Revenue recognition: bill-and-hold and variable consideration under IFRS 15
Semey Agro Processing LLP (Kazakhstan) sells grain-processing equipment. In December 2025 it recognised revenue of KZT 620 million on a contract with a customer. The facts are: (a) the equipment was completed and invoiced on 20 December 2025, but the customer asked for it to be stored in the seller's warehouse until April 2026 because its new plant is not ready; (b) the customer has paid a 10% deposit and signed an acceptance certificate; (c) the contract includes a 5% volume rebate if the customer purchases more than 10 units over 24 months, and historically 70% of similar customers reach the threshold; (d) the contract also includes a 12-month warranty that covers both assurance-type and a separately priced maintenance service. The company recognised the full KZT 620 million in December 2025 and no rebate provision.
1. Assess whether the December 2025 revenue recognition is appropriate under IFRS 15, addressing the bill-and-hold arrangement.
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Recognition in December 2025 is not automatically appropriate. Under IFRS 15, revenue is recognised when control transfers. For a bill-and-hold arrangement, all of the following must be met:
- The reason for the arrangement is substantive (e.g. customer's request) - here, the customer's plant is not ready, which may be substantive, but must be evidenced.
- The product is separately identified as belonging to the customer - the equipment must be segregated and not available to serve other customers.
- The product is ready for delivery - completed and tested.
- The seller cannot use the product or direct it to another customer.
- The payment terms are consistent with a sale (not, e.g., a deposit only).
Assessment:
- The 10% deposit is not consistent with a completed sale; the customer has not paid substantially all of the price.
- The equipment must be physically segregated and marked as the customer's; if it remains in general inventory, criterion 2 fails.
- The acceptance certificate alone does not establish control transfer.
Conclusion: Unless all five criteria are documented and evidenced, revenue should not be recognised in December 2025. The amount should be deferred (contract liability) until control transfers, likely April 2026. The auditor should obtain the bill-and-hold agreement, evidence of segregation, and the customer's written confirmation.
2. Calculate and explain the treatment of the volume rebate and the warranty, and quantify the adjustment to revenue if the rebate must be accrued.
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Volume rebate (variable consideration):
- The rebate is a variable consideration that reduces the transaction price. It must be estimated using the expected-value or most-likely-amount method and constrained so that a significant reversal is not probable.
- Expected value: 70% probability of reaching the threshold × 5% rebate = expected rebate of 3.5% of the contract price.
- On KZT 620 million: 620 × 3.5% = KZT 21.7 million should be recognised as a refund liability / reduction of revenue, with a corresponding reduction in the receivable or increase in contract liability.
- If the rebate is probable and can be reliably estimated (history supports 70%), it should be accrued at contract inception and updated each reporting date.
Warranty:
- The assurance-type component (standard 12-month warranty that the product meets agreed specifications) is accounted for under IAS 37 as a provision, not as a separate performance obligation.
- The separately priced maintenance service is a distinct service and must be separated as a separate performance obligation; revenue is recognised over the service period (12 months).
- The transaction price must be allocated to the equipment and the maintenance service based on relative standalone selling prices.
Adjustment: Revenue for December 2025 should be reduced by the rebate accrual of KZT 21.7 million and by the amount allocated to the maintenance service, which is deferred and recognised over time. The auditor should test the rebate estimate against historical data and assess the standalone selling price allocation.