practice, it was sometimes unclear whether an arrangement fell within scope of
IFRIC 12 or IFRIC 4. The concept of an operator’s right of ‘access to operate the
infrastructure’, [IFRIC 12.11], could appear to be very similar to an arrangement that
‘conveys the right to use the asset’. [IFRIC 4.6(b), 9]. It was unclear whether the private
sector entity was a lessee or the operator of a service concession arrangement. There
were similar difficulties in determining whether the private sector entity was acting as a
lessor or as a provider of outsourcing services, rather than as the operator of a service
concession. One cause for this confusion was the fact that IAS 17 applied a risks and
rewards approach, whereas the application of IFRIC 12 is established on the basis of
which entity has control over the related infrastructure asset. As a result, there was
diversity in practice whereby IFRIC 4 and IFRIC 12 could be applied to seemingly
similar contractual arrangements.
Under IFRS 16, the distinction is clear. Any arrangement that meets the control criteria
in paragraph 5 of IFRIC 12 does not meet the definition of a lease. [IFRS 16.BC69]. IFRS 16
defines an arrangement as containing a lease if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for consideration.
[IFRS 16.9]. A right to control the use of an identified asset is then described in terms of
the right to direct the use of the asset. [IFRS 16.B9]. In this way, both the new leasing
standard and IFRIC 12 apply a control model. Therefore, a conclusion that the grantor
controls or regulates what services the operator must provide with the infrastructure, to
whom, and at what price, [IFRIC 12.5], is not compatible with the assertion that the private
sector entity has a leasehold interest in the same assets under IFRS 16. The control
criteria in IFRIC 12 are discussed at 3 below.
In light of this, the IASB had considered whether it was necessary to explicitly exclude
from the scope of IFRS 16 service concession arrangements within the scope of
IFRIC 12. However, stakeholders informed the IASB that including a scope exclusion
for service concession arrangements in IFRS 16 would provide clarity in this respect.
[IFRS 16.BC69].
2.4.1
Entities previously applying IAS 17 and IFRIC 4
As discussed at 3.1.5 in Chapter 24, the requirement in IFRS 16 for a customer to have
the right to direct the use of an identified asset is a change from IFRIC 4. A contract may
have met the conditions in IFRIC 4 for lease classification even if the customer did not
have the right to direct the use of the identified asset. Despite the fact that such contracts
would not be considered leases under IFRS 16, the transitional provisions of the
Service concession arrangements 1809
Standard allow a practical expedient, whereby entities are not required to reassess
whether a contact is, or contains, a lease at the date of initial application of the Standard
if they had previously determined that the contract contained a lease under IFRIC 4.
Instead and entity is permitted: [IFRS 16.C3]
(a) to apply IFRS 16 to contracts that were previously identified as leases applying
IAS 17 and IFRIC 4; and
(b) not to apply IFRS 16 to contracts that were not previously identified as containing
a lease applying IAS 17 and IFRIC 4.
By virtue of the same practical expedient, we believe that there is no requirement for
entities to reassess those arrangements entered into before the date of initial application
of IFRS 16 that were previously determined to be leases under IFRIC 4 rather than
service concession arrangements under IFRIC 12. For this purpose, the date of initial
application is the beginning of the annual reporting period in which an entity first
applies IFRS 16. [IFRS 16.C2].
If an entity chooses to apply the practical expedient, it discloses that fact and applies
the practical expedient to all of its contracts that were previously determined to be
leases under IFRIC 4. As a result, entities would only have to reassess those service
concession contracts entered into after the date of initial application of IFRS 16.
[IFRS 16.C4].
2.5 Private-to-private
arrangements
While the Interpretations Committee expects IFRIC 12 to be applied to arrangements
that share the features of the public service obligation (see 2.2 above), its application to
private-to-private arrangements is neither required nor prohibited. The Basis for
Conclusions notes that application by analogy could be appropriate under the hierarchy
in IAS 8 if the arrangement met the control criteria quoted above. [IFRIC 12.BC14].
Accordingly, the application of IFRIC 12 to other arrangements would be regarded as
an accounting policy choice, rather than a treatment that could be determined on a case
by case basis. 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.
2.6
Accounting by grantors
The Interpretation applies only to accounting by the operator, not the grantor.
[IFRIC 12.4, 9]. Grantor accounting was determined not to be a priority for the Committee,
who noted that grantors are government bodies that do not necessarily apply IFRS.
[IFRIC 12.BC15]. In 2011, the International Public Sector Accounting Standards Board
(IPSASB) approved a new standard, IPSAS 32 – Service Concession Arrangements:
Grantor – that addresses the grantor’s accounting in such arrangements. Its approach is
consistent with that used for the operator’s accounting in IFRIC 12, in that an
infrastructure asset is recognised by the grantor, together with an obligation comprising
either a financial liability to the operator or, where an unconditional to pay cash to the
operator is not a feature of the arrangement, a deferred revenue balance.2 This chapter
does not address accounting by grantors.
1810 Chapter 26
3 THE
CONTROL
MODEL
A contractual arrangement that is within the scope of IFRIC 12 includes the following
features, commonly referred to as the ‘control criteria’:
(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 infrastructure at the end
of the concession term through ownership, beneficial entitlement or otherwise.
[IFRIC 12.5].
The Interpretations Committee considers that, taken together, these conditions identify
when the infrastructure is controlled by the grantor for the whole of its economic life,
in which case an operator is only managing the infrastructure on the grantor’s behalf.
[IFRIC 12.AG6]. Crucially, it has concluded from this that an infrastructure asset controlled
by the grantor cannot be the property, plant and equipment of the operator.
[IFRIC 12.11, BC21, BC22]. Control should be distinguished from management. If the grantor
retains both the degree of control described in (a) above and any significant residual
interest in the infrastructure, the operator is only managing the infrastr
ucture on the
grantors behalf – even though, in many cases, it may have wide managerial discretion.
[IFRIC 12.AG5].
3.1
Regulation of services
Although there has to be a contract between grantor and operator for the arrangement
to be a service concession, the control or regulation of services does not have to be
governed by contract as it could include control via an industry regulator. Control also
extends to circumstances in which the grantor buys all of the output as well as those in
which it is bought by other users.
The grantor and relevant related parties (see 2.1.2 above) must be considered together. If
the grantor is a public sector entity, the public sector as a whole, together with any
independent regulators acting in the public interest, are to be regarded as related to the
grantor. [IFRIC 12.AG2]. ‘Price’ can mean the amount at which the grantor buys the service
or the amount that the operator charges members of the public or a combination of both.
This means that many regulated public utilities (water, sewage, electricity supply etc.)
will fall within (a) above. Other arrangements that fall within (a) include public health
facilities that are free to users and subsidised transport facilities (rail, some toll roads
and bridges) that are partly paid by public sector grant and partly by passenger fares. Of
course, all of these will only be within scope of IFRIC 12 if there is also a contract
between grantor and operator for the arrangement and any significant residual interest
is also ‘controlled’ by the grantor under (b).
The Interpretations Committee stresses that the grantor does not need to have complete
control of the price. It is sufficient for the price to be regulated, which could be by way
of a capping mechanism (regulated utilities are usually free to charge lower prices).
Other ‘caps’ may not be so apparent. A contract may give the operator freedom to set
its prices but any excess is clawed back by the grantor, e.g. through setting a maximum
return on an agreed investment in the infrastructure. In such a case, the operator’s return
is capped and the price element of the control test is substantively met. [IFRIC 12.AG3].
Service concession arrangements 1811
Care should be taken to look to the substance of the agreements, so a cap that only
applies in remote circumstances will be ignored.
Some arrangements only allow the grantor to control prices for part of the life of the
infrastructure, particularly if it is a lease-type arrangement. For example, an operator
may construct clinical facilities that are used by a government health care provider (the
grantor) for a five year contract term. At the end of the term, the health care provider
may extend the contract by renegotiation. If it does not do so, the operator can run the
facilities for private health care. Although the prices are controlled for the first five
years, this arrangement is unlikely to meet the control condition in (a) above.
Alternatively, the contract might allow regulation of the prices of some but not all of the
services provided with the infrastructure. Judgement is required in determining whether
arrangements involving partially regulated assets fall within the scope of IFRIC 12
(see 3.4 below).
3.2
Control of the residual interest
In order for an arrangement to be within scope of IFRIC 12, the grantor must control
not only the services provided with the infrastructure but also any significant residual
interest in the property at the end of the concession term through ownership, beneficial
entitlement or otherwise. [IFRIC 12.5(b)]. The grantor’s control over any significant residual
interest should restrict the operator’s ability to sell or pledge the infrastructure. The
grantor must also have a right of use of the infrastructure throughout the concession
term. [IFRIC 12.AG4]. As discussed below, control over the residual interest does not
require the infrastructure to be returned to the grantor. It is sufficient that the grantor
controls how access to the infrastructure is awarded after the concession term.
Many infrastructure assets are partially replaced during the course of the concession
and the impact of this on condition (b) at 3 above has been considered. If the operator
has to replace part of an item of infrastructure during the life of the concession, e.g. the
top layer of a road or the roof of a building, the item of infrastructure is to be considered
as a whole, so that condition (b) will be met for the whole of the infrastructure, including
the part that is replaced, if the grantor has the residual interest in the final replacement
of that part. [IFRIC 12.AG6].
IFRIC 12 pays little attention to the residual interest. Its application guidance states that
‘the residual interest in the infrastructure is the estimated current value of the
infrastructure as if it were already of the age and in the condition expected at the end
of the period of the arrangement’. [IFRIC 12.AG4]. This echoes the definition of ‘residual
value’ in IAS 16, but excludes any deduction for the estimated costs of disposal. [IAS 16.6].
See Chapter 18 at 5.2. However, the Interpretation does not expand on what is regarded
as ‘significant’. Some infrastructure assets such as toll roads and bridges generate cash
flows directly and it may be possible to use estimated future cash flows to calculate the
significance of the residual value, whether or not the grantor will charge tolls after
reversion of the asset. It may not be possible to base the assessment of ‘significance’ on
the cash flows received by the operator on handing back the asset to the grantor as these
may be nominal amounts; indeed, the grantor may pay nothing. In such a case, the
remaining useful life of the asset when it reverts may give a good indication, e.g. if a
1812 Chapter 26
hospital is handed back to the public sector with a remaining useful life of twenty years,
this residual interest is likely to be significant.
There are a number of features that indicate whether the grantor controls the residual
interest. There are usually several contractual alternatives: the operator is granted a
second concession term, a new operator is allowed to acquire the assets or the grantor
acquires the assets and brings the arrangement ‘in house’. The grantor still controls the
residual as it will determine which of these alternatives applies and the option exercise
price (if it or a new operator acquires the infrastructure) is irrelevant.
In some arrangements the grantor only has an option to reacquire the asset at the end
of the concession term. The operator cannot control the infrastructure until the grantor
decides what to do with the option. An option at fair value at the date of exercise may
by itself be enough to give the grantor control over the residual under IFRIC 12 if it is
sufficient to restrict the operator’s ability to sell or pledge the infrastructure. This is a
clear difference between a ‘risks and rewards’ and a ‘control’ model as under the former,
the operator would be seen as keeping the risks and rewards of ownership if another
party had the right to acquire the asset at fair value.
Example 26.1: Residual arrangements
A gas t
ransmission system is being operated under a concession arrangement with the State Gas Authority.
At the end of the term, the grantor will either acquire the infrastructure assets at their net book value,
determined on the basis of the contract, or it may decide to grant a new SCA on the basis of a competitive
tender, which will exclude the current operator. If the grantor elects to do the latter, the operator will be
entitled to the lower of the following two amounts:
(a)
the net book value of the infrastructure, determined on the basis of the contract; and
(b)
the proceeds of a new competitive bidding process to acquire a new contract.
Although the operator cannot enter the competitive tender, it also has the right to enter into a new concession
term but, in order to do so, it must match the best tender offer made. It has to pay to the grantor the excess of
the best offer (b) above the amount in (a); should the tender offer be lower than (a), it will receive an
equivalent refund.
In this arrangement, the grantor will control the residual. It can choose to take over the activities of the
concession itself or it can allow potential operators, including the incumbent, to bid for a second term. The
price that might be received by the operator, or paid by the grantor, is not relevant.
What if the arrangement is for the whole life of the infrastructure? Assets in service
concession arrangements may revert to the grantor at the end of the concession term
but they may not have much, if any, remaining useful life. Many modern buildings, for
example, only have a useful life of thirty years or so and this is a common concession
term. Consequently, infrastructure used in a service concession arrangement for its
entire useful life (‘whole of life infrastructure’) is included within the scope of IFRIC 12.
[IFRIC 12.6].
The Interpretations Committee noted that one reason for including the ‘significant
residual interest’ requirement was to differentiate between privatised, but still regulated,
industries and service concession arrangements, thereby seeming to confirm that it had
not intended regulated industries to be in scope.3 The Interpretations Committee
considers that privatised regulated industries should generally be out of scope, because
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 356
