1 Best and Complete Read – Non-cash consideration

Non-cash consideration

Non-cash consideration received from a customer is measured at fair value.

If an entity cannot make a reasonable estimate of the fair value, then it refers to the estimated selling price of the promised goods or services (IFRS 15.66–67).

Estimates of the fair value of non-cash consideration may vary. Although this may be due to the occurrence or non-occurrence of a future event, it can also vary due to the form of the consideration – e.g. variations due to changes in the price per share if the non-cash consideration is an equity instrument (IFRS 15.68).

When the fair value of non-cash consideration varies for reasons other than the form of the consideration, those changes are Performancereflected in the transaction price and are subject to the guidance on constraining variable consideration (IFRS 15.69).

Non-cash consideration received from the customer to facilitate an entity’s fulfilment of the contract – e.g. materials or equipment – is accounted for if and when the entity obtains control of those contributed goods or services.

The standard does not provide specific guidance on the measurement date for non-cash consideration. It appears that an entity should apply judgement, based on the relevant facts and circumstances, to determine whether to measure non-cash consideration with reference to the date on which the contract is entered into, the date the non-cash consideration is received or the date the performance obligation is satisfied. Changes in the fair value of non-cash consideration after the measurement date are not included in the transaction price (IFRS 15.126, IE156–158, BC254A–BC254G).

Transaction price

When determining the transaction price, the starting point is that the vendor should measure the non-cash consideration at its fair value.

Non-cash considerationIf 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.

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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.

Constraint does not apply when variation is due to the form of non-cash consideration

The requirement to constrain estimates of variable consideration applies regardless of whether the amount received will be cash or non-cash consideration. Therefore, variability in the estimate of the fair value of non-cash consideration is constrained if that variability relates to changes in the fair value for reasons other than the form of the consideration – i.e. changes other than the price of the non-cash consideration.

If the variability is because of the entity’s performance – e.g. a non-cash performance bonus – then the constraint applies. If the variability is because of the form of the non-cash consideration – e.g. changes in the stock price – then the constraint does not apply and the transaction price is not adjusted.

The determination of whether a change in fair value was caused by the form of the non-cash consideration or other reasons, and the determination of how to allocate fair value changes between those affecting transaction price and those that do not, may be challenging in some situations (IFRS 15.BC251–BC252).

Transfers of assets from customers

In certain industries, it is common for entities to receive transfers of property, plant and equipment (or cash to acquire it) from their Satisfaction of performance obligationscustomers in return for a network connection and/or an ongoing supply of goods or services.

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The nature of these arrangements can vary widely. In some arrangements, the party that transfers the assets (the transferor) is the party that receives access to a supply of goods or services (the ultimate customer). In other arrangements, the transferor is not the ultimate customer or is the ultimate customer for only a short period of time. Non-cash consideration

For example, a property developer builds a residential complex in an area that is not connected to the water mains. To connect to the water mains, the property developer is required to install a network of pipes and to transfer them to the water supply company, which will supply future services to the residents of the complex. Non-cash consideration

An entity that receives such contributed assets evaluates all relevant facts and circumstances to determine the appropriate accounting, including whether the contribution is part of a contract with a customer in the scope of the standard (see IFRS 15 Scope). If the contract is in the scope of the standard, then the entity determines whether: Non-cash consideration

An entity considers all of its obligations under the contract to determine the appropriate timing of revenue recognition.


Non-cash consideration: Measured at contract inception

Real Estate Developer D enters into a contract with Customer C to build an office block on C’s land. As consideration, D will receive 50,000 in quarterly installments as construction progresses and a piece of C’s land adjacent to the construction site. The land title transfers to D up-front, but it is subject to recall if D defaults and does not complete the office block.

In this scenario, D determines that it is appropriate to measure the non-cash consideration at the date of contract inception.

Non-cash consideration: Measured when the performance obligation is satisfied

Real Estate Developer R enters into a contract with Customer M for the sale of a unit in a new retirement village. The project is scheduled to take three years. Under the contract, R will receive an up-front payment of 20,000 and M’s existing house on completion of the unit. M retains all of the rights to occupy and pledge the house until the unit in the new retirement village is ready. R concludes that control over the unit transfers to M at the point in time when construction is completed.

In this scenario, R determines that it is appropriate to measure the non-cash consideration at the date when it satisfies the performance obligation.

Non-cash consideration: Free advertising

Production Company Y sells a television show to Television Company X. The consideration under the arrangement is a fixed amount of 1,000 and 100 advertising slots. Y determines that the stand-alone selling price of the show would be 1,500. Based on market rates, Y determines that the fair value of the advertising slots is 600.

Y determines that the transaction price is 1,600, comprising the 1,000 fixed amount plus the fair value of the advertising slots.

If the fair value of the advertising slots could not be reasonably estimated, then the transaction price would be 1,500 – i.e. Y would use the stand-alone selling price of the goods or services promised for the non-cash consideration in these circumstances.

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(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.

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.

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

See also: Non-cash consideration

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