Prepayments

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Aga
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Joined: 26 Apr 2019, 21:57

Prepayments

Post by Aga »

Hello Marek,

The Company paid prepayments for the delivery of goods in 2018 to a related party. Prepayments were reclassified from short-term prepayments to long-term aprepayments. The settlement of "prepayments" is likely to take place in the coming years through the delivery of goods. The Company cannot reclassify prepayments into loans due to bond covenants. Due to the fact that there will be a very long period from the payment of the prepayments to the date of receipt of the goods, should the Company separate the financing element? If so, should I use IFRS 15 to extract this element? Should I recognize the cost of purchasing goods at the cash price and charge interest income as the difference between the cash price and the lower price paid for the goods that results from the prepayment?

Best regards,
Aga
JRSB
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Re: Prepayments

Post by JRSB »

Seems quite clear to be a financing element - why did they pay so far in advance, was it in substance an interest free loan from the related party? Was the price for the goods the same as a third party would pay?
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Aga
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Joined: 26 Apr 2019, 21:57

Re: Prepayments

Post by Aga »

In substance it is free interest loan to the related party. The purchase price of the goods is lower than for 3parties.
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Marek Muc
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Re: Prepayments

Post by Marek Muc »

So it seems to me that this should be accounted for as a loan. If you don't want to do that, then it's best to follow the approach that you outlined, though IFRS 15 does not apply strictly speaking from the perspective of the Company lending money, as it is a buyer in this arrangement.

Ps. It's an open community, so it's 'hello Members' rather than 'hello Marek' ;)
JRSB
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Re: Prepayments

Post by JRSB »

also, if I recall correctly, IFRS 15 only has in its scope arrangements which are conducted under commercial terms
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pub_acco
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Re: Prepayments

Post by pub_acco »

This AD is directly relevant to this topic, maybe? https://www.ifrs.org/content/dam/ifrs/s ... tracts.pdf

IMO this arrangement is not a loan or under IFRS 9 if the buyer is not able to collect the prepayment in cash.
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Marek Muc
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Re: Prepayments

Post by Marek Muc »

It couldn't be more relevant :)

And you are obviously right that this is not a financial instrument.

So I guess the best option is to keep it as a prepayment and accrue interest income over time
Aga
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Joined: 26 Apr 2019, 21:57

Re: Prepayments

Post by Aga »

Hello Members,

Thank you very much.

Best regards,
Aga
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