This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

IFRIC 12 — Payments made by an operator in a service concession arrangement

Date recorded:

At its November 2011 meeting, the Committee considered a request for clarification on the accounting for certain contractual costs to be incurred by an operator 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?

The Committee noted that when the payments are linked to the right of use of a tangible asset, judgement should be used to determine whether the operator obtains control of the right of use of the asset to determine whether the arrangement is within the scope of IFRIC 12 or of IAS 17 Leases. The Committee tentatively decided that when the right of use of a tangible asset is at the direction of the grantor, the operator does not control the right of use and the arrangement is therefore within the scope of IFRIC 12. The Committee tentatively decided that if the payments are part of the service concession arrangement in the scope of IFRIC 12, then whether they are structured as concession fees or right-of-access payments should not impact the accounting for them.

At the January 2012 meeting, the Committee reviewed the staff´s agenda paper which proposed that the accounting for the concession payments depends on the type of service concession (i.e., the financial asset model or intangible asset model). The Committee asked the staff to reconsider the issue and the way in which it should be addressed, focusing on the principles of IAS 18 and multiple element arrangements in order to identify what concession payments represent, before considering if the payments give rise to an asset. The Committee noted that the type of service concession arrangement might affect the accounting for the payments made by the operator.

At the March 2012 meeting, the Committee tentatively agreed with the staff´s view that it would not be able to provide a single answer to the question in the submission that was asked, because the accounting would depend on the substance of what the concession payment is exchanged for, which in turn would depend on facts and circumstances.

However, the Committee tentatively agreed to provide guidance to preparers to help them to identify what factors they should consider when determining what the concession payments represent.

The Committee also tentatively clarified the key principles in the context of concession payments as follows:

  • if the concession fee arrangement gives the operator a right to a good or service that is distinct from the service concession arrangement, the operator should account for that distinct good or service in accordance with the applicable IFRS
  • when the payments are linked to the right of use of a tangible asset, judgement should be used to determine whether the operator obtains control of the right of use of the asset. If the operator controls the right of use the arrangement would be considered to be an embedded lease within the scope of IAS 17 Leases;
  • when the payments are linked to the right of use of a tangible asset, but the arrangement does not represent an embedded lease, the payment should be analysed in the same way as a concession fee arrangement discussed in (d) below, and
  • if the concession fee arrangement does not give the operator a right to a distinct good or service that is separate from the concession arrangement, the type of service concession arrangement should be taken into account:
    • if the service concession results in the operator having a contractual right to receive cash from only the grantor, then the concession payment is a reduction in the overall consideration (i.e., financial asset model);
      • the key assumption in this analysis is that there is only one customer for the operator´s services and that customer is the grantor.
    • if the service concession arrangement results in the operator having only a right to charge users of the public service, then the concession payment represents consideration for the concession right (i.e., intangible asset model) ; and
      • the key assumption in this analysis is that the customer of the operation services is the public and the customer for any construction services is the grantor. Where there is no construction service provided by the operator, the only customer is the public.
    • the key assumption in this analysis is that the arrangement represents a collaboration agreement between the operator and the grantor where the operator and grantor share the demand risk. This makes the analysis of the revenue arrangement more difficult because there is not a clear customer for the operation services (which was a key basis for the staff in determining the accounting for the concession payments in the other types of service concession arrangements).

One of the Committee members expressed concerns as to whether it would be necessary to define who the customer is but the majority of the Committee members felt that it was necessary to define who the customer. The Committee tentatively agreed that these contractual costs should not be treated as executory in nature. One of the Committee members expressed concerns that under the financial asset model, the concession payment arrangement should be treated as an adjustment to the fair value of the consideration rather than as a reduction in the overall consideration.

The Committee tentatively agreed that IFRIC 12 should be amended to incorporate the principles described above. However, the Committee discussed the staff´s concerns that because the issue of variable payments for the acquisition of items of PP&E and intangible assets outside of a business combination significantly impacts this issue, the IFRIC 12 should only be amended once the Committee reaches a conclusion on the variable payments issue.

The Committee asked the staff to prepare a draft amendment for the next meeting based on the principles that were discussed and to also include an analysis of variable payments in the context of contingent rentals based on an index and future activity or use based on existing leasing literature with a consideration of the impact of the revised leasing proposals. The Committee will discuss at the next meeting on how it will proceed with the proposed guidance.