IFRIC 12 — Payments made by an operator in a service concession arrangement
At its November 2011 meeting, the Committee considered a request for clarification on the accounting for certain contractual costs to be incurred by an operation in a service concession arrangement; specifically should they be recognised at the start of the concession as an asset with an obligation to make the related payment or should they be treated as executory in nature and recognised over the term of the concession arrangement?
In November, the Committee noted that if payments made by the operator to the grantor are within the scope of IFRIC 12 Service Concession Arrangements, further analysis would need to be performed before the Committee could make a decision on how to proceed with the issue.
Thus, the Committee asked the staff to:
- analyse the arrangements and focus on whether the arrangements represented the acquisition of an asset
- analyse what the accounting would be if the operator could cancel the arrangement without penalty
- consider, if an asset is recognised, whether the asset could be classified as a financial asset based on the principle in IFRIC 12 regarding the financial asset model
- consider, if an asset is recognised, what amount the asset should initially be measured at and how any subsequent measurement would interact with IAS 39 Financial Instruments: Recognition and Measurement if the requirement to make payments was a financial liability, both in relation to fixed and variable payments.
Thus, at this meeting, the staff brought back its analysis on these topics.
The Committee first considered whether an asset, if applicable, should be classified as a financial asset or intangible asset based on the principles in IFRIC 12. With little debate, the Committee generally agreed that payments made by the operator to the grantor should be assessed under the existing principles of paragraphs 16-18 of IFRIC 12 to determine if the arrangement represents the acquisition of an intangible asset or a financing arrangement or both.
The Committee was then asked whether there would be any recognition of an asset or liability on day one of a service concession that included a right-of-access (i.e., payment to the grantor or third party for the use of tangible assets) or concession fee arrangement (i.e., payment to the grantor by the operator for the right to operate the concession) if the financial asset model is applicable, or whether the financial asset or liability would be recorded by the operator only at the time that the financing payment or receipt is incurred.
This question led to a lot of debate amongst Committee members as to whether right-of-access and concession fee arrangements should be grossed up (i.e., the operator would initially recognise the financial liability representing the obligation to pay cash to the grantor in the future and the financial asset representing the contractual right to receive cash in the future, but with its measurement limited to the financial liability so as not to record a day one gain for services that have not yet been provided) or reflected net (i.e., recognise financial asset and liability only once the financing has been provided in cash and recognising a financial asset or liability by comparing the cumulative net cash received by the operator to the cumulative related revenue that has been earned at that point in time) if the financial asset model applies. The Committee concerns arose on the staff proposal that finance transactions should be recorded on a net basis (as contractual future payment represent a financing arrangement that are not part of the revenue arrangement for operation or construction services) while the acquisition of an intangible assets should be recorded gross as it is representative of deferred financing.
Many Committee members questioning whether finance elements can be distinguished in these transactions (effectively a question of whether the multiple-element arrangement guidance in IAS 18 Revenue can be applied to these transactions) and how variable consideration should be treated in the acquisition of an intangible asset. Other Committee members noted that gross versus net recognition is based on individual facts and circumstances, and therefore, they expressed concern with developing a general principle which did not consider the scope of other standards (e.g., a financing element to a transaction may be viewed akin to a loan commitments, but a loan commitment should be assessed under IAS 32 and recorded gross unless a right of offset exists, which would contradict the general principle outlined by the staff).
As the deliberations were not advancing in any meaningful way, the Committee asked the staff to reframe the issue; focusing first on application in a fixed consideration environment before considering variable consideration in a future meeting. The staff will bring back this analysis in a future meeting. Other topics outlined in the staff paper were not addressed in this meeting.