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IAS 18 — Customer contributions

Date recorded:

The IFRIC continued their discussion of the accounting for non-cash distributions (see July IFRIC meeting notes). The discussion at this meeting concentrated on the following issues:

  • How to account for the receipt of customer contributions
  • Estimating the duration of the ongoing service (service period)
  • 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.

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