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11 March 2009 1,394 views 4 Comments

Dear All,

The company has equipment which will be used in providing their service (communication equipment). this equipment will be sold to the costomer or will be given to the costumer temporarly during the service period which the company provides. After the costomer ceased agreement with the company, the equpment is returned to the company and then can be used again. The asset’s useful life is more than one year. By your opinion, how can be treated such equipments according to IFRS, as Inventory, PPE or some other assets (for-sale)?

And if it’s inventory, at the returning the asset, should we reduce COGS for this period, or it’s treated as income. thanks a lot

Salome TODUA

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4 Comments »

  • admin (author) said:

    message from Alan

    Standards to consider:

    (i) IAS 18

    (ii) IAS 16

    (iii) IAS 17

    Is it a sale of good?

    Key word is continuing managerial involvement.

    Another key word is the passing of the title.

    Is it a plant and equipment?

    I think it is safe to assume that the equipment is a non-current asset (useful life > 1 year).

    Is it a finance lease or operating lease?

    Run through IAS 17 conditions, lessor point of view.

    The transaction should be classified as one of the following:

    (i) Sale of good

    Title passes.

    (ii) Operating lease

    Title does not pass.

    PV of MLP is not at least substantially all than the FV of asset.

    Period of arrangement does not form a major part of useful life of the asset.

    Maintenance cost borne by your company.

    (iii) Finance lease

    Title does not pass, or passes at a later point.

    PV of MLP is at least substantially all of the FV of asset.

    Period of arrangement forms a major part of the useful life of the asset.

    # 11 March 2009 at 10:31 am
  • asadlarik3 said:

    the equipments are not inventory because your company does not trade in those inventories

    the transaction does not fall in leases as it is neither a lease agreement nor a hire-purchase

    So it has to be Property Plant and Equipment

    # 13 March 2009 at 12:00 am
  • admin (author) said:

    Message from Zeeshan

    Hi Salome,

    Can you clarify whether for the use of the equipment, the customer is paying any amount to the company.

    As rightly pointed out by Alan, for it to be classified under sale of goods, title needs to be transferred which does not seem to be the case since at the end of the contract machine is returned to the company.

    In my opinion, this can be treated as an operating lease and the revenue being received by the company as the rentals for use of machine.

    I am assuming it cannot be classified as finance lease since the machine has a life of period more than for which is it given for use by the customer. However, this assumption will change if we receive more information as to the total expected life of the machine and total expected time the customer is expected to use the machine and then return back.

    Hope this helps.

    Regards

    # 18 March 2009 at 9:12 am
  • admin (author) said:

    Message from Ali

    It is operating lease in accordance with given information(assuming pv
    of MLP is not greater than asset’s fair value). Treatment will be as
    follows:

    Communication equipment will be recorded as non-current asset.And will
    be depreciated as company policy.
    Income from the operating lease will be apportioned on rational basis,
    excluding charges for services e.g maintenance and insurance.

    Thanks you
    Ali

    # 19 March 2009 at 9:22 am

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