AST Limited enters into a contract with a customer to build a manufacturing facility. The entity determines that the contract contains one…

CA Final · Financial Reporting · MTP · November 2024
AST Limited enters into a contract with a customer to build a manufacturing facility. The entity 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 25 crore. The entity has the opportunity to earn a performance bonus for early completion as follows: 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)10 percent bonus if completed by the 32nd month (40% likelihood)5 percent bonus if completed by the 34th month (15% likelihood) In addition to the potential performance bonus for early completion, AST Limited is entitled to a quality bonus of 2 crore if a health and safety inspector assigns the facility a gold star rating as defined by the agency in the terms of the contract. AST Limited concludes that it is 60% likely that it will receive the quality bonus. Determine the transaction price. (6 Marks)

Suggested Answer and Working Notes:

In determining the transaction price, AST Limited separately estimates variable consideration for each element of variability i.e. the early completion bonus and the quality bonus. AST 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. AST's best estimate of the early completion bonus is 2.13 crore, calculated as shown in the following table: Bonus % Amount of bonus (₹ in crore) Probability Probability-weighted amount (₹ in crore) 15% 3.75 25% 0.9375 10% 2.50 40% 1.00 5% 1.25 15% 0.1875 0% 20% 2.125 AST 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 (2crore or Nil) and this method would best predict the amount of consideration associated with the quality bonus. AST Limited believes the most likely amount of the quality bonus is 2crore. Total transaction price would be 25 cr + 2.125 cr + 2 cr = 29.125 cr.

Topics: Ind AS 115

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