Variable consideration
Variable consideration is any part of the promised consideration that can change: discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or usage-based fees. An entity estimates it using the expected value or the most likely amount, whichever better predicts the outcome, and then applies the constraint.
Standard references
- ASC 606606-10-32-5 to 32-9
- IFRS 15paragraphs 50–54
- Ind AS 115paragraphs 50–54
Worked example
Illustrative: a $60,000 annual fee with a 10% service-level credit if uptime falls below 99.9%. History shows a breach in about 10% of comparable contracts.
- Expected value: 0.9 × $60,000 + 0.1 × $54,000 = $59,400. Suited to a large portfolio of similar contracts.
- Most likely amount: $60,000. Suited to a single contract with a binary outcome.
- Choose the method that better predicts the amount, apply it consistently, then test the estimate against the constraint.
Result: Estimated consideration of $59,400 or $60,000, depending on the method the facts support.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Missing implied price concessions, such as a history of accepting partial payment.
- Switching estimation methods between similar contracts.
- Not updating the estimate at each reporting date (ASC 606-10-32-14; IFRS 15.59).