How revenue recognition games inflate bonuses - and how to stop them
There’s an old truth in corporate life: what you measure, you get. And what you pay for, you get more of. Many executive bonuses ride on the twin steeds of revenue and profit. But when those are the scorecards, it doesn’t take a criminal mind to bend the numbers - it only takes a creative reading of the rulebook.
Enter IFRS 15, the accounting standard meant to govern when companies can book revenue. On paper, it’s about discipline. In practice, it’s elastic. Stretch it, and suddenly numbers shine, bonuses glitter, champagne corks fly - while the bill quietly waits in the drawer, due next year.
The tricks of the trade - in plain sight
The genius of these games is that none of them are hidden. They live right in the filings, in the daylight, described in tidy footnotes that no investor ever reads.
Book revenue before the cash arrives. Sign a fat contract in December, recognise a slice of it immediately, even though no invoice will go out until spring and the cash won’t hit the bank until summer.
Call a long project “finished” early. Declare victory while the customer is still running tests, and release deferred revenue straight into this year’s profit line.
Count chickens before they hatch. Assume renewals, assume milestones, assume usage - and call it “probable” revenue. If the customer fails to deliver, you reverse it later, long after bonuses are safe.
Re-label contracts to flatter this year. Hardware, software, support: slice and dice the bundle so more falls into the upfront column and less into the long tail.
Year-end deal sweeteners. Offer a discount, a freebie, or a sugar rush of easy terms just to close before 31 December. It flatters the top line today but leaves the cupboard bare tomorrow.
The punchline? It looks like growth. But really, it’s borrowing from the future.
What the balance sheet shows
The P&L is the novel, the sales pitch, the tale told to the market. The balance sheet is the ledger, the IOU, the quiet truth-teller in the corner. Look closely, and it betrays the games.
Deferred revenue. That’s money collected for work still owed. If it’s racing ahead of reported revenue, growth may not be clean.
Contract assets. That’s revenue recognised before billing or cash. If this line keeps swelling, management is pulling tomorrow’s rabbits out of the hat.
Cash versus revenue. A true win should ring the till. If the cash flow statement doesn’t keep pace with revenue, you’re watching theatre, not economics.
Three questions
Boards like big numbers. But boards also sign the cheques. Here are three questions every RemCo or audit committee should carve into the mahogany table:
How much of this year’s revenue is cash, and how much is an IOU?
Why is deferred revenue moving differently from reported revenue - and what does that say about the quality of growth?
Have we had to reverse revenue we once booked, and what assumptions drove those reversals?
The Conclusion
Bonuses tied only to the P&L invite executives to raid the future for today’s applause. The balance sheet is where the truth lives: it shows whether growth is earned or merely borrowed against tomorrow.
So let the board adopt this maxim: The P&L tells the story. The balance sheet shows the IOU.
And if you care about sustainable growth, pay attention to the IOUs - because one day, they come due.