Transaction price and allocation

Step 3 — the transaction price is the consideration the entity expects to be entitled to in exchange for the promised goods or services, excluding amounts collected for third parties such as VAT (IFRS 15.47). (US GAAP additionally offers a policy election to exclude all sales and similar taxes from the transaction price, ASC 606-10-32-2A; IFRS 15 has no such election, so each tax is assessed.) It is not always the sticker price:

• Variable consideration — discounts, rebates, refunds, performance bonuses, penalties, price concessions. Estimate it using the expected value (probability-weighted, best for many similar contracts or several possible outcomes) or the most likely amount (best for a binary outcome, such as a bonus that is either earned or not) — whichever better predicts the amount (IFRS 15.53).
• The constraint — include variable consideration only to the extent it is highly probable that a significant reversal of cumulative revenue won't occur when the uncertainty is resolved (IFRS 15.56). Amounts highly susceptible to factors outside the entity's influence (market prices, weather), long uncertainty periods and limited experience all point to constraining the estimate.
• Rights of return — revenue is recognised only for goods not expected to be returned; the expected refunds are a refund liability, and the right to recover the returned goods is a separate asset measured at their former carrying amount less recovery costs (IFRS 15.B21).
• Significant financing component — if payment timing gives either party a significant financing benefit, adjust for the time value of money. A practical expedient lets you ignore it when the gap between transfer and payment is one year or less (IFRS 15.63).
• Non-cash consideration is measured at fair value; consideration payable to the customer (such as slotting fees) normally reduces the price.

Step 4 — allocation. The price is allocated to each performance obligation in proportion to its stand-alone selling price — the price at which the entity would sell that good or service separately (IFRS 15.76). The best evidence is an observable price; otherwise estimate it with the adjusted market assessment, expected cost plus a margin, or — only when prices are highly variable or uncertain — the residual approach (IFRS 15.79). A discount is spread across all obligations unless observable evidence shows it relates to only some of them (IFRS 15.81–82), and variable consideration can be allocated entirely to one obligation when it relates specifically to it (IFRS 15.85).

Allocations must add back to the transaction price exactly. Work each one as price × SSP ÷ total SSP, round to the cent, and let the last line take any rounding difference.