The transaction price includes variable consideration. Which one of the following statements is reasonable?
Crisis Call Line Ltd. buys 1,000 telephones from Telecommunications Inc. at a fixed price per telephone. Crisis Call Line Ltd. has the ability to return the telephones to Telecommunications Inc. if they determine that they are not suitable for their national crisis line service. Given the price per phone is fixed the transaction price is fixed, i.e., Telecommunications Inc. has no variable consideration.
Rig Construction Ltd. constructs an oil rig for Oil & Gas Inc. and is entitled to a bonus if the rig is completed by a set date, but subject to escalating penalties for each day it is not. In considering the likelihood of the bonus or penalties Rig Construction Ltd. determines that there is a large number of possible outcomes and therefore uses the most likely amount to estimate variable consideration.
Creative Interiors Ltd. is commissioned to complete the interior design of the Duke of Melbourne’s palace. Creative Interiors Ltd. is entitled to receive a bonus of MU900,000 if the interior design is completed on time or none at all if it is not. Creative Interiors Ltd. determines that the expected value method is the method that better predicts the amount of consideration to which it will be entitled.
The statement that is reasonable regarding the inclusion of variable consideration is:
"Creative Interiors Ltd. is commissioned to complete the interior design of the Duke of Melbourne’s palace. Creative Interiors Ltd. is entitled to receive a bonus of MU900,000 if the interior design is completed on time or none at all if it is not. Creative Interiors Ltd. determines that the expected value method is the method that better predicts the amount of consideration to which it will be entitled."
According to IFRS 15, the transaction price should reflect all variable considerations, including estimates of variable consideration such as bonuses or penalties based on performance targets. In this case, Creative Interiors Ltd. has determined that the expected value method, which calculates the sum of each possible outcome multiplied by the probability of that outcome occurring, is the best approach to estimate the variable consideration (the bonus) in its contract with the Duke of Melbourne. This aligns with the standard's requirement to consider all forms of variable consideration, including estimating the best possible amount using an appropriate method, such as the most likely amount or the expected value method, depending on which one provides a better prediction of the transaction price.
