My customer isn’t paying … now what?

Revenue recognition is a fundamental principle in financial reporting, ensuring the revenue is recorded in the correct accounting period and at the correct value. This becomes quite complex when you’re uncertain about collecting what is due.

IFRS 15 Revenue from Contracts with Customers provides guidance on what to do when you’re dealing with a customer who’s slow to pay – or might not pay at all. We’ll walk through three possible scenarios, depending on how likely it is that you’ll actually collect the money.

1. When you can’t recognise revenue yet

IFRS 15 sets out five criteria for recognising revenue from a contract. One of the big ones? You need to be able to identify the contract, and to do that… you need to be reasonably sure you’ll get paid. The Basis of Conclusions to IFRS 15 explains that the collectability criterion serves to confirm that the contract is valid and represents a genuine transaction and that entities would usually only enter into revenue transactions when it is probable[1]that they will receive the consideration due. If it’s not probable that the customer will pay up, then you shouldn’t recognise revenue - even if you’ve delivered the goods or services.

So, what happens when this is not the case?

Evaluating collectability

Sometimes, businesses go ahead with a sale or service even when they know payment may not be as and/or when agreed. In those cases, IFRS 15 says: hold off on recognising revenue. For long-term contracts, where a contract meets the criteria to recognise revenue, it does not need to be reassessed unless there is a significant change in facts and circumstances… and things can change. If the customer’s financial health takes a dive, or “politics” come into play, you may need to hit pause on revenue recognition. If the contract doesn’t meet the probability criterion, revenue should not be recognised as the performance obligation is satisfied, except as explained later.

The collectability criterion should be reassessed on a continuous basis to determine if/when it is met again.

What if you’ve already received some money?

If you’ve received payment but the contract doesn’t meet IFRS 15’s criteria, that money should be recorded as a liability – not revenue. You can only recognise it as revenue later if:

(b)    You’ve received all (or nearly all) of the payment, it’s non-refundable, and you don’t owe the customer anything else.

(b)    The contract has been terminated, and the payment is non-refundable.

This approach is similar to the “cash or deposit method” – you only recognise revenue when the money is in hand and there’s nothing left to deliver.
^{1_{In the context of IFRS® Accounting Standards, probable is defined as “more likely than not”.}}

2. When you need to account for doubtful debts

Let’s say you’ve already recognised revenue, but now the customer’s payment looks shaky. In this case, IFRS 9 kicks in. You’ll need to assess the trade receivable for impairment using the expected credit loss (ECL) model.

This means estimating how much of the receivable (or contract asset) might not be collected, based on current information and future expectations, and recording a loss allowance. It’s a way to reflect the credit risk in your financials.

It is, however, important to note that this is a short-term solution, where you’ve been recognising revenue over a longer period that must be written off, you might need to consider if the revenue recognition should have stopped earlier.

3. When you’re accepting less than you expected

Sometimes, you might agree to accept less than originally contracted – maybe to keep the customer relationship going or because they’re facing financial trouble, you might still cover your costs … and something is better than nothing right? This is called a price concession.

Under IFRS 15, you’ll need to figure out whether this concession changes the contract (a contract modification) or should be accounted for as variable consideration. If it’s the latter, you’ll need to estimate how much you expect to receive and only recognise revenue when it’s highly probable that you won’t have to reverse it when the uncertainty is resolved.

Putting it into practice

So how do you decide which path to take? It depends on the timing and the facts. Factors such as the customer’s payment history, current financial condition, and any communication indicating liquidity challenges should be considered:

• If you’re unsure about payment from the start, you might not have a valid contract (Option 1) or you might be dealing with a price concession (Option 3). Revenue should not be recognised until the uncertainty is resolved.
• If significant doubt arises or there is a significant change during a long-term contract, you may need to stop recognising revenue (Option 1) or reassess for a concession (Option 3).
• If the customer’s payment becomes doubtful after you’ve already recognised revenue, it’s time to look at impairment (Option 2).

Conclusion

Revenue recognition gets tricky when customers don’t pay. But IFRS 15 gives us a roadmap. By staying alert to payment risks and applying the right accounting treatment, you can keep your financials accurate… and avoid surprises down the line.

Author:

Sonica Schoeman, Director