This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IAS 16, IAS 38 and IFRIC 12 — Variable payments for the separate acquisition of property, plant and equipment and intangible assets

Date recorded:

The Committee previously considered a request to clarify the accounting for variable fees in a service concession arrangement. The request for clarification relates to whether these costs should be recognised at the start of the concession arrangement as an asset with an obligation to make the related payment, or treated as executory in nature and recognised over the term of the concession arrangement.

At its September 2012 meeting, the Committee directed the staff to prepare a paper for discussion at a future meeting which analyses a number of models historically considered by the Committee in accounting for variable payments for the separate purchase of property, plant and equipment and intangible assets, including

  • the ‘financial liability model’, based on the principles in IAS 32 Financial Instruments: Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments on the accounting for a financial liability;
  • the ‘IFRS 3 model’, based on the accounting for contingent consideration in IFRS 3 Business Combinations;
  • the ‘IAS 16/IAS 37 model’, based on the principles in IAS 16, IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities; and
  • the ‘Leases model’, based on the tentative decisions taken so far by the Board in the leases project.

The Committee also directed the staff to propose alternatives that focus on the accounting for the debit side of the transaction, rather than on the recognition and measurement of the liability, and that consider whether there are circumstances in which the remeasurement of the liability should be included as an adjustment to the cost of the asset.

At this meeting, the Committee considered some of these issues. Namely, in considering the core issue regarding the initial accounting for variable payments, the Committee considered whether the purchaser has an obligation on the date of purchase of the asset to pay the variable payment – highlighting two alternatives: [Alt 1] all variable payments meet the initial recognition criteria of a financial liability on the date of purchase of the asset (akin to IAS 32 and IFRS 3 requirements); or [Alt 2] variable payments that are dependent on the purchaser’s future activities do not meet the initial recognition criteria of a financial liability until the activity requiring the payment is performed (akin to IAS 37 and the IASB’s current leasing proposals).

In discussing the above, Committee members expressed mixed views on the above alternatives. Some Committee members preferred Alt 1 on a conceptual basis (i.e., the purchaser has an obligation on the date of purchase of the asset to pay the variable payment). However, other Committee members expressed support for Alt 2 for varying reasons including that it represents the Board’s current direction on the leasing project (in which they foresaw no conceptual difference in the accounting for variable payments in leases and variable payments in concession arrangements), a view that the purchaser does not have an obligation to pay variable payments that are dependent on the purchaser’s future activity until the activity is performed and the difficulties in measuring variable payments at the start of the concession arrangement. Others expressed alternative views including introducing the concept of purchaser’s control over future activities in the liability recognition conclusion.

The Committee Chair noted a lack of consensus on the initial accounting topic. However, he requested that the Committee consider the subsequent accounting for variable payments to the degree it could be decoupled from initial accounting considerations.

The staff noted the core issue in subsequent accounting is whether the remeasurement of the financial liability to make variable payments should be recognised in profit or loss (akin to paragraph AG8 of IAS 39, for example), or should be included as an adjustment to the cost of the asset (akin to IAS 16/IAS 38 and IFRIC 1, for example).

Many Committee members expressed support for the adjustment of the liability as described in paragraph AG8 of IAS 39 being recognised as a corresponding adjustment to the cost of the asset (entirely when the adjustment is a change in estimate, as in IFRIC 1, and to the extent that it relates to future economic benefits to be derived from the asset when the adjustment is not a change in estimate, as in the leases project). However, other Committee members found it difficult to decouple the issue of initial and subsequent accounting, and building on this point, requested that illustrative examples be brought to a future meeting to outline comprehensively the initial and subsequent measurement options under varying examples (such as variable payments which are dependent on an index or a rate, variable payments that are dependent on the purchaser’s future activity derived from the underlying asset and variable payments that are made if the asset acquired complies with agreed-upon specifications at specific dates in the future).

Summarising the discussion, the Committee Chair noted general consensus for recognising remeasurement of the financial liability to make variable payments as an adjustment to the cost of the asset, but requested that the staff bring back illustrative examples to outline comprehensively the initial and subsequent measurement options.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.