In short
Variable consideration is any part of a contract's price that can change, such as discounts, rebates, refunds, performance bonuses and penalties. It is estimated and included in the transaction price, subject to a constraint.
Key takeaways
- It is estimated using either the expected value or the most likely amount, whichever better predicts it.
- The constraint limits it to the amount for which a significant revenue reversal is not probable.
- Sales- or usage-based royalties on licenses of intellectual property follow a separate exception.
Where it's tested
FAR: Revenue Recognition — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company sells a machine for $100,000 with a 5% volume rebate that historically about 60% of customers claim. How should the company initially estimate the transaction price for a sale where the rebate is expected to be claimed?