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Page | 20 Evaluating Variable Consideration > A signifi cant change included in the new revenue recognition standard, ASC 606 Revenue from Contracts with customers, is the treatment of variable consideration. This change will likely impact every contractor. The following are examples of variable considerations within a contract: • Claims and pending change orders • Unpriced change orders • Incentive and penalty provisions within the contract • Shared savings • Price concessions • Liquidating damages • Unit price contracts with variable units In accordance with ASC 606, entities are required to estimate variable consideration in determining the transaction price, subject to guidance on constraining estimates of variable consideration. As discussed in ASC 606-10-32-9: "…an entity shall consider all the information (historical, current and forecasted) that is reasonably available to the entity and shall identify a reasonable number of possible consideration amounts. The information that an entity uses to estimate the amount of variable consideration typically would be similar to the information that the entity's management uses during the bid- and-proposal process and in estimating prices for promised goods and services." After estimating the transaction price, an entity is required to evaluate the likelihood and magnitude of a reversal of revenue due to a subsequent change in the estimate. ASC 606- 10-32-11 discusses when to include variable consideration in the transaction price and notes that an entity should include in the transaction price some or all of the variable consideration amount estimated in accordance with ASC 606-10-32-8 only to the extent that it is probable that a signifi cant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Note that the "signifi cance" of a reversal is measured against cumulative revenue recognized to date on the performance obligation and is not a fi nancial materiality measure. According to ASC 606-10-32-12, factors that could increase the likelihood and magnitude of a revenue reversal include the entity's experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value. When a contract includes multiple performance obligations, the assessment of the signifi cance of the future reversal is measured at the contract or fi nancial materiality level, not at the performance obligation level. The amount of the estimate must be updated each period for changes as events occur or when the uncertainty has been resolved. The new standard requires an entity to estimate variable consideration and apply the constraint in determining the transaction price, rather than assessing whether the amount is fi xed or determinable. This may result in earlier revenue recognition in a number of circumstances.

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