Splitting a bundle's price between its parts
How a client splits the price of a bundled sale, such as equipment with installation and support, across its performance obligations under IFRS 15.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client sells a packaging machine, installs it at the customer's factory and supports it for a period after handover. There is one quotation, one invoice and one price, usually with a discount negotiated across the whole deal. The ledger shows a single sale on the day the machine was delivered. IFRS 15 may see three separate promises, each earning revenue at a different time.
Splitting that price is where many small-company revenue figures go wrong. Not because the rule is obscure, but because nobody asks the question until the year-end file is open.
Is each part distinct?
IFRS 15 works through five steps: identify the contract with the customer, identify the performance obligations in it, determine the transaction price, allocate that price to each performance obligation, and recognise revenue when each obligation is satisfied. Allocation is the fourth step, but it depends entirely on the second.
ACCA explains that under IFRS 15 a good or service is a distinct performance obligation if the customer can benefit from it on its own or together with other readily available resources, and it is separately identifiable from the other elements of the contract.
Apply that to the machine sale:
- The machine. The customer could use it, or have someone else install it. It is likely to be distinct.
- Installation. If other installers could do the job and installation does not substantially change what the customer receives, it is likely to be distinct. If it is a complex integration only the seller can perform, it may be inseparable from the machine.
- Support. Help-desk access or maintenance visits over a period are usually a separate promise.
The whole sequence is set out in the five steps of IFRS 15.
Relative stand-alone selling prices
Once the distinct obligations are known, the price is shared between them. ACCA explains that IFRS 15 allocates the transaction price at contract inception based on relative stand-alone selling prices. The IFRS Foundation's summary of IFRS 15 describes the same principle: the price is allocated on the basis of the relative stand-alone selling prices of each distinct good or service promised.
"Relative" is the important word. The client does not use the line prices printed on the quote, nor whichever figure it would like to recognise first. It works out what each element would sell for on its own, adds those amounts together, and gives each obligation its proportion of the actual contract price. A discount on the bundle therefore ends up spread across the parts.
A worked example in words: the machine, the installation and a year of support each have their own separate selling price, and the bundle is sold for less than the sum of the three. Add up the three stand-alone prices. Each element's share of that total is the share of the bundle price it receives. The machine's share is recognised when control of the machine passes, installation's share when the installation is done, and support's share across the support period.
Observable prices as the best evidence
ACCA explains that the best evidence of a stand-alone selling price is the observable price when the entity sells the item separately. Many small clients have that evidence already: the machine has a list price when sold without installation, and the support contract is renewed on its own each year at a known price.
Where an item is never sold on its own, the client has to estimate its price, for example from what similar items sell for in the market or from cost plus the client's usual margin. Whatever approach is used, document the data and the reasoning. An estimate that cannot be explained to a reviewer will not survive a review.
Timing differences once the price is split
Allocation changes when revenue lands. In the example, the client invoiced the whole bundle on delivery. After allocation, part of that price relates to support not yet given. At year end, that part is not revenue; it is a contract liability, often called deferred income. If the installation happened after year end, its share is deferred too.
The reverse can happen as well. A client that bills in stages may have satisfied an obligation before invoicing it, which creates a contract asset. Either way, the year-end figures move from what was invoiced to what was earned, and the difference has to sit on its own line.
Lines and policy wording for bundled sales
A client with significant bundled sales usually needs:
- a revenue policy explaining how bundled contracts are split and when each part is recognised;
- a deferred income or contract liability line, kept apart from trade payables;
- separate disclosure of the main categories of revenue where support or service income is material.
In Achekam's Financials Studio, the standard policy wording is based on IFRS for SMEs and labelled for review before issue. A full IFRS client with bundled contracts will usually need its own wording, and staff can write their own policies. Notes take their figures from the mapped trial balance, and anything the trial balance does not hold is left as "[to be completed]" for the preparer to fill in from the client's contracts and price lists.
A firm can also add its own statement lines and groups and rename any row title, and later builds keep those choices. A line such as "Deferred support income" still totals into a standard line, so the notes and the cash flow statement stay consistent. Revenue policy wording more broadly is discussed in the revenue recognition policy.
ACCA's technical article revisiting IFRS 15 explains the five-step model, including how the transaction price is determined and allocated.
A short checklist for the file
- Copy of the contract or quotation and the invoice.
- A list of the promises in it, with a note on why each is or is not distinct.
- The stand-alone selling price of each distinct item, with its evidence.
- The allocation calculation.
- The year-end split between revenue, contract assets and contract liabilities.
Ask for the client's price list early in the engagement. It is often the cheapest and strongest evidence the file will ever hold.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
