Accounting for non-cash consideration in terms of IFRS 15

Consideration for the sale of goods can be received in cash as well in a form other than cash. IFRS 15 provides specific guidance when it comes to determining the transaction price for contracts in  which a customer promises consideration in a form other than cash.

Note: The requirements for accounting for non-cash consideration are prescribed by IFRS 15. The determination of the fair value of the non-cash consideration to be accounted for must be done in accordance with IFRS 13.

If a customer provides goods and/or services to assist an entity in fulfilling its contract, the entity should assess whether it obtains control of such goods or services. In the event that the entity does obtain control of such goods and services, the goods and services will be considered to be non-cash consideration and should be accounted for as such.

This document will provide a brief snapshot regarding the treatment which IFRS 15 prescribes when accounting for non-cash consideration.

  1. What is non-cash consideration?
    Non-cash consideration can typically be defined as consideration which is received or receivable by the customer which is in a form other than cash.Examples of non-cash consideration typically include:
    ➢ Shares
    ➢ Material, equipment and labor
    ➢ Contribution of assets from the customer for the purposes of the contract being met where the entity gains control of these assets.
  2. How should non-cash consideration be measured?
    IFRS 15 prescribes that an entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair value as defined in IFRS 13. Therefore, the fair value of such the non-cash consideration (or promise of non-cash consideration) should be as at the measurement date of the transaction, which would typically be the transaction date. It is therefore extremely important to ensure that your client has accounted for the fair value of any non-cash consideration receivable at the correct date.Note that if an entity cannot reasonably estimate the fair value of the non-cash consideration, the entity shall measure the consideration indirectly by reference to the stand-alone selling
    price of the goods or services promised to the customer (or class of customer) in exchange for the consideration.
  3. How should subsequent changes in fair value of the non-cash consideration receivable be accounted for?
    If the fair value of the non-cash consideration promised by a customer varies for reasons other than only the form of the consideration (for example, the fair value could vary because of
    the entity performance), an entity shall apply the requirements in paragraphs 56 – 58 of IFRS 15.

Remember to take note of the following important points when accounting for non-cash consideration:

  • The general rule to follow is that if the consideration in the contract is received or is to be received in a form other than cash, the entity will measure such non-cash consideration at
    fair value, as defined in IFRS 13.
  • The requirements of IFRS 13 with regards to the measurement therefore need to be applied when accounting for non-cash consideration.
  • It is also crucial to note that, in accordance with IFRS 13, fair value is market-based measure of an exit price that is receivable and NOT an entity-specific value.
  • Therefore, an entity’s intention with regards to any non-cash consideration received (for example, an asset) is not relevant for the purposes of determining its fair value.

Tips on how to successfully manage the transition to the new Lease Accounting Standard

Note: The requirements for lessors remain basically unchanged since IFRS 16 substantially carries forward the requirements of IAS 17 based on the distinction between operating leases and finance leases.

To become – and remain – compliant, companies need to address five key challenges in the life cycle of a lease as far as lessees are concerned:

  1. Engage with your auditors and advisors
    a. IFRS 16 requires a significant amount of judgement and estimations.
    b. Engaging with your auditors and IFRS advisors ensures you begin with the end in mind, and will make good choices that will withstand the test of time, and help you sleep better at night.
  2. Determine if the contract contains a lease?
    a. Is there an identified asset?
    b. Does the person renting the asset obtain substantially all of the economic benefits?
    c. Does the person renting the asset have the right to direct the asset’s use?
    d. Does the person renting the asset have the right to operate the asset?
  3. Determining the lease term
    a. Non-cancellable period of the lease PLUS
    b. Period covered by an option to extend (if option is likely to be exercised) PLUS
    c. Period covered by an option to terminate (if option not exercised) contract (non-lease component).
  4. How to determine the appropriate discount rate.
    a. If there is an interest rate implicit in the lease then you should use this to discount the minimum lease payments.
    b. However, if this cannot be readily determined, you should use your company’s incremental borrowing rate (which is the rate of interest that you would have to pay to borrow a similar amount of money to fund a similar asset for a similar length of time with similar securities.)
  5. Presentation and disclosure requirements.
    a. As IFRS 16 requires much of the information that was previously disclosed in the notes to financial statements to appear on the balance sheet, investors may expect that lease liabilities on the balance sheet under IFRS 16 will reflect the discounted amount of lease commitments disclosed in the notes section under the previous Standard.
    b. Making sure that the disclosures are as complete as possible in the period between now and the application of the new Standard, will help avoid unnecessary complications.

Remember to make use of the practical expedients during the transition:

  • Application of a single discount rate to a portfolio of leases with reasonably similar characteristics.
  • Use of the exemption to apply lease accounting to leases for which the lease term ends within 12 months of the date of initial application.
  • Use of the exemption to apply lease accounting to leases of low-value items.
  • Exclusion of the initial direct costs from the measurement of the right-of-use asset at the date of initial application.
  • Using the “grandfather” approach on the previous assessment of contracts – this means the definition of a lease in terms of IFRS 16 is only applied for contracts entered into after the date of initial application.

The ‘date of initial application’ is the beginning of the annual reporting period in which a company first applies the standard. If a company prepares financial statements for annual periods ending on 31 December, presents one year of comparative financial information and adopts IFRS 16 in 2019, then its date of initial application is 1 January 2019.