Question

If you have a set price for a performance obligation with a potential for a bonus if certain criteria are met but those criteria probably will not be met is it still considered variable consideration? Or is it fixed consideration? Also, is there any evidence in 606 you can point me to?

Answer 1

In many instances, the expected consideration in a transaction is a variable amount, such as when an entity will get a bonus if it finishes the project ahead of schedule. In these instances, the variable consideration that an entity expects to receive must be estimated. Once the variable consideration has been estimated, the entity must determine if the consideration is attributable to:

All of the performance obligations
One or more, but not all, of the performance obligations (e.g., the consideration is based on the percentage of sales to customers that use a software license when the license is only one portion of the contract).
One or more, but not all, distinct goods or services provided in a series of distinct goods or services that make up one performance obligation (e.g., the price for the second year of a two-year cleaning service contract will increase based on the movement of an inflation index) (see ASC 606-10-32-39).
The variable consideration is allocated to one or more, but not all, of the performance obligations or distinct goods or services if the following two criteria are met:

The terms of the variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the good or service (or to a specific outcome from satisfying the performance obligation or transferring the good or service).
Allocating the variable amount of consideration entirely to the performance obligation or distinct good or service represents the amount of consideration that the entity would expect to receive for transferring the promised goods or services to the customer (see ASC 606-10-32-40).