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Chapter 4
Variable consideration
IFRS 15 says that if a contract includes variable consideration (e.g. a bonus or a
penalty) then the entity must estimate the amount it expects to receive.
This estimate of variable consideration will only be included in the transaction price if
it is highly probable that a significant reversal in the amount of revenue
recognised will not occur when the uncertainty is resolved.
Example 2
Variable consideration
On 1 January 20X1, Gross Net, a payroll service provider, enters into a two
year contract with a customer. The contract price is $1 million. In addition, the
customer will pay Gross Net a $0.2 million bonus if the number of errors made
by Gross Net falls below a set threshold.
Discuss the accounting treatment of the above in the year ended 31
December 20X1 assuming that:
Gross Net has little experience with this type of work and is unsure
whether the bonus target will be achieved.
Gross Net has extensive experience with this type of work and
considers it highly likely that the bonus target will be achieved.
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