IFRIC 22 clarifies the accounting for transactions that include the payments in advance of obtaining or delivering the services or goods in a foreign currency in terms of determining “the date of the transaction”. How does the new interpretation impact IFRS preparers?
Since almost all IFRS-reporting companies invest their capacities into finding their way through the transition to the major new standards IFRS 9, 15 and 16, there may be preparers that haven’t yet thought about the implications that the new requirements included in IFRIC 22 will bring to their 2018 financial statements.
Numerous companies make and receive prepayments in foreign currencies in advance of obtaining or delivering the respective goods and services to which the prepayments relate to. In the past, there was diversity in practice for the treatment of such foreign currency transactions which is illustrated in more detail in the following example.
- Company C’s functional currency is the Swiss Franc (CHF). C receives a non-refundable amount of 100 euro (EUR) on 1 January 2018 as advance payment for delivery of a machine on 1 July 2018. The spot CHF/EUR exchange rate is 1.20 on 1 January 2018 and 1.30 on 1 July 2018.
- C would recognise cash received of EUR 100 and a contract liability (deferred revenue) of EUR 100. Both would be translated into CHF using the spot exchange rate at 1 January 2018 of 1.20 – i.e. CHF 120.
- What exchange rate will C actually use when the deferred revenue is derecognized at 1 July 2018 when the machine is actually delivered to the customer? Is the liability remeasured at that date to the then-current spot rate of 1.30?
IFRIC 22 clarifies that the answer is no (i.e the transaction date is the date on which the company initially recognizes the prepayment or contract liability arising from the advance consideration). At 1 July 2018, C derecognizes the liability of EUR 100 and recognizes revenue of CHF 120 using the 1 January 2018 spot exchange rate of 1.20 (derived from a worked example).
The new interpretation does not extend only to revenue transactions but to all transactions that include determining the exchange rate for initial recognition of related assets, expenses or income when there has been a prepayment in either direction.
I believe that this minor change may have a major impact on some IFRS preparers such as those involved in the construction sector, especially in countries where statutory financial statements are required to be drawn up in accordance with IFRS because of the generally lower materiality threshold than the one used on Group level. There may be a need to adapt accounting systems and processes in order to comply with the requirements of the new interpretation.
IFRIC 22 is applicable from 1 January 2018. There is a choice of transition options to initially apply the new requirement.
What impact do you see for your own financial statements?