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Revenue toolkit: Step four—Allocate the transaction price · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:03
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:06
  SPEAKER_03: I'm Heather Horn.
• 0:07
  SPEAKER_03: Thanks for tuning in to the next episode of our Tool Cut series, where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:21
  SPEAKER_03: For the month of March, it's all about revenue recognition.
• 0:25
  SPEAKER_03: This week, it's step four of the revenue mollow, allocating the transaction price.
• 0:30
  SPEAKER_04: There's lots of guidance to follow here, and you can get a little bit lost in the numbers and the mechanics, and you can't forget to then step back, look at the allocation.
• 0:44
  SPEAKER_04: Does it make sense?
• 0:45
  SPEAKER_01: What I would suggest is when you estimate, when companies have to estimate SSP, they consider leveraging an existing process.
• 0:54
  SPEAKER_03: Angela Ferguson, a PWC National Office Partner, is, of course, back with me again, and she's brought with her a familiar voice, PwC National Office Partner Mike Coleman, who you may remember from the second episode in this series.
• 1:08
  SPEAKER_03: To give a quick recap, so far over the past three weeks, we've identified the contract, identified the performance obligations, and determined the transaction price.
• 1:18
  SPEAKER_03: We're now at step four where we'll allocate the transaction price, which is an exciting milestone because it's the last step before we get to actually recognize revenue.
• 1:28
  SPEAKER_03: We're almost there.
• 1:30
  SPEAKER_03: Mike, Angela, welcome back to our fourth step in the five-step revenue recognition model.
• 1:36
  SPEAKER_03: So getting close to done.
• 1:38
  SPEAKER_03: And this week we're going to be talking about allocating the transaction price.
• 1:42
  SPEAKER_03: And we'll be running through the accounting guidance in the area, including those topics where we get the most questions or always like to talk about the areas of judgment.
• 1:52
  SPEAKER_03: So with all of that background, Angela, can you just remind our listeners of sort of where we are in these five steps?
• 1:59
  SPEAKER_04: Sure thing.
• 2:00
  SPEAKER_04: So we started out with step one, which is when we identified the contract with the customer.
• 2:06
  SPEAKER_04: Then in step two, we identified the performance obligations in that contract.
• 2:13
  SPEAKER_04: Last week, when we covered step three, we talked about determining the transaction price.
• 2:20
  SPEAKER_04: Now in step four, we're going to allocate that transaction price to each of the performance obligations that we identified in step two.
• 2:30
  SPEAKER_03: So, Angela, before you go on to tell us the objective in step four, since we're almost to the end, can you tell people what step five is so they know what to look forward to?
• 2:39
  SPEAKER_04: We'll finally be recognizing revenue in general.
• 2:41
  SPEAKER_04: All right.
• 2:42
  SPEAKER_03: Next week.
• 2:43
  SPEAKER_02: They better tune in next week.
• 2:44
  SPEAKER_03: Okay.
• 2:45
  SPEAKER_03: So with that to look forward to, let's stick to this week.
• 2:48
  SPEAKER_03: So what is sort of the key objective of step four?
• 2:52
  SPEAKER_04: So step four has a stated objective that we're going to allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled to for transferring the promised goods or services to the customer.
• 3:13
  SPEAKER_04: So you can you can tell I was reading that.
• 3:16
  SPEAKER_04: In general, the way we're going to achieve that objective is by allocating the transaction price to each performance obligation based on relative standalone selling price, or as we like to call it, SSP.
• 3:31
  SPEAKER_04: All right, get the lingo down.
• 3:33
  SPEAKER_04: So SSP is going to be a big part of step four.
• 3:39
  SPEAKER_04: Importantly, this allocation happens at contract inception.
• 3:44
  SPEAKER_04: So after you allocate the transaction price at contract inception, you do not reallocate later on, even if there are changes in SSP.
• 3:56
  SPEAKER_04: There are also some special considerations when you're allocating discounts and variable consideration.
• 4:03
  SPEAKER_04: So we will also hit on that during this podcast.
• 4:07
  SPEAKER_03: All right.
• 4:07
  SPEAKER_03: Well, definitely seems like the key place to start is SSP or standalone selling price.
• 4:13
  SPEAKER_03: So how is that determined?
• 4:16
  SPEAKER_04: So as the name would suggest, the best evidence of SSP is the price that a company would charge for that good or service when it's sold separately or sold on a standalone basis to similar customers in similar circumstances.
• 4:35
  SPEAKER_04: So a couple of things to note here is that you cannot assume that the price stated in the contract is SSP when it's being bundled with other things.
• 4:47
  SPEAKER_04: So what we're focusing on here is what is the price when the when a good or service is sold on its own.
• 4:55
  SPEAKER_04: Additionally, list price is not automatically SSP because companies will often give discounts or a practice of providing price concessions or adjustments to list prices.
• 5:09
  SPEAKER_04: So you have to take all of that into account.
• 5:13
  SPEAKER_04: And then lastly, it's not unusual to have situations where a good or service is not sold on its own.
• 5:22
  SPEAKER_04: A company is always bundling it with something else.
• 5:25
  SPEAKER_04: So that is where we have judgment in this area, and the company has to estimate the standalone selling price.
• 5:33
  SPEAKER_03: All right.
• 5:34
  SPEAKER_03: So then, Mike, bringing you into the conversation, what are some of the common approaches that you see where you know when a company has to estimate this SSP?
• 5:44
  SPEAKER_01: Uh sure.
• 5:45
  SPEAKER_01: So the the revenue standard doesn't prescribe or prohibit any particular method for estimating SSP as long as the method results in an estimate that faithfully represents the price an entity would charge for the goods or services if they were sold separately.
• 6:04
  SPEAKER_01: So it's important to note the company should maximize the use of observable inputs into the estimate.
• 6:11
  SPEAKER_01: And the standard does discuss three possible methods that may be used.
• 6:16
  SPEAKER_01: Those three are the adjusted market assessment approach, which is basically considering pricing for similar goods or services in the market, uh whether it's the company selling them or those sold by competitors.
• 6:29
  SPEAKER_01: Um the second one that's mentioned is the cost plus margin approach.
• 6:33
  SPEAKER_01: So you determine the costs to fulfill the performance obligation plus some reasonable profit margin.
• 6:39
  SPEAKER_01: And then the last one is a residual approach that's allowed in limited circumstances.
• 6:46
  SPEAKER_03: I have two questions.
• 6:47
  SPEAKER_03: So the first one, is there any I know you said there's three possible methods and you know it doesn't specify.
• 6:54
  SPEAKER_03: Is there any sort of preference among those, or do you use the best in the circumstances?
• 6:59
  SPEAKER_01: No, I I I I don't the the standard doesn't have a preference.
• 7:03
  SPEAKER_01: It's what is makes the most sense to come up with a price that you'd estimate if you were selling that price by itself.
• 7:10
  SPEAKER_01: So there's there's no hierarchy or or ordering.
• 7:14
  SPEAKER_03: All right.
• 7:14
  SPEAKER_03: And then I assume, like many places in GAP, that we would expect people to use similar approach to similar contracts, or does it really depend facts and circumstances of an individual contract?
• 7:26
  SPEAKER_01: Um I I think it's probably more the promise, the particular good or service that you're estimating more than the contract itself.
• 7:36
  SPEAKER_01: Um the contract you get into the customer grouping, right?
• 7:40
  SPEAKER_01: So that that may impact into it.
• 7:42
  SPEAKER_01: But it's more if I've got one product and I'm establishing the price for that one product, I should be consistent when I sell that same product, others.
• 7:52
  SPEAKER_03: Yes, that makes sense.
• 7:53
  SPEAKER_03: Standalone selling price would not change, likely.
• 7:56
  SPEAKER_03: So I guess again, depending.
• 7:58
  SPEAKER_03: But so from that to that point, then, what are some of the considerations when you're estimating that um SSP?
• 8:05
  SPEAKER_01: Yeah, so as much as you want to take that consistent type of approach, you can have a different SSP for the same product depending upon the type of customer you're selling it to.
• 8:19
  SPEAKER_01: So if you've got uh you know um large volume customers versus small volume customers, or if I sell the product to resellers or end users or OEMs, I I may have a different pricing strategy for those types of customers, geographies, industries, etc.
• 8:38
  SPEAKER_01: Again, the goal is if you sold that separately, what would your selling price be?
• 8:43
  SPEAKER_01: And a lot of times who the customer is or the type of customer would indicate a different price.
• 8:51
  SPEAKER_03: So as always, we're gonna have a little vocabulary lesson here.
• 8:55
  SPEAKER_03: So OEM for the listeners that may not recognize that term.
• 8:58
  SPEAKER_01: Oh, uh original equipment manufacturer.
• 9:01
  SPEAKER_03: Ah, that was my guess.
• 9:02
  SPEAKER_03: I should have said it.
• 9:03
  SPEAKER_03: Okay.
• 9:04
  SPEAKER_03: All right.
• 9:04
  SPEAKER_01: The other thing to keep in mind, Heather, is is when establishing the price, it can be a range.
• 9:10
  SPEAKER_01: Right?
• 9:11
  SPEAKER_01: It doesn't need to be one price for your your product group because because oftentimes you negotiate different prices with different customers.
• 9:20
  SPEAKER_01: So it doesn't have to be a single point, it can be a range.
• 9:23
  SPEAKER_03: All right.
• 9:23
  SPEAKER_03: And then um my guess is based on all the rest of our conversation, is that there's no specific guidance in terms of how big a range you can use.
• 9:32
  SPEAKER_01: No.
• 9:32
  SPEAKER_01: No, there isn't.
• 9:34
  SPEAKER_01: Um so there's no bright lines on how big the range is.
• 9:37
  SPEAKER_01: Now, having said that, if there's a wide range, the customer the company should probably decide if they should stratify that population or that pricing to different customers to see if the the pricing that they've estimated is correct, and maybe there should be two ranges instead of one very wide range.
• 9:59
  SPEAKER_01: You also want to be consistent of how you apply the range.
• 10:03
  SPEAKER_01: So we say, okay, well, what does that mean?
• 10:05
  SPEAKER_01: Well, let's say you establish your SSP as a range, and then in a contract, you have a product where the price falls outside of the range.
• 10:14
  SPEAKER_01: Well, the reallocation are you allocating to the end of the range, to the middle of the range?
• 10:19
  SPEAKER_01: So the the question is you should probably be consistent and have a policy for what you do for those things outside of the range.
• 10:27
  SPEAKER_01: And then you know, sometimes instead of coming up with that price, even though it's in a range, you may also be appropriate to consider um SSP as a percentage or of some type of value relationship.
• 10:44
  SPEAKER_01: So for example, if I'm a software vendor that bundles certain software licenses with PCS, and I don't sell the software licenses on a standalone basis, it may be reasonable to conclude that there's a value relationship between the license and the PCS that could be used to establish SSP if the vendor has historically and consistently priced PCS as a percentage of the license fee for both the initial purchase and the renewals for other types of software.
• 11:16
  SPEAKER_01: So, for example, let's say a vendor may determine that for certain of its software, PCS is historically and consistently priced at 20% of the license fee.
• 11:27
  SPEAKER_01: And so they want to use that amount, which would be considered an observable input, something we have to maximize in the process, and we use that relationship, the 20% of the license fee, as an input into trying to figure out what the SSP should be for the cases where we don't sell the software and PCS separately.
• 11:49
  SPEAKER_03: All right, and then one more term.
• 11:50
  SPEAKER_03: So PCS.
• 11:52
  SPEAKER_01: Uh post-customer contract support.
• 11:55
  SPEAKER_01: I know I said four four things.
• 11:56
  SPEAKER_01: The post-customer has a hyphen.
• 11:59
  SPEAKER_02: All right.
• 12:00
  SPEAKER_01: Post-customer.
• 12:02
  SPEAKER_01: Got it.
• 12:05
  SPEAKER_02: Oh, yeah, that's a good point, because otherwise it would be PCCS.
• 12:08
  SPEAKER_02: All right.
• 12:08
  SPEAKER_02: So good.
• 12:09
  SPEAKER_02: We're learning a lot of new things here.
• 12:11
  SPEAKER_03: So okay.
• 12:12
  SPEAKER_03: So then let me ask another follow-up question.
• 12:15
  SPEAKER_03: And Angela, I'll go back to you for this one.
• 12:17
  SPEAKER_03: So, Mike, when he was listing these possible approaches, did mention a residual approach, but said that would be limited circumstances.
• 12:25
  SPEAKER_03: So, can you provide some um greater context on that?
• 12:29
  SPEAKER_04: Yeah, well, first I'll explain what we mean by residual approach.
• 12:33
  SPEAKER_04: So, residual approach is when you start with the total transaction price and then subtract from that the SSP for goods or services where you have an observable SSP, and then what you have left or the residual gets allocated to the remaining item or could be more than one item.
• 12:58
  SPEAKER_04: So the the use of this residual approach to estimate SSP is only permitted when you meet uh certain criteria.
• 13:07
  SPEAKER_04: So the criteria are either one, the price is highly variable.
• 13:13
  SPEAKER_04: So that means you have a good or service that you sell for a broad range of prices, or the price of the good or service is uncertain, which means the company hasn't yet established a price because it hasn't sold the good or service before.
• 13:32
  SPEAKER_04: So typically when we're talking about residual approach, it's when a good or service is being sold for a broad range of prices, or you're in that highly variable category.
• 13:46
  SPEAKER_04: But the circumstances where you can use the residual approach are meant to be limited.
• 13:53
  SPEAKER_04: So you should consider whether there's another method that provides a reasonable estimate of SSP before you go to the residual approach.
• 14:03
  SPEAKER_04: And this goes back to what Mike talked about when he was saying you need to maximize the use of observable data.
• 14:12
  SPEAKER_03: So then, Mike, from your experience, when do you often see this residual approach being used?
• 14:18
  SPEAKER_03: Because it does sound pretty limited when you'd be able to.
• 14:21
  SPEAKER_01: Yeah, it's typically for intangibles, and we see it a lot in software as a type of intangible for it.
• 14:28
  SPEAKER_01: And this is generally because other methods just may not be relevant or practical to apply.
• 14:34
  SPEAKER_01: So, for example, like the cost plus margin approach sometimes is difficult.
• 14:39
  SPEAKER_01: So for equipment, it's easier easier to determine the direct and indirect costs of that piece of equipment to then apply your margin to.
• 14:49
  SPEAKER_01: Sometimes software, it's not so easy to figure out what those direct costs are and how to apply exactly a cost plus margin approach.
• 14:58
  SPEAKER_01: So we typically see it for software.
• 15:01
  SPEAKER_01: The the other important reminder is when you do apply the approach, you've got to step back and assess: are we meeting the objective?
• 15:10
  SPEAKER_01: Are these results reasonable?
• 15:12
  SPEAKER_01: Is this really what I would sell that piece of software for or that license or whatever I'm using the residual method for?
• 15:20
  SPEAKER_03: But so but if you've gone through sort of your hierarchy here and you've applied that, what do you mean by saying, okay, is this reasonable?
• 15:29
  SPEAKER_01: Sure.
• 15:30
  SPEAKER_01: Let me give you an example.
• 15:31
  SPEAKER_01: So let's say we apply, we go through that that step and we say, oh, this is a great candidate for the residual method, and we apply the residual method and the result is zero.
• 15:41
  SPEAKER_01: So the price of the zero.
• 15:44
  SPEAKER_01: Okay, that's not a price.
• 15:47
  SPEAKER_01: So I I know that's extreme, but it but it can happen given the wide variability of the software, which is one of the reasons you'd apply this method, but you still have to meet the objective.
• 15:59
  SPEAKER_01: So if it comes up with a number that makes zero sense and that would never be what you would sell the item for separately, then back to the drawing board, you've got to come up with something else.
• 16:11
  SPEAKER_01: It can't be the residual method.
• 16:13
  SPEAKER_03: So then is it fair to say this is more of an art than a science when you're calculating the SSP?
• 16:19
  SPEAKER_01: It it is, it is, but that art requires a lot of analysis to support and a lot of data.
• 16:25
  SPEAKER_03: All right, so make sure you have some good spreadsheets.
• 16:29
  SPEAKER_03: Yeah, make sure you have some spreadsheets for your art.
• 16:31
  SPEAKER_03: So all right, that's helpful.
• 16:33
  SPEAKER_03: So then let me switch gears again.
• 16:35
  SPEAKER_03: And Angela, you mentioned early on that there's some special considerations for allocating discounts and variable considerations.
• 16:42
  SPEAKER_03: So didn't want to skip over that comment.
• 16:45
  SPEAKER_03: Uh, can you kind of walk through what we should be thinking about there?
• 16:49
  SPEAKER_04: Yeah, and to go back to the general model again, generally you're gonna allocate transaction price based on relative, relative standalone selling price.
• 17:00
  SPEAKER_04: So that means even if you have discounts or variable consideration in a contract, you're generally gonna allocate those items across all of the performance obligations in the contract.
• 17:14
  SPEAKER_04: However, there are certain situations where a discount or variable consideration would be allocated only to one or more, but not all of the performance obligations in the contract.
• 17:31
  SPEAKER_04: So if we start with discounts, um I'd say, first of all, it's not that common to meet the criteria to allocate a discount to only one performance obligation.
• 17:45
  SPEAKER_04: But it is possible.
• 17:47
  SPEAKER_04: So to explain this through an example, you know, assume you have a contract to sell a piece of equipment along with installation services and professional services, and that all three of those things are distinct.
• 18:01
  SPEAKER_04: So you have three performance obligations in the contract.
• 18:06
  SPEAKER_04: And now let's assume that overall there's a 20% discount in this contract as compared to the SSP for those three items.
• 18:16
  SPEAKER_04: So generally, you would allocate that 20% discount proportionally proportionately across the three performance obligations.
• 18:27
  SPEAKER_04: But if the company regularly sells each of these items on a standalone basis and regularly sells the equipment and installation, for example, at a 20% discount, then you would allocate the discount only to the equipment and installation and not to the professional services.
• 18:54
  SPEAKER_04: So you know there are these factors or these criteria if you meet them that would indicate that the discount clearly relates to only part of the contract and not to the entire contract.
• 19:08
  SPEAKER_04: But I would say this is a fairly high bar to meet, and so we don't see it that often.
• 19:14
  SPEAKER_04: Usually discounts are going to end up being allocated across the whole contract.
• 19:18
  SPEAKER_01: Heather, it would be one of those scenarios where you need a lot of spreadsheets and data to support.
• 19:24
  SPEAKER_03: All right, so Angela, I think that's helpful.
• 19:26
  SPEAKER_03: Now let's get on to something that I think we've mentioned at least one of our other podcasts, if not more than one, and that would be allocating variable considerations.
• 19:36
  SPEAKER_03: So, what are some of the things we should be thinking about there?
• 19:39
  SPEAKER_04: Yeah, and this is a topic that does come up quite often.
• 19:43
  SPEAKER_04: Um, and again, under the general model, as we've talked about, variable consideration is estimated and included in the transaction price, you know, in step three.
• 19:55
  SPEAKER_04: And then in allocation, we would allocate that to all the performance obligations based on relative standalone selling price.
• 20:04
  SPEAKER_04: However, there are there is some special guidance where variable consideration would be allocated to a specific performance obligation or to a distinct good or service within a series if certain criteria are met.
• 20:23
  SPEAKER_04: And these are that the terms of the variable payment relate specifically to the company's efforts to satisfy the performance obligation or transfer that distinct good or service, and allocating the variable amount of consideration entirely to that element is consistent with the allocation objective.
• 20:48
  SPEAKER_04: So going back to my last example, the equipment installation services and professional services, assume that this company is going to get a performance bonus, which is a type of variable consideration, if the equipment is installed by a certain date.
• 21:11
  SPEAKER_04: So in this case, the terms of this bonus or the variable fee or variable consideration relate specifically to the company's efforts to complete the installation services.
• 21:24
  SPEAKER_04: And so this is a situation where you may end up concluding that that bonus should be allocated entirely to the installation services rather than being spread across all the performance obligations in the contract.
• 21:40
  SPEAKER_03: So, Angela, if I think about your two criteria, it makes the first one makes a lot of sense to me, especially in your example.
• 21:48
  SPEAKER_03: So I'm getting this bonus because I installed the equipment.
• 21:51
  SPEAKER_03: So I'm in the relate by a certain date.
• 21:54
  SPEAKER_03: So I'm going to associate with the bonus to the um installation.
• 21:59
  SPEAKER_03: Totally makes sense.
• 22:00
  SPEAKER_03: sense.
• 22:00
  SPEAKER_03: But your second criteria was that you that allocating the variable amount entirely to that element is consistent with the allocation objective.
• 22:12
  SPEAKER_03: So what do we mean when we say consistent with the allocation objective?
• 22:18
  SPEAKER_04: Well you'll remember at the very beginning I gave that textbook objective, right?
• 22:24
  SPEAKER_04: That was we're going to allocate um transaction price in an amount that depicts the amount of consideration to which the entity expects to be entitled to for transferring the promised goods or services to the customer.
• 22:39
  SPEAKER_04: But what does that really mean?
• 22:41
  SPEAKER_04: Well that means that when you step back and look at the big picture, once you've allocated the transaction price, does this end result make sense?
• 22:52
  SPEAKER_04: So for example, you know in my you know simple illustration if the amount of that bonus was disproportionately large compared to the fee that the vendor was charging for the other items in the contract then it may not make sense to allocate all of that bonus to the installation services.
• 23:29
  SPEAKER_04: So I mean generally where you should end up is that big picture the amount allocated to each performance obligation should be consistent with relative standalone selling price but it isn't going to necessarily be an exact science.
• 23:47
  SPEAKER_03: All right back to the spreadsheets that Mike needs to support his art in in this conversation.
• 23:54
  SPEAKER_03: So then Mike with that point where do you often see this allocation question come up in practice?
• 24:02
  SPEAKER_01: Yeah I would say a common situation is when we're providing a service that's a series of distinct services.
• 24:10
  SPEAKER_01: So if you recall Angela talked about series uh during the step two podcast uh Angela used bookkeeping as the series as the example I'm not going to use bookkeeping.
• 24:22
  SPEAKER_01: I'm going to use a different example.
• 24:23
  SPEAKER_01: So I'm going to take let's say we had a um a series that's a contract to provide transaction processing services where the companies promise to process all the transactions for a stated period of time.
• 24:37
  SPEAKER_01: And then the company concluded each month is a distinct period of services within that series.
• 24:45
  SPEAKER_01: And the contract has a variable fee for each transaction processed during the month.
• 24:51
  SPEAKER_01: So a P times Q, as it were, for the transactions processed during that month.
• 24:55
  SPEAKER_01: So by applying the guidance Angela outlined, you would likely conclude the variable fee occurred in each month should be allocated to that month's performance.
• 25:06
  SPEAKER_01: And then each month's variable fee relates specifically to the company's effort for that month, assuming the fee per transaction is consistent throughout there's no underlying like volume discounts, etc.
• 25:18
  SPEAKER_03: So Mike, is there a scenario when you wouldn't conclude that or no?
• 25:22
  SPEAKER_01: Well there are scenarios where you wouldn't conclude it, but you wouldn't want to be in those scenarios, right?
• 25:29
  SPEAKER_01: You really want to be in the series guidance because if you concluded you weren't and you concluded the variable consideration relates to everything in the contract now take your transaction processing example you'd have to estimate all the transactions processed during the period of time and then allocate all that estimate of variable consideration to all of those transactions processed.
• 25:56
  SPEAKER_01: And then you'd have to true it up every month it would be a well challenging is a word others would say it would be a nightmare to try to apply to do that.
• 26:07
  SPEAKER_01: So that's sort of the important distinction we give to the series guidance in that case for variable consideration.
• 26:13
  SPEAKER_01: But there are cases where you are are left with doing that and that would be well let's say for I've got a contract for a year and the first six months is a fixed fee and then the next six months is a variable fee.
• 26:27
  SPEAKER_01: It's like okay now I don't have one measure and of of of fee it's not every same um formula for every distinct distinct uh month in the series and you might left be left with saying well that's not something I can allocate to each month and I've got to move out of that and estimate.
• 26:51
  SPEAKER_01: So it does happen.
• 26:53
  SPEAKER_01: You don't want it to happen though.
• 26:54
  SPEAKER_03: Well and I guess that goes back Angela to your point and maybe they don't use the same words but your overall allocation objective doesn't seem like it would be met if I just followed the contract in Mike's example of the six months and six months.
• 27:09
  SPEAKER_04: Right.
• 27:09
  SPEAKER_04: And another example would be like if the fee per transaction was significantly different in different periods and there wasn't a good reason or you know a reason that was consistent with the economics of why that fee was changing.
• 27:27
  SPEAKER_04: And then you'd say well having a very low fee in one period per transaction and a very high period a high fee per transaction in a different period would not make sense or meet the allocation objective.
• 27:40
  SPEAKER_03: So Mike, Angela definitely a lot to think about here as you sort of reflect on the overall model, what would be your key takeaway for this particular step?
• 27:51
  SPEAKER_03: Angela go to you first.
• 27:53
  SPEAKER_04: Well I mean I think it's part of what we just talked about in that last topic which is the importance of stepping back and looking at the big picture.
• 28:01
  SPEAKER_04: So I mean you there's lots of guidance to follow here and you can get a little bit lost in the numbers and the mechanics and you can't forget to then step back, look at the allocation does it make sense?
• 28:17
  SPEAKER_04: Is it consistent with what we're trying to achieve the objective of the step like you can't forget to have that final analysis of the big picture.
• 28:27
  SPEAKER_03: All right sanity check.
• 28:29
  SPEAKER_03: And Mike how about from your perspective?
• 28:33
  SPEAKER_01: Yeah what what I would what I would suggest is when you estimate when companies have to estimate SSP they consider leveraging an existing process.
• 28:42
  SPEAKER_01: So for example if a company has a pricing process that's established consider leveraging that as the way you create SSP instead of creating an entirely new estimate that the company's not familiar with.
• 28:56
  SPEAKER_03: Definitely good advice there.
• 28:57
  SPEAKER_03: Especially I think your auditors would appreciate that advice as well.
• 29:00
  SPEAKER_03: So all right well Mike Angela as always definitely learned a lot today.
• 29:05
  SPEAKER_03: Thank you so much for all your insight uh before we wrap up though two more things.
• 29:10
  SPEAKER_03: So first of all Angela where would our listeners go for more information?
• 29:14
  SPEAKER_04: Yeah we cover step four of the model allocating transaction price in chapter five of our revenue guide revenue from contracts with customers guide.
• 29:26
  SPEAKER_03: And then of course we're up to my favorite part of the podcast Stump the Guess.
• 29:29
  SPEAKER_03: Now I think when I had the two of you on a few weeks ago think you got 50%.
• 29:34
  SPEAKER_03: So let's see if you guys can get up to 100% 100% correct today although these are interesting questions.
• 29:42
  SPEAKER_03: So question number one so as you both would know for many years when companies were allocating the transaction price and software arrangements they were beholden to the stringent standard of VSOE or vendor specific objective evidence of fair value.
• 30:00
  SPEAKER_03: What guidance introduced the concept of VSOE and more importantly the for so we'll do this in two parts.
• 30:09
  SPEAKER_03: This is still all one question.
• 30:11
  SPEAKER_03: SOP 97 too all right so you knew the first part.
• 30:14
  SPEAKER_03: So and you already have you kind of got this is going to give you a clue for my next question.
• 30:22
  SPEAKER_03: No no no this is now moving on to literature.
• 30:26
  SPEAKER_03: So the first book of what major international best selling book series was also published the same year as that guidance.
• 30:34
  SPEAKER_03: So we know it's 97 although maybe that was published in 98 but some is published but what best selling book series first book was published the same year?
• 30:44
  SPEAKER_03: I should have guessed maybe like Harry Potter or something yeah that was going to be my guess too it's got to be what other like major international so fact check Mike got the first part right with his answer of the AI CPA's SOP 972 and he was right again along with Angela on the second part of the question the Harry Potter and the Philosopher's stone was released in the UK in 1997 then released in the US in 1998 as Harry Potter and the Sorcerer's Stone so then continuing so so far two for you're going to get at least two out of three.
• 31:29
  SPEAKER_03: So continuing with our theme of superseded guidance EITF 0801 introduced what concept is the third choice in the hierarchy of determining fair value of deliberables in a multi-element arrangement following V SOE and TPE.
• 31:47
  SPEAKER_03: Maybe you can tell us what TPE is first.
• 31:50
  SPEAKER_04: Third party evidence wasn't it Mike right it introduced SSP.
• 31:56
  SPEAKER_01: All right I yeah I think I think 0801 introduced SSP.
• 32:01
  SPEAKER_03: That would be my guess I will check the answer on that one fact check Angela nice work on telling us what TPE stands for a bonus point for you.
• 32:15
  SPEAKER_03: The correct answer for the true question is the concept introduced was ESP or estimated selling price Angela and Mike as I said as always such a pleasure to have you on.
• 32:31
  SPEAKER_03: Thanks so much for joining me today.
• 32:36
  SPEAKER_03: That's our show for today join me back here next Tuesday for the final episode in our five-part revenue recognition series.
• 32:43
  SPEAKER_03: And I'll also be announcing April's topic of the month it's a newer area where we can continue to see a rise in questions and my team and I are excited to tell you what we have planned for April.
• 32:54
  SPEAKER_03: But before then we have two more new shows for you this week on Thursday we're covering the SEC's cyber proposal and on Friday it's a bonus episode looking at the SEC's climate proposal.
• 33:05
  SPEAKER_03: Two timely hot up the press to shows you won't want to miss and look for some special programming the following week covering the accounting and business implications of the Russian government invasion of Ukraine.
• 33:19
  SPEAKER_03: So that you never miss any of our audio content follow the PWC Accounting Podcast series wherever you listen to podcasts.
• 33:27
  SPEAKER_03: From Thought Leadership at PWC I'm Heather Horn.
• 33:31
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