AASB 15/IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for revenue recognition.[Fill in the blank]
List the five steps in the revenue recognition process under AASB 15/IFRS 15.[Fill in the blank]
When estimating transaction prices involving variable consideration, explain the difference between the expected value method and the most likely amount method.[Fill in the blank]

Question

BlackTom AI · Accepted Answer

The question asks you to fill in three related areas about IFRS 15/AASB 15 revenue from contracts with customers: (a) the five steps in the revenue recognition process, (b) the five steps again as a list, and (c) the difference between the expected value method and the most likely amount method when estimating variable consideration.

First, consider the standard five-step model for recognizing revenue under IFRS 15/AASB 15. Step 1 is to identify the contract with a customer, which establishes the legal enforceability basis for revenue and the performance obligations that may arise. Step 2 requires identifying the performance obligations in the contract, i.e., the promises to transfer goods or services to the customer that are distinct. Step 3 involves determining the transaction price, which is the amount of consideration the entity expects to be entitled to in exchange for transferring goods or services. Step 4 is allocating the transaction price to the performance obligations based on relative standalone selling prices (or an acceptable alternative method), so each obligation has an amount of revenue assigned. Step 5 deals with recognizing revenue when (or as) the entity satisfies a performance obligation, which can occur at a point in time or over time as control of the goods or services transfers to the customer.

Second, when the five steps are listed as a single sequence, the wording should mirror the canonical order used in IFRS 15 guidance. The phrasing should clearly enumerate each step without omitting or duplicating any, to reflect the standard’s framework: identify the contract, identify performance obligations, determine the transaction price, allocate the transaction price to performance obligations, and recognize revenue when or as the performance obligation is satisfied. This explicit enumeration helps ensure understanding of how revenue flows from a contract through to recognition.

Third, the distinction between the expected value method and the most likely amount method for estimating variable consideration hinges on how you quantify uncertainty in the transaction price. The expected value method sums the probability-weighted amounts across all possible outcomes, which makes sense when there are multiple potential scenarios and you want an average outcome across the range. This approach is appropriate when there isn’t a single most probable result, or when outcomes are more than two possibilities and you want to reflect the distribution of possibilities.

By contrast, the most likely amount method looks at the single outcome that has the highest probability of occurring and uses that amount as the transaction price component. This method is suitable when there are limited outcomes (often effectively a binary or near-binary outcome) and one result dominates in likelihood, so you base the estimate on the single most plausible figure.

Overall, the first blank should contain the five-step sequence as described above, the second blank should present the exact wording of the five steps in a list format, and the third blank should contrast the two methods with practical guidance on when each is appropriate, emphasizing how the expected value aggregates across possibilities while the most likely amount focuses on the single best estimate. The goal is to convey both the procedural framework and the methodological choices for variable consideration in revenue measurement.

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