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An asset-manager contract pays a 2% quarterly management fee on AUM PLUS a 20% performance fee on returns above a market index over 5 years. AUM at Q4 = ₹100 cr. Under Ind AS 115, at the end of Q4 the manager should recognise revenue equal to:
A₹2 crore — the actual quarterly management fee resolved this period; the incentive fee remains constrained because market-driven outcomes don't yet meet the highly-probable-no-reversal test
B₹2 crore management fee + an expected-value estimate of the incentive fee over the full 5 years
CNil — both fees are variable and must be constrained until the 5-year contract expires
D₹3 crore — full quarterly management fee + a proportionate share of expected incentive
Answer & Solution
Correct answer: A. ₹2 crore — the actual quarterly management fee resolved this period; the incentive fee remains constrained because market-driven outcomes don't yet meet the highly-probable-no-reversal test
The management fee variability is resolved each quarter (the 2% × actual AUM = ₹2 cr) — that's recognised. The performance fee is market-driven, with a broad range of outcomes and limited predictive experience, so the entity cannot conclude it is highly probable that a significant reversal won't occur. The performance fee remains constrained; only the quarterly management fee is recognised.
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