Non-cash consideration

Non-cash consideration – IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Non-cash consideration

This section is part of step 3 determining the transaction price. In some cases, a customer might pay for goods or services in the form of non cash assets. For example, a customer (in particular one which is listed on a public market) might issue shares to the vendor.

Non-cash consideration When determining the transaction price, the starting point is that the vendor should measure the non-cash consideration at its fair value. If it is not possible to measure the fair value of the non-cash consideration, then the vendor is required to estimate this by using the stand-alone selling prices of the goods or services subject to the contract.

Variable consideration

Non-cash consideration with a variable fair value is considered variable consideration, which requires the entity to estimate the amount of consideration it will receive. After estimating the amount of variable consideration to be received, these estimates must be adjusted until they no longer include amounts for which it is probable that a significant reversal will occur (the “constraint”). This area involves significant judgment and must include an assessment of both the likelihood of reversal as well as the magnitude of the reversal when compared to the total transaction price.

If non-cash consideration is variable due only to the form of the consideration, then no constraint is applied. For example, if the consideration was variable solely because it was in the form of stock options or stock, an entity would not need to apply a constraint. By comparison, the entity would need to apply a constraint if the number of stock options it will receive is variable because the amount is based on a performance measure

Customer contributed goods or services

A customer might contribute goods or services (for example, a customer for a construction contract might contribute materials, equipment or labor). In such cases, the entity determines whether it retains control of those goods or services after the contract is completed. If the entity retains control, those goods or services are accounted for as non-cash consideration. For example, a customer contributes specific supplies to a manufacturer to complete a contract. If the manufacturer uses the supplies to complete the order and receives no other benefit, then those are not non-cash consideration. However, if the manufacturer has supplies from the customer left over and uses those supplies on other contracts, then the left over supplies are accounted for as non-cash consideration.

Basis for conclusions

When an entity receives cash from a customer in exchange for a good or service, the transaction price and, therefore, the amount of revenue, should be the amount of cash received (ie the value of
the inbound asset). To be consistent with that approach, the boards decided that an entity should measure non-cash consideration at fair value. The non-cash consideration could be in the form of
goods or services, but it may also be in the form of a financial instrument or property, plant and equipment. For example, an entity might receive an electrical substation in exchange for connecting houses in a new residential development to the electricity network. (IFRS 15 BC 248)

The boards decided that if an entity cannot reasonably estimate the fair value of the non-cash consideration, it should measure the promised consideration indirectly by reference to the stand-alone selling price of the goods or services promised in exchange for the consideration.

That approach is consistent both with requirements in previous revenue Standards in IFRS and with requirements for other situations in which the fair value of the assets surrendered in exchange for assets received may be estimated more reliably. (For instance, IFRS 2 Share-based Payment and
Subtopic 505-50 Equity-Based Payments to Non-Employees state that if the fair value of the goods or services received cannot be estimated reliably, then the entity measures them indirectly by reference to the fair value of the granted equity instrument.) (IFRS 15 BC 249)

Disclosures

(IFRS 15 126) Information about the methods, inputs and assumptions used of all of the following:

  1. determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration;
  2. assessing whether an estimate of variable consideration is constrained;
  3. allocating the transaction price, including estimating stand-alone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable); and
  4. measuring obligations for returns, refunds and other similar obligations.

Non-cash consideration

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