Hi,
Appreciate if you can kindly help to have a look at the below:
In an example provided by a pwc guide, the situation is as follows:
Entity contracts with customer who paid $200 for Service A and an option to purchase Service B for $100.
Standalone selling price for A and B are $200 and $160 respectively.
Estimated standalone selling price for the option is $50 taking into account the possibility of exercising the option.
As a result, allocation of transaction price would be $160 to A and $40 to option for B.
It follows that when option is exercised by customer afterwards, Revenue of $100 + $40 = $140 is recognised.
Question:
Because the incremental benefit of the option offered is $160 - $100 = $60 for getting service B, and the standalone selling price given is $50, would that imply a probability of exercising the option of 83%? (e.g. entity expects a breakage of 17%)
If so should be recognise revenue of ($40/83%) + $100 = $150?
Many thanks,