Staff had analysed the comments received and determined ten key areas where change may be necessary.
Proposal 1: grantor's accounting should be outside the scope
D12 does not deal with how grantors should account, as IFRIC was asked to provide guidance for operators. Many respondents commented that the scope exclusion limited the usefulness of the draft interpretation. Staff recommended that IFRIC not address the accounting by grantors in this interpretation, mostly due to time constraints, and the urgency of this project.
IFRIC broadly agreed with the staff recommendation, but noted that one of the reasons for confusion here was that whilst D12 purports not to deal with the accounting by grantors, it does consider a grantor's involvement in the arrangement. D12 should only deal with the operator's accounting, but some of the wording should be re-drafted to clarify that generally, when an asset is not an operator's, it will be a grantor's, but this may not always be the case.
Proposal 2: existing assets of the operator should be outside the scope of the interpretation
An operator may have owned the infrastructure before the concession arrangement. It will have recognised this infrastructure as property, plant and equipment. The service concession arrangement may convey a right of use of the infrastructure to the grantor, in which case the operator would apply the requirements of IAS 16, IAS 17, and IFRIC 4 to determine whether it should derecognise the existing infrastructure. The basis for conclusions to D12 justifies this decision on the grounds that it would be:
- difficult to add to the requirements of IAS; and
- unusual for such assets to be significant in the context of a service concession arrangement as a whole.
Many respondents did not understand that such infrastructure was excluded as IFRIC regarded existing requirements as clear. They further challenged the assertion that it would be unusual for these assets to be significant in the context of a service concession arrangement as a whole.
IFRIC concluded that clarification and increased explanation was necessary. They noted that the current words were unclear in situations such as privatisations, whereby a formal contract may not have been signed at the outset of the concession arrangement (for instance, it may only have been signed at the date of privatisation.)
Additionally, D12 should clarify that deals with recognition; it does not deal with derecognition. An operator may face derecognition issues, but these should be addressed by looking at IAS 16, IAS 17, and IFRIC 4.
Proposal 3: Amendments to the 'significant residual interest' criterion
The scope of D12 includes public-to-private service concession arrangements where the grantor controls or regulates the service provided by the operator and controls the significant residual interest in the infrastructure at the end of the concession.
Many respondents questioned the exclusion of arrangements where no significant residual interest exists. They pointed out that significant residual interest is a good indicator of control, but questioned the validity of the assumption that infrastructure without a significant residual interest necessarily precludes control by the grantor.
This issue prompted much debate by IFRIC members. An example was given of government land on which an operator builds and runs a school, whereby the concession and useful economic life of the school are both 30 years. It was noted that the residual value of the school after 30 years may not be zero, and would be a function of the money spent maintaining it during the concession period.
This prompted discussion of whether assets that were constructed or bought for the concession, and whose useful economic life (determined at the outset of the arrangement) was no greater than the concession period were within the scope of D12.
It was decided that staff would present a new paper, which would cover which assets are within the scope of D12, distinguishing between those assets with rights of use or access attached to them, and all other assets (which are presumed to be assets of the operator). The paper would also cover whether assets that must be returned at the end of the concession are within the scope of D12.
Proposal 4: Clarifying the requirements for control of usage
Respondents questioned how the criteria for control in D12 reconciled to those in IFRIC 4. They were also unclear on how to apply paragraph 5(a) of D12, which states that D12 applies to infrastructure if 'the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price?'. For example, a grantor could set a fixed price that the operator must charge, or it could set a maximum price.
Staff agreed that the extent of control over pricing and usage may vary, and that D12's scope should extend beyond contracts where the grantor controls almost every aspect.
In principal, many IFRIC members agreed with the staff, but did not consider the proposed amendments to be any clearer than the original text. Staff were asked to consider this issue as part of the paper they were going to present at a later meeting (see above).
Proposal 5: Reconcile the scope of D12 to IFRIC 4 and SIC 29
Some respondents expressed concerns that the scope creates inconsistencies with IFRIC 4, as it does not require specific assets to be used in the concession arrangements to be identified. Additionally, SIC 29 identifies concession arrangements more widely.
The staff view was that IFRIC did not need to re-articulate the all the requirements of IFRIC 4; it is implicit in service concession arrangements that the asset is specified. Further, SIC 29 is an interpretation requiring disclosures for a broad range of arrangements, whereas IFRIC does not need to address all such arrangements in this project. IFRIC concurred with the staff view.
Proposal 6: Clarify application of the requirements to partly regulated assets
At its December 2004 meeting, IFRIC considered draft guidance explaining how to account for infrastructure that is used partly for regulated and partly for non-regulated purposes. IFRIC concluded this guidance should not be included, as it was not possible for the interpretation to deal with every possible fact pattern.
Several respondents requested clarification on dealing with infrastructure that is used for both regulated and unregulated purposes. Staff believed that the extent of the confusion was such that guidance should be given, and should be based on the guidance proposed in the December 2004 meeting.
IFRIC members agreed that the accounting for such infrastructure was unclear. They also agreed, however, that the proposed guidance was not sufficient and that further analysis was needed.
Proposal 7: Clarify the requirement for a public service obligation
IFRIC agreed with the staff that paragraph 2 should be amended to clarify what is meant by public service obligation. The requirement is that the infrastructure be available for public use. It is irrelevant whether the public chooses to use the infrastructure. Where the infrastructure is not available for the public to use, a public service obligation does not exist. It was acknowledged that public service obligations may vary from country to country.
Proposal 8: Clarify application where operator provides the infrastructure but not the services
Some commentators remarked it was unclear whether D12 applied in situations where the operator provides the assets, and the services related to those assets, but the grantor provides the public service. For example, an operator builds and operates a hospital, and the government provides the medical services.
Staff proposed that such arrangements should be within the scope of the interpretation. IFRIC felt this issue was similar to that in proposal 7 above, and that it depended on whether there was a public service obligation. A contract to build and maintain a building would not be within the scope, however if other services were provided (that is, all services other than the provision of medical services, such as timetabling operations), this would be within the scope. Clearer drafting was needed on this point.
Proposal 9: Scope should exclude private-to-private service concession arrangements
Many respondents commented the scope of D12 was too limited, as it excludes private-to-private service concession arrangements. Staff believed that private-to-private service concession arrangements should have to apply D12, rather they should determine whether existing literature provided guidance, and if not, whether the principles of D12 should be applied by analogy in accordance with the hierarchy in IAS 8. IFRIC agreed that there should be no change to broaden the scope.
Proposal 10: Editorial text to clarify the term infrastructure
Several respondents requested clarification on the meaning of 'infrastructure'. Staff proposed to amend paragraph 1 to clarify that infrastructure comprises all assets from which the public service derives.
IFRIC asked that this issue also be considered in the paper the staff would present to it (see proposals 3 and 4 above).
Other Issues Raised by Commentators
Paper 2A contained an appendix of other issues raised by commentators. These were issues that staff did not believe IFRIC needed to dedicate significant resources to. IFRIC asked that renewal options be considered further by staff as part of its paper revisiting 'significant residual interest'.
IFRIC briefly considered agenda paper 2C, which dealt with the issue of double recognition of revenue in the intangible asset model proposed in draft interpretation D14.
Paper 2C notes that the double recognition of revenue only occurs in the intangible asset model. It does not occur in the financial asset model. The paper considers the guidance in IAS 18 on exchanges of goods or services, and IAS 16 on whether an exchange lacks commercial substance. The paper argues that the future cash flows that underpin the constructed infrastructure are the same as those that underpin the intangible asset (the right to operate the infrastructure to generate revenues). Therefore there has been an exchange of similar assets, and the transaction lacks commercial substance.
As a result, the staff recommendation was that the intangible asset model should be revised to require that no revenue be recognised on the exchange of constructed infrastructure for an intangible asset giving the right to operate that infrastructure to generate future cash flows. The staff acknowledged that the resulting accounting would be the same as under the 'acquired intangible asset' alternative dismissed in D14.
IFRIC members were not generally supportive of the staff view. They did not see why who the cash is received from (that is, from the grantor, or from a right to charge the public) should determine whether revenue is recognised during the construction phase of the arrangement. Further, arguing that the exchange lacked substance appears inconsistent with the logic that the asset is the grantor's, and not the operator's. If the operator has merely constructed an asset, on what basis does it transfer to the books of the grantor? An additional problem was that different accounting results would arise from a situation in which the same party constructs and operates the infrastructure to the situation where different parties construct and operate the infrastructure.
Staff were asked to present a new paper that deals separately with the two main issues: double recognition of revenue and recognition of profit during the construction phase.
This summary is based on notes taken by observers at the IFRIC meeting and should not be regarded as an official or final summary.