International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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rebate, refund or credit.’
• other facts and circumstances that indicate ‘the entity’s intention, when entering
into the contract with the customer, is to offer a price concession to the customer.’
[IFRS 15.52].
These concepts are discussed in more detail below.
6.2.1
Forms of variable consideration
Paragraph 51 of IFRS 15 describes ‘variable consideration’ broadly to include discounts,
rebates, refunds, credits, price concessions, incentives, performance bonuses and
penalties. [IFRS 15.51]. Variable consideration can result from explicit terms in a contract
to which the parties to the contract agreed or can be implied by an entity’s past business
practices or intentions under the contract. It is important for entities to appropriately
identify the different instances of variable consideration included in a contract because
the second step of estimating variable consideration requires entities to apply a
constraint (as discussed further at 6.2.3 below) to all variable consideration.
Many types of variable consideration identified in IFRS 15 were also considered
variable consideration under legacy IFRS. An example of this is where a portion of
the transaction price depends on an entity meeting specified performance conditions
and there is uncertainty about the outcome. This portion of the transaction price
would be considered variable (or contingent) consideration under both legacy IFRS
and IFRS 15.
The Board noted in the Basis for Conclusions that consideration can be variable even
when the stated price in the contract is fixed. This is because the entity may be entitled
to consideration only upon the occurrence or non-occurrence of a future event.
[IFRS 15.BC191]. For example, IFRS 15’s description of variable consideration includes
amounts resulting from variability due to customer refunds or returns. As a result, a
contract to provide a customer with 100 widgets at a fixed price per widget would be
considered to include a variable component if the customer has the ability to return the
widgets (see 6.4 below).
In many transactions, entities have variable consideration as a result of rebates and/or
discounts on the price of products or services they provide to customers once the
customers meet specific volume thresholds. The standard contains the following
example relating to volume discounts. [IFRS 15.IE124-IE128].
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Example 28.36: Volume discount incentive
An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for €100 per unit.
If the customer purchases more than 1,000 units of Product A in a calendar year, the contract specifies
that the price per unit is retrospectively reduced to €90 per unit. Consequently, the consideration in the
contract is variable.
For the first quarter ended 31 March 20X8, the entity sells 75 units of Product A to the customer. The entity
estimates that the customer’s purchases will not exceed the 1,000-unit threshold required for the volume
discount in the calendar year.
The entity considers the requirements in paragraphs 56–58 of IFRS 15 on constraining estimates of variable
consideration, including the factors in paragraph 57 of IFRS 15. The entity determines that it has significant
experience with this product and with the purchasing pattern of the entity. Thus, the entity concludes that it
is highly probable that a significant reversal in the cumulative amount of revenue recognised (i.e. €100 per
unit) will not occur when the uncertainty is resolved (i.e. when the total amount of purchases is known).
Consequently, the entity recognises revenue of €7,500 (75 units × €100 per unit) for the quarter ended
31 March 20X8.
In May 20X8, the entity’s customer acquires another company and in the second quarter ended 30 June 20X8
the entity sells an additional 500 units of Product A to the customer. In the light of the new fact, the entity
estimates that the customer’s purchases will exceed the 1,000-unit threshold for the calendar year and
therefore it will be required to retrospectively reduce the price per unit to €90.
Consequently, the entity recognises revenue of €44,250 for the quarter ended 30 June 20X8. That amount is
calculated from €45,000 for the sale of 500 units (500 units × €90 per unit) less the change in transaction
price of €750 (75 units × €10 price reduction) for the reduction of revenue relating to units sold for the quarter
ended 31 March 20X8 (see paragraphs 87 and 88 of IFRS 15).
See 5.6.1.E above for discussion on whether volume rebates and/or discounts on goods
or services should be accounted for as variable consideration or as customer options to
acquire additional goods or services at a discount. See 5.6.1.C above for a discussion on
distinguishing between a contract that contains an option to purchase additional goods
or services and a contract that includes variable consideration based on a variable
quantity (e.g. a usage-based fee).
6.2.1.A
Implicit price concessions
For some contracts, the stated price has easily identifiable variable components.
However, for other contracts, the consideration may be variable because the facts and
circumstances indicate that the entity may accept a lower price than the amount stated
in the contract (i.e. it expects to provide an implicit price concession). This could be as
a result of the customer’s valid expectation that the entity will reduce its price because
of the entity’s customary business practices, published policies or specific statements
made by the entity.
An implicit price concession could also result from other facts and circumstances
indicating that the entity intended to offer a price concession to the customer when it
entered into the contract. For example, an entity may accept a lower price than the
amount stated in the contract to develop or enhance a customer relationship or because
the incremental cost of providing the service to the customer is not significant and the
total consideration it expects to collect provides a sufficient margin.
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The standard provides the following example of when an implicit price concession
exists and the transaction price, therefore, is not the amount stated in the contract.
[IFRS 15.IE7-IE9].
Example 28.37: Consideration is not the stated price – implicit price concession
An entity sells 1,000 units of a prescription drug to a customer for promised consideration of €1 million. This
is the entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty.
Thus, the entity expects that it will not be able to collect from the customer the full amount of the promised
consideration. Despite the possibility of not collecting the full amount, the entity expects the region’s
economy to recover over the next two to three years and determines that a relationship with the customer
could help it to forge relationships with other potential customers in the region.
When assessing whether the criterion in paragraph 9(e) of IFRS 15 is met, the entity also considers
paragraphs 47 and 52(b) of IFRS 15. Based on the assessment of the facts and circumstances, the entity
determines that it expects to provide a price conc
ession and accept a lower amount of consideration from the
customer. Accordingly, the entity concludes that the transaction price is not €1 million and, therefore, the
promised consideration is variable. The entity estimates the variable consideration and determines that it
expects to be entitled to €400,000.
The entity considers the customer’s ability and intention to pay the consideration and
concludes that even though the region is experiencing economic difficulty, it is probable
that it will collect €400,000 from the customer. Consequently, the entity concludes that
the criterion in paragraph 9(e) of IFRS 15 is met based on an estimate of variable
consideration of €400,000. In addition, on the basis of an evaluation of the contract
terms and other facts and circumstances, the entity concludes that the other criteria in
paragraph 9 of IFRS 15 are also met. Consequently, the entity accounts for the contract
with the customer in accordance with the requirements in IFRS 15.
Variable consideration may also result from extended payment terms in a contract and
any resulting uncertainty about whether the entity will be willing to accept a lower
amount when it is paid in the future. That is, an entity has to evaluate whether the
extended payment terms represent an implied price concession because the entity does
not intend to, or will not be able to, collect all amounts due in future periods.
However, in the Basis for Conclusions, the IASB acknowledged that in some cases, it
may be difficult to determine whether the entity has implicitly offered a price
concession or whether the entity has chosen to accept the risk of the customer
defaulting on the contractually agreed consideration (i.e.
impairment losses).
[IFRS 15.BC194]. The Board did not develop detailed application guidance to assist in
distinguishing between price concessions (recognised as variable consideration, within
revenue) and impairment losses (recognised as a bad debt expense, outside of revenue).
Therefore, entities need to consider all relevant facts and circumstances when analysing
situations in which an entity is willing to accept a lower price than the amount stated in
the contract.
Appropriately distinguishing between price concessions (i.e. reductions of revenue) and
customer credit risk (i.e. bad debt) for collectability concerns that were known at
contract inception is important because it affects whether a valid contract exists
(see 4.1.6 above) and the subsequent accounting for the transaction. If an entity
determines at contract inception that a contract includes a price concession (i.e. variable
consideration), any change in the estimate of the amount the entity expects to collect,
absent an identifiable credit event, is accounted for as a change in the transaction price.
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That is, a decrease in the amount the entity expects to collect would be recorded as a
reduction in revenue and not as a bad debt expense, unless there is an event that affects
a customer’s ability to pay some or all of the transaction price (e.g. a known decline in a
customer’s operations, a bankruptcy filing). As illustrated in Example 28.37 above,
entities may estimate a transaction price that is significantly lower than the stated
invoice or contractual amount, but still consider the difference between those amounts
to be variable consideration (e.g. a price concession), rather than a collectability issue
related to bad debt. Under legacy IFRS, such amounts were likely expensed as bad
debts, rather than being reflected as a reduction of revenue.
6.2.1.B
Liquidated damages, penalties or compensation from other similar
clauses: variable consideration versus warranty provisions
Should liquidated damages, penalties or compensation from other similar clauses be
accounted for as variable consideration or warranty provisions under the standard?
Most liquidated damages, penalties and similar payments should be accounted for as
variable consideration. However, in limited situations, we believe that amounts that are
based on the actual performance of a delivered good or service may be considered
similar to warranty payments (e.g. in situations in which an entity pays the customer’s
direct costs to remedy a defect).
Some contracts provide for liquidated damages, penalties or other damages if an entity
fails to deliver future goods or services or if the goods or services fail to meet certain
specifications. Paragraph 51 of IFRS 15 includes ‘penalties’ as an example of variable
consideration and describes how promised consideration in a contract can be variable
if the right to receive the consideration is contingent on the occurrence or non-
occurrence of a future event (e.g. the contract specifies that a vendor pays a penalty if
it fails to perform according to the agreed upon terms). [IFRS 15.51].
Penalties and other clauses that are considered similar to warranty provisions would be
accounted for as:
(a) consideration paid or payable to a customer (which may be variable consideration,
see 6.7 below); or
(b) an assurance-type or service-type warranty (see 10.1 below on warranties).
Cash fines or penalties paid to a customer would generally be accounted for under the
requirements on consideration payable to a customer. However, we believe there may
be situations in which it is appropriate to account for cash payments as an assurance-
type warranty (e.g. an entity’s direct reimbursement to the customer for costs paid by
the customer to a third party for the repair of a product).
6.2.1.C
Identifying variable consideration: undefined quantities with fixed per
unit contractual prices
At the July 2015 TRG meeting, the TRG members were asked whether the consideration
is variable in a contract that includes a promise to provide an undefined quantity of
outputs or to perform an undefined quantity of tasks, but has a contractual rate per unit
that is fixed. The TRG members generally agreed that if a contract includes an unknown
quantity of tasks throughout the contract period, for which the entity has enforceable
rights and obligations (i.e. the unknown quantity of tasks is not an option to purchase
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additional goods or services, as described at 5.6.1.C above) and the consideration
received is contingent upon the quantity completed, the total transaction price would
be variable. This is because the contract has a range of possible transaction prices and
the ultimate consideration depends on the occurrence or non-occurrence of a future
event (e.g. customer usage), even though the rate per unit is fixed.
The TRG agenda paper on this topic noted that an entity would need to consider
contractual minimums (or other clauses) that would make some or all of the
consideration fixed.67
6.2.1.D
If a contract is denominated in a currency other than that of the entity’s
functional currency, should changes in the contract price due to
exchange rate fluctuations be accounted for as variable consideration?
We believe that changes to the contract price due to exchange rate fluctuations do not
result in variable consideration. These price fluctuations are a consequence of entering
into a contract that is denominated in a foreign currency, rather than a result of a
contract term like a discount or rebate or one that depends on the occurrence or non-
occurrence of a future event, as described in paragraph 51 of IFRS 15. [IFRS 15.51].
The variability resulting from changes in foreign exchange rates relates to the form of
the consideration (i.e. it is in a currency other than the entity’s functional currency). As
such, we believe that it would not be considered variable consideration when
determining the transaction price. This variability may, instead, need to be accounted
for in accordance with IFRS 9 if it is a separable embedded derivative. Otherwise, an
entity would account for this variability in accordance with IAS 21 – The Effects of
Changes in Foreign Exchange Rates.
The IFRS Interpretations Committee published IFRIC
22– Foreign Currency
Transactions and Advance Consideration specifies that when foreign consideration is
recognised in advance of the associated revenue, the appropriate application of IAS 21
is to measure the revenue using the exchange rate at the date the advanced receipt is
recognised, normally the payment date (see Chapter 15 at 5.1.2).
6.2.1.E
Price protection or price matching clauses
Clauses subject to price protection or price matching clauses that require an entity to
refund a portion of the consideration to the customer in certain situations should be
accounted for as variable consideration under IFRS 15. That is, we believe that, if an
entity is required to retrospectively apply lower prices to previous purchases made by
a customer (or has a past business practice of doing so, even if the contractual terms
would only require prospective application), the consideration would be accounted for
as variable consideration.
Examples include contracts between an entity and a customer that provide, either as a
matter of formal agreement or due to an entity’s business practices, that the entity will
refund or provide a credit equal to a portion of the original purchase price towards
future purchases if the entity subsequently reduces its price for a previously delivered
product and the customer still has inventory of that product on hand. An entity may also
offer to match a competitor’s price and provide a refund of the difference if the