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ASC 606 Variable ConsiderationExpected Value vs Most Likely Amount

Is this entity in good shape, or are there warning signs?

Expected value and most likely amount from up to four outcomes, then the constraint, for the transaction price.

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Your figures
Example figuresIllustrative only. Type over them with your own.
Variable consideration in the transaction price
$40,000
After the constraint
Expected value
$42,000
Most likely amount
$50,000
Drawn to one scale
Variable consideration in the transaction price$40,000
Expected value$42,000
Most likely amount$50,000
Estimate before the constraint$42,000
All results
MeasureResult
Variable consideration in the transaction price$40,000
Expected value$42,000
Most likely amount$50,000
Estimate before the constraint$42,000
Probabilities add to100.00%
How this was worked out
Work shownrecomputed as you type
Expected value = sum of (amount x probability)
Most likely amount = the outcome with the highest probability
Included amount = lower of the estimate and the constraint amount

Illustrative arithmetic on the figures you enter. Check the result against your firm's methodology before relying on it.

The formulas

  • Expected value = sum of (amount x probability)
  • Most likely amount = the outcome with the highest probability
  • Included amount = lower of the estimate and the constraint amount

How it works

ASC 606-10-32-8 requires the expected value or the most likely amount, whichever better predicts the consideration. Expected value suits many similar contracts or many possible outcomes; the most likely amount suits a binary outcome such as a bonus earned or not.

ASC 606-10-32-11 then includes variable consideration only to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty resolves. Enter that ceiling in the constraint field.

Illustrative figures only. Check the result against your firm's methodology before relying on it.

Common questions

Can I switch methods each period?

No. Apply one method consistently throughout the contract for a given type of variable consideration.

Is the constraint a separate estimate?

It is a judgment on the estimate. The tool caps the estimate at the amount you conclude meets the probable threshold.

Are sales-based royalties on licenses included?

No. ASC 606-10-55-65 has an exception: recognize them when the later sale or usage occurs.

Sources

Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.

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