Understanding Variable Consideration: A CFO’s Guide

In early-stage companies, revenue forecasts often rest on the best-case scenario. Sales closes, customers pay, revenue flows. But in the real world, customer behavior introduces variability. They cancel, return, dispute, or renegotiate. Incentives offered to close the deal—refund guarantees, performance bonuses, volume rebates—often stretch well beyond the original contract. Under ASC 606, we no longer recognize revenue based solely on invoicing or delivery. We must also estimate and constrain variable consideration. For CFOs leading through Series A to D, this is not an abstract accounting concept. It is a critical part of managing risk, trust, and valuation.

Variable consideration is the catch-all category for anything that adjusts the transaction price after the contract is signed. And it can materially distort top-line reporting if not properly modeled and disclosed. I have worked with companies in SaaS, digital commerce, healthcare, and supply chain technology. The common thread across all of them is this: overconfidence in forecasts leads to audit challenges. And audit challenges lead to delayed closings, lower valuations, or worse—restatements.

This post will decode how to treat variable consideration in a way that not only satisfies ASC 606, but builds credibility with your board, auditors, and future investors.

What Counts as Variable Consideration?

Under ASC 606, any component of a contract that may change the price paid by the customer qualifies as variable consideration. This includes:

• Refunds or rights of return
• Performance bonuses or penalties
• Volume discounts or tiered pricing
• Usage-based fees or royalties
• Early payment incentives or rebates
• Price concessions made at management’s discretion

The list is long. What matters is whether the final transaction price is known at contract inception. If not, the finance team must estimate the amount of consideration it expects to receive, using either the expected value method or the most likely amount.

The choice of method depends on the nature of the variability. Expected value works well when you have multiple potential outcomes with known probabilities. Most likely amount works best for all-or-nothing scenarios—such as whether a bonus will be paid.

Estimating Is Not Guessing

CFOs must bring discipline to the estimation process. Estimates should not be guesses. They must be built from observable inputs—historical returns, deal win rates, contract amendments, payment history, or customer-specific behavior.

One e-commerce company I worked with had a liberal return policy. Historically, ten percent of items were returned. But the finance team recognized revenue at full invoice value, deferring only when refunds were processed. When the auditors stepped in, they required an upfront reduction in revenue based on expected returns. That meant restating revenue and booking a refund liability. That liability showed up in due diligence, and the founder spent a month explaining the misstep to investors.

The lesson was simple: once returns become predictable, they must be accounted for at contract inception.

How the Constraint Works

Even if you can estimate variable consideration, you may not be allowed to recognize it immediately. ASC 606 requires you to apply a constraint. That means you recognize only the amount of variable consideration that is probable not to reverse. “Probable” here follows a U.S. GAAP standard—typically interpreted as a likelihood of seventy-five to eighty percent.

If you are uncertain whether the customer will meet a rebate threshold, or if they may trigger a refund clause, you must defer revenue until that uncertainty resolves or until you gather more data. CFOs often want to accelerate revenue recognition in growth phases. But constrained estimates are not optional. They are the line between judgment and overstatement.

I once reviewed a SaaS company that recognized $500,000 in success fees tied to customer adoption. The criteria were subjective, and adoption was far from certain. The auditors reclassified the amount as deferred revenue. The board flagged the error. Investor conversations slowed. The CFO learned the hard way that optimistic assumptions have real costs.

Breakage, Returns, and Refund Liabilities

Another wrinkle in variable consideration is the treatment of breakage and refunds. Breakage refers to revenue from services the customer is entitled to but never uses—such as prepaid credits or gift cards. If you can reasonably estimate that a portion will not be redeemed, ASC 606 allows recognition proportionate to usage.

But this estimate must be backed by experience. New companies, without sufficient redemption history, must wait. I’ve seen startups attempt to recognize breakage on unused professional services or training hours. Without historical support, those recognitions do not hold.

For refund liabilities, ASC 606 requires that you book a liability and a corresponding asset for expected returns. The asset reflects your right to recover the product or service. This is not just an accounting nuance—it affects your balance sheet. It also affects how boards interpret margin quality.

Systems Must Catch Up to Policy

Policies mean little if your systems cannot enforce them. If your ERP or revenue platform does not track rebates, refund rights, or tiered pricing, your accruals will break down. If your deal desk grants concessions without visibility to finance, revenue misstatements will multiply.

One logistics platform I worked with offered usage-based fees that scaled down after 10,000 shipments. But the billing system lacked tier logic, and the finance team booked revenue based on list price. During audit, we had to create a manual waterfall of credits. It delayed close by four weeks. It cost audit fees. It nearly killed a strategic funding deal.

The lesson was clear. If variability drives your pricing, your systems must drive your accounting.

Internal Controls and Variable Revenue

Estimates create judgment. Judgment invites risk. That is why ASC 606 requires that companies apply consistent estimation methodologies, document assumptions, and reassess regularly.

At board level, this means CFOs should disclose estimation models for high-variability items. At controller level, it means maintaining memos, schedules, and audit trails. And at systems level, it means validating that booking logic reflects real-world terms.

One of the best-run SaaS firms I worked with held a quarterly revenue assumptions meeting. We reviewed each type of variable consideration, updated models with real data, and adjusted estimates prospectively. The auditors noted the discipline. So did the board.

Where Startups Often Get It Wrong

First, by ignoring variable consideration entirely and booking revenue at list price. Second, by estimating too aggressively without applying the constraint. Third, by failing to reassess assumptions as new data emerges. And fourth, by treating documentation as an afterthought.

Variable consideration is not an edge case. It is the norm. And ignoring it damages credibility.

Embrace the Estimate. Defend the Logic. Protect the Business.

ASC 606 does not forbid estimates. It demands they be grounded. It does not require conservatism. It requires consistency. Finance teams that embrace this discipline improve their close processes, enhance transparency, and win investor trust.

In the end, the goal is not to maximize short-term revenue. It is to reflect reality—predictably, defensibly, and with the full weight of your internal systems supporting the judgment.

Revenue is not a number. It is a signal. Make sure yours is honest.