QUESTION 37 Illust 37 FV of non-cash consideration varies for reasons other than the form of the consideration RT Limited enters into a contract to build an office building for AT Limited over an 18-month period. AT Limited agrees to pay the construction entity $ 350 million for the project. RT Limited will receive a bonus of 10 Lakhs equity shares of AT Limited if it completes construction of the office building within one year. Assume a fair value of $ 100 per share at contract inception. Determine the transaction price.

Solution

In this scenario, the transaction price will include both a fixed consideration and a variable consideration.

The fixed consideration is $350 million that RT Limited will receive for the construction of the office building.

The variable consideration is the bonus of 10 Lakh shares (equivalent to 1 million shares) that RT Limited will receive if it completes the construction within one year. The fair value of these shares at the contract inception is $100 per share, so the value of the variable consideration at contract inception is 1,000,000 shares * $100/share = $100 million.

However, due to the uncertainty around the achievement of the bonus (i.e., completion of the building within one year), RT Limited would only include the variable consideration (bonus) in the transaction price to the extent that 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 accordance with IFRS 15.32).

Therefore, if RT Limited believes it is highly probable that they will complete the construction within one year and receive the shares, and a significant reversal of revenue will not occur, then the transaction price would be $350 million + $100 million = $450 million.

However, if RT Limited is uncertain about completing the construction within one year, it may not include the variable consideration in the transaction price, and the transaction price would be $350 million.

Note that the transaction price could be updated in future reporting periods as the uncertainty around the completion of the building within one year gets resolved. For example, if the construction is on track to be completed within one year, the variable consideration may be included in the transaction price in a later period. Conversely, if the construction is delayed and it becomes unlikely that the building will be completed within one year, the variable consideration may need to be removed from the transaction price.

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