Deferred payment beyond normal credit terms

Learning objectives

• Calculate the cash price equivalent of an acquisition on deferred payment terms and the interest expense.L3, L4
• Recognise an acquisition on deferred payment terms.L3

Normative references

• IAS 38 §32If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent; the difference from the total payments is recognised as interest expense over the period of credit unless it is capitalised in the cost of a qualifying asset in accordance with IAS 23.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

7 questions

• True or false? When payment for an acquired licence is deferred beyond normal credit terms, its initial cost is the total of the scheduled payments, including the portion that remunerates the credit.L2
• Kestrel acquires a process patent. The seller, whose usual settlement terms are 60 days, offers either a cash payment of {cash_price} on signing or a single payment of {deferred_amount} in three years. Kestrel opts for payment in three years. Determine the cost of the patent and the total interest expense to be recognised over the period of credit.L3
• The games publisher Pixelune buys the rights to a character licence from a studio, which agrees to be paid in a single instalment, {deferred_payment}, after two years, whereas its sales are normally settled at 30 days. No cash price is stated; the two-year discount factor, at the rate of equivalent financing, is {discount_factor}. Calculate the cost of the licence and the total interest to be spread over the period of credit.L3
• On 1 January 20X1, Ondalis acquires the right to exploit a music catalogue, payable in a single instalment, {final_payment}, on 31 December 20X2, whereas the seller usually grants 45 days. The cash price equivalent is {cash_price_equivalent}. Ondalis spreads the difference over the period of credit by applying the implicit rate of {implicit_rate} to the liability outstanding at the start of each year. Determine the cost of the right and the interest expense for 20X1 and for 20X2.L4
• On 1 January 20X1, the distributor Brenta acquires an exclusive licence to distribute a range of cosmetics, payable in a single instalment, {final_payment}, on 31 December 20X2, well beyond normal credit terms. The cash price equivalent is {cash_price_equivalent}; Brenta calculates interest at the implicit rate of {implicit_rate} on the outstanding liability. Record the acquisition entry (E1) and the entry at 31 December 20X1 (E2).L3
• On 1 January 20X1, a small brewery, Houblonne, buys the patented recipe of a beer from its inventor, who agrees to be paid {final_payment} in two years, instead of the 30 days he usually allows. Paid immediately, the patent would have cost {cash_price_equivalent}. Houblonne recognises interest at the implicit rate of {implicit_rate} on the outstanding liability. Record the acquisition (E1) and the closing entry at 31 December 20X1 (E2).L3
• The Solvane group acquires a customer list from a competitor. The contract sets a price of 1,000,000 payable in four years; the seller would have accepted 820,000 in cash, and its usual settlement terms are 30 days. The finance director wants to recognise the asset at 1,000,000, on the grounds that this is the contractual price. Which treatment should be adopted?L4