TITLE: IFRIC 12: New way of accounting assets valuation

Authors: Dario Silić, PhD and Hrvoje Volarević, PhD

Abstract: IFRIC 12 describes the accounting treatment of concession contract arrangements. It was
designed to address the plurality of practices involved in the treatment of concession contract arrangements,
as well as offer a means of assistance to those who have difficulty understanding how the treatment works. It
is intended to service concession arrangements and focus on both the Build-Operate-Transfer type
arrangements and the Rehabilitate-Operate-Transfer type arrangements of existing IFRSs. An arrangement is
within the scope of IFRIC 12 if the grantor controls services by using its infrastructure or if there is
significant residual interest found within the infrastructure at the end of the concession. The financial asset is
recognised to the extent that the operator has an unconditional right to receive cash irrespective of the usage
of the infrastructure, while the intangible asset is recognised to the extent that it has a right to charge for the
usage of the infrastructure. The effective date for the IFRIC 12 was 1 January 2008. However, early
adoption was permitted, with the full retrospective application required, provided its adoption did not
overcomplicate the process. If IFRIC conditions are satisfied, some Croatian concessions could have
significant consequences regarding their assets. This is due to the fact that the IFRIC 12’s valuation of assets
has several problematic features: type of asset, unclear conditions to be respected, tax issues etc.

Key words : valuation, concession, asset, IFRIC 12, IAS, accounting.

1. Introduction

In standard accounting practice, the accounting asset valuation is very simple; the investment cost is
capitalized during the investment period along with the costs related to the investment and then amortized
from the start of the usage of the investment until the last year of amortization. In some cases, investments
can be depreciated with accelerated amortization. However, in most cases, the linear amortization would
apply. During the last 10 years, the accounting practice highlighted a huge diversity of accounting asset
valuations; tangible asset, intangible asset, financial asset, mixed assets, leasing, receivables etc. In some
cases the auditors showed the accounting manipulations with items booked in a sheet that was out of balance
or not properly booked at fair values (such as Enron or Worldcom).
Due to the diversity in accounting practice, and the complicated nature of some contracts (especially
concession arrangements through PPP (public and private partnership) or PFI (private finance initiative)),
the IASB (International accounting standard board) has created the Interpretation n12 called IFRIC 12
(International Financial Reporting Interpretation Committee).

Based on SIC-29 Disclosure – Service Concession Arrangements 1, a concern has been expressed regarding
the lack of specific guidance on how service concession arrangements should be accounted for. In response
to these concerns, the IASB asked a group comprising representatives of the standard-setters of Australia,
France, Spain and the UK (four of the countries that had expressed such concerns) to carry out some initial
research on the subject, and to clarify how certain aspects of existing IASB literature would be applied to
service concession arrangements.

The public services infrastructure assets (roads, bridges, tunnels, prisons, hospitals, airports, energy and
water supply and telecommunication networks) have traditionally been constructed, operated and maintained
by the public sector and financed through public budget. As a result, huge public deficits are often created.
In order to reduce the public deficits, the concessions all around the world are given to private entities as

1
SIC-29 Disclosure – Service Concession Arrangements, available at www.iasb.org.uk

1
they offer an access to capital market without sovereign guaranty. Moreover, such entities offer
construction, operation and maintenance of assets.

The following table sets out some of the typical types of arrangements for private equity participation in the
public services and provides references to IFRSs that apply to each specific type of arrangement.

Table 1 : Contractual arrangements for different types of assets

Source : IFRIC 12 interpretation by IASB, information note 2, p 14, available at : www.iasb.org

Through Concession agreement, the concessionaire is entitled to finance, build, operate and maintain the
asset if the Grantor request the Concessionaire to operate it when the asset is completed and opened to
clients.
The accounting treatment concerning the booking of investments, in almost all cases, represented investment
through tangible asset with linear method of amortization until the end of the concession period or the
amortization by part of the asset.
Grantors have introduced contractual service arrangements to increase private capital participation in the
development, financing, operation and maintenance of assets. The assets 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 entity constructing an infrastructure for the sake of public service.
An arrangement may also involve the private entity upgrading, operating, or maintaining a particular
infrastructure for a specified period of time. The operator is paid for its services over the period of the
arrangement.
The arrangement is defined in a contract that sets out performance standards, mechanisms for adjusting
prices, and rights and obligations of each contractual party. Such an arrangement is often described as a
‘build-operate-transfer’, a ‘rehabilitate-operate-transfer’ or a ‘public-to-private’ service concession
arrangement.

Chart 1 : Different phases in asset valuation

2
IFRIC 12 or Interpretation 12 of IASB became effective 1st of January 2008. Companies were not obliged to
implement IFRIC 12 before 2008 if they proved that it was not possible to do so in the previous years. The
retroactive use of IFRIC-12 interpretation is done in accordance with IAS 8 (the change of accounting
standards) and is applied to the accounting of the concessionaire from the beginning of concession. If a
company proved the retroactive use was impossible before 2008, the IFRIC 12 is to be applied on
01.01.2008 using financial asset, intangible asset, or a combination of the two2.
This interpretation of IAS is applied on contractual arrangements in which the private entities participate in
development, financing, operation and maintenance of assets with public interest. In other words, the IFRIC
12 is applied on public private partnerships (PPP) based on contractual concession arrangements. On one
side there is a concessionaire or operator (for IFRIC 12 there is no difference) which offer the infrastructure
asset to users while on the other side there is a grantor which acts as a public institution (State, city, public
institution etc.) and which grants concession to the concessionaire to build, finance and operate it through
the concession period defined in concession contract3.

The idea of IASB was to provide guidelines for booking assets in PPP. As the private equity is invested in
public infrastructures (highways, hospitals, railways, water, electricity etc) the IASB decided that assets of
such companies should not be considered as tangible but rather intangible, financial or mix. Among other
conditions, the main reason for such an interpretation was to transfer assets at the end of the concession
period to the Grantor for free or with a contractual fee.

So, IFRIC 12 comes as a response to the huge diversity of concessions and different accounting policies of
concessions through Build-Operate-Transfer models or Rehabilitate-Operate-Transfer models. This
interpretation is not only one standard, but rather a summary of different IAS interpretations (IAS 7,11, 18,
23, 32, 37, 38 and 39) which are applied to a concession through the investment (CAPEX) or operation
(OPEX) period. In other words, during the investment period, the costs are capitalized, while at end of
investment period and at beginning of operation period, all costs are booked in a profit and loss statement.

2. IFRIC 12 conditions

Two main conditions of IFRIC 12 are related to the following questions: Does the Grantor, or the public
authority which grants concession, control the concession services at a certain level? Does the Grantor
control or give back the asset which is subject to concession at the end of concession period? If the answers
are positive in each instance, then the company falls within the jurisdiction of IFRIC 12. Since Croatian law
on accounting applies the IAS, companies are obliged to apply IFRIC 12 if they possess the fore mentioned
attributes.

2
IFRIC 12 interpretation, available at www.ey.com/ifrs
3
IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
3
Although the concessions are not defined, some of the concessions’ main characteristics are described by
IFRIC 12. At the beginning of interpretation, it shows that the purpose of the asset of infrastructure is to
provide services for public users. Moreover, the services provided by the concessionaire must be defined in
a specific contract or contractual arrangement (such as the concession agreement). The private partners on
behalf of the Grantor offer the services of operation and maintenance of the asset. At end of the concession,
the asset is usually resituated back to the Grantor.

It is important to note that IFRIC 12 does not provide booking guidelines for the Grantor, but only for the
concessionaire or the operator. IFRIC 12 also does not provide booking guidelines for the assets that the
concessionaire had before the concession, which are part of the concession area or part of the concession
agreement regarding the operation and maintenance of such assets4.

Even if IFRIC 12 provided accounting guidelines for concessions, it leaves a great deal open to
interpretation or application such as:
Rights of the concessionaire during the concession period, financial or intangible asset, booking of
investment and related margin on construction and operation services, operation services, costs of debts,
assets of Grantor given to concessionaire for operation, finance income etc.

The following chart, based on IFRIC 12 interpretation, shows the main conditions 5 of IFRIC 12 to be
respected by the Concessionaire. Even if it does not answer all of the questions, the chart does answer the
main questions concerning IFRIC-a 12: Does the Grantor influence or control the concession services? Is the
asset resituated back to the Grantor at end of concession period?

Chart 2 : Main conditions of IFRIC 126

In the conditions outlined by IFRIC, the words of control or regulation by the Grantor of services are very
often used with the purpose of clarifying what the rights and obligations of the Concessionaire and the
Grantor are in the concession agreement during the periods of construction and operation. In other words,
4
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
5
Service Concession Arrangements, available at www.iasb.org.uk
6
IFRIC12 Concessions, Ceste i mostovi, Zagreb, Dario Silic, July 2008
4
one of the goals of IFRIC 12 was to further clarify IFRIC 4 interpretation (definition of leasing in some
contractual arrangements) or to remove any concessions from the frame of IFRIC 47.

One of the most significant forms of control or influence concerns the concession services’ prices. As long
as the Grantor, or the regulator or any other public institution influences the prices offered by the
concessionaire, the revenues of the concessionaire are limited, and the concession is understood with regard
to IFRIC 12 as defined by IASB8.

The assets which are considered by IFRIC 12 interpretation have different considerations. This means that
the asset built by the concessionaire or provided by the Grantor to the concessionaire based on the
concession agreement are subject to IFRIC 12, while assets that the concessionaire owned before the
concession agreement, and which are part of concession, are not within the scope of IFRIC 12.

3. Financial or Intangible asset

As shown in the chart above, as long as the Grantor controls the services provided by the concessionaire,
and receives the asset of the infrastructure at end of the concession period, the concessionaire is obliged to
book an intangible asset, a financial asset or a combination of two. If it is a financial asset, it is considered a
receivable that is booked in the asset of a balance sheet. If it is an intangible asset, it means that the
concessionaire is entitled to charge services to clients based on a concession contract.

Concession becomes the financial asset if the concessionaire has the unconditional right to receive cash from
the Grantor regardless of what the infrastructure asset usage is 9. This means that the concessionaire does not
risk client demand, since such a risk is covered by the Grantor’s financial guaranties.

If your asset is treated as intangible, it means you are entitled to charge for services offered to clients. This
also means you have the right to collect revenues from users of the infrastructure, and your rights of
financial sources from the Grantor are limited.

The following table demonstrates the various infrastructure assets of different countries, and also shows the
difference once IFRIC is applied. As this study was done in 2008, it is important to note that the assets could
be different in 2011. IFRIC 12 considerations have been analyzed by companies and auditors in greater
detail since the time of IFRIC’s initial inception, and it is likely that the data has changed since that time.
However, the chart clearly highlights that tangible assets cannot exist under IFRIC 12. Even if IFRIC 12
conditions are met, almost all infrastructure arrangements, whether PPP or PFI, force companies to adopt
financial assets, intangible assets or a combination of the two.

Table 1A : Benchmark of IFRIC 12 in some concession companies in the world

TOMORRO
BEFORE IFRIC 12 W
      "IF" IFRIC 12
7
IFRIC 12 interpretation, available at www.ey.com/ifrs
8
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
9
IFRIC 12 Information Notes, Illustrative Examples and a Basis for Conclusions, available at www.iasb.co.uk
5
 Concession ASSETS AMORTIZATION ASSETS
Alis (France) Tangible (Highway) Progressive Intangible
A41 (France) Tangible (Highway) Linear Intangible
AKA (Hungary) Tangible (Highway) Linear Financial
TJH (Jamaica) Tangible (Highway) Linear+Progressive Intangible
Bina Istra (Croatia) Tangible (Highway) Linear Financial
MCB (South of Korea) Tangible (Bridge) Linear Intangible
Mars (France) Tangible (Railway) Linear Financial
Bombela (South of Africa) Tangible (Railway) Linear Intangible
Warnow (Germany) Tangible (Tunnel) Linear Intangible

Source : Benchmark study done by Dario Silic during a research seminar in Lyon, France in 2008

If the concessionaire directly bears the risk of demand without the right to financial contribution from the
Grantor, depending of level demand, the asset is considered to be intangible. It is important to note that
intangible or financial assets have their own way of booking accounting items through a balance sheet and
an income statement. In accounting, there is a new way of booking assets and other accounting items:
amortization, receivable, construction, margin on construction, finance income, services revenues etc. While
financial assets are booked within the scope of IAS 39, intangible assets are booked within the optic of IAS
38, which is not much different from the way in which tangible assets are booked.

IFRIC 12 interpretation explains that the concessionaire, for its construction of asset services, is
compensated by the Grantor in the form of receiving an asset which allows the concessionaire to charge
services to clients for asset usage10. For example, in case of highway concession, the concessionaire is
entitled to charge tolls to users of the highway for its construction services. In Croatia, this is the case of
concession companies: Bina Istra, AZM and ARZ.

Even if the interpretation 12 provides the main guidelines of booking, and specifies the differences between
financial and intangible asset, it are still many questions concerning its practical application.

Firstly, the unconditional right to receive financial contribution from the Grantor is disputable 11. Very often
it depends on the quality of services provided by the concessionaire (for example the closure of
infrastructure, technical conditions, number of accidents, ecology etc). It can also depend on some minimum
of revenues received by the concessionaire. The Grantor would only have to pay if there was some level of
usage within the infrastructure. IFRIC 12 specifies that, for financial asset booking, the Grantor has to pay
the precise amounts which are not limited or conditioned by any financial, technical, operational or other
criteria. The conclusion is that the Grantor pays the financial contribution even if the concessionaire does
not need it to cover currents or other concession expenses.

Secondly, the manner in which the Grantor would be able to control services provided by the concessionaire
is extremely debatable12. It could be a kind of direct control on service prices, on construction price, and on
the return of the equity of the shareholders. It could also be an indirect control through the legislation of the
conditions of construction, ecology, permits, social policy, tax policy etc.

Thirdly, the concession contract allows for different services to be provided by the concessionaire to its
users. This means that the construction service is considered by IAS 11, while the other services are
considered by IAS 18. Moreover, the margins on different services are not the same. Construction services
10
IFRIC12 Concessions, Ceste i mostovi, Zagreb, July 2008
11
IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
12
IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
6
should be treated differently from other services. In accounting, the amount of construction is booked as an
expense, while the same amount increased by margin is booked as revenue in the profit and loss statement.

The booking and calculation of this margin, along with the margin on the revenue booking in the profit and
loss statement, becomes disputable due to the fact that such booking results in a double recognition of
revenues13. In the first time through, the revenue of infrastructure pays the mentioned margin. On the
second time through, it pays the margin on construction in accordance with IFRIC 12. There is also a tax
treatment problem to be considered as there is no clear position of tax authority on how to treat the margin
on construction retroactively, as well as future margin recognition in taxable income.

There is also a VAT issue to be considered. The VAT is to be applied to the margin on construction, finance
income, or service revenues if the booking and tax recognition are related to service delivery or invoicing.
Besides that, the amount of construction booked in the profit and loss statement creates an issue concerning
the compensation to be made to the Croatian Chamber of Economy for the usage of natural resources. Such
contribution is calculated in the total revenues, and should also be considered along with the construction
increased for margin. Here again, there is an issue concerning double revenue recognition, and double
payment contributions required of the concessionaire. First, there is the revenue of usage (if it is an
infrastructure asset) and second, there is the revenue on construction booked in accordance with IFRIC 12.

For the time being, the tax authority does not have a clear position on IFRIC 12, as well as many of the
issues concerning the interpretation 12.

Thirdly, determining the responsibilities of the Grantor at end of the concession is problematic 14. The
concession contract can impose some obligations onto the Concessionaire to maintain the infrastructure, but
in many concessions, such obligations do not exist. The infrastructure can be given back to the Grantor at
the end of the concession, requiring some level of maintenance and upgrade. However, in some concessions,
the Grantor has the right to ask the concessionaire to do some repairs at its own expense. The IAS 37 is
applied in such circumstances and the concessionaire is required to conform to the proposition at the outset.
There is also an issue concerning how to distinguish renewal from extraordinary maintenance (IAS 18)15.

Finally, if the concessionaire is only partially paid by the Grantor for its construction services, and partially
for its infrastructure revenue collection, IFRIC 12 offers a possibility of mix booking. Mixed booking is a
combination of financial and intangible assets, and both assets should be taken into account using their fair
value.

4. Issues in asset's valuation

Valuation of either intangible or financial asset faces several major issues16 :

4.1. Treatment of the operator’s rights over the asset

13
IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
14
IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
15
IFRIC 12 interpretation, available at www.ey.com/ifrs
16
IFRIC 12 published by IASB, available at : www.iasb.org
7
Asset should not be recognised as tangible of the operator because the contractual service arrangement does
not specify the right to give control of the public service infrastructure to the operator 17. The operator has
access to the asset infrastructure as a means of offering public services to users on behalf of the grantor in
accordance with the concession agreement.

4.2. Recognition and measurement of arrangement consideration

In accordance with the logic of IFRIC 12, the operator acts as a service provider 18. The operator constructs
or upgrades the infrastructure and operates and maintains that infrastructure during the duration of the
concession period. In accordance with IAS, the operator is supposed to book and measure revenue in
accordance with IAS 11 and IAS 18 for the services that it performs 19. If the operator performs more than
one service under a single contract, consideration received or receivable shall be allocated by reference to
the relative fair values of the services delivered. This is envisaged only when the amounts can be separately
identifiable.

4.3. Construction or upgrade services

The IAS 11 indicates that the operator should book for revenue and costs relating to construction or upgrade
services, and the amount received or receivable by the operator should be recognised at its fair value20.

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 in the direction of, the grantor for its 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 requirements21.

On the other side, the operator shall recognise an intangible asset to the extent that it receives a right to
charge users for public service. A right to charge users for public service is not an unconditional right to
receive cash because the amounts are contingent on the extent that the public uses the service.

In case the operator is paid for the construction services partly by a financial asset, and partly by an
intangible asset, it is necessary to book at fair value separately for each operator's asset.

4.4. Operation services

In accordance with IAS 18, the operator should book for revenue and costs relating to operation services. In
some concession arrangements, the operator is obliged to fulfil some specific conditions related to asset
usage to operate the infrastructure to a specified level of serviceability, or to restore the infrastructure to a
specified condition before it is given back to the grantor at the end of concession. The IAS 37 explains how
these contractual obligations are to maintain or restore the infrastructure within the context of accounting
treatment22.

4.5. Borrowing costs

17
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
18
IFRIC12 Concessions, Ceste i mostovi, Zagreb, July 2008
19
IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12), available at : www. ey.com
20
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
21
IFRIC 12 interpretation by IASB articles 15-19, p 7, available at : www.iasb.org
22
IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12), available at : www. ey.com
8
In accordance with IAS 2323, borrowing costs linked to the financing of assets should be booked as an
expense in the period in which such costs are incurred. This is not the case if operator has a contractual right
to receive an intangible asset. In this case, borrowing costs linked to the financing of assets could be
capitalised during the investment period in accordance with the relevant accounting standard.

4.6. Retroactive and subsequent accounting treatment of a financial asset and an intangible
asset

Changes in accounting policies24 are accounted for in accordance with IAS 825 retrospectively.
The accounting treatment and valuation of financial or intangible asset should start from the beginning of
concession. However, if for some practical reasons it is not possible, than the start date can be another
related to the first year of IFRIC 12 application, the year of the last contractual mechanisms change, last
audit year etc.

In such cases, there has to be good arguments for the last application, and companies should26
(a) recognise financial assets and intangible assets that existed at the start of the earliest period presented;
(b) use the previous carrying amounts of those financial and intangible assets as their carrying amounts at
that date; and
(c) 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.

IASs 32 and 39 and IFRS 7 apply to the financial asset recognised under paragraphs 16 and 18. The amount
due from or at the direction of the grantor is accounted for in accordance with IAS 39 as:
(a) a loan or receivable;
(b) an available-for-sale financial asset; or
(c) if so designated upon initial recognition, a financial asset at fair value through profit or loss, if the
conditions for that classification are met27.

4.7. Items provided to the operator by the grantor

The infrastructure items, to which the operator is given access by the grantor within the concession contract
in order to operate it and collect revenues, are not recognised as tangible to the operator. If such assets form
part of the consideration payable by the grantor for these services, they are not government grants as defined
in IAS 20. They are recognised as assets of the operator, measured at fair value on initial recognition28.
It is to be highlighted that the operator shall recognise a liability in respect of the unfulfilled obligations it
has assumed in exchange for the assets.

5. Valuation of financial asset

Recognition of financial asset29, instead of tangible asset, means that the company applies IAS 39, which
requires a booking with fair value30. The asset becomes a debt or receivable to the Grantor if it has a method
of effective interest rate. In other words, the asset becomes a long term debt or receivable obtained by

23
IFRIC12 Concessions, Ceste i mostovi, Zagreb, July 2008
24
IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12), available at : www. ey.com
25
IFRIC 12 interpretation, available at www.ey.com/ifrs
26
IFRIC 12 interpretation, available at www.ey.com/ifrs
27
IFRIC 12 interpretation by IASB articles 23-26, p 8, available at : www.iasb.org
28
IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12), available at : www. ey.com
29
IFRIC12 Concessions, Ceste i mostovi, Zagreb, Dario Silic, July 2008
30
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
9
projecting the calculation of the net present value on all future received cash flow, and discounted with the
market interest rate on the financial instrument with the same risk.

In this case, the concession possesses an interest rate that the Grantor could have obtained when issuing a
public debt on the financial debt market. While the financial receivable is within the financial assets of the
balance sheet, the finance revenue from interests on receivable or finance income is booked with a method
of effective interest rate, as is the revenue in the profit and loss statement. The finance income is revenue
that the concessionaire is entitled to receive from the Grantor.

In comparison with the tangible asset model, the amortization costs booked as expense, and the financial
contribution booked as revenue, are no longer in the profit and loss statement of IFRIC 12. The amortization
of the receivable is done directly through a balance sheet in the same manner as a simple long term debt. As
in the case of the intangible model, the financial model requires that the construction cost, and the same
amount increased for margin, are booked as expense and revenue in the income statement.

Services such as operation, maintenance, renewal and other standard costs are booked in the income
statement as expense and revenue increased for margin.

In valuation of financial asset, each year the receivable is increased for construction and finance income and
decreased for cash received from the Grantor. It has to be an unconditional right to receive such cash from
the Grantor. If at the end of the concession, the impairment tests show that the assets are not fully amortized,
the revalorization of assets is done, and the difference is booked through the profit and loss statement. At the
same time, the finance interest rate has to remain fixed. However, this model is very disputable and is open
to many practical issues: fixed interest rate, delay payments of cash, revalorisations, guaranteed cash etc.

The following set of tables31 deals with the accounting treatment of IFRIC 12 in the manner of a financial
model. The arrangement period is only ten years and the operator’s annual receipts are constant over that
period.
The terms of a service arrangement require an operator to construct a road, completing construction within
two years and maintain and operate the road to a specified standard for eight years (ie years 3 to 10). The
terms of the arrangement also require the operator to resurface the road when the original surface has
deteriorated below a specified condition. The operator estimates that it will have to undertake the resurfacing
at the end of the eighth year. At the end of the tenth year, the service arrangement will end.

The operator estimates that the necessary costs to fulfil its obligations will be:

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18

31
IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18, available at : www.iasb.org
10
Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18

The following table demonstrates the evolution of the receivable from year 1 to year 10 using an estimated
effective interest rate of 6.18%.

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18, available at : www.iasb.org

The operators pay an interest rate of 6.7 percent every year on outstanding debt. If the cash flows and fair
values remain the same as those in the forecast, the operator’s cash flows, income statement and balance
sheet over the next 10 years will be:

11
Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18, available at : www.iasb.org

The following table demonstrates the evolution of income statement from year 1 to year 10. The
construction phase occurs in the first two years, with revenue increased for margin and related costs, while
the operation phase occurs in the last seven years.

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18, available at : www.iasb.org

The following table demonstrates the evolution of receivable, debt and net assets from year 1 to year 10.

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 1, p 15-18, available at : www.iasb.org

6. Valuation of intangible asset

For its construction services, the concessionaire has the right to charge the users of the infrastructure asset
usage to its clients. It also has the right of intangible asset as specified in the IFRIC 12. Intangible asset is
booked through IAS 38 and uses a fair value of infrastructure asset 32. In a case of intangible asset, the fair
value would be the sum of construction costs increased for margin. However, the amount of margin is very
disputable, and leaves a great deal open to speculation. IFRIC 12 explains that the margin can be the same as
some other infrastructure projects with the same risks. On top of that, IAS 38 defined that the intangible
asset should be amortized during the concession period using the linear method of amortization. The
amortization expense should be calculated as a percentage of investment cost increased for margin in the

32
Official Journal of the European Union, COMMISSION REGULATION (EC) No 254/2009, 26.03.2009
12
valuation of intangible asset. All capital expenditures are capitalized during the investment period and
amortized when the infrastructure is opened to users.

The intangible model requires that the construction costs and same-amount margin increases be booked as
expense and revenue in the income statement 33. Services such as operation, maintenance, renewal and other
standard costs are booked as expense and revenue increased for margin in the income statement. In
comparison with the tangible model, there are no other significant differences in accounting.

The financial model does not allow a booking of interests in capital expenditures during investment, while
the intangible model allows it.

The following set of tables34 deals with the accounting treatment of IFRIC 12 in the case of an intangible
model. The arrangement period is only ten years, and the operator’s annual receipts are constant over that
period.
As in the case of the financial asset described above, the same hypothesis will be kept for the purposes of
making a comparison between the two models.

The operator estimates that the costs it will incur to fulfil its obligations will be:

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

The following table shows how the intangible asset is built within the investment period.

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

The following table shows how resurfacing is considered in an income statement.

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IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008
34
IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org
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Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

Here it is assumed that the operator finances the arrangement wholly with debt and retained earnings. The
operators pay interest at 6.7 percent per year on outstanding debt. If the cash flows and fair values remain
the same as those forecasted, the operator’s cash flows, income statement and balance sheet over the next 10
years will be:

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

Here it is assumed that all cash flow will take place at the end of the year. The operator estimates the fair
value of its consideration received to be equal to the forecast construction costs, plus 5 percent margin. In
accordance with IAS 38, the intangible asset is amortised over the period in which it is expected to be
available for use by the operator, ie years 3 to 10.
The depreciable amount of the intangible asset (CU1,084) is allocated using a straight-line method.

The following table demonstrates the evolution of the income statement from year 1 to year 10. In the first
two years we notice the construction phase with revenue increased for margin and related costs, while the
operation phase occurs from years 3 to 10.

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Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

The following table demonstrates the evolution of the balance sheet from year 1 to year 10 during the
construction phase (first two years) and the operation phase (last seven years). The intangible asset is fully
amortized in year 10.

Source : IFRIC 12 interpretation by IASB, illustrative examples, example 2, p 18-21, available at : www.iasb.org

Here, the valuation tables and mixed model of financial and intangible assets are not represented due to the
fact that they are combined within a singular model.

7. Conclusion

IFRIC 12 describes the accounting treatment of concession contract arrangements which, until the 01 st of
January 2008, did not possess clear and simple guidelines for booking due to the many differences in the
PPP projects’ concession arrangements. The IFRIC came as a response to the plurality of practice found
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within the treatment of concession contract arrangements, as well as user requests for assistance. It applies to
existing IFRSs to service concession arrangements and focuses on Build-Operate-Transfer type
arrangements and Rehabilitate-Operate-Transfer type arrangements. The IFRIC 12 valuation process
considers a set of different IAS: 7,11, 18, 23, 32, 37, 38 and 39.

An arrangement is within the scope of IFRIC 12 if the grantor controls what services are provided using the
infrastructure. An arrangement also falls within the scope of the IFRIC 12 if the grantor controls any
significant residual interest in the infrastructure at the end of concession period.

The financial asset is recognised to the extent that the operator has an unconditional right to receive cash
irrespective of the usage of the infrastructure, while the intangible asset is recognised to the extent that it has
a right to charge for usage of the infrastructure.

If the amount due from, or at the direction of, the grantor is accounted for in accordance with IAS 39 (as a
loan or receivable) than the Financial asset is considered, while the IAS 38 applies to the intangible asset in
the same manner as the tangible asset. The effective date for IFRIC 12 was on the 1 st of January 2008, but
early adoption was permitted, with full retrospective application required, provided the process was not
impractical.

If IFRIC conditions are satisfied, these conditions could have a considerable impact on the assets of some
Croatian concession companies. Even if IFRIC 12 relates to accounting treatment, this interpretation could
have significant effects on concessions cash flow. Besides potential financial consequences, there are other
technical and tax considerations to be taken into account such as: the start date of IFRIC 12 application,
profit tax, forest contribution calculation, retroactive application, finance income etc. As long as tax
authorities do not have a clear view on IFRIC 12’s tax implications, it is important for Croatian companies
to have good accounting, contractual and tax arguments to book financial, intangible, or combination assets
in a profit and loss statement or a balance sheet. The audit of Croatian companies, which have had to apply
IFRIC 12 since 01.01.2010, will cause a great deal of confusion as there is no history or experience that
could help auditors and companies to have a better understanding of the many opened ended issues
concerning IFRIC 12. The IFRIC 12 valuation of assets is certainly the most disputable and problematic
interpretation, and it will be an extremely prevalent topic in the discussions, debates and decisions of
concessionaires, operators, tax authorities, auditors and economists in 2011.

Abbreviations :

IFRIC 12 : International Financial Reporting Interpretation Committee

IAS : International accounting standard

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IASB :International accounting standard board

References :

-www.iasb.org

-www.iasb.co.uk

-www.ey.com/ifrs

-IFRIC Interpretation 12 Service Concession Arrangements (IFRIC 12) paragraphs 1–30 and Appendices A
and B.

- IFRIC 12 Information Notes, Illustrative Examples and a Basis for Conclusions.

-IFRIC12 Concessions, Ceste i mostovi, Dario Silic, Zagreb, July 2008

-IFRIC 12 in concessions, HUKA bulletin, Dario Silic, June 2008

Contacts:

Dario Silić, PhD

Zagreb School of Economics and Management
+385 (0)1 2354-272
e-mail: dario.silic@zsem.hr 
 

Hrvoje Volarević, PhD

Zagreb School of Economics and Management
+385 (0)1 2354-155
e-mail: hrvoje.volarevic@zsem.hr

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