Variable consideration is the part of a price that can change after the deal is signed. A rebate, a bonus or a refund moves it. Accounting rules make the business estimate that amount at the start. A loyalty program meets it in partner fees, rebates and unused points.
What is variable consideration?
Variable consideration is any part of a contract price that is not fixed. ASC 606 lists discounts, rebates, refunds, credits, price concessions, incentives, bonuses and penalties. A price also varies when payment hinges on a later event. A sale with a right of return and a bonus for a milestone are two cases (ASC 606-10-32-6). IFRS 15 paragraph 51 has the same list (IFRS 15).
The contract need not say so. A price is variable when the customer can expect a price cut, based on the business’s usual practice, published policies or statements (ASC 606-10-32-7). Deloitte says variability is easiest to spot when price or quantity is not fixed at the start (Deloitte).
How do you estimate variable consideration?
The business must estimate what it will be entitled to (ASC 606-10-32-5). The standard offers two methods (ASC 606-10-32-8):
- Expected value. Weigh each possible amount by its odds and add them up. It suits a business with many similar contracts.
- Most likely amount. The single likeliest outcome. It suits a contract with two outcomes, such as a bonus earned or not.
The business picks the method that predicts better. It uses that one method for the whole contract and weighs all the information it has (ASC 606-10-32-9).
Deloitte adds a rule of thumb. With only two outcomes, the most likely amount often fits. With many similar contracts whose outcomes do not depend on each other, expected value can predict better, even when each contract has two outcomes (Deloitte DART 6.3.2.1). It also shows when many contracts still call for the most likely amount. A firm has 1,000 contracts. Each pays a $500 bonus if its yearly ranking is in the top quartile. All 1,000 ride on one ranking, so the bonus pays on every contract or on none (Deloitte).
The standard’s own volume discount example shows the math. A seller charges $100 a unit. The price falls to $90 on every unit if the customer buys over 1,000 in a year. In the first quarter the customer buys 75 units and the seller expects no discount, so revenue is $7,500. In the second quarter the customer buys 500 more and now looks set to pass 1,000. Revenue for that quarter is $44,250. That is $45,000 for 500 units at $90, less $750 for the first 75 units (ASC 606-10-55-216 to 55-220).
What is the constraint on variable consideration?
The constraint caps how much of the estimate goes into the price. The business counts the estimate only as far as it is probable that a big reversal of booked revenue will not follow when the doubt clears (ASC 606-10-32-11). The test weighs how likely a reversal is and how large it would be. Five things raise the risk (ASC 606-10-32-12):
- The amount hangs on things outside the business’s control, such as markets or third parties.
- The answer is a long way off.
- The business has thin or weak experience with similar deals.
- The business often offers a wide range of price cuts.
- The deal has many possible amounts across a wide range.
The constraint works on the estimate. A business can hold a firm contract and still keep part of the price out of revenue until the doubt clears.
IFRS 15 paragraph 56 says “highly probable” where ASC 606 says “probable.” Deloitte says both mean the same thing (Deloitte).
How is variable consideration allocated and updated?
A variable amount goes to one promise when two tests are met. The payment must tie to the business’s effort on that promise. The split must also fit the standard’s overall allocation goal (ASC 606-10-32-40). Other amounts are split by standalone selling price (ASC 606-10-32-41). Hilton says most of its promises are series of distinct services, paid through variable management, franchise and licensing fees. It allocates those fees to the services they relate to (Hilton).
The estimate does not stay fixed. Each reporting period, the business updates the transaction price and re-tests the constraint (ASC 606-10-32-14). Changes go to the same promises on the same basis as at the start. The share tied to work already done is booked as revenue, or a cut to revenue, in the period of the change (ASC 606-10-32-43). Money the business expects to hand back is a refund liability (ASC 606-10-32-10).
Which loyalty program amounts are variable consideration?
Loyalty programs run on contracts whose price moves with member behavior. Published filings show the pattern:
| Amount | What makes it vary | Published example |
|---|---|---|
| Co-brand card fees | Cardholder spend, points bought, certificates issued | Marriott |
| Franchise royalties | A share of property revenue | Marriott |
| Licensing and management fees | A share of revenue or profit | Hilton |
| Merchant discount revenue | A share of merchant sales | American Express |
| Volume rebates | Total purchases in a period | ASC 606 Example 24 |
Marriott’s co-brand deals show it. Fixed fees mostly come at the start. Variable fees arrive monthly. They follow cardholder spend, points bought, free night certificates and gift cards (Marriott). Its franchise royalty fees “represent variable consideration.” So do the discount fees American Express earns from merchants (American Express).
For illustration, a program signs a one-year co-brand deal. The bank pays $2 million up front and $300,000 more if cardholder spend passes $500 million. The bonus has two outcomes, so finance can use the most likely amount. Weighing it by odds instead would add only part of it, such as 60% of $300,000, or $180,000. Either way, finance then asks whether the amount added passes the constraint. If spend falls short at year-end, the price drops by $300,000 and revenue reverses.
Points follow a related path. The business estimates how many points members never redeem, using the same constraint guidance (ASC 606-10-55-48). Hilton’s 2025 roll-forward shows an update at work. Changes in the estimated price for Hilton Honors points added $226 million to its contract liabilities, with no effect on revenue (Hilton 2025 10-K). Costco books its 2% Executive reward as a cut to sales, net of expected non-redemptions. The net cut was $3,007 million in fiscal 2025 (Costco 2025 10-K). Coupons and vouchers given to customers also cut the price, unless the customer supplies a distinct good or service in return (ASC 606-10-32-25).
Loyalty and finance teams draw on the same inputs. Those are redemption rates, expiry dates and partner volumes. Finance and its auditors make the final call.
How GRAVTY handles variable consideration
Finance makes the estimates. They need clean inputs. GRAVTY records every earn, burn and expiry event at the member and transaction level. It tracks the cost and value of every point issued and redeemed.
That gives finance and loyalty teams the liability, breakage and partner billing insight they need. A single ledger nets what partners owe and are owed, as our guide to partner settlement explains.
Frequently asked questions
Is a discount the same as variable consideration?
No. A discount is one of several kinds. Rebates, refunds, credits, bonuses and penalties also count (ASC 606-10-32-6).
What is the difference between expected value and most likely amount?
Expected value weighs every possible outcome by its odds, while most likely amount picks the likeliest one. The standard calls expected value a fit for many similar contracts. It calls most likely amount a fit for a contract with two outcomes (ASC 606-10-32-8).
Are sales-based royalties variable consideration?
Yes, but they get their own rule. A sales-based royalty on a license of intellectual property is booked only when the later sale occurs or the promise is kept. That rule overrides the constraint (ASC 606-10-55-65).
Are loyalty points variable consideration?
No. Points that give a material right are a separate promise to the member. The variable part is the estimate of points that go unused, which follows the constraint guidance (ASC 606-10-55-42 and 55-48).
Does a change in estimate change revenue already booked?
Yes. A change in the transaction price is booked in the period it happens, and it can cut revenue from work already done. In the standard’s volume discount example, the second quarter takes a $750 cut for units sold in the first (ASC 606-10-32-43).