Explore the accounting requirements for Service Concession Arrangements (SCAs) under IFRIC 12. Understand control criteria and three accounting models for operators.
Service concession arrangements (SCAs) have been beneficial for the public sector, private sector, and consumers worldwide. These arrangements involve cooperation between the government and private entities and have been applied in various sectors such as transportation, water treatment, waste-to-energy transformation, public housing, healthcare, and environmental protection.
An overview of accounting requirements under IFRIC 12:
The Interpretation Committee has determined that the accounting of an arrangement under IFRIC 12 depends on whether control over the underlying infrastructure assets rests with the operator or the grantor. The basis for the conclusion section clearly states that the interpretation applies to infrastructure assets controlled by the grantor. The term ‘control’ therefore holds immense prominence for the application of this guidance.
The ‘control criteria’ is detailed in paragraph 5 of the Interpretation as follows:
i. The grantor controls or regulates the services that the operator must provide with the infrastructure, to whom it must provide them, and at what price; and
ii. The grantor controls significant residual interest in the infrastructure at the end of the term of the arrangement through ownership, beneficial entitlement, or otherwise.
In addition to the above, it is also important to consider whether the infrastructure is being used by the operator to deliver services for the benefit of the public or for the benefit of the grantor in order to differentiate ‘outsourcing arrangements’ from the concession arrangement within the scope of this Interpretation.
When the grantor procures certain services for its own benefit rather than for the benefit of the public, this results in the arrangement being an outsourcing arrangement.
Under the contractual terms of the arrangements within the scope of this Interpretation, the operator acts as a service provider. It constructs or upgrades infrastructure (construction or upgrading services) used to provide public services and operates and maintains that infrastructure (operational services) for a specified period of time. IFRIC 12 clarifies that the operator should recognize and measure revenue in accordance with IFRS 15 for the services it performs under the arrangement. The requirement to recognize a corresponding asset as consideration for the construction service brings about three possible accounting models: the Financial Asset Model, the Intangible Asset Model, and the Mixed Model.
The Interpretation states that the selection of the appropriate model depends on the nature of the consideration given by the grantor to the operator and should be determined by reference to the terms of the contractual arrangement as follows:
| S. No. | Classification | Operator’s rights under the arrangement |
| 1 | Financial Asset Model |
The operator should recognize a financial asset to the extent it has an unconditional contractual to receive cash or another financial asset from or at the direction of the grantor, for the construction services. It should be noted that the operator has an unconditional right to receive cash if the grantor contractually guarantees to pay – i. specified or determinable amount or ii. the shortfall, if any between amounts received from users of the service and a specified or determinable amount. A financial asset exists in these circumstances even if the payments are contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. [IFRIC 12:16] |
| 2 | Intangible Asset | The operator should recognize an intangible asset to the extent it receives a license to charge user of the public service. There is no unconditional right to receive cash in such case, as the amounts are contingent on the extent that the public uses the service i.e., the operator bears the demand risk. |
| 3 | Mixed Model | If the operator is remunerated for the construction services partly by a financial asset and partly by an intangible asset, it is necessary to separately account for each component of the consideration. To the extent the arrangement conveys a contractual right to receive cash or other financial asset, a financial asset should be recognized and an intangible asset should be recognized for the remainder (i.e., difference between the fair value of the construction service and the financial asset component). |
A detailed analysis of accounting implications for each model will be covered under under further articles.
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