International

This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to International Accounting Standards Board during April, 2008:

Dear Sir,

IFRIC Draft Interpretation D24 - Customer Contributions

We are pleased to have the opportunity to comment on the above draft Interpretation, on behalf of BDO International ¹⁾.  We are supportive of the development of guidance in this area.
The title of the proposed Interpretation is imprecise, as the guidance covers contributions by individuals and/or entities other than customers;

• It is not clear why the scope of the guidance is restricted to the contribution of assets that fall within the definition of property, plant and equipment.  Similar arrangements could give rise to the contribution of intangible assets, such as licences;
• The layout and drafting of the proposed guidance is unnecessarily complex and difficult to understand.  We believe that there is significant scope to simplify the guidance and enhance its clarity and encourage the IFRIC to revisit the drafting of the Interpretation;
• Additional definitions should be included in order to clarify the identity of the various parties referred to in the draft Interpretation;
• It is not clear why reference is made to IFRIC 4 in the context of the provision of services, and not also in the context of the arrangement which gives rise to the receipt by the service provider of the property, plant and equipment (or other assets);

• We believe that it should be made clearer that the guidance covers the recognition of revenue as well as contributed assets.

Our detailed responses are set out below.

I)  The title of the draft Interpretation

We note that paragraph 4 of the draft Interpretation states that:
‘the customer that receives access to a supply of goods or services may contribute the asset or it may be contributed by another party’
Paragraph 6 of the draft Interpretation also notes that:
‘a customer contribution or cash contribution may be received from a customer or prospective customer or from another entity.’
We also note that the draft Interpretation deals with revenue recognition arising from the contribution.
We therefore consider that the current title ‘Customer Contributions’ is imprecise and that a more suitable title might be “Accounting for Contributions of Assets by Customers or Other Parties and the Consequent Recognition of Revenue”. 

II)  Scope

We note that the scope of the draft Interpretation is such that it would apply to all circumstances in which an entity receives an item of property, plant and equipment that it is required to use to provide access to a supply of goods or services.  Paragraphs 4 and 6 note that the asset(s) may be contributed by a customer, prospective customer or another party (paragraph 4) / entity (paragraph 6).

While we understand why the IFRIC would wish to extend the scope of parties which might contribute asset(s), there is a risk that the scope of the draft Interpretation might be widened to cover other situations which may not be intended (e.g. business reorganisations or the exchange of assets).

The May 2007 edition of IFRIC Update notes that this draft Interpretation is aimed at explaining the proper accounting treatment for contributions (assets or cash) received from and/or on behalf of customers, in order for the customers to obtain an ongoing service or to secure the ongoing supply of goods from the entity.  It would be helpful for this more restrictive language to be included in the Interpretation.

It is also unclear why the scope of contributed assets is restricted to property, plant and equipment.  We believe that the IFRIC should consider expanding this to cover other assets, including intangibles such as licences.

III)  The overall layout of the draft Interpretation

The layout and content of the draft Interpretation is difficult to follow and could usefully be enhanced.  The draft Interpretation might be better set out as follows:
1)  References
2)  Background
3)  Scope
4)  Definitions
5)  Issues
6)  Recognition of a cash contribution
7)  Recognition of customer contribution
8)  Determining whether the contribution and/or on-going arrangements contain a lease
9)  Recording the obligation to provide access to a supply of goods and services
10)  Recognition of revenue from the provision of access to a supply of goods and services
11)  Effective date
12)  Transition
13)  Basis for conclusions

IV)  The defined terms used in the draft Interpretation

It would be helpful for additional defined terms to be included, and for the definitions of existing terms to be clarified.  In particular:
i)  Access Provider

Although the term ‘access provider’ is used in the draft Interpretation, it is not defined.  It would be helpful for this definition to be included and linked to the definitions of customer contributions and cash contributions.

ii)  Customer contribution

The term ‘customer contribution’ is imprecise and unclear in the context of the draft Interpretation.  This term might be replaced by, for example ‘functional contribution’, ‘non-monetary contribution’ or ‘contributed asset’ which would be more descriptive of the fact that the item could be contributed by a party other than a customer.

We also note that the language used in the draft Interpretation is inconsistent.  The definition of customer contribution in paragraph 5 states that the access provider is ‘required to use’ the item of property, plant and equipment to provide access to a supply of goods or services to a customer or customers.  However, paragraph 4 states that the item ‘must be used’ in order to provide such access which implies that the access could be provided by a party other than the access provider, even if the access provider retained the ultimate responsibility for the provision of the goods or services.

V)  Definition of an asset and determination of whether an arrangement contains a lease

We agree with the requirement to assess whether a resource would meet the definition of an asset, with reference to the recognition criteria in the Framework.  However, it would be helpful to set out in the Basis for Conclusions how the first sentence of paragraph 10 (which states that “In order to demonstrate that it controls the resource, the entity shall consider the terms and conditions of the arrangement to assess whether it has the ability to access the benefits arising from the resource and whether it has the powers to restrict others’ access to those benefits.”) links to the relevant paragraphs in the Framework.
We note that guidance has been included to cover circumstances where an ongoing arrangement contains a lease.  However, it would also be appropriate for consideration to be given to whether a customer contribution (whether from a customer or another party) itself gives rise to a lease which should be recognised by an access provider as a lessee (whether this is an operating lease or, perhaps more importantly, a finance lease).  For example, the exclusive use by an entity of a contributor’s asset may give rise to the entity acquiring an asset (or assets) under a finance lease even though the entity does not itself own the asset(s); paragraph 10 in particular should be redrafted to make this clear.

VI)  The recognition of a customer contribution as an asset

Paragraph 8 requires that where a customer contribution qualifies for recognition as an asset then such an asset shall be recognised as property, plant and equipment and measured on initial recognition at fair value.  We believe that paragraph 8 should give more direct reference to IAS 16 in the context of subsequent accounting for the contributed asset (subject to a widening of scope to cover contributed assets which fall within the scope of other standards).

There may be instances where there is no market based evidence of fair value of the contributed resource because of the specialist nature of the assets concerned.  It would be necessary to ascertain fair value using a depreciated replacement cost approach or an income approach.  However, the contributed asset(s) may be of such a specialist nature that it may be very difficult to ascertain the fair value.  The draft Interpretation might provide guidance on how this might be addressed.

As noted above, there may be arrangements where a contributed asset does not meet the definition of property, plant and equipment.  For example, it might be a significant item of computer software, or some other intangible asset such as a licence that is used to provide access to a supply of goods and services.  In addition, in certain business arrangements a customer or potential customer might contribute a controlling interest in an entity which holds specific assets that provide ongoing goods or services.  This might have the same substantive effect as a direct contribution of the relevant assets. 
It would be helpful for the scope of the draft Interpretation to be widened to deal with these circumstances.

VII)  Cash contributions

Arrangements may dictate that cash contributions are to be received in stages (for example amounts may be paid to the access provider in instalments under a contract).  It would therefore be helpful if the draft Interpretation clarified the accounting for an arrangement where the customer contribution is of a financial asset other than a direct cash contribution.

VIII)  Provision of access to a supply of goods or services

It is unclear as to why the obligation to provide access to a supply of goods or services can not be longer than the useful life of the contributed asset (see paragraph 20).  For example, an entity might have an obligation to provide goods and services over a period of 20 years and, as an incentive, receive assets on inception of the arrangement which have a useful economic life of 10 years.

IX)  Consideration of the use of illustrative examples

It would be of particular assistance if the draft Interpretation included examples of the accounting for the following four scenarios:

A) The receipt of a customer contribution (for example with a contractual obligation for the access provider to provide access to goods or services) that does not contain an operating lease;

B)  The receipt of a customer contribution (for example with a contractual obligation for the access provider to provide access to goods or services) that contains an operating lease;

C)  The receipt of a cash contribution (for example with a constructive obligation arrangement for the access provider to provide access to goods or services); and

D)  The receipt of the combination of a cash contribution and a customer contribution where the cash contribution will be required to be used to construct an item of property, plant and equipment that must be used to access provider to provide access to goods or services.

X)  Matters addressed in the Basis of Conclusions

Paragraphs BC8 and BC9
The first sentence of paragraph BC9 uses the phrase “the customer”, which appears to imply that there is always a customer providing the contributed asset.  However, paragraph 5 notes that such an asset could be contributed by another party (and paragraph 6 that the contribution could be made by another entity).  The use of the phrase “the customer” should be replaced by ‘the individual or entity’.

Because the contribution could be received from an individual or entity other than the customer, paragraphs BC8 and BC9 should be redrafted as appropriate.

Paragraph BC24(b)
Paragraph BC24 (b) should also address the appropriate accounting approach where it is not the customer making the contribution.


Should you wish to discuss any of the observations included in this letter please do not hesitate to contact Helen Thomson, ph: +32 (0)2 778 01 30, or Andrew Buchanan, ph: +44 (0)20 7893 3300.

Yours faithfully,


BDO Global Coordination B.V.

¹⁾ BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients.  Each BDO Member Firm is an independent legal entity in its own country. 
 
The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the Global Coordination Office is located.

Draft Interpretation D24, Comments due 25 April 2008:

IFRIC Draft Interpretation D24 - Customer Contributions.pdf