IFRS Accounting decisions

Borrowing costs – Q&A IAS 23

by

Q&A Borrowing costs

Q&A Borrowing costs is a questions and answers lesson type of narrative following the captions of this rather simple IFRS Standard.

  1. General scope and definitions
  2. Borrowing costs eligible for capitalisation
  3. Foreign exchange differences
  4. Cessation of capitalisation
  5. Interaction IAS 23 and IFRS 15 Construction contracts with customers

General scope and definitions

1.1 A qualifying asset is an asset that ‘necessarily takes a substantial period of time to get ready for its intended use or sale’. Is there any bright line for determining the ‘substantial period of time’?

No. IAS 23 does not define ‘substantial period of time’. Management exercises judgement when determining which assets are qualifying assets, taking into account, among other factors, the nature of the asset. An asset that normally takes more than a year to be ready for use will usually be a qualifying asset. Once management chooses the criteria and type of assets, it applies this consistently to those types of asset.

Management discloses in the notes to the financial statements, when relevant, how the assessment was performed, which criteria were considered and which types of assets are subject to capitalisation of borrowing costs.

1.2 The IASB has amended the list of costs that can be included in borrowing costs, as part of its 2008 minor improvement project. Will this change anything in practice?

The amendment eliminates inconsistencies between interest expense as calculated under IAS 23 and IFRS 9. IAS 23 refers to the effective interest rate method as described in IFRS 9. The calculation includes fees, transaction costs and amortisation of discounts or premiums relating to borrowings. These components were already included in IAS 23. However, IAS 23 also referred to ‘ancillary costs’ and did not define this term.

This could have resulted in a different calculation of interest expense than under IFRS 9. No significant impact is expected from this change. Alignment of the definitions means that management only uses one method to calculate interest expense.

Read more

Non-refundable upfront fees

by

Non-refundable upfront fees

In short – Some contracts include non-refundable upfront fees that are paid at or near contract inception – e.g. joining fees for health club membership, activation fees for telecommunication contracts and set-up fees for outsourcing contracts. The standard provides guidance on determining the timing of recognition for these fees.

An entity assesses whether the non-refundable upfront fee relates to the transfer of a promised good or service to the customer. (IFRS 15.B40, B48–B51)

In many cases, even though a non-refundable upfront fee relates to an activity that the entity is required to undertake to fulfil the contract, that activity does not result in the transfer of a promised good or service to the customer. Instead, it is an administrative task. For further discussion on identifying performance obligations, use this link.

If the activity does not result in the transfer of a promised good or service to the customer, then the upfront fee is an advance payment for performance obligations to be satisfied in the future and is recognised as revenue when those future goods or services are provided.

If the upfront fee gives rise to a material right for future goods or services, then the entity attributes all of it to the goods and services to be transferred, including the material right associated with the upfront payment. For further discussion on allocating the transaction price and customer options, use this link and this link, respectively.

The non-refundable upfront fee results in a contract that includes a customer option that is a material right if it would probably impact the customer’s decision on whether to exercise the option to continue buying the entity’s product or service (e.g. to renew a membership or service contract or order an additional product). (IFRS 15.BC387)

Read more

Derecognition of financial assets – Best Guide IFRS 9

by

Derecognition of financial assets Derecognition of financial assets has drawn a lot of attention in the Enron scandal. Enron used special purpose entities—limited partnerships or companies created to fulfil a temporary or specific purpose to fund or manage risks associated with specific (financial and/or non-financial) assets. Derecognition of financial assets On October 16, 2001, Enron announced that restatements to its financial statements for years 1997 to 2000 were necessary to correct accounting violations. The restatements for the period reduced earnings by $613 million (or 23% of reported profits during the period), increased liabilities at the end of 2000 by $628 million (6% of reported liabilities and 5.5% of reported equity), and reduced equity at the end of 2000 by $1.2 … Read more

IFRS 15 Contract modifications Decision tree

by

IFRS 15 Contract modifications Decision tree guides you through the treatment of changes in contracts under IFRS 15 Revenue from contracts with customers. Parties to an arrangement frequently agree to modify the scope or price (or both) of their contract. If that happens, an entity must determine whether the modification is accounted for as a new contract or as part of the existing contract. Generally, it is clear when a contract modification has taken place, but in some circumstances, that determination is more difficult. [see IFRS 15 18 – 19] Account for contract modifications timely IFRS 15 indicates that an entity may have to account for a contract modification prior to the parties reaching final agreement on changes in scope … Read more

Determining when promises are performance obligations

by

In determining when promises are performance obligations the assessment has to be made whether the performance obligations consist of a series of distinct goods and/or services that are substantially the same and have the same pattern of transfer, OR Determining when promises are performance obligations a series of non-distinct goods and/or services that are not substantially the same and not have the same pattern of transfer. This is important in the recognition of revenue over time or at a point in time. Determining when promises are performance obligations Separate performance obligations After identifying the promised goods or services within a contract, an entity determines which of those goods or services will be treated as separate performance obligations. That is, the … Read more

Consideration paid or payable to a customer

by

Many entities make payments to their customers. In some cases, the consideration paid or payable to a customer represents purchases by the entity of goods or services offered by the customer that satisfy a business need of the entity. In other cases, the consideration paid or payable represents incentives given by the entity to entice the customer to purchase, or continue purchasing, its goods or services. [ see text in IFRS 15 70 – 72] The following decision tree illustrates these requirements: Consideration paid or payable to a customer Consideration paid or payable to a customer References: Consideration payable – IFRS 15 70 Distinct good or service payment – IFRS 15 71 Reduction of transaction price – IFRS 15 72 … Read more

Arrangements that do not meet the definition of a contract

by

What happens with arrangements that do not meet the definition of a contract under IFRS 15. How are these accounted for? What IFRSs are used in such a case? If an arrangement does not meet the criteria to be considered a contract under the standard, it must be accounted for as stipulated in IFRS 15 15 – 16 (recognition of the consideration received as revenue if certain events have been met or as a liability until one of these events have been met), using the following decision tree: Arrangements that do not meet the definition of a contract If the arrangements identifies as a IFRS 15 Contract with customers go to Step 2 – 5 References: Contract qualifying criteria – … Read more

IFRS 15 Create or enhance an asset

by

IFRS 15 Create or enhance an asset is the second phase for IFRS 15 Revenue recognition. This is part of a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts. IFRS 15 Create or enhance an asset The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just think of: a retailer sells a candy bar for cash in the shopping … Read more

No alternative use enforceable payment right

by

No alternative use enforceable payment right for work to date is the last phase in the satisfaction of performance obligations in IFRS 15 Revenue recognition. This is part of a primary and fundamental subject in the recognition of revenue. There are two ways of recognising revenue, revenue recognition over time and revenue recognition at a point in time. Revenue recognition over time is often referred to as the ‘Percentage of completion‘ method under the (superseded) IAS 11 Construction contracts. Revenue recognition at a point in time The general principle is the revenue is recognised at a point in time (and as such it is the most common type of sales transaction at least in volume, just think of: a retailer … Read more

1 Perfect Subsequent assessment of effectiveness

by

Subsequent assessment of effectiveness Under IFRS 9 derivative financial instruments are always (by definition) classified as instruments at fair value through other comprehensive income. As a result, an accounting mismatch can occur when an entity uses derivatives (hedging items or hedging instruments) to hedge against business exposures to a market risk arising from an underlying asset or liability that is not measured at fair value through profit or loss (hedged items). Hedge accounting is intended to deal with this accounting mismatch. By adjusting the basis (hedged risk) for the hedged item in case of fair value hedges or the hedging item in respect of cash flow hedges entities can effectively use hedge accounting to reduce income statement volatility. The accounting … Read more