ANSWER 11

According to IFRS 15, the vendor should include the variable consideration (in this case, the potential penalty of $100,000) in the transaction price if it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

In this case, the vendor should estimate the likelihood of completing the construction by the specified date and the potential impact of the penalty on the transaction price. The vendor can use either the 'expected value' method (the sum of probability-weighted amounts in a range of possible outcomes) or the 'most likely amount' method (the single most likely amount in a range of possible outcomes), whichever method the vendor expects will better predict the amount of consideration to which the vendor will be entitled.

If the vendor estimates it is highly probable they will not incur the penalty (i.e., they will complete the construction by the specified date), the vendor would not adjust the transaction price.

However, if the vendor estimates that it is highly probable that they will incur the penalty, the transaction price would be reduced by the estimated penalty amount, subject to the constraint that it is highly probable that a significant revenue reversal will not occur.

As the project progresses, the vendor would need to reassess this estimate each reporting period and adjust the transaction price accordingly. If the penalty is subsequently incurred, this will decrease the transaction price and therefore the revenue recognized. If the penalty is avoided, this will increase the transaction price and therefore the revenue recognized.

It is important to note that this is an area that involves judgement and depends on the specific circumstances. The vendor should also consider any additional disclosure requirements in the financial statements.