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In determining the estimated transaction price, variable consideration may sometimes need to be considered. One method...

In determining the estimated transaction price, variable consideration may sometimes need to be considered. One method is probability-weighted expected value, the other is most-likely. Provide examples of when each might be used.

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When the consideration promised in a contract with a customer includes a variable amount, a vendor estimates the amount of consideration to which it expects to be entitled in exchange for the transfer of the promised goods or services. There are two possible methods which can be used, and which are required to be applied consistently throughout the term of each contract:

i) Expected value method - The sum of probability weighted amounts in a range of possible outcomes. This may be an appropriate approach if the vendor has a large number of contracts which have similar characteristics.

ii) Most-likely -  The most likely outcome from the contract. This may be an appropriate approach if a contract has two possible outcomes, For example performance bonus which either will or will not be received.

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