QUESTION 19 Illustration 19–Estimating variable consideration XYZ Limited enters into a contract with a customer to build a sophisticated machinery. The promise to transfer the asset is a performance obligation that is satisfied over time. The promised consideration is $ 2.5 Million, but that amount will be reduced or increased depending on the timing of completion of the asset. Specifically, for each day after 31 March 2018 that the asset is incomplete, the promised consideration is reduced by $ 1 Lakh. For each day before 31 March 2018 that the asset is complete, the promised consideration increases by $ 1 Lakh. In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based on metrics that are defined in the contract. If the asset receives a specified rating, the entity will be entitled to an incentive bonus of $ 15 Lakhs. Determine the transaction price.

Solution

In determining the transaction price, the entity prepares a separate estimate for each element of variable consideration to which the entity will be entitled using the estimation methods described in paragraph 53 of IFRS 15:

a)    the entity decides to use the expected value method to estimate the variable consideration associated with the daily penalty or incentive (i.e.$ 2.5 Million, plus or minus $ 1 Lakh per day). This is because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.

b)    the entity decides to use the most likely amount to estimate the variable consideration associated with the incentive bonus. This is because there are only two possible outcomes ($ 15 Lakhs or $ Nil) and it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.

 


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