A company enters into a single contract to deliver three distinct goods to a customer. It regularly sells two of the goods separately and has directly observable standalone selling prices for both. The third good is being offered for the first time: the company has never sold it on a standalone basis and has not yet set a price for it, so no directly observable or comparable market evidence of its selling price exists. IFRS 15 identifies the adjusted market assessment approach, the expected cost plus a margin approach, and the residual approach as suitable methods for estimating a standalone selling price that is not directly observable. Under IFRS 15 paragraph 79, when is the residual approach specifically available?
- Whenever the entity finds it administratively simpler than gathering observable market data or cost information for the good
- Only when the good is sold exclusively as part of bundled contracts and is never, under any circumstance, sold on a standalone basis to any customer
- Only when the good's selling price is highly variable because the entity sells it to different customers, at or near the same time, for a broad range of amounts with no discernible representative price, or when the entity has not yet established a price for the good and has never sold it on a standalone basis, making the price uncertain
- Only when the customer explicitly requests that the price be calculated as a residual amount rather than through a market-based or cost-based method
Why C? And why not the others?
Correct answer: C. Only when the good's selling price is highly variable because the entity sells it to different customers, at or near the same time, for a broad range of amounts with no discernible representative price, or when the entity has not yet established a price for the good and has never sold it on a standalone basis, making the price uncertain
IFRS 15 paragraph 79 restricts the residual approach to situations where a good or service's standalone selling price is highly variable — sold to different customers, at or near the same time, for a broad range of amounts from which no representative price is discernible — or uncertain, meaning the entity has not yet established a price for the good and has never sold it on a standalone basis, exactly the circumstances described. The option treating the residual approach as available whenever it is merely more convenient is wrong because paragraph 79 sets out specific eligibility criteria rather than leaving the choice of method to administrative preference. The option restricting the approach to goods that are never sold standalone under any circumstance is wrong because the uncertain-price criterion only requires that the good has not yet been sold standalone as of the current estimate, not that standalone sales be permanently impossible in the future. The option conditioning use of the approach on a customer's request is wrong because IFRS 15 makes the residual approach a matter of the entity's own accounting policy judgment against the standard's criteria, not something triggered by customer preference.
Source: IFRS 15 Revenue from Contracts with Customers, paragraph 79 (estimating standalone selling price)