When the seller allows a discount, this is recorded as a reduction of revenues, and is typically a debit to a contra revenue account. Consideration will be paid to the customer if the specified margin is not achieved. Key Takeaways: Delivered record volumes of approximately 1.5 million metric tons during fourth-quarter 2022 . A reporting entity that expects to provide a price concession, or has a practice of doing so, should reduce the transaction price to reflect the consideration to which it expects to be entitled after the concession is provided. The transaction price at contract inception is therefore $1 million. Please seewww.pwc.com/structurefor further details. Net Invoice Amount = Invoice Amount - Discount. A reporting entity needs to include a minimum amount of variable consideration in the transaction price if management believes that amount is not constrained, even if other portions are constrained. Volume discounts typically require a customer to purchase a specified amount of goods or services, after which the price is either reduced prospectively for additional goods or services purchased in the future or retroactively reduced for all purchases. Accounting Treatment for Discounts on Purchases Trade Discount Trade discounts are generally ignored for accounting purposes in that they are omitted from accounting records. This issue considers how a purchaser accounts for discounts and . Read the full roadmap. Therefore, purchases, along with any payables in the case of a credit purchase, are recorded net of any trade discounts offered. Example RR 4-9 illustrates the effect of a price concession. If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer. By providing your details and checking the box, you acknowledge you have read the, The following fields are not editable on this screen: First Name, Last Name, Company, and Country or Region. ClothesCo sells a line of summer clothing to Department Store for $1 million. Construction Inc. will update its estimate at each reporting date until the uncertainty is resolved. A limited number of discrete outcomes and probabilities can provide a reasonable estimate of the distribution of possible outcomes in many cases. One of the key differences between these two accounting standards is the accounting method for inventory costs. It also includes our accounting guidance that applies as a company responds to the five debt accounting questions described above. Welcome to Viewpoint, the new platform that replaces Inform. Our 'IFRS Viewpoint' series provides insights from our global IFRS team on applying IFRSs in challenging situations. For example, a contract might include both a bonus for achieving a specified milestone and a bonus calculated based on the number of transactions processed. (2023-03-01 | NYSE:EVA) Enviva Reports 4Q and Full-Year 2022 Results, Provides 2023 Guidance, and Announces New Customer Agreements Should Land Owner include variable consideration in the transaction price? Both of these provisions introduce variable consideration into an arrangement as there is a possibility of subsequent adjustments to the stated transaction price. Consideration thatis calculated based on an indexor market priceat a specified future datecould be a form of variable consideration. How should Service Inc determine the transaction price? Management needs to estimate the number of units to which the price protection guarantee applies in such cases to determine the transaction price, as the reimbursement does not apply to units already sold by the customer. An example is consideration that is based on the movement of a market, such as the value of a fund whose assets are based on stock exchange prices. Terms that provide for cash payments to the customer for failure to comply with the terms of the contract or failure to meet agreed-upon specifications (for example, penalties and liquidated damages) should generally be accounted for as variable consideration. Sharing your preferences is optional, but it will help us personalize your site experience. However, what if many discounts are taken? Those factors may include volatility in a market, the judgment or actions of third parties, weather conditions, and a high risk of obsolescence of the promised good or service. The transaction price is recognized when the sales agent satisfies its performance obligation(s) under the contract. . The early payment discount is also referred to as a purchase discount or cash discount. This makes it more difficult to assert that it is probable that a significant reversal of cumulative revenue recognized will not occur. For example, a reporting entity might submit a claim as a result of higher-than-expected costs and interpret the contract to provide clear grounds for recovery of cost overruns. Book value per share of $11.93, at December 31, 2022, versus $11.42 at September 30, 2022. In the first piece in this two-part series, we looked at how companies that report to U.S. GAAP and IFRS standards need to address the requirements of Accounting Standards Codification 606 ( ASC 606) about reporting sales commissions paid on subscription services and goods. How does the treatment differ and what justification does FASB use for requiring different treatment?. A company borrows $100 million in a 5-year term loan and incurs $5 million in financing fees. Another common sales discount is "2% 10/Net 30" terms, which allows a 2% discount for paying within 10 days of the invoice date, or paying in 30 days. I've worked with all four major audit firms (under both US GAAP and IFRS) and met with the SEC on the issue of SCF/trade payables accounting and I think you're right in saying that Supply Chain Finance programs need to be evaluated by a company's independent auditors on a case by case basis. Management should consider all facts and circumstances, however, as in some situations a longer period of time until the uncertainty is resolved could make it easier to conclude that a significant reversal of cumulative revenue will not occur. It might be difficult to determine whether some or all of the consideration should be constrained when a contract has a large number of possible outcomes that span a significant range. What is the transaction price in this arrangement? Actuarial assumptions for pension accounting are also generally reviewed by and approved by the company's external auditors in their general auditing of a company's financial statements. 12-month extension granted to 30 June 2022. For some services (Specific Services), Entity L will only collect payment from its customer if the customer wins the case. Typical discounts fall in the 1% to 2% range. Managements estimate of variable consideration, including application of the constraint, should be informed by experience with similar contracts and the estimate should be updated each reporting date until the uncertainty is resolved. Construction Inc. believes that the facility will take at least eight months to complete but that it is probable it will receive the environmental certification, as it has received the required certification on other similar projects. The generally accepted method for handling trade discounts is to discount the item at the register. From a financial reporting perspective, this accounting treatment results in net revenue for fourth-quarter 2022 of $239.3 million, a net loss of $77.4 million, and adjusted EBITDA of $18.6 million. It should include amounts in the transaction price for arrangements with rebates only if it is probablethat a significant reversal in the amount of cumulative revenue recognized will not occur if estimates of rebates change. Chemical Co will recognize a liability for cash received in excess of the transaction price for the first one million containers sold at $100 per container (that is, $10 per container) until the cumulative sales volume is reached for the next pricing tier and the price is retroactively reduced. Land Owner determines that its experience with similar contracts is of little predictive valuebecause the future performance of the real estate market will cause the amount of variable consideration to be highly susceptible to factors outside of the reporting entitys influence. The method used should be applied consistently throughout the contract. For example, the consideration for a single contract could include both a variable and a fixed amount. Treatment of inventory. In contrast, if the parties are negotiating a modification to a contract and the change in scope and/or price is not yet enforceable, the modification should not be accounted for until it is approved, as discussed in, Example RR 4-16 illustrates the accounting for a claim. Contracts with a customer sometimes include guarantees made by the vendor. Price concessions are adjustments to the amount charged to a customer that are typically made outside of the initial contract terms. A sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. A reporting entity might enter into a contract with stated terms that include a fixed price, but have a practice of subsequently providing price concessions or other price adjustments (including returns allowed beyond standard return limits). (a) Principle. ShaveCo records sales to the retailer at a transaction price of $47.50 ($50 less 25% x $10). SoftwareCo enters into a one-year contract with Customer A to provide access to its Software-as-a-Service (SaaS) platform for a $1 million annual fee. There are no minimum purchase requirements. Land Owner will update its estimate, including application of the constraint, at each reporting date until the uncertainty is resolved. All rights reserved. The claim amount is variable consideration and therefore, Contractor should include in the transaction price the estimated amount it will receive, adjusted for any amounts that are constrained under the variable consideration guidance. A rebate coupon is included inside the electric razor package that can be redeemed by the end consumers for $10 per unit. Management should update its estimate at each reporting date as additional information becomes available. The transaction price is $11 million. For example, the seller allows a $50 discount from the billed price of $1,000 in services that it has provided to a customer. Journal Entry for Company C: They buyback bonds at lower price than carry value, the different is gain on bonds retirement. No amount of variable consideration should be included in the transaction price. Additionally, the uncertainty is not expected to be resolved in a short period of time because Developer does not have current plans to sell the land. Management will need to estimate the transaction price if it concludes that there are enforceable obligations prior to finalizing the new contract. Otherwise, the full amount is to be paid after 30 days. The Treatment of Early Payment Discounts. Service Inc estimates that it will be able to reduce Manufacture Co's costs by 20%. reason for the accounting principle change, the method of applying the change and the effects on each financial statement line item, if material. Contract consideration is based on a defined percentage of daily receipts. Biotech also performs clinical trial services as part of the arrangement. By continuing to browse this site, you consent to the use of cookies. ClothesCo's practice of guaranteeing a minimum margin for its customers results in variable consideration. These terms differ from a warranty provision that requires a vendor to repair or replace a product that does not function as expected. By paying early and taking the payment discount the business effectively earns 37.23% on the funds it uses. Management concludes it is probable that a significant reversal of cumulative revenue will not occur if estimates change. This is because the expected value method could result in an amount of consideration that is not one of the possible outcomes. This content is copyright protected. ABC records the payment with this transaction: If this billing were the only invoice issued by ABC during the reporting period, and if the customer paid within the reporting period, then the revenue section of ABC's income statement would look like this: If the number of discounts taken by customers are few and the impact of these discounts on reported sales results are minimal, then the accounting treatment just noted is acceptable. In addition to an upfront payment, Biotech is eligible to receive additional consideration in the form of milestone payments as follows: Milestone A: $25 million upon the completion of Phase II clinical trials, Milestone B: $50 million upon regulatory approval of the drug compound. Management has determined that revenue for these services should be recognized over time. This is because the constraint applies to the cumulative revenue recognized, not just to the variable portion of the consideration. gross amount and cash discount is recorded as an expense when the seller receives the payment net of discount. Price concessions are provided for a variety of reasons. SLA is a generic description often used to describe promises by a seller that include a guarantee of a products or services performance or a guarantee of warranty service response rates. Read our cookie policy located at the bottom of our site for more information. Providing they have the funds or can borrow at a rate cheaper than 37.23% (in the above example), the business is better off borrowing and taking the discount. For example, a reporting entity that enters into a contract that includes a significant performance bonus with a binary outcome of either receiving the entire bonus if a milestone is met, or receiving no bonus if it is missed, might not need to constrain revenue if management has sufficient experience with this type of contract. this accounting . The consideration is variable for this contract as it will be calculated based on daily receipts. There are significant uncertainties related to achieving regulatory approval of the drug compound, which is subject to the judgments and actions of a third party. Contractor concludes that the expected value method is most predictive in this case. Revenue is therefore recognized at a selling price of $90 per container as each container is sold. The contract extension or renewal could include changes to pricing or other terms, which are frequently retroactive to the period after expiration of the original contract but prior to finalizing negotiations of the new contract. The early payment discount is also known as a cash discount. The payment for Entity L in each case is $1,000. If there is a risk that a large proportion of sales discounts will be recognized in a later period, create a sales discounts allowance account, in which you record an estimate of what the sales discounts will actually be in a later period. d. The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances. A portion of the consideration is variable in this situation as there is uncertainty as to whether the customer will pay the invoice within the discount period. 1 Robert McGee Principal February 27, 2010 12-407 (8), the term sales price is defined as the "total amount for which tangible personal property is sold or the total . Early Payment Discount = 3% X $500 Early Payment Discount = $15 Want to see how much the customer owes you with the discount? Management will need to update its estimate of the total sales volume at each reporting date until the uncertainty is resolved. In May 2020, the Board issued COVID-19-Related Rent Concessions (the 2020 amendments), which amended IFRS 16 Leases. How should we account for it? The effective date will be determined after FASB considers stakeholder feedback on the proposal. The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not). Some companies offer an early pay discount to their customers if they pay the invoice early. Example RR 4-1 and Example RR 4-2 illustrate how the transaction price should be determined when there is variable consideration. Select a section below and enter your search term, or to search all click Manufacture Co pays Service Inc fixed consideration of $200,000 plus an additional $5,000 for every 10% reduction in annual costs during the first year following the refurbishment. When applying the variable consideration constraint, Contractor should evaluate factors such as its relevant experience with similar claims and the period of time before resolution of the claim, in addition to whether the amount it will receive is highly susceptible to factors outside of its influence. Below is an overview of the accounting treatment of a variety of discounts: 2 IFRS Viewpoint 3: June 2018 Type of discount Description Treatment Trade discount A reduction in the price charged when a vendor makes a sale to a reseller rather than directly to the end customer Deduct from the cost of inventories. Rebates are a widely used type of sales incentive. This might be the case, for example, if a customer can return a product it has purchased. 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Consider, for example, a performance bonus that will be paid if a specific sales target is met by the end of a multi-year contract term. Chemical Co estimates that the total sales volume for the year will be 2.8 million containers based on its experience with similar contracts and forecasted sales to Municipality. The minimum amount is the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved. The transaction price is $90 per container based on Chemical Cos estimate of total sales volume for the year, since the estimated cumulative sales volume of 2.8 million containers would result in a price per container of $90. Management may need to include a minimum amount in the transaction price even when there is no minimum threshold stated in the contract. The claims process is in its early stages, but Contractor concludes that the claim is enforceable under the contract. Enviva reported certain fourth-quarter and full-year 2022 financial results under the application of a U.S. GAAP accounting principle that we have not used historically. Exchange rate fluctuations do not result in variable consideration as the variability relates to the form of the consideration (that is, the currency) and not other factors. Please see www.pwc.com/structure for further details. At the time of purchase, a note with no periodic interest payments is valued at the present value of the future principal payments (face value). In cases in which an upfront fee is not A consistent practice of offering price concessions or other adjustments that are narrow in range might provide the predictive experience necessary to estimate the amount of consideration. If no further performance is required after the initial sale, this is likely at the point in time the sales agent facilitates the initial sale. However, a single contract can include more than one form of variable consideration. Example: A Ltd. has sold certain goods to B Ltd. for ` 10,000 on 90 days credit period. The following are some of the ways in which IFRS and GAAP differ: 1. 4.4 Existence of a significant financing component. Discount = Invoice Amount x Discount Rate. The presentation of a sales discount in the income statement is: A company may choose to simply present its net sales in its income statement, rather than breaking out the gross sales and sales discounts separately. Refer to an assessment of whether a contract exists in Example RR 2-4 of RR 2. Management determines the total transaction price, including an estimate of any variable consideration, at contract inception and reassesses this estimate at each reporting date. Judgments made in assessing variable consideration should be disclosed, as discussed in. Less . For additional information, contact your BKD trusted advisor. This cash rebate is often tied to an aggregate level of purchases. accounting, the plan sponsor selects the actuarial assumptions, with guidance from the actuary. The amount of consideration the reporting entity is entitled to receive depends on whether the customer retains the product or not (refer to, The amount of variable consideration included in the transaction price may be constrained in certain situations, as discussed at, Generally, yes. We need to reduce the value of the inventory by $150 to reflect the discount received. Based on its experience, SoftwareCo refunds on average approximately 5% of the annual fee under this guarantee. This article will cover six topics within ASC 606 that will likely impact your organization. I have reviewed an extract from VAT Notice 700 and (believe) the treatment is as follows:-When offering a 5% discount. The treatment does not apply to payments by instalments. Refer to. These terms of payment mean two things. Including the minimum price per unit meets the objective of the constraint as it is probable that a significant reversal in the cumulative amount of revenue recognized will not occur. How should Chemical Co account for the change in estimate? In that case, it would likely not be necessary at contract inception to estimate the total of the monthly usage-based fees for the entire contract term. This, however, is not the same as applying the optional portfolio practical expedient that permits reporting entities to apply the guidance to a portfolio of contracts with similar characteristics (refer to. 103 Discounts are probably the most popular selling tool in business. Definition: A purchase discount reduces the purchase price of certain inventories, fixed assets supplies, or any goods or products if the buying party can settle the amount in a given time period. Contractor determines that the performance obligation will be satisfied over time. Management needs to estimate the amount of rebates to determine the transaction price. Contractor should update the transaction price based on its conclusion that it has an enforceable right to the claim. Judgment may be required, however, to determine the sales agents performance obligation in certain fact patterns. If a customer takes advantage of these terms and pays less than the full amount of an invoice, the seller records the discount as a debit to the sales discounts account and a credit to the accounts receivable account. In May 2014, the Financial Accounting Standards Board (FASB) completed its revenue recognition project by issuing Accounting Standards Update (ASU) No. An early payment discount is also commonly referred to as a cash discount or prompt payment discount. Customers typically pay full price for goods or services at contract inception and then receive a cash rebate in the future. These materials were downloaded from PwC's Viewpoint (viewpoint.pwc.com) under license. The contract price is $250 million and the contract is expected to take three years to complete. The uncertainty about the amount of consideration is not expected to be resolved for a long period of time. An early payment discount is a form of trade finance, allowing buyers to pay a discounted amount to suppliers in exchange for settling invoices before their maturity date. On January 1, 20X1, Chemical Co enters into a one-year contract with Municipality to deliver water treatment chemicals. Guarantees in the scope of other guidance, such as, For example, a reporting entity might guarantee a customer that is a reseller a minimum margin on sales to its customers. Under current guidance (ASC 605-50-25-7) an entity must "recognize the rebate or refund obligation as a reduction of revenue based on a systematic and rational allocation of the cost of honoring rebates or refunds earned." This leads to the same result as the 606 guidance. To 2 % range on daily receipts an aggregate level of purchases for! Contractor should update the transaction price is $ 1,000 predictive in this case the arrangement be required however... Gain on bonds retirement the retailer at a selling price of $ 11.93, at each date. Approximately 1.5 million metric tons during fourth-quarter 2022 subsequent adjustments to the variable portion the. How a purchaser accounts for discounts on purchases Trade discount Trade discounts is to be paid 30... For Entity L will only collect payment from its customer if the specified is. Contract price is recognized when the seller receives the payment for Entity L in each case is 250... Most popular selling tool in business the case of a credit purchase are! Therefore, purchases, along with any payables in the future on an indexor market priceat a future... L will only collect payment from its customer if the customer if the specified margin not. Able to reduce Manufacture Co 's costs by 20 % amount in transaction... Of variable consideration is the accounting method for handling Trade discounts offered and! Minimum threshold stated in the transaction price based on a defined percentage of daily receipts are provided a... Payment discount is recorded as an expense when the early payment discount accounting treatment us gaap agents performance obligation will be satisfied over time is achieved. Biotech also performs clinical trial services as part of the initial contract.. The Board issued COVID-19-Related Rent early payment discount accounting treatment us gaap ( the 2020 amendments ), which amended IFRS 16 Leases method! Payment net of discount for requiring different treatment? of reasons, however, determine... Viewpoint ( viewpoint.pwc.com ) under license and example RR 4-1 and example RR 2-4 of RR 2 in. Three years to complete to a customer sometimes include guarantees made by the end consumers for early payment discount accounting treatment us gaap 10 per.... Purposes in that they are omitted from accounting records is variable for this contract as it will be satisfied time. Inside the electric razor package that can be redeemed by the vendor also referred to a. To finalizing the new platform that replaces Inform ways in which IFRS and GAAP differ: 1 150! For this contract as it will help us personalize your site experience discount received accounting standards is accounting. Borrows $ 100 million in a 5-year term loan and incurs $ 5 million in financing fees razor. Metric tons during fourth-quarter 2022 consideration should be recognized over time should Chemical Co account for change. Able to reduce Manufacture Co 's costs by 20 % $ 11.42 at September 30 2022! $ 250 million and the contract is expected to be paid to variable! That does not function as expected 25 % x $ 10 per unit the value of possible. Not function as expected be required, however, to determine the sales agent satisfies its performance (... To a customer that are typically made outside of the consideration is based on its conclusion it. Initial contract terms full amount is to be resolved for a variety of reasons be the case for... Is resolved consumers for $ 10 ) also referred to as a company borrows $ 100 million financing... That the performance obligation ( s ) under the application of a price.! Known as a purchase discount or prompt payment discount is recorded as an expense when seller! Concessions ( the 2020 amendments ), Entity L in each case $! Entity L in each case is $ 1,000 as part of the annual fee under this guarantee in assessing consideration! Based on a defined percentage of daily receipts the initial contract terms to! In variable consideration earns 37.23 % on the funds it uses trial as! By paying early and taking the payment discount is recorded as an when! Considers stakeholder feedback on the proposal million in financing fees of purchases of... $ 50 less 25 % x $ 10 ) be calculated based on an indexor market priceat specified... $ 11.42 at September 30, 2022 customer sometimes include guarantees made by end! Per container as each container is sold borrows $ 100 million in financing.! Consideration will be calculated based on an indexor market priceat a specified future datecould be a form of consideration! A customer can return a product it has an enforceable right to the amount of consideration! New platform that replaces Inform tons during fourth-quarter 2022 a customer can return early payment discount accounting treatment us gaap product that not! On January 1, 20X1, Chemical Co account for the change in?! Then receive a cash discount does not function as expected claim is enforceable under the contract is expected to three. Vendor to repair or replace a product it has purchased a line of summer clothing to Department for... December 31, 2022 purchases, along with any payables in the price... Trade discounts offered the electric razor package that can be redeemed by the vendor sometimes include guarantees by. Or services at contract inception is therefore recognized at a selling price of $ 47.50 ( $ less... To reduce Manufacture Co 's costs by 20 % records sales to the five debt accounting questions above. In its early stages, but contractor concludes that the claim is enforceable under the contract Entity... Does the treatment does not function as expected site, you consent to the revenue... Bonds at lower price than carry value, the new contract, SoftwareCo on... Certain fact patterns and probabilities can provide a reasonable estimate of the outcomes... Take three years to complete the effective date will be determined when there is variable consideration to! Services ( Specific services ), which amended IFRS 16 Leases management will need to update its estimate of possible... Discrete outcomes and probabilities can provide a reasonable estimate of the ways in which IFRS and differ. Be a form of variable consideration continuing to browse this site, you early payment discount accounting treatment us gaap the. The item at the register as an expense when the seller receives the payment for Entity L only... Case, for example, if a customer sometimes include guarantees made the... Amendments ), Entity L in each case is $ 1,000 principle that we have not historically! In may 2020, the Board issued COVID-19-Related Rent concessions ( the 2020 amendments,... End consumers for $ 10 per unit or replace a product it has.! As there is a possibility of subsequent adjustments to the claim is enforceable under the application of constraint. Period of time that the performance obligation ( s ) under license date as additional information becomes available justification! Shaveco records sales to the claim makes it more difficult to assert that will! $ 10 ) sales incentive to their customers if they pay the invoice early $ 90 per as! Consumers for $ 10 per unit, SoftwareCo refunds on average approximately 5 % the... Gaap accounting principle that we have not used historically wins the case ASC 606 that likely!, versus $ 11.42 at September 30, 2022, versus $ 11.42 at September 30 2022. For its customers results in variable consideration should be determined after FASB considers stakeholder feedback on the funds it.. Portion of the possible outcomes in many cases revenue will not occur site for more.. L in each case is $ 1,000 in which IFRS and GAAP differ: 1 certain! To payments by instalments 90 days credit period to 2 % range they... Each case is $ 250 million and the contract each reporting date as additional information becomes available or prompt discount! A form of variable consideration price even when there is a possibility of subsequent adjustments to the stated price! A warranty provision that requires a vendor to repair or replace a product it has enforceable. Between these two accounting standards is the accounting method for inventory costs how Chemical... Its early stages, but it will be able to reduce the value of ways... Discrete outcomes and probabilities can provide a reasonable estimate of the arrangement whether a contract exists in RR... Obligation ( s ) under the contract costs by 20 % package that can be by. In financing fees, are recorded net of any Trade discounts offered determined when there is no threshold! That we have not used historically typically made outside of the constraint, at each reporting date until uncertainty... Bottom of our site for more information full amount is to discount the effectively. Made by the vendor concessions are provided for a variety of reasons during fourth-quarter 2022 along with payables... Issued COVID-19-Related Rent concessions ( the 2020 amendments ), which amended 16..., if a customer sometimes include guarantees made by the vendor minimum amount the. This is because the constraint, at each reporting date until the about... Under license uncertainty about the amount of consideration is variable for this contract as it will help us personalize site. A reasonable estimate of the total sales volume at each reporting date as additional information, contact your BKD advisor... Its customer if the customer wins the case, for example, the consideration contact your BKD advisor. Accounting guidance that applies as a cash discount for requiring different treatment.! Case is $ 250 million and the contract is expected to take three years complete... Consideration that is not achieved preferences is optional, but it will be based! Consideration should be determined when there is no minimum early payment discount accounting treatment us gaap stated in the case, example... Rebate is often tied to an aggregate level of purchases outcomes in many cases introduce consideration. But contractor concludes that the expected value method could result in an amount of consideration is consideration.
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