Key Points
- The stand-alone selling price must be determined at contract inception for every performance obligation in the arrangement.
- When no observable price exists, the entity must estimate it using one of four permitted methods, most commonly the expected cost plus a margin approach or the adjusted market assessment approach.
- IFRS 15.78 permits the residual approach only when the selling price is highly variable or uncertain.
- An incorrect stand-alone selling price shifts revenue between performance obligations and distorts the timing of recognition.
What is Stand-alone Selling Price?
IFRS 15.77 states that the best evidence of a stand-alone selling price is the observable price when the entity sells that good or service separately in similar circumstances to similar customers. That observable price exists less often than practitioners assume. Bundled contracts and customer-specific pricing mean the entity sells many goods or services only as part of a package.
When no observable price exists, IFRS 15.79 requires the entity to estimate it. Three methods are available. The adjusted market assessment approach looks at the market for the good or service and estimates what a customer in that market would pay. The expected cost plus a margin approach starts with the entity's forecast cost and adds an appropriate margin. The residual approach backs into the stand-alone selling price by subtracting the observable stand-alone selling prices of other obligations from the total transaction price. IFRS 15.79(c) restricts this last method to situations where the price is highly variable (the entity sells the same item at a wide range of prices) or uncertain (the entity has not yet established a price).
Worked example: Schafer Elektrotechnik AG
Client: German electronics manufacturer, FY2025, revenue EUR 310M, IFRS reporter. Schafer sells a bundled package to a Polish industrial customer for EUR 1,200,000. The package contains three performance obligations: (a) customised control hardware, (b) a two-year software licence, and (c) a 12-month installation and commissioning service.
Step 1 — Determine observable stand-alone selling prices
Schafer sells the software licence separately to other customers at prices ranging from EUR 180,000 to EUR 210,000, with a median of EUR 195,000. The installation service is sold separately under standalone service agreements at a consistent rate of EUR 150,000 for comparable projects. The customised hardware is never sold independently because Schafer designs it to the buyer's specifications.
Step 2 — Select estimation method for hardware
Because the hardware is custom-built and never sold separately, no observable price exists. Management applies the expected cost plus a margin approach (IFRS 15.79(b)). Forecast production cost is EUR 680,000. Schafer's historical gross margin on comparable custom hardware projects averages 22%. The estimated stand-alone selling price is EUR 680,000 / (1 - 0.22) = EUR 871,795, rounded to EUR 872,000.
Step 3 — Allocate the transaction price
Total stand-alone selling prices: EUR 872,000 + EUR 195,000 + EUR 150,000 = EUR 1,217,000. The transaction price of EUR 1,200,000 is allocated in proportion to relative stand-alone selling prices per IFRS 15.73.
| Obligation | SSP | Ratio | Allocated amount |
|---|---|---|---|
| Custom hardware | EUR 872,000 | 71.65% | EUR 859,800 |
| Software licence | EUR 195,000 | 16.02% | EUR 192,240 |
| Installation service | EUR 150,000 | 12.33% | EUR 147,960 |
| Total | EUR 1,217,000 | 100% | EUR 1,200,000 |
Conclusion: The allocation is defensible because two of three stand-alone selling prices are directly observable and the third rests on a cost-plus-margin estimate supported by four years of project-level cost data.
Why it matters in practice
- Teams frequently default to the residual approach for convenience without establishing that the conditions in IFRS 15.79(c) are met. The residual approach is a fallback, not a shortcut. If the entity has cost data or market comparables available, the adjusted market assessment or expected cost plus margin approach takes precedence. ISA 540.13(a) requires the auditor to challenge the method selection, not just the arithmetic.
- The FRC's 2021/22 thematic review of IFRS 15 application found that entities often failed to update stand-alone selling price estimates when market conditions or cost structures changed between annual reporting periods. IFRS 15.77 pegs the determination to contract inception, but when an entity enters hundreds of contracts per year, stale pricing inputs applied to new contracts produce systematic allocation errors.
Stand-alone selling price vs. transaction price
| Dimension | Stand-alone selling price | Transaction price |
|---|---|---|
| What it represents | The hypothetical price for each good or service sold individually | The total consideration the entity expects to receive for the entire contract |
| Determined for | Each performance obligation separately | The contract as a whole |
| Role in allocation | Provides the ratio used to split the transaction price across obligations | The amount being allocated |
| Observable evidence | Must be directly observable or estimated per IFRS 15.77–80 | Determined by adjusting the contract price for variable consideration, financing components, non-cash consideration, and amounts payable to the customer per IFRS 15.47 |
| When a discount exists | The discount is typically allocated proportionally unless evidence links it to specific obligations per IFRS 15.81 | Reflects the discount already (the transaction price is the net amount) |
The distinction matters on every multi-obligation contract. The transaction price tells you how much revenue the contract generates in total. The stand-alone selling prices tell you how to carve that total across obligations so each one receives the right share.
Related terms
Frequently asked questions
How do I document the stand-alone selling price in the audit file?
Record the method used (observable price, adjusted market assessment, expected cost plus margin, or residual) alongside the supporting data. Include the rationale for selecting that method over alternatives. IFRS 15.126(b) requires disclosure of the methods and significant assumptions used to determine stand-alone selling prices. The audit working paper should contain enough detail to demonstrate the auditor evaluated the inputs per ISA 540.18.
Can I use the residual approach for more than one performance obligation in the same contract?
IFRS 15.79(c) permits the residual approach only when the stand-alone selling price is highly variable or uncertain. Applying it to two obligations in the same contract would mean subtracting only one observable price from the transaction price and splitting the remainder between the two residual obligations. IFRS 15.80 allows this but requires the entity to use another estimation method for at least one of them if a reasonable estimate can be made.
Does the stand-alone selling price change when a contract is modified?
It depends on the type of modification. If the modification is treated as a separate contract under IFRS 15.20, the entity determines stand-alone selling prices for the additional goods or services at the modification date, not at original inception. If the modification is treated as a termination and creation of a new contract under IFRS 15.21(a), the entity re-determines stand-alone selling prices for all remaining obligations at the modification date.