borrowing costs on assets being developed for sale for which revenue is recognised over
time. At the time of writing, the matter was being analysed and had not been discussed
by the IFRS Interpretations Committee.87
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6.5.3
Financial statement presentation of financing component
As discussed at 6.5 above, when a significant financing component exists in a contract,
the transaction price is adjusted so that the amount recognised as revenue is the ‘cash
selling price’ of the underlying goods or services at the time of transfer. Essentially, a
contract with a customer that has a significant financing component would be separated
into a revenue component (for the notional cash sales price) and a loan component (for
the effect of the deferred or advance payment terms). [IFRS 15.BC244]. Consequently, the
accounting for accounts receivable arising from a contract that has a significant
financing component should be comparable to the accounting for a loan with the same
features. [IFRS 15.BC244].
The amount allocated to the significant financing component would have to be
presented separately from revenue recognised from contracts with customers. The
financing component is recognised as interest expense (when the customer pays in
advance) or interest income (when the customer pays in arrears). The interest income
or expense is recognised over the financing period using the effective interest method
described in IFRS 9. The standard notes that interest is only recognised to the extent
that a contract asset, contract liability or receivable is recognised in accordance with
IFRS 15. [IFRS 15.65].
As discussed in 11.1 below, a contract asset (or receivable) or contract liability is
generated (and presented on the balance sheet) when either party to a contract
performs, depending on the relationship between the entity’s performance and the
customer’s payment. Example 28.43 in the standard (see 6.5.1 above) illustrates a
situation in which an entity transfers control of a good to a customer, but the customer
is not required to pay for the good until two years after delivery. The contract includes
a significant financing component.
Furthermore, the customer has the right to return the good for 90 days. The product is
new and the entity does not have historical evidence of returns activity. Therefore, the
entity is not able to recognise revenue (or a contract asset or receivable) upon delivery
because it cannot assert that it is highly probable that a significant revenue reversal will
not occur (i.e. it cannot assert that it is highly probable that the product will not be
returned). Accordingly, during the 90-day return period, the entity also cannot record
interest income. However, as depicted in the example, once the return period lapses, the
entity can record revenue and a receivable, as well as begin to recognise interest income.
The IASB noted in the Basis for Conclusions that an entity may present interest income
as revenue only when interest income represents income from an entity’s ordinary
activities. [IFRS 15.BC247].
Although there are two components within the transaction price when there is a significant
financing component (i.e.
the revenue component and the significant financing
component), it is only in the case of deferred payment terms that there are two cash flow
components. In that case, the revenue component cash flows should be classified as cash
flows from operating activities, and the cash flows related to the significant financing
component should be classified consistent with the entity’s choice to present cash flows
from interests received/paid in accordance with paragraph 33 of IAS 7 – Statement of Cash
Flows – (i.e. as cash flows from operating or investing/financing activities). If the customer
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pays in advance, the sum of the cash amount and the accrued interest represent revenue,
and thus there is only one cash flow component. Accordingly, the cash received should be
classified as cash flows from operating activities.
Impairment losses on receivables, with or without a significant financing component,
are presented in line with the requirements of IAS 1 and disclosed in accordance with
IFRS 7 – Financial Instruments: Disclosures. However, IFRS 15 makes it clear that such
amounts are ‘disclosed separately from impairment losses from other contracts.’
[IFRS 15.113(b)].
We believe entities may need to expend additional effort to track impairment losses on
assets arising from contracts that are within the scope of IFRS 15 separately from
impairment losses on assets arising from other contracts. Entities need to ensure that
they have the appropriate systems, internal controls, policies and procedures in place
to collect and separately present this information.
6.6 Non-cash
consideration
Customer consideration may be in the form of goods, services or other non-cash
consideration (e.g. property, plant and equipment, a financial instrument). When an
entity (i.e. the seller or vendor) receives, or expects to receive, non-cash consideration,
the fair value of the non-cash consideration is included in the transaction price.
[IFRS 15.66].
An entity likely applies the requirements of IFRS 13 – Fair Value Measurement – or
IFRS 2 – Share-based Payment – when measuring the fair value of any non-cash
consideration. If an entity cannot reasonably estimate the fair value of non-cash
consideration, it measures the non-cash consideration indirectly by reference to the
stand-alone selling price of the promised goods or services. [IFRS 15.67].
For contracts with both non-cash consideration and cash consideration, an entity needs
to measure the fair value of the non-cash consideration and it looks to other
requirements within IFRS 15 to account for the cash consideration. For example, for a
contract in which an entity receives non-cash consideration and a sales-based royalty,
the entity would measure the fair value of the non-cash consideration and refer to the
requirements within the standard for the sales-based royalties.
The fair value of non-cash consideration may change both because of the form of
consideration (e.g. a change in the price of a share an entity is entitled to receive from a
customer) and for reasons other than the form of consideration (e.g. a change in the
exercise price of a share option because of the entity’s performance). Under IFRS 15, if
an entity’s entitlement to non-cash consideration promised by a customer is variable for
reasons other than the form of consideration (i.e. there is uncertainty as to whether the
entity receives the non-cash consideration if a future event occurs or does not occur),
the entity considers the constraint on variable consideration. [IFRS 15.68].
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In some transactions, a customer contributes goods or services, such as equipment or
labour, to facilitate the fulfilment of the contract. If the entity obtains control of the
contributed goods or services, it would consider them non-cash consideration and
account for that consideration as described above. [IFRS 15.69]. Assessing whether the
e
ntity obtains control of the contributed goods or services by the customer may
require judgement.
The Board also noted that any assets recognised as a result of non-cash consideration
are accounted for in accordance with other relevant standards (e.g. IAS 16).
The standard provides the following example of a transaction for which non-cash
consideration is received in exchange for services provided. [IFRS 15.IE156-IE158].
Example 28.48: Entitlement to non-cash consideration
An entity enters into a contract with a customer to provide a weekly service for one year. The contract is
signed on 1 January 20X1 and work begins immediately. The entity concludes that the service is a single
performance obligation in accordance with paragraph 22(b) of IFRS 15. This is because the entity is providing
a series of distinct services that are substantially the same and have the same pattern of transfer (the services
transfer to the customer over time and use the same method to measure progress – that is, a time-based
measure of progress).
In exchange for the service, the customer promises 100 shares of its common stock per week of service (a
total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the
successful completion of each week of service.
The entity measures its progress towards complete satisfaction of the performance obligation as each week
of service is complete. To determine the transaction price (and the amount of revenue to be recognised),
the entity measures the fair value of 100 shares that are received upon completion of each weekly service.
The entity does not reflect any subsequent changes in the fair value of the shares received (or receivable)
in revenue.
The concept of accounting for non-cash consideration at fair value is consistent with
legacy IFRS. IAS 18 required non-cash consideration to be measured at the fair value of
the goods or services received. ‘When this amount cannot be measured reliably, non-
cash consideration is measured at the fair value of the goods or services given up.’
[IAS 18.12]. IFRIC 18 also required any revenue recognised as a result of a transfer of an
assets from a customer to be measured at fair value, [IFRIC 18.13], consistent with the
requirement in IAS 18. Therefore, IFRS 15 did not result in a significant change in
respect of the measurement of non-cash consideration.
SIC-31 specified that a seller could reliably measure revenue at the fair value of the
advertising services it had provided in a barter transaction, by reference to non-
barter transactions that met specified criteria. IFRS 15 does not contain similar
requirements. Therefore, significant judgement and consideration of the specific
facts and circumstances are likely to be needed when accounting for advertising
barter transactions.
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6.6.1
Non-cash consideration implementation considerations
Stakeholders raised questions about the date that should be used when measuring the
fair value of non-cash consideration for inclusion within the transaction price. In
addition, constituents noted that the variability of non-cash consideration could arise
both from its form (e.g. shares) and for other reasons (e.g. performance factors that
affect the amount of consideration to which the entity will be entitled). Consequently,
they questioned how the constraint on variable consideration would be applied in
such circumstances.
At the January 2015 TRG meeting, the TRG members discussed these questions and
agreed that, while the standard requires non-cash consideration (e.g. shares,
advertising provided as consideration from a customer) to be measured at fair value,
it is unclear when that fair value must be measured (i.e. the measurement date). The
TRG members discussed three measurement date options: contract inception; when
it is received; or when the related performance obligation is satisfied. Each view
received support from some TRG members. Since IFRS 15 does not specify the
measurement date, an entity needs to use its judgement to determine the most
appropriate measurement date when measuring the fair value of non-cash
consideration. However, in accordance with paragraph 126 of IFRS 15, information
about the methods, inputs and assumptions used to measure non-cash consideration
needs to be disclosed. [IFRS 15.BC254E].
IFRS 15 requires that the constraint on variable consideration be applied to non-cash
consideration only if the variability is due to factors other than the form of
consideration (i.e. variability arising for reasons other than changes in the price of
the non-cash consideration). The constraint does not apply if the non-cash
consideration varies because of its form (e.g. listed shares for which the share price
changes). However, the standard does not address how the constraint would be
applied when the non-cash consideration is variable due to both its form and other
reasons. While some of the TRG members said the standard could be interpreted to
require an entity to split the consideration based on the source of the variability,
other TRG members highlighted that this approach would be overly complex and
would not provide useful information.
The FASB’s standard specifies that the fair value of non-cash consideration needs to be
measured at contract inception when determining the transaction price. Any
subsequent changes in the fair value of the non-cash consideration due to its form
(e.g. changes in share price) are not included in the transaction price and would be
recognised, if required, as a gain or loss in accordance with other accounting standards,
but would not be recognised as revenue from contracts with customers. However, in
the Basis for Conclusions, the IASB observed that this issue has important interactions
with other standards (including IFRS 2 and IAS 21) and there was a concern about the
risk of unintended consequences. Therefore, the Board decided that, if needed, these
issues would be considered more comprehensively in a separate project. [IFRS 15.BC254C].
The IASB acknowledged in the Basis for Conclusions, that the use of a measurement
date other than contract inception would not be precluded under IFRS. Consequently,
it is possible that diversity between IFRS and US GAAP entities may arise in practice.
Unlike US GAAP, legacy IFRS did not contain specific requirements regarding the
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measurement date for non-cash consideration related to revenue transactions. As such,
the IASB does not expect IFRS 15 to create more diversity than previously existed in
relation to this issue. [IFRS 15.BC254E].
The FASB’s standard also specifies that when the variability of non-cash
consideration is due to both the form of the consideration and for other reasons, the
constraint on variable consideration would apply only to the variability for reasons
other than its form. While IFRS 15 does not have a similar requirement, the Board
noted in the Basis for Conclusions that it decided to constrain variability in the
estimate of the fair value of the non-cash consideration if that variability relates to
changes in the fair value for reasons other than the form of the consideration. It also
noted the view of some TRG members that, in practice, it might be difficult to
distinguish between variability in the fair value due to the form of the consideration
and other reasons, in which case applying the variable consideration constraint to
the whole estimate of the non-cash consideration might be more practical.
[IFRS 15.BC252]. However, for reasons similar to those on the measurement date for
non-cash consideration, the IASB decided not to have a similar requirement to that
of the FASB’s standard. Consequently, the IASB acknowledged that differences may
arise between an entity reporting under IFRS and an entity reporting under
US GAAP. [IFRS 15.BC254H].
6.7
Consideration paid or payable to a customer
Many entities make payments to their customers. In some cases, the consideration paid
or payable 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.
The standard states that consideration payable to a customer includes ‘cash amounts
that an entity pays, or expects to pay, to the customer (or to other parties that purchase
the entity’s goods or services from the customer). Consideration payable to a customer
also includes credit or other items (e.g. a coupon or voucher) that can be applied against
amounts owed to the entity (or to other parties that purchase the entity’s goods or
services from the customer).’ [IFRS 15.70].
To determine the appropriate accounting treatment, an entity must first determine
whether the consideration paid or payable to a customer is: a payment for a distinct
good or service; a reduction of the transaction price; or a combination of both. For a
payment by the entity to a customer to be treated as something other than a reduction
of the transaction price, the good or service provided by the customer must be distinct
(as discussed at 5.2.1 above). The standard also states that, if the consideration payable
to a customer includes a variable amount, an entity must estimate the transaction price
in accordance with the requirements for estimating (and constraining) variable
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