(b) An operator enters into a toll bridge concession. The operator is permitted to
collect revenues from users or the grantor until it achieves a 6% return on its agreed
infrastructure spend, at which point the arrangement comes to an end.
In commercial terms, the toll bridge concession may be virtually identical to a
transaction that falls within (3) above, e.g. where the users pay tolls but the grantor
guarantees a minimum 6% return. The crucial difference is the grantor’s guarantee. The
arrangement with the guarantee, which will contain a financial asset, is likely to leave
more of the rewards of ownership with the operator than the intangible arrangement in
(b) as the operator will be entitled to benefits in excess of the 6% return. This
demonstrates that the distinction between the financial asset and intangible asset
models is linked less to the transfer of commercial risk, but more by the existence (or
not) of an unconditional contractual right to cash flows.
There are jurisdictions where public-to-private contract laws or the concession
arrangements themselves allow an operator to ask the grantor for a revision of the tariffs
for the public service when the operator’s actual return is below initial expectations.
Although this feature in the concession arrangement is included to reduce the operator’s
risk, it only gives the operator a right to re-negotiate and the outcome of that is not
certain. As a result, the operator does not have an unconditional right to receive cash
and, therefore, the existence of these features would not allow the operator to apply the
financial asset model.
Many payment mechanisms include deductions for substandard performance of
services. These do not affect the analysis of the contract as a financial asset or intangible
asset and are discussed further below.
4.2
The financial asset model
Under the financial asset model, which applies if the entity has an unconditional
contractual right to receive cash or another financial asset, [IFRIC 12.16], the service
element that relates to the construction of the infrastructure asset (‘construction
services’) is accounted for in accordance with IFRS 15. [IFRIC 12.14]. For the avoidance of
doubt, an asset is not recognised for the discounted present value of all amounts payable
by the grantor under the service concession arrangement. The entity recognises an asset
for construction services performed up to the reporting date; subsequently it may
recognise an asset on the same basis for upgrade services; the carrying value of the asset
does not include future services yet to be performed or maintenance services that are
accounted for as expenses. The consideration received by the operator for other
services is addressed at 5 below.
IFRIC 12 requires a contract asset rather than a financial asset to be recognised during
the construction activity. Only once construction is complete are the amounts due from
the grantor accounted for in accordance with IFRS 9. [IFRIC 12.19]. This is discussed
further at 5.4.1.E below.
The recognition of a financial asset at the end of the construction phase is not affected
by the fact that the operator’s contractual right to receive cash may be contingent on
1824 Chapter 26
performance standards, as in the example of a unitary charge for a hospital in
Example 26.2 above. The Interpretations Committee points out that this is no different
from other circumstances and other financial assets where the payment for goods and
services depends on the subsequent performance of the asset. [IFRIC 12.BC44].
As required by IFRS 9, the financial asset would be recognised at amortised cost, at fair
value through other comprehensive income, or at fair value through profit or loss,
depending upon how the financial asset is classified under IFRS 9. [IFRIC 12.24]. If the
amount due from the grantor is measured at amortised cost or fair value through other
comprehensive income, interest income will be recognised, calculated using the
effective interest method. [IFRIC 12.25]. Classification of financial assets under IFRS 9 is
discussed in Chapter 44 at 2.
Borrowing costs cannot be capitalised under the financial asset model. [IFRIC 12.22].
The financial asset recognised by the operator will be subject to the impairment
requirements of IFRS 9. IFRS 15 also requires that contract assets are assessed for
impairment in accordance with IFRS 9. [IFRS 15.107]. The impairment requirements of
IFRS 9 are discussed in Chapter 47 at 5.
Example 26.3 below is based on Illustrative Example 1 in IFRIC 12 and illustrates how
the financial asset model may be applied. It should, however, be noted that this example
deals with only one of many possible types of arrangements seen in practice. It is
important that entities understand and assess the facts and circumstances of their own
service concession arrangements in order to determine the appropriate accounting.
Example 26.3: The Financial Asset Model
Table 1 Concession terms
The terms of the arrangement require an operator to construct a road – completing construction within two
years – and maintain and operate the road to a specified standard for eight years (i.e. years 3-10). The terms
of the concession also require the operator to resurface the road at the end of year 8. At the end of year 10,
the arrangement will end. Assume that the operator identified three performance obligations for construction
services, operation services and road resurfacing. The operator estimates that the costs it will incur to fulfil
its obligations will be:
Year
€
Construction services (per year)
1-2
500
Operation services (per year)
3-10
10
Road resurfacing
8
100
The terms of the concession require the grantor to pay the operator €200 per year in years 3-10 for making
the road available to the public.
For the purpose of this illustration, it is assumed that all cash flows take place at the end of the year.
Table 2 Contract revenue
The operator recognises contract revenue in accordance with IFRS 15. Revenue – the amount of consideration
to which the operator expects to be entitled from the grantor for the services provided – is recognised when
(or as) the performance obligations are satisfied.
The total consideration (€200 in each of years 3-8) is allocated to the performance obligations based on the
relative stand-alone selling prices of the construction services, operating services and road resurfacing, taking
into the significant financing component, as follows:
Service concession arrangements 1825
Transaction price allocation (including effect
of the significant financing component)
€
Construction services (a)
1,050
Operation services (b)
96
Road resurfacing services (c)
110
Total
1,256
Implied interest rate (d)
6.18% per year
(a) The operator estimates the relative stand-alone selling price by reference to the forecast cost plus 5 per cent.
(b) The operator estimates the
relative stand-alone selling price by reference to the forecast cost plus 20 per cent.
(c) The operator estimates the relative stand-alone selling price by reference to the forecast cost plus 10 per cent.
(d) The implied interest rate is assumed to be the rate that would be reflected in a financing transaction between the
operator and the grantor.
Financial asset
During the first two years, the entity recognises a contract asset and accounts for the significant financing
component in the arrangement in accordance with IFRS 15. Once the construction is complete, the amounts
due from the grantor are accounted for in accordance with IFRS 9 as receivables.
Table 3 Measurement of contract asset / receivable
€
Amount due for construction in year 1
525
Contract asset at end of year 1*
525
Effective interest in year 2 on contract asset at the end of year 1 (6.18% × €525) 32
Amount due for construction in year 2
525
Receivable at end of year 2
1,082
Effective interest in year 3 on receivable at the end of year 2 (6.18% × €1,082) 67
Amount due for operation in year 3 (€10 × (1 + 20%))
12
Cash receipts in year 3
(200)
Receivable at end of year 3
961
* No effective interest arises in year 1 because the cash flows are assumed to take place at the end of the year.
Overview of cash flows, statement of comprehensive income and statement of financial position
For the purposes of this example, it is assumed that the operator finances the arrangement wholly with debt
and retained profits. It pays interest at 6.7 per cent per year on outstanding debt. If the cash flows and fair
values remain the same as those forecast, the operator’s cash flows, statement of comprehensive income and
statement of financial position over the duration of the arrangement will be as follows.
Table 4 Cash flows (€)
Year
1
2
3
4
5
6
7
8
9
10
Total
Receipts
–
–
200
200
200
200
200
200
200
200
1,600
Contract
(500) (500) (10)
(10)
(10)
(10)
(10)
(110)
(10) (10) (1,180)
costs (a)
Borrowing
– (34) (69)
(61)
(53)
(43)
(33)
(23)
(19) (7) (342)
costs (b)
Net inflow
(500) (534) 121
129
137
147
157
67
171
183
78
/ (outflow)
(a)
Table
1
(b) Debt at start of year (table 6) × 6.7%
1826 Chapter 26
Table 5 Statement of comprehensive income (€)
Year
1
2
3
4
5
6
7
8
9
10
Total
Revenue
525
525
12
12
12
12
12
122
12
12
1,256
Contract
(500) (500) (10)
(10)
(10)
(10)
(10)
(110)
(10) (10) (1,180)
costs
Finance
–
32
67
59
51
43
34
25
22
11
344
income (a)
Borrowing
–
(34)
(69)
(61)
(53)
(43)
(33)
(23)
(19)
(7)
(342)
costs (b)
Net profit
25
23
–
–
–
2
3
14
5
6
78
(a) Amount due from grantor at start of year (table 6) × 6.18%
(b) Cash / (debt) (table 6) × 6.7%
Table 6 Statement of financial position (€)
End of year
1
2
3
4
5
6
7
8
9
10
Amount
525
1,082
961
832
695
550
396
343
177
–
due from
grantor (a)
Cash /
(500) (1,034) (913)
(784)
(647)
(500)
(343)
(276)
(105) 78
(debt) (b)
Net assets
25
48
48
48
48
50
53
67
72
78
(a) Amount due from grantor at start of year, plus revenue and finance income earned in year (table 5), less
receipts in year (table 4).
(b) Debt at start of year plus net cash flow in year (table 4).
4.3
The intangible asset model
If the financial asset model does not apply (i.e. there is no unconditional contractual
right to cash or other financial assets), the operator’s consideration for its construction
services will be an intangible asset. [IFRIC 12.15]. As with the financial asset model, the
operator cannot have an item of property, plant and equipment because the physical
infrastructure is controlled by the grantor (see 3 above). [IFRIC 12.11]. Therefore, the
Interpretations Committee has concluded that the right of an operator to charge users
of the public service, for example the right to collect tolls from a road or a bridge, meets
the definition of an intangible asset, that should be accounted for in accordance with
IAS 38. It is, in effect, a licence ‘bought’ in exchange for construction services.
[IFRIC 12.17].
Consideration is classified as a contract asset during the construction or upgrade period.
[IFRIC 12.19]. The intangible asset recognised at the end of the construction or upgrade
period should be measured in accordance with IFRS 15 [IFRIC 12.15] and revenue for
construction or upgrade services will be recorded in accordance with IFRS 15.
[IFRIC 12.14]. See 5.4 below for a discussion of the interaction between IFRIC 12 and
IFRS 15.
The intangible asset under the concession (the licence received in return for
construction services) meets the definition of a qualifying asset because it will not
/>
be ready for use until the infrastructure is constructed. Therefore borrowing costs
must be capitalised during the period of construction. [IFRIC 12.22]. This contrasts with
the treatment of borrowing costs under the financial asset model, where
Service concession arrangements 1827
capitalisation is forbidden but financial income (the accretion of interest on the
financial asset) is recognised.
Furthermore, it is argued that an inevitable consequence of applying the intangible asset
model is that there must be an exchange transaction in which the operator receives the
intangible right in exchange for its construction services. As this is an exchange of
dissimilar assets, revenue must be recognised in accordance with IFRS 15, which
requires the recognition of revenue based on the fair value of the assets received, unless
the fair value of the assets received cannot be measured reliably. [IFRIC 12.BC32,
IFRS 15.66, 67]. This means that the operator must establish the fair value of either the
intangible asset it receives or the stand-alone selling price of the construction services.
[IFRS 15.67].
In the following example, based on Illustrative Example 2 in IFRIC 12, the operator
determines the fair value of the intangible asset indirectly by reference to the stand-
alone selling price of the construction services delivered. As with Example 26.3 above,
it should be noted that this example deals with only one of many possible types of
arrangements seen in practice and it is important that entities understand and assess the
facts and circumstances of their own service concession arrangements in order to
determine the appropriate accounting.
Example 26.4: The Intangible Asset Model – recording the construction asset
Arrangement terms
The terms of a service arrangement require an operator to construct a road – completing construction within
two years – and maintain and operate the road to a specified standard for eight years (i.e. years 3-10). The
terms of the arrangement also require the operator to resurface the road when the original surface has
deteriorated below a specified condition. The operator estimates that it will have to undertake the resurfacing
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 359