A company launches a new subscription analytics service it has never priced or sold before. To estimate this service's standalone selling price, the company evaluates the market in which it will sell the subscription, looks at prices charged by competitors for comparable services, and adjusts that observed pricing to reflect the company's own cost structure and margin objectives, rather than simply copying a competitor's price. Under ASC 606-10-32-33(a), which standalone selling price estimation method is the company applying?
- The adjusted market assessment approach, which evaluates the market in which the entity sells goods or services and estimates the price customers in that market would be willing to pay, informed by observable data such as competitor pricing adjusted for the entity's own costs and margins
- The expected cost plus a margin approach, which forecasts the entity's own expected costs of satisfying the performance obligation and adds an appropriate margin for that good or service
- The residual approach, which subtracts the sum of the observable standalone selling prices of the contract's other performance obligations from the total transaction price
- A blended average of the prices charged in the entity's three most recent contracts for similar services, without regard to market conditions or the entity's own cost structure
Why A? And why not the others?
Correct answer: A. The adjusted market assessment approach, which evaluates the market in which the entity sells goods or services and estimates the price customers in that market would be willing to pay, informed by observable data such as competitor pricing adjusted for the entity's own costs and margins
ASC 606-10-32-33(a) describes the adjusted market assessment approach as evaluating the market in which the entity sells its goods or services and estimating the price that customers in that market would be willing to pay, which may include referencing competitor prices for similar goods or services and adjusting those prices as needed to reflect the entity's own costs and margins; that is exactly what the company is doing by starting from competitor pricing and adjusting it rather than adopting it unchanged. The option describing forecasting expected costs and adding a margin is instead the expected cost plus a margin approach in ASC 606-10-32-33(b), a different method that starts from the entity's own cost base rather than observed market pricing. The option describing subtracting other performance obligations' observable prices from the total transaction price is the residual approach under ASC 606-10-32-34, which is reserved for narrow circumstances such as highly variable or previously unpriced goods or services and is a completely different calculation than estimating a standalone selling price directly. Averaging a handful of the entity's own recent contract prices without considering broader market conditions or its cost structure is not one of the estimation methods ASC 606 describes and would not reflect the standalone selling price objective of representing the price the entity would charge a similar customer in similar circumstances.
Source: FASB Accounting Standards Codification: ASC 606-10-32-33(a), Revenue from Contracts with Customers — Estimating Standalone Selling Prices