IFRS 15, Revenue from Contract with Customers has been effective for a few years, but with any new standard, particularly one as comprehensive as IFRS 15, issues arise in practice. The good news is that there are groups, such as the IASB’s own International Financial Reporting Interpretations Committee (IFRIC), that can help us understand how a standard such as IFRS 15 should be interpreted and applied. They may also recommend changes to a standard. There have been numerous practice issues related to IFRS 15 addressed by the IFRIC over the last few years, including the one this blog will illustrate related to training costs incurred to fulfill a contract.
Let’s explore this practice issue by looking at an example. This issue and the resulting explanatory guidance were addressed in a March 2020 IFRIC agenda decision. Consider the following scenario:
Workers4Hire (W4H) specializes in providing outsourced manufacturing workers to help manufacturing companies during times of peak demand. After W4H enters into a contract with a customer to provide outsourced services, it must train its employees so that they understand the customer’s processes and equipment and can immediately provide service to the customer. This training is a material cost to W4H and management is trying to determine how it should be accounted for.
So, how should W4H account for the training costs? The short answer, they should be expensed as incurred. You might have wondered if the costs should be capitalized, possibly as a contract asset under IFRS 15. Or even as an intangible asset under IAS 38. Let’s see why the costs aren’t capitalizable and therefore why the answer is expense as incurred.
There are a few standards that might apply in this scenario. Since this is part of a revenue transaction with a customer, IFRS 15 should be considered. IFRS 15 requires the capitalization of costs to fulfill a contract as a “contract asset” so long as 1.) they do not fall under the scope of another standard, and 2.) they meet three criteria specified in IFRS 15. Therefore, before even considering those criteria, we must determine whether the costs fall within the scope of another standard. These costs might be considered an intangible asset because they give rise to future economic benefits. Looking at the scope of IAS 38 Intangible Assets, training costs are specifically mentioned as being “in scope". Therefore, IFRS 15 does not apply because the costs are in scope of another standard.
Looking further into IAS 38, there are two paragraphs that address “training costs” like in our example:
- Paragraph 15 discusses training costs and states that they are unlikely to meet the definition of an intangible asset because an entity has insufficient control over the expected economic benefits arising from the training costs, unless protected by legal rights.
- Paragraph 69 further discusses this issue and notes that training activities are an example of an expenditure that is incurred “to provide future economic benefits to an entity, but no intangible asset is acquired or created that can be recognized”.
As you can see, both of these paragraphs indicate that an entity incurs these costs with the objective to provide future economic benefits, but unless the entity truly has control over those benefits, no intangible asset can be recognized. Therefore, to realize any future economic benefit from these costs, the entity must have control over its employees. And the problem with employees is that they can generally leave at any time. In turn, this creates problem with having control over the future economic benefits from the training costs. So, unless the entity is somehow protected by legal rights, the costs must be expensed as incurred.
This is one of several recent practice issues related to IFRS 15. The IFRIC, as well as certain regulators, have also addressed numerous other practice issues spanning a variety of topics. Want to learn more? Check out our IFRS Update 2020 eLearning series. It is available now and can be taken on-demand. Broken into three modules, it covers recently issued IFRS standards and amendments, IFRS 16 (Leases) implementation issues, and a variety of IFRS practice issues such as the one covered in this post.
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