Question

Velocity Racing School is a company that trains people to drive their sports cars on a track. They are under contract with Thunderhill Raceway to train drivers on that track. They are paid $500 per student, and at the end of the month, they receive an additional $100 per student if 80% or more of the students rate the instructors as ‘excellent’. They are paid on the 10^th of the following month. They make adjusting entries both mid and end of month. For the month of July, they worked with 100 students in the first 15 days, and by the way things were going, they felt that 40% of the students would rate them as excellent. During the latter half of the month, they worked with another 200 students, but by the end of the month, they felt that 90% of the students would rate them as excellent. When it was time to be paid on the 10^th of the following month, it turns out that 70% of the students had rated them as excellent. Velocity uses expected value for variable consideration. How much revenue did they book on the 15^th? On the 31^st? On the 10^thof the following month?

Answer 1

As per IFRS 15 Revenue from Contracts with Customers ,

Many businesses have contracts with their customers that set out the consideration receivable that is not just for a fixed amount. The consideration receivable can often include amounts such as:

• Awards for early or timely delivery and penalties for late delivery (common in industries such as construction – see example 1 below), or
• Volume based rebates or stepped-pricing (common in industries such as retail or manufacturing – see example 2 below).

Under IFRS 15 these amounts are referred to as ‘variable consideration’. Variable consideration can also arise in other situations such as sales with a right of return, or where there is a valid expectation (either based on customary business practice, or the seller’s intention when entering into the contract) that a price concession will be offered later.

It is important to consider the treatment of these elements of revenue when looking at the accounting required under IFRS 15 as this can differ from the previous accounting treatment.

At the start of the contract a seller must estimate the amount of consideration to which it expects to be entitled on the contract. This estimate is updated at each reporting date until no further consideration is receivable. IFRS 15 requires that this estimate of variable consideration is determined using either:

• The expected value method – based on probability-weighted amounts, or
• The most likely outcome method – appropriate where there are few possible outcomes (for example, an entity either achieves a performance bonus or not).

The most appropriate method should be selected for each contract, and then must be applied consistently throughout the contract term.

Regardless of which method is used, the estimation of the variable consideration amount is constrained to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. This means that when estimating the variable consideration, IFRS 15 sets a higher hurdle than the previous IFRS standards which may defer the recognition of some revenue.

In present case as question suggest that Velocity uses expected value for variable consideration. so we are projecting on that basis

Date	Note	No of Student (A)	Rate Per Student (B)	Total Revenue Recognised (A*B)
15/X1/XXXX		100	500	USD 50,000.00
31/X1/XXXX		200	500	USD 1,00,000.00
Note 1	As it is estimated by company that 90% Student would rate them Excellent.	300	100	USD 30,000.00
10/X2/XXXX	We will revese Projected Revenue	300	100	USD 30,000.00

15/X1/XXXX	Debit	Thunderhill Raceway/Customer A/c	USD 50,000.00
	Credit	Revenue/Sales A/c	USD 50,000.00
31/X1/XXXX	Debit	Thunderhill Raceway/Customer A/c	USD 1,00,000.00
	Credit	Revenue/Sales A/c	USD 1,00,000.00
31/X1/XXXX	Debit	Variable Consideration A/c	USD 30,000.00
	Credit	Projected Revenue Account A/c	USD 30,000.00
10/X2/XXXX	Debit	Projected Revenue Account A/c	USD 30,000.00
	Credit	Variable Consideration A/c	USD 30,000.00