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?

Q: Answer-Consideration is ₹1.90 crore fixed plus a ₹20 lakh performance bonus if go-live is achieved in 4 mon...

Variable consideration may be estimated expected value fits multiple outcomes, but revenue recognized must be constrained if theres a risk of significant reversal. With only 40 historical success for the bonus, its not highly probable at inception penalty likelihood is lowtypically no recognition until outcome clarity.

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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