Performance bonuses: estimate the fee, then test the revenue constraint
A service contract pays £100,000 plus a £20,000 completion bonus. At the first close, management expects to earn the bonus, but a substantial outside approval remains uncertain. Calling the bonus likely does not settle how much revenue to recognise. UK-adopted IFRS 15 requires an estimate of variable consideration and a separate assessment of whether including it could cause a significant revenue reversal. In this hypothetical case, the transaction price at the first close includes no bonus.
Choose the estimation method for the uncertainty
IFRS 15 paragraphs 50 to 54 require an estimate of variable consideration. The entity uses either expected value or the most likely amount, choosing whichever better predicts the consideration to which it will be entitled. Expected value weighs possible outcomes. The most likely amount selects the single most likely outcome and can suit a contract with a binary bonus.
Use the selected method consistently for the same uncertainty. A management comment that the bonus is 80% likely does not by itself mean that £16,000 should enter the transaction price. If the most-likely-amount method is appropriate, the amount estimate for a £20,000-or-nothing bonus may be £20,000. The constraint is a further test, not a reason to switch methods.
Sources and context, checked :
Ask how a reversal could happen
Paragraph 56 includes estimated variable consideration only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur when the uncertainty is resolved. Assess both the likelihood and the magnitude of a reversal. There is no prescribed 80% or 90% numerical threshold in this guidance.
Paragraph 57 identifies factors that increase reversal risk. They include matters outside the entity's influence, a long period before resolution and limited or weakly predictive experience with similar contracts. The evidence needs to address the actual uncertainty. A forecast of successful delivery may say little about an unresolved third-party approval.
The constraint does not require every uncertain bonus to be excluded until cash arrives. Some or all may be included when the evidence supports the required conclusion. This article addresses an ordinary qualifying service contract under UK-adopted full IFRS. Sales- or usage-based royalties for intellectual-property licences have specific guidance in paragraph B63, referenced by paragraph 58.
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Two closes, different evidence
Assume one integrated service obligation qualifies for over-time recognition and its progress measure faithfully depicts performance. The base fee is £100,000 and the binary bonus £20,000. At the first close, progress is 50%. The most likely amount is the full bonus, but substantial outside approval uncertainty means including it fails the constraint. All £20,000 is excluded on these stipulated facts.
The transaction price is therefore £100,000 and cumulative revenue is £50,000. At the next close, progress reaches 75% and improved evidence supports including the whole bonus because the significant-reversal constraint is now met. The revised transaction price is £120,000 and cumulative revenue becomes £90,000.
Current-period revenue is £90,000 less the £50,000 already recognised, or £40,000. That consists of £25,000 from additional base-fee progress and £15,000 from the bonus becoming includable at 75% completion. Recognising the full £20,000 bonus at that point would ignore the remaining service.
| Measure | First close | Next close |
|---|---|---|
| Faithful progress | 50% | 75% |
| Bonus included in transaction price | £0 | £20,000 |
| Total transaction price | £100,000 | £120,000 |
| Cumulative revenue | £50,000 | £90,000 |
| Revenue since previous close | £50,000 | £40,000 |
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Allocation and collection are separate questions
Paragraph 59 requires the estimated transaction price and the constraint to be updated at each reporting period end. Paragraphs 87 to 89 address changes in transaction price, including amounts allocated to performance already satisfied, which are recognised in the period of change.
The worked example has only one obligation. In a contract with several obligations or a series of distinct services, do not automatically spread every bonus across the whole contract. Paragraphs 84 to 86 permit a variable amount to be allocated entirely to a particular obligation or distinct service only when the specified conditions are met.
Nothing in the example implies a cash receipt or decides whether the balance is a receivable. The question of what fee has been earned is also separate from credit impairment under IFRS 9. Tax, financing, other obligations and costs are excluded from the illustration.
Keep two conclusions in the close file
For each open bonus, write the predicted amount and method on one line and the constraint conclusion on another. Attach the relevant trigger, outside approvals, expected resolution date and evidence supporting the possible reversal. At the next close, change those conclusions only for a stated reason, apply current progress and allocation, and deduct revenue already recognised.