Constraint on variable consideration
The constraint limits how much variable consideration enters the transaction price: include an estimate only to the extent it is probable (IFRS 15: highly probable) that a significant reversal of cumulative revenue recognised will not occur when the uncertainty resolves. Factors include external influences, limited experience and a broad range of outcomes.
Standard references
- ASC 606606-10-32-11 to 32-13
- IFRS 15paragraphs 56–58
- Ind AS 115paragraphs 56–58
- ASC 606606-10-55-65 (sales- or usage-based royalty exception for licences of IP)
Worked example
Illustrative: a fixed $90,000 implementation plus a $30,000 bonus if the customer goes live by 31 March. The vendor has never integrated with this ERP, and the date depends on the customer's IT team.
- Estimate: most likely amount of the bonus is uncertain; the outcome depends on factors outside the vendor's control and it has no relevant experience.
- Including $30,000 now could lead to a significant reversal, so the constrained amount is $0.
- Transaction price at inception: $90,000. At each reporting date, reassess; once achievement is probable, add the $30,000 and recognise the share relating to work already done as a catch-up.
Result: $90,000 at inception; the bonus enters the transaction price only when the reversal risk is resolved.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Constraining the whole transaction price instead of only the variable portion.
- Defaulting to a constraint of zero without analysing the factors.
- Applying the general constraint to sales- or usage-based royalties on licences of IP, which follow their own exception.