28 April 2008
Mr R Garnett
Chairman IFRIC
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
UNITED KINGDOM
ifric@iasb.org
Dear Mr Garnett
D23 Customer Contributions
The Group The Group of 100 (G100) is an organization of chief financial officers from Australia’s largest business enterprises with a purpose of advancing Australia’s financial competitiveness. The G100 is pleased to provide comments on the Draft Interpretation.
The G100 is concerned that the scope of D24 is too broad in seeking to deal with all classes of customer contributions. It is not clear whether IFRIC has considered arrangements such as tooling in the automotive industry. The G100 believes that if the project is continued the focus should initially be on those customer contributions which are made to obtain connection to a network. Under these arrangements the contribution may be in the form of cash or property, plant and equipment. In these cases a distinction should be drawn between:
| i. | the physical connection to the network which is normally the purpose
of making the contribution; and |
| ii. | the subsequent access to and supply of goods or services which would normally be dealt with on an ongoing basis, |
as a means of establishing a principle.
The G100 considers that having accepted the customer contribution the provider is obliged to undertake work to connect the customer to the network (for example, gas, electricity, telecommunications, water) in accordance with the terms of the agreement. As such, it is important to identify the particular facts and circumstances in each case. For example, in come cases the obligation may be to provide goods at a reduced price as occurs in some recoverable tooling arrangements in the automotive industry while in others the fee is for connection to a network where all other services are paid for separately as provided in IAS 18, example 17.
The extension of the network and the connection of the contributor have as an objective the provision of goods and services to the customer over a presumably extended period. While D24 proposes that the contribution should be recognized as revenue it does not provide guidance as to a reasonable time period for any amortization, other than to indicate that it should be the period over which it has an obligation to provide access.
In the absence of guidance there is likely to be considerable diversity in determining an appropriate time period. For example, an entity may argue that it has fulfilled its obligation to the customer and completed all the work that is necessary once the customer is connected to its network and thus recognize the customer contribution as revenue at this point. On the other hand, a provider may consider that its obligation is to provide access to a supply over an extended period whether it is 20 years, 40 years or longer and, accordingly, recognize revenue over that period. For example, properly maintained infrastructure may have an extended useful life of 80 – 100 years or longer. In addition, arrangements in the telecommunications industry may feature renewal provisions exercisable at the option of the customer. In this regard clarity of the requirements in paragraphs 16 and 20 is desirable.
In respect of a cash contribution it is feasible that the amount of the contribution is greater than the cost of constructing the asset with the result that the entity has made a gain on the contribution transaction. It is not clear whether gains of this type are recognized upon completion of the constructed asset or whether it is also amortized over the useful life of the constructed asset.
Yours sincerely
Tony Reeves
National President