When a contract includes consideration that depends on the outcome of future events, sellers estimate that variable consideration and include it in the contract$$s transaction price. The seller$$s estimate is based either on the most likely outcome or the expected value of the outcome. However, a constraint applies$$variable consideration only should be included in the transaction price to the extent it is probable that a significant revenue reversal will not occur. The estimate of variable consideration is updated each period to reflect changes in circumstances. A seller also needs to determine if it is a principal $($and recognizes as revenue the amount received from the customer$)$ or an agent $($and recognizes its commission as revenue$),$ consider time value of money, and consider the effect of any payments by the seller to the customer. Once the transaction price is estimated, we allocate it to performance obligations according to their stand$-$alone selling prices, which can be estimated using the adjusted market assessment approach, the expected cost plus margin approach, or the residual approach.

Knowledge Check $01$

Which of the following statements is true with regards to variable consideration?

Multiple Choice

The most likely amount is calculated by multiplying the possible amounts by their respective probability.

Variable consideration means the transaction price is uncertain.

When at least part of the transaction price is uncertain, no amount of revenue can ever be recognized until the contract is complete.

When at least part of the transaction price is uncertain, only the certain portion can ever be recognized as revenue until the contract is complete.

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