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IFRS 15 — Compensation for delays or cancellations

Date recorded:

Background

The Committee received a submission about whether an airline entity shall account for its obligations to compensate customers for delayed or cancelled flights either as part of the transaction price; or as obligations under IAS 37. In the fact pattern submitted, legislation stipulates customers' rights to receive compensation.

Staff analysis

The staff analyse the definition of 'transaction price' under IFRS 15 includes 'penalties'. The staff further analyse that IFRS 15:B33 set out that the compensation stipulated by law for harm or damage caused by an entity's products are accounted for in accordance with IAS 37. In order to address the question, the staff view that the performance obligation in the contract is to transport the customer from one specific location to another by a specified time on a particular date based on the existence of the legislation, and such that the compensation directly relates to the entity's performance under the contract because it is payable for non-performance of performance obligation set out in the contract, rather than a compensation for harm or damage caused by a performance obligation that is already completed.

Staff recommendation

The staff recommended that a tentative agenda decision be issued stating that the Committee's concluded that IFRS Standards provide an adequate basis for an entity to determine its accounting for obligations to compensate customers for delays or cancellations.

Discussion

Some Committee members agreed with the staff analysis but a few of them cannot see the specific correlation of compensation to the original source of performance. The compensation term is due to legislation (law become part of the contract) rather than contractual terms (although it may vary among jurisdictions). The compensation might not be just a flat rate and it can be in other forms. They were not convinced that it should always be treated as a reduction of revenue. Another Committee member suggested that in differentiating between harm and variable consideration, the entity needs to be very clear about what promise is to be transferred to the customer. In the staff paper, the law forms part of the contract and as such 'damage' is considered as part of the consideration.

A Committee member started discussing about the application of IFRS 15:B33 in analysing the subject matter. He was confused on how broad or how narrow the term "damage" should be interpreted. IFRS 15:B33 talks about harm caused by the products provided by the entity. As such, it does not apply to the fact pattern because there is no direct link between the delay and harm since the customers do not have to prove that they are harmed to receive compensation. The staff explained that the Board developed IFRS 15:B33 with a particular narrow scope. It is about "products causing harm or damage" under product liability law. The intention of the staff of including IFRS 15:B33 in the paper is to ask the question 'Do you consider any compensation paid for delay or cancellation to be part of contract between airline entity and the customer that might affect the transaction price, or is it something separate from the contract?'. The staff analysed that IFRS 15:B33 deals with promises which are separate to the contract. As the compensation directly related to the entity's performance, the compensation for delay is all about the promise in the contract. The Committee member suggested, and the staff agreed, to modify in the tentative agenda decision that the compensation does not represent compensation for harm or damage caused by the products.

A Committee member said he is not sure how to support the tentative agenda decision. He pointed out that delayed flight and cancelled flight are not the same – in terms of compensation, for cancelled flight (which services were not delivered at all), the compensation could be higher than the ticket price. Such 'negative revenue' appears to be more like harm and damage, rather than variable compensation. Also the staff paper did not explicitly deal with the issue if the compensation exceeds the amount of consideration received.

After listening to the comments from the Committee members, the staff suggested the wordings changes in the tentative agenda decision including (a) specifying the right to be compensated include separate reimbursement of actual cost and that stipulated for legislation; (b) highlighting the fact that negative revenue is not being considered and (c) removing the example of construction services and instead including IFRS 15:IE20 in the analysis.

The Committee decided, by a majority of votes, not to add the matter to the standard-setting and to adopt the tentative agenda decision subject to the above-mentioned changes.

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