1. (a) Evaluating the economic ownership of the instruments loaned to customers is quite judgemental with all factors needing to be evaluated separately.
The use of ‘substance over form’ should always be a priority in this situation. The existing asset definition states that it is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Thus an asset is a resource rather than the inflow of economic benefits which the resource may generate. An asset must be capable of producing economic benefits, although these economic benefits need not be certain nor is there any minimum threshold before that resource meets the definition of an asset.
It is therefore important to determine whether the customer or Medsupply has the right to obtain substantially all of the economic benefits arising from use and the right to direct the use of the identified asset throughout the period. A customer has control of an asset if it has the right to operate the asset or has designed the asset in a way that predetermines its use.
The rewards associated with ownership would include the unrestricted ability to use the asset as well as to participate in any potential increases in value. Risks include the possibility of impairment, the risk of loss and usage restrictions.
There are several factors which will help to determine who enjoys the economic benefits. On the return of the instruments, they are disposed of as clinical waste and, hence, it would appear that the instruments have no value on return. Additionally, the instruments are nearly always returned at the end of their useful life and hence the economic benefit has remained with the hospital throughout.
the life of the instrument. It appears from the above discussion that the hospital has the right to obtain substantially all the economic benefits and therefore no assets should appear in the financial statements of Medsupply. This conclusion is despite the fact that Medsupply retains the legal ownership.
Lessors are required to apply IFRS 15 Revenue from Contracts with Customers to allocate the consideration in the contract.
Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to their relative standalone selling prices. Thus it could be argued that the contract of sale contains a lease from the viewpoint of the instruments and that the transaction price should be split accordingly between the value of the devices and the instrumentation.
The costs incurred to fulfil a contract are recognised as an asset if and only if all of the following criteria are met:
– the costs relate directly to a contract (or a specific anticipated contract);
– the costs generate or enhance resources of the entity which will be used in satisfying performance obligations in the future; and
– the costs are expected to be recovered.
Thus utilising the above criteria from IFRS 15, it would indicate that the cost of the instrumentation should not be shown as an asset of Medsupply as it will not be recovered. The instruments form an integral part of an overall surgical process and are part of a multiple-component arrangement between Medsupply and the hospital. However, in this case, the instruments are simply a cost of sale. The instruments should be initially recorded at their acquisition and/or production cost in accordance with IAS 2
Inventory. Subsequent to initial recognition, the instruments should be measured at the lower of cost and net realisable value and when the instrument is loaned to the hospital, the manufacturer should reduce its inventory and recognise costs of sales accordingly, as Medsupply is not receiving proceeds for the usage of the instrument.
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