QUESTION 25 Illustration 25–Financing component: significant or insignificant? A commercial airplane component supplier enters into a contract with a customer for promised consideration of $ 7,000,000. Based on an evaluation of the facts and circumstances, the supplier concluded that $ 140,000 represented an insignificant financing component because of an advance payment received in excess of a year before the transfer of control of the product. State whether company needs to make any adjustment in determining the transaction price. What if the advance payment was larger and received further in advance, such that the entity concluded that $ 1,400,000 represented the financing component based on an analysis of the facts and circumstances.

Solution

Situation 1: $140,000 Financing Component

In the first scenario, the supplier has concluded that the $140,000 represented by the advance payment is an insignificant financing component. This means that this amount does not represent a significant financing element that the supplier provides to the customer by accepting the advance payment over a year before the delivery of the product.

As per IFRS 15, if the financing component is deemed insignificant, no adjustment needs to be made to the transaction price. Therefore, in this case, the transaction price remains at $7,000,000.

Situation 2: $1,400,000 Financing Component

In the second scenario, if the advance payment was larger and received further in advance, such that the entity concluded that $1,400,000 represented the financing component, this would mean that a significant financing component exists in the contract.

According to IFRS 15, if there is a significant financing component in a contract, the entity needs to adjust the promised amount of consideration to reflect the time value of money. This would require adjusting the transaction price to reflect the financing component. The specific adjustment would depend on the interest rate used and the time period over which the advance payment is made.

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