fact that the existence of a shop has no direct impact on the function of the
infrastructure in the provision of regulated services. However, it is not clear at what
1818 Chapter 26
point a secondary activity would become or cease to be ‘purely ancillary’ which will be
a matter of judgement.
In addition, there are many concession agreements that include unregulated services
that are neither purely ancillary nor delivered by using a physically separable
portion of the total infrastructure, a situation not addressed by AG 7. For example,
a grantor may control prices charged to children, pensioners and the unemployed
who use a sports facility but the amounts charged to other adults are not controlled.
The same facility is being used by all, regardless of the amount that they pay.
Alternatively, price regulation could apply only to services provided at certain times
of the day rather than to different classes of user. In such cases it will be a matter of
judgement whether enough of the service is unregulated in order to demonstrate
that the grantor is not considered to control the asset, which would lead to the
arrangement as a whole falling out of the scope of IFRIC 12. This assessment will be
made at the beginning of the contract and will not be revisited unless errors were
made in the original assessment.
However, if it transpires that there are significantly fewer unregulated users than
anticipated then it is likely that the contract will be renegotiated. This is because of the
public service obligation, which means that the grantor will want the service to continue
to be provided to the public albeit under new terms. The new contract may be within
scope of IFRIC 12. If a toll bridge has had fewer users than anticipated, the grantor might
subsidise the tolls under a new arrangement.
4
ACCOUNTING BY THE CONCESSION OPERATOR: THE
FINANCIAL ASSET AND INTANGIBLE ASSET MODELS
Arrangements within the scope of IFRIC 12 will be those that meet the following criteria:
1.
the arrangement is a public-to-private service concession (see 2.1 above); [IFRIC 12.4]
2.
the grantor controls or regulates the services (see 3.1 above); [IFRIC 12.5(a)]
3. the
grantor
controls
any significant residual interest (see 3.2 above); [IFRIC 12.5(b)]
4. infrastructure
is
constructed or acquired (or the grantor provides access to that
infrastructure) for the purpose of the service concession (see 3.3 above); [IFRIC 12.7]
and
5.
the operator has either a contractual right to receive cash from or at the direction
of the grantor; or a contractual right to charge users of the service. [IFRIC 12.16, 17].
The last element also determines which of IFRIC 12’s accounting models, financial asset
or intangible asset, should be applied.
The Interpretations Committee’s accounting framework for public-to-private
arrangements is summarised in the following diagram from Information Note 1 in
IFRIC 12. The diagram starts with the presumption that the arrangement has already
been determined to be a service concession (see 2 above):
Service concession arrangements 1819
Does the grantor control or regulate what services
the operator must provide with the infrastructure,
to whom it must provide them, and at what price? No
Yes
OUTSIDE
THE SCOPE OF
THE
Does the grantor control, through ownership,
INTERPRETATION
beneficial entitlement or otherwise, any
No
significant residual interest in the infrastructure
at the end of the service arrangement?
Or is the infrastructure used in the arrangement
for its entire useful life?
Yes
No
Is the infrastructure constructed or
No
Is the infrastructure existing
acquired by the operator from a third
infrastructure of the grantor to which the
party for the purpose of the service
operator is given access for the purpose
arrangement?
of the service arrangement?
Yes
Yes
WITHIN THE SCOPE OF THE INTERPRETATION
Operator does not recognise infrastructure as property, plant and equipment
or as a leased asset.
Does the operator have a
Does the operator have a
No
contractual right to receive cash
OUTSIDE
contractual right to charge
or other financial asset from or
THE SCOPE OF
No
users of the public services?
at the direction of the grantor?
THE
INTERPRETATION
Yes
Yes
Operator recognises a financial
Operator recognises an
asset to the extent that it has a
intangible asset to the extent
contractual right to receive cash
that it has a contractual right
or another financial asset
to receive an intangible asset
The two accounting models in IFRIC 12 apply several decisions of principle:
• the control model applies as described at 3 above, which means that the operator
will not recognise infrastructure assets as its property, plant and equipment;
[IFRIC 12.11] and
• the operator is providing ‘construction services’ and not, for example, constructing
an item of property, plant and equipment for sale. Construction services are to be
accounted for separately from ‘operation services’ in the operations phase of the
contract. [IFRIC 12.14, BC31].
There is a third important point of principle: although the nature of the consideration
determines the subsequent accounting (as discussed at 4.1.2 below), both types of
consideration give rise to a contract asset during the construction or upgrade period.
[IFRIC 12.19].
1820 Chapter 26
4.1
Consideration for services provided and the choice between the
two models
Most service concession agreements are for both construction (or upgrade) services
and operations services. Operators almost always negotiate a single contract with
the grantor and, although the Interpretation does not refer to this, this will usually
include a single payment mechanism throughout the concession term, sometimes
called a ‘unitary payment’. The operator is unlikely to be remunerated separately
for its different activities. The payment mechanism often falls into one or other of
the following models:
Example 26.2: Payment mechanisms for service concessions
(a) a hospital where the payment is based on the availability of the whole hospital
The unitary payment is based on the full provision of an overall accommodation requirement which is
divided into different units, such as hospital wards, consulting rooms, operating theatres, common parts
and reception. Availability is defined in terms of being usable and accessible and, includes some associated
core services such as heating, power and (in the case of operating theatres) appropriate clean
liness. There
is a payment deduction for failure to provide an available unit according to a contractual scale. There are
no separate payment streams for any of the non-core services but substandard performance can result in
payment deductions.
P = (F × I) – (D + E)
P = unitary payment per day
F = price per day for overall accommodation requirement
I = Indexation increase based on the retail prices index
D = deductions for unavailability
E = performance deductions
The payments for both schemes are not immediately separable between amounts attributable to the
construction or other services.
b) a prison where payment is made based on the number of occupied places
The unitary payment is based on the number of occupied places. Occupied means not only that a prisoner is
allocated a physical space but the associated core services and minimum requirements must be met in relation
to services such as heating, mail delivery and food. No payment is made for unoccupied places. There are no
separate payment streams for any of the non-core services (i.e. not associated with the definition of an occupied
place) but deductions from the unitary payment can be made for substandard performance of these services.
The unitary payment is based on the following formula:
P = (F × I) – Z
P = unitary payment per place
F = Fixed amount per occupied place per day
I = Indexation increase based on the retail prices index
Z = Performance deductions
IFRIC 12 clarifies that the operator should recognise and measure revenue in
accordance with IFRS 15 for the services it performs. [IFRIC 12.13]. This requires the
operator to allocate the consideration receivable to each performance obligation in
proportion to their relative stand-alone selling prices. The exercise to separate the
consideration receivable for the distinct services (i.e. construction, upgrade or operating
services) provided by the operator is expanded at 4.1.1 below. The nature of the
consideration determines the accounting model, [IFRIC 12.13], as described at 4.1.2 below.
Payments often start only when the infrastructure asset has been completed and
accepted as suitable for purpose by the grantor. Operators usually seek payment during
Service concession arrangements 1821
the construction phase but whether or not they receive any is inevitably a result of
negotiation between the parties. Payments that are received are normally for services
provided and not directly to meet construction costs; any amounts received will be
allocated to the relevant service activity as described below.
4.1.1
Allocating the consideration
The Interpretation argues that the separate services within this contract, i.e.
‘construction services’, ‘upgrade services’ or ‘operations services’, should be
disaggregated ‘because each separate phase or element has its own distinct skills,
requirements and risks’. [IFRIC 12.BC31].
Although there is a single contract and a single payment mechanism, it is often
straightforward in practice to identify the underlying cash flows that relate to different
activities. This may be on the basis of the original contract negotiations or because the
contract contains terms allowing for subsequent price adjustments by ‘market testing’
or benchmarking. However, the cash flows may not reflect the stand alone prices of the
underlying services so care will have to be taken. There will always be practical
problems when it comes to apportioning the total contract consideration between the
elements of the contract and the allocation will be a matter of judgement. The allocation
of revenue for the provision of separate services is determined in accordance with
IFRS 15. [IFRIC 12.14, 20]. (See Chapter 28). The interaction between IFRIC 12 and IFRS 15
is discussed at 5.4 below.
An operator may also be contractually required to make payments to the grantor. These
may take the form of payments for the right of access to infrastructure or other assets,
for the construction of assets or additional fees for the right to operate the concession.
If the SCA falls within the financial asset model, the payments made may reduce the
consideration received from the grantor. This is considered further at 4.7 below.
4.1.2
Determining the accounting model
IFRIC 12 states that the operator may receive a financial asset or an intangible asset as
consideration for its construction services and the asset that it receives determines the
subsequent treatment. [IFRIC 12.15, 19]. The nature of the consideration given by the
grantor to the operator shall be determined by reference to the contract terms and,
when it exists, relevant contract law. [IFRIC 12.19].
The Interpretations Committee decided that the boundary between the financial and
the intangible asset models should be based on the operator’s unconditional contractual
right to receive cash from, or at the direction of, the grantor. [IFRIC 12.16]. The grantor
does not need to pay the cash to the operator directly. Fees or tolls received from users
are viewed as essentially no more than collections on behalf of the grantor if they are
part of an overall arrangement under which the grantor bears ultimate responsibility. If
the grantor pays but the amounts are wholly based on usage of the infrastructure and
there is no minimum guaranteed payment, the entity has no unconditional contractual
right to receive cash, as the amounts receivable are contingent on the extent to which
the public uses the service. In this case the intangible asset model will apply.
The operator will recognise a financial asset to the extent that it has a contractual right
to receive cash or other financial assets from the grantor for the construction services,
1822 Chapter 26
where the grantor has little, if any, discretion to avoid payment. This is usually because
the agreement is legally enforceable. [IFRIC 12.16]. The operator will recognise an
intangible asset to the extent that it receives a licence to charge users of the public
service. [IFRIC 12.17].
Sometimes it is necessary to ‘bifurcate’ the operator’s right to cash flows for
construction services into a financial asset and an intangible asset and account
separately for each component of the operator’s consideration. This, the Interpretations
Committee argues, is because the operator is paid for its services partly by a financial
asset and partly by an intangible asset. [IFRIC 12.18].
The analysis between the different models can be seen in the following table:
Arrangement
Applicable
model
1
Grantor pays – fixed payments
Financial asset
2
Grantor pays – payments vary with demand
Intangible asset
3
Grantor retains demand risk – users pay but grantor
Financial asset or bifurcated (part
guarantees amounts
financial, part intangible)
4
Grantor retains demand risk – operator collects revenues
Intangible asset
from users until it achieves specified return
5
Users pay – no
grantor guarantees
Intangible asset
Of the two arrangements in Example 26.2 above, the hospital is an example of (1) above:
the payments are contractually fixed if all obligations and services are provided. The
prison, as described in Example 26.2 above, would fall within (2) and be accounted for
as an intangible asset. However, the prison operator might be paid on a different basis,
e.g. it might be paid for 1,000 ‘available places’ and receive this as long as heating and
food were capable of being provided. In this case it would be no different to the hospital
and be a financial asset. There are, of course, many potential variations and a
combination of fixed and variable demand could lead to bifurcation.
Common examples of arrangements that fall within (3) above are transport concessions
where the operator collects revenue from users but is entitled to an agreed return on
capital invested in the infrastructure. The fees or tolls up to this amount are considered
to be collections on behalf of the grantor. There will be a financial asset to the extent of
the guaranteed return. There may be an intangible asset as well if the operator retains a
right to collect tolls in excess of the guaranteed amount.
However, arrangements of the type in (4) above remain to be treated as intangible assets
even if the overall risk to the operator of not obtaining a specified result is very low. An
arrangement that effectively caps revenue collected from users once an agreed level of
return is reached, it is argued, is not a contractual right to cash but a right to collect
revenues from users and it is not relevant that the risk is low or that the operator will,
in effect, get a fixed return. [IFRIC 12.BC52].
The following are examples of arrangements that will be accounted for using the
intangible asset model:
(a) A municipality grants the operator a contract to treat all of its waste collections
for which it will be paid per unit processed. The arrangement does not provide
for any guaranteed volume of waste to be treated by the operator (so it does not
contain a take-or-pay arrangement) or any form of guarantee by the grantor.
Service concession arrangements 1823
Historically, however, the annual volume of waste has never been less than 40,000 tons
and the average annual volume over the last 20 years has been 75,000 tons.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 358