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IFRS Question 012: How to account for barter transactions?

I work in a food producing company and we buy cashew nuts from the local agricultural company for cash. However, recently, our supplier wanted to buy some products from us for their employees and we agreed that they would pay us with cashew nuts.

How shall we account for this transaction under IFRS 15?

It says that non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers are excluded from IFRS 15 rules.

So how shall we account for this transaction?

IFRS Answer 012

Nice question as I love cashew nuts!

My short answer is – under IFRS 15, at fair value.

Let’s break it down.

Does IFRS 15 apply for barter transactions?

It is true that the standard IFRS 15 specifically excludes non-monetary exchanges between entities in the same line of business to facilitate sales to customer or potential customers.

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And, the standard gives an example for two oil companies that agree to an exchange of oil to fulfil the demand from their customers in different locations.

The reason why IFRS 15 excludes similar transactions from its scope is that recognizing revenues in this case would just gross up expenses and revenues which is not appropriate when the same company acts as a supplier and a customer of the same homogeneous product at the same time.

So, the question is:

Are you working in the same line of business?

I would say no, because the food producer produces the ready-made products and sells them to the end customers.

As opposed to that, the supplier grows cashews and they are pretty different item than processed food and maybe this agricultural company has also different customers.

The second question is:

Do you swap inventories to facilitate sales to the customers?

As these 2 companies grow or make products for different types of customers, then I would say no, these inventories – cashews for finished products – are NOT made to facilitate sales.

So this is NOT the transaction excluded from the scope of IFRS 15.

How to account for this transaction?

Well, both companies simply recognize the revenue from sale of the products.

The food producer sells the finished products and receives payment with cashews and on the other side the agricultural company sells cashews and receives payment with finished products.

In what amount?

The standard IFRS 15 specifies the rules for non-cash consideration in paragraph 66 that prescribes to measure the revenue at fair value.

In the above question the fair values can be determined quite easily because they will be just selling prices for cash.

Illustration: Barter transactions under IFRS 15

Let’s say that the food producer swapped the cashews with normal purchasing price of 1 000 CU for own finished products with normal sales price of 1 000 CU.
The cost of swapped finished products was 800 CU.

So, the food producer accounts for the sale of finished products as:

  • Debit Inventories of cashews: CU 1 000,
  • Credit Sales of finished goods: CU 1 000.

Then, the finished goods are derecognized from inventories as:

  • Debit Cost of sales: CU 800,
  • Credit Inventories: CU 800.

Simple as that.

IFRS 15 and exchanges of PPE

Let me just add a note to all of this.

IFRS 15 applies to the contracts with customers.

It implies that here we are talking about swapping inventories.

Sometimes, you can swap also an item of property, plant and equipment for some other item of PPE.

In this case, IFRS 15 does not apply, because an item of PPE is not sold or disposed of within your regular operating activity and you can hardly say that the buyer of your PPE is your customer.

Just look who the customer is according to IFRS 15:
“A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. “ (IFRS 15 Definitions)

As a result, when you swap an item of PPE, it does not fall under IFRS 15.

Instead, you should be looking at IAS 16 Property, plant and equipment, more specifically at exchanges of assets.

So here, you recognize the asset acquired at fair value, you derecognize the asset given up and you can recognize gain or loss on disposal.

If you have any questions, please let me know in the comments below. Thank you!