IFRS 15 Significant financing component (Interest expense)

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Njabulo
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Joined: 11 Aug 2020, 10:49

IFRS 15 Significant financing component (Interest expense)

Post by Njabulo »

IFRS 15:65 and IAS 1 require that a disclosure of interest expense due to SFC be me.

My concern is, how is fair presentation achieved when i disclose this interest expense on the face of the income statement when i do not owe anyone?

Basically, the standard wants us to account for interest i would have incurred (but i did not incur it) had i went to the bank to borrow money (which i obviously did not do).
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exIFRS
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Re: IFRS 15 Significant financing component (Interest expense)

Post by exIFRS »

Just to clarify, are you looking at this from the perspective of the buyer or the seller? The seller recognises interest revenue (unless we are talking about payment in advance). But in either case the argument is the same, it is effectively about opportunity cost and consistency.

The BC to IFRS 15 provides the following example (IFRS 15.BC244 in part):
"Consider the following example: Customer A purchases a good on credit and promises to pay CU1,000 in three years. The present value of this trade receivable is CU751. Now consider Customer B who borrows CU751 from a bank with a promise to pay CU1,000 in three years. Customer B uses the loan to purchase the same good as Customer A. Economically, those transactions are the same, but, in the absence of the requirements in IFRS 15 to account for a significant financing component, the form of the transaction would determine whether an entity would recognise revenue of CU751 or CU1,000 (ie on a discounted or an undiscounted basis). For this reason, paragraphs 60 -65 of IFRS 15 require a contract with a financing component that is significant to the contract to be separated, which results in the same revenue recognition for both transactions."
Edit: Ignored the possibility of payment of advance to the seller in first answer
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