Under ASC 606, when a contract includes variable consideration (e.g., a performance bonus), how should the transaction price be estimated?

Answer options:

Always use the Most Likely Amount method.

Always use the Expected Value method.

Exclude variable consideration until the uncertainty is resolved.

Use either Expected Value or Most Likely Amount, whichever is better predictive, subject to the constraint that significant reversal is not probable.

How to approach this question

Two methods: Expected Value (probability weighted) or Most Likely Amount (single outcome). Choose the best predictor. Apply Constraint (only recognize if probable no reversal).

Full Answer

D.Use either Expected Value or Most Likely Amount, whichever is better predictive, subject to the constraint that significant reversal is not probable.✓ Correct

ASC 606 requires estimating variable consideration using either the expected value method (sum of probability-weighted amounts) or the most likely amount method (single most likely outcome), depending on which better predicts the amount. The estimate is constrained to the extent that it is probable that a significant reversal will not occur.

Common mistakes

Thinking variable consideration is deferred until cash is received.

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