IAS 18 — Customer contributions

Date recorded:

At the May 2007 meeting the IFRIC considered whether it should develop guidance as to how a utility company should account for customer contributions received.

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 Revenue.

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.

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