Exposure draft of TFRS for NPAEs

Continuing on from the previous newsletter, the details of main changes in the revised Thai Financial Reporting Standards for Non-publicly Accountable Entities (“TFRS for NPAEs”) which are expected to become effective on 1 January 2023 are set out below.

Keywords: Mazars, Thailand, Accounting, TFRS, NPAEs, TFAC

23 August 2022

Current TFRS for NPAEs

Revised TFRS for NPAEs

1. Contingent assets

Chapter 16 of the current TFRS for NPAEs addresses only provisions and contingent liabilities.

The revised TFRS for NPAEs also address how contingent assets should be defined and measured. Contingent assets are those assets which may be acquired in certain events. Their existence can be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. Contingent assets should not be recognized, but should be disclosed when the inflow of economic benefits is probable.

2. Customer loyalty programs

The current TFRS for NPAEs does not address the issue of customer loyalty programs.

Chapter 18, ‘Revenue’, of the revised TFRS for NPAEs addresses the recognition of a customer loyalty program.

A customer loyalty program is used to promote sales by the entity granting the award credits, such as points to customers. The award can be redeemed by customers to receive another product or service, or to purchase a product or service at a discount.

There are two methods of recognizing a customer loyalty program, which are as follows:

1.  to recognize it as an expense using the best estimate method as at the date of the reporting period; or

2. to recognize it as a liability in the financial statements. The amount of proceeds from initial sales should be allocated to the award credits and measured using the fair value of the award credits if they have been sold separately.

3. Principal-agent relationship

As is the case with customer loyalty programs, the current TFRS for NPAEs do not address the issue of an agent-principal relationship.

The issue of a principal-agent relationship is important for revenue recognition. An entity is required to assess whether it acts as a principal or agent when providing goods or services to the customers. The entity acts as a principal when it takes risks and receives significant returns from providing goods or services. The factors provided for determining if an entity acts as a principal are as follows:

1. The entity is primarily responsible for the provision of goods or services.

2. The entity takes inventory risk, either before or after the goods have been transferred to the customers, and during transportation.

3. The entity has discretion in determining prices.

4. The entity takes the credit risk in regard to customers.

For agents, apart from the fact that they do not take risks and receive significant returns from providing goods or services, another factor is that the commission they receive is mostly a fixed amount agreed on in advance or a percentage of the proceeds.

4. The effects of changes in foreign exchange rates

The principles for converting the results and the financial position of foreign operations and of the functional currency are not provided.

The revised TFRS for NPAEs state that an entity must convert transactions in foreign currencies to the presentation currency by doing the following:

1. using the closing rate of the financial reporting date for assets and liabilities in the financial statements;

2. using the exchange rate for the date on which the transactions occur for revenues and expenses; and

3. recognizing exchange rate differences arising from the conversion in equity or other comprehensive income if the entity prepares statements of comprehensive income.

The functional currency is the currency of the primary economic environment in which the entity operates. Under the revised TFRS for NPAEs, an entity is not required to indicate the functional currency. However, if the financial statements need to be prepared using a functional currency other than Thai baht, the entity needs to comply with TAS 21, “The effects of changes in foreign exchange rates”.

5. Business combinations

The current TFRS for NPAEs do not provide guidelines on transactions related to business combinations.

Chapter 25 of the revised TFRS for NPAEs addresses the issue of business combinations.

A business combination is a transaction or other event in which an acquirer gains control of one or more businesses. This can occur in many ways, such as by transferring cash, incurring liabilities, issuing equity instruments, etc. The entity needs to assess whether the transaction meets the definition of a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the assets acquired are not a business, then the entity must book the transaction as the acquisition of an asset.

If the assets acquired are a business unit, the entity can choose to record the transaction by:

1. recognizing each asset acquired, such as inventory, property, plant and equipment, and intangible assets in accordance with the relevant chapter of the revised TFRS for NPAEs; or

2. applying the acquisition method indicated in TFRS 3, “Business combination”, except for goodwill.

If goodwill arises from the acquisition, goodwill with a finite useful life needs to be amortized over that useful life. In contrast, goodwill with an indefinite useful life must be amortized for 20 years.

6. Derivatives

The current TFRS for NPAEs do not provide guidelines on derivatives.

Chapter 24 of the revised TFRS for NPAEs defines derivatives as financial instruments or other contracts with all three of the following characteristics:

1. their value changes in response to changes in underlying conditions, i.e., interest rates, foreign exchange rates, or other variables;

2. an initial net investment is not required, or only a small amount is required compared to other types of contracts; and

3. they are settled in the future.

Examples of derivatives are forward contracts, futures, options, or swaps.

An entity with derivatives can choose one of the following options:

1. to disclose the outstanding balance as at the reporting date by disclosing the contract value and fair value;

2. recognizing derivatives using the sample accrual method and disclosing the information as stated in no. 1 above;

3. recognizing the initial value at fair value on the date that the contract is made. Subsequent measurement is recognized at fair value. Any changes in the fair value of derivatives are recognized in the profit and loss statement. The disclosure of profit (loss) from changes in the fair value of derivatives during the period is required, together with the information stated in no. 1 above; or

4. recognizing derivatives using hedge accounting. If the entity chooses to use hedge accounting, it is required to comply with the Thai financial reporting standards related to financial instruments.

This newsletter is the last summary of the exposure draft of TFRS for NPAEs. However, we will update it again when the revised TFRS for NPAEs are issued or announced in the Royal Gazette.

References: TFAC and TFAC (in Thai)