“Dive into the world of Service Concession Arrangements (SCAs) under Ind AS 115. Explore their meaning, significance, and accounting treatment. Learn how to recover costs through different models and navigate the revenue recognition principles. Uncover the disclosure requirements to ensure compliance and transparency. Stay informed on the evolving landscape of SCAs with the implementation of Ind AS 115.”

Service Concession Arrangements (SCAs) have become increasingly common in various sectors, including infrastructure, transportation, and public services. These arrangements involve the grantor granting a right to an entity (the concessionaire) to provide public services or operate infrastructure facilities for a specified period. The introduction of the Indian Accounting Standard (Ind AS) 115 has brought significant changes in the recognition, measurement, and presentation of revenue from SCAs. In this article, we will provide a comprehensive guide to understanding SCAs and their accounting treatment under Ind AS 115.

1. Meaning of Service Concession Arrangements (SCA) : Service Concession Arrangements also known as ‘Build-Operate-Transfer’ or ‘Private to Public arrangements’ are the agreements between Government and Private players under which Govt. contract with private players to build an asset for the govt like Toll roads, Hospitals, Expressways, Schools etc.

2. Why Service Concession Arrangement : Govt enter into SCA when it feels that it do not have efficient staff, technology or resources to build the asset by itself.

3. Methods of Recovery by private players for cost incurred in construction : Cost incurred in constructing the asset can be recovered under two models as follows:

Recovery from Public : Under this model, the constructed asset will be leased to private players for a specified period & revenue generated from it during leased period will be retained by private player. If Collection from public becomes excess to cost incurred, it will result in Profit to private players and vice-versa. Govt. will not pay anything to Private players under this case.

Guaranteed Fixed Amount by Govt. : Under this model, the constructed asset will be hand over to Govt as soon as it gets completed. The Govt will then pay a fixed amount (Higher than the cost incurred) to private player after a specified period. Under this case, Private player has no right to recover anything from public but the amount will be directly given by Govt.

4. Accounting of SCA under Ind AS 115 :

Ind AS 115, Revenue from Contracts with Customers, establishes a comprehensive framework for revenue recognition and supersedes the previous revenue recognition guidance under Ind AS 18, Revenue. The key principles of revenue recognition under Ind AS 115 are as follows:

1. Identify the contract: The first step is to determine whether a contract exists and identify its specific terms and conditions.

2. Identify performance obligations: The entity needs to identify the distinct goods or services promised in the contract.

3. Determine transaction price: The transaction price is the amount to which the entity expects to be entitled in exchange for transferring goods or services to the customer.

4. Allocate the transaction price: The transaction price is allocated to the performance obligations based on their relative stand-alone selling prices.

5. Recognize revenue when performance obligations are satisfied: Revenue is recognized as the performance obligations are satisfied, i.e., when control of the promised goods or services is transferred to the customer.

Applying these principles to SCAs, the concessionaire generally recognizes revenue over the term of the arrangement. The revenue recognition may vary depending on the nature of the services provided, but it typically involves the following steps:

a. Identify the distinct performance obligations: The concessionaire identifies the different services it is obligated to provide under the SCA, such as construction, operation, maintenance, and collection of tolls or fees.

b. Determine the transaction price: The transaction price is determined based on the consideration the concessionaire expects to receive, such as user fees, availability payments, or a share of the revenue generated.

c. Allocate the transaction price: The transaction price is allocated to each distinct performance obligation based on their relative stand-alone selling prices.

d. Recognize revenue when performance obligations are satisfied: Revenue is recognized as the concessionaire satisfies each distinct performance obligation over time or at a point in time, depending on the circumstances.

Accounting of SCA depends upon the nature of recovery as follows:

If Recovery from public:-

A. When Amount incurred on construction-

Capital WIP Dr. XXX
to Bank A/c XXX

B. When Construction completed –

Intangible Assets Dr XXX
to Capital WIP XXX

(Note: Intangible Asset will be recorded at Fair Value & Difference between Intangible Asset and Capital WIP will be transferred to Profit & Loss)

C. During Operation Phase (Recovery from public) –

Bank A/c Dr. XXX
to Revenue A/c XXX

D. Intangible Asset will be Amortized over contract period in accordance with Ind AS- 38.

If Guaranteed Amount by Govt :-

A. When Amount incurred on construction-

Capital WIP Dr. XXX
to Bank A/c XXX

B. When Construction completed –

Financial Asset Dr  XXX
to Capital WIP XXX

(Note: Financial Asset will be recorded at Fair Value & Difference between Financial Asset and Capital WIP will be transferred to Profit & Loss)

C. During Operation Phase –

Financial Asset Dr. XXX
to Finance Income XXX

D. When Amount Received from Govt –

Bank A/c Dr. XXX
to Financial Asset XXX
to other income (if any) XXX

5. Disclosure Requirements: Ind AS 115 also includes specific disclosure requirements that entities need to comply with. These disclosures provide users of financial statements with information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from SCAs.

Conclusion: The implementation of Ind AS 115 has brought significant changes in the accounting treatment of Service Concession Arrangements. Concessionaires need to carefully evaluate their SCAs, identify distinct performance obligations, determine transaction prices, and apply the appropriate revenue recognition methods under the standard. It is essential for entities to ensure compliance with the disclosure requirements to provide transparent and useful information to stakeholders.

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Qualification: Student - CA/CS/CMA
Company: N/A
Location: New Delhi, Delhi, India
Member Since: 15 May 2023 | Total Posts: 2
Deepak Jain is a CA Final aspirant constantly learning in the field of Taxation, Accounting & Finance. He is having a keen interest in writing on various topics after thorough research. All the contents shared are accurate to the best of our knowledge. However, if any discrepancy found, please s View Full Profile

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4 Comments

  1. M.Thiruvengadam says:

    Thank you Mr. Deepak jain. very nicely explained.
    I have a doubt in this entry
    C. During Operation Phase –
    Financial Asset Dr. XXX
    to Finance Income XXX
    in the previous journal entry also financial asset is debited and now again here financial asset is debited. Effectively Financial asset is getting debited twice.

    1. Deepak Jain says:

      Dear sir, Thank you for your appreciation.
      In journal entry (b), Financial asset is debited by the amount of cost incurred during construction but in journal entry (c), Financial asset is debited by the amount of Interest income booked on Financial asset. Hence, it is true that Financial asset is debited twice but for different incomes.
      Hope it resolved your query. If you still have one, feel free to discuss more.
      Regards

  2. Pinky Jain says:

    Thoroughly explained article on Service Concession arrangements. I have one doubt over the last journal entry in Guaranteed Fixed amount by govt i.e.
    Bank A/c. Dr XXX
    to financial asset. XXX
    to other income XXX

    What is Other Income in this case ?

    1. Deepak Jain says:

      Thank you pinky jain for your appreciation.
      Govt. pay the amount to private player for two things viz. Construction and Maintenance. As far as construction is concerned, we have taken into consideration the Finance Income in earlier journal entries which have accumulated to Financial Asset Account But For maintainence, since the amount is not known in advance hence amount related to it will directly be posted through this entry i.e. Bank A/c. Dr
      to financial asset
      to other income.

      Hope it resolved your doubt. If you still have one, feel free to ask.

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