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ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue

Orla Co's finance director proposes to record the full expected $400,000 performance bonus from a customer as revenue in the current year to help meet a lender's covenant, even though the audit team believes a significant reversal is reasonably possible. Which response best reflects IFRS 15 and ethical reporting requirements?

Orla should apply the variable consideration constraint and exclude the bonus, because a significant reversal is reasonably possible. Covenant pressure does not justify aggressive estimates and threatens professional integrity and objectivity, so the accountant should escalate the matter to those charged with governance if the pressure persists.

  1. AAccept it, as management is responsible for estimates
  2. BRecognise the bonus because the covenant makes it commercially necessary
  3. CRecognise half the bonus as a compromise between the two views
  4. DApply the constraint and exclude the bonus, and raise the matter with those charged with governance if the pressure continuesCorrect

Explanation

Where a significant reversal is reasonably possible, the highly probable test is not met, so the constraint requires exclusion. Covenant pressure is not a basis for estimates, and it raises an integrity and objectivity threat for the accountant. Compromising at half has no IFRS basis, and escalation is the appropriate ethical step.

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