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be assessed by reference to the requirements of IFRIC 12 and IFRS 15 and could result
in a change to the accounting illustrated in Illustrative Example 1.
5.4.1.A
Step 1: Identify the contract(s) with a customer
Under IFRS 15, a contract is defined as an agreement between two parties that creates
enforceable rights and obligations. [IFRS 15 Appendix A].
Because the public sector grantor of the concession retains control over the
infrastructure asset, construction and upgrade (resurfacing) services are provided to the
grantor. The grantor pays cash consideration to the operator in exchange for those
services. The grantor is the only party with which the operator has a contract.
Because of the public service nature of the obligation undertaken by the operator, the
operating services (operation of the road) are provided to the public. However, a
customer is defined in IFRS 15 as a party that has contracted with an entity to obtain
goods or services that are an output of an entity’s ordinary activities in exchange for
consideration. [IFRS 15 Appendix A]. In IFRIC 12 Illustrative Example 1, the operator does not
collect any tolls so the end user of the road is not passing consideration to the operator
and therefore is not considered a customer. The grantor is therefore considered to be
the only customer of the operator in this arrangement.
Service concession arrangements 1851
Identification of the contract(s) with the customer under IFRS 15 is discussed in
Chapter 28 at 4.
5.4.1.B
Step 2: Identify the performance obligations in the contract
IFRIC 12 Illustrative Example 1 identifies construction services, operation services and
road resurfacing as performance obligations within the contract with the grantor.
[IFRIC 12.IE5].
IFRS 15 provides guidance on the types of items that may be goods or services promised
in the contract. Examples given by the standard include performing a contractually
agreed-upon task (or tasks) for a customer, and providing a service of standing ready to
provide goods or services. [IFRS 15.26]. This introduces the possibility that maintenance
may also be a performance obligation within the contract with the grantor.
A promised good or service is a performance obligation if it is either:
(a) a good or service that is distinct; or
(b) a series of distinct goods or services that are substantially the same and have the
same pattern of transfer to the customer. [IFRS 15.22].
In order to be distinct, a promised good or service must be:
(a) capable of being distinct – i.e. provide a benefit to the customer either on its own
or together with other resources that are readily available to the customer; and
(b) distinct within the context of the contract – i.e. the entity’s promise to transfer the
good or service to the customer is separately identifiable from other promises in
the contract. [IFRS 15.27].
If a promised good or service is not distinct, IFRS 15 requires that the entity should
combine those goods or services with other promised goods or services until it identifies
a bundle of goods or services that is distinct. [IFRS 15.30].
It could be argued that because major maintenance enhances an asset that the grantor
owns, then it is providing a benefit to the grantor. In addition, contractual terms often
require an operator to repay an element advanced by the grantor for maintenance
services if the operator does not incur contracted levels of maintenance spend. This
may also support the argument that maintenance is a separate performance obligation.
In practice, there is likely to be some judgement involved in determining whether
maintenance is a separate performance obligation, based on how it is defined in the
contractual arrangement. To the extent that the contract requires the operator to
provide major maintenance, similar in nature to an upgrade, that enhances the
infrastructure asset, maintenance could be a separate performance obligation. However,
minor maintenance necessary to preserve the road in a condition required for the
operator to operate the road safely and to return the road to the grantor in a certain
condition at the end of the arrangement could be argued as not transferring a distinct
good or service to the grantor.
Similar challenges in distinguishing upgrade elements from other maintenance and
restoration obligations exist in current practice under IFRIC 12.
Maintenance has not been identified as a separate performance obligation in Illustrative
Example 1 to IFRIC 12. This may be on the basis that the operator is required to return
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the road to the grantor in a specified condition at the end of the concession
arrangement. IFRIC 12 requires contractual obligations to maintain infrastructure to a
specified level of serviceability or to return infrastructure to the grantor in a specified
condition at the end of the service concession arrangement to be recognised and
measured in accordance with IAS 37. [IFRIC 12.21]. This treatment is akin to that required
for assurance-type warranties under IFRS 15. An assurance-type warranty provides the
customer with assurance that the product complies with agreed-upon specifications and
is not a separate performance obligation. [IFRS 15.B30]. IFRS 15 requires the estimated cost
of satisfying assurance warranty obligations to be accrued in accordance with the
requirements in IAS 37. [IFRS 15.B30]. In many arrangements other than service
concessions, the 8 year term of the maintenance promise would likely indicate that
treatment as an assurance-type warranty may not be appropriate. However, common
warranty practices within the industry and the entity’s business practices relating to
warranties should be considered when identifying assurance-type warranties under
IFRS 15. The accounting for warranties under IFRS 15 is discussed in Chapter 28 at 10.1.
Alternatively, it may be that in Illustrative Example 1, maintenance is considered to be
a promised service that is not distinct in the context of the contract, as the operator
would not be able to fulfil its promise to operate the road without maintaining the road
in a safe condition. As such, maintenance may have been bundled with operation
services into a single performance obligation.
If the terms and conditions of the concession lead the operator to conclude that
maintenance is a separate performance obligation, this would lead to different
accounting than is presented in Illustrative Example 1 to IFRIC 12.
Whilst Illustrative Example 1 to IFRIC 12 identifies operation services as a performance
obligation, it is not clear whether operation services are considered to be a single
distinct service, being the provision of operation services for a period of 8 years (as in
IFRS 15.22(a)), or whether the provision of operation services each day over the 8 year
operation period is considered to be part of a series of distinct services that are
substantially the same and have the same pattern of transfer to the customer (as in
IFRS 15.22(b)). This conclusion could impact which measure of progress over time is
selected in step 5 of the IFRS 15 model to most faithfully depict the entity’s satisfaction
of the operation servic
es performance obligation.
Identification of performance obligations in a contract under IFRS 15 is discussed in
Chapter 28 at 5.
5.4.1.C
Step 3: Determine the transaction price
Transaction price is defined in IFRS 15 as the amount of consideration to which an
entity expects to be entitled in exchange for transferring promised goods or services to
a customer, excluding amounts collected on behalf of third parties. [IFRS 15.47]. Because
of the timing of payments from the grantor compared to the provision of construction
services by the operator, the arrangement in Illustrative Example 1 to IFRIC 12 is likely
to contain a significant financing component that must be taken into account in
determining the transaction price. The amount of promised consideration should be
discounted at a rate that the operator would use if it were to enter into a separate
financing transaction with the grantor at contract inception. The discount rate should
Service concession arrangements 1853
reflect the credit characteristics of the grantor, as well as any collateral or security
provided, including assets transferred in the contract, [IFRS 15.64], i.e. the discount rate is
a rate specific to the contract.
The effect of financing is excluded from the transaction price prior to the allocation of
transaction price to performance obligations.
In Illustrative Example 1 to IFRIC 12, the total amount of consideration to which the operator
expects to be entitled in exchange for transferring promised construction, operating,
maintenance and upgrade services to the grantor is €200 per year for 8 years, i.e. €1600. The
financing component is €344, based on a rate of 6.18% per year. This gives a net transaction
price of €1256 (being €1600 – €344).
Determination of the transaction price under IFRS 15 is discussed in Chapter 28 at 6.
5.4.1.D
Step 4: Allocate the transaction price to the performance obligations in
the contract
IFRS 15 requires the transaction price to be allocated to each performance obligation in
proportion to their relative stand-alone selling prices. [IFRS 15.74].
If stand-alone selling prices are not readily observable, they must be estimated,
considering all information that is reasonably available to the entity. The operator may
choose to estimate stand-alone selling prices using an expected cost plus margin
approach, [IFRS 15.79], although other approaches are permitted. Illustrative Example 1 to
IFRIC 12 shows the operator estimating stand-alone selling prices for each performance
obligation using an expected cost plus margin approach.
In IFRIC 12 Illustrative Example 1, the transaction price allocated to each performance
obligation is equal to the estimated stand-alone selling price for that performance
obligation, as there is no discount given within the contract.
Allocation of the transaction price to performance obligations under IFRS 15 is
discussed in Chapter 28 at 7.
5.4.1.E
Step 5: Recognise revenue when (or as) the entity satisfied a performance
obligation
IFRS 15 requires that revenue is recognised when an identified performance obligation
is satisfied, by transferring a promised good or service to a customer, i.e. when the
customer obtains control. [IFRS 15.31]. Performance obligations will be satisfied either over
time or at a point in time. [IFRS 15.32].
In Illustrative Example 1 to IFRIC 12, revenue is recognised over time for construction,
resurfacing and operating services. As discussed at 5.4.1.B above, maintenance is
assumed not to be a separate performance obligation within this example and therefore
no revenue is recognised in respect of maintenance.
One criteria within IFRS 15 for recognising revenue over time is that an entity’s
performance creates or enhances an asset that the customer controls. [IFRS 15.35(b)]. In
order to be in scope of IFRIC 12, the grantor to a service concession arrangement must
control the infrastructure asset, including any significant residual interest. It therefore
appears reasonable to conclude that this criteria for recognising revenue over time is
met for construction and resurfacing services.
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In some circumstances, an entity may be unable to reasonably measure the outcome of
the construction performance obligation. They may be able to determine that a loss will
not be incurred, but may not be able to reasonably estimate the amount of profit. Until
the entity is able to reasonably measure the outcome, IFRS 15 requires the entity to
recognise revenue, but only up to the amount of costs incurred. [IFRS 15.45]. This could
result in an operator recognising no margin on construction services until they are able
to reasonably estimate the amount of profit.
An alternative criteria in IFRS 15 for recognising revenue over time is that the customer
simultaneously receives and consumes the benefit as the entity performs. [IFRS 15.35(a)].
i.e. a performance obligation is satisfied over time if an entity determines that another
entity would not need to substantially re-perform the work that the entity has
completed to date if that other entity were to fulfil the remaining performance
obligation to the customer. [IFRS 15.B4]. It would seem reasonable to conclude that this
criteria is met for operating services in Illustrative Example 1.
Progress over time may be measured using an input method to recognise revenue on the
basis of the operator’s inputs to the satisfaction of the performance obligation (e.g. costs
incurred or time elapsed) relative to the total expected efforts to the satisfaction of that
performance obligation. [IFRS 15.B18]. Other methods are also permitted, although the entity
should determine the best method that faithfully depicts the entity’s performance.
In Illustrative Example 1 to IFRIC 12, construction revenue appears to be recognised
over time by reference to costs incurred relative to total expected costs required to
satisfy the construction services performance obligation. Revenue from operation
services is also recognised using an input method. In Illustrative Example 1, operating
costs are incurred evenly over the operating phase of the service concession
arrangement and so the recognition pattern shown in Illustrative Example 1 may be
derived using either a time elapsed input method or by reference to costs incurred
relative to total expected costs required to satisfy the performance obligation. Although
upgrade revenue appears to meet the criteria to be recognised over time as it enhances
an asset owned and controlled by the grantor, all upgrade services occur in year 8 and
hence the revenue allocated to this performance obligation is all recognised in year 8.
With regards the recognition of finance income, IFRIC 12 requires a contract asset to be
recognised during the construction activity [IFRIC 12.19] and requires the significant
financing component in the arrangement to be accounted for in accordance with
IFRS 15 until construction or upgrade is complete. Under IFRS 15 a significant financing
component would be recorded if the consideration was paid more than a year after
construction is complete, which is typically the case in service concession agreements,
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and is the case in Illustrative Example 1 to IFRIC 12, as noted at 5.4.1.C above.
Illustrative Example 1 does not identify any significant financing component in respect
of upgrade services delivered in year 8. Based on the entity’s chosen approach to
allocating the consideration receivable under the arrangement to the various
performance obligations, at contract inception, the entity may expect the period
between delivery of the upgrade services and the date on which payment will be
received to be one year or less. [IFRS 15.63]. Once construction is complete the amounts
due from the grantor are accounted for in accordance with IFRS 9. On initial
recognition, IFRS 9 requires a financial asset to be measured at its fair value (plus or
Service concession arrangements 1855
minus transaction costs). [IFRS 9.5.1.1]. As a result, the financial asset would initially be
recognised at fair value, once construction is complete. The fair value of the financial
asset is impacted by changes in market interest rates. Where construction or upgrade
activity takes a significant time (as is common in many infrastructure projects), it is
possible that market interest rates will have moved over the construction phase of the
arrangement, such that there is a difference between the initial measurement of the
financial asset in accordance with IFRS 9 and the amount of construction revenue and
accrued interest recognised as a contract asset in accordance with IFRS 15 during the
construction period. In addition, whilst fair value under IFRS 9 is based on market
interest rates, accrued interest recognised as part of the contract asset under IFRS 15 is
determined using the rate ‘that would be reflected in a separate financing transaction
between the entity and its customer at contract inception’, [IFRS 15.64], i.e. a rate specific
to the contract. This may also lead to differences between the amount recognised as a
contract asset under IFRS 15 and the initial measurement of the financial asset under
IFRS 9. IFRS 15 requires any difference between the initial measurement of the financial
asset in accordance with IFRS 9 and the corresponding amount of revenue recognised
under IFRS 15 to be presented as an expense. [IFRS 15.108]. Illustrative Example 1 to
IFRIC 12 assumes no difference between these two amounts.