Executory Contracts IFRS 9: An Overview
Executory contracts are a common occurrence in business transactions. These contracts are often used in situations where both parties have yet to fulfill their obligations. However, under International Financial Reporting Standards (IFRS) 9, these contracts can have significant implications for financial reporting.
In this article, we will take a closer look at executory contracts under IFRS 9, their accounting treatment, and the impact they can have on financial statements.
What are Executory Contracts?
Executory contracts are agreements between two parties where one or both parties have yet to perform their obligations. Some common examples of executory contracts include leases, employment contracts, and service agreements.
In these contracts, one party promises to provide goods or services to another party, while the other party promises to pay for those goods or services. Until both parties have fulfilled their obligations, the contract is considered executory.
Executory Contracts under IFRS 9
IFRS 9 provides guidance on the accounting treatment of executory contracts, which can have a significant impact on a company’s financial statements.
According to IFRS 9, executory contracts should be classified as either financial assets or financial liabilities, depending on the nature of the contract and the company’s role in the transaction.
If the contract meets the definition of a financial asset, it should be accounted for as such. If the contract meets the definition of a financial liability, it should be accounted for as a liability.
It is worth noting that not all executory contracts meet the definition of a financial asset or financial liability. For example, some contracts may not have a significant impact on a company’s financial statements and may be classified as non-financial contracts.
Impact on Financial Statements
The accounting treatment of executory contracts can have a significant impact on a company’s financial statements.
If the contract is classified as a financial asset, it will be recorded on the company’s balance sheet at fair value. If the contract is classified as a financial liability, it will be recorded at its present value.
The fair value or present value of the contract can vary depending on a number of factors, such as interest rates, market conditions, and the creditworthiness of the parties involved.
If the value of the contract changes, it will impact the company’s income statement and may also affect its cash flows.
Executory contracts are a common occurrence in business transactions, but their accounting treatment under IFRS 9 can be complex. Understanding the classification of these contracts as financial assets or financial liabilities is essential for accurate financial reporting.
By taking the time to properly account for executory contracts, companies can ensure that their financial statements are accurate, reliable, and compliant with IFRS 9 standards.