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Issue Description: How to apply IFRS and Interpretations to service concessions – arrangements under which an entity (the Concession Operator), by contract with a Concession Provider (usually a government), receives a right and incurs an obligation to provide public services. The service concession arrangement often gives the Concession Operator the right to use specified tangible assets, intangible assets, and/or financial assets, in exchange for the Concession Operator committing to provide the services according to certain terms and conditions during the concession period, and, when applicable, committing to return at the end of the concession period the rights received at the beginning of the concession period and/or acquired during the concession period. Examples of service concession arrangements involve water treatment and supply facilities, motorways, car parks, tunnels, bridges, airports and telecommunication networks. Examples of arrangements that are not service concession arrangements include an enterprise outsourcing the operation of its internal services (such as an employee cafeteria, building maintenance, and accounting or information technology functions). Discussion at the IFRIC Meeting September 2003: This was IFRIC's initial discussion of this project. The goal was to identify issues that the IFRIC might address and the sequence in which to address them. The IFRIC tentatively decided to address the following:
Discussion at the IFRIC Meeting December 2003: The IFRIC agreed with the staff's proposal that the lease model is the most suitable model. Some members expressed concerns about the process and asked for a timeline with expected objectives for IFRIC at each meeting. The staff presented several examples with which the IFRIC generally agreed. IFRIC asked the staff to explore and emphasise, in the draft Interpretation, the conditions that transform a contract from being accounted for under IAS 11 to being accounted for under IAS 17 (that is, what types of services may lead to a lease contract). IFRIC asked the staff to work on the componentisation and segmentation of contracts and to explore whether some contracts should be seen as "leaseback contracts" by analogy because the "rights" could be reversed. IFRIC asked the staff to look at alternative models as well. It was noted that the revenue recognition issue would be dealt at future meeting. The staff will come back with a new analysis at the next meeting. Given the significance of this project and the breadth of issues to be addressed, this issue should be considered a long-term project. Discussion at the February 2004 IFRIC Meeting The IFRIC discussed how existing IASB literature should be applied in accounting for service concession arrangements. The IFRIC agreed that there are a number of accounting methodologies that are, in some ways, analogous to accounting for service concession arrangements, particularly accounting for leases, with accounting for intangible assets and construction contracts also noted as relevant. The IFRIC discussed a number of examples of issues relating to the recognition of service concession arrangements on the balance sheet in relation to the leasing model in IAS 17 and agreed to continue its debate on these topics at a future meeting. The IFRIC discussed a number of issues regarding the impact of service concession arrangements on recognised profit and loss. The IFRIC asked that staff give consideration to the appropriate definition of contract revenue and to costs that ought to be deferred as part of service concession arrangements, and present a position to the IFRIC at a future meeting. Discussion at the March 2004 IFRIC Meeting The IFRIC discussed accounting for service concession arrangements, with the objective of providing sufficient guidance to staff to enable a draft interpretation to be prepared for presentation at the May IFRIC meeting. The staff noted that guidance provided by IFRIC would need to cover a range of situations such as a contract that relates to new infrastructure, a contract that relates to existing infrastructure, a contract in which the concession provider pays, and a contract in which the user pays. The IFRIC agreed that the following issues must be addressed
The IFRIC then considered some examples developed by staff. The IFRIC requested that staff develop further examples to illustrate whether or not, if finance costs are capitalised as part of the construction contract, the effect of segmenting or combining the build and operate phases of the project will be significant. The IFRIC tentatively agreed that in assessing how to account for assets arising under concession contracts, the following hierarchy should be followed
The IFRIC discussed interest methods of depreciation and agreed that the basis for conclusions of the eventual interpretation should state that this depreciation method was considered and determined to be inappropriate. The IFRIC considered the requirements of US GAAP (SFAS 71) and Spanish GAAP in relation to the rights of recovery of finance and other costs. The IFRIC decided that the issues addressed by those pronouncements should be addressed in the draft interpretation, but did not finalise an IFRIC position on how the concepts in these pronouncements would be incorporated into the eventual interpretation. The IFRIC considered the issue of depreciation of assets arising from concession arrangements on a basis that is less conservative than straight line. The IFRIC agreed that where the concession operator is considered to own the fixed asset, the units of production method is appropriate. The IFRIC agreed that the expected revenue method of depreciation should not be discussed in the interpretation. If the asset arising under the contract is accounted for as an intangible asset, the IFRIC considered that it should not endeavour to override the statement in IAS 38 that it would be rare for a method of depreciation other than straight line to be appropriate. March 2004: IFRIC D12, D13, and D14 Issued IFRIC D12, D13, D14 were issued 3 March 2005. Click for:
Discussion at the May 2004 IFRIC Meeting The IFRIC was presented with a comprehensive set of papers addressing the following issues in accounting for service concessions:
These papers were presented together with an overview paper. The overview paper notes that the following two issues also require consideration at a future meeting:
The IFRIC considered a flow chart depicting the framework within which they propose to develop interpretations on the above issues. The framework started by considering which entity recognises the physical asset, and then whether (a) whether IAS 16 Property, Plant and Equipment should be applied to the asset or (b) IAS 11 Construction Contracts and IAS 18 Revenue should be applied to the contract. The IFRIC agreed that the flow chart will be reproduced in the next IFRIC update to give an indication to the public of the parameters within which this project is currently being conducted. The IFRIC debated the merits of applying the risks and rewards approach required by IAS 17 Leases and IAS 18 Revenue to determine whether an asset should be accounted for in accordance with IAS 16. (That is, if substantially all the risks and rewards of an asset are held by a particular entity that entity should account for the asset as its own in accordance with IAS 16). The IFRIC agreed that the social rewards to governments from having a particular concession contract in existence (for example, a road) should not be considered in determining whether the government or the concession operator have substantially all the risks and rewards. The IFRIC agreed that while some members questioned the validity of the risks and rewards approach to recognising an asset in accordance with IAS 16, IFRIC would continue its discussions at this time based on using those criteria. The IFRIC discussed the impact of the sale and leaseback requirements of IAS 17 and agreed to draw to the IASB's attention the apparent discrepancy between the treatment of a sale that fails the recognition criteria in IAS 18 and a sale and lease back under IAS 17. The IFRIC agreed that if a sale transaction exists together with a repurchase option, the transactions should be considered together as a whole. The IFRIC agreed to return to further debate of this issue once the concessions project is more advanced. The IFRIC discussed whether, if an entity builds property on land that is recognised as an asset of another entity, that property should be recognised as an asset of the entity that holds the land. A number of IFRIC members dissented from this proposition for a variety of reasons. Staff agreed to reconsider this issue and present an alternative means of achieving the intended objective at a future meeting. Combining and Segmenting Service Concession Contracts The IFRIC discussed the difficulties of appropriately segmenting a service concession contract into is component construction and services parts. The IFRIC agreed that where different components of a concession arrangement have substantially different margins (particularly construction components and services components) they should be accounted for in a manner that reflects those margins. The IFRIC considered a proposition that one could arrive at this answer without needing to segment the contract under IAS 11 and IAS 18, but did not reach consensus on whether this was possible. The IFRIC agreed that the development of a position on combining and segmenting concessions arrangements should use the same language and semantics as in the IFRIC's separate project on Combining and Segmenting Contracts more generally. Overview Issues The IFRIC determined that they needed to address in more detail the issues around the nature of the asset held by the concession operator before progressing with the more specific issues. The IFRIC discussed the various implications for the amount and timing of revenue recognised under various models depending on whether the physical asset was recognised by the concession operator, a receivable was recognised by the concession operator or an intangible asset was recognised by the concession operator. The staff agreed to present a paper on the nature of the concession operator's asset in various situations as the June IFRIC meeting. Discussion at the July 2004 IFRIC Meeting As requested by the IFRIC at its last meeting, staff prepared a set of draft Interpretations for the IFRIC to consider. They are:
The Flowchart (Click to Open in New Window) sets out the structure of the draft interpretations. New terminology is proposed. The party that grants the concession is called the grantor (formerly the concession provider), and the party that operates the concession is called, simply, the operator (formerly the concession operator). The terminology will be incorporated into SIC 29 as well for consistency purposes. The July discussion was a preliminary one. Further discussion will take place at the IFRIC's September 2004 meeting. Staff hopes, after the September meeting, to be in a position to prepare definitive drafts, with a view to publishing them in October or, at the latest, November. A comment period of at least two months would be provided. Discussion by the IASB at the September 2004 IASB Meeting The Board's discussion of Service Concession Arrangements was educational in nature, and no decisions were made. Staff explained to the Board the issues dealt with by IFRIC in developing draft interpretations on such arrangements. The following were the key issues that emerged from this session:
Discussion by the IASB at the November 2004 IASB Meeting The IFRIC considered issues raised by the financial instruments staff of the IASB in respect of the proposed draft interpretations. The IFRIC considered what situations across the following range of situations should be considered within the financial assets model
The proposal from the staff was that only the first two of these items should fall within the financial instruments model. The IFRIC agreed to expose this, but to include in the basis for conclusions a discussion of the possible merits of including the other items, and requesting comments on whether the IFRIC had drawn the distinction between the intangible asset model and the financial asset model in the correct manner. It was noted that a majority of IFRIC members supported exposing this proposal, but a majority do not necessarily agree that this is the most appropriate answer. The IFRIC also considered the limitation in IAS 39 that an item cannot be classified as a loan or receivable unless the entity is expected to recover substantially all of the amount , subject to any credit deterioration risk. It was noted that many service concessions arrangements would not meet this criteria and therefore could not be accounted for as a receivable. It was agreed that a discussion of this in the basis for conclusions was required (as the IFRIC had previously determined that an item could still be accounted for as a receivable if the only risk of non-recovery was related to future service issues - such as penalty clauses for non-availability of the asset), and that further consideration should be given to whether this highlights an inconsistency between IAS 11 and IAS 39. The IFRIC will consider a worked example of the service concessions models at a future meeting, but decided not to delay exposure of the proposals until this had been done. Accordingly this topic will be discussed at the December meeting with a view to issuing the draft interpretations for exposure. Discussion at the December 2004 IFRIC Meeting The IFRIC considered a number of amendments to the draft interpretations on service concessions. [Editorial note: When these Draft Interpretations were ultimately issued, the numbers were D12, D13, and D14.] D11 Determining the Accounting Model The IFRIC considered the drafting of the Basis for Conclusions which details the alternative methods by which the line between the financial asset model and the intangible asset model could be drawn. The IFRIC agreed, subject to some minor amendments, that the drafting captured adequately the debates held and the range of views expressed by IFRIC members on this topic. The IFRIC considered the drafting of the Basis for Conclusions in relation to sale of infrastructure by the grantor to the operator. The IFRIC had noted in the May 2004 meeting that there were some difficulties in reconciling the revenue recognition criteria for a sale in IAS 18 with those for a sale and lease back in IAS 17. The IFRIC agreed that the Basis for Conclusions should simply note that the IAS 18 criteria are used because the interpretations deal with the right of the access rather than the right of use, and that new derecognition criteria are not being developed in the interpretation. The IFRIC agreed that the issues of reconciling the requirements of IAS 17 and IAS 18 have broader application than to service concessions alone, and therefore this issue should be considered by IFRIC as a separate project. The IFRIC considered the comments in the Basis for Conclusions regarding situations where infrastructure is used for both regulated and unregulated purposes. It was agreed that the Basis for Conclusions should not go into this in great detail as, per previous IFRIC discussions; it is not possible for the interpretation to address every possible scenario, a fact which has been stated in the draft interpretation. The IFRIC agreed to the inclusion of drafting which would be interpreted that an arrangement could be accounted for using a different model simply by undertaking some 'cheque-passing' activities. The IFRIC agreed that subject to the edits requested, the draft interpretation should be issued. D12: The Financial Asset Model The IFRIC agreed with the staff's analysis that the interpretation effectively prevented financial assets arising from concession arrangements from being classified as held to maturity investments, and agreed to include an explanation of the reasons for this in the basis for conclusions. The IFRIC noted that the transitional provisions contained in the draft interpretation would not be available to first-time adopters, and accordingly an amendment to IFRS 1 would be required. The IFRIC agreed that, similar to the proposals for existing IFRS users, the IFRS 1 requirement ought to be that existing service concession assets should be reclassified as they would be under the interpretations but need not be remeasured in accordance with the interpretations. Therefore, depending on previous accounting treatment, it is possible that assets and liabilities may be entirely derecognised on transition because they do not meet the recognition criteria. However, the first step would be to reclassify those amounts which do meet the recognition criteria. The IFRIC noted that the effect of caps and floors on service concession arrangements was discussed in D13 but not D12. Previously the IFRIC had decided that while D11 would direct you to the treatment required either by D12 and D13, the two would not be stand alone documents, that is, irrespective of which model you were using, there would be relevant information in both interpretations. The IFRIC reversed this decision and agreed to amend interpretations D12 and D13 should be stand alone documents and should be made to be as consistent as possible with one another. The IFRIC noted that the discussion explaining that financial assets are not qualifying assets (and therefore borrowing costs cannot be capitalised on those assets) had wider application than to service concessions. The IFRIC agreed that the media release accompanying the release of the draft interpretations should highlight to interested parties the range of issues covered and that many of them have broader application to companies not involved in service concessions. The IFRIC agreed, subject to the amendments, that the draft interpretation should be issued. D13: Intangible Asset Model The IFRIC agreed to some wording in the basis for conclusion explaining why interest rate methods of depreciation are considered inappropriate. The IFRIC also agreed to some wording explaining the measurement of revenue on the exchange of assets. They discussed the interaction of IAS 18 and IAS 38, and possible inconsistencies between the two, but agreed to remain silent on this matter. Some wording from IAS 38 will be included in the basis to explain the measurement, and it will be clarified that when the intangible asset is ready for use borrowing costs should cease being capitalised. The IFRIC noted that accounting for hand-over obligations had a broader application than simply to service concessions, and agreed that rather than being addressed in this project it should be addressed as part of a separate project in the future. The IFRIC agreed, subject to the amendments, that the draft interpretation should be issued. The IFRIC agreed that worked examples should be developed and made publicly available during the exposure period. They agreed to consider the worked examples at the February 2005 meeting, but that the publication of the text of the draft interpretations should not be delayed by the development of the worked examples. Accordingly, amendments to the draft interpretations will be made and they will be circulated for out of session approval (unless the resolution of any issues raised by IFRIC members proves to need in session discussion) and made available. The 90-day comment period will be counted as starting from the date the worked examples are made available. Discussion at the February 2005 IFRIC Meeting The IFRIC considered worked examples illustrating the effects of applying the proposed models for accounting for service concession arrangements. The IFRIC considered concerns raised by the Spanish working group on accounting for concessions that the example was too simplified due to the relatively short period of the arrangement (ten years) and the assumption of static toll charges. The Spanish working group had proposed that the arrangement cover 50 years, but only show amounts in five year increments – this proposal was deemed to be unworkable as discounting and other factors would make the source of numbers hard for constituents to use. The reason for the simplified example was to make it publishable in normal IASB format and to illustrate the point as simply as possible. The concern raised was that this short life example failed to show the heavy losses in early years and super profits in later years. The IFRIC agreed to proceed with the examples as currently drafted. However, the IFRIC did agree that for constituents who would want to see the affects on a more realistic fact pattern, it would be more helpful if they all commented on a single fact pattern, rather than all constituents submitting their own fact pattern and commenting on the effects thereon. The latter would make comment letter analysis time consuming as staff and IFRIC members would need to analyse the validity of each fact pattern before considering the comments made. Therefore staff agreed to consider whether an existing example from any one of a number of groups could be analysed for consistency with the interpretations, and published on the IASB website so constituents that desired to do so could comment on that more intricate and realistic fact pattern. The IFRIC agreed to pose a question in the invitation to comment as to whether the timing of recognition of an intangible asset in the intangible asset model can be mandated to be one of the available options (at inception, built up over construction, or exchanged of a receivable for an intangible at completion of construction) or whether all are supportable. The IFRIC also agreed to ask the question as to whether the difference in timing and amount of recognition of repairs and maintenance obligations between the two models is appropriate. The IFRIC agreed to pose a question in the invitation to comment as to whether constituents think it appropriate under the financial asset model that different profit margins be applied to different parts of a non-segmented contract and to note to constituents that this assumption is inherent in the interpretation but is pending further consideration. In addition, the IFRIC agreed to note, in the basis for conclusions, that classification as an intangible asset or as a financial asset is dependent on the nature of the contractual relationship because this is how IAS 39 works. The IFRIC noted that transitional provisions were insufficiently clear to tell people that existing assets on the operator's balance sheets that should not be there in accordance with the interpretation have to be derecognised from the earliest period presented. The IFRIC agreed that the comment period should be as long as possible whilst still allowing an analysis of comments to be brought to the June meeting, thus enabling the IFRIC to give clear indications in public session as to the direction of the project prior to the time when entities would begin preparing their interim reports for the period ended 30 June 2005. 3 March 2005: Three Draft Interpretations Issued On 3 March 2005, IFRIC released for public comment Three Related Draft Interpretations:
Service concession arrangements are arrangements whereby a government or other body grants contracts for the supply of public services, such as roads, energy distribution, prisons, or hospitals, to private operators. D12 proposes that if, as often happens, the grantor continues to control how the infrastructure is used both during and after the concession, the operator should not recognise that infrastructure as its own property, plant, and equipment. The operator may construct or acquire such infrastructure for the purpose of the concession. If it does so, it should account for having provided construction services to the grantor under a construction contract, and recognise as an asset the rights it receives in exchange from the grantor. D13 and D14 provide guidance on how the operator should apply relevant IFRSs when it recognises a financial or intangible asset respectively. Both address the recognition and measurement of contract revenue and costs, and service concession assets and obligations (such as obligations to repair and maintain infrastructure). The three Interpretations are proposed to be effective for annual periods beginning on or after 1 January 2006. Early adoption would be permitted. Comments are requested by 3 May 2005. Click for IASB Press Release (PDF 61k). Discussion at the August 2005 IFRIC Meeting The IFRIC received 76 comment letters on Draft Interpretations D12, D13, and D14, many of which were highly critical of the IFRIC proposals. However a great number of comment letters had stressed the need for the IFRIC to finalise a solution even if that solution is only interim in its nature. The main areas of criticism were:
The IFRIC was asked at this meeting to determine the overall direction of the project, particularly whether the IFRIC wished to pursue any aspect of this project, or whether it should be deferred for consideration by the IASB. Furthermore the IFRIC was asked to reconsider the scope of the project, with particular reference to when property, plant, and equipment should be recognised by the operator, and to reconsider the dividing line between the intangible asset model and the financial asset model. The IFRIC agreed that the criticisms relating to the limited scope of the project reflected poor communication with constituents. The intention of the IFRIC in limiting the scope was to limit the draft interpretations to those items for which the accounting under existing IFRS was unclear. Therefore, if an arrangement was outside the scope of the draft interpretations it was intended that this would imply to constituents that existing IFRS adequately dealt with the arrangement. For example, some arrangements would be outside the scope of the service concessions project because the assets clearly form part of the property, plant and equipment of the operator, and should therefore be accounted for in accordance with the requirements of IAS 16 Property, Plant and Equipment. Other comments on the limited scope of the draft interpretations arose because commentators wished IFRIC to allow practices which the IFRIC in fact did discuss during the development of D14 - D16, and decided in those discussions were not appropriate within the IFRS framework. Examples of this include use of the annuity based depreciation method, and capitalisation of borrowing costs into the financial asset model. The IFRIC agreed that they needed to communicate more clearly with constituents those items they had discussed and dismissed as being inappropriate. The IFRIC considered the direction of the project, and reached the following conclusions:
The IFRIC was then asked to consider the basis for recognising property, plant, and equipment (that is the scope paragraphs of D12). A majority of commentators questioned the approach taken in D12, believing that the criteria should take into account the risks and rewards relating to the asset, rather than a purely control based approach. The IFRIC agreed that it needed to have a clear idea of the consequences of each of the four possible accounting models for service concessions (tangible fixed asset, financial asset, intangible asset, and operating lease) and that it should consider a paper detailing the implications of each of the models. The IFRIC agreed that the scope criteria did need to be reconsidered, particularly with respect to the significant residual value, as it seemed anomalous that whole of life contracts would be outside of the scope of the interpretations. The IFRIC also noted that whether the counter-party to a contract is a government body is not a defining factor in determining whether the arrangement is within the scope of the Interpretations. The IFRIC confirmed an earlier decision that the interpretations would be drafted so as to provide guidance on the accounting from the perspective of the operator only. The IFRIC noted that its key objective had been in trying to ensure that operators understood how to treat the significant upfront debit that occurs in these arrangements, and that consideration of accounting by the grantor would not be useful in finalising a position on this. The IFRIC agreed that the draft interpretations needed to provide more guidance on how the scope requirements should be applied in respect of existing assets of the operator. Furthermore the IFRIC agreed that more guidance was needed to support their conclusions in respect of assets constructed for the purposes of the service concession arrangement. The IFRIC reconsidered the statement in D12 in respect of sale and lease-backs with re-purchase agreements. They agreed that this statement is not sustainable as an add on in the basis for conclusions of that document. They agreed that the agenda committee should consider a paper on sales, sales and leasebacks and sales and leasebacks with repurchase options and determine how, if at all, the IFRIC should proceed with a separate project, as the implications would be far wider than too the service concessions industry alone. It was agreed that the progression of this separate project was not critical to the furtherance of the service concessions project. The IFRIC then considered a paper examining the dividing line between the intangible asset model and the financial asset model. The paper was an attempt to shift this boundary such that economically similar arrangements could be accounted for using the same model, by referring to the back-stop provisions provided by the grantor, rather than only to the part from whom the cash flows flow to the operator. The IFRIC agreed that the boundary that had been drawn in the draft interpretations was inappropriate. It was agreed that the intangible asset model could not be removed altogether, because some service concession arrangements are purely a licence to operate with no guaranteed return. It was therefore agreed that the distinction might be drawn between whether you have contract revenue (and therefore a financial asset arising from that contract) or a licence (and therefore an intangible asset which gives you a right to endeavour to earn revenue). In the case of contract revenue, it appears that the grantor actually has the primary obligation, which may be defeased in part by the receipt of payments from the public. The IFRIC noted that where an operator retains all or substantially all of the demand risk, that operator has acquired a licence to operate, and therefore the intangible asset model would apply. It was noted that the relevant question appears to me not how much risk is taken on, but the nature of that risk. The IFRIC agreed that a contractual possibility of forfeiture does not automatically mean an arrangement could not be a financial asset. It also agreed that it is possible that the contractual possibility of further gain may create an additional intangible, but that such a conclusion would have much wider application than to service concessions and should therefore not be explored at this time. The IFRIC noted that in many cases the grantor would provide a minimum return only, and therefore a mixed measurement model may be required in respect of such arrangements – a financial asset for the guaranteed portion and an intangible asset for the remainder. The IFRIC agreed to consider this further at a future meeting. The chair of the meeting noted that the IASB did not wish the IFRIC to feel pressured into reaching conclusions with which it is not comfortable. Accordingly the IFRIC should clear up those issues which it feels able to fix within its mandate to improve financial reporting, and should not feel pressured to resolve all issues within the service concessions industry. At its next meeting the IFRIC will consider a paper dealing with whether the operator is providing construction services or selling an asset, and a further paper dealing with the scope of the draft interpretations. Discussion by the IASB at its September 2005 Meeting Scope IFRIC spent most of their time considering Agenda paper 2A, which dealt with the scope of draft interpretation D12. Many respondents expressed either opposition to the scope of the interpretation, or confusion over it. 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:
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'. Revenue Recognition 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. Discussion by the IASB at its October 2005 Meeting This session was educational and no decisions were taken. IFRIC staff presented an update on IFRIC's project on service concession arrangements. Staff outlined how the IFRIC intends to deal with the following issues raised by commentators:
One Board member noted that the IFRIC should be described as 'heroic' for exposing the intangible asset model in IFRIC D14 including the double counting of revenue, which that Board member considered to be a direct function of the correct application of IFRS. Discussion at the March 2006 IFRIC Meeting The Chairman opened this session by expressing his goal to complete Service Concessions project during the summer of 2006. He said he hoped that today's session would give the staff opportunity to get into 'drafting mode' to reach that goal. Today's session covered staff proposals set out in three papers:
Determining the appropriate accounting model The purpose of this paper was to clarify when the assets of the service provider in a service concession arrangement meet the definition of a financial asset under IAS 32. The staff proposed to amend the wording of the consensus in the draft interpretation to better reflect the economics of the arrangement, rather than base classification on who has primary responsibility to pay. This amendment raised the possibility of bifurcation of a service concession: depending on the economics and substance of the transaction, the service provider would have to account for financial assets while also recognising intangibles under the same contract. The IFRIC discussed how to determine the dividing line between recognising a financial asset and an intangible. Most IFRIC members supported the staff's proposed amendment. IFRIC members then discussed how contractual rights arising from a guarantee would affect recognition of a financial asset. Members generally agreed that a contractual guarantee by the grantor, ensuring a certain cash amount on the service concession, should be recognised as a financial asset. Some members also said that there should be a dividing line between contractual rights to cash and other contractual rights to non-cash items. This would imply that contractual rights/guarantees given to a service provider do not necessarily exclude the recognition of an intangible arising under the same contract (that is, recognition of both financial assets and intangibles). While acknowledging that bifurcation may be appropriate in certain circumstances, some IFRIC members expressed their concern that this would create measurement problems. The following general views were given at the end of this part of the discussion:
Staff will provide the IFRIC with a revised Draft interpretation. The interaction of D12 with IFRIC 4 The paper set out two issues for the IFRIC to decide:
Staff recommended no changes to the scope paragraph (that is, leaving the 'significant residual interest' criterion in service concessions as proposed in the Exposure Draft), as they thought the criterion was essential to clarify the scope of D12. The IFRIC discussed how this would affect classification of 'whole of life assets' (that is, an asset used in a service concession arrangement for the whole of its useful life). IFRIC members generally concluded that the 'significant residual interest' criterion should be kept, which would mean that such assets would be out of the scope of service concessions. Members generally felt that a contract would not be outside the scope of IFRIC 4 just because there is a significant residual. However, because comment letters expressed concerns about the scope issue, it would be more helpful to amend IFRIC 4. The IFRIC agreed that the residual interest criterion in paragraph 5(b) of IFRIC D12 should be amended to clarify that the interpretation applies if a significant residual interest exists and that interest passes to the grantor. If a significant residual interest does not exist (that is, whole of life arrangements) but the other scope criteria are met, the arrangement will be also within the scope. The IFRIC therefore decided to amend IFRIC 4 stating a specific scope exclusion for service concession arrangements. Analysis of remaining comments Staff had analysed the responses received on the remaining questions in exposure drafts D12, D13, and D14 that had not been discussed at the prior IFRIC meeting. Staff made various proposals based on responses received. Timing of recognition of an intangible asset The ED had proposed not to mandate the timing of recognition of an intangible asset. The staff suggested that the IFRIC postpone its discussion of this issue until final agreement on the dividing line between recognising a financial asset and recognising an intangible asset. The IFRIC agreed to the postponement. Amortisation of an intangible asset The staff proposed to clarify in the Basis for Conclusions that amortisation methods acceptable under IAS 38 would be acceptable for amortisation of intangibles in service concession arrangements. The IFRIC discussed the 'unit of production' (UOP) method in relation to this proposal. Some members thought that the UOP method would better reflect the economic circumstances if the underlying value of the intangible changed during the service arrangement. The IFRIC did not decide whether to accept the staff proposal. Instead, IFRIC asked the staff to explore the interaction with the requirements in IAS 38 on amortisation of intangibles and bring this issue back at a future meeting. Repairs and maintenance obligations Staff proposed that the IFRIC should reconsider the treatment of repair and maintenance obligations when they had concluded on how to proceed regarding the dividing line between financial assets and intangibles. IFRIC decided to postpone this discussion. Allocation of contract revenue Staff had proposed to strengthen the analysis on which revenue should be allocated between different activities of a service concession arrangement by reference to the fair values. Some members expressed a fundamental disagreement with the staff proposal. They commented that this was an issue that could not be answered under service concessions because it is being addressed by the Board as part of its measurement project. The IFRIC decided not to address this issue. Effective date Staff proposed that IFRIC should consider an effective date for the interpretations when their post-exposure deliberations are complete. The IFRIC agreed. Discussion at the May 2006 IFRIC Meeting The IFRIC discussed a draft Interpretation based on D12 Service Concession Arrangements – Determining the accounting model. In summary, the IFRIC agreed:
The IFRIC discussed these issues in some detail. Unusually, the Observers were provided with the draft Basis for Conclusions (but not the draft Interpretation). IFRIC Members made detailed comments on the proposed Basis, and it is likely to be redrafted significantly before the individual IFRIC members are happy with it. Significant residual value The IFRIC agreed with a staff recommendation that Application Guidance should be added to specify the meaning of the term residual interest. The residual interest is the estimated value of the infrastructure at the end of the term of the concession, if the infrastructure were already of the age and in the condition expected at the end of the term of the concession. The staff had drafted a detailed rationale, but the IFRIC seemed to prefer a statement of the principle rather than providing the detailed explanation of how the IFRIC reached its conclusion (for fear of the rationale being applied to situations to which such a conclusion might not be appropriate). Next steps The IFRIC will continue its discussions of D13 and D14 at a later meeting. Discussion at the IASB Meeting May 2006 [Educational Session] IFRIC staff conducted an educational session to:
No decisions were made during this session. The IFRIC has focused its deliberations on accounting by the service provider, and especially accounting for:
The IFRIC is focussing on these types of arrangements because the responsibilities between the service provider and the grantor are most intertwined and the accounting complexity is the greatest. The IFRIC has tentatively concluded that two models apply under service concessions for the rights received by the service operator:
The discussion focused on the dividing line between the two models. The Board discussed this at length as they wanted to understand the criteria that determined the model a service provider should apply. At the end of the session, IFRIC staff noted that the Board appeared to agree that the amendments made by IFRIC to the exposure drafts based on comments had not changed the fact that the draft interpretations are still consistent with IFRSs. The staff indicated that IFRIC intends to combine the original three drafts into one interpretation. The IFRIC has not concluded its redeliberations and will therefore be discussing service concessions at its July and September meetings. The staff noted that the IFRIC will be discussing whether to re-expose the draft interpretations as a single interpretation where the material in all three previous draft interpretations is covered in one. Discussion at the July 2006 IFRIC Meeting The staff presented the findings of further research it had conducted to obtain an understanding of how the contractual commitments for operations and maintenance obligations of service concession arrangements work in practice. As a result of this improved understanding, the staff recommended certain changes to the application guidance of the financial asset model set out in D13. Decision Although the IFRIC disagreed with some of the staff suggestions, it was agreed that the it was necessary to explain when it would be appropriate to use the 'D 13' model to repairs and maintenance obligations and that the final Interpretation should include examples of when IAS 37 would apply to such obligations and when the D 13 model would apply. Next steps The IFRIC will next consider proposed illustrations of the bifurcated model and revised examples based on the approaches proposed in D13 and D14. At a subsequent meeting(s), the IFRIC will consider the timing of recognition of any intangible assets; the transition date; and whether re-exposure is necessary. It is hoped that, barring the necessity for re-exposure, a final Interpretation would be issued by December 2006. Discussion at the October 2006 IASB Meeting At its September 2006 meeting the IFRIC decided to present the revised draft text of IFRIC X Service Concession Arrangements to the Board as a final draft and that the Board should be asked for approval to issue the Interpretation. The Board briefly discussed the revised draft text without making other than editorial changes to it. The Board unanimously supported the revised draft. It was decided to post the revised draft on the IASB website and to give constituents an opportunity to comment on it within a short comment period. The Board intends to approve a final Interpretation at its November 2006 meeting. 25 October 2006: IASB posts 'near-final' service concessions draft The IASB has made the Near-final Draft of IFRIC 11 Service Concession Arrangements available on its website (PDF 494k, download from IASB website). It is our current understanding that the IASB will invite those constituents who commented on the draft interpretations (D12, D13, and D14) to attend a public meeting in November during the Board meeting week (week of 13 November 2006) to provide comments on the posted draft. The IASB expects to approve the final interpretation later that week. There is no public call for comments on the IASB website. Our Project Page has details of IFRIC's deliberations on service concessions over the past three years. The Deloitte Observer Notes from the Board's October 2006 meeting stated:
Discussion at the November 2006 IASB Meeting The objective on the Board discussion on service concession arrangements was to:
The staff had identified three main points raised at the public meeting:
The Board voted to approve the draft Interpretation. It clarified that the vote would stand whether or not the IFRIC decided to make the amendments in the basis for conclusions of the draft interpretation. The Board also confirmed that the interpretation should be effective from 1 January 2008. November 2006: IFRIC 12 Issued On 30 November 2006, the IFRIC issued Interpretation 12 Service Concession Arrangements.
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