Multiple advances and multiple service deliveries

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 3—Multiple payments for purchases of services over a period of time

On 1 May 20X3, Entity C entered into a contract with a supplier for services. The supplier will provide the services to Entity C evenly over the period from 1 July 20X3 to 31 December 20X3. The contract requires Entity C to pay the supplier FC200 on 15 June 20X3 and FC400 on 31 December 20X3. Entity C has determined that, for this contract, the payment of FC200 on 15 June 20X3 relates to the services to be received in the period 1 July–31 August 20X3, and the payment of FC400 on 31 December 20X3 relates to the services to be received in the period 1 September–31 December 20X3.

Entity C initially recognises a non-monetary asset translating FC200 into its functional currency at the spot exchange rate between the functional currency and the foreign currency on 15 June 20X3.

In the period 1 July–31 August 20X3, Entity C derecognises the non-monetary asset and recognises an expense of FC200 in profit or loss as it receives the services from the supplier. Entity C determines that the date of the transaction for the expense related to the advance consideration of FC200 is 15 June 20X3 (the date of initial recognition of the non-monetary asset).

In the period 1 September–31 December 20X3, Entity C initially recognises the expense in profit or loss as it receives the services from the supplier. In principle, the dates of the transaction are each day in the period 1 September–31 December 20X3. However, if exchange rates do not fluctuate significantly, Entity C may use a rate that approximates the actual rates as permitted by paragraph 22 of AASB 121. If that is the case, Entity C may, for example, translate each month’s expense of FC100 (FC400 ÷ 4) into its functional currency using the average exchange rate for each month for the period 1 September–31 December 20X3.

As Entity C recognises the expense in the period 1 September–31 December 20X3, it recognises a corresponding liability in respect of its obligation to pay the supplier. The liability is a monetary item. Entity C updates the translated amount of the liability until the liability is settled.