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Entity sells a licence to sell products in one geographical area. Seller retains the rights to sell to rest of world. Therefore disposal must be recognised on the % of rights transferred.
15m was paid immediately and an extra 3m consideration is payable if sales in that country exceed 35m.
I called the extra 3m ‘contingent consideration’ and didnt recognise it as there was no evidence it was probable the conditions would be met – which i stated in the discussion.
However, the solution called it ‘variable consideration’ and states that is is not recognised in disposal but recognised n p/l when received. I dont understand this concept. Is this recognised as revenue when received?
1. It doesn’t matter whether you call it contingent or variable.
2. I would recognise it if it was HIGHLY PROBABLE that it would be received.
The standard deals with the uncertainty relating to variable consideration by limiting the amount of variable consideration that can be recognised. Specifically, variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been subsequently resolved. (Source IAS PLUS)
Don’t forget they are looking for your ability to explain and there is often no absolutely right answer, as in life.
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