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IAS 2 – Should interest be accreted on prepayments in long-term supply contracts?

Date recorded:

The Senior Technical Manager reminded the Committee that they had received a request to clarify the accounting for long-term supply contracts of raw materials when the purchaser of the raw materials agreed to make significant prepayments to the supplier. The submitter had asked whether the purchaser should recognise interest income, resulting in an increase of the cost of inventories. IAS 2 stated that when an arrangement effectively contained a financing element, that element was recognised as interest expense over the period of the financing. IFRS 15 reconfirmed this. A majority of respondents in an outreach to national standard-setters had indicated that the prevalent practice was not to accrete interest in long-term payments. The staff recommended further outreach based on the distinction made in IFRS 15 between prepayments to suppliers that arose from a financing component and those that arose from operational considerations.

A Committee member said that he agreed with the staff’s recommendation as it needed to be clear how widespread the issue was. However, he warned that IFRS 15 was not the Conceptual Framework. He also said that IFRS 15 was fairly new and had not been applied by anybody yet.  Another Committee member said that the issue was very widespread and therefore agreed with performing further outreach. A fellow Committee member agreed and said it should be clear whether the background for such a transaction was financial or operational.

One Committee member said that not only interest should be examined but also foreign currency. A Committee member agreed and said it would not be simple to identify a financing component. She recommended involving the revenue transition resource group (TRG).

An observing IASB member welcomed the outreach and said that it should be examined what justified the difference between the amount that would be paid at contract inception and the amount that would be paid only on delivery.

The Chairman wondered whether it would be useful to set up potential examples that were clearly financial or clearly operational and ask constituents to comment on those. The Senior Technical Manager disagreed and said that she would prefer to speak to people in detail and that refining the issue was an iterative process.

An observing Board member pointed out that IFRS 15 was talking about ‘significant’ finance components only.

The Chairman summarised that there was broad support for the staff recommendation.

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