Service Concession Arrangements

Illustrative examples Service Concession Arrangements

These examples accompany, but are not part of, IFRIC 12.

Example 1: The grantor gives the operator a financial asset

Arrangement terms Service Concession Arrangements

IE1 The terms of the 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 (ie years 3–10). The terms of the arrangement also require the operator to resurface the road at the end of year 8—the resurfacing activity is revenue-generating.

At the end of year 10, the arrangement will end. The operator estimates that the costs it will incur to fulfil its obligations will be:

Table 1.1 Contract costs Service Concession Arrangements

IE2 The terms of the arrangement require the grantor to pay the operator 200 currency units (CU200) per year in years 3–10 for making the road available to the public.

IE3 For the purpose of this illustration, it is assumed that all cash flows take place at the end of the year.

Contract revenue Service Concession Arrangements

IE4 The operator recognises contract revenue and costs in accordance with IFRS 15 Revenue from Contracts with Customers. The costs of each activity—construction, operation and resurfacing—are recognised as expenses by reference to the stage of completion of that activity.

Contract revenue—the fair value of the amount due from the grantor for the activity undertaken—is recognised at the same time. Under the terms of the arrangement the operator is obliged to resurface the road at the end of year 8.

In year 8 the operator will be reimbursed by the grantor for resurfacing the road. The obligation to resurface the road is measured at zero in the statement of financial position and the revenue and expense are not recognised in profit or loss until the resurfacing work is performed.

IE5 The total consideration (CU200 in each of years 3–8) reflects the fair values for each of the services, which are:

Table 1.2 Fair values of the consideration received or receivable Service Concession Arrangements

Fair value

IE6 In year 1, for example, construction costs of CU500, construction revenue of CU525 (cost plus 5 per cent), and hence construction profit of CU25 are recognised in profit or loss.

Financial asset

IE7 IFRS 9 Financial Instruments may require the entity to measure the amounts due from the grantor at amortised cost, unless the entity designates those amounts as measured at fair value through profit or loss. If the receivable is measured at amortised cost in accordance with IFRS 9, it is measured initially at fair value and subsequently at amortised cost, ie the amount initially recognised plus the cumulative interest on that amount calculated using the effective interest method minus repayments.

IE8 If the cash flows and fair values remain the same as those forecast, the effective interest rate is 6.18 per cent per year and the receivable recognised at the end of years 1–3 will be:

Table 1.3 Measurement of receivable

Overview of cash flows, statement of comprehensive income and statement of financial position

IE9 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 per cent per year on outstanding debt. If the cash flows and 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:

Table 1.4 Cash flows (currency units)Year 1 2 3 4 5 6 7 8 9 10 Total

Table 1.6 Statement of comprehensive income (currency units)

Table 1.6 Statement of financial position (currency units)

IE10 This example deals with only one of many possible types of arrangements. Its purpose is to illustrate the accounting treatment for some features that are commonly found in practice. To make the 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 that period. In practice, arrangement periods may be much longer and annual revenues may increase with time. In such circumstances, the changes in net profit from year to year could be greater.

Example 2: The grantor gives the operator an intangible asset (a licence to charge users)

Arrangement terms

IE11 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 (ie 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 2.1 Contract costs

IE12 The terms of the arrangement allow the operator to collect tolls from drivers using the road. The operator forecasts that vehicle numbers will remain constant over the duration of the contract and that it will receive tolls of 200 currency units (CU200) in each of years 3–10.

IE13 For the purpose of this illustration, it is assumed that all cash flows take place at the end of the year.

Intangible asset

IE14 The operator provides construction services to the grantor in exchange for an intangible asset, ie a right to collect tolls from road users in years 3–10. In accordance with IAS 38 Intangible Assets, the operator recognises the intangible asset at cost, ie the fair value of consideration transferred to acquire the asset, which is the fair value of the consideration received or receivable for the construction services delivered.

IE15 During the construction phase of the arrangement the operator’s asset (representing its accumulating right to be paid for providing construction services) is classified as an intangible asset (licence to charge users of the infrastructure). The operator estimates the fair value of its consideration received to be equal to the forecast construction costs plus 5 per cent margin. It is also assumed that, in accordance with IAS 23 Borrowing Costs, the operator capitalises the borrowing costs, estimated at 6.7 per cent, during the construction phase of the arrangement:

Table 2.2 Initial measurement of intangible asset

CIE16 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, ie years 3–10. The depreciable amount of the intangible asset (CU1,084) is allocated using a straight-line method. The annual amortisation charge is therefore CU1,084 divided by 8 years, ie CU135 per year.

Construction costs and revenue

IE17 The operator recognises the revenue and costs in accordance with IFRS 15 Revenue from Contracts with Customers, ie by reference to the stage of completion of the construction. It measures contract revenue at the fair value of the consideration received or receivable. Thus in each of years 1 and 2 it recognises in its profit or loss construction costs of CU500, construction revenue of CU525 (cost plus 5 per cent) and, hence, construction profit of CU25.

Toll revenue Service Concession Arrangements

IE18 The road users pay for the public services at the same time as they receive them, ie when they use the road. The operator therefore recognises toll revenue when it collects the tolls.

Resurfacing obligations Service Concession Arrangements

IE19 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 Provisions, Contingent Liabilities and Contingent Assets, ie at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

IE20 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 CU17 (discounted to a current value) 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 2.3 Resurfacing obligation (currency units) Service Concession Arrangements

Overview of cash flows, statement of comprehensive income and statement of financial position

IE21 For the purposes of this illustration, 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 and 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:

Table 2.4 Cash flows (currency units) Service Concession Arrangements

Table 2.5 Statement of comprehensive income (currency units)Year 1 2 3 4 5 6 7 8 9 10 Total

Table 2.6 Statement of financial position (currency units)

IE22 This example deals with only one of many possible types of arrangements. Its purpose is to illustrate the accounting treatment for some features that are commonly found in practice. To make the 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 that period. In practice, arrangement periods may be much longer and annual revenues may increase with time. In such circumstances, the changes in net profit from year to year could be greater.

Example 3: The grantor gives the operator a financial asset and an intangible asset

Arrangement terms Service Concession Arrangements

IE23 The terms of a service arrangement require an operator to construct a road—completing construction within two years—and to operate the road and maintain it to a specified standard for eight years (ie 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 year 8. At the end of year 10, the arrangement will end. The operator estimates that the costs it will incur to fulfil its obligations will be:

Table 3.1 Contract costs

IE24 The operator estimates the consideration in respect of construction services to be cost plus 5 per cent.

IE25 The terms of the arrangement allow the operator to collect tolls from drivers using the road. In addition, the grantor guarantees the operator a minimum amount of CU700 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 CU200 in each of years 3–10.

IE26 For the purpose of this illustration, it is assumed that all cash flows take place at the end of the year.

Dividing the arrangement

IE27 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 consideration into two components—a financial asset component based on the guaranteed amount and an intangible asset for the remainder.

Table 3.2 Dividing the operator’s consideration Tot

Financial asset

IE28 IFRS 9 Financial Instruments may require the entity to measure the amount due from or at the direction of the grantor in exchange for the construction services at amortised cost. If the receivable is measured at amortised cost in accordance with IFRS 9, it is measured initially at fair value and subsequently at amortised.

Amount guaranteed by the grantor as a proportion of the construction services cost, ie the amount initially recognised plus the cumulative interest on that amount minus repayments.

IE29 On this basis the receivable recognised at the end of years 2 and 3 will be:

Table 3.3 Measurement of receivable

Intangible asset

IE30 In accordance with IAS 38 Intangible Assets, the operator recognises the intangible asset at cost, ie the fair value of the consideration received or receivable.

IE31 During the construction phase of the arrangement the operator’s asset (representing its accumulating right to be paid for providing construction services) is classified as a right to receive a licence to charge users of the infrastructure.

The operator estimates the fair value of its consideration received or receivable as equal to the forecast construction costs plus 5 per cent. It is also assumed that, in accordance with IAS 23 Borrowing Costs, the operator capitalises the borrowing costs, estimated at 6.7 per cent, during the construction phase:

Table 3.4 Initial measurement of intangible asset

IE32 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, ie years 3–10. The depreciable amount of the intangible asset (CU361 including borrowing costs) is allocated using a straight-line method. The annual amortisation charge is therefore CU361 divided by 8 years, ie CU45 per year.

Contract revenue and costs Service Concession Arrangements

IE33 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 recognises contract revenue and costs in accordance with IFRS 15 Revenue from Contracts with Customers, ie by reference to the stage of completion of the construction.

It measures contract revenue at the fair value of the consideration receivable. Thus in each of years 1 and 2 it recognises in profit or loss construction costs of CU500 and construction revenue of CU525 (cost plus 5 per cent).

Toll revenue Service Concession Arrangements

IE34 The road users pay for the public services at the same time as they receive them, ie 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 3.5 Allocation of toll receipts

Resurfacing obligations Service Concession Arrangements

IE35 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 Provisions, Contingent Liabilities and Contingent Assets, ie at the best estimate of the expenditure required to settle the present obligation at the end of the reporting period.

IE36 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 CU17 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 3.6 Resurfacing obligation (currency units)

Year 3 4 5 6 7 8 Total

Overview of cash flows, statement of comprehensive income and statement of financial position

IE37 For the purposes of this illustration, 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 and 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: Service Concession Arrangements

Table 3.7 Cash flows (currency units)

* Table 3.1, Service Concession Arrangements
† Debt at start of year (table 3.9) × 6.7%

Table 3.8 Statement of comprehensive income (currency units)

* Interest on receivable, Service Concession Arrangements
† Table 3.1, Service Concession Arrangements
‡ In year 2, borrowing costs are stated net of amount capitalised in the intangible (see table 3.4).

Table 3.9 Statement of financial position (currency units)

* Debt at start of year plus net cash flow in year (table 3.7)End of year 1 2 3 4 5 6 7 8 9 10

IE38 This example deals with only one of many possible types of arrangements. Its purpose is to illustrate the accounting treatment for some features that are commonly found in practice. To make the 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 that period. In practice, arrangement periods may be much longer and annual revenues may increase with time. In such circumstances, the changes in net profit from year to year could be greater.

Service Concession Arrangements