Variable Consideration Is Included in The Transaction Price When It Is Highly Probable That A Significant

Variable consideration
Variable consideration is included in the transaction price when it is highly probable that a significant
reversal of reversal of revenue or decrease in revenue will not occur.
For example, an entity has a contract to sell through a distributor. The distributor has the right to return
if it cannot sell the product and the entity recognizes revenue when the distributor resells the product to
ultimate customers.
Under PFRS 15, the entity can recognize revenue when goods are sold to the distributor based on the
number of units sold less the units expected to be returned.
Time Value of Money
If the contract has a significant financing component, the consideration should be adjusted for time
value of money. Revenue is measured based on the cash selling price.
The difference between the total consideration and cash selling price is accounted for as interest
income.
However, if the contract period is less than one year, the entity can disregard time value of money.
Noncash Consideration
Noncash consideration is measured at fair value.
If the fair value cannot be reasonably estimated, the stand-alone selling of the promised goods or
service is used.
Consideration payable to the customer
The entity needs to determine if consideration payable to the customer may result in a reduction of the
transaction price.
Examples include vouchers, coupons and volume rebate.
Step 4 Allocation of the transaction price
The transaction price is allocated to each performance obligation on the basis of relative stand-alone
selling price of each good or service.
Stand-alone selling price is the price that the entity would sell a promised good or services separately to
a customer.
Determining stand-alone selling price
The best evidence of the stand-alone selling price is an observable price of a good or service when sold
on a stand-alone basis or when sold separately.
If the stand-alone selling price is not directly observable, the entity must estimate such price by using
the following methods:
a. Adjusted market assessment approach

b. Expected cost plus margin approach
c. Residual approach
The adjusted market assessment approach means the entity may refer to prices from competitors for
similar good or service adjusted for specific cost and margin.
The expected cost plus margin approach means that entity may forecast expected cost to satisfy the
performance obligation adjusted for an appropriate margin or profit.
The residual approach may be used only when either the selling price of the good or service is highly
variable or is uncertain.
Under the residual approach the stand-alone selling price is the difference between the total transaction
price and the sum of the observable stand-alone selling prices of other goods or services in the contract.
Step 5 Recognition of revenue
As entity shall recognize revenue when or as it satisfies a performance obligation by transferring control
of a good or service to a customer.
Simply stated, revenue should be recognize when an entity transfers control of the good or service to a
customer.
The amount of revenue is the amount allocated to the performance obligation.
Control of an asset refers to the ability to direct the use of the asset and obtain substantially all the
benefits from the asset.
Revenue can either be recognized either at a point in time or over time.
Revenue recognition at a point in time
The following factors would indicate revenue recognition at a point in time:
A. The entity has the right to receive payment for the asset and for which the customer is obliged
to pay.
B. The customer has legal title to the asset
C. The entity has transferred physical possession of the asset to the customer.
D. The customer has the significant risks and rewards of ownership of the asset.
Revenue recognition over time
Revenue is recognized over time when any of the following is satisfied:
a. The customer simultaneously receives and consume the benefits provided by the entity’s
performance as the entity performs.
For example, routine or recurring payroll processing services.
b. The entity’s performance creates or enhances an asset that the customer controls as the asset
created or enhanced.
For example, constructing an asset on a customer site.
c. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to receive payment for performance completed date.
For example, constructing a specialized asset that only the customer can use or constructing an
asset in accordance with customer order.

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Variable consideration

Time Value of Money

Noncash consideration is measured at fair value.

Consideration payable to the customer

Examples include vouchers, coupons and volume rebate.

Step 4 Allocation of the transaction price

a. Adjusted market assessment approach

Step 5 Recognition of revenue

The amount of revenue is the amount allocated to the performance obligation.

Revenue can either be recognized either at a point in time or over time.

Revenue recognition at a point in time

The following factors would indicate revenue recognition at a point in time:

Revenue is recognized over time when any of the following is satisfied:

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