IFRS 15 – Step 5 ver’s Variable consideration conditions.

Hello,

First of I would like to thank you for these free lectures and I really appreciate what Open Tuition is trying to achieve. Along side your notes and lectures I am studying ACCA through Kaplan and there is a question on IFRS 15 – revenue I am not completely happy with.

The question is as follows:

On December 1st 20X1, Company A provides a service to a customer for the next 12 months. The consideration is $12million. Company A is also entitled to an extra $3million if, after twelve months, the number of mistakes falls below a certain threshold.

Required:

Discuss the accounting treatment of the above for the year ended 31 December 20X1 given that it is highly probable that the number of mistakes made will fall below the acceptable threshold.

The answer I am given in brief is $1.25million.

I know that the consideration of $1million will not change however there is discussion on the variable consideration of $3million. I can easily understand that 3/12 gives me the $250,000 and as Company A its highly probable to meet the threshold, thus $1.25million revenue should be recognized as at December 31st 20X1.

My question is:

Step 5 states that revenue is recognised when (or as) a performance obligation is satisfied, isn’t it true that the variable consideration should only be recognised AFTER the 12th month is finished as this is when the performance obligation is satisfied?

Company A could, in theory, meet the mistakes threshold limit for 11 months thus recognising the extra $250K variable contribution per month however come December 20X2, Company A could make enough mistakes to take them over the acceptable threshold thus making them not qualify for the extra $3million.

I argued that because of Step 5, I could only recognise the variable contribution after completing the 12 months and keeping under the acceptable mistake threshold.

However, I was wrong. I hope my question makes sense.