FACTORS AFFECTING THE TRANSACTION PRICE

[Yakub02]

Variable consideration

The amount of consideration for the sale of goods and services might be variable due to the existence of discounts, price concessions, incentives, performance bonuses, penalties and similar items.

Consideration can also vary if its amount is contingent on the occurrence or non occurrence of a future event. For example, where a product is sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone.

The variability relating to the consideration promised by a customer may be explicitly stated in the contract. However, in addition to the terms of the contract, the consideration is variable if either of the following circumstances exists:

 the customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract.

 other facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer.

If consideration includes a variable amount an entity must estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer.

 

[Yakub02]

If consideration includes a variable amount an entity must estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer.

The amount of variable consideration should be estimated by using either of the following methods:

 Expected value: the sum of probability weighted amounts in a range of possible consideration amounts.

This may be an appropriate estimate if an entity has a large number of contracts with similar characteristics.

 The most likely amount: the single most likely amount in a range of possible consideration amounts.

This may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not).

The method used should be the method expected to better predict the amount of consideration and should be applied consistently throughout the contract.

 

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Refund liabilities

An entity might expect to return some (or all) of the consideration received from a customer. Such consideration must be recognised as a refund liability.

A refund liability is measured at the amount of consideration received (or receivable) for which the entity does not expect to be entitled. It must be updated at the end of each reporting period for changes in circumstances.

The ability to estimate variable consideration does not necessarily mean that it would be included in the transaction price as there might be constraints on the estimate.

Variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal of the amount of cumulative revenue recognised will not occur when any uncertainty associated with the variable consideration is subsequently resolved.

 

[Yakub02]

This sounds complicated but it means that the variable consideration should only be included if it is highly probable that the entity will earn the amount after all uncertainties are resolved.

(The variable consideration is included in the transaction price when the company expects to receive it).

Variable consideration may be attributable to the entire contract or to a specific part of the contract.

A variable amount (and subsequent changes to that amount) should be allocated entirely to a performance obligation if both of the following criteria are met:

 the terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation; and

 the allocation is consistent with the IFRS 15 allocation objective