Allocation
Allocation is step four of the five-step model: distributing the transaction price of a contract to its performance obligations, generally in proportion to their standalone selling prices.
Revenue Recognition
Explanation
When a contract includes several performance obligations, the total price must be divided among them. The basic rule is relative SSP allocation: each obligation receives a share of the transaction price that corresponds to its share of the total SSPs.
Two exceptions apply:
• Discounts are allocated proportionally to all performance obligations, unless there is observable evidence that the discount relates to specific obligations only.
• Variable consideration can be allocated entirely to one performance obligation (or a distinct good or service within a series) if certain criteria are met.
When the transaction price changes after contract inception, it is reallocated on the same basis as at inception.
Why It Matters
Allocation is why revenue often differs from invoiced amounts. A bundled discount can shift revenue between equipment and service, affecting both timing and contract balances. In SAP Revenue Accounting and Reporting (RAR), allocation is performed automatically at contract level and updated when contracts change.
Related Terms
Standalone Selling Price · Transaction Price · Performance Obligation · Contract Asset
Related Articles
• Standalone Selling Price (SSP): Methods and Common Mistakes
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