods/services in the contract from the total transaction price.
  • Performance obligations marked for residual estimation are excluded from SSP validations.
  • During the Identify Customer Contracts process, the residual SSP is computed automatically.
  • The computed residual SSP is used as the Extended SSP for allocation of contract revenue.

Example:

  • Total Contract Price = $100,000
  • SSP of Hardware = $40,000
  • SSP of Training = $20,000
  • SSP of Consulting (unknown, residual applied) = ?

Residual SSP = $100,000 – ($40,000 + $20,000) = $40,000

Revenue allocation now includes $40,000 for consulting as the residual SSP.

Allocation of Residual SSP Across Obligations

If two or more performance obligations require residual SSP estimation, the computed residual SSP is allocated based on the obligations’ selling prices.

Example:

  • Residual Pool = $30,000
  • Obligation A (relative price weight: 60%) → $18,000 allocated
  • Obligation B (relative price weight: 40%) → $12,000 allocated

Negative Residual SSP Handling

In cases where the computed residual SSP is negative:

  • The negative value is displayed for transparency.
  • The Extended SSP is set to zero to avoid allocation of negative revenue.

Special Considerations in Residual Approach

  1. FBDI Transaction Lines (Specific to Oracle RMCS)
    • Residual SSP takes priority over unit SSP.
    • Any unit SSP on uploaded transactions is ignored.
  2. Performance Obligation Templates
    • Derive Pricing Dimension combinations are used only as secondary grouping.
    • They have no impact on the residual estimation itself.
  3. Contract Modifications
    • Only material contract modifications are permitted.
    • Immaterial changes are ignored.
    • When adding new lines, set Action Code = Create New PO.

Benefits of Using the Residual Approach

  • Ensures compliance with ASC 606 / IFRS 15.
  • Provides flexibility for new or highly customized offerings.
  • Prevents distortion in allocation when SSPs for other obligations are known and reliable.

Final Thoughts

The Residual Approach to estimating standalone selling prices is a powerful tool when SSPs are either too variable or not yet established. By following the rules outlined in ASC 606 and IFRS 15, organizations can confidently allocate transaction prices, remain compliant, and accurately reflect their revenue performance obligations.

Whether it’s a software license sold at varied deal sizes, or a new product with no historical sales, the residual approach ensures that revenue allocation remains fair, accurate, and transparent.

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