Question

What are some examples of variable consideration? What are the two approaches for estimating variable consideration?

Short answer

Discounts, credits, rebates, refunds, price concessions, and incentives are all examples of variable considerations. Whether officially specified in the contract or tacitly expressed, the transaction price incorporates such variable factors.

Step-by-step solution

Definition of Variable Consideration

Variable consideration is a wide term that can refer to various things, including price concessions, rebates, and reimbursements. Even though the quantity is constant, consideration is deemed variable if the amount an entity will get is dependent on a future event occurring or not occurring.

Examples and approaches for estimating variable consideration

Price or volume discounts, rebates, credits, performance incentives, or royalties are examples of variable consideration (where the price of an item or service is based on future events). To assess the amount of revenue to recognize, a firm estimates the amount of variable consideration it will get from the contract.

Two approaches for estimating variable consideration are

Companies estimate variable consideration using either (1)the anticipated value, which is a probability-weighted number, or (2) the most likely amount in a range of potential quantities. Companies choose between these two strategies based on which one anticipates the amount of attention they are entitled the best.