Revenue, variable consideration and lease classification at a first-time IFRS adopter
Shymkent-based distributor Zhanat Trade LLP is preparing its first IFRS financial statements for the year ended 31 December 2025. In November 2025 it signed a contract with a retail chain to supply, install and maintain 40 refrigeration units for total consideration of KZT 120 million. The contract specifies equipment KZT 90 million, installation KZT 15 million and three-year maintenance KZT 30 million. The customer pays KZT 40 million on signing and the balance in equal annual instalments over two years. The contract also promises a rebate of up to KZT 10 million if the chain purchases more than 500 units over the next 18 months. Zhanat's historical experience with similar rebates is that the target is met 70% of the time. Equipment transfers when installed and accepted; installation takes two weeks and is not complex. Zhanat also leases a warehouse for five years at KZT 1.2 million per month. The lease has no purchase option; the lessor may terminate only on payment of a penalty equal to six months' rent. The finance director asks whether the lease can be treated as short-term and whether the rebate should be recognised only when the target is achieved.
1. Allocate the KZT 120 million transaction price to the performance obligations and state when Zhanat should recognise revenue for each. Show the allocation calculation and explain any judgement about whether installation is a separate performance obligation.
Read the worked answer
First identify the promises: equipment, installation and three-year maintenance. Installation is not complex and the equipment transfers only when installed and accepted, so the customer may not be able to benefit from the equipment without installation. On those facts, equipment and installation are likely a single combined performance obligation; maintenance is distinct because the customer can benefit from it separately and it is not highly integrated with the equipment. If installation were separately identifiable, the allocation would differ, so document the judgement.
Standalone selling prices: combined equipment and installation KZT 105 million; maintenance KZT 30 million; total KZT 135 million. The KZT 15 million discount is allocated proportionately:
- Equipment and installation: 120 x 105/135 = KZT 93.33 million.
- Maintenance: 120 x 30/135 = KZT 26.67 million.
Revenue for equipment and installation is recognised at acceptance, when control transfers. Maintenance revenue is recognised over the three-year service period, normally on a straight-line basis unless the pattern of benefit differs. The rebate is variable consideration and reduces the transaction price; it must be estimated and allocated to the performance obligations before revenue is recognised, subject to the constraint.
2. Evaluate whether the volume rebate should be included in the transaction price at inception and explain the constraint. Also assess whether the contract contains a significant financing component.
Read the worked answer
The rebate is consideration payable to the customer and therefore reduces revenue. Because there are two possible outcomes, the expected value method is appropriate: KZT 10 million x 70% = KZT 7 million expected rebate. That amount is included in the transaction price only to the extent it is highly probable that a significant reversal will not occur when the uncertainty is resolved. A 70% historical hit rate is evidence, but it is not conclusive; Zhanat should consider whether the 500-unit target is achievable, whether the customer's behaviour is comparable and whether the rebate has a long history. If the constraint is met, the KZT 7 million is allocated proportionately and revenue is reduced at inception, not only when the target is achieved.
On financing: the customer pays KZT 40 million upfront and KZT 80 million over two years. The period between transfer of the equipment and the final payment is more than one year, so a significant financing component may exist. Zhanat should adjust the promised consideration for the time value of money using a discount rate reflecting the credit characteristics of the customer, unless the practical expedient applies because the period is one year or less. The interest element is recognised separately from revenue.
3. The finance director proposes to treat the warehouse lease as short-term and to recognise the rebate only when the target is achieved. Critically evaluate both proposals.
Read the worked answer
The lease proposal is not acceptable. The lease term is five years, so it is not short-term; the short-term exemption applies only to leases of 12 months or less. The six-month termination penalty does not make the lease cancellable for accounting purposes because the lessee does not have the unilateral right to terminate without significant penalty. Unless the warehouse is low-value, Zhanat recognises a right-of-use asset and a lease liability, with depreciation and interest, rather than expensing rent.
The rebate proposal is also inconsistent with IFRS 15. Variable consideration is estimated at contract inception and constrained, not ignored until the trigger is met. Waiting until the target is achieved would overstate revenue in 2025 and 2026 and create a liability only at the last moment, which is not faithful representation. The correct approach is to estimate the expected rebate, apply the constraint, allocate it to the performance obligations and remeasure at each reporting date. The finance director's approach may be simpler, but it is not IFRS-compliant and would need to be corrected in the audit.