Variable consideration is defined broadly and can take many forms, such as price concessions, rebates or refunds. Consideration is also considered variable if the amount an entity will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.
What is a variable amount of consideration?
Variable consideration is defined broadly and can take many forms, such as price concessions, rebates or refunds. Consideration is also considered variable if the amount an entity will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.
What is the recognition of variable consideration?
The recognition of variable consideration is a significant change from prior accounting standards. In the past, entities were required to determine whether the amount of consideration was fixed or determinable, and only recognize the fixed or determinable portion.
What is the meaning of valuable consideration?
valuable consideration. noun. : an equivalent or compensation having value that is given for something acquired or promised (such as money or marriage) and that may consist either in a benefit accruing to one party or a loss falling upon the other.
What is consideration in law?
In general, consideration consists of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do.
What is a variable consideration?
Variable consideration includes discounts, credits, rebates, performance bonus, penalties, sales returns, refunds, price concessions, incentives, etc. The transaction price includes such variable considerations, whether explicitly stated in the contract or implicitly stated.
What is the example of variable consideration?
Examples of variable consideration include discounts, incentives, rebates, penalties, refunds, contingencies, credits, price concessions, performance bonuses, etc. A company can use either of the following methods for estimating variable consideration – (i.) the expected value method or (ii.) the most likely amount.
How do you find the variable consideration?
The expected value method estimates variable consideration based on the range of possible outcomes and the probabilities of each outcome. The estimate is the probability-weighted amount based on those ranges.
When a contract includes variable consideration?
As per ASC 606-10-32-5 – Estimation of Variable consideration: If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.
What is constraint on variable consideration?
The Constraint on Variable Consideration. After applying one of the two methods to estimate the variable consideration, entities must overcome one more hurdle. The consideration can only be included in the transaction price “to the extent that it is probable that a significant reversal … will not occur” (606-10-32-11).
Is contingent consideration a variable consideration?
If 'contingent' is considered to be a subset of 'variable', this would not be the case, unless different types of variable consideration are accounted for differently. 40 For the distinction to have an effect, the EFRAG Secretariat suggests linking the two terms to different types of uncertainties.
What is variable consideration ifrs15?
Under IFRS 15, if a contract includes variable consideration, then a company estimates the amount of consideration to which it will be entitled. Variable consideration includes discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties and other similar items.
Are royalties variable consideration?
Royalties are another form of variable consideration. However, ASC 606 contains an exception to the principle requiring an estimate of variable consideration for a sales-based royalty for a license of Intellectual Property (IP).
What is consideration payable to a customer?
Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to a customer (or to other parties that purchase the entity's goods or services from the customer).
When a contract includes variable consideration the probability weighted amount must be used when there are different probabilities of occurrence?
When a contract includes variable consideration, the probability-weighted amount must be used when there are different probabilities of occurrence. Revenue is realized when assets a company receives in exchange for goods or services are readily convertible to known amounts of cash or claims to cash.
What is fixed consideration?
Fixed Consideration means the aggregate sum (a) the Cash Consideration, and (b) the Stock Consideration.
What is variable revenue?
Variable means the revenue goes up and down each quarter and you have no guarantee of what it will be. So you have customers coming back, but you don't know how much they will spend each time. Fixed revenue typically comes from some agreed upon contract with the same level of revenue each quarter.
How does Arqule determine variable consideration?
Arqule explained how it determines the variable consideration for its drug licensing agreements. “At contract inception the Company evaluates whether milestones are considered probable of being achieved, and to the extent that significant reversal would not occur in future periods, estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments that are subject to the judgments and actions of a third party, such as regulatory approvals, have significant uncertainties and are excluded from the transaction price until those approvals are received. The Company updates its estimates for milestones at each reporting date until the uncertainty is resolved. Lastly, the Company considered ASC 606-10-55-65, which provides that sales-based royalties promised in exchange for a license of intellectual property should be recognized at the later of when the subsequent sale occurs or when the performance obligation is satisfied.”
What are the factors that affect the amount of consideration?
Those factors may include volatility in a market, the judgment or actions of third parties, weather conditions, and a high risk of obsolescence of the promised good or service.
What is variable consideration in ASC 606?
ASC 606 requires companies to include variable consideration in the transaction price of each contract only to the extent that it is not probable that a significant reversal of revenue will occur for that amount. Companies are required to determine both the likelihood and the magnitude of potential reversals to correctly determine what amounts should be constrained. The constraint requires the most judgment when variable amounts are near the “probable” threshold.
What is a judgment in estimating transaction price?
“Judgments that can be significant in estimating transaction price are related to the constraint. To determine the constraints to be applied to LTV [lifetime value commissions], the Company compares prior calculations of LTV to actual cash received and reviews the reasons for any differences. The Company then applies judgment in assessing whether the difference between historical cash collections and LTV is representative of differences that can be expected in future periods. The Company also analyzes whether circumstances have changed and considers any known or potential modifications to the inputs into LTV and the factors that can impact the amount of cash expected to be collected in future periods such as commission rates, carrier mix, policy duration, changes in laws and regulations, and cancellations of insurance plans offered by health insurance carriers with which the Company has a relationship” ( September 2019 letter to the SEC ).
Why is the most likely method more appropriate?
In such cases, the most likely method may be more appropriate because it produces a better estimate of the consideration the company expects to receive. However, this method may be hard to apply when one outcome is not significantly more likely than the other.
When using the most likely amount, the transaction price for the contract is the amount that is most likely to be received.
This method works well in situations with only two possible outcomes . If only two real possibilities exist, using an expected value approach would likely result in a transaction price that is significantly different than either of the two possible outcomes. In such cases, the most likely method may be more appropriate because it produces a better estimate of the consideration the company expects to receive. However, this method may be hard to apply when one outcome is not significantly more likely than the other.
Is variable consideration included in transaction price?
Fixed consideration should always be included in the transaction price. Variable consideration, on the other hand, should only be included to the extent that the company expects to be entitled to the consideration. This article will define variable consideration, give examples of the two methods to estimate it, ...

Variable Consideration
- Variable consideration can come in many forms, such as discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, rights of return, and prompt payment discounts. Sales- and usage-based royaltieshave unique guidance separate from the guidance discussed here. Variable amounts of consideration may be explicitl...
The Constraint on Variable Consideration
- After applying one of the two methods to estimate the variable consideration, entities must overcome one more hurdle. The consideration can only be included in the transaction price “to the extent that it is probable that a significant reversal … will not occur” (606-10-32-11). Probable is defined as “likely to occur” which is a higher standard than “more likely than not.” Making this det…
Additional Issues Related to Variable Consideration
- Several additional issues are relevant to the variable consideration discussion. Here are a few of those issues:
Conclusion
- Estimating variable consideration requires significant judgment by preparers and auditors. ASC 606 requires companies to include variable consideration in the transaction price of each contract only to the extent that it is not probable that a significant reversal of revenue will occur for that amount. Companies are required to determine both the likelihood and the magnitude of potentia…
Resources Consulted
- ASC 606-10-32-2 to 32-13
- ASU 2014-09: “Revenue from Contracts with Customers.” BC206-BC207, BC218, 234.
- EY, Financial Reporting Developments: “Revenue from Contracts with Customers.” January 2020. Section 5.2.
- FASB, “Revenue Recognition Implementation Q&As.” January 2020. Question 30, Question 41.