Here’s an issue recently considered by IFRIC:
- The Committee received a request about training costs incurred to fulfil a contract with a customer. In the fact pattern described in the request:
- an entity enters into a contract with a customer that is within the scope of IFRS 15. The contract is for the supply of outsourced services.
- to be able to provide the services to the customer, the entity incurs costs to train its employees (as described in paragraph 15 of IAS 38 Intangible Assets) so that they understand the customer’s equipment and processes. Applying IFRS 15, the entity does not identify the training activities as a performance obligation.
- the contract permits the entity to charge to the customer the costs of training (i) the entity’s employees at the beginning of the contract, and (ii) new employees that the entity hires as a result of any expansion of the customer’s operations.
- The request asked whether the entity recognizes the training costs as an asset or an expense when incurred.
Apparently this kind of scenario is common in industries that provide outsourcing or long-term services—for example, outsourced IT, infrastructure management, facilities management, maintenance, call centres and public transportation services – and according to the submission is “arising with increasing frequency”. IFRIC’s first step was to determine which IFRS standard applies to the training costs:
- Paragraph 95 of IFRS 15 requires an entity to recognize an asset from the costs incurred to fulfil a contract with a customer not within the scope of another IFRS Standard, only if those costs meet all three criteria specified in paragraph 95. Consequently, before assessing the criteria in paragraph 95, the entity first considers whether the training costs incurred to fulfil the contract are within the scope of another IFRS Standard.
- Paragraph 5 of IAS 38 states that ‘this Standard applies to, among other things, expenditure on advertising, training, start-up, research and development activities’. Accordingly, the Committee concluded that, in the fact pattern described in the request, the entity applies IAS 38 in accounting for the training costs incurred to fulfil the contract with the customer.
The other potential way of looking at this, as set out in the initial submission to IFRIC, would be that IAS 38 excludes from its scope “assets arising from contracts with customers that are recognised in accordance with IFRS 15 Revenue from Contracts with Customers.” The reference in IAS 38.5 to “training” might be considered as applying to an entity’s general ongoing training activities, rather than to specific learning-type activities related entirely to fulfilling an identified contract. IAS 15.97 says that “costs that are explicitly chargeable to the customer under the contract” fall into the concept of costs incurred in fulfilling a contract. So, you might argue, specifically-targeted, chargeable-to-the-customer training should fall under IFRS 15 and potentially, if all the criteria are met, recognized as an asset. But the IFRIC took a literal view of the matter: if it’s a training cost, it’s within IAS 38.
Having concluded the item falls under IAS 38, the rest is fairly straightforward:
- Paragraph 69(b) of IAS 38 lists ‘expenditure on training activities’ as an example of expenditure that an entity recognizes as an expense when incurred. Paragraph 15 of IAS 38 explains that ‘an entity usually has insufficient control over the expected future economic benefits arising from a team of skilled staff and from training for these items to meet the definition of an intangible asset’.
Even if the training costs in question did fall under IFRS 15, they likely still wouldn’t be recognized as an asset. The standard’s basis of conclusions clarifies: “only costs that give rise to resources that will be used in satisfying performance obligations in the future and that are expected to be recovered are eligible for recognition as assets. Those requirements ensure that only costs that meet the definition of an asset are recognized as such.” This would exclude training costs, for the reasons just noted. (It’s not hard to see though why some might intuitively think the capacity to recover the costs from the customer would make a difference.)
The Committee concluded that all this can be adequately analyzed from the standards as they stand, and so tentatively (for now) decided not to add the matter to its agenda. It appears that some companies have been recognizing assets under IFRS 15 in such cases, so this may be one of those cases where the recent commentary on the appropriate time allowed to implement an agenda decision is relevant (i.e. they should deal with it within months rather than years).
The background material notes one possible complexity: “One respondent noted that IFRS Standards do not define training activities and, thus, an entity may need to apply judgment to determine whether a particular activity is ‘training’ within the scope of IAS 38.” In many situations, it might be hard to draw a clear line between the costs of (say) learning how to do something and those of actually doing it. So perhaps some companies will try to nudge the excluded training costs toward the latter category…
The opinions expressed are solely those of the author.