Worked Example One: A Volume Rebate (Variable Consideration, Expected Value Method)

A manufacturer sells parts to a distributor under a 12-month contract. The list price is $100 per unit. If the distributor buys more than 50,000 units over the year, a retrospective rebate of $8 per unit applies to every unit purchased, not just the units above the threshold. Based on historical ordering patterns with this distributor, the manufacturer estimates a 70% probability that the distributor will exceed 50,000 units and a 30% probability it will not.

The rebate is variable consideration under AASB 15 — the transaction price is not fixed at $100 per unit because a future event (total annual volume) changes the amount the manufacturer is entitled to keep. AASB 15 requires the entity to estimate variable consideration using either the expected value method (a probability-weighted average, appropriate when an entity has a large number of contracts with similar characteristics) or the most likely amount method (appropriate when the contract has only two possible outcomes). Because the manufacturer sells to many distributors under similar rebate arrangements, the expected value method is the more appropriate estimate here.

Expected value per unit = (70% × $92) + (30% × $100) = $64.40 + $30.00 = $94.40. The manufacturer recognises revenue at $94.40 per unit as parts are delivered throughout the year, not at the full $100 list price. A refund liability is built up for the portion of consideration ($5.60 per unit) that is expected to be repaid or credited back if the threshold is met. At year end, once actual volume is known, the estimate is trued up to the actual rebate earned — this is not a new estimate technique, it is closing out the same estimate with better information.

The estimate is also subject to the constraining estimate requirement: variable consideration is only included in the transaction price to the extent it is highly probable that a significant reversal will not occur when the uncertainty is resolved. Because the manufacturer has several years of reliable ordering history with this distributor and the rebate mechanics are contractual and unambiguous, $94.40 clears the constraint. A newer distributor with no ordering history, or a rebate tied to a subjective performance metric, would warrant a more conservative estimate.

Worked Example Two: A Contract Modification Priced at Standalone Selling Price (Separate Contract)

A software vendor has an existing 3-year contract to license 200 users at $60 per user per year. In month 8, the customer asks to add 40 additional users of the same software, at the same $60 per user per year rate the vendor currently charges new customers for that user tier. The additional licences are a distinct good — the customer can benefit from them on their own, and the vendor’s fulfilment of them is separately identifiable from the original 200 licences.

AASB 15 treats a contract modification as a separate contract, accounted for prospectively with no adjustment to the original contract, when two conditions are both met: the additional goods or services are distinct, and the price of the addition reflects the standalone selling price of those additional goods or services, adjusted as appropriate for the circumstances of the contract. Both conditions are met here — the additional licences are distinct, and $60 per user is the vendor’s standalone selling price for that tier, not a discounted or premium rate negotiated because of the existing relationship.

The result: nothing is restated. The original 200-user contract continues to be recognised exactly as it was being recognised before the modification. The 40 additional licences are accounted for as a new, separate contract running from month 8, recognised at $60 per user per year over its own term. No cumulative catch-up adjustment is needed because there is nothing to catch up — the two contracts are, in substance, two contracts.

Worked Example Three: A Modification Not at Standalone Price (Cumulative Catch-Up)

Now change the facts. The same software vendor agrees, in month 8, to add the 40 additional users at $40 per user per year — a discount extended specifically to secure the customer’s agreement to renew the whole arrangement for a further 2 years, and not reflective of what the vendor charges other customers for that tier. Because the price of the addition does not reflect its standalone selling price, this modification cannot be treated as a separate contract.

Where the remaining licences (the original 200, plus the new 40) are still distinct from what has already been transferred, AASB 15 requires the modification to be accounted for as if it were a termination of the original contract and the creation of a new contract, accounted for prospectively. The remaining consideration — the amount left to be received under the original contract for periods not yet delivered, plus the consideration for the added licences — is reallocated across the remaining performance obligations (the licences still to be delivered under the extended arrangement) based on their relative standalone selling prices at the date of modification.

Practically: the vendor does not go back and restate revenue already recognised for months 1 to 8. It takes the remaining transaction price for the balance of the contract term, recalculates a blended effective rate per user per year for the remaining periods, and recognises revenue at that blended rate going forward. This is the “prospective, no catch-up on the past” outcome — distinguishable from cumulative catch-up accounting, which applies to a different kind of modification (one where the added goods are not distinct from those already delivered, such as adding scope to a single performance obligation already partly satisfied over time).

Practical Takeaway

Two questions decide how a modification is treated: are the additional goods or services distinct from what has already been promised, and is the incremental price for them a standalone selling price? Both “yes” means a clean separate contract with no impact on existing recognition. Either “no” means either a prospective reallocation across remaining obligations, or — for non-distinct additions to a single performance obligation already being recognised over time — a cumulative catch-up adjustment in the period of modification. The variable consideration estimate in Worked Example One is a different mechanism entirely: it is not triggered by a change to the contract, but by uncertainty that already existed in the original contract, and it is revisited every reporting period as new information becomes available, not just at the point of modification.