IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12) is set out in paragraphs 1⁠–⁠30 and Appendices A and B. IFRIC 12 is accompanied by information notes, illustrative examples and a Basis for Conclusions. The scope and authority of Interpretations are set out in the Preface to IFRS Standards.

IFRIC Interpretation 12Service Concession Arrangements

Background

[Refer:Basis for Conclusions paragraphs BC2⁠–⁠BC7]

1

In many countries, infrastructure for public services—such as roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities, energy supply and telecommunication networks—has traditionally been constructed, operated and maintained by the public sector and financed through public budget appropriation.

2

In some countries, governments have introduced contractual service arrangements to attract private sector participation in the development, financing, operation and maintenance of such infrastructure. The infrastructure may already exist, or may be constructed during the period of the service arrangement. An arrangement within the scope of this Interpretation typically involves a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining that infrastructure for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes. Such an arrangement is often described as a ‘build‑operate‑transfer’, a ‘rehabilitate‑operate‑transfer’ or a ‘public‑to‑private’ service concession arrangement.

3

A feature of these service arrangements is the public service nature of the obligation undertaken by the operator. Public policy is for the services related to the infrastructure to be provided to the public, irrespective of the identity of the party that operates the services. The service arrangement contractually obliges the operator to provide the services to the public on behalf of the public sector entity. Other common features are:

(a)

the party that grants the service arrangement (the grantor) is a public sector entity, including a governmental body, or a private sector entity to which the responsibility for the service has been devolved.

(b)

the operator is responsible for at least some of the management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor.

(c)

the contract sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement.

(d)

the operator is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration, irrespective of which party initially financed it.

Scope

[Refer: 

Basis for Conclusions paragraphs BC9⁠–⁠BC19

Information Note 1]

4

This Interpretation gives guidance on the accounting by operators for public‑to‑private service concession arrangements.

5

This Interpretation applies to public‑to‑private service concession arrangements if:

(a)

the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and

(b)

the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of the arrangement.E1

[Refer:paragraphs AG1⁠–⁠AG8]
E1

[IFRIC® Update, September 2016, Agenda Decision, ‘IFRIC 12 Service Concession Arrangements—service concession arrangements with leased infrastructure’ 

The Interpretations Committee received a request to clarify how an operator accounts for a service concession arrangement in which the infrastructure is leased. In this arrangement, the operator is not required to provide any construction or upgrade services with respect to the infrastructure.

The submitter described an arrangement that involves three parties: a grantor, an operator and a lessor. The operator enters into an arrangement with the grantor to operate a public service. Some or all of the infrastructure in the arrangement is leased from the lessor. The lessor and the grantor may be controlled by the same governmental body. The operator is contractually required to pay the lessor for the lease of the infrastructure. The operator has an unconditional contractual right to receive cash from the grantor to reimburse those payments. In arrangements in which the lessor and the grantor are not controlled by the same governmental body, the grantor provides the lessor with a guarantee of the lease payments to be made during the lease term, and of any residual value at the end of the lease term. The grantor also has an option to renew the lease at the end of the initial non-cancellable period of the contract.

The submitter asked the Interpretations Committee to clarify whether the arrangement (including the leased infrastructure) is within the scope of IFRIC 12 (scope issue). If the arrangement (including the leased infrastructure) is determined to be within the scope of IFRIC 12, the submitter notes that the lease of the infrastructure is not within the scope of IFRS 16  Leases (IAS 17  Leases) for the operator. Consequently, the submitter also asked the Interpretations Committee to clarify how the operator accounts for any assets and liabilities arising from the arrangement with the lessor (recognition and presentation issues).

With respect to the scope issue, the Interpretations Committee observed that:

(a)

assessing whether the arrangement (including the leased infrastructure) is within the scope of IFRIC 12 requires consideration of the specific facts and circumstances. In particular, the operator assesses whether the control conditions in paragraph 5 of IFRIC 12 and the condition relating to the infrastructure in paragraph 7 of IFRIC 12 apply.

(b)

the operator is not required to provide construction or upgrade services with respect to the infrastructure for the arrangement to be within the scope of IFRIC 12.

With respect to the recognition and presentation issues, if the arrangement (including the leased infrastructure) described in the submission is determined to be within the scope of IFRIC 12, the Interpretations Committee observed that the grantor, rather than the operator, controls the right to use the infrastructure. Accordingly, the Interpretations Committee observed that:

(a)

the operator assesses whether it is obliged to make payments to the lessor for the lease or whether the grantor has this obligation. This assessment requires consideration of the specific facts and circumstances. If the grantor is obliged to make payments to the lessor, then in that case the operator is collecting cash from the grantor that it remits to the lessor on the grantor’s behalf.

(b)

if the operator is obliged to make payments to the lessor as part of the service concession arrangement, then the operator recognises a liability for this obligation when it is committed to the service concession arrangement and the infrastructure is made available by the lessor. At the time the operator recognises the liability, it also recognises a financial asset because the operator has a contractual right to receive cash from the grantor to reimburse those payments.

(c)

the operator’s liability to the lessor described in b. above is a financial liability. Accordingly, the operator offsets the liability to make payments to the lessor against the corresponding receivable from the grantor only when the criteria for offsetting a financial asset and a financial liability in IAS 32  Financial Instruments: Presentation are met.

The Interpretations Committee concluded that the requirements in IFRS Standards provide an adequate basis to enable an entity to determine how to account for the arrangement.

In the light of the existing requirements in IFRS Standards, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.]

6

Infrastructure used in a public‑to‑private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Interpretation if the conditions in paragraph 5(a) are met. Paragraphs AG1⁠–⁠AG8 provide guidance on determining whether, and to what extent, public‑to‑private service concession arrangements are within the scope of this Interpretation.

7

This Interpretation applies to both:

(a)

infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement; and

(b)

existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.

8

This Interpretation does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering the service arrangement. The derecognition requirements of IFRSs (set out in IAS 16) apply to such infrastructure.

[Refer:Basis for Conclusions paragraphs BC16⁠–⁠BC18]

9

This Interpretation does not specify the accounting by grantors.

[Refer:Basis for Conclusions paragraph BC15]

Issues

10

This Interpretation sets out general principles on recognising and measuring the obligations and related rights in service concession arrangements. Requirements for disclosing information about service concession arrangements are in SIC‑29. The issues addressed in this Interpretation are:E2

(a)

treatment of the operator’s rights over the infrastructure;

(b)

recognition and measurement of arrangement consideration;

(c)

construction or upgrade services;

(d)

operation services;

(e)

borrowing costs;

(f)

subsequent accounting treatment of a financial asset and an intangible asset; and

(g)

items provided to the operator by the grantor.

E2

[IFRIC® Update, July 2016, Agenda Decision, ‘IFRIC 12 Service Concession Arrangements—Payments made by an operator to a grantor in a service concession arrangement’

The Interpretations Committee received a request to clarify how an operator accounts for payments it makes to a grantor in a service concession arrangement within the scope of IFRIC 12 Service Concession Arrangements.

The Interpretations Committee observed the following in circumstances other than those in which the operator is collecting amounts (for example, sales taxes) on behalf of, and remitting them to, the grantor:

(a)

if payments are for a right to a good or service that is separate from the service concession arrangement, then the operator accounts for those payments applying the applicable IFRS Standard(s);

(b)

if payments are for the right to use an asset that is separate from the infrastructure within the scope of IFRIC 12, then the operator assesses whether the arrangement contains a lease. If the arrangement contains a lease, the operator accounts for those payments applying IFRS 16 Leases (IAS 17 Leases);

(c)

if payments are not for the right to a separate good or service or a separate right-of-use that is a lease, then the operator accounts for those payments as follows:

(i)

if the service concession arrangement results in the operator having only a contractual right to receive cash from the grantor (ie the financial asset model applies as described in paragraph 16 of IFRIC 12), the operator accounts for those payments as a reduction of the transaction price, applying the requirements on consideration payable to a customer in paragraphs 70⁠–⁠72 of IFRS 15 Revenue from Contracts with Customers; 

(ii)

if the service concession arrangement results in the operator having only a right to charge users of the public service (ie the intangible asset model applies as described in paragraph 17 of IFRIC 12), the operator has received an intangible asset (ie the right to charge the users of the public service) in exchange for construction/upgrade services and the payments to be made to the grantor. Consequently, an entity accounts for those payments applying IAS 38 Intangible Assets; and

(iii)

if the operator has both a right to charge users of the public service and a contractual right to receive cash from the grantor (ie both the intangible asset model and the financial asset model apply as described in paragraph 18 of IFRIC 12), the operator considers whether those payments represent payments made for the intangible asset, or consideration payable to a customer, or both.

The Interpretations Committee observed that, when the intangible asset model in IFRIC 12 applies, the accounting for variable payments to be made by the operator in a service concession arrangement is linked to the broader issue of accounting for variable payments for asset purchases. However, the Interpretations Committee noted that it had determined in March 2016 [Refer: IFRS IC Agenda Decision referenced to the end of paragraph 27(a) of IAS 38] that the issue of accounting for variable payments for asset purchases is too broad for the Interpretations Committee to address within the confines of existing IFRS Standards and, consequently, decided not to add the issue to its agenda. Therefore, the Interpretations Committee concluded that addressing how an operator accounts for variable payments that it makes to a grantor when the intangible asset model in IFRIC 12 applies is too broad for the Interpretations Committee to address within the confines of existing IFRS Standards.

The Interpretations Committee also concluded that the requirements in existing IFRS Standards are sufficient to address the other aspects of how an operator accounts for payments that it makes to a grantor as described above. Consequently, the Interpretations Committee decided not to add this issue to its agenda.]

Consensus

Treatment of the operator’s rights over the infrastructure

11

Infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract.

[Refer:Basis for Conclusions paragraphs BC20⁠–⁠BC29]

Recognition and measurement of arrangement consideration

[Refer:Basis for Conclusions paragraphs BC30⁠–⁠BC35]

12

Under the terms of contractual arrangements within the scope of this Interpretation, the operator acts as a service provider. The operator constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time.

13

The operator shall recognise and measure revenue in accordance with IFRS 15 for the services it performs. The nature of the consideration determines its subsequent accounting treatment. The subsequent accounting for consideration received as a financial asset and as an intangible asset is detailed in paragraphs 23⁠–⁠26 below.

Construction or upgrade services

14

The operator shall account for construction or upgrade services in accordance with IFRS 15.

[Refer:Illustrative Examples, examples 1⁠–⁠3]

Consideration given by the grantor to the operator

15

If the operator provides construction or upgrade services the consideration received or receivable by the operator shall be recognised in accordance with IFRS 15. The consideration may be rights to:

(a)

a financial asset, or

[Refer:Illustrative Examples, example 1]

(b)

an intangible asset.

[Refer:Illustrative Examples, example 2]
[Refer:Basis for Conclusions paragraphs BC36⁠–⁠BC40]

16

The operator shall recognise a financial asset [Refer:IAS 32 paragraph 11 (definition of a financial asset)] to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services; the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements.

[Refer:

paragraphs 23⁠–⁠25

Basis for Conclusions paragraphs BC41⁠–⁠BC45]

17

The operator shall recognise an intangible asset [Refer:IAS 38 paragraph 8 (definition of an intangible asset)] to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service.

[Refer:

paragraph 26

Basis for Conclusions paragraphs BC46⁠–⁠BC52]

18

If the operator is paid for the construction services partly by a financial asset [Refer:paragraph 16] and partly by an intangible asset [Refer:paragraph 17] it is necessary to account separately for each component of the operator’s consideration. The consideration received or receivable for both components shall be recognised initially in accordance with IFRS 15.

[Refer:

Basis for Conclusions paragraphs BC53 and BC54

Illustrative Examples, example 3]

19

The nature of the consideration given by the grantor to the operator shall be determined by reference to the contract terms and, when it exists, relevant contract law. The nature of the consideration determines the subsequent accounting as described in paragraphs 23⁠–⁠26. However, both types of consideration are classified as a contract asset during the construction or upgrade period in accordance with IFRS 15.

Operation services

20

The operator shall account for operation services in accordance with IFRS 15.

[Refer:Illustrative Examples, examples 1⁠–⁠3]

Contractual obligations to restore the infrastructure to a specified level of serviceability

21

The operator may have contractual obligations it must fulfil as a condition of its licence (a) to maintain the infrastructure to a specified level of serviceability or (b) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service arrangement. These contractual obligations to maintain or restore infrastructure, except for any upgrade element (see paragraph 14), shall be recognised and measured in accordance with IAS 37, ie at the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period.E3

[Refer: 

Basis for Conclusions paragraphs BC55 and BC56

Illustrative Examples, examples 2 and 3]

E3

[IFRIC® Update, August 2005, Agenda Decision, ‘IAS 37 Obligations to repair/maintain another entity’s property, plant and equipment’ 

The IFRIC considered a suggestion made during its project on service concessions that it should take onto its agenda a separate project to interpret the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets in respect of obligations to repair or maintain another entity’s property, plant and equipment that the reporting entity uses.

The IFRIC decided not to add this topic to its agenda because, in practice, entities are recognising a provision for repairs as damage or usage occurs that the entity is obliged to make good. The IFRIC was not aware of evidence that significantly divergent interpretations were being reached in practice.]

Borrowing costs incurred by the operator

22

In accordance with IAS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with that Standard.

[Refer:

Basis for Conclusions paragraphs BC57⁠–⁠BC59

Illustrative Examples, examples 2 and 3]

Financial asset

[Refer:

Basis for Conclusions paragraphs BC60⁠–⁠BC62

Illustrative Examples, examples 1 and 3]

23

IAS 32 and IFRSs 7 and 9 apply to the financial asset recognised under paragraphs 16 and 18.

24

The amount due from or at the direction of the grantor is accounted for in accordance with IFRS 9 as measured at:

(a)

amortised cost; or

(b)

fair value through other comprehensive income; or

(c)

fair value through profit or loss.

25

If the amount due from the grantor is measured at amortised cost or fair value through other comprehensive income, IFRS 9 requires interest calculated using the effective interest method to be recognised in profit or loss.

Intangible asset

[Refer:Illustrative Examples, examples 2 and 3]

26

IAS 38 applies to the intangible asset recognised in accordance with paragraphs 17 and 18. Paragraphs 45⁠–⁠47 of IAS 38 provide guidance on measuring intangible assets acquired in exchange for a non‑monetary asset or assets or a combination of monetary and non‑monetary assets.

[Refer:Basis for Conclusions paragraphs BC63⁠–⁠BC68]

Items provided to the operator by the grantor

27

In accordance with paragraph 11, infrastructure items to which the operator is given access by the grantor for the purposes of the service arrangement are not recognised as property, plant and equipment of the operator. The grantor may also provide other items to the operator that the operator can keep or deal with as it wishes. If such assets form part of the consideration payable by the grantor for the services, they are not government grants as defined in IAS 20. Instead, they are accounted for as part of the transaction price as defined in IFRS 15.

[Refer:Basis for Conclusions paragraphs BC69⁠–⁠BC71]

Effective date

28

An entity shall apply this Interpretation for annual periods beginning on or after 1 January 2008. Earlier application is permitted. If an entity applies this Interpretation for a period beginning before 1 January 2008, it shall disclose that fact.

28A⁠–28C

[Deleted]

28D

IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended the ‘References’ section and paragraphs 13⁠–⁠15, 18⁠–⁠20 and 27. An entity shall apply those amendments when it applies IFRS 15.

28E

IFRS 9, as issued in July 2014, amended paragraphs 23⁠–⁠25 and deleted paragraphs 28A⁠–⁠28C. An entity shall apply those amendments when it applies IFRS 9.

28F

IFRS 16, issued in January 2016, amended paragraph AG8. An entity shall apply that amendment when it applies IFRS 16.

Transition

[Refer:Basis for Conclusions paragraphs BC72⁠–⁠BC75]

29

Subject to paragraph 30, changes in accounting policies are accounted for in accordance with IAS 8, ie retrospectively.

30

If, for any particular service arrangement, it is impracticable for an operator to apply this Interpretation retrospectively at the start of the earliest period presented, it shall:

(a)

recognise financial assets and intangible assets that existed at the start of the earliest period presented;

(b)

use the previous carrying amounts of those financial and intangible assets (however previously classified) as their carrying amounts as at that date; and

(c)

test financial and intangible assets recognised at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment as at the start of the current period.

Appendices

Appendix AApplication guidance

This appendix is an integral part of the Interpretation.

Scope (paragraph 5)

AG1

Paragraph 5 of this Interpretation specifies that infrastructure is within the scope of the Interpretation when the following conditions apply:

(a)

the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price;E4 and

(b)

the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of the arrangement.

E4

[IFRIC® Update, July 2009, Agenda Decision, ‘IFRIC 12 Service Concession Arrangements—Scope of IFRIC 12’

The IFRIC received requests for guidance on the application of IFRIC 12. One request related to the requirement that the grantor control or regulate the price the operator can charge to users of the service provided by the infrastructure. The other requested guidance on the accounting for aspects of the arrangement other than the infrastructure.

The IFRIC noted that guidance in paragraphs AG2 and AG3 of IFRIC 12 on the requirement that the grantor controls or regulates the price of the service states that the grantor does not need to have complete control of the price. Rather, the IFRIC noted that any reviews or approvals by the grantor required by the agreement would generally be sufficient to meet this requirement, and it would be inappropriate to assume that they are perfunctory or ‘rubber stamps’ that can be disregarded.

The IFRIC also noted that in redeliberating the Interpretation it had decided to focus on the guidance on accounting for the infrastructure but had provided references to other IFRSs that apply to arrangements not within its scope. IFRIC 12 also refers to other IFRSs for accounting for aspects of the arrangement other than the infrastructure, such as repair and maintenance obligations and revenue recognition.

Given the guidance in IFRSs, the IFRIC concluded that any guidance it could provide would be in the nature of implementation guidance rather than an interpretation. The IFRIC therefore decided not to add the issues to its agenda.]

AG2

The control or regulation referred to in condition (a) could be by contract or otherwise (such as through a regulator), and includes circumstances in which the grantor buys all of the output as well as those in which some or all of the output is bought by other users. In applying this condition, the grantor and any related parties shall be considered together. If the grantor is a public sector entity, the public sector as a whole, together with any regulators acting in the public interest, shall be regarded as related to the grantor for the purposes of this Interpretation.

AG3

For the purpose of condition (a), the grantor does not need to have complete control of the price: it is sufficient for the price to be regulated by the grantor, contract or regulator, for example by a capping mechanism. However, the condition shall be applied to the substance of the agreement. Non‑substantive features, such as a cap that will apply only in remote circumstances, shall be ignored. Conversely, if for example, a contract purports to give the operator freedom to set prices, but any excess profit is returned to the grantor, the operator’s return is capped and the price element of the control test is met.

AG4

For the purpose of condition (b), the grantor’s control over any significant residual interest should both restrict the operator’s practical ability to sell or pledge the infrastructure and give the grantor a continuing right of use throughout the period of the arrangement. The residual interest in the infrastructure is the estimated current value of the infrastructure as if it were already of the age and in the condition expected at the end of the period of the arrangement.

AG5

Control should be distinguished from management. If the grantor retains both the degree of control described in paragraph 5(a) and any significant residual interest in the infrastructure, the operator is only managing the infrastructure on the grantor’s behalf—even though, in many cases, it may have wide managerial discretion.

AG6

Conditions (a) and (b) together identify when the infrastructure, including any replacements required (see paragraph 21), is controlled by the grantor for the whole of its economic life. For example, if the operator has to replace part of an item of infrastructure during the period of the arrangement (eg the top layer of a road or the roof of a building), the item of infrastructure shall be considered as a whole. Thus condition (b) is met for the whole of the infrastructure, including the part that is replaced, if the grantor controls any significant residual interest in the final replacement of that part.

AG7

Sometimes the use of infrastructure is partly regulated in the manner described in paragraph 5(a) and partly unregulated. However, these arrangements take a variety of forms:

(a)

any infrastructure that is physically separable and capable of being operated independently and meets the definition of a cash‑generating unit as defined in IAS 36 [Refer:IAS 36 paragraph 6 (definition of a cash‑generating unit)] shall be analysed separately if it is used wholly for unregulated purposes. For example, this might apply to a private wing of a hospital, where the remainder of the hospital is used by the grantor to treat public patients.

(b)

when purely ancillary activities (such as a hospital shop) are unregulated, the control tests shall be applied as if those services did not exist, because in cases in which the grantor controls the services in the manner described in paragraph 5, the existence of ancillary activities does not detract from the grantor’s control of the infrastructure.

AG8

The operator may have a right to use the separable infrastructure described in paragraph AG7(a), or the facilities used to provide ancillary unregulated services described in paragraph AG7(b). In either case, there may in substance be a lease from the grantor to the operator; if so, it shall be accounted for in accordance with IFRS 16.

Appendix BAmendments to IFRS 1 and to other Interpretations

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2008. If an entity applies this Interpretation for an earlier period, these amendments shall be applied for that earlier period.

* * * * *

The amendments contained in this appendix when this Interpretation was issued in 2006 have been incorporated into the text of IFRS 1, IFRIC 4 and SIC‑29 as issued on or after 30 November 2006. In November 2008 a revised version of IFRS 1 was issued. In January 2016 IFRIC 4 was superseded by IFRS 16 Leases.

Footnotes

1

The reference is to the IASC’s Framework for the Preparation and Presentation of Financial Statements, adopted by the Board in 2001 and in effect when the Interpretation was developed. (back)

2

The title of SIC‑29, formerly Disclosure—Service Concession Arrangements, was amended by IFRIC 12. (back)