IAS 21 — Revenue transaction denominated in foreign currency

Date recorded:

The project manager introduced the Agenda paper 2, IAS 21- The Effects of Changes in Foreign Exchange Rates - Draft Interpretation Foreign Currency Transactions and Advance Consideration. She said that they were continuing to make progress on the proposed draft interpretation. She said that the interpretation should provide guidance on identifying the date of the transaction for foreign currency transactions in circumstances in which a prepayment asset or deferred income liability was recognised before the related asset, expense or income (i.e. including, but not restricted to, revenue transactions). She then explained the scope of the draft interpretation, the interactions with IFRS 15, the considerations over the term “deferred income liability” and transition requirements.

She then opened the discussion for scoping.

One Committee member said that he agreed with the staff recommendation as long as it would properly scope out non-cash consideration.

Several Committee members expressed concerns with the wording of paragraphs 4c and 7 of the draft interpretation. One member said that there was “circularity” on the definitions. Paragraph 4c seemed to scope out non-monetary transactions while paragraph 7 seemed to indicate how the transaction date for those transactions should be determined.  He said that the submission was primarily focused on the date of the transaction; while paragraph 4c was scoping out the transactions that they were trying to address.  One Committee member suggested that there should be a simpler way to articulate the concept. The scope should be considered in terms of what was excluded rather than what was included.

The Chairman concluded that subject to wording there were no further objections.

The project manager then introduced the issue related to the interaction with IFRS 15 which she said was discussed in paragraphs  27 to 57 of the agenda paper. She said that entities would apply first the principles of IFRS 15 to revenue transactions and then IAS 21 to determine the exchange rate to use. She clarified that they were dealing with a draft interpretation of IAS 21 and they were not making an interpretation of IFRS 15. She said that there were four issues to be considered (covered by issues 3 to 7 in the agenda paper):

  1. Unconditional right to consideration in advance of the recognition of revenue – the staff recommended that the proposed Interpretation should refer to the date of initial recognition of the deferred income liability or prepayment asset instead of to date of payment or receipt of the advance consideration;
  2. Contract assets – the staff recommended not to include guidance on the accounting for contract assets in the proposed Interpretation of IAS 21 or in the examples accompanying the proposed Interpretation;
  3. Variable consideration – the staff recommended  to include in Example 2 and Example 4 a reference to the fact that the entity would determine that, because the amount of consideration in the foreign currency was fixed, the variable consideration requirements in IFRS 15 did not apply; and
  4. Significant financing components – the staff recommended not to address significant financing components in the proposed Interpretation of IAS 21 or in the examples accompanying the proposed Interpretation.

Several Committee members disagreed with not including financing components in the proposed Interpretation.

Also, several Committee members expressed concern about fixing the currency at the point when there was an unconditional right to receive a payment but before receiving any payments. They pointed out that an entity would still be exposed to foreign currency risk from the point of having the right up to the point of receiving the payment. The project manager indicated that based on the outreach activities performed she believed that there would be a small population of transactions in which that situation would apply.  She also said that the rationale for what they were trying to address was to follow the principle of IFRS 15 which stated that when there is an unconditional right to receive a payment, the transaction should be recognised.

The Senior Director of technical activities said that he did not understand why the staff did not consider the requirement of paragraph 9 of IFRS 15 which indicated the criteria for recognition of a contract with a customer. He also said that there were several references to IFRS 15 in the interpretation which could be seen as interpreting IFRS 15 instead of IAS 21.  The project manager responded that given that IFRS 15 was a new standard, it made sense to have discussion about its implication. She said that IAS 21 referred to a date that a transaction first qualified for recognition, and then in order to determine when a transaction would qualify for recognition, it was necessary to address IFRS 15. She also said that in paragraph 28 of the agenda paper they had identified situations that would trigger the recognition of a transaction.

One Committee member said that paragraph 9 of IFRS 15 discussed the identification of a contract with a customer; while foreign currency was a separate issue and he agreed with the staff recommendation that the key was to identify when there was an unconditional right to receive payment.

One Committee member said that he believed that they would receive more questions surrounding the application of IFRS 15 because it was a new standard but they were dealing with a narrow scope issue. On the other hand, in order to keep exploring the implications of IFRS 15 they would need a research project.

The Chairman concluded that given the concerns raised they should vote on those questions later and suggested the project manager to present the remaining topics.

The project manager then presented the next topic which was presented as issue 8 in the agenda paper and was related to the deferred income terminology. She said that the term was used in the agenda paper; however, it was not a term defined in IFRSs. She said that it was used in the agenda paper to refer to an entity’s obligation to transfer goods or services that was recognised in the financial statements, because for example the consideration had been received before the recognition of revenue.  She said that IFRS 15 used the term contract liability but the IAS 21 interpretation was intended to have a wider scope and therefore that term could not be used. She also said that even though the term deferred income was not defined, it was a term widely understood in the accounting profession.  She said that the staff was recommending to use an alternative term such as “performance liability” which would better reflect that an entity had an obligation to transfer goods or services.   

One Committee member said that they should not use the term contract liability because this project was not an IFRS 15 interpretation; he would prefer the term deferred income because it was a term widely understood.

The Chairman pointed out that there could be a potential conflict with the conceptual framework project if they started using new terms, he would prefer just defining the concept rather than focusing on one specific term. He said that the staff would work on the wording.

The project manager then presented issue 9 – transition requirements. She said that on initial application of the proposed Interpretation, entities should have the option of relief from retrospectively restating all assets, expenses and income that were completed transactions before either the start of the current reporting period or the start of a prior reporting period that was presented in the first reporting period of application.  She said that completed transactions meant to be consistent with IFRS 15. She said that the staff was proposing that the transition requirements should refer to prospective application from a specific date instead of referring to ‘completed transactions’.

Several Committee members expressed concern that the drafting was not clear.

One Committee member asked to confirm whether the interpretation would apply to assets, liabilities, income or expense recognised after the effective date. He asked if there was an existing prepayment on the balance sheet at the implementation date whether that amount would have to be remeasured in accordance with this interpretation and if an entity was remeasuring a non-monetary asset if the entity would have to restate the opening balances. The project manager responded that the staff was not expecting any further adjustment to amounts already recognised. She said that based on the outreach conducted they concluded that entities were using the exchange rate at the date of recognition. She said that the issue was the point in time of recognition but not remeasuring. She said that conceptually if an entity was remeasuring it should restate the opening balances. The Chairman said that the concept was not clear from the draft and it was not consistent with a prospective approach.

Another Committee member expressed a concern related to what would happen when there were transactions recorded in stages (i.e. an entity was receiving prepayments in stages). The project manager responded that an entity would only deal with new transactions recorded after the effective date. The Committee member responded that this should be clarified in the interpretation.

One Committee member asked about adoption at an interim date. He also said that it was not clear from the drafting whether there was an option to apply the interpretation prospectively.

Another Committee member commented that it would be necessary to provide the same relief to first time adopters.

The Chairman concluded that based on the concerns raised during the meeting they were not yet ready to approve or reject the interpretation. He suggested making some decisions to indicate to the staff on how to proceed.

He first asked whether they should wait for the TRG group to have more progress on the analysis of IFRS 15 or whether they should proceed. The Implementation Director indicated that the staff could continue working with the drafting and continue discussions with the Committee offline.

There was no support for waiting.

The Chairman then asked whether any member would object based on the draft as presented now. Only one member said that he would object.

He then asked if the next draft should be discussed in a public meeting or could be circulated offline.  The project manager suggested that the process would be more efficient if it was dealt with offline. The Chairman then said that the discussions would continue offline with a pre-ballot draft for comment and then a ballot draft. The implementation director said that the Board would also be provided with a draft interpretation and would be asked in a public meeting if any member would object. 

Finally, the Chairman asked if there was any objection in relation to the appropriateness of the due process requirements. There were no objections.

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