Question

A company is evaluating a revenue arrangement to determine proper revenue recognition. The contract is for manufacturing 20 race cars. The customer needs the cars by May 1, 2021. The customer provides a bonus payment of $320,000 if all cars are delivered by the May 1 deadline. The bonus is reduced by a fourth of the total available bonus amount (i.e., reduced by $320,000 divided by 4) each week that the cars are delivered after the deadline until no bonus is paid if the cars are delivered after May 22nd, 2021. The company has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (20%) for each full delivery outcome. How much should the company recognize as revenue related to this bonus?

Answer 1

According to IFRS 15 - Revenue Recognition from contract with customers.

For recognising variable consideration there are.

The following are the two methods inorder to estimate the variable consideration

(a) The expected value - the expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.

(b) The most likely amount - the most likely amount is the single most likely amount in a range of possible consideration amounts. The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes.

Here we will use the expected value method.

Probability	Outcome	Bonus	Weighted average
20%	1 Week delay	2,56,000	51,200
20%	2 Week delay	1,92,000	38,400
20%	3 Week delay	1,28,000	25,600
20%	4 Week delay	64,000	12,800
20%	5 Week delay	-	-
		Bonus Recognised	1,28,000

As per constraining estimated of variable consideration bonus once recognised should not be reversed.

Note - The above problem is solved as per the most recent and widely accepted revenue recognition standard IFRS-15.