Revenue – ifrs 15 handbook

Example 2 – Enterprise service contract with penalties
Telco B enters into an agreement to provide data hosting services to a large 
business customer, Company C, for a period of five years. Certain service-level 
agreements (SLAs) are signed by B as part of the contract with C. Specifically, 
the SLAs will result in a reduction of consideration paid by C to B, if B does not 
meet a specified level of service. Because the SLAs are part of the contract with 
C, the SLA penalties create variable consideration. 
Therefore, B estimates the amount of the penalties at contract inception in 
determining the transaction price. For a discussion on the variable consideration 
allocation exception, see 
Section 4.2
.
Consideration can be deemed to be variable even if the price 
stated in the contract is fixed
IFRS 15.BC190–BC194
The guidance on variable consideration may apply in a wide variety of 
circumstances. The promised consideration may be variable if an entity’s 
customary business practices and relevant facts and circumstances indicate 
that the entity may accept a lower price than what is stated in the contract – i.e. 
the contract contains an implicit price concession or the entity has a history of 
providing price concessions or price support to its customers.
In these cases, it may be difficult to determine whether the entity has implicitly 
offered a price concession or whether it has chosen to accept the risk of default 
by the customer of the contractually agreed consideration (customer credit 
risk). Entities need to exercise judgement and consider all of the relevant facts 
and circumstances in making this determination (see 
Section 3.1
).
A fixed rate per unit of output may be variable consideration
When an entity enters into a contract with a customer for an undefined quantity 
of output at a fixed contractual rate per unit of output, the consideration may 
be variable. In some cases there may be substantive contractual terms that 
indicate that a portion of the consideration is fixed – e.g. contractual minimums. 
For contracts with undefined quantities, it is important to appropriately evaluate 
the entity’s underlying promise to determine how the variability created by 
the unknown quantity should be treated under the standard. For example, the 
entity’s underlying promise could be a series of distinct goods or services (see 
Section 2.3
), a stand-ready obligation or an obligation to provide the specified 
goods or services. Unknown quantities could also represent customer options 
for additional goods or services for which the entity will need to consider 
whether a material right exists (see 
Section 10.4
).

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50 | Revenue – IFRS 15 handbook