Exploring three accounting models under Service Concession Arrangements (SCAs)

i. The Financial Asset Model: In the financial asset model, the operator has an unconditional contractual right to receive cash or another financial asset for the construction or upgrade services provided. Here are the accounting implications:

• The operator should follow the guidelines of IFRS 15 to account for the service element and recognize a contract asset for the construction or upgrade services performed up to the reporting date.
• A receivable is recognized under IFRS 9 when payment is not conditional on future performance by the operator.
• If the consideration amount receivable is sufficient to recover the construction revenue, a financial receivable is recognized instead of the contract asset once the construction phase is completed. Otherwise, the financial receivable is limited to the amount expected to be recovered.
• Initial recognition of a receivable under IFRS 9 is at its fair value adjusted for transaction costs, but interest recognized on the contract asset under IFRS 15 is accrued using the rate specific to the contract at inception. Differences between the two measurements are recognized as gains or losses in the statement of profit or loss.
• The subsequent recognition of the receivable depends on its classification determined under IFRS 9, such as amortized cost, fair value through other comprehensive income, or fair value through profit or loss.

ii. The Intangible Asset Model: Under the intangible asset model, the grantor provides a non-cash payment to the operator in the form of a license for charging users of the public service. Here are the accounting implications:

• The operator recognizes revenue for the construction services performed and inreases the amount related to the intangible asset (license) received in exchange.
• Borrowing costs incurred during the construction phase can be capitalized, following the guidance of IAS 23 on borrowing costs.
• However, during the construction phase, the consideration is classified as a contract asset rather than an intangible asset as per IFRIC 12. Once the construction services are completed, the contract asset is reclassified as an intangible asset.
• The intangible asset is accounted for in accordance with IAS 38. It should be amortized over the period of the concession, using an appropriate method (e.g., straight-line, diminishing balance, or units of production) based on the expected pattern of consumption of economic benefits.
• Amortization of the intangible asset begins when it is available for use, which generally occurs when the construction phase is completed and the asset is in the necessary location and condition for intended operation.

iii. The Bifurcated Model or Mixed Model: In the bifurcated model, the operator receives both a financial asset and an intangible asset as consideration. The accounting implications are as follows:

• The operator needs to separately account for the components of the consideration.
• The contract asset is split into two components: a financial asset component based on guaranteed payments and an intangible asset component representing the difference between the fair value of construction services and the financial asset component.
• During the construction phase, the financial asset component is recognized as a contract asset, and any significant financing component is accounted for in accordance with IFRS 15.
• Once the construction phase is completed, the financial asset component is reclassified as a receivable under IFRS 9, provided that payment is not conditional on future services.
• During the construction phase, the borrowing costs related to the intangible asset component can be capitalized under IAS 23 if they are related to that component.
• Upon completion of the construction phase, the intangible asset component is converted into an intangible asset and subsequently accounted for in accordance with IAS 38.

Each model has specific considerations for revenue recognition, borrowing costs, provision for lifecycle or replacement costs, and other accounting areas.

1. Revenue Recognition: In contrast to the financial asset model, the total revenue does not equal the total cash inflows (from the grantor) under the intangible asset model. The reason for this is  that under the intangible asset model, two sets of revenues are recognized. The first set arises from the exchange of construction services for the intangible asset in a barter transaction, acknowledging the value of the services provided during the construction phase. The second set of revenues is generated when the intangible asset is utilized to generate cash flows from users of the public service, representing the ongoing benefits derived from operating the infrastructure.

2. Borrowing costs: According to IFRIC 12, borrowing costs incurred by the operator during the construction phase should be recognized as an expense in the period incurred unless the operator has a contractual right to receive an intangible asset. Therefore, these costs are capitalized under the Intangible Asset Model, while in the Financial Asset Model, they are recognized as an expense. The Bifurcated Model treats borrowing costs related to the intangible asset component as capitalized, while the remaining balance is expensed.

3. Provision for lifecycle or replacement costs: Contractual obligations to maintain, replace, or restore infrastructure are recognized and measured in accordance with IAS 37. However, the treatment of these obligations differs among the accounting models. Under the Financial Asset Model, these obligations are more likely to be recognized as separate performance obligation, while the Intangible Asset Model and the Bifurcated Model treat them as provisions according to IAS 37.

Previous Articles on IFRIC 12

IFRIC 12 Accounting for Service Concession Arrangements: