irrespective of the identity of the party that operates the services. The service concession
arrangement contractually obliges the operator to provide the services to the public on
behalf of the public sector entity. IFRIC 12 states that ‘other common features’ are:
‘(a) the party that grants the service arrangement (the grantor) is a public sector entity,
including a governmental body, or a private sector entity to which the
responsibility for the service has been devolved.
(b) 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.
(c) the contract sets the initial prices to be levied by the operator and regulates price
revisions over the period of the service arrangement.
(d) the operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement, for little or no incremental
consideration, irrespective of which party initially financed it.’ [IFRIC 12.3].
2.2.1
Public service nature of the obligation
The Interpretation identifies the public service nature of the obligation undertaken by the
operator as a feature of a service concession without defining what is meant by the term.
Instead, the Committee refers to examples of service concession arrangements. IFRIC 12
identifies roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities,
energy supply and telecommunications networks as examples of infrastructure used for
public services. [IFRIC 12.1]. SIC-29 refers to water treatment and supply facilities,
motorways, car parks, tunnels, bridges, airports and telecommunications networks.
[SIC-29.1]. It also states that a service concession arrangement generally involves the grantor
conveying to the concession operator the right to provide services that give the public
access to major economic and social facilities for the period of the concession. [SIC-29.2(a)].
1804 Chapter 26
SCAs fall into two broad categories where the public service obligation can be identified:
1.
SCAs in which the services ‘related to the infrastructure’ are provided to the public
by the operator (e.g. transport, and water supply and treatment). In some cases, the
operator may have direct involvement with the public as consumers of the output
of the infrastructure (e.g. transport). In other cases, the operator may not have
direct involvement with the public. For example, the operator of water treatment
facilities, which would typically not be open to the public for safety reasons.
2.
SCAs where the services ‘related to the infrastructure’ continue to be provided by the
grantor, e.g. the services provided by hospitals. The operator may be obliged to build
and maintain a hospital that is then used by the government to provide medical
services. However, the infrastructure that is the subject of the contractual arrangement
is used to provide services directly to the public, or to a significant part of it.
In other cases, it may be less clear whether the operator has undertaken a public service
obligation. This is understandable, since different governments will have a range of
political or ideological views of what activities should be provided by the state. As such,
the meaning of a public service obligation is a matter of judgement. We do not believe
that it is necessary for the operator to have direct involvement with the public in order
for an arrangement to contain a public service obligation. It is, however, important to
consider whether the infrastructure is being used by the operator to provide services
for the benefit of the public (such as in the case of the water treatment facility noted
above), rather than to the grantor for its own benefit. SIC-29 identifies examples of
activities that are not service concession arrangements, citing an entity outsourcing the
operation of its internal services, such as employee cafeteria, building maintenance, and
accounting or information technology functions (see 2.3.1 below). [SIC-29.1].
Nevertheless, whilst entities look for evidence of a public service obligation in
considering whether an arrangement has the features of a service concession, the
determination as to whether IFRIC 12 should be applied depends primarily on meeting
the three criteria noted at 2 above:
1.
the arrangement is a public-to-private service concession; [IFRIC 12.4]
2.
the grantor controls or regulates the services; [IFRIC 12.5(a)]
3.
the grantor controls any significant residual interest. [IFRIC 12.5(b)].
Accordingly, in our view, entities should apply the requirements of IFRIC 12 to
arrangements between a private sector operator and a public sector body that relate to
the examples of infrastructure noted above if the control criteria in paragraph 5 of
IFRIC 12 are met (see 3 below).
For arrangements that meet the control criteria in IFRIC 12, but relate to infrastructure
other than that listed in paragraph 1 of SIC-29 or paragraph 1 of IFRIC 12, it would be
appropriate to consider whether there is a predominant local consensus amongst IFRS
reporters as to what constitutes a public service obligation. In the absence of a clear
consensus we believe that entities should refer to the facts and circumstances as
specified in the contract and that it would not be appropriate for an entity simply to
apply a group-wide accounting policy for arrangements involving similar infrastructure.
Service concession arrangements 1805
2.2.2
Infrastructure assets within the scope of IFRIC 12
Infrastructure assets within scope are those constructed or acquired for the purpose of
the concession or existing infrastructure to which the operator is given access by the
grantor for these purposes (see 3.3 below). [IFRIC 12.7]. Accounting is based on who
controls the right to use the infrastructure. Crucially, control may be separated from
ownership. Therefore, if the grantor controls the infrastructure assets, they should be
accounted for according to one of the service concession models (see 4 below).
2.2.3
Operator does not ‘merely act as an agent’
A feature of SCAs is that 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 12.3(b)].
For example, an operator constructs and maintains for 25 years a building that will be
used for administrative purposes by the Defence Ministry in a particular country. The
building does not have any parts dedicated to services provided directly to the public
although the service that is provided within the building (national security) may be
considered a public service as a matter of policy. At the end of the concession term, the
building reverts to the Ministry for a nominal sum. In the interests of national security,
all details of the services to be provided are predetermined. In this type of arrangement
there may be virtually no scope for the operator to make any management decisions,
making it unlikely that the arrangement will be within scope of IFRIC 12.
This will always be
a question of degree and is unlikely to be the crucial feature in
making a decision but it may help distinguish SCAs within scope of IFRIC 12 from some
of the ‘outsourcing’ type arrangements discussed at 2.3.1 below.
2.2.4
A contract with the grantor
An arrangement can only be an SCA if there is a contract with the grantor ‘that sets out
performance standards, mechanisms for adjusting prices, and arrangements for
arbitrating disputes’. [IFRIC 12.2].
If the operator of an asset obtains a licence to provide services but has no contractual
obligation to the grantor (including parties ‘related’ to the grantor in the sense in which
the term is used in IFRIC 12, see 3.1 below) then the arrangement will not be within scope.
There are many activities that require a formal licence; in some jurisdictions these include
licences to operate pharmacies, provide childcare or carry out certain waste disposal
activities, any of which could be considered public service obligations in some countries.
Obtaining the licence does not bring the activity into scope of IFRIC 12 unless there is a
separate contractual arrangement that governs the provision of the service.
Information Note 2 to IFRIC 12, reproduced at 2.3 below, indicates that there are
certain contractual arrangements between grantor and operator that are not within
scope of the Interpretation. These include arrangements in which there is a service
and/or maintenance contract, i.e. to perform specific tasks such as processing licence
applications, where IFRS 15 is the relevant standard. Another example is where the
operator leases assets from the public sector for its own use, in which case IFRS 16
would provide relevant guidance, unless, for example, the lease payments are made as
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part of a wider service concession, in which case the costs may have to be taken into
account as part of the costs of an infrastructure asset (see 3.3 below).
However, the contractual arrangement does not need to be for construction services in
respect of any infrastructure. The arrangement may be within scope of IFRIC 12 in
respect of post-construction services alone. Accounting for the post-construction
period is described at 5 below.
2.3
Arrangements that are not in the scope of IFRIC 12
The Committee acknowledged that in practice there are arrangements for private sector
participation in the provision of public services that will not fall in the scope of IFRIC 12.
However, it was satisfied that the Interpretation would apply to most of the public-to-
private service concession arrangements for which guidance had been sought.
Nevertheless, the Committee did consider a range of typical arrangements and decided
that it could provide references to the standards that apply to those that fall outside the
scope of IFRIC 12 without giving any guidance as to their application. [IFRIC 12.BC13].
These references are presented in Information Note 2 to IFRIC 12 (on which the following
table is based) and which shows a range of arrangements between the public and private
sectors. The Interpretations Committee’s view is that IFRIC 12 is interpreting IFRSs for the
transactions in the middle of this range, where the application of standards was previously
unclear. These are described in the table below as ‘Rehabilitate-operate-transfer’ and
‘Build-operate-transfer’ arrangements. The table also demonstrates how other standards,
namely IFRS 16, IFRS 15 and IAS 16, apply to arrangements that do not contain the features
of a public-to-private service concession as defined in the Interpretation.
Category Lessee
Service
Provider
Owner
Typical
Lease, e.g.
Service and/or
Rehabilitate-
Build-
Build-
100%
arrangement
Operator
maintenance
operate-
operate-
own-
Divestment
types
leases
contract
transfer
transfer
operate
Privatisation,
asset from
(specific tasks
Corporation
grantor
e.g. debt
collection)
Asset
Grantor Operator
Ownership
Capital
Grantor Operator
Investment
Demand Risk
Shared
Grantor
Operator and/or Grantor
Operator
Typical
8-20 years
1-5 years
25-30 years
Indefinite (or
Duration
may be limited
by licence)
Residual
Grantor Operator
Interest
Relevant IFRSs
IFRS 16
IFRS 15
IFRIC 12
IAS 16
For entities still applying IAS 17, the reference to IFRS 16 in the above table is replaced
with that Standard.
Service concession arrangements 1807
2.3.1 Outsourcing
arrangements
Service concessions are not the only contractual arrangements between public sector
bodies and private sector providers of services. Public sector bodies lease buildings or
other property, plant and equipment from private sector entities for their own use. The
private sector entity might also be engaged to construct the buildings or other property
before it is occupied by the public sector body. The public sector also engages
independent subcontractors to perform procurement services or to outsource the
operation of its internal activities and functions. Sometimes the leasing of assets and the
provision of outsourcing services to government are embodied in the same contract. In
this case, the private sector entity would have to identify and account for the lease
element of the contact and the distinct performance obligations within the contract
separately. [IFRS 15.5, 22].
SIC-29 states that outsourcing arrangements are not service concessions. [SIC-29.1]. It
does not set out any principles to apply to distinguish an outsourcing arrangement from
a service concession, but it does provide examples of each. Examples of outsourcing
arrangements include contracts for the provision of building maintenance services,
accounting and information technology functions and operating employee cafeteria.
[SIC-29.1]. The Interpretations Committee noted in September 2005 that it would not
expect an information technology outsourcing arrangement for a government
department to be dealt with under IFRIC 12.1 SIC-29 also states that a service
concession arrangement generally involves the grantor conveying to the concession
operator the right to provide services that give the public access to major economic and
social facilities for the period of the concession. [SIC-29.2(a)]. In our view a distinguishing
feature is the nature of the infrastructure used in the arrangement and the purpose to
which the assets are applied. In a service concession arrangement, the private sector
operator is contracted by a public sector grantor to operate certain infrastr
ucture in the
provision of services in circumstances where there is a public service obligation.
[IFRIC 12.3]. By contrast, in an outsourcing arrangement, the infrastructure is used by the
grantor for its own benefit. That use might allow the public sector body to ultimately
provide public services but the infrastructure is not used itself to provide public services
and the obligation undertaken by the operator is not of a public service nature.
The assessment of whether an arrangement is a service concession within scope of
IFRIC 12 or an outsourcing arrangement could give rise to differences in accounting for
the private sector entity. Treating an arrangement as an outsourcing arrangement could
result in the private sector entity recognising PP&E in its financial statements in respect
of the assets subject to the arrangement. This would be the case if the arrangement were
accounted for as the provision of goods and services under IFRS 15. When the private
sector entity is considered to be the lessor, given the length of typical service concession
arrangements, it is likely that a finance lease receivable would be recognised under
IFRS 16. [IFRS 16.67]. For an arrangement accounted for under IFRIC 12, the private sector
entity (operator) would recognise either a financial asset or an intangible asset,
depending upon the nature of consideration receivable for construction or upgrade
services provided. [IFRIC 12.16-17]. Another important distinction is that in an IFRIC 12
service concession, the private sector entity would recognise revenue in the period
during which any infrastructure asset was being constructed. [IFRIC 12.14]. A lessor would
1808 Chapter 26
record an IAS 16 asset under construction and only recognise revenue if the terms of
the lease required that asset to be derecognised.
2.4
Interaction of IFRS 16 and IFRIC 12
IFRS 16 was issued by the IASB in January 2016 and is effective for annual reporting
periods beginning on or after 1 January 2019. The scope of IFRS 16 excludes service
concession arrangements falling within scope of IFRIC 12. [IFRS 16.3(c)]. Leasing
arrangements were previously governed by IAS 17 and IFRIC 4 – Determining whether
an Arrangement contains a Lease. Like IFRS 16, the scope of IFRIC 4 excluded service
concession arrangements falling within scope of IFRIC 12. [IFRIC 4.4]. However, in
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 355
