IFRS Practice Issues:

Transfers of assets
from customers
March 2010

Foreword
The International Accounting Standards Board published IFRICInterpretation 18 Transfers of Assets from
Customers on 29 January 2009. Previously there was no specific guidance in IFRSs on the accounting for assets
received from customers, for example, in return for a network connection and/or an ongoing supply of goods
orservices.
The divergence in practice that gave rise to the interpretation came originally from the power and utilities
industry. However, the scope of the interpretation is not limited to specific industries and it is expected to have a
wide impact on existing accounting practice.
In the year since the interpretation was issued, we have had a chance to reflect on two key questions raised
by its requirements: under what circumstances an asset should be recognised in the statement of financial
position; and over what period the corresponding revenue should be recognised in profit or loss. This period of
reflection has revealed some challenging application issues, especially in the rate-regulated environment, which
are outlined in this publication.

Phil Dowad (chair)

Catherine Morley (vice-chair)
Bruce Darton
Mary Tokar
KPMGs global IFRSRevenue Recognition and Provisions leadership team
KPMG International Standards Group

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About this publication

Our IFRS Practice Issues publications address practical application issues that an entity may encounter
when applying International Financial Reporting Standards (IFRSs). They may include discussion of selected
requirements, interpretative guidance and illustrative examples to elaborate and clarify the practical application
of the requirements.

Acknowledgements

This publication has been produced jointly by the KPMG International Standards Group (part of KPMG IFRG
Limited) and the Department of Professional Practice of KPMG in Switzerland.
We would like to acknowledge the efforts of the principal authors of this publication. Those authors include
Bruce Darton, Phil Dowad, Julie Santoro, Irina Ipatova and Nicole Perry of the KPMG International Standards
Group, and Thomas Schmid and Daniel Haas of the Department of Professional Practice of KPMG in Switzerland.

Content

This issue of IFRSPractice Issues considers the requirements in IFRICInterpretation18 Transfers of Assets
from Customers (IFRIC18). While this publication considers some of the key issues that an entity may
encounter when applying the requirements of IFRIC18, it is not a comprehensive analysis of the requirements
of IFRSs. Further analysis will be necessary in order for an entity to apply the requirements to its own facts,
circumstances and individual transactions.
The text of this publication is referenced to IFRIC18 and to selected other IFRSs in issue at 28 February 2010.
References in the left-hand margin identify the relevant paragraphs.
When preparing financial statements in accordance with IFRSs, an entity has regard to its local legal and
regulatory requirements. This publication does not consider the requirements of a particular jurisdiction.
IFRSs and their interpretation change over time. Accordingly, neither this publication nor any of our other
publications should be used as a substitute for referring to the IFRSs.

Other KPMG publications

A more detailed discussion of the general accounting issues that arise from the application of IFRSs can be
found in our publication Insights into IFRS.
In addition to Insights into IFRS, we have a range of publications that can assist you further, including:

IFRScompared to US GAAP
Illustrative financial statements for interim and annual periods
IFRSHandbooks, which include extensive interpretative guidance and illustrative examples to elaborate or
clarify the practical application of a standard
New on the Horizon publications, which discuss consultation papers
IFRS Practice Issues publications, which discuss specific requirements of pronouncements
First Impressions publications, which discuss new pronouncements
Disclosure checklist.

IFRS-related technical information also is available at www.kpmgifrg.com.

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Contents
1.

Overview of accounting requirements

2.
2.1
2.2
2.3

Key implementation issues

Recognising an asset
Measuring fair value
Determining performance obligations

5
5
5
5

3.
3.1
3.2
3.3
3.4

Scope
Industries and arrangements
Transferred assets
Transferors and ultimate customers
Arrangements scoped out

6
6
6
7
7

4. Recognising an asset
4.1 Definition
4.1.1 Which party controls the asset?
4.1.2 Future economic benefits
4.2 Recognition criteria
4.3 Fair value measurement

8
8
8
8
9
9

5. Recognising revenue
5.1 Nature of performance obligations
5.1.1 Determining whether a connection is a separately identifiable service
5.1.2 Determining whether additional performance obligations arise from the transfer
5.1.3 Role of pricing of ongoing services
5.2 Separation and allocation of revenue
5.3 Revenue recognition in respect of ongoing supply of goods or services

11
11
12
12
13
14
14

6. Cash contributions

15

7. Illustrative example
7.1 Basic fact pattern

16
16

8. Effective date and transition

18

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1.

IFRSPractice Issues: Transfers of assets from customers

March 2010

Overview of accounting requirements

l

IFRIC18 Transfers of Assets from Customers provides guidance on accounting for

transfers of property, plant and equipment or cash to acquire such property, plant and
equipment (customer contributions) for entities that receive such contributions from
their customers to connect the customer to a network, or to provide the customer with
ongoing access to a supply of goods or services, or both.
The interpretation addresses only the accounting by the entity receiving the
contribution (the receiving entity).
In some cases the party contributing the asset may be different from the party that will
receive access to a supply of goods or services. This fact does not affect the accounting
outcome under IFRIC18. For convenience the interpretation refers to both parties as
the customer. This publication follows that same convention.
Although the power and utilities industry is an example of an industry to which the
guidance might apply, other industries and arrangements might be affected. Those
include telecommunication companies and car manufacturers supply and outsourcing
arrangements.
The interpretation does not apply to agreements within the scope of IFRIC12 Service
Concession Arrangements or IAS20 Accounting for Government Grants and Disclosure
of Government Assistance.
An entity that has received a customer contribution recognises it as an asset if it meets
the definition of, and recognition criteria for, an asset. In determining whether the
definition of an asset is met, the receiving entity assesses which party controls that item.
On initial recognition, the cost of the asset is measured at its fair value.
The corresponding amount for the asset recognised by the receiving entity is
recognised as revenue as the related performance obligations are satisfied.
If the only performance obligation related to the receipt of the asset is establishing
a connection to a network, then the revenue is recognised when the connection
isestablished.
If an ongoing supply of goods or services is identified as part of the arrangement,
then the revenue related to that ongoing supply is recognised over the term of the
agreement, or over a period no longer than the useful life of the asset if the period of
supply is not specified.
The accounting for cash contributions depends on whether the item of property, plant
and equipment that must be acquired or constructed is recognised as an asset of
theentity.
Irrespective of an entitys accounting period, IFRIC18 is applied prospectively to
assets received on or after 1July2009. Application to earlier transactions is permitted
provided that the necessary valuations and other information were obtained when
those transfers occurred.

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IFRSPractice Issues: Transfers of assets from customers

March 2010

2.

Key implementation issues

Due to the lack of specific guidance in IFRSs about transactions within its scope prior to the
publishing of IFRIC18, entities accounted for such transactions in a variety of ways. For example,
some entities previously recognised customer contributions received at a cost of nil or recognised
them at some amount other than fair value, some entities deferred amounts billed to customers
for establishing a connection to a network over the useful life of the asset, and some entities
accounted for a cash contribution as a deduction of the cost of the related asset. While the
introduction of IFRIC 18 may reduce divergence in practice, its implementation raises a number
of issues, especially for entities with rate-regulated operations,1 which are discussed throughout
thispublication.

2.1

Recognising an asset

The receiving entity determines whether the definition of an asset is met, and thus whether
an asset is recognised, by assessing which party controls the transferred property, plant and
equipment. The interpretation, however, does not provide extensive guidance about determining
which party controls the asset. In considering which party controls the transferred asset,
management considers all relevant factors including:

the receiving entitys power to obtain the benefits generated by the asset;
the receiving entitys power to restrict access of others to those benefits; and
which party is responsible for the operation and maintenance of the asset, specifically if the
receiving entity is required to maintain and use the transferred asset for a specified purpose.

In assessing whether an asset should be recognised, rate-regulated entities operating under a costof-service model (seesection4 of this publication) need to consider carefully the future economic
benefits expected to be realised when the asset is not included in the cost-of-servicebase.

2.2

Measuring fair value

2.3

Determining performance obligations

IFRIC 18.15(b)

In particular, issues that might be challenging in practice in determining the timing of revenue
recognition include those related to:

On initial recognition the asset is measured at its fair value. Depending on the nature of the asset,
the determination of fair value may be a difficult exercise. When determining fair value of an asset
received, an entity takes into account all of its characteristics, such as covenants and restrictions
attached. Management may need to consult specialists to assist in determining fair value.

A corresponding amount for the asset received is recognised by the receiving entity as revenue as
the related performance obligations are satisfied. In determining the timing of revenue recognition,
an entity is required to consider the nature of its performance obligations as a result of receiving
the asset. In practice it may be difficult to determine whether in return for the transferred assets
the entity is required only to connect the customer to a network, or to provide ongoing access to a
supply of goods or services, or both.

determining whether a connection to a network has stand-alone value to the customer and,
accordingly, represents a separate component of an arrangement; and
analysing the role of pricing of an ongoing supply of goods or services.

1 In this publication the term rate-regulated operations refers to a broad range of activities for which an authorised body regulates the
prices that an entity is allowed to charge its customers for goods or services. It is not necessarily intended to be used in the same
meaning as in the IASBs Exposure Draft Rate-regulated Activities.
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IFRSPractice Issues: Transfers of assets from customers

March 2010

3.

Scope

3.1

Industries and arrangements

IFRIC18.4

IFRIC18.2,
IE6-9

Customer contributions often are associated with the power and utilities industry. It is common
practice in that industry for suppliers of services to require their customers to contribute
equipment, or cash to acquire equipment, in order to connect customers to a network and to
provide them with access to a supply of services. The interpretation addresses the accounting only
by the receiving entity, and not by the entity that transfers the asset.

Example 3.1
CustomerC constructs a manufacturing plant some distance from the electricity network. To
obtain access to the network C has two options: (1) construct the infrastructure (cables, poles
etc.) from the plant to the network and transfer those assets to the electricity supplier; or (2)
request the electricity supplier to construct the infrastructure and reimburse the electricity
supplier for the costs incurred. Once the connection has been established, C will be charged on
an ongoing basis for the electricity that it consumes. In this example, IFRIC18 deals only with
how the electricity supplier should account for the customer contribution made by C.

Although the power and utilities industry is illustrated in IFRIC18 as an example of an industry to
which the guidance would apply, the scope of the interpretation is not limited to power and utility
companies. Other industries and arrangements that might be affected include telecommunication
companies and car manufacturers supply and outsourcing arrangements. An example of an
outsourcing arrangement accompanies IFRIC18 and an illustrative example related to the
telecommunications industry is included in section7 of this publication.

Many of the arrangements under which customers transfer assets may be in the scope of other
IFRSs as well as IFRIC18. For example, arrangements under which an entity receives assets that
constitute a business would be within the scope of IFRS3 Business Combinations and certain
arrangements may need to be evaluated under the guidance in IFRIC4 Determining whether an
Arrangement contains a Lease.

3.2

Transferred assets

IAS8.11, 12,
IFRIC18.BC5

The interpretation provides guidance on accounting for transfers of items of property, plant and
equipment or cash to acquire or construct such property, plant and equipment. While the IFRIC
did not prohibit the application of IFRIC18 by analogy, its application is not mandated for certain
transactions, for example, transfers of intangible assets such as software, patents, licences or
intellectual property rights. For transactions involving the transfer of assets other than property,
plant and equipment or cash to acquire or construct such property, plant and equipment, entities
consider the criteria in IAS8 Accounting Policies, Changes in Accounting Estimates and Errors in
order to determine whether IFRIC18 or other appropriate guidance should be applied by analogy.

Example 3.2
CompanyR, the receiving entity, enters into an agreement with a customer, which involves the
customer outsourcing its information technology (IT) functions to R. The agreement requires
the customer to transfer ownership of its existing IT equipment and all software licences to R.
Under the agreement, R is responsible for maintaining the equipment and for replacing it when
needed. R determines that this transaction does not constitute a business combination. In this
example, the IT equipment transferred to R by the customer is within the scope of IFRIC18.

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IFRSPractice Issues: Transfers of assets from customers

March 2010

The software licences transferred to R are not included within the scope of the interpretation
explicitly, however, R may conclude that it should apply IFRIC18 by analogy to account for the
softwarelicences.

3.3

IFRIC18.3

3.4

IFRIC18.7

Transferors and ultimate customers

In some cases the transferor may be different from the party that will receive access to a supply
of goods or services (the ultimate customer). This fact does not affect the accounting outcome
under IFRIC18. For convenience the interpretation refers to both parties as the customer. This
publication follows that same convention.

Example 3.3
A property developer builds a residential complex in an area that is not connected to the water
mains. To connect to the water mains, the property developer is required to install a network
of pipes and to transfer them to the water supply company, which will supply future services
to the residents of the complex. In this example, the property developer and residents of the
neighbourhood (present and future) would both be regarded as customers.

Arrangements scoped out

Arrangements within the scope of IFRIC12 and IAS20 are excluded from the scope of IFRIC18.

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4.
4.1

IAS16.7,
IFRIC18.9,
F.49(a), 89,

IFRSPractice Issues: Transfers of assets from customers

March 2010

Recognising an asset
Definition

An entity that has received a customer contribution within the scope of IFRIC18 recognises an
asset if it determines that the transferred item meets the definition of, and the recognition criteria
for, an asset. An asset is defined in the Framework for the Preparation and Presentation of Financial
Statements (Framework) as a resource controlled by the entity as a result of past events and from
which future economic benefits are expected to flow to the entity.

4.1.1

Which party controls the asset?

IFRIC18.9, 10 The interpretation does not provide extensive guidance on how to determine which party controls
the asset in an arrangement and does not go beyond making reference to the Framework.

Insight who controls the asset

Factors to consider in deciding who controls the asset, include:

Does the receiving entity have the power to obtain economic benefits from the asset?
Can the receiving entity restrict the access of others to the benefits from the asset?
Who is responsible for operating and maintaining the asset, i.e. the customer or the
receiving entity?

Example 4.1
Company R is an electricity supplier with a large manufacturing customer, Customer C. C
wants to ensure that it has a constant electricity supply to meet its high usage requirements.
Under the local regulatory framework, in order to obtain such a constant supply, C is required
to construct a dedicated electricity substation to Rs specifications on Cs property. Once
constructed, R will be responsible for maintaining the substation and for guaranteeing the
electricity supply to C via the substation. If C chooses to disconnect from R, then the substation
could not be used by another supplier. In this example, R controls the asset. Note that R may
also need to assess this arrangement in accordance with IFRIC 4 to determine if it acts as a
lessor in a lease in connection with the arrangement.

IFRIC18.10

The interpretation applies to transfers of assets that the recipient is required to use to connect the
customer to a network or to provide the customer with ongoing access to a supply of goods or
services, or both. Generally the receiving entity would not be able to use that asset for purposes
other than the provision of services to the contributor and, in certain circumstances, other parties,
nor would the receiving entity be able to exchange the asset, to distribute it to its owners or to use
it to settle liabilities. However, the restrictions imposed on the use of the asset by the terms of the
arrangement do not preclude the receiving entity from assessing that it controls theasset.

IFRIC18.9

The legal ownership of the asset is not the sole determinative factor in concluding which party
controls the asset.

4.1.2

Future economic benefits

The receiving entity assesses the future economic benefits that it expects to receive as part of
determining whether the definition of an asset is met. In many cases it is likely that the asset will
generate cash inflows as part of the larger infrastructure to which the asset relates.

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IFRSPractice Issues: Transfers of assets from customers

March 2010

IAS 16.7,
F49(a), 89

Insight cost-of-service model

In a rate-regulated environment, some entities may operate under a cost-of-service model.
Under this model rates charged to customers for services or goods provided largely are based
on the entitys own capital expenditures for the infrastructure, and therefore do not reflect
any customer contributions. In our view, the fact that a contributed item is not allowed by the
regulator to be included in the cost-of-service base does not necessarily imply that the item is
not an asset of the entity. While no direct economic benefits arise from inclusion in the cost-ofservice base, the asset recognition criterion requiring that economic benefits be probable may
be fulfilled.

To draw an analogy from paragraph11 of IAS16 Property, Plant and Equipment, these customercontributed assets may enable the entity to derive future economic benefits from related
assets in excess of what could be derived had those items not been acquired. An extension
to a network may enable further volume to flow through the entire network, thereby creating
economic benefit for the entity receiving the asset.

In rare cases a receiving entity may conclude that it is not probable that future economic
benefits are likely to flow to it from the use of the asset. In such situations, the asset recognition
criteria are not met.

Accordingly, rate-regulated entities operating under cost-of-service regulation need to consider

whether it is probable that future economic benefits will be realised, especially when the asset
is not included in the cost-of-service base, and hence whether the criteria for recognition of an
asset are met.

Entities also may need to consider whether there are indicators of impairment when contributed
assets that are not included in a cost-of-service base are recognised, both on initial recognition
and subsequently. IAS36 Impairment of Assets provides guidance about the recognition and
measurement of impairment of assets that are in scope of IFRIC18.

4.2

IAS16.7,
IFRIC18.11,
F89

IAS 16.24,

Recognition criteria

In determining whether a transferred asset is recognised by the recipient, IFRIC18 focuses on

determining whether the definition of an asset contained in the Framework is met. In discussing
the initial measurement of the transferred asset, the interpretation also refers to the recognition
criteria for property, plant and equipment contained in IAS16, which are consistent with the
recognition criteria for an asset in the Framework and which require that the flow of future
economic benefits associated with the item to the entity be probable and the cost of the item can
be measured reliably.
The cost of an asset received in exchange for services to be provided is determined by reference to
fair value at the date the asset is received. Section4.3 of this publication discusses application
issues related to fair value measurement.

IFRIC 18.BC14, its

15

4.3

IFRIC18.11

Fair value measurement

On initial recognition, the transferred asset is measured at its fair value. Depending on the
circumstances and the nature of the asset, the determination of fair value may be a difficult
exercise. When determining fair value of an asset received, an entity takes into account all of
its characteristics at the date of initial recognition, such as covenants and restrictions attached,
including those arising from rate-regulation. Management may need to consult specialists to assist
in determining fair value.

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IAS16.32, 33

IFRSPractice Issues: Transfers of assets from customers

March 2010

10

IAS16 specifies that the fair value of an item of property, plant and equipment usually is
determined as its market value, which normally is determined by appraisal undertaken by
professionally qualified valuers. However, due to the specialised nature of some assets it may be
difficult to determine their fair value by reference to market-based evidence.

Example 4.2
Company R supplies gas to customers. R provides a discounted rate to customers who have
installed their own pipelines, even though R has responsibility for maintaining those pipelines. In
accordance with IFRIC18, R determines that the pipelines are its assets.

For transferred assets received prior to the adoption of IFRIC 18, R measured the initial carrying
amount of the pipelines received by estimating the present value of the discount likely to be
provided to customers who contributed the assets. However, under IFRIC18 this methodology
would not necessarily represent the fair value of the pipelines. Notwithstanding the above, as
discussed in section5 of this publication, discounts to standard rates for goods or services
may play a role in determining the nature of the performance obligations and the timing of
revenuerecognition.

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11

IFRSPractice Issues: Transfers of assets from customers

March 2010

5.

Recognising revenue

IFRIC18.13

The corresponding amount for an asset recognised by the receiving entity is recognised as revenue.
The exact timing of revenue recognition requires judgement and careful consideration of the facts
and circumstances of each particular arrangement.

IFRIC18.14

In some cases the receiving entity may be required only to establish a connection to a network; in
other cases the entity may be required to provide ongoing access to a supply of goods or services;
or it may have some other performance obligation.

IFRIC18.14-20 In

5.1

determining the timing of revenue recognition, the receiving entity should consider:
what performance obligations it has as a result of receiving the customer contribution;
whether these performance obligations should be separated for revenue recognition purposes in
accordance with IAS18 Revenue; and
when revenue related to each separately identifiable performance obligation should be
recognised.

Nature of performance obligations

IFRIC18.BC18 The

interpretation does not provide comprehensive guidance on how to determine the entitys
performance obligations. In practice it may be difficult to determine whether the entity only has
to connect the customer to a network, or it has to provide ongoing access to a supply of goods or
services, or both.

IFRIC18.BC17 The

draft interpretation that preceded IFRIC18 proposed to defer revenue in all cases and to
recognise that revenue over the useful life of the asset or over the period of the agreement if
shorter. During its redeliberations the IFRIC reconsidered its proposals based on comments from
constituents. In particular, when an entity receiving an asset from its customers is required by law
or regulation to provide ongoing access to a supply of goods or services to all customers at the
same price, regardless of whether or not these customers contributed an asset, the entity may
not have any further performance obligations arising from the customer contributions once the
connection has been established. In developing its final guidance, the IFRIC shifted to the view
that revenue does not necessarily need to be deferred and that it might be appropriate in certain
situations to recognise revenue up front upon establishing a connection to a network.

Insight starting point of the analysis

The interpretation does not specify whether the analysis of performance obligations starts
with evaluating whether the connection is a separately identifiable service or with determining
whether any additional performance obligations arise from the transaction:
l

One approach is to determine whether a connection is a separate component. If the answer

to that question is no, then the performance obligation relates to the provision of ongoing
services. Accordingly, all revenue is deferred and recognised in profit or loss as services are
performed or over a period no longer than the useful life of the asset if the service period is
not specified.
Another approach is to determine whether an entity receiving a customer contribution has
an obligation to provide ongoing services. If such an ongoing obligation arises from the
customer contribution, then some or all revenue should be deferred. If no such ongoing
obligation is identified, then all revenue is recognised up front on establishing a connection
to the network.

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5.1.1
IFRIC18.15

Neither IFRIC18 nor IAS18 prescribe the manner in which an analysis of separately identifiable
components is performed. In our view, an entity should make an accounting policy choice and
disclose and apply that accounting policy consistently in determining separately identifiable
components of such arrangements.

Determining whether a connection is a separately identifiable service

To determine whether a connection is a separately identifiable service, the interpretation provides
two indicators, which are not intended to be exhaustive:

IFRSPractice Issues: Transfers of assets from customers

March 2010

the connection has stand-alone value to the customer; and

the fair value of the connection can be measured reliably.

In our experience, the principles underlying these indicators are consistent with indicators often
considered in practice in applying IAS18 to arrangements with multiple deliverables.

Insight stand-alone value of connection service

The term stand-alone value is used in IFRIC18 but is not defined in IFRSs nor does IFRIC18
contain any discussion of how to determine if a component of an arrangement has standalonevalue.

Some argue that in certain circumstances, in particular when customers are not free to choose
their supplier of goods or services, a connection to the network does not have stand-alone
value to them as the item is not sold separately by the receiving entity nor can it be resold by
the customer. Accordingly, such a connection does not represent a separate component of the
arrangement. This view is consistent with the determination of whether an item has value on a
stand-alone basis in US GAAP literature. Under US GAAP a delivered element has stand-alone
value if a vendor sells the item on a stand-alone basis or the customer could resell it for other
than scrap or salvage value.

Others have read stand-alone value to have a broader meaning than as defined under US GAAP
and believe that an item has stand-alone value if the customer derives value from that item that
is not dependent on receiving other deliverables under the same arrangement.

In our view, both of these interpretations of stand-alone value are acceptable. We believe that
an entity should make an accounting policy choice and disclose and apply that accounting policy
consistently in determining the definition of stand-alone value. Regardless, of the policy applied,
the determination of whether a component within an arrangement has stand-alone value to the
customer depends upon facts and circumstances and requires judgement.

5.1.2

Determining whether additional performance obligations arise from the transfer

A key focus for many entities is analysing whether the connection provided to the customer is
the only service provided in return for receiving the asset, thereby requiring all revenue to be
recognised up front. All relevant facts and circumstances should be evaluated when determining
whether additional performance obligations arise from the transfer including:

IFRIC18.17, IE3

whether or not the customer providing the contribution is charged the same fee for the supply
of goods or services as is charged to other customers that are not required to make such
customer contributions;

whether customers have the ability to change the supplier of goods or services at their
discretion; and

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12

13

IFRSPractice Issues: Transfers of assets from customers

March 2010

5.1.3
IFRIC18.16,
17, BC17

IFRIC18.17

whether a successor customer needs to pay a connection fee when the customer that made
the customer contribution discontinues the service, and if so, the amount of such connection
fee relative to the fair value of the asset contributed.

Role of pricing of ongoing services

While IFRIC18 requires an entity to consider the pricing of ongoing services, questions have arisen
in practice about how that requirement should be interpreted in a rate-regulated environment.
These are challenging questions and require significant judgement and careful analysis of the facts
and circumstances of each individual entity.
In our view, in determining whether a rate charged to a customer includes a discount, the entity
should compare rates for ongoing services charged to customers that make a contribution with
the rates charged to customers that do not. This is supported by paragraph 17 of IFRIC18, which
states, a feature that indicates that the obligation to provide the customer with ongoing access
to a supply of goods or services arises from the terms of the entitys operating licence or other
regulation rather than from the agreement relating to the transfer of an item of property, plant and
equipment is that customers that make a transfer pay the same price as those that do not for the
ongoing access, or for the goods or services, or for both.

Example 5.1
Company C builds a new production plant in an area that is not connected to the electricity
network. C enters into a network access contract with the local electricity supplier.

All customers who require a connection to be installed (e.g. manufacturers such as C or real
estate developers) are required to contribute infrastructure between facilities requiring electricity
supply and the electricity network. The electricity supplier has ownership of the access
infrastructure and is responsible for its maintenance, repair and overhaul.

Rates for electricity supply are regulated by the government and all customers pay the
same standard rate for the delivery of electricity. When determining the rates allowable, the
contributed assets are not included.

IFRIC18.BC17,

Given that all customers pay the same standard rate, the entity concludes that the
connection is the only performance obligation arising from the contribution of the assets and,
accordingly, revenue is recognised upon completion of the connection. This is consistent with
the conclusion reached in paragraph IE1 of the illustrative examples that accompany IFRIC 18.

IE1

One could argue that in the fact pattern above, if the customer had not contributed the
infrastructure, then the cost of that infrastructure incurred by the receiving entity would need
to be recovered by the service provider via a rate increase over the period of supply. Therefore,
revenue would be deferred because the customer would pay a different rate if the asset was
not contributed. However, in our view, the actual and not the hypothetical rates should be
considered and an obligation to provide a customer with goods or services at a standard rate
does not in itself create a separate performance obligation as a result of receiving the customer
contribution. We believe that in the fact pattern above in which all customers are required to
make a contribution and the amount of that customer contribution depends on the distance
from the network and the required capacity, such contribution in itself does not create a
separate performance obligation to provide ongoing services.

This conclusion relates to the scenario outlined and it could differ should some of the facts or
circumstances be different or additional facts or circumstances exist.

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5.2

IFRIC18.19,
BC19

Separation and allocation of revenue

5.3

IFRIC18.20

14

If more than one performance obligation is identified, then they are separated and revenue is
allocated to each separate service. IAS 18 does not mandate which allocation method to use,
and IFRIC18 refers to the guidance in IFRIC12 and IFRIC13 Customer Loyalty Programmes.
Accordingly, in our view, the following are appropriate allocation methods:

IFRSPractice Issues: Transfers of assets from customers

March 2010

allocating consideration based on relative fair values; or

applying the residual method, based on the fair value of the undelivered component(s).

This issue is discussed in our publication Insights into IFRS (4.2.60.20).

Revenue recognition in respect of ongoing supply of goods or services

If it is determined that some or all of the revenue arising from the customer contribution relates to
the ongoing supply of goods or services, then revenue is recognised as those goods or services
are delivered. Typically such revenue is recognised over the term specified in the agreement with
the customer. If, however no such term is specified, then IFRIC18 limits the period of revenue
recognition to the useful life of the transferred asset.

Example 5.2
Company R is an electricity supplier. Company C, a customer of R, contributes an electricity
substation to R. In return R connects C to the network and provides electricity via the substation
for five years at a reduced rate.

R determines that the substation should be recognised as its asset. R can estimate both the
expected costs of the connection, as well as the costs of supplying electricity to C over the term
of the contract. Additionally, R can estimate the amount of the discount that will be provided to
C over the five years compared to other customers who do not contribute assets.

It is assumed in this example that R determines that the connection has stand-alone value to
C and represents a separately identifiable component of the arrangement. On establishing the
connection, R has performed its obligation in that respect and should recognise the related
revenue. The amount of revenue related to the connection service can be determined either
based on the relative fair values of the connection service and the value of the discount applied
to ongoing services, or as a residual of the fair value of the asset contributed less the value of
the discount for ongoing services.

R recognises the remaining revenue as it fulfils the remaining performance obligations under the
contract, that is as R provides electricity to C.

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IFRSPractice Issues: Transfers of assets from customers

March 2010

6.

Cash contributions

Instead of property, plant and equipment, an entity may receive cash that must be used to
construct or acquire an item of property, plant and equipment in order to connect the customer to a
network and/or provide the customer with ongoing access to a supply of goods or services.

IFRIC18.21

The accounting for such cash contributions depends on whether the item of property, plant and
equipment that must be acquired or constructed is recognised as an asset of the entity upon
acquisition/completion:

If the asset is not recognised by the entity, then the cash contribution is accounted for as
proceeds for providing the asset to the customer under IAS 11 Construction Contracts or IAS 18,
as applicable.
If the asset is recognised by the entity, then the asset is recognised and measured as it is
constructed or acquired in accordance with IAS 16; the cash contribution is recognised as
revenue following the guidance in section5.

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IFRSPractice Issues: Transfers of assets from customers

March 2010

16

7.

Illustrative example

The following example includes two scenarios: (1) a transfer of property, plant and equipment; and
(2) a transfer of cash to acquire the property, plant andequipment. Both examples use the same
basic fact pattern. Income tax effects are ignored for the purposes of these examples.

7.1

Basic fact pattern

Under the agreement reached, R will have an exclusive right to provide the services to offices and
shops located in the new development for 20 years. In return C and its tenants will receive a rate
for services lower than R charges to its other customers. The standard monthly rate charged by R is
120, while the rate offered to C is 100. The rate reduction does not represent a volume discount.

Scenario 1: Transfer of property, plant and equipment

To fulfil this agreement, C is required to provide a special telephone substation tailored to the
requirements of the new development. The substation will be owned and maintained by R. The
estimated fair value of the telephone substation is 10,000. The useful life of the substation is
25years. The residual value of the substation is nil.

In this example R has two performance obligations: to connect the customers to the telephone
network;1 and to provide services at a reduced rate. Therefore, the total consideration
received from C will be split into two components. The fair value of the service component
may be calculated based on the value of the discount over the period of the agreement
((120-100)x12x20=4,8002, 3):

R records the following entries:

Company C develops a new commercial property, which includes offices and retail space. C
approaches telephone Company R to provide telephone facilities for the new development.

Debit

Property, plant and equipment

10,000
Deferred revenue
To recognise receipt of asset from Company C (upon receipt
of the asset)
Deferred revenue
5,200
Revenue connection component
To recognise connection of customers to the telephone
network (upon connection to the network)
(10,000 - 4,800)
Deferred revenue
240
Revenue service component
To recognise provision of services (each year over 20 years)
(4,800/20)

1 This example assumes that all customers are connected the network within the same reporting period.
2 The time value of money is not taken into account in this example.
3 This example assumes that R is using the residual method for allocation of revenue.
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Credit

10,000

5,200

240

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IFRSPractice Issues: Transfers of assets from customers

March 2010

Debit

Credit

Depreciation expense
400
Accumulated depreciation
400
To recognise depreciation of substation (each year over its
useful life of 25 years)
(10,000/25)

Scenario 2: Transfer of cash to acquire property, plant and equipment
In scenario 2 R constructs the substation itself and C pays for the cost of construction, i.e.
Company R receives cash rather than an asset contribution from C.
R records the following entries:

Debit

Credit

Cash
10,000
Deferred revenue
To recognise receipt of cash from Company C

10,000

Property, plant and equipment

10,000
Cash
To recognise construction of the substation (as
construction progresses)
Deferred revenue
5,200
Revenue connection component
To recognise connection of customers to the telephone
network (upon connection to the network)
(10,000 - 4,800)
Deferred revenue
240
Revenue service component
To recognise provision of services (each year over 20 years)
(4,800/20)

10,000

5,200

240

Depreciation expense
400
Accumulated depreciation for the asset
400
To recognise depreciation of substation (each year over its
useful life of 25 years)
(10,000/25)

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IFRSPractice Issues: Transfers of assets from customers

March 2010

18

8.

Effective date and transition

The interpretation specifies prospective application to transfers of assets from customers received
on or after 1July2009. Application to earlier transactions is permitted only if the necessary
valuations and other information were obtained at the time those transfers occurred.

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Cover design: Mytton Williams
Publication name: IFRS Practice Issues: Transfers
of assets from customers
Publication no: 908003
Publication date: March 2010