Accounting for Prepayments in Foreign Currency under IFRS
Last update: 2023
Transactions in foreign currencies are sometimes a nightmare.
Obviously, we are trading with each other, our own currencies are different and foreign exchange rates are jumping up and down constantly.
We are all aware of basic rules with regard to selection of appropriate exchange rate to apply.
If you would like to refresh a bit, please check out our free materials about IAS 21 and foreign currencies here.
When it comes to more complicated transactions, then it’s hard to apply the rules. Often, I receive one and the same question:
“Dear Silvia, we entered a contract for production and delivery of a machine specific to our business and we paid the first down-payment in a foreign currency.
What is the correct accounting for prepayments in foreign currency under IFRS? How do IFRS treat the effect of moving exchange rates?”
Let me tell you that here, it’s not all black or white.
It depends on more factors, especially the nature of a specific prepayment.
Let me explain why and how. And let me illustrate 2 different scenarios in the examples.
What do the rules say?
Standard IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes how to convert amounts to another currency in 2 cases:
- How to translate How to translate foreign currency amounts to your functional currency;
- How to translate a foreign operation’s financial statements to presentation currency.
When you record your transactions in a foreign currency during the year, then you are translating the foreign currency amounts to your functional currency.
The standard IAS 21 prescribes:
- Initially, you should re-calculate all foreign currency amounts to your functional currency at the spot exchange rate valid at the date of transaction;
- Subsequently (that is – after initial recognition), at each closing or the reporting date, you should re-calculate:
- All monetary items in foreign currency using closing exchange rate at the reporting date;
- All non-monetary items in foreign currency carried at historical cost using the historical exchange rate (at the date of transaction);
- All non-monetary items in foreign currency carried at fair value using exchange rate at the date when fair value was determined.
To clarify the issue with prepayments, IASB issued IFRIC 22 Foreign Currency Transactions and Advance Considerations in 2016 which basically confirms that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability.
Now, Let’s break it down.
There are 2 crucial aspects to assess:
- Date of transaction;
- The nature of prepayment.
1. Date of transaction
It’s all crystal clear that initially, you should use the spot exchange rate at the date of transaction for the translation.
But here – what is the date of transaction?
It is the date on which the transaction first qualifies for recognition in accordance with IFRS.
Of course, it can be different for various items, for example:
- For financial liabilities: when an entity becomes a party to a contractual provisions of a contract;
- For property, plant and equipment: when it’s probable that the future economic benefits from the asset will flow to the entity and the cost is reliably measurable.
Although this sounds quite straightforward, some difficulties may arise in determining the transaction date.
For example – you receive goods in day 1, invoice for these goods in day 3 and you pay for these goods in day 4 – what is the date of transaction here? What currency rate shall be applied – day 1, 3 or 4?
We’ll cover this in our example, just go on reading.
2. The nature of prepayment
With regard to subsequent translation at the closing rate, IAS 21 makes a difference between monetary items and non-monetary items:
- Monetary items are translated using closing exchange rate;
- Non-monetary items are NOT re-translated, but kept at the original or historical rate.
Is the prepayment for your fixed asset monetary or non-monetary? Well, it can be either monetary, or non-monetary!
There is one thing that makes a difference:
A right to receive or obligation to deliver a fixed or determinable number of units of currency.
Prepayments as such may or may not carry this feature and you should assess each prepayment individually and carefully.
Read the specific contract – what does it say? Is your prepayment refundable and at what conditions?
If there’s a clause of refunding you the deposit – what is the probability of a refund?
In most cases, prepayments made for the acquisition of fixed assets or any goods / services in general are rarely refundable, or the probability is very low.
Therefore, your prepayment for a machine is (in most cases) a non-monetary item and as a result, you should NOT recalculate it using the closing rate at the year-end.
The following example will show you how to account for a prepayment for the acquisition of a machine if it’s classified as non-monetary asset.
Example 1 – Prepayment for the acquisition of a machine
Your functional currency is EUR and you entered into a contract for the production of a machine with a US supplier.
Total cost of a machine is USD 100 000, and you agreed to pay in 2 parts:
- Payment 1: USD 30 000 after signature of the contract;
- Payment 2: USD 70 000 after machine’s delivery.
The relevant dates and exchange rates are as follows:
| Date | What happened | Exchange rate |
| 4 February 20X1 | Contract signed | 1.3552 |
| 11 February 20X1 | The first cash prepayment for a machine | 1.3391 |
| 31 December 20X1 | The closing date | 1.3791 |
| 15 January 20X2 | Machine delivered and ownership transferred | 1.3606 |
| 20 January 20X2 | Invoice received | 1.3566 |
| 2 February 20X2 | Invoice paid | 1.3498 |
How and when should you account for these transactions?
4 February 20X1: Contract signed
On 4 February 20X1, you entered into a contract.
However, no asset can be recognized in line with IAS 16 Property, plant and equipment, as recognition criteria are not met.
Similarly, it is necessary to assess whether you should recognize some financial liability or not.
In most cases, no financial liability related to firm commitments is recognized until the goods are delivered (or shipped, depending on Incoterms), and the risks and rewards of ownership have passed.
Conclusion: no accounting on 4 February 20X1.
11 February 20X1: You paid the first payment of USD 30 000
On 11 February 20X1, recognition criteria for recognizing a machine in IAS 16 are still NOT met. Remember, you have no machine yet.
At this point, you cannot control the machine and as a result, “the future economic benefits flowing to the entity” are not probable.
I know that many companies adopted similar practice – they simply book the first payment as debit PPE – machine and credit cash. It is NOT correct, as there is no machine.
So what is the correct entry on 11 February 20X1?
-
Debit Assets – prepayments for PPE: EUR 22 403 (USD 30 000 / 1.3391)
-
Credit Cash: EUR 22 403 (USD 30 000 / 1.3391)
In practice you would use the exchange rate depending on the circumstances:
- If you paid USD 30 000 from EUR account: you use the rate at which your bank recalculated the transaction;
- If you paid USD 30 000 from your USD account: you apply some officially pronounced rate, e.g. rate by the European Central Bank.
31 December 20X1: The reporting date
In this case, the prepayment of USD 30 000 for a machine is non-monetary.
This means no recalculation. Your statement of financial position will show the prepayment at the historical rate, that is in amount of EUR 22 403.
15 January 20X2: Machine delivered and ownership transferred
This is exactly the date when you gain control over the machine. At this point, recognition criteria under IAS16 are met and you can recognize the machine as your own property, plant and equipment.
However, the invoice for the remaining part of USD 70 000 arrived on 20 January 20X2.
What currency rate should you apply?
At the date of transaction.
In this case, the date of transaction is 15 January 20X2, when a machine was delivered and the delivery gave rise to a financial liability.
As a result, your entry should be:
-
Debit Assets – machine (PPE): EUR 51 448 (USD 70 000 / 1.3606)
-
Credit Liabilities – suppliers: EUR 51 448 (USD 70 000 / 1.3606)
This is a very strict application of IAS 21 rules, but let’s be a bit more practical.
It might be acceptable to apply the exchange rate at the date of invoice rather than at the date of delivery of a machine, especially when there’s just a small delay in the invoice issuance.
However, if there’s some big change in foreign exchanges, you should really stick with the machine’s delivery date.
15 January 20X2: What about your prepayment?
On the machine’s delivery date, you need to recognize the machine and measure it at its cost.
A part of machine’s cost is your prepayment paid after contract’s signature. Cost of a machine is a non-monetary item, too – we recalculate nothing at all and keep it in historical rates.
Therefore, you do not recalculate anything and your entry is:
-
Debit Assets – machine (PPE): EUR 22 403
-
Credit Assets – prepayments for PPE: EUR 22 403
Now you may argue – but, the date when a machine appears in your financial statements is on delivery, so we should recalculate the full amount of USD 100 000 with the rate applicable on delivery.
Some companies apply this treatment, but it’s not really correct and presenting true and fair view of the transaction.
The truth is that on machine’s delivery, the recognition criteria are met and you need to recognize the machine at 1 point.
But, the measurement of its cost is a different matter.
Your real cost incurred is USD 30 000 translated with exchange rate on the date of the first payment and USD 70 000 translated with exchange rate on the date of delivery.
Please, just realize that the prepayment of USD 30 000 is no longer a USD asset. It is your EUR asset. Why?
Try to look at it this way: most non-monetary assets stop being “foreign currency” assets at the moment you recognize them in your accounts. So, you don’t have an asset (prepayment) of USD 30 000 in your books – instead, you have an asset (prepayment) of EUR 22 403.
2 February 20X2: Invoice is paid
This should be crystal clear. You record your payment with the spot exchange rate on the date of payment and any difference is recognized in profit or loss.
Your entry would be:
-
Debit Liabilities – suppliers: EUR 51 448 (USD 70 000 / 1.3606)
-
Credit Cash: EUR 51 860 (USD 70 000 / 1.3498)
-
Debit P/L – Foreign exchange loss with EUR 412 (51 860 less 51 448)
The summary of all accounting entries is here:
| When | Amount in USD | Exchange rate | Amount in EUR | Debit | Credit |
| 11 February 20X1 – Prepayment paid | 30 000 | 1.3391 | 22 403 | Assets – prepayments for PPE | Cash (bank account) |
| 15 January 20X2 – Machine delivered and ownership transferred | 70 000 | 1.3606 | 51 448 | Assets – machine (PPE) | Liabilities – suppliers |
| – | – | 22 403 | Assets – machine (PPE) | Assets – prepayments for PPE | |
| 2 February 20X2 – Invoice paid | 70 000 | 1.3498 | 51 860 | Cash (bank account) | |
| – | – | 51 448 | Liabilities – suppliers | ||
| – | – | 412 | P/L – foreign exchange loss | ||
Example 2 – Security deposit for long-term rental
Your company (functional currency: EUR) wants to rent a property in Chicago for 12 months and pays a security deposit of USD 10 000. The deposit will be refunded at the end of rental term.
The relevant dates and exchange rates are as follows:
| Date | What happened | Exchange rate |
| 24 October 20X1 | Contract signed | 1.3777 |
| 1 November 20X1 | Deposit paid | 1.3505 |
| 31 December 20X1 | Closing date | 1.3791 |
Here, the situation is a bit different because as a prepayment is refundable, it is a monetary asset.
When you make a payment, you translate it using the spot exchange rate at the date of payment.
Subsequently, you need to translate it using the closing rate on 31 December 20X1 and recognize any foreign exchange difference in profit or loss.
Here’s the summary of accounting entries:
| When | Amount in USD | Exchange rate | Amount in EUR | Debit | Credit |
| 1 November 20X1 – Deposit paid | 10 000 | 1.3505 | 7 405 | Assets – prepayments (refundable) | Cash (bank account) |
| 31 December 20X1 – Closing date | – | 1.3791 | 154 (7 405 – 10 000 / 1.3791) | P/L – foreign exchange loss | Assets – prepayments (refundable) |
What’s your own accounting practice related to deposits, prepayments or advances in foreign currencies? And, did this article help you?
Please, let me know in a comment below the article and if you know someone who can use this information, please share – thank you!
Update 05 February 2015: There was a great discussion on LinkedIn in relation to this topic. I answered several questions around, as this is very confusing topic and lots of us have some doubts around. Please, if interested, read here.
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107 Comments
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Hi Silvia,
Thank you for the detail explanation. Would you please say what will be the treatment for Advance Received.
Suppose, a construction company received an advance amount for mobilization with a condition that this amount will be adjusted with the future invoices in a proportionate manner.
Then how the advance amount will be treated in the Balance Sheet? Which rate will be used? Spot rate or closing rate?
Silvia:
Most Inventory systems have a Goods Received Not Invoiced functionality. Typically there is a transaction at January 20th recording the invoice before it’s paid (Dr liab Goods Received not Invoiced, Cr liab Accounts Payable.) Are there any IFRS standards as to whether or not you can capitalize the change in exchange rate at time of creating the AP/Invoice recording?
No, sorry.
Hi Silvia,
Thank you for your lovely refreshment of the foreign currency issues that you stated best. In addition, there is a case to identify the date of point of sales when the following occurs:
1) Transaction date
2) Invoice date
3) Payment date
So, I will be happy if you discuss this issue since it has an effect on the recognition of transaction date up on acquisition of goods/services/ made by my Company.
Hi Silvia ,
Sometimes we mix up the terms like Deferred income, Deferred Expense , Deferred tax assets , Deferred tax liability and confuse whether it is assets or liability or income . we really mix up on this lot of times.
Please write a short article on it.
Thank you
If 100% advance is made as prepayment then how we should recognisr
Hi Silvia,
Thank you for the article.
I have a question about revaluation of prepaid expenses. The scenario involves prepayments for IRU contracts (indefeasible right of use). When it comes to IRU contract, usually the customer is making one large prepayment in the begging of the contract for obtaining right of use of dark fiber line for a long period (10-15 years).
Our functional currency is EUR, but on some occasions, the prepayments are made in USD.
A basic scenario is when the advance is paid in the beginning involving one total amount. For example, we pay an advance of USD 10 million for 10 years IRU contract. Here we have advance of USD 10 million, equal to EUR 8.5 million (randomly selected fx rate USD 1.176/EUR). The prepayment is not refundable and as such I assume that the advance should not be revalued at each year end.
In this case we will recognize an annual expense of EUR 850 k.
However, for some contracts, the payments are made with few installments, rather than having one lump payment in the beginning.
The same scenario as above – 10 years IRU contract amounting to USD 10 million (the amount is not refundable). The payment schedule is as follows:
In the beginning of year 1, we pay USD 4 million
In the beginning of year 2, we pay USD 4 million
In the beginning of year 3, we pay USD 2 million.
In this case, for each payment, we have different fx rate for USD/EUR.
Could you share your thoughts about the second example. Should we revalue the advances at the year end. Further, how to estimate what EUR amount we should recognize as expense each year?
Thank you in advance.
Hi Ivan,
very interesting question. In this case, I would not revalue it either, because this is still non-monetary advance (no right to receive cash). As for the expense in EUR, I would estimate it using weighted average method. Actually, there’s no guidance about this specific case in IFRS, so you need to develop your own methods. Simply, in the year 1, you have no choice than use the historical rate of the 1st payment. In the end of the year 2, you can estimate the weighted average of the remaining 3 mil. from the 1st payment and 4 mil. from the 2nd payment and translate with that rate. You get the point. Alternatively, maybe FIFO method would be acceptable, too. Use the rate of payment 1 for the expense in the years 1-4, rate of payment 2 for the expense in the years 5-8 and rate of payment 3 for the expense in the years 9-10. Hope this helps! S.
Thank you, Silvia, for the swift reply. It was very helpful.
Hi Silvia,
I have two questions:
1) Why are non refundable prepayments non-monetery? Is it because no cash element is present in the transaction.
2) For Monetary & Non-Monetary transactions, is cash an essential factor because there could be settlements/realization made in other than cash too such as buy backs by issuing fresh equity.
I would be grateful if you may answer at the earliest.
Thanks
Ketan
Hi Silvia, thank you for your reply.
Thank you for this article. This is very informative.
But I just want to ask if the monthly restatement the monetary amount necessary? For example, our functional currency is in Yen, and we have a Cash in Bank in USD? Is it necessary to restate our USD to Yen monthly using the month end rate?
Your reply will be very helpful to us and this will be highly appreciated.
Thank you.
Jack
Hi Jack, well, IFRS do not prescribe monthly restatement. Technically speaking no, you don’t have to do it – but, if you prepare monthly reports under IFRS, then yes, you have to do it, because otherwise your reports would not be IFRS compliant.
Thanks Silvia, I need to know exactly is advances from clients for proved services or goods in monetary or not (reevaluated at the end of period or not)
talking the possibility to canceled the contract and refund the amount of advance to client
Silvia? Hope you will find some time to support / challange my confidence in the case above….. Will be highly appreciated. Thnx in advance!
Hi Silvia,
Can you please help me on the below?
The reporting currency is USD.
We purchase something and the vendor issues its invoice in EUR.
When we record the liability we use the official EUR/USD rate of the local bank of issue.
Some days later, when we pay off the liability, we evaluate the payment on Reuters daily EUR/USDrate.
There is know linkage between Reuters and the local bank of issue.
Can we follow this practice (evaluating the liability and the payment based on completely different financial institutes’ FX rates as a mix) or we should record the selected financial institute as FX rate source in our Accounting Policy?
I have reviewed IAS 21 but cannot find a clear instruction.
Please, when you answer, insert the relevant IFRS regulation reference as well.
Many thanks in advance.
Regards,
Otto
Sorry, ‘there is no linkage’ is the correct expression.
Please, replace ‘know’ with ‘no’
Dear Otto,
IAS 21 does not state precisely what rate you should use – whether Reuters, or the local bank’s rate. However, IAS 21 in par. 26 says that you should use the rate at which the future cash flows of the relevant transaction will be settled. As a result, using the local bank’s rate for recording the liability is OK, but I have doubts about translating the payments by the Reuters rate, because the payments are mostly settled using the bank’s commercial rates, too. S.
Dear Silvia,
Thank you for the answer.
Regards,
Otto
Hi Silvia,
We are in the US and Foreign Company prepaid for royalties, though in the contract the money is refundable. Each month the royalties are calculated and subtracted from the prepay.
Should the monthly royalty payments be determined using the historic currency rate or should they be calculated using the current currency rate?
Thanks for your help!
Caitlin, this is really unsolved area in IFRS. In general, I would treat it as non-monetary item, based on the probability of their refund. S.
I would be grateful to get your advice in dealing with the scenario where we have prepaid to rent an office premises overseas in USD for 1 year, and are expensing the monthly charges in USD, however our reporting currency is GBP, and due to the fluctuation of currency over the period the GBP value at the end of the year is distorted.
Is it allowable to revalue the prepayment balance for the year end financial statements even though this is a non-monetary asset?
In some other examples the closing prepayment has a positive balance in USD, but a negative value in GBP.
Thanks
Hi Tony,
your balance in GBP should not be negative. It should equal the balance of the remaining rent to be spend in USD translated by the historical rate.
In fact, when you were expensing monthly charges in USD, you should have translated these charges by the historical rate GBP/USD, not the actual rate at the time of expense. The reason is that this prepayment is a non-monetary asset (no right to receive cash, but service) and your real expense in GBP is exactly what you paid at the time of making the prepayment. S.
This is really an awesome article, thanks a million.
But my concerned is the advance or first payment made. There is no reference to the supplier account to whom the payment was made. The entries was; Debit Asset-prepayment PPE and Credit Cash. Whereas the final payment was booked in supplier account with the effect that only that portion of the total Asset value shown in supplier account in the book of the company.
In the final analysis, the supplier account in the company book does not give the total value of the Asset supplied to or purchased by the company.
Can you please, clarify this.
Thanks
is post employment benefit asset monetary item?
Yes.
Is advance given to agents for making payments of expenses on our behalf to be considered as monetary asset?
Hi Chirag,
it depends on the type of the advance. Sometimes it’s monetary and sometimes it’s non-monetary, depending on the terms agreed between the two parties (especially right of refund, its probability, etc.). I would say that in your case, it is non-monetary, because you are expecting some services to be delivered (and not cash back). Please, read more about it here. S.
are dividends paid after oci or before
Hi Silvia,
I would like to ask whether prepayments of service fees is non monetary asset, what rate to use, and for the amortization of this asset what rate should I use. Thanks.
Dear Jarra, it is very similar as for any asset you acquire. In most cases, these prepayments are non-monetary as there is no right to receive cash. S.
Thank you for your lesson and explain. it is very apparent
Very critical and interested topic
You’re highly capable in delivering and summarizing ideas
Many thanks
Dear Silvia,
As you have explained that prepayment against capital items are primarily non-monetary on the pretext that they are non refundable in nature. However, if such advance is secured in nature e.g. against 100% bank guarantee which can be invoked in case of failure of delivery of PPE and amount can be recovered. In this case, can such advance be treated as monetary item and can be translated at closing rate??
Thanx
Rosh, again, what is the probability of failure of delivery of PPE? I think that the bank guarantee does not change a character of the advance – it is still non-monetary. S.
Hey Sylvia,
I would just like to ask what if the company pays an insurance policy with a premium of 50,000, for example on June 1 but the coverage period only starts on June 15. How do you record it on both dates?
Dear Silvia,
thank you for the explanation. I’ve got the following problem:
Company 1 is ordering materials from company 2 and performs a prepayment (non-monetary goods so it should not be revalued). Both companies belong to the same owner.
Each company uses a different functional currency, the transaction happens in the reporting currency of the holding both companies belong to. Over time (with changing exchange rates) the balances of those two companies don’t match anymore. How can this difference be handled?
Hi, Silvia
we are in travel industry and Frequently,we are paying advance to Airline companies. Can we recognize these advance payments as monetary assets at end of each month?
Dear Bandara,
I think these advances are non-monetary as in most cases, the service follows (and not the repayment of the advance back to you). S.
Thank you for your valuable answer.
Hi,
I have one question. What is the treatment of Credit balance with supplier.suppose order cost is USD 50,000 we remitted 75,000 to supplier 50,000 for the order already placed and 25,000 for future orders. end of financial year company did not place any new order in that case 50,000 is advance payment to supplier being non -monetary item no translation required.but what about 25,000 against which we have not placed any order till balance sheet date . its credit balance with supplier .Should we use closing exchange rate as its a monetary item
Hi,
What about non-refundable advance payments to suppliers to buy manufacturing raw materials, is it monetary or non-monetary item given the fact that it gives the company the right to pay less than the full invoice value, I.e. Less monetary units!
Thanks
Tarig
Hi thank you for your information.
I have one question. If a company is a property seller and it takes advance payment for its construction and then they book the advance to unearned revenue. They receive advance with other currencies not functional one. Do they need to run exchange rate and calculate exchange gain loss for the unearned revenue?
Thanks for this great article bringing clarity. It would be good if you could do another write up with illustration for the opposite of above (Treatment of Advance /Deposits received).
I work for a law firm and Clients accounts aside which is straight I would like to know the following:
1. Is it acceptable to recognise or track non-monetary asset/liability in transactional (forex) currency at spot rate even though they would be not subject to translation at year end?
2. In law firms we have WIP Disbursements (also known as Unbilled Disbursements) that would be ongoing as matter proceeds and that would comprise of many entries with multiple transactional currency. My current practice is to recognise these WIP assets at historical cost value. Should it instead be recognised as monetary assets and be subjected to translation at year end? The problems here: we would have local currency Disbursements as well as forex Disbursements: then on top of that we don’t know whether the billings for these disbursements in future (especially after year end) would be in local or forex currency.
3. We also have concept of General or Office Retainer which are essentially credits or unapplied Receipts or call it Advance Deposits against matters. In G/L these are credits in WIP Disbursements Asset account.
Please ignore the above post. I would like to replace the above post with the following:
Thanks for the great article. Perhaps you could do another write up on treatment of advances received.
I need your brains on the following problem.
I work for a law firm and we have Clients Accounts and Office accounts for client matters. My issues on office accounts:
1. We would have Unbilled Disbursements (WIP Asset account) that we could incur in forex, local or mix of currencies on clients’ matters. Are these monetary items?
2. Is it okay to track foreign currency incurred Unbilled Disbursements at transaction time in forex even if they are considered non-monetary items?
3. If we track foreign currency incurred Unbilled Disbursements at their forex values, and they are considered non- monetary (hence not translated at year end), and they need to be billed in forex as billing currency is established after year end, how do we have handle this?
4. We would also have Advance Deposits (we call them General Retainers or Unapplied Credits) received in forex, local or mix of currencies to be applied to future billings on clients’ matters. These are credits to WIP Asset account. Are these monetary items?
5. Is it okay to track foreign currency received Advance Deposits at transaction time in forex even if they are considered non-monetary items?
6. If we track foreign currency received Advance Deposits at their forex values, and they are considered non- monetary (hence not translated at year end), and they need to be recognised in forex and credited against monetary forex invoices (A/R) during billing time, how do we handle this?
Thank you.
Hi Sivia
Can prepaid expenses be recorded as intangible assets which are non monetary assets.
Amit
I have a question, if the prepaid expense like prepaid insurance, will it be monetary item? and how does it affect gain/loss in currency translation?
i would like to ask you about foreign currency treatment of advance payment to supplier for multiple invoices. as payment made not relate to single invoice, some time this supplier account have Debit balance sometime credit balance.We have family relationship with supplier and have trust on him.. in order to supply finished product that required many steps for example printing, packing & material itself etc, to give him comfort we paid mostly advance amount(not relate to any single invoice) so he can use it to produce finished product.
i m confused what exchange rate to use. may i use average rate and how?
Awsome article. From now onwards i m ur die heart fan. Ur article motivated me to do more research
Hi,
This is clear to me if the case is AUC (asset under construction).
How about procurement of Inventory (trading goods)?
is historical rate of the prepayment applied to inventory cost?
Thanks,
Thank you for crystal clear explanation on accounting and
Is it monetary item when we received advance for tour package from customer.
Hi Akshan, with prepayments, it’s not crystal clear and you need to assess every single prepayment carefully. E.g. if the advance for tour package is not refundable, then it indicates it’s non-monetary. Please read more here: http://www.cpdbox.com/monetary-non-monetary/ S.
x
Dear Silvia,
If the foreign currency prepayment is not for PPE but an expense, for example, we paid Jan 20×2 rental expense in Dec 20×1, as it is a non-monetary item so we don’t recalculate it at the end of Dec 20×1 (reporting date), then when we record the rental expense in Jan 20×2 (Dr. Rental Expense/Cr. Prepayment), the expense will be shown at the historical rate (Dec 20×1), is it correct?
Thank you very much!!
Hi,
Thank you for your helpful article
i using evaluation model in PPE and the gain recognised in OCI
is this apply for All non-monetary items in foreign currency carried at fair value using exchange rate at the date when fair value was determined?
if not please give me example
Yes.
Hi, may I ask another question please?
There is no such thing as Dr Prepaid PPE and Cr Accounts payable right? Some would argue that this “AP” doesn’t meet liability criteria stated in IFRS, but to me it’s fine though, as
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. – So in this case, a past event could be the contract to buy the PPE signed and invoice sent?
Thank you very much !
But the problem is that you don’t have prepaid PPE as you haven’t paid actual cash. In practice, invoices for advanced payments are not recognised, because they would artificially increase both assets and liabilities. Anyway, if you have a contract as your past event + invoice, and you are not going to pay that, then you should recognise a liability for the penalty 😉 S.
Hi, thank you for your prompt answer.
So we need to debit full amount of PPE on the date the machine was deliver? And also credit the amount of prepayment of $30,000 that we made on 11 Feb 20X1? What if the next payment of $20,000 on 15 Feb 20X2 will only be invoiced that day?
I’m a bit confused because I thought liability/AP would only be recorded once invoice has been received.
Thank you in advance
In fact, you have some liability when you receive PPE. But be a bit practical – I don’t think that days really matter if the space between them is not that big.
Hi,
Thank you for your super helpful article. However, I have a question. Lets say a machine costs $100,00 and payment schedule is:
11 Feb 20X1: Prepayment 1: $30,000
15 Jan 20X2: Payment 2: $50,000 (machine delivered)
15 Feb 20X2: Final payment: $20,000
What would be the accounting treatment for the machine in this case? Do we record the whole PPE amount at $100,000 in 15 Jan 20X2, or do we only debit PPE $80,000?
Thank you in advance.
Hi Anh,
you should debit the full cost and the amount unpaid to the liability.
S.
Thank you very much .. I was looking for the answer from a long time.
Thank you for a good and useful article.
I would like to ask a question on advances received balances. Shall we also revalue the advances received in foreign currency from our customers?
Thank you
Dear Mica,
this is not so easy question as the situation here is unclear. Also, IFRS Foundation works on the conclusion and you can find more details here: http://www.ifrs.org/Current-Projects/IASB-Projects/date-of-transaction-identifying-applicable-exchange-rate-revenue-recognition/Pages/default.aspx
In my opinion, until the conclusion is reached, I would assess whether these advances received are refundable or not. If they are refundable and it is probable that they will be refunded, then yes, I would revalue them. But if they are non refundable, then I would not treat them as monetary liability and would not revalue.
Hi Silvia, First of all, thank you for the explanation. Do you have an updated link of this project? As we are also coping with such an issue. Thank you. Regards.
Pursuant to ASC 255-10-55-1, advances to suppliers that are not related to a fixed-price contract are considered to be rights to receive credit for a sum of money, and not claims to a specified quantity of goods or services and are considered to be monetary items. In contrast, non-refundable advances to suppliers related to a fixed-price contract are classified as nonmonetary items because they are in effect claims for future goods and services and are recorded using the historical exchange rate.
Do you believe that the above is a gaap difference between US GAAP and IFRS?
Can impairment be recorded on non-monetary assets (PPE under IAS 16) just because of exchange rate fluctuation?
thanks for the article.
I have a slightly different question because I have a chf invoice booked in 2014 for expenses in 2015 bought using a chf bank account with chf bought in 2014 to pay off the chf invoice in Dec 2014.
We account in GBP being a UK company.
The invoice is a subscription for calendar year 2015.
In order to fix the cost for 2015 in gpb we bought chf in oct 2014 to pay off the invoice in chf.
We paid the invoice in Dec 2014.
we have accounted for the chf invoice using the chf in the bank and put the cost of the invoice using the chf bank to prepayments as at end of dec 2014 with view that this cost will be spread over 2015 evenly. The cost of the prepayment is equal to the cost of the chf paid from the chf bank.
Effectively we used the average rate as proxy for spot rate to book the chf invoice.
The chf bought to pay for invoice were booked at rate given and bought from the bank.
we accounted for paying off the supplier by using the average rate as proxy for spot rate to pay the invoice from supplier account.
All fx on the chf bank and supplier account went to P&L and then was journalled to prepayments so that the prepayment cost was the cost of buying the chf.
The company has always accounted for it this way but there is little guidance for this kind of situation in ifrs and would like some advice.
what are your views.
Thanks
Paul from UK
Thank you Dear Silvia, i have a question, about the presentation of prepayments, when do you allocated? I reviewed the ifrs , and dont find this specificly , only IAS 1, mencioned about materiality in the presentation,
For example in Perú if you have a prepayment about PPE, you should presentation that as PPE, is similar if you have a prepayment about inventory you should presentation that as inventory, It is correct with IFRS ??
Hi Jim,
unfortunately, there’s no specific guidance about this matter, so we need to apply general IAS 1 rules.
As the prepayment is long-term (you don’t expect to get it back within 12 months and it will turn to PPE one day), I would really present it in the separate line under your PPE – as”prepayments for the acquisition of PPE”. This is also what our own legislation requires. For me, it’s more appropriate to show it right next to PPE rather than somewhere in the long-term loans, receivables or so. Have a nice day! S.
Thanks Silva for this educative endeavour. A company accrues rent income which it charges in a different currency on a monthly basis because it prepares its management accounts monthly. Is this a monetary item or non monetary? Which exchange rate must it use? Does the company need to re translate this item at the reporting date? I must add that the tenants do not necessarily pay before they move into premises. When they eventually pay, how do you treat it?
Dear Dasaa,
this issue is not that easy as it seems, and indeed, there are a lot of views on it. Therefore, IFRS Foundation added it to the agenda and will form some conclusion. In practice, the treatment varies, entity by entity, nation by nation.
If you are interested, please read this paper published in November 2014 by the IFRS Foundation- it will give you some approaches. (if the link does not work, please copy this to your browser: media.ifrs.org/2014/IFRIC/November/IFRIC-Update-November-2014.html#E )
S.
Thanks for writing this awesome article.
Will you please answer the following question?
If a company invests in 10,000 shares of its US based subsidiary at US$ 1 per share, will the parent company has to re-calculate the value of these shares in its separate accounts at the closing/reporting date in the following two different cases:
1.Shares are traded in the active market;
2.An active market does not exist for shares of subsidiary company.
Dear Mumtaz,
thank you for the comment. I assume the functional currency of your company is NOT USD (otherwise you would not ask).
Well, by definition, shares are NON-monetary asset, because there is no right to receive fixed or predetermined amount of a currency.
However, the recalculation depends on how you classified these shares in your financial statements.
Is it the financial instrument? If yes, then how did you categorize it? If it’s at fair value (through profit or loss, or OCI) – then yes, you recalculate these shares by the exchange rate valid at the date of setting the fair value. In this case, exchange rate differences are a part of revaluation to fair value.
However, if you keep the shares at cost (for whatever reason), then you do not recalculate it, as it is a non-monetary asset NOT at fair value.
Hope it helps!
S.
My dear, you have made accounting very interesting to me because, you have simplified most complex and difficult IFRS issues very simple and interesting
Iwish you long and healthy life.
Thank you.
Best regard.
Pinto Addo.
In case of Investments in shares or debts, Fx difference recognition place (P/L or OCI) depends upon its measurement classification category i.e. Amortized Cost, FVTPL or FVOCI under IFRS 9 and HTM, FVTPL of AFS under IAS 39
Sure, but this does not contradict what I wrote above.
Hi, my company is operating in the business of telecommunication and we have foreign suppliers invoice us once in 3 months for channel service provided by them. Every month we accrue the payment with the month-end exchange rate. These rates sometimes differ from the date of payment rate. So I have a question that where should I show this exchange difference in the financial statement, do I need to adjust this to cost of sales or record it under exchange gain/ Loss on the comprehensive income statement?