What should you consider regarding financing components in IFRS 15?
December 12, 2023
IFRS 15 - Revenue from Contracts with Customers
IFRS 15 is the international accounting standard that provides guidance on recognizing revenue from contracts with customers. The standard was issued by the International Accounting Standards Board (IASB) and is effective for annual reporting periods beginning on or after January 1, 2018.
Significant financing components within contracts with customers:
In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties to the contract. [IFRS 15:60]
Key considerations related to the significant financing component in IFRS 15 include:
Time Value of Money: IFRS 15 recognizes that the time value of money is a relevant factor in certain transactions. If the timing of payments agreed upon in the contract provides the customer or the entity with a significant benefit of financing, this should be considered and adjusted for.
Interest Rate Implicit in the Contract: The standard encourages the use of the interest rate implicit in the contract to evaluate whether a significant financing component exists. However, if the interest rate cannot be readily determined, the entity is permitted to use its incremental borrowing rate.
Practical Expedient: IFRS 15 provides a practical expedient, allowing entities not to adjust the promised amount of consideration for a significant financing component if the period between the transfer of the promised goods or services to the customer and the payment by the customer is one year or less.
Scope of Application: The concept of a significant financing component primarily applies to contracts with a significant financing element. It may not be relevant in contracts where the timing of payments is customary in the industry or if the customer pays substantially before or after the goods or services are transferred.
At MBG, we specialize in identifying contracts of this nature within your business and offering expert accounting guidance. Given the implementation of corporate tax, adherence to IFRS regulations is crucial. Feel free to reach out and let us know how we can assist you in ensuring compliance and optimizing your financial processes.