Page 19 - 19. COMPILER QB - INDAS 115

To Contract liability Rs. 494
* Rs. 494 = Rs. 4,000 contract liability × (6% interest per year for two years).

(c) Recognise revenue for the transfer of the asset:
Contract liability Dr. Rs. 4,494
To Revenue Rs. 4,494
(Year 1 - 4,000 + 6% = 4,240; year 2 - 4,240 + 6% = 4,494)

Q17. (APRIL 21)
Buildings Limited with a financial year end of 31st March, entered into a contract with its customer, Radar

Limited, to build a manufacturing facility. Buildings Limited determines that the contract contains one
performance obligation satisfied over time. Construction is scheduled to be completed by the end of the 36th
month for an agreed upon price of Rs. 25 crores. Buildings Limited has the opportunity to earn a performance
bonus for early completion as follows:
● 15% bonus of the contract price if completed by the 30th month (25% likelihood).
● 10% bonus of the contract price if completed by the 32nd month (40% likelihood).
● 5% bonus of the contract price if completed by the 34th month (15% likelihood).

In addition to the potential performance bonus for early completion, Buildings Limited is entitled to a quality
bonus of Rs. 2 crores if a health and safety inspector assigns the facility a gold star rating as defined by
Radar Limited in terms of the contract. Buildings Limited concludes that it is 60% likely that it will receive

the quality bonus.
Analyze and determine the amount of variable consideration Building Limited should recognize in its contract
with Radar Company Limited to build a manufacturing facility.
SOLUTION

In determining the transaction price, Buildings Limited separately estimates variable consideration for each
element of variability i.e. the early completion bonus and the quality bonus.
Buildings Limited decides to use the expected value method to estimate the variable consideration associated
with the early completion bonus because there is a range of possible outcomes and the entity has experience

with a large number of similar contracts that provide a reasonable basis to predict future outcomes. Therefore,
the entity expects this method to best predict the amount of variable consideration associated with the early
completion bonus. Buildings Ltd.‖s best estimate of the early completion bonus is Rs. 2.125 crore, calculated
as shown in the following table:
Bonus % Amount of bonus (Rs. in crore) Probability Probability-weighted
amount (Rs. in crore)
15% 3.75 25% 0.9375

10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -

100% 2.125
Buildings Limited decides to use the most likely amount to estimate the variable consideration associated with
the potential quality bonus because there are only two possible outcomes (Rs. 2 crore or Rs. Nil) and this
method would best predict the amount of consideration associated with the quality bonus. Buildings Limited
19. 18