IFRIC 12, or the International Financial Reporting Interpretations Committee Interpretation 12, provides guidance on the accounting treatment for service concession arrangements (SCAs). SCAs are arrangements between a government or a public sector entity and an operator, in which the operator provides public services on behalf of the government or public sector entity. In this article, we will discuss the definitions, explanations, examples, and case studies related to IFRIC 12 in 1200 words.
Definitions:
IFRIC 12 provides the following key definitions related to service concession arrangements:
Service Concession Arrangement:
A service concession arrangement is an arrangement between a government or a public sector entity (referred to as the grantor) and an operator (referred to as the concessionaire). Under this arrangement, the concessionaire provides public services on behalf of the grantor using the infrastructure, such as roads, bridges, airports, or other public facilities, owned, or controlled by the grantor.
Grantor:
The grantor is a government or a public sector entity that grants the right to use the infrastructure to the concessionaire and receives public services in return.
Concessionaire:
The concessionaire is the entity that is granted the right to use the infrastructure and provides public services on behalf of the grantor.
Explanations:
IFRIC 12 provides guidance on how to account for SCAs from both the grantor’s and concessionaire’s perspectives. Let’s look at the explanations for each:
Grantor’s Accounting Treatment: According to IFRIC 12, the grantor should recognize the infrastructure asset in its financial statements if certain conditions are met. These conditions include the grantor having the right to regulate the services provided using the infrastructure, the grantor controlling or regulating the services to be provided to the public, and the grantor controlling or regulating access to the services by the public.
The grantor should initially recognize the infrastructure asset at its fair value and should subsequently measure it at cost or revalued amount, depending on the accounting policy chosen by the grantor. The grantor should also recognize a liability for the obligations arising from the SCA, such as the obligation to maintain or upgrade the infrastructure, and should recognize revenue over time as the services are provided by the concessionaire.
Concessionaire’s Accounting Treatment:
The concessionaire should recognize the right to charge users for the services provided as a financial asset in its financial statements, initially measured at the fair value of the consideration received or receivable. The concessionaire should also recognize a financial liability for the obligation to provide the services, initially measured at the fair value of the consideration received or receivable.
The concessionaire should recognize revenue over time as the services are provided to users, and should also recognize expenses related to the services provided. The net amount of revenue and expenses recognized should be reported as either revenue or an expense, depending on the nature of the services provided.
Examples:
Let’s look at some examples to illustrate the accounting treatment under IFRIC 12:
Example for Grantor:
A government grants a concession to a private company to operate a toll road. The government retains the right to regulate the toll rates and control access to the toll road. The government also has the obligation to maintain and upgrade the toll road. The government should recognize the toll road as an infrastructure asset at its fair value and should recognize a liability for the obligation to maintain and upgrade the toll road. The government should recognize revenue over time as the toll road is used by the concessionaire to provide services to the public.
Example for Concessionaire:
A private company enters into a concession agreement with a government to operate an airport. The company has the right to charge users for the services provided, such as landing fees and passenger fees, and also has the obligation to provide services according to the terms of the concession agreement. The company should recognize the right to charge users as a financial asset and the obligation to provide services as a financial liability, both initially measured at the fair value of the consideration received or receivable. The company should recognize revenue over time as services are provided to users, and should also recognize expenses related to the services provided, such as personnel costs, maintenance costs, and other operating expenses.
Case Studies:
Let’s look at some real-world case studies that highlight the application of IFRIC 12:
Case Study 1:
In 2019, a government entered into a concession agreement with a private company to operate a public transportation system, including buses and trains, in a major city. The government retained the right to regulate the fares and routes, and also had the obligation to maintain the infrastructure, such as the stations and tracks. The private company recognized the right to charge fares as a financial asset and the obligation to provide transportation services as a financial liability. The company recognized revenue over time as services were provided to passengers, and also recognized expenses related to the operation and maintenance of the transportation system. The government recognized the infrastructure assets and the associated liabilities in its financial statements, and recognized revenue over time as the transportation services were provided to the public.
Case Study 2: In 2020, a government granted a concession to a private company to operate a water treatment plant and supply clean water to the public. The private company had the right to charge users for the water services and was also responsible for the maintenance and operation of the water treatment plant. The government retained the right to regulate the water rates and quality. The private company recognized the right to charge for water services as a financial asset and the obligation to provide water services as a financial liability. The company recognized revenue over time as services were provided to users, and also recognized expenses related to the operation and maintenance of the water treatment plant. The government recognized the water treatment plant as an infrastructure asset and the associated liabilities in its financial statements, and recognized revenue over time as the water services were provided to the public.
In both case studies, the accounting treatment followed the guidance provided by IFRIC 12, with the grantor recognizing the infrastructure asset and related liabilities, and the concessionaire recognizing the right to charge for services as a financial asset and the obligation to provide services as a financial liability.
Conclusion:
In conclusion, IFRIC 12 provides guidance on the accounting treatment for service concession arrangements, which are arrangements between a government or public sector entity and an operator for the provision of public services using infrastructure. The interpretation provides definitions, explanations, examples, and case studies to help entities understand how to account for SCAs from both the grantor’s and concessionaire’s perspectives. It is important for entities involved in SCAs to carefully apply the guidance of IFRIC 12 to ensure proper accounting and financial reporting of these arrangements in their financial statements.