Residual Method Calculation
When the conditions are met that trigger the residual method, the second step of allocation takes place. The delivery status is considered only to determine whether the residual method is required. It has no effect on the calculation. For a description of the first step of allocation, see Fair Value and Allocation.
The formula used in the second step is:
|
(total discounted sales amount) – (VSOE prices of items) |
= |
amount to apply to items without a VSOE price, distributed in proportion to their discounted sales amounts |
For example, you sell the following bundle:
|
|
Allocation Type |
Discounted Sales Amount |
Calculated Fair Value Amount |
Is VSOE |
Ratio (Item ÷ FV Total) |
Step One (Ratio × Total Discounted Sales Amount) |
Step Two (VSOE & Residual) |
|---|---|---|---|---|---|---|---|
|
Item 1 |
Software |
200 |
360.00 |
Yes |
0.2377 |
228.21 |
360.00 |
|
Item 2 |
Software |
120 |
540.00 |
Yes |
0.3566 |
342.31 |
540.00 |
|
Item 3 – Delivered |
Software |
360 |
345.60 |
|
0.2282 |
219.08 |
33.75 |
|
Item 4 – Delivered |
Software |
280 |
268.80 |
|
0.1775 |
170.40 |
26.25 |
|
Total |
|
960 |
1,514.40 |
|
|
960.00 |
960.00 |
The total discounted sales amount is $960, and the total revenue amount after allocation must also equal $960. Step One follows the standard allocation rules, and uses the ratio of each item’s fair value to allocate the transaction amount.
This bundle qualifies for the residual method. All items without VSOE prices are delivered. Step Two allocates the VSOE prices to items 1 and 2. The total discounted sales amount minus these VSOE prices is $60. This residual amount is allocated to items 3 and 4 in proportion to their discounted sales amounts.