Year
1 2 3 4 5 6 7 8 9 10
€ € € € € € € € € €
Opening
balance
0 561
1,135
1,004 870 733 592 449 302 152
Additions 525
525
115 115 115 115 115 115 115 115
Net
cash
30
30 (270) (270) (270) (270) (270) (270) (270) (270)
Finance
income* 6 19 24 21 18 15 12 8 5
3
Closing
balance 561
1,135
1,004 870 733 592 449 302 152
–
* Finance income is calculated on the average debtor balance outstanding.
In the above example, the land use charge is treated as an adjustment to the transaction
price and is not treated as an expense. If the land use charge were accounted for
separately as an expense, this would not affect contract profit, which would still
represent the total consideration received for services, less the total costs including the
land use charge. However, in this case, the land use charge could be regarded as part of
the cost of providing construction and operation services, and the stand-alone selling
price of each of these performance obligations would include a margin on the land use
charge. This could impact the allocation of the transaction price between construction
and operation services and therefore the timing of revenue recognition over the term
of the arrangement.
4.7.3
Accounting for contractual payments under the intangible asset
model
Under the intangible asset model, concession payments would be treated in accordance
with IAS 38 as part of the consideration for the intangible asset.
While lease-type costs and land use charges can be part of any concession
arrangement, concession fees (however called) are much more commonly a feature
1842 Chapter 26
of arrangements which follow the intangible asset model. This is unsurprising as they
are in substance payments made by the operator for the right to charge users of the
concession infrastructure.
The Interpretations Committee have noted that unless the contractual payments
relate to the right to use assets controlled by the operator itself or relate to a distinct
good or service that is distinct from the service concession arrangement, the
concession payment represents consideration for the concession right (i.e. part of
the cost of the intangible asset recognised)16 (see 4.7 above). However, the effects on
reported revenues were not addressed directly. In the following illustration, the
concession fee is regarded as a distinct cost in addition to the fair value of the
construction services. Alternatively, the concession fee could be regarded as a cost
of the construction services, for example if the concession payments were for access
to the land on which the infrastructure was to be constructed or for an asset used in
the delivery of the construction services. In that case, the estimate of the stand-
alone selling price of the construction services would include an appropriate margin
on top of the concession fee (see 4.3 above).
Example 26.10: Contractual payments made to a grantor under the intangible
asset model
Entity B enters into a 10 year concession agreement to construct a toll road and be responsible for operations
services. After a 2 year construction period, the entity expects to receive tolls of €300 per year, which it
expects to remain at the same level for the duration of the concession. The entity must pay a concession fee
of €50 per year in years 5-10.
The entity concludes that the obligation for the concession fee is incurred in year 1 and estimates that its
present value is €209, using a discount rate of 5%. The contract costs and contractual payments are as follows:
Annual charge
Total
Year
€ €
Construction services
1-2
500
1,000
Operation services
3-10
100
800
Concession fee 5-10
50
300
Total cash paid
1-10
2,100
The entity assesses the fair value of its intangible asset to be the stand-alone selling price of the construction
services, which it determines as the cost of construction services plus a margin of 5%. To this it adds an
amount to reflect the present value of the obligation to pay the concession fee. This means that it will record
construction revenue and additions to its intangible asset in years 1 and 2 as follows.
Year
1
2
€
€
Construction services
500
500
Revenue (uplift costs by 5%)
525
525
Concession fee (present value of obligation)
209
–
Intangible asset additions
734
525
This means that the entity recognises concession revenue for construction services totalling €1,050 (525+525)
and an intangible asset of €1,259 (734+525). It concludes that, as usage is expected to be the same throughout
the term, the intangible asset should be amortised in equal annual instalments commencing in year 3. The
concession gross profit (revenue – contract costs – unwinding discount on the concession fee – amortisation
of the intangible asset) is calculated as follows:
Service concession arrangements 1843
Year
1 2 3 4 5 6 7 8 9 10
€ € € € € € € € € €
Concession
revenue
525 525 300 300 300 300 300 300 300 300
Contract costs
(500) (500) (100) (100) (100) (100) (100) (100) (100) (100)
Unwinding
discount
(10) (11) (12) (12) (12) (11) (9) (7) (5) (2)
Amortisation*
–
– (157) (157) (158) (158) (158) (157) (157) (157)
Concession
profit**
15 14 31 31 30 31 33 36 38 41
* The amortisation is adjusted for rounding
** Concession profit totals €300, which represents the total consideration received from users for services
(€2,400) less the total costs including the concession fee of €2,100. In the income statement this is analysed as:
€
Concession revenue (525+525+2,400)
3,450
Contract costs
(1,800)
Unwinding discount
(91)
Amortisation
(1,259)
Total
300
5
REVENUE AND EXPENDITURE DURING THE
OPERATIONS PHASE OF THE CONCESSION AGREEMENT
So far, we have described the recognition and measurement of the infrastructure asset
in the accounts of the operator under the two models. A significant issue in practice is
that service concession arrangements are composite transactions. They usually have a
long duration (twenty-five to thirty years is not uncommon) during which time the
operator has a variety of obligations. These may be in connection with the infrastructure
asset itself and include:
&
nbsp; • enhancement of the infrastructure or construction of new infrastructure;
• infrastructure components that must be replaced in their entirety;
• infrastructure subject to major cyclical repairs; and
• regular repairs and maintenance.
In addition, many service concession arrangements involve the provision of services. In
the case of a hospital, for example, this could include utilities (such as water and
electricity) and a wide range of ‘soft’ services such as cleaning, laundry, meals, portering,
security and grounds maintenance, amongst others. All of these might be paid for as a
single unitary charge that would probably be adjusted according to performance as in
Example 26.2 above. The accounting models for service concessions must be able to
deal with all of these issues.
IFRIC 12 identifies two principle revenue-generating activities in a service concession
arrangement, construction or upgrade services and operation services, requiring that both
are accounted for in accordance with IFRS 15. [IFRIC 12.14, 20]. The Interpretation also states
that, during the construction phase, both accounting models (intangible asset and financial
1844 Chapter 26
asset) give rise to a contract asset in accordance with IFRS 15. [IFRIC 12.19]. Whilst the
Interpretation includes examples to illustrate how these requirements might be applied to
a relatively simple set of facts and circumstances, it does set out any special treatments in
relation to how IFRS 15 is applied for an SCA. In the absence of a detailed explanation in
IFRIC 12, we set out our thoughts of how those examples meet the requirements of
IFRS 15 at 5.4 below. However, any questions about how IFRS 15 should be applied in
accounting for revenue from construction, upgrade or operation services or for the
contract assets and liabilities arising during the construction phase of an SCA will be
answered by reference to that Standard (see Chapter 28), rather than to IFRIC 12.
5.1
Additional construction and upgrade services
The concession may include obligations to construct new infrastructure (construction
services) or to enhance either new or existing infrastructure to a condition better than
at the start of the concession (upgrade services). IFRIC 12 does not deal in detail with
the treatment to be adopted other than to say that revenue and costs relating to
construction or upgrade services are recognised in accordance with IFRS 15. [IFRIC 12.14].
This means that all construction or upgrade services are accounted for in accordance
with the appropriate model, regardless of when they take place. Contractual obligations
to maintain or restore infrastructure may also include an upgrade element. [IFRIC 12.21].
Upgrade or construction services are separate performance obligations. This means that
the contract has to require the particular service to be carried out at a specified time. This
is not the same as a general requirement to maintain the asset in a specified condition.
It would be unusual for a toll road concession, for example, to require resurfacing to
take place according to a predetermined schedule as road surfaces degrade with usage
(based on both the number of vehicles and weight per axle) as well as weather
conditions. However, the contract might require a new bridge or access road after a
specified period of time and either of these could be separate upgrade services.
Upgrade services must be recognised in accordance with IFRS 15. [IFRIC 12.14].
Accounting for construction contracts under IFRS 15 is discussed in Chapter 28, and the
interaction between IFRIC 12 and IFRS 15 is considered at 5.4 below.
The entity has to determine the consideration receivable for the upgrade services. This
may be part of the allocation at inception of the contract, as shown in Example 26.3
above where part of the contract revenue is attributed to road resurfacing, or the
contract may specify a separate payment when the upgrade is performed. In either case,
the entity would allocate the transaction price for the arrangement as a whole to each
of the performance obligations in proportion to their stand-alone selling prices in
accordance with IFRS 15. [IFRIC 12.14]. The entity would recognise revenue for the
upgrade service only as the obligation to provide those services is fulfilled.
5.1.1
Subsequent construction services that are part of the initial
infrastructure asset
In some circumstances, the ‘enhancement’ spend is a component of the original
intangible asset and should be recognised as part of the exchange transaction to secure
the right to charge users described at 4.3 above. An example of this is the common
requirement in concession contracts that the operator replace certain items at the
Service concession arrangements 1845
operator’s cost, whether or not the items concerned have become unserviceable. For
example, a water supply operator may be contractually required to replace all lead pipes
for environmental and health reasons; similarly, a gas supply operator may be required
to replace all cast-iron pipes for safety reasons.
Assuming that the intangible asset model is the relevant one, the first issue is whether
these expenditures should be regarded as operating costs (obligations to maintain or to
restore the infrastructure) and treated as described at 5.2 below or as an additional cost
of the intangible asset. They do not directly increase the future economic benefits of
any particular infrastructure asset when the costs are incurred and might therefore be
treated as the cost of maintaining the original benefits and expensed. However, unlike
most subsequent expenditure on intangible assets, which is not recognised as an asset
because it cannot be distinguished from expenditure to develop the business as a whole,
[IAS 38.20], it is possible in the case of SCAs to attribute the expenditure directly to the
cost of securing a particular intangible asset (the right to operate the concession). The
requirement of the operator to incur subsequent expenditure for building, upgrading or
maintaining a physical infrastructure asset is embodied in the contract entered into to
secure that intangible right. IAS 16 explicitly allows such expenditure to be capitalised
as part of an item of property, plant and equipment, [IAS 16.10], so it would seem that
capitalisation is an appropriate treatment.
These features indicate that these expenditures should be included in the measure of
the consideration given for the intangible asset and therefore recognised as part of its
carrying value on initial recognition. This would require the recognition of a liability
for the present value of the best estimate of the amount required to replace the
underlying asset, such as the pipes. Note that the revenue earned in the construction
phase is based on the fair value or stand-alone selling price of the building or upgrade
work performed on initial recognition, in accordance with IFRS 15. In other words,
the fair value or stand-alone selling price of the ‘construction services’ may remain
unchanged although the entity has accrued additional costs in relation to the other
obligations it has assumed in return for securing the right to operate the infrastructure
asset and to earn related revenue
s.
The Interpretations Committee did not address the accounting treatment of
subsequent variations in the amount of the liability for the operator’s unfulfilled
obligations that is recognised as part of the cost of the intangible asset (the licence)
e.g. when the estimated amount of the expenditures to be incurred is revised. The
situation may be regarded as analogous to the situation addressed by
IFRIC Interpretation 1 – Changes in Existing Decommissioning, Restoration and
Similar Liabilities – where the obligation is recognised as a liability in accordance with
IAS 37 and as part of the cost of an asset. [IFRIC 1.1]. Therefore, the principles set out in
IFRIC 1 – Changes in Existing Decommissioning, Restoration and Similar Liabilities –
should be applied, i.e. a change in the measurement of the liability should be added
to, or deducted from the cost of the intangible asset, subject to impairment testing and
to the extent that the amount deducted from the cost of the asset does not exceed the
carrying amount of the intangible asset. [IFRIC 1.5]. The periodic unwinding of the
discount must be recognised in profit or loss. [IFRIC 1.8]. IFRIC 1 is discussed in
Chapter 27 at 6.3.1.
1846 Chapter 26
5.1.2
Subsequent construction services that comprise a new infrastructure
asset
An operator may be contractually entitled to add to or upgrade the infrastructure and from
this generate additional revenues. The operator may have a right to extend a distribution
network and, under its right to charge for the services, it will obtain revenues from newly
connected users. There is an example of such a right in Extract 26.3 below, in which
Telenor ASA discloses that it has a right ‘to arrange, expand, operate and provide the
cellular telephone services in various areas in Thailand’.
Extract 26.3: Telenor ASA (2017)
Notes to the Financial Statements / Telenor Group [extract]
NOTE 17 Intangible assets [extract]
dtac operates under a concession right to operate and deliver mobile services in Thailand granted by CAT Telecom
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 363