Question

Consideration is ₹1.90 crore fixed plus a ₹20 lakh performance bonus if go-live is achieved in 4 months (historically achieved only 40% of the time). A modest penalty of ₹5 lakh applies if go-live slips beyond 6 months (historically 10% occurrence). At contract inception, what is the most appropriate treatment of variable amounts?

A Include net ₹15 lakh using expected value; constraint not applied due to small magnitude.
B Exclude ₹20 lakh bonus due to low probability; include ₹5 lakh penalty immediately as it’s likely not to occur.
C Estimate variable consideration using expected value (probability-weighted) but apply constraint to exclude the bonus until highly probable that significant reversal will not occur.
D Use most likely amount: ₹0 bonus, ₹0 penalty, recognize only fixed ₹1.90 crore.
E Recognize full ₹2.10 crore since outcomes can be estimated reliably from history.
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