International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards

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  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)].

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  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

  1806 Chapter 26

  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