Revenue cut-off and variable consideration at a machinery manufacturer
Balkan Hydraulics AD (functional currency BGN, EUR-pegged) signs a contract on 1 November 2025 to deliver 12 hydraulic press units for a fixed price of BGN 240,000 each, total BGN 2,880,000. Delivery is scheduled in three batches: 4 units on 20 December 2025, 4 on 15 February 2026, 4 on 30 April 2026. Each batch is a distinct performance obligation satisfied at a point in time. The contract includes a retroactive volume rebate: if cumulative deliveries exceed 10 units by 31 December 2026, the price of every unit falls to BGN 225,000, refundable in cash. Management assessed on 1 November that exceeding 10 units was 70% likely. By 31 December 2025, 4 units have been delivered and accepted; a component shortage makes the February batch uncertain, and management revises the probability of reaching 11+ units to 45%. The finance director has already booked BGN 960,000 of revenue for the December batch and refuses any adjustment, arguing the rebate is only a 2026 event.
1. Quantify the correct revenue for the December 2025 batch and explain the treatment of the rebate under IFRS 15, including the change in estimate.
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The rebate is variable consideration and must be estimated and constrained at contract inception, not deferred to the year it becomes payable. On 1 November, expected value of the rebate is 70% x (BGN 240,000 - 225,000) x 12 = 70% x 180,000 = BGN 126,000, giving transaction price BGN 2,754,000, or BGN 229,500 per unit. Because the constraint requires a high probability that no significant reversal occurs, the 70% estimate is only accepted to the extent it is highly probable; a 30% chance of reversal on BGN 180,000 is material, so a more conservative constrained amount should be applied.
At 31 December 2025, the estimate is updated to 45%. Expected rebate = 45% x 180,000 = BGN 81,000; transaction price BGN 2,799,000; per-unit price BGN 233,250. Revenue for the 4 delivered units = 4 x 233,250 = BGN 933,000.
Journal: Dr Revenue / Cr Contract liability (refund liability) BGN 27,000 to reduce the BGN 960,000 already booked. The change is a change in accounting estimate applied prospectively under IAS 8. The director's position is wrong: IFRS 15.56-58 require updating the transaction price at each reporting date, and the cumulative catch-up is recognised in the period of change. Note also that only 4 of 12 units are delivered, so no refund is yet due in cash; the liability is a refund liability, not a payable.
2. Assume instead that by 31 December 2025 the entity concludes the 11-unit threshold is 90% likely. Recompute revenue and explain how the constraint interacts with the highly probable test.
Read the worked answer
At 90%, expected rebate = 0.90 x 180,000 = BGN 162,000; transaction price = 2,880,000 - 162,000 = BGN 2,718,000; per unit BGN 226,500; revenue for 4 units = BGN 906,000.
However, the constraint is not a mechanical expected-value calculation. IFRS 15.56 requires that it be highly probable that a significant reversal will not occur when the uncertainty resolves. With 10% probability of no rebate, the maximum reversal exposure is 162,000 x 10% = BGN 16,200, which is immaterial relative to contract value, so recognising the full expected rebate is defensible. The examiner's point is that the constraint is a separate judgement layered on top of expected value: a high probability of the rebate being payable supports recognising the reduced price, while a low probability supports recognising more revenue. Document the assessment each period, because the 45% scenario in the first task would have required constraining the rebate to a smaller amount than the expected value.