Contractual Price
After a performance obligation has been created, its original price can be changed multiple times over the lifecycle of its fulfillment. For example, the price can be changed on the sales order after the sales order has been created initially. The price of a sales order item can be changed when it is invoiced. The contractual price is the final price that has all price changes consolidated but is the transaction price before allocation occurs. Therefore, the contractual price is the effective price of the performance obligation before price allocation.
Example
Assume that your company sells 10 articles of product A at EUR 400 each and 10 articles of product B at EUR 600 each to a customer. When a revenue accounting contract is created, it includes two performance obligations: A and B. Then the transaction price is calculated and allocated between these two performance obligations, for example, according to their standalone selling prices.
Performance Obligation | Contractual Price | Allocated Price |
|---|---|---|
A | EUR 4,000 | EUR 5,000 |
B | EUR 6,000 | EUR 5,000 |
Later, when 5 articles of product A are invoiced, the invoice changes the price of product A to 350 EUR each (for the 5 articles being invoiced). In this case, the contractual prices and price allocation are as follows:
Performance Obligation | Contractual Price | Allocated Price |
|---|---|---|
A | EUR 3,750 | EUR 4,875 |
B | EUR 6,000 | EUR 4,875 |
Note
In this example, the price change applies only to the 5 articles of product A being invoiced. Therefore, the price of the remaining 5 articles remains unchanged. In this case, the total price of performance obligation A becomes EUR 3,750, and the transaction price of the entire contract becomes EUR 9,750. The contractual price is the effective price at which the product is sold. The allocated price determines how much revenue can be recognized when the performance obligation is fulfilled.