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IFRIC 12 – Payments to operate (new)

Date recorded:

The Committee received 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 executor in nature and recognised over the term of the concession arrangement.

Examples of contractual payments that operators are required to make include payments to the grantor for the use of tangible assets (i.e. right of use payments) and fees payable to the grantor by the operator for the right to operate the concession.

The staff separated the issue into two parts: (1) payments which give the operator a right of use over a tangible asset and (2) payments (either fixed or variable) which the operator is required to make to the grantor for the service concession.

On the first issue (right-of-use payments) the staff presented the Committee with three potential views. View 1 is that IAS 17 should be applied to all payments for the right-of-use of tangible assets. View 2 is that IAS 17 or IFRIC 12 should be applied depending on the characteristics of the tangible asset. View 3 is that IAS 17 or IFRIC 12 should be applied depending on whether the operator controls the right-of-use related to the tangible asset. The staff told the Committee they believed View 3 was the most appropriate of the three views. The Committee generally agreed with the staff analysis on this issue.

On the second issue (payments the operator is contractually required to make to the grantor for the right to operate the service concession) the staff presented the Committee with four potential on the treatment of concession fees. View 1 is that they are treated as annual license fees, View 2 as consideration for an intangible asset, View 3 is presented as contra-revenue and View 4 is that the treatment depends on the underlying asset as either tangible or intangible. The staff told the Committee that they believed View 2 was the most appropriate of the four views.

Some of the Committee members mentioned they also agreed with View 2 but that they reached that view in a different manner from the staff analysis. One Committee member suggested that the analysis should place less emphasis on the liability side (i.e. whether the payments are fixed or variable) but rather to first examine the asset side and determining whether the right-of-use is an intangible or an executor contract. Another Committee member suggested analysing whether the operator can exit the arrangement (one that can exit would suggest an executor contract while one that is bound to the agreement is an intangible). Another Committee member raised the issue of whether the liability would be within the scope of IAS 39 and measured at fair value.

The staff will take the Committee's comments on the two issues and revise their analysis accordingly. The staff will then bring the issue back to the Committee during a future meeting to determine whether the Committee will add the issue to their agenda.

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