Step 4: Allocate the Transaction Price to the Performance Obligations

                                    Allocate the Transaction Price

 A performance obligation constitutes a commitment within a contract to provide a distinct good or service to the customer. Contracts often encompass multiple performance obligations, which can be explicitly stated or implied.

• Standalone Selling Prices: The allocation relies on the standalone selling prices of each distinct good or service assured within the contract. The standalone selling price denotes the price at which the entity would vend the goods or services autonomously under comparable circumstances. If the standalone selling price is readily observable, it is employed. However, in numerous instances, estimating the standalone selling price becomes necessary, especially when goods or services aren't vented separately or when historical data is scarce or nonexistent. In such scenarios, entities can employ various estimation techniques, such as adjusted market assessment, expected cost plus margin, or a residual approach.
• Variable Consideration Allocation: In cases where the transaction price encompasses variable compensation, like performance bonuses or penalties, the entity is obliged to distribute the variable compensation to the performance obligations. This distribution should be proportional to the standalone selling prices of the performance obligations, based on their relative standalone value to the customer.
• Constraint on Variable Consideration Allocation: Similar to Step 3, entities must apply restrictions on the allocation of variable compensation to guarantee that any allocated variable compensation doesn't surpass the threshold of being highly probable to avoid a significant reversal of cumulative revenue that has been recognized.
• Non-Cash Consideration Allocation:  When the transaction price includes non-monetary compensation, such as goods or services received from the customer, the entity must ascertain and distribute the fair value of that compensation to the performance obligations. This allocation is executed based on the relative standalone selling prices of the performance obligations.
• Consideration Payable to the Customer Allocation: In scenarios where the entity anticipates disbursing compensation to the customer, such as incentives or rebates, the compensation payable to the customer is deducted from the transaction price before its allocation to the performance obligations. This deduction lessens the net amount of compensation accessible for allocation. After the transaction price has been assigned to each performance obligation, entities proceed to recognize revenue for each performance obligation when the control of the goods or services is transferred to the customer, either at the time of transfer or as it occurs. The quantity of revenue acknowledged is contingent on the allocated transaction price for each performance obligation.

In summary, the fourth phase of the revenue recognition model encompasses the distribution of the transaction price among the separate goods or services pledged in the contract. This process takes into account factors like standalone selling prices, variable compensation, non-monetary consideration, and compensation payable to the customer. The objective is to guarantee that revenue is acknowledged in a way that mirrors the handover of goods or services to the customer.