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Meeting Summaries and Observer Notes

 IFRIC July 2008


The IFRIC considered comments received on Draft Interpretation D24, published for comment in January 2008. The staff presented a paper summarising the comments received. Most respondents supported the IFRIC’s conclusion that it should develop an interpretation on this issue. However, many raised revenue recognition issues and asked the IFRIC for clarifications. Some, including utility companies, pointed out that, for example, when a utility company is required by law or regulation to provide access to a supply of a commodity to all customers at the same price, the access provider may not have any further obligation once connection to the service has been made. Some respondents believed that an obligation to provide ongoing services to the customer who contributed the asset exists only if the customer obtains in exchange some exclusive right of access to goods or services, eg at a reduced price.

The IFRIC discussed an example of a customer contribution for connection to a price-regulated network based on the background of the initial submission to the IFRIC and existing guidance issued by a national interpretative group. In the example, an electricity substation is contributed by a real estate developer to the utility company operating the electricity network. Either by law or regulation, the utility company has an ongoing obligation to provide access to the electricity network to all connected customers at the same price, regardless of whether they have contributed an asset. Once a customer is connected, the utility company provides ongoing access to its network and charges the customer a quarterly fee for that access. The customer is free to purchase electricity from providers other than the utility but must use the utility’s network to receive it.

The IFRIC generally supported the staff’s conclusion that, in the specific facts of the example, the ongoing obligation to provide access arises from the terms of the operating licence not from the contribution. The IFRIC concluded that in these circumstances the ongoing performance obligation is an executory contract and should not be accounted for, unless it is onerous.

However, some IFRIC members pointed out that the example prepared by the staff was very narrow and asked the staff to develop additional examples with different facts and circumstances (eg in a non-regulated environment or circumstances in which IFRIC 4 Determining whether an Arrangement contains a Lease might apply). Some IFRIC members also questioned whether, in accordance with paragraph 13 of IAS 18 Revenue, connection services would be identified as a separate component from the ongoing service of providing access to the network.

For discussion at the next meeting, the IFRIC directed the staff to develop indicators based on IAS 18 to help identify whether a performance obligation arising from a customer contribution exists, to prepare additional examples, and to carry forward the proposals in D24 in respect of recognition and measurement of the contributed asset.

Date: 7/10/2008