Real-World Examples Across Industries
Applying complex accounting standards often comes to life when looking at specific industries. Each industry has its own typical transactions and risks that call for nuanced decision-making. Below are several global examples illustrating how professional judgment is exercised in practice:
- Technology & Software: A global software company selling multi-element arrangements (software license, implementation services, and ongoing support) under IFRS 15 must determine how to allocate revenue. They judge that the license and support are distinct performance obligations, so revenue for the license is recognized upfront when delivered, and support is deferred over time. This judgment significantly affects the timing of revenue. In the 2000s, some software firms aggressively recognized most revenue upfront by claiming services were minimal, only to face restatements when regulators or auditors later concluded the services were significant and should have been separate (thus much of the revenue should have been deferred). Today, companies use decision frameworks to evaluate each contract: e.g. are implementation services routine or do they significantly customize the product? Such qualitative judgments decide revenue timing. Another tech example is intangible asset impairment: a smartphone manufacturer that acquired a startup for its technology might carry goodwill or capitalized R&D. If a competitor’s innovation renders that technology less valuable, the company must quickly assess if the asset is impaired. In 2018, for instance, a big tech firm had to write down part of its goodwill from an acquisition because the expected synergies in a new market didn’t materialize. The decision involved projecting future cash flows from the acquired business and admitting they wouldn’t meet original hopes. Tech markets shift rapidly, so judgments about longevity of product cash flows are critical – companies that are candid and proactive in impairing obsolete tech assets tend to maintain more credibility than those who delay until losses accumulate.
- Manufacturing & Construction: A construction contractor working on infrastructure projects (bridges, roads) under IFRS 15 uses percentage-of-completion to recognize revenue. Judgment is needed to estimate total costs and project completion. In one case, a contractor building a bridge encountered geological issues doubling the cost. According to IFRS 15, as soon as that became evident, the company had to update its estimates – resulting in recognizing a loss on the project (because the cost to complete now exceeded revenue). If management had been too optimistic (judging the issues as minor at first) and delayed updating, it might have continued recognizing profit only to reverse it later dramatically. Indeed, there have been real cases: for example, a large international contractor disclosed a significant write-down on a major project due to “revised estimates,” essentially acknowledging prior estimates were overly optimistic. This shows how judgment in estimating is ongoing. Another manufacturing scenario: a car manufacturer assessing if its dealer incentives and rebates (sales discounts) trigger revenue reversal under IFRS 15’s variable consideration guidance. They use judgment to estimate future rebate claims based on past patterns. If they underestimate (judgment error), revenue will be overstated initially and need correction. That happened with some auto companies that had to adjust revenues when actual rebate uptake was higher than assumed.
- Financial Services (Banking): Banks arguably face the most continuous judgment calls. Under IFRS 9, a European bank during the COVID-19 pandemic had to decide how to treat loans under payment moratoria. As mentioned, many banks applied management overlays. For example, Bank X decided to assume a certain percentage of loans in hospitality sectors under moratorium would eventually default and moved them to Stage 2 (lifetime loss) even if they weren’t 30 days past due (given government programs allowed deferral). Another Bank Y might have waited for actual delinquency after programs ended. The result: Bank X showed higher provisions earlier, Bank Y increased provisions later. Regulators, like ESMA in Europe, explicitly told banks that use of moratoria should not automatically trigger SICR, but also that banks should not assume all is well – they should exercise informed judgment using portfolio analysis and macro cues. There was also variation in how banks incorporated multiple economic scenarios. Some used three scenarios, some five, with different weights. When vaccines emerged in late 2020, some banks quickly adjusted their worst-case weight down, others waited for more certainty. These subtle differences in judgment cumulatively led to different provisioning levels. Despite all banks following the same standard, the human element introduced divergence – a clear real-world testament to the role of professional judgment. Over time, these differences even out (loans either default or not), but interim financial statements can differ. Investors and analysts learned to parse disclosures deeply (e.g. scenario assumptions, sector-specific overlays) to truly understand a bank’s numbers. This trend is pushing for even more disclosure standardization.
- Financial Services (Insurance): Insurers under IFRS 17 (a new standard as of 2023) and IFRS 9 also have significant judgment. For example, in setting discount rates for insurance liabilities and risk adjustments, management choices can affect profit emergence. Insurers must use judgment to estimate how interest rates might affect long-term liabilities, and whether to lock in assumptions or update them. Different firms have taken different approaches in the transition, requiring careful explanation in their financial reports. Although IFRS 17 is beyond our main scope, it’s worth noting as another area where principles require much judgment (especially in dividing changes between profit or OCI).
- Retail & Consumer Goods: A retail chain implementing IFRS 16 faced the earlier mentioned lease term judgments. One international retailer disclosed that it generally assumed lease extensions for its high-performing stores due to strategic importance, which increased its average lease term. A peer took a more cautious approach, only counting signed contractual terms. As a result, the first retailer showed larger lease liabilities (and assets) on the balance sheet. Without context, one might think it had more debt, but in fact it was partly due to a difference in judgment policy. Both disclosed their approach, allowing analysts to adjust comparisons. Retailers also contend with revenue recognition judgments around customer loyalty programs (IFRS 15 requires part of the revenue to be allocated to loyalty points as a separate performance obligation). Estimating the stand-alone selling price of loyalty points (i.e. the future benefit to the customer) is judgmental. Many retailers use past redemption rates and customer behavior analytics to estimate this. If they guess too low, they’d recognize too much revenue upfront and face a correction later when more points are redeemed than expected. For example, a global coffee chain initially estimated only X% of points would be redeemed, but if an unexpected surge in loyalty usage occurs, they have to adjust their liability (deferring more revenue). This happened during some promotional pushes – companies had to refine their estimates, showing again how judgment is updated with experience.
- Oil & Gas / Natural Resources: These industries often see impairment judgments under IAS 36 when commodity prices swing. Take 2020: oil prices briefly went negative, and many energy companies had to judge whether that was a short-term anomaly or indicative of a longer slump requiring impairments. Some companies did large write-downs on reserves and goodwill, expecting a sustained low price environment (e.g. BP and Shell wrote off billions, citing a transition to renewables and weaker long-term oil demand outlook – a judgment about the future). Others took a smaller hit, implicitly judging that prices would recover. Indeed by 2021 oil prices rebounded sharply, and some that were conservative found themselves potentially reversing impairments or enjoying higher profits on fully written-down assets. Another example: mines are impaired or not based on long-term metal price forecasts – management may use industry consensus or their own internal view. In countries with regulators or auditors closely reviewing, companies might converge on similar forecast ranges, but there is room for judgment. These decisions can have significant impact on local communities and investors as well, since an impairment might signal a mine will close sooner (affecting jobs and supply contracts). It shows the broad impact of what might seem like an “accounting” judgment.
Overall, these examples underscore that while the standards provide the structure, it is the judgment of professionals that determines how those standards manifest in financial reports. The context of each industry – be it tech’s rapid innovation, banking’s risk management, or retail’s lease strategy – shapes the judgments that need to be made. A consistent thread is that transparency about these decisions helps stakeholders understand and trust the outcomes. Companies that share their assumptions (like scenario weights, or reasons for treating a contract in a certain way) allow users to see the link between the business reality and the accounting result, which is the ultimate aim of principle-based standards.