IFRIC 22
Published
Foreign Currency Transactions and Advance Consideration
Addresses which exchange rate to use when translating advance consideration paid or received in a foreign currency, clarifying that the transaction date is the date of initial recognition of the prepayment or deferred income.
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Conceptual Framework Linkage
Why the exchange rate for advance consideration was unclear
IAS 21's general rule is that foreign currency transactions are translated at the EXCHANGE RATE AT THE DATE OF THE TRANSACTION. But advance consideration (prepayments or advance receipts) creates a timing gap: the CURRENCY EXCHANGE OCCURS at one date, while the RELATED REVENUE OR EXPENSE is recognised at a LATER DATE. IFRIC 22 resolves this gap by clarifying that the "date of the transaction" for translation purposes is the DATE OF INITIAL RECOGNITION of the prepayment or deferred income – not the later date when revenue or expense is recognised.
This clarification was important because advance consideration is common in international trade, construction, and service industries – entities were applying different exchange rates, creating inconsistent measurement of both the prepayment and the related revenue/expense.
The monetary vs non-monetary distinction
IAS 21 distinguishes between MONETARY and NON-MONETARY items for exchange rate translation. Monetary items are retranslated at each reporting date; non-monetary items are translated at the transaction date and never retranslated. IFRIC 22 clarifies that ADVANCE CONSIDERATION is a NON-MONETARY item – it is not retranslated at each reporting date, but is measured at the exchange rate on the date of initial recognition.
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Scope & Definitions
What IFRIC 22 covers
IFRIC 22 applies to the EXCHANGE RATE used when translating ADVANCE CONSIDERATION – including ADVANCE PAYMENTS (prepayments made by the entity) and ADVANCE RECEIPTS (deferred income from customers). The interpretation applies when the advance consideration is denominated in a FOREIGN CURRENCY and the entity's functional currency is different. IFRIC 22 does NOT apply to monetary items (which are retranslated under IAS 21's general rule) or to the subsequent measurement of the related revenue or expense.
TYPICAL FACT PATTERNS
Advance payments for imported inventory paid in USD when functional currency is GBP Advance receipts from international customers denominated in EUR for services to be delivered later Construction contracts with advance payments in foreign currency Prepayments for PPE acquired from a foreign supplier
Key definitions
Advance consideration
An amount paid or received in advance of the delivery of goods or services, denominated in a foreign currency, which gives rise to a prepayment asset or deferred income liability.
Date of initial recognition
The date on which the entity first recognises the prepayment asset or deferred income liability – the exchange rate date IFRIC 22 specifies for translation.
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The Question IFRIC 22 Answers
The specific ambiguity IFRIC 22 resolved
Before IFRIC 22, entities faced a genuine ambiguity: IAS 21 says to translate at the "date of the transaction," but advance consideration involves TWO dates – the date the currency is EXCHANGED and the date the PREPAYMENT OR DEFERRED INCOME is RECOGNISED. Different entities applied different dates, leading to materially different measurements. Some used the exchange date (when the cash changed hands); others used the later recognition date (when the prepayment or deferred income was recorded). IFRIC 22 resolves this by specifying the RECOGNITION DATE.
⚠️ The "date of the transaction" in IAS 21 refers to the date the entity ACQUIRES or INCURS the obligation – for advance consideration, that is the date of INITIAL RECOGNITION of the prepayment or deferred income, NOT the date the cash was paid or received.
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The Core Conclusion – Date of Initial Recognition
The definitive rule
IFRIC 22 specifies that advance consideration is translated at the EXCHANGE RATE AT THE DATE OF INITIAL RECOGNITION of the prepayment asset or deferred income liability. This date is when the entity FIRST RECOGNISES the asset or liability in its financial statements – which may be the date the cash is paid or received, but may be a different date if the entity's accounting policies defer recognition.
TRANSLATION RATE FOR ADVANCE CONSIDERATION
Advance consideration (functional currency) = Foreign currency amount × Exchange rate at the date of initial recognition
Why the recognition date, not the cash flow date
The recognition date is the appropriate date because it is the point at which the entity ACQUIRES A RIGHT (prepayment) or INCURS AN OBLIGATION (deferred income). At that point, the economic substance of the transaction is complete – the entity has either paid for future goods/services or received payment for future delivery. The cash flow date is merely the settlement mechanism; the accounting event occurs at recognition.
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Multiple Advance Payments or Receipts
Each advance payment has its own exchange rate
When an entity makes MULTIPLE ADVANCE PAYMENTS or receives multiple advance receipts, EACH PAYMENT is translated at the EXCHANGE RATE ON ITS OWN DATE OF INITIAL RECOGNITION. There is no averaging or pooling of exchange rates across multiple payments. This means that if a company makes advance payments on 1 January, 1 March, and 1 June, each payment is translated at the rate on its respective date.
PRACTICAL IMPLICATIONS
Each prepayment/receipt creates a separate asset/liability measured at its own exchange rate When the advance is applied to revenue or expense, the translation difference (if any) affects the P&L Systems must track individual advance payments by date – not just aggregate amounts
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Why the Prepayment Is Non-Monetary
The non-monetary classification
IFRIC 22 clarifies that ADVANCE CONSIDERATION is a NON-MONETARY ITEM under IAS 21. This means it is NOT retranslated at each reporting date using the closing rate. Instead, it is measured at the exchange rate on the date of initial recognition and remains at that rate until the prepayment is applied to revenue or expense. This classification is consistent with IAS 21's general principle that non-monetary items are measured at historical cost (transaction date rate).
The contrast with monetary items
If the advance consideration WERE a monetary item, it would be retranslated at each reporting date using the closing rate, with exchange differences recognised in profit or loss. IFRIC 22's non-monetary classification means that exchange differences arise ONLY when the prepayment is ultimately applied to revenue or expense – not at each interim reporting date. This produces less P&L volatility than a monetary treatment would.
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Worked Example – Single Advance Payment
Example: USD advance payment for inventory
A UK company (functional currency: GBP) pays a USD 100,000 advance to a US supplier for inventory to be delivered in 6 months. The exchange rate on the payment date (1 January) is 1.25 USD/GBP. The exchange rate on the delivery date (30 June) is 1.35 USD/GBP. The inventory cost is USD 500,000 in total.
1 January – Advance payment recognised:
Prepayment = USD 100,000 ÷ 1.25 = £80,000
Exchange rate used: 1.25 (date of initial recognition)
30 June – Inventory delivered:
Total inventory cost = USD 500,000
Balance paid = USD 400,000 ÷ 1.35 = £296,296
Total inventory cost = £80,000 + £296,296 = £376,296
Exchange difference:
No retranslation of the prepayment at 30 June (non-monetary)
The prepayment is simply applied to the inventory cost at its original rate of £80,000
Key point: The prepayment is translated ONLY at 1.25 (the recognition date). It is NOT retranslated at 1.35 on 30 June. The exchange difference (£80,000 vs £74,074 at 1.35) is NOT recognised in P&L – it is simply part of the inventory cost.
Prepayment = USD 100,000 ÷ 1.25 = £80,000
Exchange rate used: 1.25 (date of initial recognition)
30 June – Inventory delivered:
Total inventory cost = USD 500,000
Balance paid = USD 400,000 ÷ 1.35 = £296,296
Total inventory cost = £80,000 + £296,296 = £376,296
Exchange difference:
No retranslation of the prepayment at 30 June (non-monetary)
The prepayment is simply applied to the inventory cost at its original rate of £80,000
Key point: The prepayment is translated ONLY at 1.25 (the recognition date). It is NOT retranslated at 1.35 on 30 June. The exchange difference (£80,000 vs £74,074 at 1.35) is NOT recognised in P&L – it is simply part of the inventory cost.
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Worked Example – Instalment Advances
Example: Three instalment advance payments
A German company (functional currency: EUR) makes three advance payments for equipment from a Japanese supplier: EUR 50,000 on 1 February (rate: 130 JPY/EUR), EUR 30,000 on 1 April (rate: 135 JPY/EUR), and EUR 20,000 on 1 June (rate: 140 JPY/EUR). Total equipment cost is JPY 15,000,000, delivered on 1 July.
1 February payment:
Prepayment 1 = EUR 50,000
Rate: 130 JPY/EUR
1 April payment:
Prepayment 2 = EUR 30,000
Rate: 135 JPY/EUR
1 June payment:
Prepayment 3 = EUR 20,000
Rate: 140 JPY/EUR
1 July – Equipment delivered:
Total prepayments = EUR 100,000
Remaining balance = JPY 15,000,000 - (50,000×130 + 30,000×135 + 20,000×140)
= JPY 15,000,000 - JPY 13,100,000 = JPY 1,900,000
Balance in EUR = JPY 1,900,000 ÷ 140 = EUR 13,571
Total equipment cost:
EUR 50,000 + EUR 30,000 + EUR 20,000 + EUR 13,571 = EUR 113,571
Key point: Each advance payment is translated at its OWN rate. No averaging across payments. The equipment is recognised at the sum of the translated advances plus the translated balance payment.
Prepayment 1 = EUR 50,000
Rate: 130 JPY/EUR
1 April payment:
Prepayment 2 = EUR 30,000
Rate: 135 JPY/EUR
1 June payment:
Prepayment 3 = EUR 20,000
Rate: 140 JPY/EUR
1 July – Equipment delivered:
Total prepayments = EUR 100,000
Remaining balance = JPY 15,000,000 - (50,000×130 + 30,000×135 + 20,000×140)
= JPY 15,000,000 - JPY 13,100,000 = JPY 1,900,000
Balance in EUR = JPY 1,900,000 ÷ 140 = EUR 13,571
Total equipment cost:
EUR 50,000 + EUR 30,000 + EUR 20,000 + EUR 13,571 = EUR 113,571
Key point: Each advance payment is translated at its OWN rate. No averaging across payments. The equipment is recognised at the sum of the translated advances plus the translated balance payment.
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Disclosure
What IFRIC 22 requires
The exchange rate(s) used to translate advance consideration The carrying amount of advance consideration at the beginning and end of the period Any exchange differences recognised when the advance consideration is applied to revenue or expense Whether the advance consideration relates to inventory, PPE, or revenue recognition
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Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Determining the exact date of initial recognition for advance consideration (especially when there is a delay between payment and accounting recognition) Whether the advance consideration is monetary or non-monetary (affecting retranslation requirements)
SIGNIFICANT ESTIMATES
The timing of the related revenue or expense recognition, which determines when the advance is derecognised
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IFRIC 22 vs US GAAP
Comparison – IFRIC 22 vs US GAAP
FeatureIFRIC 22 (IFRS)US GAAP
Translation dateDate of initial recognition of prepayment/deferred incomeTransaction date (when the foreign currency transaction occurs)
RetranslationNon-monetary – not retranslated at each reporting dateNon-monetary – not retranslated at each reporting date
Multiple paymentsEach payment translated at its own date of initial recognitionEach payment at its own transaction date
Exchange differencesRecognised when the advance is applied to revenue or expenseRecognised when the advance is applied to revenue or expense
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Statement Mapping
Where every IFRIC 22 event lands
EventStatement(s) affectedNotes
Advance payment recognised (prepayment asset)SOFPNon-monetary asset at exchange rate on recognition date
Advance receipt recognised (deferred income)SOFPNon-monetary liability at exchange rate on recognition date
Prepayment applied to inventory/PPESOFP SOPLAsset recognised at translated amount; no exchange difference in P&L
Deferred income recognised as revenueSOPL SOFPRevenue at translated amount; any difference vs cash received in deferred income
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Related Standards
Cross-reference map
StandardConnection
IAS 21The parent standard IFRIC 22 interprets, supplying the monetary/non-monetary distinction and general transaction-date translation rule
IFRS 15Governs recognition of the related revenue for advance consideration received from customers
IAS 2Governs recognition of inventory acquired using advance consideration
IAS 16Governs recognition of PPE acquired using advance consideration
Quick-reference glossary
Advance consideration
An amount paid or received in advance of the delivery of goods or services, denominated in a foreign currency, which gives rise to a prepayment asset or deferred income liability.
Date of initial recognition
The date on which the entity first recognises the prepayment asset or deferred income liability – the exchange rate date IFRIC 22 specifies for translation.
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Glossary
Advance consideration
An amount paid or received in advance of the delivery of goods or services, denominated in a foreign currency, which gives rise to a prepayment asset or deferred income liability under IFRIC 22.
Date of initial recognition
The date on which the entity first recognises the prepayment asset or deferred income liability – the exchange rate date IFRIC 22 specifies for translation.
Non-monetary item
An item that is not a right to receive a fixed or determinable number of units of currency – advance consideration is classified as non-monetary, meaning it is not retranslated at each reporting date.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Dec-2016
In December 2016 the International Accounting Standards Board issued IFRIC 22 Foreign Currency Transactions and Advance Consideration. It was developed by the Interpretations Committee.
May-2017
IFRS 17 Insurance Contracts and Amendments to References to the Conceptual Framework in IFRS Standards
Minor consequential amendment to IFRIC 22