Advance payment to purchase Property, plant and equipment

This is an example presented in IFRIC 22 Foreign Currency Transactions and Advance Consideration.

These examples accompany, but are not part of, IFRIC 22.

In these examples, foreign currency amounts are ‘Foreign Currency’ (FC) and functional currency amounts are ‘Local Currency’ (LC).

The objective of these examples is to illustrate how an entity determines the date of the transaction when it recognises a non-monetary asset or non-monetary liability arising from advance consideration in a foreign currency before it recognises the related asset, expense or income (or part of it) applying relevant IFRSs.

Example 1—A single advance payment for the purchase of a single item of property, plant and equipment

On 1 March 20X1, Entity A entered into a contract with a supplier to purchase a machine for use in its business. Under the terms of the contract, Entity A pays the supplier a fixed purchase price of FC1,000 on 1 April 20X1. On 15 April 20X1, Entity A takes delivery of the machine.

Entity A initially recognises a non-monetary asset translating FC1,000 into its functional currency at the spot exchange rate between the functional currency and the foreign currency on 1 April 20X1. Applying paragraph 23(b) of IAS 21 The Effects of Changes in Foreign Exchange Rates, Entity A does not update the translated amount of that non-monetary asset.

On 15 April 20X1, Entity A takes delivery of the machine. Entity A derecognises the non-monetary asset and recognises the machine as property, plant and equipment applying IAS 16 Property, Plant and Equipment. On initial recognition of the machine, Entity A recognises the cost of the machine using the exchange rate at the date of the transaction, which is 1 April 20X1 (the date of initial recognition of the non-monetary asset).