IAS 2 — Prepayments in long-term supply contracts

Date recorded:

Background — tentative agenda decision

The IFRS Interpretations Committee has been considering whether a purchaser should accrete interest on long-term prepayments for the purchase of inventory. The original request arose in relation to long-term supply contracts for raw materials, for which the purchaser agrees to make prepayments to the supplier. Recognising interest income would increase the cost of inventories and, ultimately, the cost of sales.

In July 2015 the Interpretations Committee concluded that the issue should not be added to the agenda. It did so on the grounds that its outreach gleaned very little information about the extent of the problem or whether there was diversity in practice. The Interpretations Committee issued a tentative agenda decision which stated that if a long-term supply contract contains a significant financing component, that financing component should be recognised separately.

Comment letter analysis

The purpose of this session is to discuss the comments letters received. The Interpretations Committee received three comment letters.  Two of the submitters urged the Interpretations Committee to add this issue to its agenda, mainly to address an uncertainty. 

The staff recommendation is to finalise the agenda decision on the grounds that the comment letters did not provide additional information and that the original conclusion of the Interpretations Committee remains valid.  


The majority of the Interpretation Committee members approved the staff recommendation. During the discussion it was agreed to amend the wording of the agenda decision by removing a reference to raw materials so as to make the wording more generic to long term supply contracts. The support was based on the fact that those transactions depend on specific facts and circumstances which made it difficult to specify and analyse.

Some Interpretation Committee members raised a concern that the agenda decision implied that a long term supply contract always includes a financing component. Other concerns raised related to the fact that the identification of financing components should be explored more fully, and disagreement with making a reference to IFRS 15 in the agenda decision, because the transaction under analysis was based on the point of view of the purchaser and not the seller.

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