Contracts often include price variations relating to bonuses / penalties / rebates – why do we need to consider these early?

Many revenue streams are covered by AASB 15 Revenue from Contracts with Customers. The core principle of this standard is ‘that an entity shall recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.’ [emphasis added].

To determine what we expect to receive, all elements of the contract that are not fixed need to be reviewed. We need to review contracts for:

• Volume discounts
• Rebates
• Refunds
• Performance bonuses
• Penalties
• Price concessions

Once we have identified variable consideration then we need to estimate the amount expected to be received using either:

• the expected amount using a probability weighted average of the likely outcomes or
• the most likely outcome.

The method chosen is the one deemed to be the best estimate of the expected consideration, and the amounts may be updated at each reporting date.

Once the consideration has been determined, the entity recognises only the revenue that is highly probable will occur – this is known as the constraint on revenue recognition.

Practically, the requirements discussed above for variable consideration are relevant only where an entity satisfies the requirements for revenue recognition over time and contract crosses a reporting date.

As the estimate of the variable consideration changes, there may need to be a catch-up adjustment on previous revenue recognition for that contract.