Variable consideration (bonuses, discounts, penalties) adds complexity to IFRS 15 revenue. This guide covers the two estimation methods, the critical "highly probable" constraint test, and the audit pushback you'll face.
Two Estimation Methods
| Method | When to Use | Example |
|---|---|---|
| Expected Value | Many possible outcomes; high variability | Discount applies if customer orders hit targets: 5 scenarios, prob-weighted |
| Most Likely Amount | Two outcomes; low uncertainty | Either hit target (bonus applies) or don't (no bonus); 80% probability of hit |
The Constraint: Highly Probable Test
Rule: Include variable consideration in revenue ONLY if it's "highly probable" it won't be reversed later.
Highly probable = 85%+ confidence (guidance indicator; not a hard rule)
Worked Example: Performance Bonus
Scenario: Company contracts to deliver services for £100k + performance bonus up to £20k.
- Bonus trigger: Hit service delivery KPIs
- Historical hit rate: 70%
- Expected value: (70% × £20k) + (30% × £0) = £14k
- Highly probable test: Is £14k highly probable? NO. 70% is below 85% threshold.
- Constrained revenue: £100k + £0 = £100k (exclude the bonus)
- Reversal risk: Too high. At year-end, if KPIs are met, adjust revenue up to £114k.
Audit Red Flags
- Overestimated bonuses: Company includes £20k bonus without proper constraint analysis
- No evidence of "highly probable": No documentation of hit rate or risk assessment
- Bonus reversal at year-end: Audit adjusts revenue downward when targets aren't met
Real-Life Case Study: A Volume Rebate That Constrains Revenue
Scenario. A supplier sells goods at £100/unit but gives a 5% retrospective rebate on all units if the customer buys over 10,000 in the year. Based on history, hitting the threshold is highly probable.
Treatment. Variable consideration is estimated and constrained so that a significant reversal is not likely. The supplier books revenue at £95/unit from the outset and recognises a refund liability for the expected rebate, rather than £100 now and a big reversal later.
Takeaway. The constraint is the safety valve: estimate the discount you expect to give and record revenue net of it from day one. Recognising gross and "sorting it out at year end" overstates revenue and invites a restatement.
Illustrative composite scenario for educational purposes. Figures are indicative and do not represent any specific company.
• IFRS 15 Performance Obligations: Identifying Distinct Goods & Services
• IFRS 15 Contract Assets & Liabilities: Timing Differences & Disclosure
• IFRS 15 Over-Time vs Point-in-Time Revenue: Decision Framework