two alternative payment options economically equivalent. However, the entity determines that, in accordance
with paragraph 64 of IFRS 15, the rate to be used in adjusting the promised consideration is six per cent,
which is the entity’s incremental borrowing rate.
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The following journal entries illustrate how the entity would account for the significant financing component:
• recognise a contract liability for the CU4,000 payment received at contract inception:
Cash CU4,000
Contract liability
CU4,000
• during the two years from contract inception until the transfer of the asset, the entity adjusts the promised
amount of consideration (in accordance with paragraph 65 of IFRS 15) and accretes the contract liability
by recognising interest on CU4,000 at six per cent for two years:
Interest expense
CU494(a)
Contract liability
CU494
(a) CU494 = CU4,000 contract liability × (6 per cent interest per year for two years).
• recognise revenue for the transfer of the asset:
Contract liability
CU4,494
Revenue CU4,494
In Example 28.47, involving a contract with an advance payment from the customer, the
entity determines that a significant financing component does not exist because the
difference between the amount of promised consideration and the cash selling price of
the good or service arises for reasons other than the provision of financing, as follows.
[IFRS 15.IE152-IE154].
Example 28.47: Advance payment
An entity, a technology product manufacturer, enters into a contract with a customer to provide global
telephone technology support and repair coverage for three years along with its technology product. The
customer purchases this support service at the time of buying the product. Consideration for the service is an
additional CU300. Customers electing to buy this service must pay for it upfront (i.e. a monthly payment
option is not available).
To determine whether there is a significant financing component in the contract, the entity considers the
nature of the service being offered and the purpose of the payment terms. The entity charges a single upfront
amount, not with the primary purpose of obtaining financing from the customer but, instead, to maximise
profitability, taking into consideration the risks associated with providing the service. Specifically, if
customers could pay monthly, they would be less likely to renew and the population of customers that
continue to use the support service in the later years may become smaller and less diverse over time
(i.e. customers that choose to renew historically are those that make greater use of the service, thereby
increasing the entity’s costs). In addition, customers tend to use services more if they pay monthly rather than
making an upfront payment. Finally, the entity would incur higher administration costs such as the costs
related to administering renewals and collection of monthly payments.
In assessing the requirements in paragraph 62(c) of IFRS 15, the entity determines that the payment terms
were structured primarily for reasons other than the provision of finance to the entity. The entity charges
a single upfront amount for the services because other payment terms (such as a monthly payment plan)
would affect the nature of the risks assumed by the entity to provide the service and may make it
uneconomical to provide the service. As a result of its analysis, the entity concludes that there is not a
significant financing component.
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6.5.2
Implementation questions on identifying and accounting for
significant financing components
See 5.6.1.I above for discussion on whether an entity is required to evaluate if a customer
option that provides a material right includes a significant financing component.
6.5.2.A
Payment terms reflect reasons other than the provision of finance
According to IFRS 15, a significant financing component does not exist if the difference
between the promised consideration and the cash selling price of the good or service
arises for reasons other than the provision of finance. [IFRS 15.62(c)]. At the March 2015
TRG meeting, the TRG members discussed whether this factor should be broadly or
narrowly applied.
The TRG members generally agreed that there is likely significant judgement involved
in determining whether either party is providing financing or the payment terms are for
another reason. The TRG members also generally agreed that the Board did not seem
to intend to create a presumption that a significant financing component exists if the
cash selling price differs from the promised consideration.
The TRG agenda paper noted that, although paragraph 61 of IFRS 15 states that the
measurement objective for a significant financing component is to recognise revenue for
the goods or services at an amount that reflects the cash selling price, this measurement
objective is only followed when an entity has already determined that a significant
financing component exists. The fact that there is a difference in the promised
consideration and the cash selling price is not a principle for determining whether a
significant financing component actually exists. It is only one factor to consider.78
Many of the TRG members noted that it requires significant judgement in some
circumstances to determine whether a transaction includes a significant financing
component.79
6.5.2.B
Existence of a financing component when the promised consideration is
equal to the cash selling price
Under IFRS 15, an entity must consider the difference, if any, between the amount of
promised consideration and the cash selling price of a promised good or service when
determining whether a significant financing component exists in a contract.
[IFRS 15.61(a)]. At the March 2015 TRG meeting, the TRG members were asked to
consider whether a financing component exists if the promised consideration is equal
to the cash selling price.
The TRG members generally agreed that even if the list price, cash selling price
and promised consideration of a good or service are all equal, an entity should not
automatically assume that a significant financing component does not exist. This would
be a factor to consider, but it would not be determinative.80
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As discussed at 6.5.2.A above, while paragraph 61 of IFRS 15 states that the
measurement objective for a significant financing component is to recognise revenue
for the goods or services at an amount that reflects the cash selling price, this
measurement objective is only followed when an entity has already determined that a
significant financing component exists. The fact that there is no difference between the
promised consideration and the cash selling price is not determinative in the evaluation
of whether a significant financing component actually exists. It is a factor to consider,
but it is not the only factor and is not determinative. As discussed above, an entity needs
to consider all facts and circumstances in this evaluation.
The TRG agenda paper noted that the list price may not always equal the cash selling
if the customer had paid cash for those goods or services when (or as) they transfer to
the customer, as defined in paragraph 61 of IFRS 15). For example, if a customer offers
to pay cash upfront when the entity is offering ‘free’ financing to customers, the
customer that offers the upfront payment may be able to pay less than the list price.
Determining a ‘cash selling price’ may require judgement and the fact that an entity
provides ‘interest-free financing’ does not necessarily mean that the cash selling price
is the same as the price another customer would pay over time. Entities would have to
consider the cash selling price in comparison to the promised consideration in making
the evaluation based on the overall facts and circumstances of the arrangement.
This notion is consistent with paragraph 77 of IFRS 15 on allocating the transaction price
to performance obligations based on stand-alone selling prices (see 7.1 below), which
indicates that a contractually stated price or a list price for a good or service may be (but
is not presumed to be) the stand-alone selling price of that good or service. The TRG
agenda paper noted that it may be possible for a financing component to exist, but that
it may not be significant. As discussed at 6.5 above, entities need to apply judgement in
determining whether the financing component is significant.81
6.5.2.C
Accounting for financing components that are not significant
At the March 2015 TRG meeting, the TRG members generally agreed that the standard
does not preclude an entity from deciding to account for a financing component that is
not significant. For example, an entity may have a portfolio of contracts in which there
is a mix of significant and insignificant financing components. An entity could choose to
account for all of the financing components as if they were significant in order to avoid
having to apply different accounting methods to each.
An entity electing to apply the requirements for significant financing components to an
insignificant financing component would need to be consistent in its application to all
similar contracts with similar circumstances.82
6.5.2.D
Determining whether the significant financing component practical
expedient applies to contracts with a single payment stream for multiple
performance obligations
The standard includes a practical expedient that allows an entity not to assess a contract
for a significant financing component if the period between the customer’s payment and
the entity’s transfer of the goods or services is one year or less. [IFRS 15.63]. The TRG
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members were asked, at the March 2015 TRG meeting, how entities should consider
whether the practical expedient applies to contracts with a single payment stream for
multiple performance obligations.
The TRG members generally agreed that entities either apply an approach of allocating
any consideration received:
(1) to the earliest good or service delivered; or
(2) proportionately between the goods or services depending on the facts and
circumstances.
The TRG agenda paper on this topic provided an example of a telecommunications
entity that enters into a two-year contract to provide a device at contract inception
and related data services over 24 months in exchange for 24 equal monthly
instalments.83 Under approach (1) above, an entity would be allowed to apply the
practical expedient because the period between transfer of the good or service and
customer payment would be less than one year for both the device and the related
services. This is because, in the example provided, the device would be ‘paid off’
after five months. Under approach (2) above, an entity would not be able to apply the
practical expedient because the device would be deemed to be paid off over the full
24 months (i.e. greater than one year).
Approach (2) above may be appropriate in circumstances similar to the example in
the TRG agenda paper, when the cash payment is not directly tied to a particular
good or service in a contract. However, approach (1) may be appropriate when the
cash payment is directly tied to the earliest good or service delivered in a contract.
However, the TRG members noted it may be difficult to tie a cash payment directly
to a good or service because cash is fungible. Accordingly, judgement is required
based on the facts and circumstances.84
6.5.2.E
Calculating the adjustment to revenue for significant financing components
At the March 2015 TRG meeting, the TRG members discussed how an entity would calculate
the adjustment to revenue for contracts that include a significant financing component.
The TRG members generally agreed that the standard does not contain requirements
for how to calculate the adjustment to the transaction price due to a significant financing
component. A financing component is recognised as interest expense (when the
customer pays in advance) or interest income (when the customer pays in arrears).
Entities need to consider requirements outside IFRS 15 to determine the appropriate
accounting treatment (i.e. IFRS 9).85
6.5.2.F
Allocating a significant financing component when there are multiple
performance obligations in a contract
At the March 2015 TRG meeting, the TRG members discussed how an entity would
allocate a significant financing component when there are multiple performance
obligations in a contract.
The standard is clear that, when determining the transaction price in Step 3 of the model, the
effect of financing is excluded from the transaction price prior to the allocation of the
transaction price to performance obligations (which occurs in Step 4). However, stakeholders
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had questioned whether an adjustment for a significant financing component could ever be
attributed to only one or some of the performance obligations in the contract, rather than to
all of the performance obligations in the contract. This is because the standard only includes
examples in which there is a single performance obligation.
The TRG members generally agreed that it may be reasonable for an entity to attribute a
significant financing component to one or more, but not all, of the performance obligations
in the contract. In doing so, the entity may analogise to the exceptions for allocating
variable consideration and/or discounts to one or more (but not all) performance
obligations, if specified criteria are met (see 7.3 and 7.4 below, respectively).86 However,
attribution of a financing component to one (or some) of the performance obligations
requires the use of judgement, especially because cash is fungible.
6.5.2.G
Significant financing components: considering whether interest expense
can be borrowing costs eligible for capitalisation
IAS 23 – Borrowing Costs – requires borrowing costs to be capitalised if they are directly
attributable to the acquisition, construction or production of a qualifying asset (whether
or not the funds have been borrowed specifically for that purpose, see Chapter 21 for
<
br /> further discussion on IAS 23). [IAS 23.8]. IAS 23 and IFRS 15 do not specifically address
whether interest expense arising from a customer contract with a significant financing
component can be considered as borrowing costs eligible for capitalisation.
According to IAS 23, borrowing costs are ‘interest and other costs that an entity incurs
in connection with the borrowing of funds.’ [IAS 23.5 – IAS 23.6]. Interest expense arising
from customer contracts with a significant financing component might qualify as
borrowing costs eligible for capitalisation if they are directly attributable to the
acquisition, construction or production of a qualifying asset.
For most revenue transactions, it is likely that entities would be considering inventory
when determining whether there is a qualifying asset. According to IAS 23, inventory
can be a qualifying asset, but ‘... inventories that are manufactured, or otherwise
produced, over a short period of time, are not qualifying assets. Assets that are ready for
their intended use or sale when acquired are also not qualifying assets.’ [IAS 23.7].
Significant judgement may be needed to determine whether inventories take a
substantial period of time to manufacture or produce before being ready for their
intended use or sale. However, it may be helpful for an entity to consider how it satisfies
its performance obligations as part of this determination. In particular, entities should
note that, if a performance obligation is satisfied over time, by definition, the customer
obtains control of the good or service (and the entity derecognises any related
inventory) as the entity performs. As discussed in 8.2.4.D, its performance should not
result in the creation of a material asset in the entity’s accounts (e.g. work in progress).
It is also important to note that capitalisation of borrowing costs is not required by
IAS 23 for inventories that are manufactured, or otherwise produced, in large quantities
on a repetitive basis even if they meet the definition of a qualifying asset. [IAS 23.4(b)].
The IFRS Interpretations Committee received a request on the capitalisation of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 422
