Use Cases

  • Use Case 1
  • Use Case 2
  • Use Case 3
  • Use Case 4

Use Case 1

A contractor enters into a contract to build both a road and a bridge (assume there are two separate performance obligations: building the road and building the bridge). The contractor determines at inception that the contract price is $151 million, which includes a $140 million fixed fee and a variable award fee depending on how early the contractor finishes the project. The contractor will receive a base award fee of $10 million if it finishes the project 30 days ahead of schedule. The award fee increases (decreases) by 10% for each day before (after) the 30 days it finishes the project.

The contractor has experience with similar contracts. The contractor uses the most likely amount method to estimate the variable consideration associated with the award fee. Based on the contractor’s prior experience and its current estimates, the contractor determines that it will finish the project 31 days ahead of schedule and be entitled to the $10 million award fee. The contractor uses the expected value method to estimate the additional variable consideration associated with the 10% daily penalty or incentive. The contractor believes it will be entitled to an additional 10% award fee, or $1 million, for total variable consideration of $11 million. The contractor concludes that it is probable (US GAAP) or highly probable (IFRS) that a change in estimate would not result in a significant revenue reversal in the future. The standalone selling price of the road, based on prior experience, is $140 million. The standalone selling price of the bridge, based on prior experience, is $30 million. How should the contractor allocate the contract price to the two separate performance obligations?

Use Case 2

A contractor enters into a contract to build both a road and a bridge (assume there are two separate performance obligations: building the road and building the bridge). The contractor determines at inception that the contract price is $151 million, which includes a $140 million fixed fee and a variable award fee depending on how early the contractor finishes the project. The contractor will receive a base award fee of $10 million if it finishes the project 30 days ahead of schedule. The award fee increases (decreases) by 10% for each day before (after) the 30 days it finishes the project.

The contractor has experience with similar contracts. The contractor uses the most likely amount method to estimate the variable consideration associated with the award fee. Based on the contractor’s prior experience and its current estimates, the contractor determines that it will finish the project 31 days ahead of schedule and be entitled to the $10 million award fee. The contractor uses the expected value method to estimate the additional variable consideration associated with the 10% daily penalty or incentive. The contractor believes it will be entitled to an additional 10% award fee, or $1 million, for total variable consideration of $11 million. The contractor concludes that it is probable (US GAAP) or highly probable (IFRS) that a change in estimate would not result in a significant revenue reversal in the future. The standalone selling price of the road, based on prior experience, is $140 million. The standalone selling price of the bridge, based on prior experience, is $30 million. How should the contractor allocate the contract price to the two separate performance obligations?

Use Case 3

A contractor enters into a contract to build both a road and a bridge (assume there are two separate performance obligations: building the road and building the bridge). The contractor determines at inception that the contract price is $151 million, which includes a $140 million fixed fee and a variable award fee depending on how early the contractor finishes the project. The contractor will receive a base award fee of $10 million if it finishes the project 30 days ahead of schedule. The award fee increases (decreases) by 10% for each day before (after) the 30 days it finishes the project.

The contractor has experience with similar contracts. The contractor uses the most likely amount method to estimate the variable consideration associated with the award fee. Based on the contractor’s prior experience and its current estimates, the contractor determines that it will finish the project 31 days ahead of schedule and be entitled to the $10 million award fee. The contractor uses the expected value method to estimate the additional variable consideration associated with the 10% daily penalty or incentive. The contractor believes it will be entitled to an additional 10% award fee, or $1 million, for total variable consideration of $11 million. The contractor concludes that it is probable (US GAAP) or highly probable (IFRS) that a change in estimate would not result in a significant revenue reversal in the future. The standalone selling price of the road, based on prior experience, is $140 million. The standalone selling price of the bridge, based on prior experience, is $30 million. How should the contractor allocate the contract price to the two separate performance obligations?

Use Case 4

A contractor enters into a contract to build both a road and a bridge (assume there are two separate performance obligations: building the road and building the bridge). The contractor determines at inception that the contract price is $151 million, which includes a $140 million fixed fee and a variable award fee depending on how early the contractor finishes the project. The contractor will receive a base award fee of $10 million if it finishes the project 30 days ahead of schedule. The award fee increases (decreases) by 10% for each day before (after) the 30 days it finishes the project.

The contractor has experience with similar contracts. The contractor uses the most likely amount method to estimate the variable consideration associated with the award fee. Based on the contractor’s prior experience and its current estimates, the contractor determines that it will finish the project 31 days ahead of schedule and be entitled to the $10 million award fee. The contractor uses the expected value method to estimate the additional variable consideration associated with the 10% daily penalty or incentive. The contractor believes it will be entitled to an additional 10% award fee, or $1 million, for total variable consideration of $11 million. The contractor concludes that it is probable (US GAAP) or highly probable (IFRS) that a change in estimate would not result in a significant revenue reversal in the future. The standalone selling price of the road, based on prior experience, is $140 million. The standalone selling price of the bridge, based on prior experience, is $30 million. How should the contractor allocate the contract price to the two separate performance obligations?