Requirement of translation of unrecoverable foreign currency receivables!

There is a case where we have foreign currency prepayments in FS which we have not translated to current exchange rate because according to IAS 21, this is considered a non monetary item! We have decided that the prepayment is not recoverable now and we need to record provision for bad debt in the accounts! Should we translate the prepayment before recording provision equal to the asset while we know the exchange rate has risen materially and would change the expense for provision of bad debt materially?

I need some clarrification. 

Your company made an advance payment in an FC to acquire an asset?

The payment is not recoverable becuase the asset will not be delivered and the payment will not be refunded?

That's exactly the case. The supplier has failed to deliver the promised subject of the contract and at the same time they can't provide us with the initial payment. So we know the amount is not recoverable! Shall we translate the prepayment as and classify it as a receivable, and then record a provision for bad debt equal to the translated amount? Or should we record the provision equal to the historical cost of the prepayment?

IFRIC 22.8 states: Applying paragraphs 21–22 of IAS 21, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.

Writing off this advance payment should be recognized as an Expense.  As such, it should be written off using the same exchange rate as when it was first recognized.

There is no justification for reclassifying this advance as a receivable since a receivable is a right to consideration arising from the sale of goods or services (IFRS 15.105) and no sale of good or services occurred.

I also do not see any reason why you would want to record a provision for bad debt.  Proper accounting would be to simply write the deposit off, reporting it as a “Loss” on the profit and loss statement.

Thank you for your consideration of the matter.
My justification for reclassifying the advance payment as a receivable (not resulting from trades of the company of course) was that the contract is not valid anymore, so the Advance Payment does not represent a future right bound by the contract and we need to simply receive it back so deciding against reclassification would distort the fair presentation.

I see what your saying as per the IFRIC 22. I perused it and I think that it does not prescribe on the case that I stated and would clarify with the following example.

Please read the example and then tell me your opinion as a user of FS.

Imagine an advance payment made in Euros (which is a foreign currency) in the books is valued at 1 million dollars, now after a couple of years the home currency (USD) suffers significant devaluation against EUR (I know in reality this would not happen but it would to emerging economies with major inflations) and if we want to translate the initial payment, it would have quadrupled (and the value would be material). Now to expense the advance payment in its initial translated value, the users of FS would not get a hold of the materiallity of the lost money, but in today's exchange rate terms, the loss would be significant and might change the opinion of the users. Deciding against translation of Adv Payment, would distort the fair representation of FS.

A pre-payment made to acquire an asset (a machine for example), is part of its acquisition cost and should be measured at the forex rate at the date it was made in the way the machine would have been measured using that rate on the date it was acquired if it had been acquired directly.

If the machine for which the deposit was made is not delivered and the deposit not refunded, it is analogous to an impairment of the machine. 

Such an impairment would be recognized at the historical cost of the machine.  The machine would not be remeasured using the forex rate on the date of the impairment.  That would not make any sense.

Thus, the argument presented in the example would be only be valid if the deposit had been recognized as a monetary asst, which it was not.  Since it was recognized as a non-monetary asset, it should not be remeasured, but should be reported as a loss in the P&L at its historical value.

BTW, there is no such thing as a receivable that is not trade if you consider the guidance provided by IFRS 15.

IFRS 15.105 …. An entity shall present any unconditional rights to consideration separately as a receivable. IFRS 15.108 A receivable is an entity’s right to consideration that is unconditional.

Similarly, IAS 1 states: (b) receivables are disaggregated into amounts receivable from trade customers, receivables from related parties, prepayments and other amounts;

Consequently, deposits given should be reported as “prepayments”.  Although commonly used in (careless) practice, the term non-trade receivables is in fact an oxymoron, and should be avoided.

 

Even we had a similar situation in our company.

As per the IFRS standard, there is no requirement to convert the prepayment amount since they are non-monetary items as you mentioned.

Hence, the provision for bad debts what's prepaid expenses can be directly routed via the Income Statement

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Regards
Casper

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