IFRIC 12 Service Concession Arrangements

Interpretation on Accounting for Service Concession Arrangements

The International Financial Reporting Interpretations Committee (IFRIC) released this interpretation. This covers service concession arrangements that a government or other group grants contracts for the supply of public services—such as roads, distributing power, jails or hospitals—to private contractors.

The interpretation was developed in response to requests for guidance on how International Financial Reporting Standards (IFRSs) apply to this type of service concession arrangement. Just to be clear, the interpretations does not amend existing IFRSs, only clarify how concession operators apply existing IFRSs to account for obligations and received in service concession arrangements.

Accounting for this type of a service concessions agreement is very important in many countries. The IFRIC is a valuable road map, in that it points private contract concession operators to the relevant IFRSs in order to help them apply them correctly. Previously, IFRS application to service concession arrangements was vague.

Without this guidance, it would be much easier for some operators to implement practices that are not outside of compliance with the IFRSs. These practices would include:

1. Inappropriate capitalization of borrowing costs
2. Combining different aspects of concession arrangements as if they were a single contract
3. Failing to select the appropriate classification for assets, such as the infrastructure or the rights obtained under the concession arrangements
4. The accounting requirements for obligations to maintain, restore or hand back infrastructure used in such concessions have regularly had manipulations as well.

Common features to concession arrangements are as follows:
1. 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.
2. 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.
3. The contract sets the initial prices to be levied by the operator and regulates price revisions over the
period of the service arrangement.
4. The operator is obliged to hand over the infrastructure to the grantor in a speci? ed condition at the end of the period of the arrangement, for little or no incremental consideration irrespective of which party initially ?nanced it.

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