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projects to restore a city’s underground rail system; and
• ‘Operate-only’ SCA – where a private sector entity becomes responsible for the
operational management and maintenance of an existing infrastructure asset that
is used to provide services to the public. This last variant, together with the
development of similar arrangements between private sector bodies, has at times
obscured the boundary between service concessions and outsourcing
arrangements (see 2.3.1 below).
The accounting challenge is to reflect the substance of these arrangements fairly in the
financial statements of both of the contracting parties, because the various transactions
between the parties to a service concession arrangement range across a number of
accounting standards and interpretations, including:
1798 Chapter 26
• accounting for the rights of the parties over the infrastructure assets (IAS 16 – Property,
Plant and Equipment, IFRS 16 – Leases – and formerly, IAS 17 – Leases – and IFRIC
Interpretation 4 – Determining whether an Arrangement contains a Lease);
• construction or refurbishment of the infrastructure assets (IFRS 15 – Revenue from
Contracts with Customers);
• accounting for the various performance obligations under the contract during the
operations period of the concession (IFRS 15 and IAS 37 – Provisions, Contingent
Liabilities and Contingent Assets); and
• recognition and measurement of the amounts payable or receivable under the
arrangement (IAS 20 – Accounting for Government Grants and Disclosure of
Government Assistance, IAS
23 – Borrowing Costs, IAS
32 – Financial
Instruments: Presentation, IAS 37, IAS 38 – Intangible Assets – and IFRS 9 –
Financial Instruments).
This makes it difficult to develop a coherent accounting model that deals with all of the
features of service concessions simultaneously, and from the position of both the private
sector (i.e. the ‘operator’) and public sector (i.e. the ‘grantor’). Moreover, prior to the
issue of IFRIC Interpretation 12 – Service Concession Arrangements, entrenched
national positions had developed and differing accounting treatments had been widely
adopted in various jurisdictions, with or without a basis in specific local accounting
standards. Also, some jurisdictions accepted more than one accounting treatment for
broadly similar arrangements, some of which are influenced by a taxation basis that has
been agreed with the jurisdictional taxation authorities. All this resulted in considerable
diversity in the accounting by IFRS reporters of seemingly similar arrangements.
In 2001, SIC-29 – Service Concession Arrangements: Disclosures – was issued. This did not
attempt to address the accounting issues but considered the information that should be
disclosed in the notes to the financial statements of an ‘operator’ and ‘grantor’ under a
service concession arrangement. [SIC-29.4]. Its requirements are described further at 6 below.
IFRIC 12 – Service Concession Arrangements – addresses the accounting issues and
was approved by the IASB in November 2006. The fact that the Interpretation took
more than three years to develop indicates the complexity of the issues and the
difficulty that the Committee encountered in fitting a solution into the existing
accounting framework.
1.1
The Interpretations Committee’s approach to accounting for
service concessions
The Interpretations Committee limits its guidance to accounting by the operator of the
service concession. [IFRIC 12.4, 9]. It views the primary accounting determination for the
operator as being whether control over the infrastructure assets has been ceded to the
operator or whether any new or existing assets under the concession arrangement are
controlled by the grantor.
Service concession arrangements 1799
The Interpretations Committee suggests that arrangements where control does not
rest with the grantor, and the asset is either derecognised by the grantor or is an
asset constructed for the concession that the grantor never controls, can be dealt
with adequately by other accounting standards or interpretations.
[IFRIC 12.BC11-BC13]. The interrelationship with other accounting standards is
discussed further at 2.3 below.
Infrastructure assets controlled by the grantor are the subject of IFRIC 12. This
applies whether the assets are constructed or acquired by the operator for the
concession, that become those of the grantor because it controls them, or existing
assets that remain under the grantor’s control and to which the operator is granted
access. [IFRIC 12.7].
‘Control’ is therefore a central concept in IFRIC 12. Control is not determined by
attributing risks and benefits to identify the ‘owner’ of the infrastructure. Instead,
IFRIC 12 regards control in terms of the operator’s ability (or lack thereof) to decide
how to use the asset during the concession term and how it will be deployed thereafter.
Its definition and consequences are discussed further at 3 below.
Thus any infrastructure that remains under the control of the grantor will be accounted
for using IFRIC 12. In doing so, the Interpretations Committee establishes a number of
principles for accounting by the operator of a concession falling within its scope:
• the infrastructure is not recognised as property, plant and equipment by the
operator; [IFRIC 12.11]
• the operator recognises revenue from construction services when assets are built
or upgraded during the concession term; [IFRIC 12.14]
• a financial asset or an intangible asset is recognised as consideration for these
construction services, depending upon the way in which the operator is paid for
services under the contract; [IFRIC 12.15] and
• revenues and costs for the provision of operating services are recognised over the
term of the concession arrangement. [IFRIC 12.20].
The requirement to recognise an asset as consideration for construction services gives
rise to two service concession models – the ‘financial asset’ model or the ‘intangible
asset’ model. These are considered further at 4 below. The recognition of revenue and
costs in the operations phase is discussed at 5 below.
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1.2
Terms used in this chapter
The following terms are used in this chapter with the meanings specified:
Term Definition
Grantor
A public sector body (including a governmental body, or a private sector
entity to which responsibility for a public service has been devolved) that
grants the service arrangement. [IFRIC 12.3].
Operator
A private sector entity that is contractually obliged to construct,
upgrade, operate and maintain infrastructure used to provide services
to the public on behalf of the public sector entity. The operator is
responsible for at least some of the management of the infrastructure
and related services and does not merely act as an agent on behalf of
the grantor. [IFRIC 12.2, 3].
Service arrangement/
A contract that obliges the operator to cons
truct, upgrade, operate and maintain
Service concession
infrastructure used to provide the services to the public on behalf of the grantor.
arrangement
The contract sets the initial prices to be levied by the operator and regulates
price revisions over the period of the service arrangement. [IFRIC 12.3].
Infrastructure
Assets used in the provision of services to the public. Examples include roads,
bridges, tunnels, prisons, hospitals, airports, water distribution facilities,
energy supply and telecommunications networks. [IFRIC 12.1]. Infrastructure
can be constructed or acquired by the operator for the purpose of the service
arrangement; or can be existing assets to which the grantor gives the operator
access for the purpose of the service arrangement. [IFRIC 12.7].
Control criteria
(a) the grantor controls or regulates what services the operator must
provide with the infrastructure, to whom it must provide them, and at
what price; and
(b) the grantor controls any significant residual interest in the
infrastructure at the end of the term of the arrangement, through
ownership, beneficial entitlement or otherwise. [IFRIC 12.5].
Government
Refers to government, government agencies and similar bodies whether
local, national or international. [IAS 20.3].
2
SCOPE OF IFRIC 12
The scope of IFRIC 12 is specific and relatively narrow. The Interpretations Committee
decided to address only public-to-private service concession arrangements in which:
(a) the grantor controls or regulates the services that the operator must provide using
the infrastructure, to whom it must provide them, and at what price; and
(b) the grantor controls any significant residual interest in the property at the end of the
concession term through ownership, beneficial entitlement or otherwise.
(Infrastructure used in a service concession for its entire useful life is deemed to meet
this second condition because there is no significant residual interest). [IFRIC 12.5, 6].
The Committee also decided to restrict its guidance to the accounting by operators in
public-to-private service concession arrangements. [IFRIC 12.4]. Accordingly, the
Interpretation does not specify the accounting by grantors. [IFRIC 12.9].
Service concession arrangements 1801
The Committee acknowledged that these restrictions would exclude many
arrangements that are found in practice for private sector participation in the provision
of public services. However, it concluded that the above conditions were likely to be
met in most of the public-to-private service concession arrangements for which
guidance had been sought and that other standards apply when these conditions are not
a feature of the arrangement. [IFRIC 12.BC11-13]. The standards that might apply for
arrangements outside the scope of IFRIC 12 are set out at 2.3 below. Arrangements
within scope will be those that meet the following criteria:
1.
the arrangement is a public-to-private service concession (see 2.1 and 2.2 below);
[IFRIC 12.4]
2.
the grantor controls or regulates the services (see 3.1 below); [IFRIC 12.5(a)]
3. the
grantor
controls
any significant residual interest (see 3.2 below). [IFRIC 12.5(b)].
The diagram below illustrates how these criteria would be applied for a service arrangement.
Is the arrangement a public to
Does the operator choose to
No
No
private service concession?
apply IFRIC 12 by analogy?
(See 2.1 and 2.2 below)
(see 2.5 below)
Yes
OUTSIDE
Yes
SCOPE
Does the grantor control or
No
regulate the services?
OF
(See 3.1 below)
Yes
IFRIC 12
Does the grantor control any
No
significant residual interest?
(See 3.2 below)
Yes
WITHIN SCOPE OF IFRIC 12
2.1
Public-to-private service concession arrangements within scope
The Committee has applied a narrow definition to the scope of IFRIC 12, restricting it
to guidance on public-to-private service concession arrangements. [IFRIC 12.4]. A broader
definition based solely on the control criteria could have applied to many existing
outsourcing and similar arrangements.
Therefore, to be within the mandatory scope, an arrangement has to involve a private
sector entity (the operator), a public sector body (the grantor), and a service concession.
These elements are discussed below.
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Application of IFRIC 12 by analogy to private-to-private service arrangements is neither
required nor prohibited, but may be appropriate under the hierarchy for selecting
accounting policies within IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors. However, this choice would not be possible if it was determined
that the arrangement falls within the scope of other standards, such as IFRS 15 and
IFRS 16. See 2.5 below.
2.1.1
Private sector entity (the operator)
Whilst an arrangement within the scope of IFRIC 12 typically involves a private sector
operator, [IFRIC 12.2], the Interpretation can still apply if the operator is ultimately
controlled by the state, provided that it can be demonstrated that it is acting
independently and not as an agent for the grantor. [IFRIC 12.3(b)].
Generally, a private sector entity would be expected to be one that was entirely
independent of the state. However, there may be circumstances in which an entity is
partially or wholly state-owned but allowed autonomy to conduct its own affairs.
Entities such as these are common, not only in jurisdictions where there is state
ownership of all economic activity. Some governments allow utilities to control most of
their own affairs while retaining ownership of the utility. Governments may take total
or partial ownership of entities as a means of encouraging economic development but
allow the entity control over its contractual arrangements.
If there is a contractual arrangement that in all other respects appears to be the same as
a service concession arrangement between a private entity and the public sector, a
state-owned operator may be considered as if it were a private sector entity and
IFRIC 12 will apply. If the activity of the ‘service concession’ is regulated only by law
rather than in a contractual arrangement between the operator and the grantor, then the
arrangement is not within scope (see 2.2.4 below).
2.1.2
Public sector body (the grantor)
The Interpretation identifies the grantor of a service concession arrangement in terms
of a public sector body, including a governmental body or a private sector entity to
which the responsibility for the public service has been devolved. [IFRIC 12.3(a)].
In its guidance as to what constitutes control over services and prices in paragraph 5(a),
described at 2 above, IFRIC 12 extends what might be considered to mean ‘public sector’:
‘... inclu
des circumstances in which the grantor buys all of the output as well as
those in which some or all of the output is bought by other users. In applying this
condition, the grantor and any related parties shall be considered together. If the
grantor is a public sector entity, the public sector as a whole, together with any
regulators acting in the public interest, shall be regarded as related to the grantor
for the purposes of this Interpretation.’ [IFRIC 12.AG2].
This means that the entire public may be considered as part of the ‘public sector’ if the
grantor purchases all of the output and provides services for free, e.g. health services
provided by privately operated hospitals but free at the point of delivery to the patient.
Not every related party of the grantor (as defined in paragraph 9 of IAS 24 – Related
Party Disclosures – see Chapter 35) need be taken into account in determining whether
Service concession arrangements 1803
the grantor controls the service concession. Some services may be provided
simultaneously to more than one public sector body but they will only be taken into
account together if they operate in concert to control the ‘output’. For instance, an
entity may provide similar information technology services to several government
departments and local government bodies but each contract is negotiated separately;
the departments and bodies are not necessarily ‘related parties’.
Regulators must be taken into account although they may not be related parties of the
grantor as defined by IAS 24, as they may be required to be independent to act in the
public interest. If the activities of the operator are regulated, but there is no contractual
arrangement between the operator and the grantor, then the arrangement is not within
scope (see 2.2.4 below).
Control over services is discussed further at 3.1 below.
2.2
Other features of a service concession arrangement (‘SCA’)
IFRIC 12 does not describe the features of a service concession agreement in the scope
paragraphs; instead they are included in ‘background’ information where they help
explain what is, and what is not, a public-to-private service arrangement. One feature
identified is the public service nature of the obligation undertaken by the operator. The
services related to the infrastructure are to be provided to the public as a matter of policy,