Prompt-payment discounts and revenue
How IFRS 15 treats a discount a client offers for early payment, what changes when a customer takes it later, and how to handle open discounts at year end.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Plenty of wholesalers, distributors and building suppliers offer their trade customers a small discount for paying quickly. It is a sensible way to bring cash in sooner. In the ledger it usually shows up as a "discount allowed" expense, recorded when the customer pays and claims it, somewhere below gross profit.
IFRS 15 sees it differently. A discount the customer may or may not take makes the price uncertain at the moment of sale, and the standard has rules for uncertain prices. Treating the discount as an expense when taken, rather than as part of revenue, can overstate revenue and misplace the cost. This article covers how the standard frames settlement discounts, the two ways of recording them, and what to do about discounts still open at year end.
Settlement discounts as variable consideration
Under IFRS 15, if the consideration promised in a contract includes a variable amount, an entity must estimate the amount of consideration to which it expects to be entitled for transferring the goods or services. IFRS 15 describes the transaction price as that amount.
A settlement discount is exactly that kind of variable amount. ACCA explains that IFRS 15 treats a settlement, or prompt payment, discount as variable consideration. At the point of sale the client does not know whether it will receive the full invoice amount or the discounted one; that depends on what the customer does next. The revenue figure has to reflect the client's expectation.
ACCA also explains how variable consideration is estimated: either as the expected value or as the most likely amount, and it is included in the transaction price only to the extent that it is highly probable that a significant reversal of revenue will not occur. For settlement discounts, a client selling to many customers on the same terms will usually find the expected value approach natural, based on its history of which customers take the discount. A client with one large customer may find the most likely amount more appropriate.
Expected to be taken: revenue net of it
ACCA sets out the first case: if the customer is expected to take the discount, revenue is recorded net of it. The client recognises revenue at the discounted amount from the start, and the receivable is recorded on the same basis.
If the customer then pays within the discount period, as expected, the receipt clears the receivable with nothing left over. If, unexpectedly, the customer pays the full amount after the discount period, the extra amount is recognised as revenue at that point.
This approach suits customers with a reliable record of paying early. A building supplier whose large contractor customers always take the discount, because their own procedures require it, is a clear example.
Not expected: revenue in full, reduced if taken
The second case, also from ACCA: if the customer is not expected to take the discount, revenue is recorded in full, and reduced only if the customer later takes the discount.
When the customer does pay early and take the discount, the reduction goes to revenue, not to an expense line. That is the practical change for many clients: "discount allowed" should not sit among operating expenses where IFRS 15 applies, because it is a reduction of the transaction price.
A worked example in words. A distributor sells to a retailer that has never paid early. Revenue is recorded at the full invoice amount. Unusually, the retailer pays within the discount period this time and deducts the discount. The distributor records the discount as a reduction of revenue in that period. Over the year, its revenue line shows the amount it actually earned from its customers, rather than a gross figure with the discounts hidden among expenses.
Discounts outstanding at year end
The year-end question is about invoices issued before year end where the discount period has not yet expired. For each significant group of such invoices:
- Identify invoices still within their discount period at year end.
- Estimate, from the customers' history, how many are likely to be paid early with the discount taken.
- Compare the estimate with how revenue was recorded on those invoices.
- Where revenue was recorded in full but the discount is now expected to be taken, reduce revenue and the receivable by the expected discount.
- Check the estimate against payments received shortly after year end.
The adjustment is often small, but for a client with large sales close to year end it can matter. Keep it separate from the allowance for credit losses on receivables, which deals with customers who may not pay at all and is covered in trade receivables impairment. Other forms of variable price, such as rebates and penalties, are discussed in variable consideration. The tax treatment of a discount, including any effect on VAT, is a separate question to settle under the rules of the client's own country.
Policy wording for clients that offer them
In Achekam's Studio, a year-end adjustment for expected discounts, or a reclassification of "discount allowed" from expenses to revenue, is posted as an adjusting entry against the client's trial balance. If it later turns out to be wrong, it is reversed with a record of who did it and why, rather than deleted.
The Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write the client's own policies. For a client that offers prompt payment discounts, the revenue policy should say that revenue is measured at the consideration the company expects to be entitled to, net of settlement discounts expected to be taken, and that discounts taken unexpectedly reduce revenue when they occur. Notes take their figures from the mapped trial balance, so map any "discount allowed" account to revenue rather than to expenses before the draft is reviewed.
ACCA's article on trade receivables and revenue explains how credit sales create trade receivables and how a prompt payment discount is treated. Look at where "discount allowed" sits in the client's trial balance this year; that line usually tells you whether the question has been considered.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
