Transaction price is the amount of consideration a company expects to be entitled to in exchange for transferring promised goods or services to a customer, net of variable consideration and other adjustments required under IFRS 15 and ASC 606. It is the number allocated to each performance obligation and recognised as revenue.
How the transaction price is set
A software vendor signs a two-year subscription with a customer at EUR 240,000 list price and a EUR 30,000 volume rebate payable if a second business unit rolls out in year two. Under IFRS 15 and ASC 606, the transaction price is not the invoiced EUR 240,000. Finance estimates the probability-weighted rebate exposure at EUR 18,000, deducts it, and sets the transaction price at EUR 222,000 across the two-year term.
The transaction price is built from four inputs: fixed consideration in the contract, variable consideration constrained where the estimate is not highly probable of not reversing, the effect of financing components, and non-cash consideration measured at fair value. Each input is reassessed every reporting period.
Where the transaction price fits in the five-step model
Transaction price sits at step three of the five-step model in IFRS 15 and ASC 606. It is derived after the contract is identified and performance obligations are separated, then allocated across those obligations before revenue recognition. Rebates, discounts, price concessions, refunds, and performance bonuses all flow into it as variable consideration.
Transaction price FAQ
Is transaction price the same as invoice price?
No. Invoice price is the amount billed at contract execution. Transaction price is the amount recognised as revenue, net of variable consideration and financing adjustments.
Do rebates reduce the transaction price?
Yes. Rebates are variable consideration and reduce the transaction price at contract inception, with a true-up each reporting period as estimates resolve against actuals.
Who signs off on the transaction price estimate?
The revenue controller. External audit tests the estimate against the variable consideration constraint under IFRS 15 paragraph 56.
