When an entity enters into a contract including more than one POs, the total agreed consideration, may be different to the sum of the considerations that would have been agreed, for each individual PO.
Proper allocation of the TP to different POs is essential, especially when some POs are satisfied over time and some at a point in time, affecting the amount of revenue to be recognized in different accounting periods.
Moreover, entities need to allocate part of the TP to POs that are contractually satisfied free of charge, as practically no PO is taken to be satisfied under IFRS 15 for no consideration.
Entities must allocate the TP to the POs, based on the stand-alone selling price (henceforth SSP) of each PO. In our examples below, we assume that the SSPs are the price at which the entity would sell each good/service separately to a customer, as alternative methods are beyond the scope of this article.