When a contract includes consideration that depends on the outcome of future events, sellers estimate that variable consideration and include it in the contract$$s transaction price. The seller$$s estimate is based either on the most likely outcome or the expected value of the outcome. However, a constraint applies$$variable consideration only should be included in the transaction price to the extent it is probable that a significant revenue reversal will not occur. The estimate of variable consideration is updated each period to reflect changes in circumstances. A seller also needs to determine if it is a principal $($and recognizes as revenue the amount received from the customer$)$ or an agent $($and recognizes its commission as revenue$),$ consider time value of money, and consider the effect of any payments by the seller to the customer. Once the transaction price is estimated, we allocate it to performance obligations according to their stand$-$alone selling prices, which can be estimated using the adjusted market assessment approach, the expected cost plus margin approach, or the residual approach.

Knowledge Check $01$

Which is correct regarding changes in estimated variable consideration?

Multiple Choice

Once an estimate has been made, changes are prohibited under GAAP.

Changes in estimated variable consideration should be recognized as an adjustment to revenue in the period the change in estimate is made.

Changes in estimated variable consideration are applied retroactively to all periods and disclosed in the notes to the financial statements.

Changes in estimates are allocated over the next five reporting periods.