Revenue – ifrs 15 handbook

Example 10 – Applying the constraint: Consideration dependent on 
regulatory approval
Biotech Company B enters into a contract with Pharma Company C for 
Compound X, which is under development. Under the arrangement, C 
will receive a licence for X and B will continue to perform the research and 
development activities required to take X through to commercialisation. Under 
the contract, B will receive an up-front payment of 2,000, an additional 5,000 if 
regulatory approval is granted and 2% of any future sales of X made by C. 
B identifies the 5,000 payable if regulatory approval is obtained as variable 
consideration and uses the most likely amount approach to estimate it. Using this 
approach, B assesses that it is 60% likely that regulatory approval will be obtained, 
and therefore its unconstrained estimate of the variable consideration is 5,000.
However, before including this estimate in the transaction price, B applies the 
constraint guidance. B notes that: 
– payment is considered highly uncertain; 
– the uncertainty is highly susceptible to factors outside B’s control; 
– the uncertainty will not be resolved for a long time; and 
– the payment is significant to the overall transaction price. 
For these reasons, B concludes that the constrained amount should be zero. 
The variable consideration guidance is not applied to the sales-based royalty 
because it is subject to the royalty exception – see 
Section 9.6
.
Therefore, B determines that the transaction price of the arrangement is initially 
2,000, being the up-front payment.

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62 | Revenue – IFRS 15 handbook
Example 11 – Applying the constraint: Bonus payment
Investment Manager M enters into a three-year contract to provide investment 
management services to Fund L. L is nearing its final liquidation and M is asked 
to execute the investment policy during the run-off period. M will be entitled to 
a significant bonus at the end of the contract if the proceeds from the liquidation 
of L’s assets exceed 2 million. M notes that:
– L’s net asset value at the end of Year 2 was 5 million: i.e. the fair value of the 
remaining assets in the fund is significantly in excess of 2 million;
– L’s remaining assets have low risk; and
– market volatility and macro-economic variables affecting L’s asset value 
indicate that a significant decrease is very unlikely to occur. 
Therefore, during Year 3 M may be able to conclude that: 
– it is sufficiently likely that the proceeds from L’s liquidation will exceed the 
required threshold; and
– it is highly probable that a significant reversal in the amount of cumulative 
revenue recognised will not occur at the end of the contract.
If this is the case, then M may include the expected bonus in the transaction 
price during Year 3, before the final resolution of the uncertainty.