Question

when the price of a good is dependent on the future event, what amount would the seller recognize as revenue?

Answer 1

When the price is dependent on the future event, the revenue amount is recognized as "variable consideration". The change in the price could be due to various factors such as price concessions, price rebates or refunds that could occur in future course of business. The variable consideration can result out of explicit terms in the contract agreement or due to seller's past experience. Under such circumstances, the variable consideration is accounted using two different methods namely the"most likely amount" method and the "expected value" method.

The "most likely amount" method considers the most likely amount (based on the seller's past experience) for accounting variable consideration. Under "expected value" method, the variable consideration is being accounted by estimating the possible outcomes and probabilities of each outcome.

Estimating the variable consideration is the new requirement prescribed by GAAP (Generally Accepted Accounting Principle) in order to recognize the revenue where the price is contingent on the future events.