Published:
Jul 28, 2020
Updated:
Oct 10, 2026
Standalone Selling Prices in ASC 606
A breakdown of the methods used to identify the standalone selling price.
Many contracts require companies to fulfill multiple performance obligations. Step four in the five-step revenue recognition process requires that entities allocate the transaction price to each performance obligation in proportion to its standalone selling price (SSP). The standalone selling price is the price at which the entity would sell a promised good or service individually to a customer.
ASC 606 Revenue from Contracts with Customers (ASC 606) requires companies to estimate the SSP if the selling price is not readily observable. The remainder of this paper will describe how to estimate the standalone selling price and present examples of estimating and allocating the transaction price.
Methods of Assigning Standalone Selling Price
The most reliable evidence of a standalone selling price is the price an entity charges for a good or service in a separate transaction with a customer. However, in practice, some goods or services are not sold on a standalone basis and are instead only offered as part of a bundled arrangement (for example, nonrenewable customer support services). In these situations, the standalone selling price must be estimated.
For instance, Apple Inc. treats “the right to receive, on a when-and-if-available basis, future unspecified software upgrades” as a separate performance obligation within its bundled products. Because this right is not sold separately, its standalone selling price cannot be directly observed and must be estimated.
While the revenue standard does not prescribe a single required method, it requires that any estimation approach faithfully reflect the price the entity would charge in a standalone transaction. To guide this process, the standard provides three commonly accepted estimation methods:
- Adjusted market assessment approach: This approach evaluates the market in which the goods or services are sold and estimates the price a customer in that market would be willing to pay. It is particularly useful when comparable offerings from competitors provide a reasonable benchmark for pricing. For example, Activision Blizzard applies this method when pricing new game releases. As described in its Form 10-K, the company considers market data, competitor pricing strategies, and the design features of both online and offline versions of its games when determining standalone selling prices.
- Expected cost plus margin approach: This method begins with the expected costs of satisfying the performance obligation and adds a margin that reflects what the market would be willing to pay. It is most appropriate when
- demand for the good or service is uncertain, and comparable market data is limited, or
- fulfillment costs can be clearly identified.
In its Form 10K, Lockheed Martin discusses the use of this approach when allocating revenue to rockets included in bundled service arrangements. These arrangements, often part of non-U.S. government contracts, involve multiple performance obligations that deliver highly customized solutions to customers.
- Residual approach: Under this approach, an entity allocates the remaining transaction price to goods or services without observable standalone selling prices after first assigning prices to those that are observable. Specifically, the total of the observable standalone selling prices is deducted from the overall transaction price, and the residual amount is attributed to the remaining performance obligations. This method is only permitted when
- the entity sells the same good or service across a wide range of prices (indicating high variability), or
- the good or service has not yet been sold on a standalone basis, and no price has been established.
The residual approach is intentionally constrained to encourage the use of other estimation methods whenever possible. For instance, National Instruments Corporation discusses its application of this method in its Form 10K for certain enterprise agreements. The company first determines standalone selling prices for other elements of the arrangement using alternative methods, then assigns the remaining transaction price—often to maintenance or software components—and subsequently evaluates whether the resulting estimate is reasonable.
Regardless of the approach used, the standalone selling price must be determined at the outset of the contract and should not be updated to reflect changes between contract inception and performance completion, with the exception of contract modifications (for more information, see Contract Modifications Part I – Separate Contracts). Management should consider all information and maximize observable inputs in determining which approach to use. For example, although an entity may not sell an item on a standalone basis or set a price for that item, it should first consider any available information from competitors to estimate, relying on the residual approach.
Prices charged to customers are often not fixed at a single point but instead fall within a range over time. When observable standalone selling prices exist, one approach is to analyze the full population of standalone transactions—or relevant subsets—to identify a relatively narrow range in which the majority of sales occur. Judgment is then required to select an appropriate point within that range for purposes of allocating consideration. Once selected, that point should be applied consistently to similar transactions. The following example illustrates how to estimate the standalone selling price using each of the three approaches described above.
Example: Determining SSP for Telephone Support
Vendor Y sells two items: Product A and telephone support. Product A is a tangible product used in the production process. Telephone support is available for one year after delivery of all products.
- On January 1, Vendor Y enters an arrangement with Customer U to provide Product A on February 1.
- Telephone support also begins on February 1 and lasts for one year.
- Total arrangement consideration is $6,000, due on delivery of Product A.
Telephone support does not have an established price and is not sold separately to customers. Assume that the customers do not renew the telephone support after year 1 (i.e., there are no standalone sales of support). Vendor Y concludes that it has enough historical sales information for Product A to support a standalone selling price. Most sales of product A to customers in the same region as Customer U were within the range of $5,000 to $5,500. Vendor Y decides to use the lower end of the range to establish a standalone selling price. The telephone support has not been sold on a standalone basis and will have to be estimated.
Adjusted Market Assessment Approach: Under the adjusted market assessment approach, Vendor Y searches for competitors that sell similar telephone support services on a standalone basis. Assume that Vendor Y finds two competitors selling these services on a standalone basis between a price range of $1,200 to $1,500. Vendor Y should consider several factors to determine the price it could charge similar customers: market share, expected profit margin, customer/geographic segments, distribution channel, etc. After considering these factors, Vendor Y estimates that it could sell the telephone services for $1,250 to customers with a similar profile to Customer U. The estimated standalone selling price would be $1,250 under this approach.
Expected Cost Plus Margin Approach: Under the cost plus margin approach, Vendor Y determines all the direct and indirect costs associated with providing telephone support. The costs considered include the personnel employed to provide the support, the costs to provide the telephone lines, the telephones, and the computer equipment needed to provide the support. After considering all these costs, Vendor Y concludes that telephone support will cost $900. After determining the cost, Vendor Y should determine an appropriate margin that the market would be willing to pay by considering several factors, including industry sales price averages, market conditions, profit objectives, margin achieved on similar products, etc. After considering these factors, Vendor Y determines that an appropriate margin in the industry would be $500. The estimated standalone selling price would be $1,400 under this approach.
Residual Approach: The company should first maximize observable inputs to make an estimate, as illustrated in the adjusted market assessment approach and the expected cost plus margin approach. If none of these are appropriate, the residual approach can be used. Under the residual approach, Vendor Y determines the standalone selling price of the telephone support by reducing the transaction price ($6,000) by the amount of the observable standalone selling prices, or in this case, Product A ($5,000). The remaining amount ($1,000) would be considered the standalone selling price of the telephone support under this approach. Using the standalone selling prices developed in the examples above, the following table illustrates how to allocate the transaction price under each method:
Method | Standalone Selling Price Product A | Standalone Selling Price Telephone Support | Transaction Price Allocated to Product A | Transaction Price Allocated to Telephone Support |
Adjusted Market Assessment | $5,000 | $1,250 | (5,000/6,250)*6,000 = $4,800 | (1,250/6,250)*6,000 = $1,200 |
Cost Plus | $5,000 | $1,400 | (5,000/6,400)*6,000 = $4,688 | (1,400/6,400)*6,000 = $1,312 |
Residual | $5,000 | $1,000 | $5,000 | $1,000 |
Combination of Methods
A combination of methods may be used to determine the standalone selling price for each performance obligation that does not have an observable standalone selling price. ASC 606-10-32-35 states that in some situations, the residual approach may be used to determine the aggregate standalone selling price of two or more goods or services with highly variable or uncertain standalone selling prices. Once the aggregate residual amount is determined for those goods or services in total, other estimation methods (adjusted market assessment, cost plus, etc.) may be employed to determine the standalone selling price of those goods or services on an individual level.
Conclusion
ASC 606 outlines three methods of recognizing the standalone selling price of a product: adjusted market assessment, expected cost plus margin, and residual approach. The method chosen should be determined at contract inception and applied consistently, unless a contract modification occurs, when there are discounts and packages offered, and a company can use a variety of these methods to identify which is most accurate. By evaluating and possibly combining the methods, companies can identify the best allocation of product prices.
Editor’s Note
This article reflects guidance under ASC 606, Revenue from Contracts with Customers, as currently codified, including subsequent amendments. The concepts discussed remain relevant as ASC 606 has not undergone substantive changes regarding standalone selling prices.
Resources Consulted
- ASC 606-10-32-31 to 32-35
- EY, Financial Reporting Developments: “Revenue from Contracts with Customers.” August 2025. Section 6.1.
- KPMG, Issues In-Depth: “Revenues from Contracts with Customers.” September 2014. Section 5.4.1.1, 5.4.1.2.
- PWC, “Revenue from contracts with customers.” March 2024. Section 5.2, 5.3.
- Apple’s 2019 Form 10-K Page 25
- Activision Blizzard Inc.’s 2019 Form 10-K Page 56
- Lockheed Martin’s 2019 Form 10-K Page 47
Footnotes
Jul 28, 2020