Variable consideration and the constraint

Learning objectives

• Identify the forms of variable consideration (discounts, rebates, refunds, credits, price concessions, performance bonuses, penalties) and the situations in which the price is variable without an explicit clause.L2
• Estimate variable consideration using the expected value (probability-weighted sum) or the most likely amount, according to which method better predicts the amount to which the entity will be entitled.L2, L3
• Assess the constraint on variable consideration: include only the portion for which it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur, in the light of the factors in the standard.L3, L4
• Recognise a refund liability and its re-estimation at each reporting date.L2, L3

Normative references

• IFRS 15 §50If the consideration promised includes a variable amount, the entity estimates the amount to which it expects to be entitled in exchange for the goods or services transferred.
• IFRS 15 §51Consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or similar items. It is also variable if the entity's entitlement depends on the occurrence or non-occurrence of a future event (for example, a product sold with a right of return, or a fixed bonus promised on achievement of a milestone).
• IFRS 15 §52The variability may be explicitly stated in the contract or implicit. It exists in particular if the customer has a valid expectation, arising from customary business practices, published policies or statements of the entity, that the entity will accept an amount less than the price stated in the contract (price concession), or if other facts indicate that the entity intends to offer such a concession when it enters into the contract.
• IFRS 15 §53The entity estimates variable consideration using the method that better predicts the amount to which it will be entitled: either the expected value (probability-weighted sum, appropriate for a large number of similar contracts) or the most likely amount (the single most likely outcome, appropriate when there are only two possible outcomes, for example a bonus achieved or not).
• IFRS 15 §54The entity applies one method consistently throughout the contract when estimating the effect of an uncertainty, and considers all information (historical, current and forecast) that is reasonably available to identify a reasonable number of possible consideration amounts.
• IFRS 15If the entity receives consideration that it expects to refund in whole or in part, it recognises a refund liability, measured at the amount of consideration received or receivable to which it does not expect to be entitled (an amount excluded from the transaction price). The liability is updated at the end of each reporting period; the accounting for sales with a right of return is specified in B20-B27.
• IFRS 15 §56The entity includes some or all of the estimated variable consideration in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is subsequently resolved.
• IFRS 15 §57In assessing whether it is highly probable, the entity considers both the likelihood and the magnitude of a revenue reversal. Factors that increase that risk include: consideration highly susceptible to factors outside the entity's influence (market, weather, judgement of third parties, obsolescence), uncertainty not expected to be resolved for a long period, limited or poorly predictive experience, a practice of offering price concessions or changing payment terms, and a broad range of possible amounts.
• IFRS 15For a sales-based or usage-based royalty promised in exchange for a licence of intellectual property, the entity applies paragraph B63 (an exception to the general estimation and constraint requirements).
• IFRS 15At the end of each reporting period, the entity updates the estimated transaction price, including its assessment of the constraint, to represent faithfully the circumstances at the end of the period and the changes during the period; changes are accounted for in accordance with paragraphs 87 to 90.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

25 questions

• Ingénova designs a production line for a customer for a fixed price of EUR {fixed_fee}. A bonus of EUR {bonus} will be due if the line is delivered before an agreed date; only two outcomes are possible. Ingénova estimates the bonus using the most likely amount, which is earning the bonus, and concludes, based on its judgement, that it is highly probable that including it will not result in a significant reversal of cumulative revenue. The contract also provides that Ingénova pays the customer EUR {payment_to_customer} as a contribution to fitting out its premises, without receiving any distinct good or service in exchange. Compute the transaction price.L3
• Lavergne sells a packaging line for 400,000. The contract provides for a penalty of 2,000 per week of late delivery, deducted from the price. This clause makes the promised consideration variable.L2
• Brennac is negotiating four maintenance contracts. Which one includes variable consideration?L2
• Valmigère, a pump manufacturer, is reviewing the clauses of its customer contracts. Which of them make the consideration variable?L2
• Brissac will receive a bonus of 30,000 if it delivers a prototype before 30 September 20X1, and nothing otherwise. It has no similar contracts. Which estimation method is, at first sight, the most appropriate to predict the bonus amount to which it will be entitled?L2
• Delmas enters into hundreds of similar furniture supply contracts each year, with year-end rebates. For a typical contract, its historical data give the following outcomes: {amount_high} with a probability of {prob_high}%, {amount_mid} with a probability of {prob_mid}% and {amount_low} with a probability of {prob_low}%. Delmas has concluded that the expected value is the most predictive method and that the constraint does not reduce the estimate (case data). Compute the estimated consideration.L2
• The carrier Ferrand invoices its logistics customers using a sliding scale linked to annual tonnages. Based on its portfolio of comparable contracts, it uses three scenarios for the contract signed with Hélix: {outcome_1} (weighting {weight_1}%), {outcome_2} (weighting {weight_2}%) and {outcome_3} (weighting {weight_3}%). Ferrand estimates the consideration using the expected value and has concluded that the constraint does not apply (given judgements). What amount does it use?L3
• Granval is building a warehouse for a fixed price of {fixed_price}. It will receive a bonus of {bonus} if the building is accepted before 30 June 20X2, and no bonus otherwise. Granval assesses the probability of meeting the deadline at {probability}%, uses the most likely amount and has concluded that it is highly probable that including the bonus will not result in a significant reversal of cumulative revenue (given judgements). Compute the transaction price.L3
• The software house Lormont is deploying a payroll application at Cassin for fees of {base_fee}. An additional {success_fee} will be paid if go-live succeeds at the first attempt; otherwise no additional amount is due. Lormont assesses the chance of success at the first attempt at {success_chance}% and uses the most likely amount (given judgement). What transaction price results from this estimate?L3
• The cooperative Sarthenay sells seeds with an additional discount if the yield of the customer's harvest exceeds a threshold. Which of the following facts increases the risk of a significant reversal of revenue recognised for this discount?L3
• Pellan, a video game publisher, is assessing the constraint on variable consideration in a distribution contract. Which items must it take into account?L3
• Ormeau manages a securities portfolio for a customer over 3 years. It receives a fixed fee of 400,000 per year and a performance fee equal to 20% of the positive difference between the portfolio's performance and a stock market index, computed at the end of the 3 years. According to management's simulations, this fee may range from 0 to 900,000; no minimum amount can be regarded as highly probable, and Ormeau's history for this type of mandate has little predictive value (case data). At contract inception, which treatment of the performance fee is most consistent with the constraint?L4
• The consultancy Hautval assists Néolis in filing an application for marketing authorisation of a medical device. Its fees comprise a fixed amount of 600,000 and a success fee of 150,000, payable only if the competent public authority grants the authorisation. The decision is expected in 18 months; Hautval has never handled an application before this authority. Write a memo determining the treatment of the success fee in the transaction price at contract inception.L4
• Corbière excluded a performance bonus from the transaction price at the inception of a 2-year contract. It need not revisit this assessment until the uncertainty is finally resolved, at the end of the contract.L3
• Albane sells 1,000 lamps for cash at 50 each, i.e. {cash_received}, with a 30-day right of return for a refund. Based on its experience, it expects to refund {expected_refunds}, an estimate judged consistent with the constraint (case data). Record the sale entry, excluding the derecognition of inventory and the cost of sales, which are recorded in a separate entry not requested here.L2
• The wholesaler Corvel delivers supplies to Ibéris during the first quarter of 20X1 and collects {amount_collected} at the full price. The contract provides that Ibéris will be refunded at year-end a rebate computed on its annual purchases; Corvel expects to pay back {expected_rebate} in respect of this quarter's purchases (an estimate judged consistent with the constraint, case data). Record the entry for the quarter.L3
• Tessier sells cameras with a right of return. For its December 20X1 sales, it recognised a refund liability of {initial_liability}. At the reporting date of 31 December 20X1, in the light of observed return trends (no refund has yet been paid), it reduces its estimate of expected refunds to {revised_refunds}. Record the entry adjusting the refund liability; the corresponding adjustment to the asset for the right to recover products is recorded in a separate entry not requested here.L3
• Valdrène builds a footbridge for a fixed price of {fixed_price}, with a bonus of {bonus} if the structure is delivered before an agreed date. At inception, Valdrène excluded the bonus from the transaction price, as its assessment of the constraint on variable consideration did not allow it to be included (case data). Six months later, early delivery is certain and the bonus is earned. Compute the change in the transaction price and the revised transaction price.L2
• The firm Solvarine manages the energy renovation of a building for a fixed fee of {fixed_fee}, plus an energy savings incentive capped at {max_incentive}. At inception, Solvarine included {initial_estimate} for the incentive in the transaction price, an amount it then considered highly probable not to have to reverse (case data). The final measurements set the incentive at {final_incentive}. Compute the change in the transaction price and the revised transaction price.L3
• Which of the following statements about sales with a right of return are correct?L3
• On 15 June 20X1, Vélinor sells {units} scooters for cash at a unit price of {unit_price}. Customers have a 30-day right of return with a full refund. Based on its history, Vélinor estimates that {return_rate} of the scooters will be returned; according to the case data, it is highly probable that this estimate will not result in a significant reversal of the revenue recognised. Calculate the revenue and the refund liability to be recognised at the date of sale.L2
• In March 20X2, the online retailer Marelia ships {units} jackets sold at {unit_price} each and paid on ordering. Customers may send the jackets back within 14 days for a refund. Using the previous season's statistics, customer service forecasts that {expected_returns} jackets will be returned; management considers, based on the case data, that this forecast meets the constraint on variable consideration. What amounts of revenue and refund liability does Marelia recognise on delivery?L3
• In December 20X1, Ardélie sells 1,000 kitchen robots at a unit price of {unit_price}, with a 90-day right of return. At the date of sale, it expects {initial_expected_returns} robots to be returned and recognises the corresponding refund liability. At 31 December 20X1, the reporting date, {returned_units} robots have been returned and refunded; Ardélie revises its estimate and now expects only {revised_remaining_returns} further robots to be returned. Calculate the refund liability at the reporting date and the adjustment to revenue (the asset for the right to recover the products is not dealt with here).L3
• In October 20X2, the board game publisher Lumbra delivers {units} game boxes to shops at a unit price of {unit_price}; the shops may return unsold boxes until 31 March 20X3 for a refund. On delivery, Lumbra estimated returns at {initial_rate} of the boxes. At 31 December 20X2, the reporting date, no box has yet been returned, but as in-store sales are disappointing, Lumbra raises its estimate to {revised_rate}. Calculate the refund liability at the reporting date and the reduction in revenue to be recognised.L3
• Quercy Agri sells fertiliser to cooperatives at a contractual price of 80,000 per delivery. The contract provides for no reduction. For several years, however, Quercy Agri has accepted, when the harvest is poor, a payment lower than the agreed price, and this practice is known to its customers. How should the promised consideration be characterised?L2