The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. Under the new revenue standard, the following rules apply to determining a service's standalone selling price:

First, you need to look at observable evidence (i.e., examples of the good or service sold by itself).
If observable evidence does not exist, any reasonable estimation method is allowed.
ASC 606 applies the same guidance across all transactions, throughout all industries. This removes the need for industry-specific guidance on stand-alone selling price.
The residual estimation method can be applied to all transactions meeting the new standard requirements, rather than a very specific allocation methodology. SSP can be estimated using a residual approach for any performance obligation that is not sold standalone or is highly variable. In the existing standard for software, the residual allocation method could be used only for delivered elements when all undelivered items had VSOE.

These changes are expected to result in a much more consistent application, across industries, of standalone selling price guidance. Most companies' process for estimating standalone selling price won't change dramatically, since the new standard aligns with current practices. However, some industries, such as software, can expect a fairly significant shift in the process of estimating standalone selling price. That change could lead to recognizing more revenue in an earlier time period.

Jagan Reddy is senior vice president of RevPro at Zuora. He joined Zuora in May 2017 following the company's acquisition of Leeyo, which he co-founded in 2009. In that capacity, Reddy was responsible for Leeyo's overall corporate leadership and product development. Prior to founding Leeyo, he spent 14 years as an IT professional in the software and high-tech industry, with specialized expertise in ERP and financial systems development and integration.

Instant Insights /

What You Need to Know About ASC 606

Related Stories

Recommended For You