International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 364
Public Company Limited (CAT). CAT allows dtac to arrange, expand, operate and provide the cellular telephone
services in various areas in Thailand. The concession originally covered a 15-year period but the agreement was
amended on 23 July 1993 and 22 November 1996 with the concession period being extended to 22 and 27 years,
respectively. Accordingly, the concession period under the amended agreement expires in September 2018.
Revenues generated by the new infrastructure will be determined under the terms of
the original licence granted to the operator. However, in this case there is no pre-
existing obligation to incur the cost of the extension work, meaning that it will only be
recognised when the expenditure is made. Accordingly, that new cost is not an
additional component of the cost of the original intangible asset but will be a new
intangible asset in its own right, giving rise to new construction revenues and recognised
using the same principles as the original as described at 4.3 above.
5.2
Accounting for the operations phase
Both the financial and intangible asset models apply the same accounting in the
operations phase of the SCA. According to the September 2006 IFRIC Update, ‘the
nature of the asset recognised by the operator as consideration for providing
construction services (a financial asset or an intangible asset) does not determine the
accounting for the operation phase of the arrangement’.17
Revenue and costs for the operation services will be recognised in accordance with
IFRS 15. [IFRIC 12.20]. This means that most operating costs are likely to be executory and
will be accounted for as incurred. Contractual obligations, including obligations to
maintain, replace or restore infrastructure to a specified level of serviceability during its
operation or to a specified condition at the end of the concession, are to be recognised
and measured in accordance with IAS 37, [IFRIC 12.21], as shown in Example 26.11 below.
Such obligations do not include any upgrade element which is treated as an additional
construction service (see 5.1 above).
Distinguishing between executory maintenance expenditure and contractual
obligations is not always straightforward. A concession arrangement may provide for
a specified total amount of expenditure to be incurred by the operator throughout
the contract. Sometimes, the contract provides for mechanisms whereby at the end
of the contract, any shortfall in the agreed amount is paid in cash to the grantor by
Service concession arrangements 1847
the operator. Particularly in the case of older contracts, it is common for the
maintenance and repair obligation to be expressed in very general terms such as
keeping the infrastructure in ‘good working condition’ or ‘state of the art’ working
condition. The obligation may include the requirement that the asset be handed over
with a certain number of years’ useful life remaining.
Local regulations or laws also change over time. Some operators are obliged to
report annually to the grantor on the level of maintenance and renewal expenditure
incurred during the year and on a cumulative basis from inception of the contract.
Sometimes, the operator must report on expected expenditures over some future
period of time (e.g. over the next 12 months or two years) as well. In these situations,
more often than not the grantor compares the cumulative expenditure at any point
in time with either the operator’s prior estimates of expenditures or with the level
of expenditure that had been anticipated at the outset of the arrangement and was
factored into the level of usage charges. In such circumstances, judgement is
required in deciding whether expenditure on renewals is an obligation requiring
recognition or an executory contract.
Example 26.11: Executory and contractual obligations to maintain and restore
the infrastructure
The operator under a water supply service concession is required as part of the overall contractual
arrangement to replace four water pumps as soon as their performance drops below certain quality levels. The
operator expects this to be the case after 15 years of service. The expected cost of replacing the pumps is CU
1,000. The operator’s best estimate is that the service potential of the pumps is consumed evenly over time
and provision for the costs is made on this basis from inception of the service concession arrangement until
the date of expected replacement. The provision is measured at the net present value of the amounts expected
to be paid, using the operator’s discount rate of 5%. The amount provided in the first year can be calculated
as CU 33.67. Assuming no changes to estimates, in 15 years CU 1,000 would have been provided and would
be utilised in replacing the pumps. The provision would be adjusted on a cumulative basis to take account of
changes in estimates to the cost of replacement pumps, the manner in which they are wearing out or changes
to the operator’s discount rate.
The Interpretations Committee has also provided an example in Illustrative Example 2,
the intangible asset model, of how operational expenditure might be accounted for in
accordance with IAS 37. Although this illustration is in the context of an intangible asset,
IAS 37 can apply to maintenance and other obligations whatever model applies. Major
maintenance, in this case the requirement to resurface the road, will be recognised as
the best estimate of the expenditure required to settle the present obligation at the
reporting date and it is suggested that this might ‘arise as a consequence of use of the
road’, therefore increasing in measurable annual increments. [IFRIC 12.IE19]. The basis for
accounting for such obligations is discussed further in Chapter 27.
Example 26.12: The Intangible Asset Model – recording the operations phase
The terms of the arrangement are the same as in Example 26.4 above. The contract costs and initial
measurement of the intangible asset are set out in Table 1 and Table 2 in that example.
Resurfacing obligations
The operator’s resurfacing obligation arises as a consequence of use of the road during the operating 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 reporting date.
1848 Chapter 26
For the purpose of this illustration, 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 proportional to
the number of vehicles that have used the road by that date and increases by €17 (discounted to a current
value) each year. The operator discounts the provision to its present value in accordance with IAS 37. The
income statement charge each period is:
Table 3 Resurfacing obligation
Year
3
4
5
6
7
8
Total
€
€
€
€
€
€ €
Obligation arising in year
(€17 discounted at 6%)
12
13
14
15
16
17
87
Increase in earlier years’ provision
arising from passage of time
–
1
1
2
4
5 13
Total expense recognised in income
statement 12
14
15
17
20
22
100
Overview of cash flows, income statement and statement of financial position
For the purpose of this illustration, it is assumed that the operator finances the arrangement wholly with debt
and retained profits. It pays interest at 6.7% a year on outstanding debt. If the cash flows and fair values
remain the same as those forecast, the operator’s cash flows, income statement and statement of financial
position over the duration of the arrangement will be:
Table 4 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
costs
(500)
(500) (10)
(10)
(10)
(10)
(10)
(110)
(10) (10)
(1,180)
Borrowing
costs† –
(34)
(69)
(61)
(53)
(43)
(33)
(23)
(19)
(7)
(342)
Net inflow/
(outflow) (500)
(534)
121
129
137
147
157
67
171
183 78
† Debt at start of year (table 6) × 6.7%
Table 5 Income statement
Year
1
2
3
4
5
6
7
8
9
10
Total
€
€
€
€
€
€
€
€
€ € €
Revenue
525 525 200
200
200
200
200
200
200 200 2,650
Amortisation – –
(135)
(135)
(136)
(136)
(136)
(136)
(135)
(135)
(1,084)
Resurfacing
expense
– –
(12)
(14)
(15)
(17)
(20)
(22)
– –
(100)
Other
operating
costs†
(500)
(500) (10)
(10)
(10)
(10)
(10)
(10)
(10) (10)
(1,080)
Borrowing
costs*
(table 4)
–
–
(69)
(61)
(53)
(43)
(33)
(23)
(19)
(7)
(308)
Net
profits 25 25 (26)
(20)
(14)
(6)
1
9
36 48 78
* Borrowing costs are capitalised during the construction phase
† Table 1
Service concession arrangements 1849
Table 6 Statement of financial position
End of Year
1
2
3
4
5
6
7
8
9
10
€
€
€
€
€
€
€
€ € €
Intangible
asset 525
1,084
949
814
678
542
406
270
135
–
Cash/
(debt)* (500)
(1,034)
(913)
(784)
(647)
(500)
(343)
(276)
(105)
78
Resurfacing
obligation –
–
(12)
(26)
(41)
(58)
(78)
–
–
–
Net assets
25
50
24
4
(10)
(16)
(15)
(6)
30
78
* Debt at start of year plus net cash flow in year (table 4)
To make this illustration as clear as possible, it has been assumed that the arrangement period is only ten
years and that the operator’s annual receipts are constant over the period. In practice, arrangement periods
may be much longer and annual revenue may increase with time. In such circumstances, the changes in net
profit from year to year could be greater.
5.3
Items provided to the operator by the grantor
Following the basic principles underlying the accounting treatment under both models,
infrastructure items to which the operator is given access by the grantor for the purpose
of the service concession are not recognised as its property, plant and equipment.
[IFRIC 12.27]. This is because they remain under the control of the grantor.
There is a different treatment for assets that are given to the operator as part of the
consideration for the concession that can be kept or dealt with as the operator wishes.
These assets are not to be treated as government grants as defined in IAS 20. Instead,
an operator should account for these assets as part of the transaction price and in
accordance with IFRS 15. [IFRIC 12.27]. (See Chapter 28).
What this means is that an operator that has been given a licence or similar arrangement
over a piece of land on which a hospital is to be built does not recognise the land as an
asset. If, on the other hand, the operator has been given a piece of surplus land on which
it can build private housing for sale, it will recognise an asset. The consideration, which
is the fair value of that land, will be aggregated with the remainder of the consideration
for the transaction and accounted for according to the model being used.
5.4
Interaction between IFRIC 12 and IFRS 15
IFRS 15 became effective for annual reporting periods beginning on or after
1 January 2018, with early application permitted. [IFRS 15.C1]. IFRIC 12 was not
&nb
sp; significantly amended upon issue of this Standard.
References to IAS 11 – Construction Contracts – and to IAS 18 – Revenue – were
replaced with a reference to IFRS 15 in relation to both the accounting for construction
and upgrade services and to the way the operator should account for operation services.
[IFRIC 12.14, 20]. As the illustrative examples to IFRIC 12 were largely unchanged as a
consequence of the issue of IFRS 15, this suggests that the Board did not expect there to
be a significant change to established accounting practices for service concession
arrangements as a result of IFRS 15.
1850 Chapter 26
As discussed in Chapter 28 at 2.1.1, the principles in IFRS 15 are applied using the
following five steps:
1.
Identify the contract(s) with a customer.
2.
Identify the performance obligations in the contract.
3.
Determine the transaction price.
4.
Allocate the transaction price to the performance obligations in the contract.
5.
Recognise revenue when (or as) the entity satisfies a performance obligation.
In the sections below, we have considered Illustrative Examples 1 and 2 from IFRIC 12
(which are reproduced in Examples 26.3 at 4.2 above, 26.4 at 4.3 above and 26.12 at 5.2
above) in the context of the 5 step model within IFRS 15. However, it should be noted
that the illustrative examples in IFRIC 12 are intended to illustrate the accounting
treatment for some features of service concession arrangements that are commonly
seen in practice. Accordingly, the examples are not intended to be exhaustive. It is
important that entities understand and assess the facts and circumstances of their own
arrangements in order to determine whether their existing service concession
accounting is supported under the 5 step model within IFRS 15.
5.4.1
IFRIC 12 Illustrative Example 1 – The grantor gives the operator a
financial asset
The terms of the arrangement are the same as in Example 26.3 at 4.2 above.
Example 26.3 is based on Illustrative Example 1 in IFRIC 12.
Illustrative Example 1 to IFRIC 12 assumes that that the operator’s annual receipts are
constant over the concession period, that cash flows and fair values remain the same as
those forecast, that no contract modifications occur over the concession period, and
that there is no change to the timing of delivery from that anticipated at contract
inception. Any changes in these assumptions or facts and circumstances would need to