Variable Consideration & Financing
Not all contracts have a fixed price. When a contract includes rebates, bonuses, or long-term payments, Step 3 of the Five-Step Model becomes significantly more complex.
1Variable Consideration
Variable consideration occurs when the price depends on future events. Think of a construction bonus for early completion or a volume rebate based on annual sales.
Expected Value
Sum of probability-weighted amounts in a range of possible outcomes.
Most Likely Amount
The single most likely outcome in a range of possible outcomes.
2The Constraint (IFRS 15.56)
Wait! Don't recognize it all.
You only include variable consideration in the transaction price if it is highly probable that a significant reversal of revenue will not occur when the uncertainty is resolved.
Think of this as "Accountant's Prudence" built into the standard. If you aren't sure you'll get the bonus, don't book it yet!
3Significant Financing Component (SFC)
If the customer pays much later than delivery (or much earlier), the transaction price includes a "financing element" (interest).
When to Adjust?
Adjust the transaction price for the time value of money if the timing of payments provides the customer (or the entity) with a significant benefit of financing.
Practical Expedient
If the period between transfer of control and payment is one year or less, you do NOT need to account for a financing component.
4Non-Cash Consideration
If a customer pays with assets instead of cash (e.g., equipment or equity shares), how do we measure the revenue?
Measure the non-cash consideration at its Fair Value at contract inception. If fair value cannot be reliably estimated, use the stand-alone selling price of the goods/services promised.
Exam Tip: The Step 3 Traps
- 1. Volume Rebates: Always check if the rebate is retrospective (applies to all previous units) or prospective. It changes your calculation of variable consideration.
- 2. Financing Rate: Always use the rate that would be reflected in a separate financing transaction between the entity and its customer.