Service Concession Arrangements under Ind AS 115: Accounting for BOT Bus Stops

 Author’s note

During my professional practice I came across client who owns and operates bus stops at various locations in Delhi, which is actually a BOT contract with government. He asked me that, “Can I record these bus stops as asset in my Balance sheet?”, but he has the right to operate those bus stops but not owns them, he can collect revenue for period as mentioned in contract. So what Ind AS says? Let’s discuss

 Client case, say STS Ventures is my client

The Government of India gave STS Ventures the right to develop, operate and maintain the bus stops in respective location for 20 years. Here, STS Ventures finances or partly finances the construction, constructs/upgrades the bus stop, operates it, maintains it, collects passenger charges, rents from shops, fines etc. and earns revenue from that bus stop, also he bears operating and/or demand risk and at the end of 20 years, the Bus stop or concession rights revert to the Government.

Here it was argued that:

“STS Ventures built the Bus stop and controls its operations for 20 years, therefore the Bus stop should be shown as Property, Plant and Equipment.”

 That conclusion is generally incorrect where the arrangement falls within Appendix D to Ind AS 115which clearly states that the accounting follows the substance of the concession arrangement, rather than merely who physically constructed the infrastructure.

Appendix D to Ind AS 115

Ind AS 115 contains specific guidance for service concession arrangements. This standard expressly identifies Bus stops as an example of infrastructure covered by service concession arrangements.

Here, in this arrangement, Government or Grantor grants concession to a private operator who constructs or upgrades the infrastructure, operates and maintains Public, passengers or busses and charges and revenues. Here the operator is essentially providing services using infrastructure over which it does not obtain the same control as an owner.

Why doesn’t the Bus stop become PPE of the operator?

Appendix D specifically states that infrastructure within its scope shall not be recognised as Property, Plant and Equipment of the operator, as the contractual arrangement doesn’t  give operator the right to control the use of the public-service infrastructure this means the physical possession is not the same thing as accounting control.

The operator may construct the Bus stop, manage the Bus stop, employ staff, maintain parking areas and boarding points, collect charges and determine operational matters within contractual limits but that does not necessarily mean that the operator controls the underlying infrastructure for accounting purposes.

Control tests

For an arrangement to fall within Appendix D, there are two major conditions are relevant first one is Who controls the service?

The grantor must control or regulate what services the operator must provide, to whom the services must be provided; and the price or tariff at which the services are provided.

For example, in Bus stop concession government may determine or regulate Bus stop services, busses/passengers to whom services are provided, Bus stop charges, landing charges, passenger charges, tariff methodology, service quality, security requirements, operational standards.

Therefore, although the operator manages the Bus stop, the Government retains significant control over the public service.

Second test is who controls the residual interest?

The grantor must also control, through ownership, beneficial entitlement or otherwise, a significant residual interest in the infrastructure at the end of the concession period.

In my example above, we saw that concession period is 20 years and at the end of 20 years

Bus stop reverts to Government. The operator cannot sell the Bus stop to another party, permanently retain the Bus stop, freely dispose of the Bus stop, or use it for unrelated purposes. Therefore, the Government retains the significant residual interest.

This is another important reason why STS can’t recognise the Bus stop as PPE. Hence I advised him not to recognise the underlying public infrastructure as its PPE. Instead, to recognise the rights and obligations arising from the concession arrangement.

Hence, the operator is viewed as a service provider, rather than the owner of the Bus stop.

Appendix D specifically provides that the operator acts as a service provider and that consideration for construction/upgradation and operation services is accounted for under Ind AS 115.

Accounting books of STS Ventures

“The asset with him is the right to operate, not the Bus stop.”

Depending upon the contractual terms, STS may recognise it either as Intangible asset or a financial asset or maybe both

Intangible asset

Suppose STS constructs the Bus stop under a 20 year concession, here the Government do not guarantee STS a fixed return. Instead, firm earns its economic return from passenger charges, Bus stop charges, parking, advertising, retail, food and beverage and other permitted Bus stop activities.

In substance, STS has obtained a right to earn economic benefits by charging users for the public service also we can say STS obtains is an enforceable contractual right. This is the intangible asset model.

The IFRS equivalent, IFRIC 12, describes the same principle, where the operator receives a right to charge users, an intangible asset arises.

It would have been recorded as PPE in the case of ownership model where the company owns Bus stop, controls it and earns revenue but in STS’s case it is a concession model where government owns/controls residual infrastructure, while the operator gets contractual right, operates infrastructure, charges users and earns revenue. Hence the contractual right is fundamentally different from ownership of the physical Bus stop.

 Financial asset

Now consider a different arrangement. Suppose the Government says, “You construct the Bus stop and we guarantee you Rs. 500 crore every year irrespective of the number of passengers.”

In this case, the operator’s return does not depend entirely on users, rather he has an unconditional contractual right to receive cash from the grantor. Appendix D therefore requires recognition of a financial asset to the extent of that unconditional right. The financial asset is subsequently accounted for under the applicable financial-instrument requirements.

Combination of financial asset and intangible asset (Both)

Suppose the concession agreement provides Rs. 200 crores guaranteed by Government and additional revenue based on passenger. Then this has both financial asset component as well as intangible asset component

After explaining this to my client, the CFO immediately threw a question, what is going to happen in Construction phase, he asked, “no PPE means no construction revenue.”

But, that is incorrect as the operator is providing construction or upgrade services and appendix D requires construction/upgradation services to be accounted for in accordance with Ind AS 115.

Therefore, during construction, the operator may recognise “Revenue from construction services” and corresponding construction costs.

Treatment when no cash is received

Revenue recognition under Ind AS 115 is not dependent upon immediate cash receipt. Here the operator has performed a service “construction of infrastructure” and receives consideration in the form of a contractual right to generate economic benefits during the concession period. Therefore, the consideration can be non-cash in form. This is consistent with the Ind AS 115 principle that revenue reflects consideration to which the entity expects to be entitled for transferring promised goods or services.

After construction phase

Once the Bus stop is operational, the operator provides operation and maintenance services and the revenue from these services is recognised in accordance with Ind AS 115.

Accounting of intangible asset

Suppose the concession right i.e. fair value of cost of construction is Rs. 500 crore, and as discussed concession period is 20 years, here we can assume that there is no residual value and straight-line amortisation.

Annual amortisation will be Rs. 500 crore ÷ 20 = Rs. 25 crore per year

Accounting entry

Amortisation expense  Dr.   25 crore

To  Accumulated amortisation – concession right  25 crore

Note: The actual amortisation pattern must reflect the pattern in which the economic benefits embodied in the intangible asset are consumed, rather than mechanically assuming straight-line amortisation in every case.

This is where Ind AS 38 Intangible assets play it’s role.

Relevance of concession period

Suppose in my example the concession is for 20 years and the operator has no ownership beyond that period. So, the economic life of the concession right is therefore closely linked to the contractual concession period and the operator cannot normally amortise the concession right over 40 years simply because the Bus stop’s physical infrastructure is expected to last 40 years as the operator’s economic right exists only for the concession period.

Applicability of Ind AS 116- Leases

A service concession arrangement within the scope of Appendix D is fundamentally different from a lease because the operator does not obtain the right to control the use of the underlying infrastructure in the manner contemplated by lease accounting.

The reasoning behind the exclusion is that the operator does not have the right to control the use of the infrastructure. Therefore, one should not automatically conclude it as “20-year right to use Bus stop as under lease by creating ROU asset under Ind AS 116.”

Treatment in case the Bus stop was already existing

Appendix D as I discussed above, also covers existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement. Therefore, the principle is not restricted to “operator constructs bus stop.” It can also apply where the government already owns a bus stop and grants an operator the right to operate it. Hence, the accounting depends upon the contractual rights and obligations.

In case the operator itself previously owned the Bus stop, then here Appendix D does not prescribe the accounting for infrastructure that was already held and recognised as PPE by the operator before entering into the service concession arrangement. Hence the relevant Ind AS requirements, including Ind AS 16 derecognition provisions, should be considered.

Why this accounting makes economic sense

Imagine STS Ventures pay Rs. 500 crore to develop an Bus stop, if it simply recognise PPE of Rs. 500 crore a user might think, “STS owns a 500 crore Bus stop”, but economically that may not be true as it don’t have right to sell, to retain it permanently, to freely change its purpose or no significant residual interest.

What STS actually possesses is a contractual right to operate the infrastructure and generate economic benefits over the concession period. Therefore, recognising the contractual right rather than the underlying infrastructure better reflects the substance of the arrangement.

 Other sectors

The same principle becomes relevant in many infrastructure arrangements involving highways, toll roads, Bus stops, metro projects, ports, power transmission, water supply, hospitals, telecom infrastructure, renewable-energy infrastructure under certain regulated arrangements.

Ind AS 115’s appendix D was specifically designed to address these public-to-private infrastructure arrangements.

Conclusion

Under Ind AS 115 Appendix D, a BOT Bus stop operator generally does not recognise the Bus stop infrastructure as its PPE. It recognises the contractual consideration for its construction/ upgradation and operation services as a financial asset and/or an intangible asset, depending upon whether it has an unconditional right to receive cash from the grantor or a right to charge users, as discussed above, the official MCA text of Ind AS 115 expressly covers Bus stops within service concession arrangements and states that infrastructure within the scope of Appendix D is not recognised as PPE by the operator. The ICAI’s current 2025-26 Ind AS compendium is also available as the latest reference set.

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Disclaimer: Author has not used original client name and respects the confidentiality, STS Ventures is authors own consulting firm.

Author can be contacted at [email protected]