Revenue – ifrs 15 handbook

Liquidated damages may represent variable consideration or a 
product warranty
IFRS 15.51
Many contracts contain terms providing for liquidated damages and similar 
compensation to the customer on the occurrence or non-occurrence of certain 
events. These terms may represent variable consideration or a warranty. 
Judgement is required to determine the appropriate accounting. For further 
discussion, see 
10.2.1
.
3.1.1 
Estimate the amount of variable consideration
IFRS 15.53
When estimating the transaction price for a contract with variable consideration, 
an entity’s initial measurement objective is to determine which of the following 
methods best predicts the consideration to which the entity will be entitled.
Expected 
value
The entity considers the sum of probability-weighted 
amounts for a range of possible consideration amounts. This 
may be an appropriate estimate of the amount of variable 
consideration if an entity has a large number of contracts 
with similar characteristics.
Most likely 
amount
The entity considers the single most likely amount from 
a range of possible consideration amounts. This may 
be an appropriate estimate of the amount of variable 
consideration if the contract has only two (or perhaps a few) 
possible outcomes.
IFRS 15.54, BC195
The method selected is applied consistently throughout the contract and to similar 
types of contracts when estimating the effect of uncertainty on the amount of 
variable consideration to which the entity will be entitled.
Example 3 – Estimate of variable consideration: Expected value
Electronics Manufacturer M sells 1,000 televisions to Retailer R for 500,000 
(500 per television). M provides price protection to R by agreeing to reimburse 
R for the difference between this price and the lowest price that it offers for that 
television during the following six months. Based on M’s extensive experience 
with similar arrangements, it estimates the following outcomes.

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3 Step 3 – Determine the transaction price | 53
3.1 Variable consideration (and the constraint)
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