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Variable consideration: How it impacts your top and bottom line · PwC's accounting podcast

• 0:00
  SPEAKER_01: Welcome to PWC's Accounting Podcast Series.
• 0:04
  SPEAKER_01: I'm Heather Horn.
• 0:05
  SPEAKER_01: How do variable fees impact revenue?
• 0:08
  SPEAKER_01: In today's episode, we're going to find out.
• 0:11
  SPEAKER_01: Revenue recognition topics are among our most popular here at the podcast.
• 0:16
  SPEAKER_01: And today we've got a new one for you: variable consideration in revenue contracts.
• 0:21
  SPEAKER_01: It's something that's quite common and may actually show up in a variety of forms.
• 0:25
  SPEAKER_01: So today we're going to tackle the topic and answer some frequently asked questions.
• 0:30
  SPEAKER_01: Helping to cover the topic is PwC National Office Partner Angela Ferguson.
• 0:35
  SPEAKER_01: Angela's a lot of experience in the revenue recognition space and is a frequent guest to the show, so I'm looking forward to our conversation.
• 0:46
  SPEAKER_01: Angela, thanks so much for joining me today to talk about variable consideration, which is a topic that's come up a lot this year as we've been discussing accounting issues impacted by COVID as well as the current economic environment.
• 1:00
  SPEAKER_01: So before we get into the details, can you just give us some background on the topic?
• 1:04
  SPEAKER_02: So under the current revenue guidance, generally you need to determine the total transaction price of a revenue contract at contract inception.
• 1:16
  SPEAKER_02: So this includes both fixed amounts or fixed fees and an estimate of any variable or contingent fees.
• 1:26
  SPEAKER_02: And just as some background, this is really a bit of a change in mindset from the guidance prior to our current revenue guidance in ASC 606.
• 1:37
  SPEAKER_02: Because previously, in many cases, you would have to defer revenue if there was any contingency attached to that revenue.
• 1:47
  SPEAKER_02: But now, generally, you're going to be estimating all variable consideration.
• 1:52
  SPEAKER_02: And we'll walk through how you do that estimate.
• 1:55
  SPEAKER_02: And I'd say that generally people would agree that this is a better reflection of the economics of the arrangement.
• 2:04
  SPEAKER_02: But on the other hand, it also is going to require more judgment and controls and processes to make those estimates and to continue to update them.
• 2:13
  SPEAKER_02: And of course, that's why it's gotten even more focus in the current environment because there's a lot of uncertainties, there's been a lot of changes in the external environment, as well as to a company's business practices that have just put more focus on these estimates and increased in many cases the amount of judgment required.
• 2:34
  SPEAKER_01: So, Angela, this also sounds like it was a big shift in mindset, right?
• 2:39
  SPEAKER_01: Because I mean, I know you said this, but basically, if before you just, oh, there's a contingency, I'm going to defer.
• 2:45
  SPEAKER_01: Now I have to think about it a different way.
• 2:47
  SPEAKER_01: I'm assuming that change has been difficult in some cases for people to kind of get their heads around.
• 2:53
  SPEAKER_02: Yeah, absolutely.
• 2:55
  SPEAKER_02: The accountants in us love to be conservative at times, and you'd rather just say if there's a contingency, we'll wait to see what happens.
• 3:03
  SPEAKER_02: But you know, often you can't do that.
• 3:05
  SPEAKER_02: I mean, you really do need to make an estimate of the variable consideration up front.
• 3:10
  SPEAKER_01: All right.
• 3:10
  SPEAKER_01: And then, Angela, one other question, does it make sense to just quickly touch on where this fits in in the broader five-step model?
• 3:18
  SPEAKER_02: Sure.
• 3:18
  SPEAKER_02: So we're going to be mostly talking about step three, which is determining the transaction price.
• 3:24
  SPEAKER_02: And that's when you're going to be including an estimate of variable consideration.
• 3:28
  SPEAKER_01: And just in case it's not top of mind for our listeners, what are steps one and two?
• 3:33
  SPEAKER_02: So step one is going to be identify the contract.
• 3:36
  SPEAKER_02: And then step two is identify the performance obligations.
• 3:40
  SPEAKER_02: So now we're in step three, which is uh determine the transaction price.
• 3:45
  SPEAKER_01: All right.
• 3:45
  SPEAKER_01: Well, I can see um a whole series here that we could do five, one for each step.
• 3:50
  SPEAKER_01: But for now we'll we'll stay focused on three.
• 3:52
  SPEAKER_01: So then, Angela, since we're talking about it, I assume it is common for contracts to include this type of variable consideration.
• 4:00
  SPEAKER_01: But can you give us some examples of common things that we see?
• 4:03
  SPEAKER_02: Yeah, absolutely.
• 4:04
  SPEAKER_02: It is it really in most contracts, there's some aspect of variable consideration.
• 4:09
  SPEAKER_02: I mean, sometimes I hear, oh, we don't have any variable consideration in this contract.
• 4:14
  SPEAKER_02: But usually when you really go through the different examples, there is some aspect where this guidance applies.
• 4:23
  SPEAKER_02: So, some more common examples are things like you know product returns, early payment discounts, and other kinds of discounts like retroactive volume discounts, price adjustments that might be made under things like a price protection clause.
• 4:40
  SPEAKER_02: Um, certainly there are variable fees like usage-based fees or royalties that fall under this guidance.
• 4:46
  SPEAKER_02: And variable consideration also includes fees that are contingent upon something happening in the future.
• 4:53
  SPEAKER_02: So that might be a bonus that the company gets if they achieve certain targets, or it could be, on the other hand, a potential penalty.
• 5:04
  SPEAKER_02: So if you fail to perform or to meet a target or perform under a service level arrangement, or you have to pay liquidated damages.
• 5:13
  SPEAKER_02: Those are also types of variable consideration.
• 5:17
  SPEAKER_02: The other thing to keep in mind is that it doesn't have to be something explicit in the agreement.
• 5:22
  SPEAKER_02: So variable consideration can also be implied by business practices.
• 5:28
  SPEAKER_02: So that would include things like price concessions.
• 5:31
  SPEAKER_02: So the potential to give a price concession would be variable consideration, and also just other kinds of refunds that the company may have a history of giving or have the intent to give to a customer would fall in this category.
• 5:46
  SPEAKER_01: So, Angela, I know we've talked about this before, but it sounds like this is definitely a prime example where it's very important to understand the business side of your contracts because making sure you understand all of these different factors is going to be critical to making sure you have the right revenue recognition.
• 6:04
  SPEAKER_02: Right, absolutely.
• 6:05
  SPEAKER_02: And also just not over-relying on historical experience, which is obviously a lot of what's come up this year in 2020, is when the future may not be the same as your historical experience and making sure you're applying the judgment to take that into account.
• 6:25
  SPEAKER_01: All right.
• 6:25
  SPEAKER_01: So then, Angela, now that we have the examples and hopefully people kind of you know understand where this fits into the overall revenue model, can you walk us through how we think about the accounting for the variable consideration?
• 6:38
  SPEAKER_02: Sure.
• 6:38
  SPEAKER_02: So, Andre, the general model, um, like I already uh mentioned, variable consideration is estimated at contract inception, and this is going to be subject to what we call a constraint, and I'll get back to that in a minute.
• 6:54
  SPEAKER_02: The estimate is going to be reassessed each reporting period until the uncertainty is resolved.
• 7:01
  SPEAKER_02: There are two methods outlined for estimating variable consideration.
• 7:06
  SPEAKER_02: The first is called the expected value method, and in this method, the estimate is based on the range of possible outcomes and applying a probability to each outcome to come up with an estimate.
• 7:21
  SPEAKER_02: And this might be applied when there are a large number of contracts with similar characteristics.
• 7:28
  SPEAKER_02: For example, when you're estimating sales returns and you've got a lot of contracts that are very similar, and you can look at your experience to come up with an estimate of returns.
• 7:39
  SPEAKER_02: It's not going to be zero or 100%, but something in between.
• 7:44
  SPEAKER_02: The other method is called the most likely amount method.
• 7:48
  SPEAKER_02: Under this method, variable consideration is estimated based on the single most likely amount in a range of possible outcomes.
• 7:58
  SPEAKER_02: So this is generally applied when, for example, there are just two possible outcomes you know, a performance bonus that the company may receive or may not receive.
• 8:09
  SPEAKER_02: Oftentimes you would use this approach to determine the most likely amount that the company expects to receive.
• 8:16
  SPEAKER_01: So then, Angela, is a company able to choose between the expected value method and the most likely amount method when they're thinking about a particular contract, or do they have to use one of them?
• 8:28
  SPEAKER_02: Well, I would not call it a policy choice.
• 8:31
  SPEAKER_02: The method selected is supposed to be the most predictive in a particular situation.
• 8:38
  SPEAKER_02: However, there's going to be some judgment around which method is the most predictive.
• 8:43
  SPEAKER_02: So it's not overly prescriptive, but again, it's not just a pure accounting policy.
• 8:49
  SPEAKER_02: Um, and then once you select a method, you would apply that consistently through the entire contract.
• 8:56
  SPEAKER_02: And then I you I would expect for similar situations or similar types of variable consideration, you would use a consistent method.
• 9:04
  SPEAKER_01: Okay, but then on that last point, a company potentially could be applying both methods, obviously in different situations.
• 9:12
  SPEAKER_01: It's not like across the board, all of your contracts would have to be used in the same method.
• 9:17
  SPEAKER_02: Yeah, absolutely.
• 9:18
  SPEAKER_02: I mean, you could even have a contract with two different kinds of variable consideration, and you might apply a different uh method to the two different types of variable consideration.
• 9:30
  SPEAKER_01: Okay, that's obviously the advanced level of this discussion, but I think helpful point to make.
• 9:35
  SPEAKER_01: Um so, Angela, I want to go back to another point you made, which is you said that there's actually a constraint on making this estimate.
• 9:42
  SPEAKER_01: So, what do we mean when we say that?
• 9:44
  SPEAKER_02: Right.
• 9:44
  SPEAKER_02: So, even after you apply one of these methods and you have an estimate, that estimate is subject to what's called a constraint.
• 9:54
  SPEAKER_02: So the overall concept of the constraint is that you should only include amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized to date will not occur in the future when the uncertainty is resolved.
• 10:14
  SPEAKER_02: So I was very careful to use the exact words from the standard there, but at a high level, you basically need to be comfortable at the probable threshold that you're not going to end up reversing revenue you've recognized at some point in the future.
• 10:30
  SPEAKER_02: So this adds an element of conservatism over the estimate of variable consideration.
• 10:37
  SPEAKER_02: And a couple of clarifications, you know, we talk about the probable threshold.
• 10:43
  SPEAKER_02: This is similar to how we use probable in many other areas of the accounting guidance, which we generally view as a 75% threshold.
• 10:53
  SPEAKER_02: And then when we think about the potential for a significant reversal of revenue, that's meant to be assessed at the relative to the contract level.
• 11:03
  SPEAKER_02: So not necessarily materiality for the company as a whole, but at for that particular contract.
• 11:11
  SPEAKER_02: So again, this doesn't mean that you will never have a reversal of revenue.
• 11:16
  SPEAKER_02: It's not absolute certainty.
• 11:18
  SPEAKER_02: However, you would expect that it would not be common to have reversals because you should be applying this probable threshold.
• 11:27
  SPEAKER_02: But when you do update estimates of variable consideration each period, that could be either an increase or a decrease in the estimate of variable consideration, which you're generally going to do on a cumulative catch-up basis.
• 11:41
  SPEAKER_01: So, Angela, obviously there's judgment involved as soon as you start talking about something being probable.
• 11:47
  SPEAKER_01: And in practice, you also said that it's important that you need to relook at this each quarter.
• 11:52
  SPEAKER_01: So I would imagine this is an area where we get a lot of questions when people are thinking maybe their assessment has changed, or do we not see a lot of changes from a quarter to quarter basis?
• 12:02
  SPEAKER_02: It certainly depends on the type of variable consideration and you know what's going on in the external environment.
• 12:10
  SPEAKER_02: I mean, this is certainly one of the reasons why variable consideration kind of had a spotlight on it this past year, is just because there were a lot of changes, and that caused people to go back and relook at estimates that may have been fairly consistent in the past, but now people needed to relook at them to see if they still were appropriate in the current environment.
• 12:32
  SPEAKER_01: And then, Angela, obviously, this would be an important place to make sure you had the right controls that you were considering new information each quarter in making this assessment.
• 12:41
  SPEAKER_01: But it also seems like there's a possibility then that there's some consideration you may not conclude is probable until you get to the very end of the contract.
• 12:50
  SPEAKER_01: Is that a reasonable assumption?
• 12:52
  SPEAKER_01: Again, depending on facts and circumstances.
• 12:54
  SPEAKER_02: Right.
• 12:55
  SPEAKER_02: Yeah.
• 12:55
  SPEAKER_02: Sometimes you will get to a conclusion that the variable consideration is fully constrained.
• 13:01
  SPEAKER_02: However, I definitely would caution that people don't immediately default to that answer.
• 13:08
  SPEAKER_02: Sometimes people are trying to sort of skip that necessary step of estimating and sort of working through the constraints and want to sort of default to an estimate of zero, but that's not always going to be appropriate.
• 13:21
  SPEAKER_02: For example, when you're estimating returns, you would generally say, well, it's not going to be zero returns.
• 13:28
  SPEAKER_02: There's going to be or zero revenue or 100% returns, I should say.
• 13:33
  SPEAKER_02: There's going to be some minimum amount that's probable of not getting reversed.
• 13:38
  SPEAKER_02: The other challenge is that you might conclude that variable considerations fully constrained at the beginning of a contract, but you would need to continue, as we've said, to reassess that each period.
• 13:52
  SPEAKER_02: And as you get closer to that uncertainty being resolved, zero may no longer be appropriate, right?
• 14:00
  SPEAKER_02: You may need to update that estimate to some minimum amount that's probable of not getting reversed.
• 14:07
  SPEAKER_01: So Angela, let's take the flip side of that.
• 14:09
  SPEAKER_01: And are there specific indicators when you should potentially be constraining your variable consideration?
• 14:16
  SPEAKER_02: Yeah, the guidance provides a list of factors to consider when you're assessing whether variable consideration needs to be constrained.
• 14:26
  SPEAKER_02: There's five factors, so I'll just quickly run through those.
• 14:30
  SPEAKER_02: The first is that the amount of consideration is highly susceptible to factors outside the entity's influence.
• 14:38
  SPEAKER_02: So this is things that are outside the company's control, which might be customer behavior or even market prices and just other things the company can't control.
• 14:49
  SPEAKER_02: The second is that the uncertainty is not expected to be resolved for a long period of time.
• 14:56
  SPEAKER_02: The third is that the entity's experience with similar types of contracts is limited, or that experience has limited predictive value.
• 15:06
  SPEAKER_02: The fourth is that the entity has a practice of either offering a broad range of price concessions or changing the payment terms of similar contracts.
• 15:17
  SPEAKER_02: And the fifth is that the contract has a broad range of possible consideration amounts.
• 15:24
  SPEAKER_02: So this provides some guidance on things to consider, but it also doesn't necessarily tell you how much of the variable consideration needs to be constrained, right?
• 15:34
  SPEAKER_02: So just because you check some of these boxes, again, doesn't necessarily mean you're at zero, but that you should be considering whether a portion of the variable consideration needs to be constrained.
• 15:48
  SPEAKER_01: So then, Angela, while you were walking through that, I was thinking about some of the types of contracts I used to see in the utility industry.
• 15:55
  SPEAKER_01: And you know, you could have, in some cases, let's say, a 30-year power contract.
• 15:59
  SPEAKER_01: And making some of these estimates over such a long period definitely seems like it could be very difficult.
• 16:05
  SPEAKER_01: So do you always have to make this estimate at the beginning of the contract?
• 16:10
  SPEAKER_02: So there are a few situations where you do not have to estimate variable consideration up front, or may not practically have to estimate up front.
• 16:20
  SPEAKER_02: So I'll walk through a few of those and I'll start with what is truly an exception to the general model.
• 16:27
  SPEAKER_02: And this is uh called the royalty exception.
• 16:30
  SPEAKER_02: And so the guidance specifically provides an exception for sales or usage-based royalties that are received in exchange for a license of intellectual property.
• 16:43
  SPEAKER_02: So, for example, an arrangement where a company licenses IP to a customer that they're going to incorporate into their product, oftentimes the fee is in the form of a royalty that the company receives as the customer sells that product.
• 17:01
  SPEAKER_02: They'll get some percentage of the sales of the product that include the IP.
• 17:07
  SPEAKER_02: So this is a very common arrangement.
• 17:10
  SPEAKER_02: And the performance obligation of licensing the IP is actually satisfied up front.
• 17:16
  SPEAKER_02: So if you were under the general model, you would have to estimate the variable consideration, which is the royalty, and recognize that up front.
• 17:26
  SPEAKER_02: So when the FASBE was developing this standard, they recognized that that was going to be extremely difficult, especially since these arrangements are often over a very long period of time.
• 17:38
  SPEAKER_02: And they also concluded that trying to make that estimate was not going to be very useful information because you were likely going to have significant changes and swings in the estimate over time.
• 17:52
  SPEAKER_02: So they decided to put in an exception, but it's only for these types of royalties that are received in exchange for a license of IP.
• 18:03
  SPEAKER_02: Under the exception, revenue is not recognized until the later of the period the sales or usage actually occurs, or the performance obligation is satisfied.
• 18:16
  SPEAKER_02: So in the example that I gave, performance obligation satisfied up front, so then you're recognizing revenue in the period that the customer's sales occur, which is when you would have the rights to the royalty.
• 18:30
  SPEAKER_02: One thing to note here is that if you're getting a report from your customer of the of their sales in order to determine the amount of the royalty, sometimes that's received on a lag.
• 18:43
  SPEAKER_02: It may be after the period that the sales actually occur.
• 18:48
  SPEAKER_02: So the revenue recognition is not necessarily the period you get the report, but it's supposed to be the period that the sales actually occurs.
• 18:57
  SPEAKER_02: So in some cases, you may have to estimate that amount, even though you're under the exception, because you'd have to estimate it in the period that the sales occurs.
• 19:05
  SPEAKER_02: But just to note, this is a very narrowly defined exception.
• 19:10
  SPEAKER_02: So for example, if you were to sell the IP instead of license it, the exception would not apply.
• 19:18
  SPEAKER_02: So you do need to make sure you're actually in the scope of the exception before applying it.
• 19:25
  SPEAKER_02: The other thing to note is that if there's a minimum royalty, which is also very common, that is not a variable consideration.
• 19:35
  SPEAKER_02: So for example, if the royalty is set up as you know the greater of a million dollars a year or actual royalties, the million dollars a year would be fixed, right?
• 19:50
  SPEAKER_02: So you would go ahead and recognize that up front, and then would only be the piece that's greater than the minimum that would be subject to the exception.
• 20:00
  SPEAKER_01: Okay, so Angela, that's definitely helpful if you are in that specific circumstance.
• 20:05
  SPEAKER_01: But obviously, there's many other types of long-term contracts with variables consideration.
• 20:11
  SPEAKER_01: So are there other situations where you wouldn't have to estimate the variable consideration?
• 20:17
  SPEAKER_02: Yes.
• 20:17
  SPEAKER_02: So in other situations, it actually comes into play when you get to the next step in the model, which is step four, allocating transaction price.
• 20:28
  SPEAKER_02: So when you come to the allocation of the transaction price, if you meet certain criteria, variable consideration might end up being allocated to just one part of the contract or just one performance obligation in the contract.
• 20:45
  SPEAKER_02: So just to give a simple example, you could have an arrangement where there's a bonus, which is a piece of variable consideration, but it relates specifically to achieving some target on just one piece of the contract.
• 21:02
  SPEAKER_02: If you meet the criteria that are laid out in the standard, then you would only allocate that bonus to that one piece of the contract.
• 21:13
  SPEAKER_02: So how does this help with estimating variable consideration?
• 21:17
  SPEAKER_02: Well, if that performance obligation or that piece of the contract is not going to be satisfied until some point in the future, and you're allocating all the variable consideration to that piece, then practically you wouldn't have to necessarily estimate that upfront.
• 21:35
  SPEAKER_02: So this also frequently comes up in contracts that are a series of goods or services provided over time.
• 21:43
  SPEAKER_02: And the example I always go back to on these podcasts is software as a service or a SaaS arrangement, which is being provided over time.
• 21:53
  SPEAKER_02: It's pretty common to have a usage based fee that depends on usage for, say, a particular Particular month in that contract.
• 22:02
  SPEAKER_02: Well, again, if you meet these specific criteria, you might allocate that usage-based fee to the particular month that it relates to.
• 22:12
  SPEAKER_02: So you would recognize it each month as the usage-based fee is incurred.
• 22:18
  SPEAKER_02: Again, this means that practically you wouldn't have to estimate all of that variable consideration up front.
• 22:25
  SPEAKER_02: And then the last situation I'll mention is that there's also a practical expedient, and again, with its own criteria to meet.
• 22:34
  SPEAKER_02: But under this practical expedient, you can recognize revenue based effectively on the amount you have the right to bill.
• 22:43
  SPEAKER_02: So again, it's basically one of the methods for recognizing revenue over time.
• 22:49
  SPEAKER_02: And so if you're under this practical expedient, you may not have to estimate all of that variable consideration up front because you're going to just recognize it as you have the right to bill.
• 23:02
  SPEAKER_02: But I would again caution for all of this that you can't just necessarily default to these conclusions.
• 23:09
  SPEAKER_02: You have to first make sure you meet all the criteria to be in these situations.
• 23:14
  SPEAKER_01: So I think that goes back to making sure you understand the contract and the terms, and then obviously making sure you have the right controls in place, as we talked about earlier.
• 23:23
  SPEAKER_01: So then, Angela, one more question before we wrap up.
• 23:26
  SPEAKER_01: I know we frequently see contracts that have components, you know, revenue components as well as lease components.
• 23:33
  SPEAKER_01: And from our discussion today, I also know there's potentially a difference in the models for variable consideration for leases versus revenue contracts.
• 23:43
  SPEAKER_01: So how do we think about that when we may have contracts that have both components?
• 23:48
  SPEAKER_02: Yeah, that's right.
• 23:49
  SPEAKER_02: It is a difference in the model for the two types of arrangements.
• 23:53
  SPEAKER_02: For revenue, like we've said, you're generally going to estimate variable consideration up front, except for the few exceptions that we've walked through.
• 24:02
  SPEAKER_02: However, under the leasing model, there are only certain variable fees that get estimated in advance.
• 24:09
  SPEAKER_02: And all the other types of variable fees are not recognized until the contingency is resolved.
• 24:16
  SPEAKER_02: So these do kind of come into play when you have an arrangement that's got elements of both revenue and a lease component.
• 24:25
  SPEAKER_02: So, for example, if you were leasing equipment and there's also maintenance services along with that equipment.
• 24:32
  SPEAKER_02: If you have to separate the two components, which is often going to be the case, there is specific guidance on how you deal with variable fees in the arrangements since the two models will deal with it differently.
• 24:46
  SPEAKER_02: I'm not going to go into too much detail, but I mean the accounting treatment depends on whether the variable fee relates only to the revenue component, in which case you're going to follow more the revenue model, versus if the variable fees relate even in part to the lease component, then you're generally going to follow the lease model for whether it's included in the transaction price before you allocate the two components.
• 25:13
  SPEAKER_02: So I'm not going to stop there because we don't have one of our lease experts to sort of keep me uh on the straight and narrow here.
• 25:20
  SPEAKER_02: But just to know that if you have the situation, there is specific guidance to look to and work through.
• 25:26
  SPEAKER_01: All right.
• 25:26
  SPEAKER_01: I think this is helpful highlights.
• 25:27
  SPEAKER_01: And I do think a good potential podcast topic would be the interaction of the revenue and lease standards.
• 25:33
  SPEAKER_01: So potentially more to come on that.
• 25:35
  SPEAKER_01: But just to wrap things up today, Angela, I know we went through a lot of different things, talked about some exceptions, uh, et cetera.
• 25:42
  SPEAKER_01: What are some of the key takeaways for the audience?
• 25:45
  SPEAKER_02: Yeah, I mean, I'd say the key takeaways are that you know most contracts are going to have some aspect of variable consideration, you know, even if it's not explicit in the terms of the contract.
• 25:57
  SPEAKER_02: Again, it can be implied by business practices, including giving concessions or the potential for accepting returns.
• 26:06
  SPEAKER_02: So in almost any case, you're going to have to have some process for identifying and estimating variable consideration.
• 26:14
  SPEAKER_02: And then going to the constraint, while it does add an element of conservatism to those estimates, don't assume that you can just default to zero.
• 26:26
  SPEAKER_02: And even if you start out at zero, maybe at the beginning of the contract, that's an estimate that has to be updated each period.
• 26:34
  SPEAKER_02: And zero may not be the right answer for the entire period of time before the contingency is resolved.
• 26:41
  SPEAKER_02: And then that, of course, just goes back to having the right processes and controls in place to both establish those estimates at contract inception, but continuing to update them each reporting period.
• 26:54
  SPEAKER_01: Okay, and then Angela, given that we're talking about estimates, I know there's some important disclosures.
• 27:00
  SPEAKER_01: So can you give us the highlights on those?
• 27:02
  SPEAKER_02: Sure.
• 27:03
  SPEAKER_02: There are multiple disclosure requirements that are going to hit on variable consideration.
• 27:09
  SPEAKER_02: The first is that there are requirements around disclosing significant contract terms.
• 27:15
  SPEAKER_02: So that's going to include the types of consideration, including variable consideration and obligations for things like returns and refunds, which all fall under the variable consideration umbrella.
• 27:28
  SPEAKER_02: You also are required to disclose significant judgments that are used for determining transaction price.
• 27:35
  SPEAKER_02: So clearly, a big judgment is going to be estimating variable consideration and assessing whether variable consideration is constrained.
• 27:44
  SPEAKER_02: There's also a requirement to disclose revenue recognized in the current period that relates to past performance.
• 27:53
  SPEAKER_02: We kind of refer to this as the out-of-peri disclosure, and it's not because of an error, but as I mentioned, you know, you're going to be updating your estimate of variable consideration each period, and often that's on a cumulative catch-up basis.
• 28:07
  SPEAKER_02: So some of that may actually relate to performance in a past period, but you're updating your estimate in the current period.
• 28:16
  SPEAKER_02: There is a disclosure requirement to disclose that amount of that catch up that's recorded in the current period.
• 28:23
  SPEAKER_01: Okay, so Angela, definitely a lot of specifics to think about, particularly on the disclosures.
• 28:28
  SPEAKER_01: So where should our listeners go if they'd like more information?
• 28:31
  SPEAKER_02: Yeah, chapter four of our revenue guide has all the details on variable considerations.
• 28:38
  SPEAKER_02: So you can go there for more information.
• 28:40
  SPEAKER_01: All right, well, Angela, thank you so much for all the insight.
• 28:42
  SPEAKER_01: And as always, like to wrap things up on a slightly lighter note.
• 28:46
  SPEAKER_01: And as we're in the beginning of March, um my thoughts turn to spring.
• 28:50
  SPEAKER_01: And I know you and I are both in California, and most people think us Californians don't care about spring, but I definitely still look forward to it.
• 28:58
  SPEAKER_01: So just curious, if there's anything in particular you're looking forward to as you know, we look into later in March.
• 29:05
  SPEAKER_02: Well, in uh my household, um, my uh schedule revolves around my kids' schedules right now.
• 29:12
  SPEAKER_02: Uh so for spring, I think of softball and baseball starting up, and it looks like they will be able to play this year.
• 29:21
  SPEAKER_02: So that's really exciting because they weren't able to uh play last spring.
• 29:26
  SPEAKER_02: Definitely looking forward to watching some softball and baseball games.
• 29:30
  SPEAKER_01: Yes, sounds fun, and definitely I think no matter what age you are, um thinking of baseball and softball definitely makes you think about spring, spring training and everything else.
• 29:40
  SPEAKER_01: So that's exciting and uh best wishes to your kids with that.
• 29:43
  SPEAKER_01: So um, all right, with that, as always, thank you so much for all your insight, Angela, and I appreciate you joining me.
• 29:49
  SPEAKER_01: Sure thing.
• 29:52
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