Capitalising movement in FV liability
Capitalising movement in FV liability
Been thinking about this one.
Say a company develops a new pharmaceutical product. It's passed trials and is in development stage so costs are capitalized.
Some small modifications are needed (not to the underlying medical product itself) which require IP licensed from elsewhere, the acquisition of which creates a financial liability held at fair value because the payments are variable depending on performance. There's no way to avoid payments for the following 10 years, which includes minimum royalties. We know that IFRS doesn't say what happens on subsequent changes to contingent consideration for acquisition of intangibles, so in this case let's say the additional liability/expense is later expensed as finance cost.
Can that finance cost be capitalized into the development asset? IAS 23 defines borrowing costs as those relating to the borrowing of funds. So no 'borrowing of funds' here. But IAS 23 6(a) is effective interest costs, which could arise in the absence of actual borrowing too.
There would also be a separated asset for the licensed IP, creating amortisation, which is capitalised too. IAS 38 66d.
Is there a bigger picture error here?
Say a company develops a new pharmaceutical product. It's passed trials and is in development stage so costs are capitalized.
Some small modifications are needed (not to the underlying medical product itself) which require IP licensed from elsewhere, the acquisition of which creates a financial liability held at fair value because the payments are variable depending on performance. There's no way to avoid payments for the following 10 years, which includes minimum royalties. We know that IFRS doesn't say what happens on subsequent changes to contingent consideration for acquisition of intangibles, so in this case let's say the additional liability/expense is later expensed as finance cost.
Can that finance cost be capitalized into the development asset? IAS 23 defines borrowing costs as those relating to the borrowing of funds. So no 'borrowing of funds' here. But IAS 23 6(a) is effective interest costs, which could arise in the absence of actual borrowing too.
There would also be a separated asset for the licensed IP, creating amortisation, which is capitalised too. IAS 38 66d.
Is there a bigger picture error here?
Re: Capitalising movement in FV liability
You can capitalise the interest accrued after the liability was recognised initially, but subsequent changes resulting from performance of the asset have nothing to do with borrowing cost IMO.
Say you have to pay 100 in 10 years, the PV is 90. The difference (10) is borrowing cost.
During year 2 you assess that you will have to pay a performance bonus of 30. PV of this payment is 25. The borrowing cost is only 5, not 30.
It's true that subsequent measurement of contingent consideration for acquisition of intangibles is not covered by IFRS, but treating it as finance costs in P/L makes no sense to me...
Say you have to pay 100 in 10 years, the PV is 90. The difference (10) is borrowing cost.
During year 2 you assess that you will have to pay a performance bonus of 30. PV of this payment is 25. The borrowing cost is only 5, not 30.
It's true that subsequent measurement of contingent consideration for acquisition of intangibles is not covered by IFRS, but treating it as finance costs in P/L makes no sense to me...
Re: Capitalising movement in FV liability
Should a contingent consideration arising from an operating activity (ie not a business combination) be measured at FVTPL? IAS 37 sounds more relevant to such a case than does IFRS 9, and probably we can follow the guidelines of IAS 8 in the subsequent changes in the estimate of the provisions, can't we?
Re: Capitalising movement in FV liability
Btw, US GAAP has a detailed guideline under ASC 230-10-45 about the presentation of contingent considerations in the cash flow statements, which I found helpful when developing an accounting policy for income statements under IFRS
Re: Capitalising movement in FV liability
I don't like the analogy to IAS 37. IAS 37 is for non-contractual items
so pub_acco, how do you account for contingent consideration relating to purchases of PP&E/intangibles under your policy?
so pub_acco, how do you account for contingent consideration relating to purchases of PP&E/intangibles under your policy?
Re: Capitalising movement in FV liability
Perhaps not 'contingent consideration', but a financial liability not meeting SPPI so at fair value? Same thing perhaps.
Re: Capitalising movement in FV liability
Initially measure PP&E/intangibles using a best estimate and subsequently restate the carrying amount when the estimate changes (if material; otherwise and usually just recognize the change through PL). To me IAS 37 is more intuitive in this case because I can simply reflect my own view rather than guessing independent counter parties' views to arrive at a fair value
Re: Capitalising movement in FV liability
Thanks for comments.
I think the first aspect eg the intangible with contingent payments not in a business combination comes under this..
https://www.iasplus.com/en/meeting-note ... nt-pricing
I think the first aspect eg the intangible with contingent payments not in a business combination comes under this..
https://www.iasplus.com/en/meeting-note ... nt-pricing
Re: Capitalising movement in FV liability
yep, and this is on IASB's agenda, but inactive for some time...
https://www.ifrs.org/projects/work-plan ... ion/#about
https://www.ifrs.org/projects/work-plan ... ion/#about
Re: Capitalising movement in FV liability
This is my #1 campaign - subsequent measurement in this scenario. The actual discussion by IASB never seems to come round!
Re: Capitalising movement in FV liability
Well in March (or thereabouts) your dreams will come true as you too can make a submission for the Trustees' IASB Agenda Consultation
https://www.ifrs.org/projects/work-plan ... ultation/
https://www.ifrs.org/projects/work-plan ... ultation/
Re: Capitalising movement in FV liability
Wow IFRIC did have the same discussion! So, now that they have completed revenue and lease projects, which way, analogy to IFRS 3 or IFRIC 1, do you guys think IFRIC would go for? I think IFRS 15 and 16 deal with variable considerations differently though....
Re: Capitalising movement in FV liability
I think that the closest analogy is to variable lease payments in IFRS 16, i.e. a liability with variable cash flows incurred for the ''acquisition'' of an asset outside of business combination
Re: Capitalising movement in FV liability
I guess the result would be an Agenda Decision re IAS 38?
Re: Capitalising movement in FV liability
It can result in amendments to IFRS. This question equally concerns IAS 16 and perhaps IAS 27
Re: Capitalising movement in FV liability
IFRS 18 : Contingent consideration in non-business combination scenarios
Re: Capitalising movement in FV liability
Sounds good to me