IFRIC 12 was adopted by the European Commission and amended by the following regulations:
(EU) 2023/1803 – consolidation of previous amendments; the amendment does not change the interpretation in substance (references to previous EU regulations have been removed)
(EU) 2019/2075 – Amendments to References to the Conceptual Framework in IFRS Standards
(EU) 2017/1986 – IFRS 16 Leases
(EU) 2016/2067 – IFRS 9 Financial Instruments
(EU) 2016/1905 – IFRS 15 Revenue from Contracts with Customers
(1274/2008/EC) – IAS 1
References
Framework for the Preparation and Presentation of Financial Statements1 | |
IFRS 1 | First-time Adoption of International Financial Reporting Standards |
IFRS 7 | Financial Instruments: Disclosures |
IFRS 9 | Financial Instruments |
IFRS 15 | Revenue from Contracts with Customers |
IFRS 16 | Leases |
IAS 8 | Accounting Policies, Changes in Accounting Estimates and Errors |
IAS 16 | Property, Plant and Equipment |
IAS 20 | Accounting for Government Grants and Disclosure of Government Assistance |
IAS 23 | Borrowing Costs |
IAS 32 | Financial Instruments: Presentation |
IAS 36 | Impairment of Assets |
IAS 37 | Provisions, Contingent Liabilities and Contingent Assets |
IAS 38 | Intangible Assets |
SIC 29 | Disclosure — Service Concession Arrangements: Disclosure |
The reference is to the IASC’s Framework for the Preparation and Presentation of Financial Statements, adopted by the Board in 2001 and in effect when the Interpretation was developed.
Background
1.In many countries, infrastructure for public services — such as roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities, energy supply and telecommunication networks — has traditionally been constructed, operated and maintained by the public sector and financed through public budget appropriation.
2.In some countries, governments have introduced contractual service arrangements to attract private sector participation in the development, financing, operation and maintenance of such infrastructure. The infrastructure may already exist, or may be constructed during the period of the service arrangement. An arrangement within the scope of this Interpretation typically involves a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining that infrastructure for a specified period of time. The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes. Such an arrangement is often described as a ‘build-operate-transfer’, a ‘rehabilitate-operate-transfer’ or a ‘public- to-private’ service concession arrangement.
3.A feature of these service arrangements is the public service nature of the obligation undertaken by the operator. Public policy is for the services related to the infrastructure to be provided to the public, irrespective of the identity of the party that operates the services. The service arrangement contractually obliges the operator to provide the services to the public on behalf of the public sector entity. Other common features are:
the party that grants the service arrangement (the grantor) is a public sector entity, including a governmental body, or a private sector entity to which the responsibility for the service has been devolved.
the operator is responsible for at least some of the management of the infrastructure and related services and does not merely act as an agent on behalf of the grantor.
the contract sets the initial prices to be levied by the operator and regulates price revisions over the period of the service arrangement.
the operator is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration, irrespective of which party initially financed it.
Scope
4.This Interpretation gives guidance on the accounting by operators for public-to-private service concession arrangements.
5.This Interpretation applies to public-to-private service concession arrangements if:
the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and
the grantor controls — through ownership, beneficial entitlement or otherwise — any significant residual interest in the infrastructure at the end of the term of the arrangement.
6.Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Interpretation if the conditions in paragraph 5(a) are met. Paragraphs AG1–AG8 provide guidance on determining whether, and to what extent, public-to-private service concession arrangements are within the scope of this Interpretation.
7.This Interpretation applies to both:
infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement; and
existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.
8.This Interpretation does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering the service arrangement. The derecognition requirements of IFRSs (set out in IAS 16) apply to such infrastructure.
9.This Interpretation does not specify the accounting by grantors.
Issues
10.This Interpretation sets out general principles on recognising and measuring the obligations and related rights in service concession arrangements. Requirements for disclosing information about service concession arrangements are in SIC-29. The issues addressed in this Interpretation are:
treatment of the operator’s rights over the infrastructure;
recognition and measurement of arrangement consideration;
construction or upgrade services;
operation services;
borrowing costs;
subsequent accounting treatment of a financial asset and an intangible asset; and
items provided to the operator by the grantor.
Consensus
Treatment of the operator’s rights over the infrastructure
11.Infrastructure within the scope of this Interpretation shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract.
Recognition and measurement of arrangement consideration
12.Under the terms of contractual arrangements within the scope of this Interpretation, the operator acts as a service provider. The operator constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time.
13.The operator shall recognise and measure revenue in accordance with IFRS 15 for the services it performs. The nature of the consideration determines its subsequent accounting treatment. The subsequent accounting for consideration received as a financial asset and as an intangible asset is detailed in paragraphs 23–26 below.
Construction or upgrade services
14.The operator shall account for construction or upgrade services in accordance with IFRS 15.
Consideration given by the grantor to the operator
15.If the operator provides construction or upgrade services the consideration received or receivable by the operator shall be recognised in accordance with IFRS 15. The consideration may be rights to:
a financial asset, or
an intangible asset.
16.The operator shall recognise a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services; the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements.
17.The operator shall recognise an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service.
18.If the operator is paid for the construction services partly by a financial asset and partly by an intangible asset it is necessary to account separately for each component of the operator's consideration. The consideration received or receivable for both components shall be recognised initially in accordance with IFRS 15.
19.The nature of the consideration given by the grantor to the operator shall be determined by reference to the contract terms and, when it exists, relevant contract law. The nature of the consideration determines the subsequent accounting as described in paragraphs 23–26. However, both types of consideration are classified as a contract asset during the construction or upgrade period in accordance with IFRS 15.
Operation services
20.The operator shall account for operation services in accordance with IFRS 15.
Contractual obligations to restore the infrastructure to a specified level of serviceability
21.The operator may have contractual obligations it must fulfil as a condition of its licence (a) to maintain the infrastructure to a specified level of serviceability or (b) to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service arrangement. These contractual obligations to maintain or restore infrastructure, except for any upgrade element (see paragraph 14), shall be recognised and measured in accordance with IAS 37, i.e. at the best estimate of the expenditure that would be required to settle the present obligation at the end of the reporting period.
Borrowing costs incurred by the operator
22.In accordance with IAS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with that Standard.
Financial asset
23.IAS 32 and IFRSs 7 and 9 apply to the financial asset recognised under paragraphs 16 and 18.
24.The amount due from or at the direction of the grantor is accounted for in accordance with IFRS 9 as measured at:
amortised cost;
fair value through other comprehensive income; or
fair value through profit or loss.
25.If the amount due from the grantor is measured at amortised cost or fair value through other comprehensive income, IFRS 9 requires interest calculated using the effective interest method to be recognised in profit or loss.
Intangible asset
26.IAS 38 applies to the intangible asset recognised in accordance with paragraphs 17 and 18. Paragraphs 45–47 of IAS 38 provide guidance on measuring intangible assets acquired in exchange for a non- monetary asset or assets or a combination of monetary and non-monetary assets.
Items provided to the operator by the grantor
27.In accordance with paragraph 11, infrastructure items to which the operator is given access by the grantor for the purposes of the service arrangement are not recognised as property, plant and equipment of the operator. The grantor may also provide other items to the operator that the operator can keep or deal with as it wishes. If such assets form part of the consideration payable by the grantor for the services, they are not government grants as defined in IAS 20. Instead, they are accounted for as part of the transaction price as defined in IFRS 15.
Effective date
28.An entity shall apply this Interpretation for annual periods beginning on or after 1 January 2008. Earlier application is permitted. If an entity applies this Interpretation for a period beginning before 1 January 2008, it shall disclose that fact.
28D.IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended the ‘References’ section and paragraphs 13–15, 18–20 and 27. An entity shall apply those amendments when it applies IFRS 15.
28E.IFRS 9, as issued in July 2014, amended paragraphs 23–25 and deleted paragraphs 28A–28C. An entity shall apply those amendments when it applies IFRS 9.
28F.IFRS 16, issued in January 2016, amended paragraph AG8. An entity shall apply that amendment when it applies IFRS 16.
Transition
29.Subject to paragraph 30, changes in accounting policies are accounted for in accordance with IAS 8, i.e. retrospectively.
30.If, for any particular service arrangement, it is impracticable for an operator to apply this Interpretation retrospectively at the start of the earliest period presented, it shall:
recognise financial assets and intangible assets that existed at the start of the earliest period presented;
use the previous carrying amounts of those financial and intangible assets (however previously classified) as their carrying amounts as at that date; and
test financial and intangible assets recognised at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment as at the start of the current period.
Appendix A Application Guidance
This appendix is an integral part of the Interpretation.
Scope (paragraph 5)
AG1.Paragraph 5 of this Interpretation specifies that infrastructure is within the scope of the Interpretation when the following conditions apply:
the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and
the grantor controls — through ownership, beneficial entitlement or otherwise — any significant residual interest in the infrastructure at the end of the term of the arrangement.
AG2.The control or regulation referred to in condition (a) could be by contract or otherwise (such as through a regulator), and includes circumstances in which the grantor buys all of the output as well as those in which some or all of the output is bought by other users. In applying this condition, the grantor and any related parties shall be considered together. If the grantor is a public sector entity, the public sector as a whole, together with any regulators acting in the public interest, shall be regarded as related to the grantor for the purposes of this Interpretation.
AG3.For the purpose of condition (a), the grantor does not need to have complete control of the price: it is sufficient for the price to be regulated by the grantor, contract or regulator, for example by a capping mechanism. However, the condition shall be applied to the substance of the agreement. Non-substantive features, such as a cap that will apply only in remote circumstances, shall be ignored. Conversely, if for example, a contract purports to give the operator freedom to set prices, but any excess profit is returned to the grantor, the operator’s return is capped and the price element of the control test is met.
AG4.For the purpose of condition (b), the grantor’s control over any significant residual interest should both restrict the operator’s practical ability to sell or pledge the infrastructure and give the grantor a continuing right of use throughout the period of the arrangement. The residual interest in the infrastructure is the estimated current value of the infrastructure as if it were already of the age and in the condition expected at the end of the period of the arrangement.
AG5.Control should be distinguished from management. If the grantor retains both the degree of control described in paragraph 5(a) and any significant residual interest in the infrastructure, the operator is only managing the infrastructure on the grantor’s behalf — even though, in many cases, it may have wide managerial discretion.
AG6.Conditions (a) and (b) together identify when the infrastructure, including any replacements required (see paragraph 21), is controlled by the grantor for the whole of its economic life. For example, if the operator has to replace part of an item of infrastructure during the period of the arrangement (e.g. the top layer of a road or the roof of a building), the item of infrastructure shall be considered as a whole. Thus condition (b) is met for the whole of the infrastructure, including the part that is replaced, if the grantor controls any significant residual interest in the final replacement of that part.
AG7.Sometimes the use of infrastructure is partly regulated in the manner described in paragraph 5(a) and partly unregulated. However, these arrangements take a variety of forms:
any infrastructure that is physically separable and capable of being operated independently and meets the definition of a cash- generating unit as defined in IAS 36 shall be analysed separately if it is used wholly for unregulated purposes. For example, this might apply to a private wing of a hospital, where the remainder of the hospital is used by the grantor to treat public patients.
when purely ancillary activities (such as a hospital shop) are unregulated, the control tests shall be applied as if those services did not exist, because in cases in which the grantor controls the services in the manner described in paragraph 5, the existence of ancillary activities does not detract from the grantor’s control of the infrastructure.
AG8.The operator may have a right to use the separable infrastructure described in paragraph AG7(a), or the facilities used to provide ancillary unregulated services described in paragraph AG7(b). In either case, there may in substance be a lease from the grantor to the operator; if so, it shall be accounted for in accordance with IFRS 16.