Revenue Recognition Frauds for Lawyers: Discount and Rebate Manipulation
Revenue recognition is a central accounting principle that dictates when a company can record a sale and recognise revenue. Revenue is often used by internal and external stakeholders as a metric to determine a company’s worth, but if revenue recognition is deliberately manipulated, the fraud can carry financial, reputational and legal consequences. This article is part of a series explaining some of the most common forms of revenue recognition frauds. See here for an overview of revenue recognition and the potential consequences of its abuse.
Revenue recognition frauds – often reported as “accounting inconsistencies” – do not always involve fictitious sales or aggressive shipment practices. In many cases they arise from judgement-based accounting estimates, particularly where commercial arrangements are complex and span multiple reporting periods. Discount and rebate manipulation is one such example. It exploits the subjectivity inherent in accounting for incentives and allowances, enabling management to shift profit between periods without altering underlying cash flows.
This article explains how discount and rebate manipulation operates, distinguishes between incentives provided on sales and income received from suppliers, and highlights the recent WHSmith plc misstatement as a practical illustration of the risks involved.
Accounting for discounts and rebates
Discounts and rebates are particularly common across the retail, manufacturing and consumer goods sectors. They are typically contingent on future volumes, performance thresholds or promotional activity, making their accounting heavily dependent on estimates and assumptions.
From a revenue recognition perspective, discounts and rebates fall into two fundamentally different categories:
- Customer discounts and rebates: incentives on a company’s own sales
Customer discounts and rebates are amounts a company expects to pay to customers, usually based on future purchase volumes or performance targets.
Under IFRS 15, customer discounts, rebates, refunds, credits and performance bonuses are treated as variable consideration. Revenue must be recognised net of the variable amount, constraining revenue to what is “highly probable” to not reverse.
The usual effect of customer discount or rebate manipulation is an overstatement of net revenue, as a result of underestimating the amount of discounts and rebates that will be applied to current sales due to customers achieving revenue targets in the future, and therefore also overstating profit in the current period.
- Supplier discounts and rebates: incentives received from suppliers
Supplier discounts and rebates – often described by the overarching term “supplier income” – are payments or credits received from suppliers, commonly linked to purchasing volumes, promotional support or sales performance.
Critically, supplier income is not revenue. It should generally be accounted for as a reduction in cost of sales. Nevertheless, whilst it shouldn’t affect revenue, its treatment impacts profits reported each period.
Like customer discounts and rebates, supplier income should be recognised only when it is probable that the discount or rebate conditions, such as volume targets, will be met and the amount can be reliably estimated. Whilst a company may in practice accrue discounts or rebates as inventory is purchased, the likelihood of future performance must be reassessed each reporting period to ensure that discount or rebate amounts that are uncertain are not recognised.
Estimating supplier income can be difficult (leaving it more exposed to manipulation) due to dependence on future behaviour and complexities with agreements, such as meeting product mix conditions as well as volume, promotional or marketing conditions and/or overlapping agreements, and any data quality or systems limitations can exacerbate difficulties.
Manipulation often results in the reporting of inflated gross margin and operating profit without any improvement in trading performance, as supplier discounts and rebates are overestimated.
How discount and rebate manipulation occurs
Discount or rebate manipulation usually involves timing rather than fabrication. Common issues include:
- Recognising contingent supplier discounts or rebates based on unlikely future performance.
- Failing to accrue for customer discounts or rebates that are probable and estimable.
- Biasing estimates of variable consideration to smooth or accelerate earnings.
- Using manual period-end journal entries to override calculations.
Such practices can persist undetected for extended periods. When malpractice is finally detected it can cast doubt not only over the current period but also a company’s previously reported results, resulting in reputational damage, an erosion of investor trust, additional costs and restated prior periods.
WHSmith: a recent case of supplier income misstatements
In August 2025, WHSmith disclosed a material accounting error relating to supplier income in its North American business. The case has many similarities to the Tesco accounting scandal in 2014, which was also in relation to supplier income and which resulted in a £129m fine paid under the terms of a Deferred Prosecution Agreement with the Serious Fraud Office.
WHSmith recognised supplier income prematurely (which reduced costs and therefore increased profits) rather than deferring it until the relevant performance conditions were met, which was not consistent with the requirements of accounting standards. The company acknowledged that insufficient systems, controls and review procedures contributed to the errors arising and committed to strengthening controls, governance and reporting procedures.
The error resulted in an overstatement of profits in WHSmith’s FY23 and FY24 reported figures, requiring prior year adjustments to be recorded, and a sharp downgrade to profit expectations for FY25. The knock on consequences included a significant share price fall, the costs of an independent review and remediation plan, the group chief executive resigning, and an investigation opened by the Financial Conduct Authority in December 2025.
The case illustrates how supplier income accounting – when misapplied – can materially distort reported performance and lead to an existential crisis for a company.
Red flags of discount and rebate manipulation
Indicators of potential discount or rebate manipulation include:
- Margin improvements unsupported by cash flows.
- Significant or unusual adjustments to provisions near period-end.
- Manual journal entries affecting rebate balances with limited documentation.
- Complex discount or rebate arrangements managed outside core accounting systems.
- Insufficient or inaccurate calculations and documentation supporting recognition in the appropriate reporting period.
Forensic and legal considerations
When investigating discount or rebate-related misstatements, key questions include:
- Are discounts and rebates recognised in the same period as the underlying performance?
- Are estimates of variable consideration supportable and unbiased?
- Does post-balance sheet date activity prior to the signing of accounts support discount/rebate calculations?
- Is supplier income correctly classified as a contra against costs rather than recognised as revenue?
- Do internal controls adequately link commercial terms to accounting treatment?
Systematic misapplication may indicate wider aggressive accounting or fraudulent financial reporting, rather than isolated error.
In summary
Discount and rebate manipulation is a subtle but powerful form of revenue recognition fraud. Whether through overstated customer revenue or prematurely recognised supplier income, it enables management to reshape reported performance without changing economic reality. The recent case of WHSmith underlines the importance of clear policies, rigorous controls and disciplined estimation to safeguard the integrity of financial reporting.
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Learn more about other common types of revenue recognition fraud:
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