Advance payment to purchase Property plant and equipment

Advance payment to purchase Property plant and equipment is an example presented in IFRIC 22 Foreign Currency Transactions and Advance Consideration. Other examples are: Multiple advances and multiple service deliveries, Multiple advances and multiple deliveries of goods and Multiple advances for one delivery of goods.

These examples accompany, but are not part of, IFRIC 22. Advance payment to purchase Property plant and equipment Advance payment to purchase Property plant and equipment

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. Advance payment to purchase Property plant and equipment

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). Advance payment to purchase Property plant and equipment

Background IFRIC Interpretation 22 Advance payment to purchase Property plant and equipment

Foreign Currency Transactions and Advance Consideration Advance payment to purchase Property plant and equipment

Paragraph 21 of IAS 21 The Effects of Changes in Foreign Exchange Rates requires an entity to record a foreign currency transaction, on initial recognition in its functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency (the exchange rate) at the date of the transaction. Advance payment to purchase Property plant and equipment

Paragraph 22 of IAS 21 states that the date of the transaction is the date on which the transaction first qualifies for recognition in accordance with IFRS Standards (Standards).

When an entity pays or receives consideration in advance in a foreign currency, it generally recognises a non-monetary asset or non-monetary liability before the recognition of the related asset, expense or income. The related asset, expense or income (or part of it) is the amount recognised applying relevant Standards, which results in the derecognition of the non‑monetary asset or non‑monetary liability arising from the advance consideration. Advance payment to purchase Property plant and equipment

The IFRS Interpretations Committee (the Interpretations Committee) initially received a question asking how to determine ‘the date of the transaction’ applying paragraphs 21–22 of IAS 21 when recognising revenue. The question specifically addressed circumstances in which an entity recognises a non-monetary liability arising from the receipt of advance consideration before it recognises the related revenue. Multiple advances and multiple deliveries of goods. Advance payment to purchase Property plant and equipment

In discussing the issue, the Interpretations Committee noted that the receipt or payment of advance consideration in a foreign currency is not restricted to revenue transactions. Accordingly, the Interpretations Committee decided to clarify the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income when an entity has received or paid advance consideration in a foreign currency. Advance payment to purchase Property plant and equipment

See also: The IFRS Foundation

Advance payment to purchase Property plant and equipment