Page 34 - 19. COMPILER QB - INDAS 115

Q29 (Dec 21 – 10 Marks)

An entity has a fixed fees contract for Rs 22,00,000 to develop a product that meets specified performance
criteria. Estimated cost to complete the contract is Rs 20,00,000. The entity will transfer control of the
product over five years, and the entity uses the cost-to-cost input method to measure progress on the
contract. An incentive award is available if the product meets the following weight criteria:

Weight (kg) Award % of fixed fee Incentive fee
951 or greater 0% —
701–950 10% Rs 2,20,000
700 or less 25% Rs 5,50,000
The entity has extensive experience creating products that meet the specific performance criteria. Based on its

experience, the entity has identified five engineering alternatives that will achieve the 10 percent incentive and
two that will achieve the 25 percent incentive. In this case, the entity determined that it has 90 percent

confidence that it will achieve the 10 percent incentive and has 10 percent confidence that it will achieve the
25 percent incentive.

Based on this analysis, the entity believes 10 percent to be the most likely amount when estimating the
transaction price. Therefore, the entity includes only the 10 percent award in the transaction price when

calculating revenue because the entity has concluded it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is

subsequently resolved due to its 90 percent confidence in achieving the 10 percent award.

The entity reassesses its production status quarterly to determine whether it is on track to meet the criteria
for the incentive award. At the end of year four, it becomes apparent that this contract will fully achieve the

weight-based criterion. Therefore, the entity revises its estimate of variable consideration to include the entire
25 percent incentive fee in the year four because, at this point, it is probable that a significant reversal in the

amount of cumulative revenue recognized will not occur when including the entire variable consideration in the
transaction price.

Evaluate the impact of changes in variable consideration when cost incurred is as follows:

Year Rs
1 1,20,000
2 3,70,000
3 8,20,000
4 5,70,000
5 1,20,000

Calculate yearly revenue, operating profit and margin (%). For simplification purposes, calculate revenue for
the year independently based on costs incurred during the year divided by total expected costs, with the
assumption that total expected costs do not change.

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