The ‘Unit of account’ definition is used for both assets and liabilities in (un)grouping transactions for financial reporting purposes and is primarily used as a term to which recognition and measurement requirements are applied.
A lessee has leased an entire office building with five floors and accounted for that lease as a single separate lease component. Partway through the lease term, the lessee commits to a plan to sublease one of the five floors. In other words, the lessee will sublease a portion of what it has previously accounted for as a single unit of account.
The following table features several examples of how to determine the “identified asset” in arrangements where the unit of account is unclear or the customer’s right of use is not related to the asset’s primary purpose.
Customer’s right to attach equipment to a utility pole
The space used by the customer is not physically distinct, and the customer’s right of use is not equivalent to the asset’s primary use, which is to suspend electrical transmission wires.
Customer’s right to attach equipment to a cell tower
Space on the cell tower
The space used by the customer is physically distinct, and the customer’s right of use is equivalent to the asset’s primary use, which is to accommodate multiple customers’ electronic communication equipment.
Customer’s right to display an advertisement on the side of a building
The exterior wall used by the customer is not physically distinct, and the customer’s right of use is not equivalent to the asset’s primary use, which is to provide residential or commercial space for tenants’ use.
Customer’s right to display an advertisement on a billboard
The billboard is a physically distinct asset, and the customer’s right of use is equivalent to the asset’s primary use, which is to display an advertisement.
Customer’s right to connect to the main pipeline via a pipeline lateral
The lateral is a physically distinct asset. A segment of a pipeline that connects a single customer to the larger pipeline is an example of an identified asset. The customer’s right of use is equivalent to the asset’s primary use, which is to transport oil and gas.
Customer’s right to connect to the “last mile” of pipeline
If the “last mile” is mechanically separable from the rest of the pipeline, then it could be physically distinct. The customer’s right of use is equivalent to the asset’s primary use, which is to transport oil and gas.
The Conceptual Framework explains ‘unit of account‘ along some essential features captured in the following subjects:
1. Definition of unit of account
The unit of account is the right or the group of rights, the obligation or the group of obligations, or the group of rights and obligations, to which recognition criteria and measurement concepts are applied.
The objective in selecting a unit of account is to provide the most useful information that can be obtained at a cost that does not exceed the benefits. See also 3 below for more details.
2. Unit of account grouped along recognition criteria and measurement concepts
A unit of account is selected for an asset or liability when considering how recognition criteria and measurement concepts will apply to that asset or liability and to the related income and expenses. In some circumstances, it may be appropriate to select one unit of account for recognition and a different unit of account for measurement. For example, contracts may sometimes be recognised individually but measured as part of a portfolio of contracts. For presentation and disclosure, assets, liabilities, income and expenses may need to be aggregated or separated into components.
A unit of account is selected for an asset or a liability after considering how recognition and measurement will apply, not only to that asset or liability, but also to the related income and expenses. The selected unit of account may need to be aggregated or disaggregated for presentation or disclosure purposes.
3. Transfer parts of an unit of account
If an entity transfers part of an asset or part of a liability, the unit of account may change at that time, so that the transferred component and the retained component become separate units of account (see derecognition).
Transfer of parts of an asset or liability needs to result in the proper parts (as per contract) to be removed from the statement of financial position and the proper parts remaining.
4. Providing useful information
A unit of account is selected to provide useful information, which implies that:
the information provided about the asset or liability and about any related income and expenses must be relevant. Treating a group of rights and obligations as a single unit of account may provide more relevant information than treating each right or obligation as a separate unit of account if, for example, those rights and obligations:
- cannot be or are unlikely to be the subject of separate transactions;
- cannot or are unlikely to expire in different patterns;
- have similar economic characteristics and risks and hence are likely to have similar implications for the prospects for future net cash inflows to the entity or net cash outflows from the entity; or
- are used together in the business activities conducted by an entity to produce cash flows and are measured by reference to estimates of their interdependent future cash flows.
the information provided about the asset or liability and about any related income and expenses must faithfully represent the substance of the transaction or other event from which they have arisen. Therefore, it may be necessary to treat rights or obligations arising from different sources as a single unit of account, or to separate the rights or obligations arising from a single source (For example, if the rights or obligations in one contract merely nullify all the rights or obligations in another contract entered into at the same time with the same counterparty, the combined effect is that the two contracts create no rights or obligations. Conversely, if a single contract creates two or more sets of rights or obligations that could have been created through two or more separate contracts, an entity may need to account for each set as if it arose from separate contracts in order to faithfully represent the rights and obligations). Equally, to provide a faithful representation of unrelated rights and obligations, it may be necessary to recognise and measure them separately.
Useful information presentation
The question remains how to present useful information, which is not an easy process. The above provides a possible check to improve information provided in financial statements.
5. Cost constraints
Just as cost constraints other financial reporting decisions, it also constrains the selection of a unit of account. Hence, in selecting a unit of account, it is important to consider whether the benefits of the information provided to users of financial statements by selecting that unit of account are likely to justify the costs of providing and using that information. In general, the costs associated with recognising and measuring assets, liabilities, income and expenses increase as the size of the unit of account decreases. Hence, in general, rights or obligations arising from the same source are separated only if the resulting information is more useful and the benefits outweigh the costs.
The objective in selecting a unit of account is to provide the most useful information that can be obtained at a cost that does not exceed the benefits.
6. Separating or combining rights and obligations
Sometimes, both rights and obligations arise from the same source. For example, some contracts establish both rights and obligations for each of the parties. If those rights and obligations are interdependent and cannot be separated, they constitute a single inseparable asset or liability and hence form a single unit of account. For example, this is the case with executory contracts (see executory contracts). Conversely, if rights are separable from obligations, it may sometimes be appropriate to group the rights separately from the obligations, resulting in the identification of one or more separate assets and liabilities. In other cases, it may be more appropriate to group separable rights and obligations in a single unit of account treating them as a single asset or a single liability.
Separating or combining rights and obligations needs to result in providing the best useful information without neglecting cost constraints.
7. Single unit of account versus offsetting
Treating a set of rights and obligations as a single unit of account differs from offsetting assets and liabilities.
Selecting a unit of account is not the same issue as offsetting. The question of offsetting arises after recognition and measurement have been applied to identified units of account for both an asset and a liability.
8. Possible units of account
Possible units of account include:
- an individual right or individual obligation;
- all rights, all obligations, or all rights and all obligations, arising from a single source, for example, a contract;
- a subgroup of those rights and/or obligations—for example, a subgroup of rights over an item of property, plant and equipment for which the useful life and pattern of consumption differ from those of the other rights over that item;
- a group of rights and/or obligations arising from a portfolio of similar items;
- a group of rights and/or obligations arising from a portfolio of dissimilar items—for example, a portfolio of assets and liabilities to be disposed of in a single transaction; and
- a risk exposure within a portfolio of items—if a portfolio of items is subject to a common risk, some aspects of the accounting for that portfolio could focus on the aggregate exposure to that risk within the portfolio.
These examples of possible units of account include factors that could determine which unit of account to use. It is suggested not to rank the factors by priority, because their relative importance depends on the specific features of the item that the entity is accounting for. No single ranking could determine the most useful unit of account consistently for a broad range of Standards.
See also: The IFRS Foundation
Unit of account
Unit of account Unit of account Unit of account Unit of account