ASC 606 vs. IFRS 15

Combination of Contracts | Can the different "legs" be combined or are they accounted for independently? An example of two legs in the transaction; Leg 1) where TradeCo buys from the Supplier; Leg 2) where TradeCo sells to the Client. If the performance obligations under the two legs are distinct and separate from each other, the contracts are not required to be combined and the legs can be accounted for independently. 

For contracts to be combined the goods or services promised on the contracts need to be a single performance obligation. Independent if each contract is negotiated independently of the other, based on market terms, and the pricing for Leg 1 and Leg 2 are decided independently (i.e. the price for one contract is not dependent on the other). 

Control  of the Asset | In a purchase and sale transaction, the transfer of physical possession is known and the contract will define when payment is due, when legal title is transferred and when acceptance occurs. The analysis is focused on whether TradeCo as customer has the significant risks and rewards related to the ownership of the goods. Whereas the benefits / rewards of ownership are fairly well described in the standard (i.e. the cash flows that can be obtained directly or indirectly by e.g. using, selling or pledging the goods), the risk component is more subjective.

The risks of any goods sale transaction may include price risk, demand risk, inventory risk and liability for customer returns. While price risk and demand risk are clearly strong indicators, these are not criteria that must be present for control to have been transferred. In fact, many traditional goods flows that we come across do not display these risks, such as made-to-order products, take-or-pay contracts, long-term supply agreements, spare parts, etc.

If goods are held in the possession of TradeCo or the Client as its agent for storage and / or transportation and TradeCo has the risk of loss or damage to the goods during this period should additionally be considered as TradeCo having the “significant risks and rewards related to ownership”. This is consistent with TradeCo being owner of the goods, as defined in ASC 606-10-25-30.

Principal vs. Agent | Control is key. An example is TradeCo has control if (a) will be responsible for delivering the goods to the Client and the Client has the option to claim for acceptability, (b) has discretion with respect to accepting and rejecting orders from the Client, (c) bears the risk of loss or damage prior to the goods being purchased by the Client, and (d) has discretion in establishing the price for the goods, since it negotiates the price

Product Financing Arrangements | Requirement on the sponsor to purchase the product at a specified (i.e. fixed) price and the price be adjustable to cover substantially all fluctuation in costs incurred by TradeCo. An example is if several factors that increase the variability of returns to TradeCo (which are not passed on to the Client as would be required by the second characteristic). The TradeCo bears, amongst other things, the following risks:

• Any increase in logistics costs;

• Any increase in its insurance premium for insurance;

• Changes to its fixed costs (e.g. hiring of new personnel for this transaction); and

• TradeCo has contractual liability for its performance and the quality of the products.

The above means that TradeCo’s return is variable given there is no adjustment mechanism in the price of the product. As such, the second characteristic is not satisfied and the proposed structure does not fall within the scope of 470-40.

Repurchase Agreements | For an arrangement to be considered as a repurchase agreement, the underlying contract needs to contain any of the following three features:

1. An obligation to repurchase the asset is a critical feature. 

2. A call option gives the seller the right to repurchase the asset at a specified price. 

3. A put option gives the buyer the right to force the seller to repurchase the asset at a specified price.