An Executive Guide to IFRS: Content, Costs and Benefits to Business

Executory contracts

One area where standard-setters with an asset and liability approach may differ significantly from transaction-oriented standard-setters is that of executory contracts. This is a problem that is not much discussed in policy circles. An executory contract is a contract that has been signed but not yet executed. Such a contract, for example an agreement to buy a car that will be delivered in three months’ time, will appear in the income statement when the transaction is performed and the goods or services are passed to the client. A forward contract to buy currency is another form of executory contract.

Such contracts are not significant in all sectors: a retailer has few such contracts with customers but may have more with suppliers. However, the value of executory contracts could be an important piece of information for investors about future cash flows. Traditionally the only executory contract that is acknowledged in financial reporting is what IAS 37 Provisions, contingent liabilities and contingent assets would refer to as an ‘onerous contract’. Conventional prudence requires that a foreseeable loss is recognized when it can be predicted, and so where an executory contract is perceived to be loss-making, the full expected loss should be provided for at once. Transaction-based standard-setters would say that you recognize nothing until the transaction is complete, except for reflecting a prudence override.

Where IASB members have an asset and liability orientation, ...