Executive Summary
Under ASC 606 and IFRS 15, Step 4 – Allocate the Transaction Price relies fundamentally on the concept of Standalone Selling Price (SSP). While the accounting standards define what SSP represents, they intentionally allow flexibility in how SSP is represented and operationalized. In practice, this flexibility gives rise to multiple SSP representation types—such as unit price, discount-based, gross margin–based, or base-price percentages—which in turn affect the calculation of Extended SSP and ultimately influence relative SSP allocation outcomes.
This whitepaper builds on prior SSP, Extended SSP, and Relative SSP concepts and takes them to the next level. Using a worked, multi-line contract example, it demonstrates how different SSP representation types—applied to the same promised goods and services—can produce different allocation results, while remaining fully compliant with ASC 606 and IFRS 15. It then explains why such differences are acceptable from an accounting perspective, even though they impact contract assets, contract liabilities, revenue timing, and margin profiles.
The objective is to establish a clear mental model that connects accounting guidance, economic substance, and system execution—without removing or diluting any previously established explanations.
1. Baseline Contract Scenario (Same Promise, Same Economics)
Contract Overview
A customer signs a bundled contract for:
| Performance Obligation | Quantity | Duration | Billing Amount |
|---|---|---|---|
| POB A – SaaS License | 10 users | 12 months | $90,000 |
| POB B – Implementation | 1 | N/A | $30,000 |
| Total Transaction Price | $120,000 |
Important constraint:
The promised goods and services are identical in all scenarios discussed in this paper. Only the SSP representation method changes.
2. Cost, List Price, and Base Price Assumptions (Fixed Across Scenarios)
| Input | SaaS | Implementation |
|---|---|---|
| Unit List Price | $1,200/user/month | $35,000 |
| Base Price | $1,000/user/month | $32,000 |
| Cost | $400/user/month | $20,000 |
These inputs remain constant across all scenarios. Any change in allocation is driven solely by SSP representation choice.
3. Scenario 1 – SSP Represented as Unit Selling Price
SSP Representation
- SaaS SSP = $1,000 per user per month
- Implementation SSP = $32,000
Extended SSP Calculation
| POB | Formula | Extended SSP |
|---|---|---|
| SaaS | 10 × 12 × $1,000 | $120,000 |
| Implementation | $32,000 | $32,000 |
| Total SSP | $152,000 |
Relative SSP Allocation
| POB | Relative SSP % | Allocated Revenue |
|---|---|---|
| SaaS | 120,000 / 152,000 = 78.95% | $94,737 |
| Implementation | 21.05% | $25,263 |
| Total | $120,000 |
4. Scenario 2 – SSP Represented as Discount Percentage of Unit List Price
SSP Representation
- SaaS SSP = 20% discount on list
- Implementation SSP = 10% discount on list
Extended SSP Calculation
| POB | Formula | Extended SSP |
|---|---|---|
| SaaS | 10 × 12 × (80% × $1,200) | $115,200 |
| Implementation | 90% × $35,000 | $31,500 |
| Total SSP | $146,700 |
Relative SSP Allocation
| POB | Relative SSP % | Allocated Revenue |
|---|---|---|
| SaaS | 78.53% | $94,236 |
| Implementation | 21.47% | $25,764 |
Observation:
The same promise and same contract price already produce a different allocation outcome.
5. Scenario 3 – SSP Represented as Gross Margin Percentage
SSP Representation
- SaaS SSP = 60% gross margin
- Implementation SSP = 40% gross margin
Extended SSP Calculation
| POB | Formula | Extended SSP |
|---|---|---|
| SaaS | (100 × Cost) / (100 − Margin) | (100 × 48,000) / 40 = $120,000 |
| Implementation | (100 × 20,000) / 60 = $33,333 | |
| Total SSP | $153,333 |
Relative SSP Allocation
| POB | Relative SSP % | Allocated Revenue |
|---|---|---|
| SaaS | 78.27% | $93,924 |
| Implementation | 21.73% | $26,076 |
6. Summary Comparison – Same Contract, Different SSP Representation
| Scenario | SaaS Allocation | Implementation Allocation |
|---|---|---|
| Unit Price | $94,737 | $25,263 |
| Discount % | $94,236 | $25,764 |
| Gross Margin | $93,924 | $26,076 |
Nothing changed except the SSP representation.
7. Why SSP Representation Changes Allocation
Key Principle
ASC 606 and IFRS 15 do not prescribe how SSP must be represented. They prescribe what SSP must represent.
SSP must be:
- A reasonable estimate
- Of the price at which the good or service would be sold standalone
- Using a consistent and supportable methodology
Each SSP representation answers the same economic question from a different lens:
| Representation | Economic Lens |
|---|---|
| Unit Price | Observable transaction behavior |
| Discount Percentage | Pricing governance and sales policy |
| Gross Margin | Cost recovery and profitability model |
| Percentage of Base Price | List-price normalization |
All are valid if they faithfully represent standalone economics.
8. Why It Is Acceptable That Allocation Changes
Critical Accounting Insight
Revenue allocation is not meant to be unique; it is meant to be reasonable.
ASC 606 explicitly allows estimation, judgment, and a range of acceptable outcomes. What the standard prohibits is arbitrary allocation, inconsistent application, or results that contradict observable economics.
9. Impact on Contract Assets and Contract Liabilities
Yes, different SSP representation choices will affect:
- Contract asset balances
- Contract liability amortization
- Revenue timing by performance obligation
- Margin profiles by period
This is expected and acceptable because:
- Allocation reflects relative value, not billing
- Contract assets and liabilities are accounting constructs, not cash
- As long as the SSP method is documented, consistently applied, and periodically reviewed, the resulting accounting is compliant
Auditors do not expect identical allocations; they expect defensible allocations.
10. Why Systems Care About SSP Representation Types
From an operational perspective, SSP representation determines:
- How SSP scales with quantity and duration
- How subscriptions versus one-time services behave
- How pricing changes propagate through allocations
- How discount reasonableness is enforced
SSP representation is therefore a control decision, not merely a calculation choice.
11. Mental Model to Retain
- SSP = Economic truth (estimated)
- Representation Type = Measurement lens
- Extended SSP = Scaled valuation
- Relative SSP = Allocation logic
- Allocated Revenue = Accounting output
Different lenses yield different measurements, all within acceptable accounting tolerance.
Conclusion
It is entirely acceptable—and expected—that the same contract with the same promised goods and services produces different allocation outcomes when different SSP representation types are used. As long as the representation faithfully reflects standalone economics, is consistently applied, and is supported by governance and documentation, the resulting revenue recognition, contract assets, and contract liabilities remain fully compliant with ASC 606 and IFRS 15.
Understanding SSP representation types is therefore essential not only for technical accounting accuracy, but also for designing scalable revenue systems, defending audit positions, and explaining allocation outcomes to stakeholders.
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