Comment Letter – IFRIC D24 Customer Contributions ________________________________________________________________________ Property, Plant & Equipment Received from Customer on Non-Returnable basis
IFRIC D24 1. Title - Customer Contributions 1.1 The title “Customer Contributions” sounds multiple interpretations (like donation, cash or capital contribution) and does not reflect that it refers only to Fixed Assets received from customer either as a Property, Plant & Equipment or as Cash with a direction to construct/procure Property, Plant & Equipment under non-returnable basis. 1.2 How far it is different from the accounting treatment applicable for “Reimbursements Received From Customer” is to be clarified in the Introduction paragraph itself 1.3 The existing title might create confusion in accounting treatment by the Contributor as an expense / advance / PPE given on loan. To minimize further clarifications the accounting treatment to be adhered by the Contributor needs mention in IFRIC. 1.4 In my view in case of PPE, the capitalization and economic benefits, relevant depreciation benefit under the tax laws etc remain with the owner and interpretation should not lead to a situation of capitalization in both customer and contributor’s books. The title “PPE Received from Customer on Non-Returnable basis” might convey the position precisely.
2. Criteria as to when the PPE contribution gives rise to an ‘asset’ of the entity receiving the contribution needs clarity in detail – Document guiding the ownership 2.1 The insurance document and document to be used for conveying the title from the customer to the person receiving - by an Invoice/Debit note/Asset Transfer Note/Returnable or Non-Returnable Gate pass, Shipping & other transport documents would largely act as support document for determining ownership. Most countries’ local legislations stipulate that the ownership of a movable property rest with the person in whose name the purchase & delivery document exist besides the physical possession. In case of immovable properties like Land and Buildings the ownership is attained only when the conveying document is written and registered with respective local authorities.
________________________________________________________________________ _DM Bala Chander, CA 1
Comment Letter – IFRIC D24 Customer Contributions ________________________________________________________________________ There would be conflicts in legislation requirements on Export/Import Regulations, VAT, Transfer Pricing Regulations especially when it is capitalized by the person receiving the asset and the accounting treatment should not fuel further confusion to the trade and industry. The following are my views for further discussion by esteemed members in IASB: Capitalization in the books of the Contributor 2.2 It must be narrated in IFRIC that despite possession/usage control with the person receiving the asset it would not qualify for capitalization as ‘PPE’ in the books of the person receiving the asset when the ownership control remain with the customer. In the following circumstances, the asset is eligible for capitalization only in the books of the customer viz Contributor; - when the asset is to be exclusively used for the customer and the insurable interest remain with the customer and the asset is provided on loan basis and has to be returned back as and when it is needed by the customer. (the capitalization must be ‘at cost’ and depreciation accounted over the economic useful life.) 2.3 Under the above circumstance, in the books of the person receiving the asset – the notes to the financial statements would “report the value of assets received from customer and remain in the possession” and “obligation / commitment if any in relation to such asset received from customer”. This would enable not to mislead the assets in possession of the person received it as its own asset. In certain countries like India, assets imported on loan basis also has certain export obligation attached to it and the financial statements reader should be made aware of such commitments.
Capitalization in the books of the access provider who is required to use the item of PPE to provide access to a supply of goods or services 2.4 In other words, if the arrangement with the customer is such that – (a) the asset need not be returned (b) during the physical possession with the person who received the asset, when the asset get damaged there is no obligation to recoup to the customer -then the person receiving the asset can capitalize at fair value. Depreciation on the capitalized value is effected over the economic useful life of the asset. 2.5 The credit effect can remain in Unearned revenue and get transferred to Income statement over the period when the supply of goods or services are delivered or economic useful life of the asset whichever is shorter.
________________________________________________________________________ _DM Bala Chander, CA 2
Comment Letter – IFRIC D24 Customer Contributions ________________________________________________________________________
3. Cash Contribution from customer The accounting treatment for Cash Contribution cannot be similar to a PPE received as it depends on whether the person receiving it works on agent or principal to principal relationship and the cash flown in to the books of person receiving it has to record the cash flow unlike asset received on loan basis. In the books of the person receiving the contribution 3.1 If the Customer (Contributor) makes contribution on an understanding that the asset to be constructed/acquired is on Non-Returnable basis and that person receiving the contribution is not discharging the construction/asset acquisition on behalf of the contributor and on fulfillment of the 3 indicators mentioned in para 3.2- then the amount of contribution can be reckoned as Unearned revenue. The same get transferred to Income statement over the period when the supply of goods or services are delivered or economic useful life of the asset whichever is shorter. 3.2 The following indicators are to be tested to support characterization of Cash Contributions as Revenue :
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Primary Obligor—i.e the amount to be incurred for the asset purchase is decided by the person receiving the contribution and is not dictated by the contributor. The person receiving the contribution is not discharging the obligations on behalf of the contributor ie.customer. Supplier Discretion—i.e person receiving the contribution can decide the PPE vendors from to be bought and to whom the payments are to be made and the same is not dictated by the contributor ie.customer. Credit Risk—i.e where there is a risk of collection involved in the amount to be reimbursed.
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3.3 If any of the conditions mentioned in para 3.2 is not satisfied or the asset is to be returned to the customer, the amount received from the customer is to be credited to “Liability”. The amount incurred for construction/acquisition is to be debited against the ‘Liability’ and net balance if any alone can be reckoned as Revenue or cost and amortized over the economic useful of the PPE. In the books of the Contributor 3.4 Since the Contributor has no right to repossess the PPE, in the scenario mentioned in paragraph 3.1 to 3.3, the contributor record the amount advanced as “Advance to Suppliers” and to be grouped as Other non-current asset. The ________________________________________________________________________ _DM Bala Chander, CA 3
Comment Letter – IFRIC D24 Customer Contributions ________________________________________________________________________ same gets expensed as and when good/services are received from the supplier or based on recoverability status To sum up – the basic condition for determining the ownership status of a movable property and it revolves around whether the asset from the customer (in asset form or in cash meant for construction/acquiring the asset) is returnable or not. If it is not returnable it partakes the character as expense/advance expense in the books of the contributor
DM BalaChander., B.Com.,FCA.,CWA., CS Chartered Accountant, India
________________________________________________________________________ _DM Bala Chander, CA 4