Question

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $62,000 and an additional $32,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will achieve the cost-savings target.

Required:
1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price.
2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the transaction price.
3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements. Calculate the transaction price.

Answer 1

As per IFRS 15 Revenue from Contracts with Customers, Transaction price in case of variable consideration is computed by two methods which are Expected Value Method which computes by taking in consideration the probability of variable amount and another is the Most Likely method which considers variable amount in full or nil.

1. $62,000 + ( $32,000*20%) =$ 68,400
2. $62,000 + $32,000 =$ 94,000 ( Variable consideration has been taken in full considering the expectations)
3. $62,000 + $00 =$ 62,000 ( Variable consideration has not been taken considering the uncertainity)