Customer contracts under IFRS 3

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tpeter81
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Joined: 29 Jun 2021, 21:01

Customer contracts under IFRS 3

Post by tpeter81 »

Dear All,

According to IFRS3 - business combinations, customer contracts (open orders) may be recognized during the transaction as arising from contractual rights.
Example: revenue 50, cost (30) -> fair value of customer contract is 20 which may be recognized as customer contract.

Considering that 50% of revenue is down payment (completion yet 0%), the future cash flow may result in negative value. Is it possible to recognize this during the PPA?
Example: revenue 50, from which 25 is advanced payment; cost (30), completion 0% -> future cash flow will be (5)

In case of down payment, how do you recognize negative future cash flow of open orders?
Is it going to be customer contract, contingent liability, contract liability or something else?

If available, referring the related sources would also be appreciated.

Thanks Peter
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Marek Muc
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Location: Warsaw, Poland

Re: Customer contracts under IFRS 3

Post by Marek Muc »

Hi, first of all, the whole customer relationship is recognised as an asset, not only open orders

if an order was prepaid, no revenue had been recognised, but this prepayment is a contract liability to be recognised when doing PPA:
https://ifrscommunity.com/knowledge-bas ... abilities/
tpeter81
Posts: 3
Joined: 29 Jun 2021, 21:01

Re: Customer contracts under IFRS 3

Post by tpeter81 »

Dear Marek,
thanks for your reply.

I understand that prepayment will be recognized as liability, however I still do not understand how negative customer relationship may be recognized. -> Cash flows minus prepayment resulted in negative value according to MEEM approach.
(As being a major EPC contractor in the energy sector, CR may relate to open orders and not to the relationship itself.)

Contracts are not onerous, 30-40% of down payment and low profit level is industry specifity.

Thanks for your kind assistance.
Peter
JRSB
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Location: UK

Re: Customer contracts under IFRS 3

Post by JRSB »

It's probably in the books of the acquiree already? As deferred income etc?
Student of IFRS.
tpeter81
Posts: 3
Joined: 29 Jun 2021, 21:01

Re: Customer contracts under IFRS 3

Post by tpeter81 »

JRSB,
advanced payment is already booked, however future cash flows of open orders will be recognized during the transaction. (completion is 0%, therefore future cash is expected.)
should future CF be positive, it would be recognized as customer relationship (satisfying contractual rights), however idk how negative fair value may be recognized.
thanks for your cooperation.
Peter
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Marek Muc
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Posts: 1710
Joined: 15 Oct 2018, 17:21
Location: Warsaw, Poland

Re: Customer contracts under IFRS 3

Post by Marek Muc »

tpeter81, these negative future cash flows are a result of the prepayment, which is recognised as a contract liability. Contract liability is the answer to your question. However, P&L impact will still be positive, as the whole amount of revenue (50 in your example) is still to be recognised in the future
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