The transaction price includes variable consideration. Which one of the following statements is reasonable?
Outriggers Ltd. constructs an oil rig for G.A.S. 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 Outriggers Ltd. determines that there is a large number of possible outcomes and therefore uses the most likely amount to estimate variable consideration.
We Fight Inc. defends Ward in a civil court case. 80% We Fight Inc.’s fee is based on the positive outcome of the court case. There is a 75% chance that the court case will have a positive outcome and a 25% chance that it will not. We Fight Inc. determines that the most likely amount is the method that better predicts the amount of consideration to which it will be entitled.
Styled Ltd. is commissioned to complete the interior design of Iolani Palace. Styled 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. Styled Ltd. determines that the expected value method is the method that better predicts the amount of consideration to which it will be entitled.
Call Us Now Ltd. buys 1,000 telephones from Tele Services Inc. at a fixed price per telephone. Calls Us Now Ltd. has the ability to return the telephones to Tele Services Inc. if they determine that they are not suitable for their national crisis line service.
The statement that reflects a reasonable approach to estimating variable consideration is the one related to Styled Ltd. According to IFRS 15, when estimating variable consideration, an entity should choose the method that best predicts the amount of consideration to which it will be entitled. Styled Ltd. is commissioned to complete a project with a binary outcome—either receiving a bonus of MU900,000 for completing the interior design on time or receiving nothing at all if it's late. In this case, Styled Ltd. correctly identifies that the expected value method is the one that better predicts the amount of consideration to which it will be entitled, as there are only two possible outcomes with known probabilities.
Outriggers Ltd.'s situation involves a range of possible outcomes with escalating penalties, so using the most likely amount might not be the best estimate, especially if there are many possible outcomes, as stated.
Similarly, We Fight Inc.'s case also involves a range of possible outcomes since the probability of a positive or negative court outcome affects the fee, and thus, the most likely amount might not be the best estimate in this scenario either.
In the case of Call Us Now Ltd. and Tele Services Inc., the transaction doesn't involve variable consideration as the price is fixed, and return rights do not constitute variable consideration under IFRS 15, but rather a warranty or guarantee.
