Telco B enters into an agreement to provide data hosting services to a large
business customer, C, for a period of five years. Certain SLAs are agreed to by
Telco B as part of the contract with Customer C. Specifically, the SLAs will result
in a reduction of consideration paid by Customer C to Telco B, if Telco B does not
meet a specified level of service. Because the SLAs are part of the contract with
Customer C, the SLA penalties create variable consideration.
Therefore, Telco B estimates the amount of the penalties at contract inception in
determining the transaction price.