At its meeting in July 2008 the IFRIC discussed an example of a customer contribution made in return for connection to a price-regulated network. The IFRIC generally supported the staff’s conclusion on revenue recognition but asked the staff to broaden the issue and develop indicators based on IAS 18 Revenue.
At this meeting, the IFRIC discussed the staff’s analysis and rationale for a revised draft Interpretation and two illustrative examples.
Whose asset is it?
The staff reminded the IFRIC of the different steps that D24 envisaged to determine whether an asset should be recognised, including the consideration of IFRIC 4 Determining whether an Arrangement contains a Lease and IAS 17 Leases. The staff pointed out that, although respondents to D24 generally did not object to the proposals, they believed that D24 was unduly complex and difficult to understand and apply. For this reason, the staff suggested simplifying D24 and addressing the issue of who controls the asset by giving guidance based on the Framework and existing IFRSs. In doing so, readers of the Interpretation would not need to refer to other IFRSs.
The IFRIC generally agreed with the staff’s conclusion that an approach with a clear focus on who controls the asset is easier to understand than the step-by-step approach in D24. However, the IFRIC asked the staff to identify whether other indicators should be added to the revised draft. In addition the staff was asked to ensure that the guidance developed in the Interpretation is consistent with guidance on similar issues in IFRSs, particularly in situations in which the arrangements between the parties identify who controls the asset only for a portion of its useful life.
How should the credit be accounted for?
When an entity concludes that it should recognise the contributed asset because it controls that asset, the second issue is how the resulting credit should be accounted for.
At its meeting in July 2008 the IFRIC discussed an example of a customer contribution for connection to a price-regulated network. On the specific facts of the example, the IFRIC reached the tentative view that the ongoing obligation to provide access arises from the terms of the operating licence, not from the contribution. In other words, if no performance obligation remains after the connection has been established, revenue should be recognised when the connection is made.
At this meeting, the staff presented a revised draft Interpretation incorporating indicators based on IAS 18 to help identify the goods or services to be provided in exchange for the customer contribution:
- some features indicate that there may be only one service delivered: connection to the network in a rate-regulated environment or ongoing services provided at a reduced rate in an outsourcing arrangement;
- other features indicate that there may be two services delivered: the initial connection to the network and the service to provide ongoing access to a supply of goods or services.
The IFRIC supported the approach the staff had developed, which was based on identifying the different components of a single transaction in accordance with IAS 18. The IFRIC took the view that developing indicators to help such identification would be useful. The IFRIC asked the staff to refine the wording of the proposed indicators, add references in the illustrative examples to the revised draft Interpretation and develop an example of a customer contribution arising in an outsourcing arrangement.
If an ongoing service is part of the arrangement, the staff raised the issue of determining the period over which revenue should be recognised. The IFRIC concluded that that period should generally be determined by the terms of the arrangement with the customer but agreed that if the arrangement did not specify a term, the revenue should be recognised over a period no longer than the useful economic life of the contributed asset used to provide the ongoing service.
At the IFRIC’s meeting in November 2008 the staff will present a revised draft of the Interpretation that takes into account the IFRIC’s tentative views and that includes a basis for conclusions and illustrative examples.