During a webcast on revenue recognition
“How are you seeing the “Best Estimated Selling Price” working in practice, especially where there is no pricing history and
The question itself is telling. I don’t think there’s any doubt that – once EITF 08-1 was finalized - the introduction of Best Estimated Selling Price (BESP) promised to make life easier than the previous practice of having to determine fair value. However, revenue recognition professionals were left with very little guidance on how to exactly calculate and use BESP in their revenue recognition analysis.
Werner’s response reminded us that the introduction of BESP did not change the requirement - the deliverables in question must still have standalone value. As a result, companies will still have transactions that result in single units of accounting because the delivered products or services do not have standalone value. An example of this would be setup fees.
Werner then discussed the three BESP methods that he has seen used in practice:
1. Gross Margin Approach: This approach takes the cost of each element of a transaction and adds the expected or average gross margin to arrive at the estimated selling price. The gross margin is often at a division or product family level. Some companies with fewer product offerings might use a company-wide gross margin.
2. Discount from List Price Approach: This works when the company has a consistent pricing approach and discount range by product or product family that has some consistency. Companies look at the average discount and then apply that to list price for each product to arrive at the BESP.
3. “Broken” VSOE Approach: These companies apply the same analysis as a VSOE study but allow greater variances in the conveyed population and the plus minus percentage. For example, if the pricing of a product is consistent for say 60% of the population with a 20% plus or minus margin variance, that might be a good indicator of a Best Estimated Selling Price. This would compare to the normal VSOE analysis of 80-85% of the population covered with a 10-15% variance.
Conclusion:
Werner’s response amply demonstrates complexities involved in developing a reasonable BESP and shows that, while a better indication of the economics of a transaction, BESP was not a silver bullet solving the world’s revenue recognition problems. Careful consideration must be given to the specifics of each transaction, and as Werner stated: “Companies should work with their consultants and auditors to develop a reasonable approach.”
Dan Berube is the