IAS 18 Revenue Recognition – Customer Contributions New Title November 2008: Transfers of Assets from Customers

Go To List of IFRIC Issues Issue Description: How should a utility or other company account for the receipt of customer contributions? Such contributions arise because the customer is required to contribute an asset (or cash towards the construction or acquisition of an asset) that is then used to provide access to an ongoing supply of goods or services to the customer. Discussion at IFRIC Meeting July 2007 The IFRIC noted that this issue could potentially apply to a diverse set of arrangements and raised the concern that considering all such arrangements could make the scope too broad for interpretation purposes. Therefore, the IFRIC decided to approach to the issue in a number of stages. At this meeting the IFRIC discussed situations in which a customer contributes an item of property, plant and equipment to a service provider. The Chairman noted that after having reached a conclusion on the treatment of property, plant and equipment the IFRIC would debate whether the scope can be widened to other assets. The staff analysis considered the following: Has an asset transfer occurred (including considering the effect of IFRIC 4 Determining whether an Arrangement contains a Lease)? Is IAS 20 Accounting for Government Grants and Disclosure of Government Assistance an appropriate accounting standard to use to account for a contributed asset? Should the asset received be measured at cost or fair value on initial recognition? How should any resulting credit should be accounted for Has an asset transfer occurred? The IFRIC tentatively decided that only contributed items of property, plant and equipment that meet the criteria for recognition as assets of the service provider should be in the scope of any Interpretation. Therefore, the entity receiving the assets should first consider whether it is required to recognise the asset in its financial statements. In particular, it should consider whether it can obtain the future economic benefits flowing from the asset and can restrict the access of others to those benefits, and whether it has control over those assets. In a second step the entity should assess whether the provision of the ongoing service to the customer contains a lease in accordance with IFRIC 4. If so, the entity should account for the lease of the asset to the customer in accordance with IAS 17 Leases. The staff was directed to prepare a revised paper for discussion at the next meeting. Is IAS 20 an appropriate accounting standard to use to account for a contributed asset? The IFRIC unanimously concluded that it is not appropriate to consider customer contribution as being similar to government grants. Should the asset received be measured at cost or fair value on initial recognition? The IFRIC tentatively agreed that the contributed asset should be recognised initially at fair value since the contribution is part of an exchange of assets, that is, that it is not a unilateral transaction. In the IFRIC's view, in return for the contributed asset the customer may receive an access right to receive an ongoing service and/or an executory contract to receive a supply of goods and/or an ongoing service. There seemed to be a consensus that recognition at fair value should be applied irrespective of how the entity accounts for the credit record. In addition it was noted that the fair value should be determined from the view of the utility company/service provider. How should any resulting credit should be accounted for? The IFRIC discussed two views: View 1: The credit does not represent a liability or an equity contribution but instead gives rise to income. View 2: The credit represents a liability which should be recorded as a liability and recognised over the life of the ongoing service. The IFRIC had a thorough debate and mixed views were expressed. There seemed to be a consensus that the credit does not represent an equity contribution but that this issue exclusively relates to the allocation of income. The IFRIC acknowledged that the accounting for the credit depends on the contractual arrangements; in particular: If there is a contract between the contributor and the service provider it is most likely that the service provider has a liability and that the revenue arising from the receipt of a customer contribution should be deferred and recognised over the life of the ongoing service. If there is no contract between the contributor and the service provider the service provider may not have a liability. This might, for example, be the case if a house builder contributes an item to a utility company and in the absence of any contractual arrangements the utility company may neither have an obligation to provide services nor to grant access to their services. One IFRIC member suggested that in this case the revenue recognition should follow the guidance in IAS 18. One IFRIC member pointed out that in both cases the accounting principle should be to 'spread the income' over the service period but that this period might be 'zero' in some circumstances. No decisions were made but the staff was asked to bring back a paper considering the views expressed at this meeting. In particular, the paper should include indicators for upfront recognition and deferral of income. Discussion at the September 2007 IFRIC Meeting The IFRIC continued their discussion of the accounting for non-cash distributions (See July 2007 IASPlus report). The discussion at this meeting concentrated on the following issues: (i) How to account for the receipt of customer contributions (ii) Estimating the duration of the ongoing service (service period) (iii) Potential extensions of the scope How to account for the receipt of customer contributions The staff presented a flowchart illustrating the approach agreed at the July meeting: Step 1: Assess whether an item of property, plant and equipment (PPE) has been transferred Step 2: Assess whether the ongoing service arrangement contains a leaseback to the customer With regard to step 1 the IFRIC decided not to provide detailed guidance on the notion of control of an item of PPE. Any Interpretation should reference to the existing guidance in IFRSs and just point out the key factors. Regarding step 2 the IFRIC decided that such assessment should be made with reference to IFRIC 4 Determining whether an Arrangement contains a Lease. The IFRIC then discussed the accounting implications of the three accounting models arising from this approach. (For a detailed analysis and illustrative examples we refer to Agenda Papers 4A and the Appendix to Agenda Paper 4 available on the IASB website). Contributions with no lease back In this case the PPE is initially recognised on the balance sheet at fair value with a corresponding liability. The PPE is depreciated over its useful economic life. The obligation is recognised in income on a basis that reflects the provision of access to the ongoing services provided, that is, over the service period. Contributions with an operating lease back The only difference to contributions with no lease back is that part of the revenue arises from rental income rather than from the provision of a service. Contributions with a finance lease back The IFRIC believed that in this case no item of PPE has been transferred (step 1) and the transaction would therefore be outside the scope. The IFRIC reaffirmed its tentative decision at the July 2007 meeting that PPE transferred by the contributor should be recorded at fair value in the financial statements of the service provider unless the application of IFRIC 4 results in a finance lease back. Estimating the duration of the ongoing service (service period) In July 2007 the IFRIC noted that the service provider would need to assess whether the contribution resulted in any ongoing obligation. If so, this obligation should be recognised in the balance sheet and the contribution should be recognised in income over the periods in which the obligation is satisfied. The IFRIC had a lengthy discussion and mixed views were expressed. The following questions were raised: What is the obligation of the provider: to grant initial access to the asset, to provide ongoing access to the asset and/or to provide an ongoing service? Should the service period be the period for which the customer has the right to receive access to the asset and/or ongoing services (for example, under a contract or under statute) or the period over which the customer is expected to receive access to the asset and/or the ongoing services (that is, taking into account contract renewals)? Does the accounting treatment differ in situations in which the PPE is contributed by one party but access to the asset and ongoing service and/ or the ongoing service is received by another party? In these cases it was acknowledged that the contributor normally contributes the asset in return for an ability to access a service rather than a right to access the service; for example, a property developer may contribute an electricity sub-station to facilitate the development of a number of houses. The developer does not itself use the asset or service, rather the ultimate customer who purchases a house within the development receives the access to the service. With regard to the first two issues, some IFRIC members noted that in some jurisdictions industries are regulated (for example, energy suppliers) and therefore the obligation to grant access could be considered to be perpetual. Others mentioned that the legal contract period may be unreasonably short compared to the expected life of the service contract. Regarding the third issue some believed that there would be no further obligation in cases where the service provider is only required to grant initial access to the asset. Other IFRIC members were concerned about full revenue recognition on day 1 as, in their view, it does not appear reasonable that an item of PPE is contributed and the other party 'is obliged to do nothing'. No decisions were made; however, there was a consensus that the service period should not exceed the useful life of the PPE. The staff was directed to include in the draft Interpretation indicators how the revenue arising from the credit entry should be allocated to future periods taking into account the views and concerns expressed at this meeting. The draft Interpretation should also identify the different types of performance obligations that may arise. Potential extensions of the scope The IFRIC tentatively decided to extend the scope to contributions of PPE or cash which is contributed for the construction or acquisition of specific items of PPE. The IFRIC intends to discuss a draft Interpretation reflecting these decisions at the next meeting. Discussion at the November 2007 IFRIC Meeting Cash contributions In September 2007 the IFRIC agreed to extend the scope of its customer contributions project to include cash contributions. Such contributions arise when a customer contributes cash to a supplier. As a result of receiving the cash, the supplier is required to construct or acquire an item of property, plant and equipment that is then used to supply goods or services to the customer. The property, plant and equipment is an asset of the supplier. However, the ongoing service arrangement may contain a lease of the asset to the customer. In deciding to include cash contributions in its project on customer contributions, the IFRIC agreed that the contribution of cash has a similar economic effect to the contribution of an item of property, plant and equipment. The two should therefore result in similar accounting consequences. The IFRIC considered how cash contributions should be accounted for by the entity receiving them. In determining how an entity should account for the receipt of a cash contribution, the IFRIC considered 5 possible approaches: Approach 1: the construction or acquisition of the property, plant and equipment is not a service to the customer. Approach 2: the cash contribution should be allocated between the construction or acquisition of the asset and the ongoing service based on fair value. Approach 3: Recognition of the cash contribution as revenue immediately. Approach 4: The construction or acquisition of an item of property, plant and equipment is a service to the customer but no revenue should be allocated to it. Approach 5: Two transactions take place. The construction or acquisition of an asset in return for a cash contribution and the provision of access to a supply of goods or services in return for contribution of that asset. A number of IFRIC members expressed concern with the double recognition of revenue in Approach 5 and queried how customer contributions could be conceptually distinguished from the requirements of IFRIC 12. One IFRIC member noted that the distinction was that when a customer contribution occurs it is the operator that ends up with the asset. The IFRIC noted that the treatment of customer contributions ultimately will be dependent on specific facts and circumstances. The IFRIC tentatively agreed (none objected) to support Approach 1. Draft Interpretation In September 2007 the IFRIC asked the staff to develop a draft Interpretation on customer contributions. The staff presented the draft Interpretation to the IFRIC. The IFRIC considered the following issues as outlined in Agenda Paper 4A: Whether guidance on the accounting for contributions of property, plant, and equipment is appropriate: Tentatively agreed, subject to some redrafting, that the guidance was appropriate. Whether the Draft Interpretation should contain an exclusion from the principle in IAS 8 that a change in policy should be applied retrospectively: Tentatively agreed that the draft Interpretation should prescribe prospective application. Whether to develop further guidance on the measurement of fair value in the draft Interpretation: Tentatively agreed no further guidance would be provided. Finally, the IFRIC considered a letter commenting on the current status of the project which disagreed with some of the tentative decision made to date. The IFRIC tentatively agreed not to make any further changes to the Draft Interpretation as a result of this letter. The IFRIC directed staff to redraft the Draft Interpretation to reflect the decisions made and other editorial comments and re-circulate to IFRIC prior to release. The Draft Interpretation will not be discussed at another meeting prior to its release. January 2008: Draft Interpretation D24 On 17 January 2008, IFRIC issued for public comment Draft Interpretation D24 - Customer Contributions. Comment deadline is 25 April 2008. Comment at the March 2008 IFRIC Meeting The IFRIC Co-ordinator indicated that the comment letter analysis for draft Interpretation D24 Customer Contributions will be discussed at the July 2008 IFRIC meeting. Discussion at the July 2008 IFRIC Meeting D24 Customer Contributions – First redeliberations The IFRIC discussed comments received on the draft Interpretation D24 Customer Contributions published in April 2008. The staff noted that of the 58 comment letters received a majority supported IFRIC's proposal to develop an Interpretation. However, almost all comment letters expressed concern regarding certain aspects of D24. The discussion focussed on the key concern raised by constituents being whether the entity receiving the customer contributions always has an obligation to provide ongoing access to a supply of goods or service. Some respondents pointed out that when, for example, a utility company is required by law or regulation to provide access to a supply of goods or services to all customers at the same price, the access provider does not have any further obligation once the connection has been made. The IFRIC discussion was based on the following example relating to customer contributions for connection to a price-regulated network: A real estate company is developing a residential real estate in a remote area that is not connected to the electricity network. In order to have access to the electricity network, the real estate company is required to construct an electricity substation that is then contributed to the utility company operating the electricity network. The contributed electricity substation becomes an asset of the utility company that it must maintain or replace at its cost. The utility company uses the contributed asset to connect each house of the residential real estate development to its electricity network. The developer then sells the connected houses to customers at a price that includes a share of the costs of the electricity substation. By law or regulation, the utility company has an obligation to provide ongoing access to the electricity network to all connected customers at the same price, regardless of whether they have contributed an asset. Customers can choose to purchase their electricity from suppliers other than the utility company, but the utility company always provides the distribution. In that event, the electricity supplier charges the customers quarterly for the consumption of electricity and collects an ongoing access fee on behalf of the utility company. The staff was of the view that in contrast to paragraph 16 of D24 in such scenario revenue should be recognised once the connection services have been performed since providing initial access would be the only service provided in exchange for the contributed asset. The staff pointed out that generally speaking they could not see why there is an ongoing obligation arising from the customer contribution when the entity that receives the contribution from a customer has no obligation to this customer that is different from its obligation to other customers who did not contribute. Some IFRIC members agreed to the staff with regard to this particular (simple) fact pattern but noted that there may be other scenarios where an ongoing obligation may exist. Other IFRIC members stated that the answer should be given from an IAS 18 Revenue standpoint, that is, whether the service in return for the customer contribution has been provided or not. In doing so the guidance in paragraph 13 of IAS 18 regarding separately identifiable components should be applied. In addition, one IFRIC member noted that the obligation arising from the customer contribution should be considered separately from obligations to other customers. The IFRIC had a thorough debate on when an ongoing obligation to provide access exists but could not agree on a principle. There seemed to be a consensus that the answer depends on facts and circumstances and that judgement may be required. However, the chairman pointed out that simply referencing to facts, circumstances, and judgement would not be appropriate in an Interpretation but that specific guidance should be given. The chairman noted that at the September 2008 meeting a decision whether the IFRIC would be able to reach a consensus on this matter on a timely basis should be made. The IFRIC decided to proceed with the project for the time being and directed the staff to further elaborate this issue by: Developing further examples to enable establishing a principle under which circumstances a performance obligation exists. The staff was asked to also address the concerns of constituents raised in respect of analogous application in this context. Develop indicators regarding the existence or non-existence of performance obligations. The IFRIC will discuss the staff's analysis on performance obligations and an analysis of the other issues raised by constituents at the September 2008 meeting. Discussion at the September 2008 IFRIC Meeting The staff presented the IFRIC with a revised draft of D24 Customer Contributions that was aimed to reflect input collected at the July IFRIC meeting. The staff began with recognition and measurement of the contributed asset. It was noted that the redraft aims to simplify deciding whether the contributed asset should be recognised by the receiving entity and that it should determine whether it controls the asset and if it is a lease in accordance with IAS 17 or IFRIC 4. The IFRIC had a lengthy debate on this topic. Some members noted that this is not the main issue to be addressed by the Interpretation and that it is the credit, that is revenue, of the journal entry that was not clear. The Chairman highlighted that before a credit is a debit (that is the asset to be recognised). Other members wanted more indicators on asset recognition and said that sole reference to IFRIC 4 is not sufficient. The IFRIC Coordinator responded that sole reference to IFRIC 4 was not intended. The staff needed an indication whether to cut back the guidance or expand it. It was also noted by IFRIC members that the final Interpretation should not introduce new guidance on control and that people might get confused over the references to the leasing guidance in IFRS. One IFRIC member noted that some transactions might indeed be linked transactions. The Chairman then summarised the discussion and asked the staff to include more guidance in the Interpretation, but try to keep it simple. The staff then turned to the question how the credit should be accounted for, especially, whether the IFRIC agreed to the guidance on identifying separate components of the transaction (that is, are connecting the customer to the network and on-going access to a supply separate components). The IFRIC, again, had a lengthy discussion on this topic with no clear direction. Much of the discussion centred around whether and what amount to recognise immediately and what amount should be deferred. One member thought of the examples as being too simplistic. Others wondered whether this guidance could be applied by analogy. The Chairman stated that if the principles identified are good, this would be appropriate. Another member highlighted that in case the obligation is legal, it is a non-issue. Others were concerned about the practical implications and difficulties of splitting up the revenue stream and recognising some revenue upfront and some over time. It was also noted that the guidance might lead to upfront revenue recognition where it is not desirable. The Chairman asked the IFRIC whether to provide guidance on these issues subject to drafting changes. The IFRIC seemed to agree. The staff then asked for further questions on the drafting of the interpretation. One IFRIC member asked the staff to be clear in the Basis for Conclusions on what issues IFRIC wanted to address. Also, it was noted that depending on the final guidance provided on adoption some transitional relief should be provided. The IFRIC Coordinator also proposed to add an example of asset contribution in a non-regulated activity. The Chairman asked the staff to prepare a revised draft including a Basis for Conclusions and bring back any issues. Although the agenda papers included a question on disclosures this was not discussed at this meeting. Discussion at the November 2008 IFRIC Meeting The IFRIC approved an Interpretation based on that exposed in D24 Customer Contributions. Title The IFRIC agreed that the title of the Interpretation should be changed to refer to 'transfers' of assets from customers. This is because, in many jurisdictions, 'contributions' are non-reciprocal transactions. The transaction being addressed by this Interpretation is a reciprocal transaction. Consensus Control of an asset Much of the discussion centred on whether an asset can be recognised by the recipient. The IFRIC was presented with wording revised since the Observer Notes were released. The revised wording concentrates on the definition of an asset in the IASB Framework. The IFRIC concluded that references to IAS 17 and IFRIC 4 were confusing and detracted from the issue being articulated in D24: who controls the asset transferred? The IFRIC noted that paragraph 49(a) of the IASB Framework states that an asset is a resource 'controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.' The IFRIC thought that a key indicator of control of an item of property, plant and equipment would be that the entity is responsible for the repair, maintenance, upgrade and replacement of the item transferred. The IFRIC agreed that if an item of property, plant and equipment received by a service provider meets the definition of an asset, it should be recognised as an asset by the recipient at its transfer date fair value. Accounting for the credit The IFRIC agreed that, should the item of property, plant and equipment meet the definition of an asset of the recipient, the credit side of the recognition entry would be a component of revenue. IFRIC members suggested that the Interpretation should clarify use of the term 'the customer.' Currently, the drafting has been simplified so that 'customer' includes both the entity transferring the item of property, plant and equipment and the entity receiving on-going services through the item transferred. IFRIC members noted that, in many cases, the entity transferring the item of property, plant and equipment will have no further association with the item and that using one term to describe two or more parties might cause more confusion than it was intended to avoid. Much of the discussion centred on whether that revenue was earned as the result of a single or multiple element transaction. If there was a multiple element transaction, some portion of the revenue would be deferred and amortised over the related service period. However, if there was a single element transaction immediate recognition of revenue would be required. The IFRIC requested that the Interpretation clarify that what the customer receives (e.g. when an office building is connected to the power grid) is the ongoing access to the distribution network, not the goods or services provided by that network. The goods and services (e.g. electrical power) are usually the subject of a separate transaction between the distributor and the customer. Only when connexion to the distribution network is bundled with a preferential rate for the future supply of services would the transaction be treated as a multiple element transaction and unbundled in to its constituent elements. IFRIC members were concerned that some of the terminology confused this intention, especially in situations in which the distributor had a statutory obligation to supply to all customers connected to its distribution network. The IFRIC agreed that the Interpretation should be clarified to avoid the inference that an obligation would be created by a connexion to a distribution network. Effective date and transition The IFRIC agreed that the Interpretation should be effective three months after it is issued. The transition provisions caused more discussion, with some IFRIC members favouring some degree of retrospective application. However, there were others who expressed reservations about this approach on practicability grounds and because of the use of hindsight in determining fair value. The IFRIC agreed that the Interpretation should apply to transfers of assets within the scope of the Interpretation occurring on or after the effective date (that is, prospective application only). Re-exposure The IFRIC discussed whether re-exposure was necessary. Although there have been some significant changes to the consensus, the IFRIC agreed with the staff analysis of the IFRIC's criteria for re-exposure that re-exposure was not necessary. However, the IFRIC staff agreed that they would publicise the post-approval steps to a greater extent than usual, which would delay the issuance of the Interpretation until January 2009 (see next steps, below). Approval Subject to drafting, the IFRIC approved the Interpretation, with one member dissenting. Next steps In response to requests from IFRIC members, the IFRIC staff agreed to: Highlight the release of the 'near-final draft' of the Interpretation on the IASB's Website (in mid-December 2008) for longer than normal. Although this document would not represent an Invitation to Comment, any comments received would be considered by the IFRIC in January 2009. Refer the Interpretation to the IASB for approval in January 2009 (rather than December 2008). Discussion at the January 2009 IASB Meeting The Board approved, subject to written ballot, IFRIC [18] Transfers of Assets from Customers (see IAS Plus Report of the December 2008 IFRIC Meeting for details). January 2009: IFRIC Interpretation 18 Issued On 29 January 2009, IFRIC issued Interpretation 18 Transfers of Assets from Customers. IFRIC 18 is effective for transfers received on or after 1 July 2009 and applies prospectively.