International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 361
the operator the right to charge for services (i.e. the operator has an intangible asset). The
operator’s infrastructure asset is to be split into a financial asset component for any
guaranteed amount of cash and an intangible asset for the remainder. [IFRIC 12.18, BC53].
These are common in transport concessions, e.g. a rail system paid for partly by grantor
subsidy and partly by the payment of fares. This gives rise to difficult matters of judgement.
It may not be clear how much of the arrangement is a financial asset and, therefore, where
to draw the boundary between the two assets. There may be minor amounts within a
contract that fall within another model and entities may conclude that these are de minimis.
The following example, based on Illustrative Example 3 in IFRIC 12, illustrates how an
entity may account for a service concession arrangement under the bifurcated model.
As with Examples 26.3 and 26.4 above, it should be noted that this example deals with
only one of many possible types of arrangements seen in practice and it is important
that entities understand and assess the facts and circumstances of their own service
concession arrangements in order to determine the appropriate accounting.
Example 26.7: The bifurcated model
Arrangement terms
The terms of a service arrangement require an operator to construct a road – completing construction within
two years – and maintain and operate the road to a specified standard for eight years (i.e. years 3-10). The
terms of the arrangement also require the operator to resurface the road when the original surface has
deteriorated below a specified condition. The operator estimates that it will have to undertake the resurfacing
at the end of the year 8. At the end of year 10, the service arrangement will end. The operator estimates that
the costs it will incur to fulfil its obligations will be:
Table 1 Contract costs
Year
€
Construction services (per year)
1-2
500
Operation services (per year)
3-10
10
Road resurfacing
8
100
The operator estimates the consideration in respect of construction services to be €1,050 by reference to the
stand-alone selling price of those services, which it estimates at forecast cost plus 5 per cent. The terms of the
arrangement allow the operator to collect tolls from drivers using the road. In addition, the grantor guarantees
Service concession arrangements 1833
the operator a minimum amount of €700 and interest at a specified rate of 6.18 per cent to reflect the timing
of cash receipts. The operator forecasts that vehicle numbers will remain constant over the duration of the
contract and that it will receive tolls of €200 in each of years 3 to 10.
Dividing the arrangement
The contractual right to receive cash from the grantor for the services and the right to charge users for the
public services should be regarded as two separate assets under IFRSs. Therefore, in this arrangement it is
necessary to divide the operator’s contract asset during the construction phase into two components – a
financial asset component based on the guaranteed amount and an intangible asset for the remainder. When
the construction services are complete, the two components of the contract asset would be classified and
measured as a financial asset and an intangible asset accordingly.
Table 2 Dividing the operator’s consideration
Year Total
Financial
asset
Intangible
asset
Construction services in year 1
525
350
175
Construction services in year 2
525
350
175
Total construction services
1,050
700
350
100%
67%
(a)
33%
Finance income, at specified rate of
22
22
–
6.18% (see table 3)
Borrowing costs capitalised
11
–
11
(interest paid in years 1 and 2 × 33)
(see table 7)
Total fair value of the operator’s
1,083
722
361
consideration
(a) Amount
guaranteed by the grantor as a proportion of the construction services.
Financial asset
During the first two years, the entity recognises a contract asset and accounts for the significant financing
component in the arrangement in accordance with IFRS 15. Once the construction is complete, the amount
due from, or at the direction of, the grantor in exchange for the construction services is accounted for in
accordance with IFRS 9 as a receivable. The example assumes that there has been no change in market interest
rates during the construction phase of the arrangement.
Table 3 Measurement of the contract asset / receivable
€
Construction services in year 1 allocated to the contract asset
350
Contract asset at end of year 1
350
Construction services in year 2 allocated to the contract asset
350
Interest in year 2 on contract asset at end of year 1 (6.18% × €350)
22
Receivable at end of year 2
722
Interest in year 3 on receivable at end of year 2 (6.18% × €722)
45
Cash receipts in year 3 (see table 5)
(117)
Receivable at end of year 3
650
Intangible asset
In accordance with IAS 38, the operator recognises the intangible asset at cost, i.e. the fair value of the
consideration received or receivable. During the construction phase of the arrangement, the portion of the
operator’s contract asset that represents its accumulating right to be paid amounts in excess of the guaranteed
amount for providing construction services is presented as a right to receive a license to charge users of the
infrastructure. The operator estimates the stand-alone selling price of the construction services as equal to the
forecast construction costs plus 5 per cent, which the operator concludes is consistent with the rate that a
1834 Chapter 26
market participant would require as compensation for providing the construction services and for assuming
the risk associated with the construction costs. It is also assumed that, in accordance with IAS 23, the operator
capitalises the borrowing costs, estimated at 6.7 per cent, during the construction phase.
Table 4 Initial measurement of the intangible asset
€
Construction services in year 1
175
Borrowing costs (interest paid in years 1 and 2 × 33%) (see table 7)
11
Construction services in year 2
175
Intangible asset at the end of year 2
361
In accordance with IAS 38, the intangible asset is amortised over the period in which it is expected to be
available for use by the operator, i.e. years 3-10. The depreciable amount of the intangible asset (€361
including borrowing costs) is allocated using a straight-line method. The annual amortisation charge
is
therefore €361 divided by 8 years, i.e. €45 per year.
Revenue and costs
The operator provides construction services to the grantor in exchange for a financial asset and an intangible
asset. Under both the financial asset model and intangible asset model, the operator accounts for the
construction services in accordance with IFRS 15. Thus in each of years 1 and 2 it recognises in profit or loss
construction costs of €500 and construction revenue of €525.
Toll revenue
The road users pay for the public services at the same time as they receive them, i.e. when they use the road.
Under the terms of this arrangement the cash flows are allocated to the financial asset and intangible asset in
proportion, so the operator allocates the receipts from tolls between repayment of the financial asset and
revenue earned from the intangible asset.
Table 5 Allocation of toll receipts
Year
€
Guaranteed receipt from grantor
700
Finance income (see table 8)
237
Total
937
Cash allocated to realisation of the financial asset per year (€937 / 8 years)
117
Receipts attributable to intangible asset (€200 × 8 years – €937)
663
Annual receipt from intangible asset (€663 / 8 years)
83
Resurfacing obligations
The operator’s resurfacing obligation arises as a consequence of use of the road during the operation phase.
It is recognised and measured in accordance with IAS 37, i.e. at the best estimate of the expenditure required
to settle the present obligation at the end of the reporting period. It is assumed that the terms of the operator’s
contractual obligation are such that the best estimate of the expenditure required to settle the obligation at any
date is proportionate to the number of vehicles that have used the road by that date and increased by €17 each
year. The operator discounts the provision to its present value in accordance with IAS 37. The charge
recognised each period in profit or loss is:
Table 6 Resurfacing obligation (€)
Year
3
4
5
6
7
8
Total
Obligation arising in year
12
13
14
15
16
17
87
(€17 discounted at 6%)
Increase in earlier years’ provision
0
1
1
2
4
5
13
arising from passage of time
Total expense recognised in profit
12
14
15
17
20
22
100
or loss
Service concession arrangements 1835
Overview of cash flows, statement of comprehensive income and statement of financial position
For the purposes of this example, it is assumed that the operator finances the arrangement wholly with debt
and retained profits. It pays interest at 6.7 per cent per year on outstanding debt. If the cash flows are fair
values remain the same as those forecast, the operator’s cash flows, statement of comprehensive income and
statement of financial position over the duration of the arrangement will be as follows.
Table 7 Cash flows (€)
Year 1
2
3
4
5
6
7
8
9
10
Total
Receipts –
–
200
200
200
200
200
200
200
200
1,600
Contract
(500) (500) (10)
(10)
(10)
(10)
(10)
(110)
(10) (10) (1,180)
costs (a)
Borrowing
– (34)
(69)
(61)
(53)
(43)
(33)
(23)
(19) (7) (342)
costs (b)
Net inflow /
(500) (534) 121
129
137
147
157
67
171 183
78
(outflow)
(a)
Table
1
(b) Debt at start of year (table 9) × 6.7%
Table 8 Statement of comprehensive income (€)
Year
1 2 3
4
5
6
7
8
9 10 Total
Revenue on
525 525 –
–
–
–
–
–
– –
1,050
construction
Revenue
– –
83
83
83
83
83
83
83
83 663
allocated to
operation
services
Finance
– 22 45
40
35
30
25
19
13 7 237
income (a)
Amortisation –
–
(45)
(45)
(45)
(45)
(45)
(45)
(45)
(46)
(361)
Resurfacing
– –
(12)
(14)
(15)
(17)
(20)
(22)
– – (100)
expense
Construction
(500) (500) –
–
–
–
–
–
– –
(1,000)
costs
Other contract
– –
(10)
(10)
(10)
(10)
(10)
(10)
(10)
(10) (80)
costs (b)
Borrowing
– (23)
(69)
(61)
(53)
(43)
(33)
(23)
(19) (7) (331)
costs (c)
(table 7)
Net profit 25
24
(8)
(7)
(5)
(2)
–
2
22 27
78
(a) Interest on receivable
(b) Table 1
(c) In
year 2, borrowing costs are stated net of amount capitalised in the intangible (see table 4).
Table 9 Statement of financial position (€)
End of year
1
2
3
4
5
6
7
8
9
10
Receivable 350
722
650
573
491
312
214
110
–
Intangible asset 175 361
316
271
226
181
136
91 46 –
Cash / (debt) (a)
(500) (1,034)
(913)
(784)
(647)
(500)
(343)
(276) (105)
78
Resurfacing
– –
(12)
(26)
(41)
(58)
(78)
–
–
–
obligation
Net assets
25
49
41
34
29
27
27
29
51
78
(a) Debt at start of year plus net cash flow in year (table 7)
1836 Chapter 26
The example above shows the operator’s contractual obligation to resurface the road
being recognised and measured in accordance with IAS 37. The accounting for
maintenance costs during the operations phase is discussed at 5.2 below.
4.6
Accounting for residual interests
Unless the infrastructure is used in a service concession arrangement for the whole of
its useful life (within scope of IFRIC 12 – see 3.2 above), there will be a residual interest
at the end of the contract that will be controlled by the grantor. The way in which the
grantor controls the residual interest will affect the way in which the operator accounts
for it. If the operator has an unconditional contractual right to cash (or another financial
asset) for the residual interest in the infrastructure, this right will be a financial asset. It
will be recognised as part of the consideration for the construction services. [IFRIC 12.16].
This is unaffected by the basis on which the consideration is calculated.
There are many different arrangements over residual interests in the infrastructure at
the end of the concession term but broadly they depend on whether the grantor has a
right or an option to acquire the residual interest and on the rights or options of the
operator:
(a) The grantor may control the residual via an obligation to purchase the
infrastructure from the operator but this could be at fair value, net book value, a