The IFRIC continued its deliberations on how an entity should account for the receipt of a customer contribution. Such contributions arise when a customer provides an asset to a service provider that is then used to provide a service to the customer.
The IFRIC reviewed the paper it had asked the staff to prepare explaining how an entity would apply the IFRIC’s previous tentative decisions. Those decisions were that an entity that receives a customer contribution should:
- first assess whether it has received an asset that meets the recognition criteria in IFRS;
- assess whether the related service arrangement contains a lease (using IFRIC 4 Determining whether an Arrangement contains a Lease);
- record customer contributions at fair value on initial recognition; and
- recognise any resulting credit as a liability representing the obligation to provide an ongoing service. This credit should be recognised in income as access to that service is given.
At its meeting in July 2007 the IFRIC asked the staff to consider the implications of concluding that a leaseback of the contributed asset had occurred. The IFRIC concluded that if an entity determines that there is a finance leaseback the entity supplying the service should re-assess whether the asset meets the recognition criteria. The IFRIC noted that if the entity considered the arrangement as a whole, it would assess that no asset had been transferred and that neither a finance lease receivable nor a liability should be recognised.
The IFRIC then considered the period over which the revenue should be recognised. The IFRIC decided that recognising the revenue over the period of the service contract may not be appropriate in all cases as an entity may be obliged to use the asset to provide access to an ongoing service for reasons other than the existence of a contract. The IFRIC concluded that an entity should recognise revenue over the period that it is obliged to use the asset to provide access to the ongoing service to the customer. The IFRIC noted that if the service to be provided is the ability to obtain access to the ongoing service immediate revenue recognition may be appropriate. An entity may be obliged because of a contract, statutory requirements, or because of a constructive obligation arising from past practice and expectations.
The IFRIC asked the staff to develop guidance as to factors that an entity should take into account in order to identify the period over which it is obliged to use the asset to give access to the service. In doing so, the IFRIC noted that, in most cases, it would be unlikely that an entity could be required to use such an asset to provide access to an ongoing service for a period longer than the useful economic life of the asset.
The IFRIC then considered the scope of the interpretation. It noted that its discussions to date had focussed on the contribution of an item of property, plant and equipment but that, in many cases, customers would contribute cash towards the construction and / or acquisition of an item of property, plant and equipment.
The IFRIC decided that it should extend the scope of its project to include contributions of cash that the entity is required to use to acquire or construct an item of property, plant and equipment to be used to provide access to a service to the customer.
The IFRIC concluded that the receipt of a cash contribution should be accounted for in the same way as the receipt of an item of property, plant and equipment since both produce substantially similar economic effects.