Revenue – ifrs 15 handbook

Constraint assessment made against cumulative revenue
When constraining its estimate of variable consideration, an entity assesses the 
potential magnitude of a significant revenue reversal relative to the cumulative 
revenue recognised – i.e. for both variable and fixed consideration, rather than 
on a reversal of only the variable consideration. The assessment of magnitude 
is relative to the transaction price for the contract, rather than the amount 
allocated to the specific performance obligation.
Specified level of confidence included in constraint requirements
IFRS 15.BC209
The inclusion of a specified level of confidence – ‘highly probable’ – clarifies 
the notion of whether an entity 
expects
a significant revenue reversal. This is 
an area of significant judgement and entities need to align their judgemental 
thresholds, processes and internal controls with these requirements. 
Documenting these judgements is also critical.
Constraint introduces an element of prudence
IFRS 15.BC207
The constraint introduces a downward bias into estimates, requiring entities 
to exercise prudence before they recognise revenue – i.e. they have to make a 
non-neutral estimate. This exception to the revenue recognition model reflects 
the particular sensitivity with which revenue reversals are viewed by many 
users of financial statements and regulators.
 
Additional application examples
Example 9 – Applying the constraint: Consideration based on 
occupancy of property
Developer D buys land and obtains approval to develop a retail centre. This is 
the first development that it has undertaken in a new regeneration zone – e.g. 
conversion of an industrial area into a retail centre.
D then enters into a contract with Company V, a large listed property fund, to 
sell the land and retail centre for a fixed price of 1 million and an amount based 
on occupancy levels one year after completion. D determines that control of the 
land and retail centre will transfer on completion of the development. 

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3 Step 3 – Determine the transaction price | 61
3.1 Variable consideration (and the constraint)
| 
At the completion date, D has estimated the variable consideration amount to 
be 500,000 using the expected value method. D then applies the constraint 
guidance and notes that:
– D does not have previous experience with similar contracts;
– occupancy levels are outside D’s control; 
– the uncertainty will not be resolved for a long time; and 
– the range of possible outcomes is large. 
As a result, D concludes that the amount of variable consideration should be 
constrained to zero. D re-evaluates its conclusions at each reporting date until 
the uncertainty is resolved.