IAS 16/IAS 38/IFRIC 12 — Variable payments for asset purchases and payments made by an operator to a grantor

Date recorded:

Variable payments for asset purchases and payments made by an operator to a grantor in a service concession arrangement (Agenda Papers 2A, 2B and 2C)


The Interpretations Committee has been considering the accounting requirements related to variable payments for asset purchases—generally referred to as contingent consideration. 

When an acquirer agrees to pay additional consideration for the acquisition of assets acquired in a business combination if particular circumstances eventuate, IFRS 3 Business Combinations requires the entity to estimate the fair value of the contingent consideration at the date of acquisition and any difference between the amount paid and the initial estimate are recognised in profit or loss.

In contrast, the forthcoming leases Standard links the measurement of the leased asset to the consideration paid.  On initial recognition the leases Standard limits contingent consideration to variable payments linked to an index or rate.  Any obligation to make additional payments that have not been recognised initially are added to the leased asset and to the lease obligation, when the obligation arises. 

There are no specific requirements in IFRS that set out the accounting for variable payments related to an asset purchase.  In its September 2015 meeting, the Interpretations Committee asked the staff to analyse the conceptual arguments underlying the principles of business combinations and leasing and assess how they might be applied when accounting for variable payments for asset purchases.

Asset acquisitions

Staff recommendations

Initial measurement:  The staff are of the opinion that, despite the associated costs of doing so, principles consistent with those of business combinations should be applied when accounting for variable payments, because they provide a conceptually robust conclusion that leads to a more faithful representation of the economic consideration transferred. In addition, the staff considered and presented the advantages and disadvantages of instead applying leasing principles for the Committee’s consideration.

Subsequent measurement:  When an adjustment to a liability is interest expense, it would be recognised in profit or loss.   Any other adjustments to the financial liability that result from a revision of estimates of payments would be an adjustment to the cost of the related asset.  

The Committee was asked whether it agrees with the staff’s resulting proposals relating to the initial recognition and measurement (see Agenda Paper 2A) and the subsequent recognition and measurement (see Agenda Paper 2B) of variable payments made for the purchase of property, plant and equipment and intangible assets outside of a business combination.

Committee discussion and decision

After a lively discussion, the Chair identified and confirmed with the Committee that no consensus had been or could be reached relating to the issues under discussion. The issue under consideration is too big and too fundamental to be addressed by the Committee and the Chair requested the staff to prepare an Agenda Decision for review that reflected this.

Many different aspects were discussed by the Committee. The primary issue is whether or not the variable payments would or should be recognised as a liability, in particular a financial liability. Some Committee members were of the opinion that they should while others did not share this view, but there was agreement that consideration of this issue was particularly complex given the inconsistent treatment within numerous Standards. Furthermore, many members raised concerns about measurement and uncertainty of any liability that was recognised.

In addition, there was no consensus, irrespective of whether a liability could be recognised or not, regarding which accounting principles (business combinations or lease accounting) should be applied.

Service concession arrangements

Staff recommendations

The staff, per the Committee’s request, also considered whether service concession arrangements represent a distinct and specific type of transaction that can be separately analysed. In addition, the staff have considered whether a solution for accounting for payments to be made by an operator to a grantor under such an arrangement could be developed without addressing the broader issues of variable payments for asset purchases (see Agenda Paper 2C).

The staff concluded that the intangible asset arising under a service concession arrangement is not unique and therefore, the Committee should resolve the broader issue of accounting for variable payments for asset purchases. If consensus cannot be reached, the staff think that a solution, with similar principles applied to accounting for a lease arrangement, can be developed within the confines of IFRIC 12.

The Committee was asked whether consensus on the appropriate consensus accounting for variable payments for asset purchases can be reached and, if not, should work on a solution within the confines of IFRIC 12 be developed.

Committee discussion and decision

Similarly to the previous issue discussed, no consensus could be reached by the Committee relating to the accounting for variable payments or whether a solution within the confines of IFRIC 12 should be developed. Again, the Chair requested that the staff prepare an Agenda Decision to reflect this.

Some Committee members questioned whether the contracts in question are actually different to other contracts and whether they should be treated differently. A number of members were comfortable that an intangible asset would arise, but that such an intangible was dissimilar to those considered when IAS 38 was drafted.  Therefore, a potential scope amendment to IAS 38 would be required should such a thought process be progressed and investigated further. Others questioned whether an intangible asset did in fact arise and stated that an adjustment to revenue recognised may be a better solution.

Some members were in favour of applying the principles of lease accounting should a solution be sought within IFRIC 12, but one member raised that IFRIC 12 as currently written clearly stated that rights to lessees are different to those of operators in a service concession arrangements, so leasing principles should not be considered.

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