Which approach best describes how revenue is allocated when a contract has multiple performance obligations with different standalone selling prices?

• A. The transaction price is allocated to each obligation proportionally to its standalone selling price
• B. The same amount is allocated to each obligation regardless of standalone selling prices
• C. All revenue is recognized when the contract is signed
• D. Revenue is recognized only when the customer pays for all obligations

Answer: (B)

Revenue from contracts with multiple performance obligations is allocated to each obligation based on the relative standalone selling prices of those obligations. This ensures the revenue reflects the value of what is promised to the customer.

If two obligations have standalone selling prices of 100 and 50 and the total transaction price is 150, you allocate 100/150 of the price to the first obligation and 50/150 to the second (that is, 2/3 to the first and 1/3 to the second). If the standalone selling prices aren’t directly observable, you estimate them using acceptable methods such as adjusted market pricing, expected cost-plus, or a residual approach.

Allocating the same amount to each obligation ignores differences in value and can distort when revenue is recognized for each obligation. Proportional allocation to the standalone selling prices is the correct approach.