Order Or Production Backlog – FAQ | IFRS

Order or production backlog

In a Business Combinations, this is a intangible asset and is therefore recognised separately from goodwill, provided that its fair values can be measured reliably. This marketing-related intangible asset meets the definition of an intangible asset because it arises from contractual or other legal rights.

An order or production backlog arises from contracts such as purchase or sales orders. An order or production backlog acquired in a business combination meets the contractual-legal criterion for identification as an intangible asset, even if the purchase or sales orders are cancellable

An example in a business combination

All the assets and liabilities of Shisa Nyama were deemed to be fairly valued on acquisition date, with the exception of the following:

  • Braai equipment with a carrying amount of €761 626 had a fair value of €850 000 on 1 March 2014.  AFF however indicated that after the acquisition they intend to stop the use of this specific braai equipment due to the equipment’s carbon emissions, and subsequently valued the braai equipment only at €800 000 on 1 March 2014. The equipment was originally purchased on 1 September 20.12 and had a useful life of five years on this date. This estimate has not changed since the acquisition of the braai equipment.
  • Shisa Nyama also distributes bottles of their braai sauce to retailers. Due to a nationwide shortage of the braai sauce’s secret ingredient, Shisa Nyama had a contractual order backlog for 60 boxes of sauce on 1 March 20.14. The fair value of this order backlog amounted to €45 000 on 1 March 2014. The order backlog was completed and distributed by the end of November 2014. The price for a box of sauce remained unchanged for the duration of the current financial year.
  • No additional assets, liabilities or contingent liabilities were identified at the acquisition date.

At acquisition the order backlog will be recognised as an intangible asset in terms of IFRS 3 13. Also refer to IFRS 3 IE25 for further guidance on the recognition of intangible assets not previously recognised by the acquiree.

The order backlog will be included in the acquisition balance sheet as follows (only the two lines of the acquisition balance sheet):

Amounts in €

DT

CR

BS – Intangible asset – Order backlog Order or production backlog

45,000

BS – Deferred tax on order backlog – 28% tax rate

12,600

The intangible asset (order backlog) will subsequently be amortised over its useful life (time to complete the order backlog so until end of November 2014) and the following journal will be processed after acquisition, when the backlog is completed (in quarterly or monthly progress depending on the frequency of reporting management information):

Amounts in € Order or production backlog

DT

CR

PL – Amortisation Intangible asset – Order backlog

45,000

BS – Intangible asset – Order backlog Order or production backlog

45,000

BS – Deferred tax on order backlog Order or production backlog

12,600

PL – Deferred tax credit Order or production backlog

12,600


Just to illustrate the sales volume of backlog in some industries some quotes in the Airbus Annual Report 2018 (page 24)

Q. What drove the big increase in underlying profit?
Firstly, as a reminder, we adopted the IFRS 15 accounting standard in 2018 which means we have restated the relevant figures for 2017. In particular, the year-end backlog value of € 460 billion is now measured under IFRS 15 and reflects an assessment of recoverability and net transaction price for airframe and engines. The significant reduction compared to 2017 – which has not been restated – is mainly due to the use of net prices versus catalogue prices.

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