Accounting for Service Concession Arrangements

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

• Which party effectively owns the fixed asset?
• What is the nature of the asset (if any) held by the concession operator if they do not effectively own the fixed asset?
• How should contracts be combined or a contract segmented into separate units of account?
• How should the high finance costs of such contracts be accounted for?
• How should the eventual return of the asset to the concession provider (if relevant) be accounted for?

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

• Determine whether concession operator owns the fixed asset (and therefore accounts for the asset in accordance with IAS 16); if not
• Analyse whether a leasing transaction exists (and is therefore accounted for in accordance with IAS 17); if not
• Analyse whether the concession operator has a receivable (and therefore accounts for the asset in accordance with IAS 39); if not
• Determine whether the concession operator has a recognisable intangible asset (and therefore accounts for the asset in accordance with IAS 38); if not
• No asset arises.

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.

IFRIC 1: Changes in Decommissioning, Restoration and Similar Liabilities

The IASB recommended a number of changes to this document as a result of their review of the document. The IFRIC considered a draft Interpretation that staff had amended to address the concerns of the Board. The changes included improvement of the explanation as to how the interpretation is applied to revalued assets and the inclusion of an exemption to IFRS 1 for first-time adopters. IFRIC members suggested minor amendments, and the interpretation will be circulated for final approval out of session with a view to the final interpretation being issued in April.

This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.

Scroll down for notes from 23 March 2004.