GROUP 1 PRESENTATION: IPSAS 32

ACC 406: PUBLIC SECTOR ACCOUNTING AND FINANCE B

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NAME SURNAME REG NUMBER
Native Muchoko R1919946N
Tawanda Gotohore R2011017A
Takunda Zishiri R2011279J
Tafadzwa Marima R199271F
Evidence Magama R1918261Y
Leeroy Mushakwe R206619M
Munashe Ngwena R2011283F
Precious Gomora R201540V
Praise R Ruvangu R2010933A
Proud Daka R1918259E
Patience N Jangara R196493E
Innocent Murandu R207982P
Panashe Farayi R208751P
Hendrik Mutukwa R2011516B
Moreblessing Chiwisa R1913761H
Caryle T Muzerengwa R187307M
Evermore Muteura R1918448C
Panashe M Musarurwa R206813V

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Q. With references to IPSAS 32 comment on the accounting treatment of the service concession
arrangements in the financial statements. Take note of recognition, measurement,
presentation and disclosure requirements of service concession asset, a liability, revenue
and expenses. You may use hypothetical example to explain and aid your presentation. We
used April 2023 question 5.

Hypothetical scenario.

The Ministry of Transport and Infrastructure Development agrees to enter into a contract with
Skyline Pvt Ltd for the construction and operation of a new Tollgate along Harare-Masvingo
highway. The fair value of the new Tollgate after completion and ready for use is $300 million.
The service concession arrangement runs for 30 years and will commence at the start of year 2.
The new Tollgate is made available for use at the end of Year 1. Skyline Pvt Ltd will generate
revenue from toll fees charged to users of the road. The estimated useful life of the infrastructure
asset is 40 years.

Solution

 IPSAS 32 defines a service concession arrangement as a binding arrangement between

a grantor (the entity that grants the right to use the service concession asset to the
operator) and an operator (the entity that uses the service concession asset to provide
public services subject to the grantor’s control of the asset) in which:
 the operator uses the service concession asset to provide a public service on behalf of
the grantor for a specified period of time; and
 the operator is compensated for its services over the period of the service concession
arrangement
 Within service concession arrangements, there are two parties, a concession operator
(normally a private sector entity) and the grantor (a public sector entity) who is the
party which grants the service arrangements and the arrangement is accounted for in the
financial statements of the grantor using accrual basis of accounting.
 Here, the Ministry of Transport and Infrastructure Development is the grantor and
Skyline Pvt Ltd is an operator.

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 A service concession asset may be provided by the operator through construction,
acquisition from third party and development, or from existing assets of the operator.
 If the operator does not provide a service concession asset, it is provided by the grantor
from its existing assets or through an upgrade to an existing asset of the grantor.
 In this scenario, Skyline (operator) is providing the service concession asset which is a
new Tollgate along Harare-Masvingo highway through construction.

RECOGNITION OF A SERVICE CONCESSION ASSET.

 IPSAS 32 requires the grantor to recognize an asset provided by the operator and an
upgrade to an existing asset of the grantor as a service concession asset if the control
criteria is met which is:
i) The grantor controls or regulates what services the operator must provide
with the asset, to whom it must provide them, and at what price; and
ii) The grantor controls—through ownership, beneficial entitlement or otherwise
—any significant residual interest in the asset at the end of the term of the
arrangement.
 The control criteria is met as the Skyline Pvt Ltd is granted permission to construct a
Tollgate in a highway which is controlled and regulated by Ministry of Transport and
Infrastructure Development.
 Only assets provided by the operator (existing asset of the operator, constructed or
developed, purchased or an upgrade to an existing asset of the grantor) are
recognized.
 New assets that are constructed or developed by the operator are recognized in
accordance with IPSAS 17, Property, Plant, and Equipment or IPSAS 31, Intangible
Assets.
 Tollgate falls under infrastructure assets in IPSAS 17 and shall satisfies the definition
of property, plant and equipment and the recognition criteria which is:
 the cost of an item of property, plant and equipment shall be recognized as an asset if
and only if it is probable that the future economic or service potential associated with

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 the item will flow to the entity and the cost or fair value of the item will be measured
reliably.
 Therefore, Tollgate shall be recognized as an item of property, plant and equipment
in the statement of financial position of the Ministry of Transport and Infrastructure
Development at $300 million in year 1. (IPSAS 17)
 Existing assets of the grantor (other than upgrades thereto) used in a service
concession arrangement that meet the above mentioned two conditions (or only i) in
the case of a whole-of-live asset) are reclassified as service concession assets – no
additional asset and related liability are recognized in such cases

MEASUREMENT OF A SERVICE CONCESSION ASSET

Initial measurement

 The grantor shall initially measure the service concession asset at its fair value in
accordance with IPSAS 32.
 Only in the case of an existing asset where the grantor performs a reclassification the
reclassified service concession asset shall be accounted for in accordance with IPSAS
17, Property, Plant, and Equipment or IPSAS 31, Intangible Assets, as appropriate.
 Where the grantor does not make payments to the operator for the asset, the asset is
accounted for in the same way as an exchange of non-monetary assets in terms of
IPSAS 17 and IPSAs 31.
 The infrastructure asset (Tollgate) is initially measured at fair value at the date of
completion (end of year 1) as per IPSAS 17 at $300 million since the grantor does
not make any payment to the operator.

Subsequent measurement.

 After initial measurement, a grantor applies IPSAS 17 and IPSAS 31 to subsequent

measurement and derecognition of a service concession asset.

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  IPSAS 17 requires a grantor to choose between cost model and revaluation model as
its accounting policy and shall apply this policy to entire class of property, plant and
equipment.
 There is no evidence of revaluation of the infrastructure asset, therefore the grantor
shall adopt the cost model and subsequently measure the Tollgate at $292.5 million
in year 2 which is after deducting annual depreciation of $7.5 million.
 IPSAS 21 and 26 are also applied in considering whether there is any indication that
a service concession asset is impaired.

RECOGNITION OF LIABILITIES IN A SERVICE CONCESSION ARRANGEMENTS.

 In general, the recognition of a service concession asset implies recognition of a

liability.
 Only when an existing asset of the grantor is reclassified as a service concession
asset then the grantor shall not recognize a liability.
 The type of liability the grantor recognizes under IPSAS 32 depends on how the
grantor compensates the operator.
 The grantor may compensate the operator for the service concession asset by any
combination of:
a) Making payments to the operator (The financial liability model);

b) Compensating the operator by other means (The grant of a right to

the operator model) such as:
i) Granting the operator the right to earn revenue from third-party
users of the service concession asset; or

ii) Granting the operator access to another revenue-generating asset for

the operator’s use.

 When the grantor has unconditional obligation to make a predetermined series

of payments to the operator (to pay cash or another financial asset), the liability is
a financial liability and the grantor shall recognize a financial liability.

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  Where the grantor does not have an unconditional obligation to pay cash or
another financial asset to the operator for the construction, development,
acquisition, or upgrade of a service concession asset, and grants the operator the
right to earn revenue from third-party users or another revenue generating
asset, the grantor account for the recognized liability as unearned portion of the
revenue arising from the exchange of assets between the grantor and the operator.
IPSAS 32:24.
 Skyline Pvt Ltd has been granted the right collect revenue as toll fees from users
of the road, therefore the Ministry of Transport and Infrastructure Development
shall recognize a liability in the form of unearned revenue (grant of a right to
the operator model).

MEASUREMENT OF A LIABILITY IN A SERVICE CONCESSION ARRANGEMENT.

 The liability recognized in a service concession arrangement shall initially be measured

at the same amount as the service concession asset, i.e., fair value.
 This amount will be adjusted by the amount of any other consideration, e.g., cash,
from the grantor to the operator, or from the operator to the grantor.
 The liability in form of unearned revenue shall be initially measured at fair value at
$300 million in year 1 by the grantor.
 Subsequently, revenue will be recognized as it is earned, reducing the liability in the
process ie the unearned revenue to be recognized end of year 2 by the grantor is $290
million (the liability has been reduced by $10 million which is assumed to be earned
during year 2).

RECOGNITION AND MEASUREMENT OF REVENUE IN A SERVICE CONCESSION

ARRANGEMENT.

 A liability is recognized for any portion of the revenue that is not yet earned.
 Revenue will be recognized as it is earned, reducing the liability in the process.
 Grantor account for revenues from a service concession arrangement, by applying IPSAS
9, Revenue from exchange transactions.

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  Where the operator provided an upfront payment, a stream of payments, or other
considerations to the grantor in addition to the service concession asset, for the right to
earn revenue from third-party use of the service concession asset, or other revenue
generating asset, any portion of the payments received from the operator not earned in the
accounting period is recognized as a liability until the conditions for revenue recognition
are met.

 When the conditions for revenue are met, the liability is reduced as the revenue is
recognized in accordance with IPSAS 9.
 The grantor shall recognize revenue at end of year 2 in the statement of financial
performance and measure it at $10 million, reducing the portion of the liability.

RECOGNITION AND MEASUREMENT OF EXPENSES IN A SERVICE

CONCESSION ARRANGEMENT.

 When the grantor uses the financial liability model to recognize a financial liability, the
grantor allocates payments to the operator and account for them as a reduction in liability,
a finance charge, and charges for services provided by the operator.
 Finance charges and charges for services provided by the operator are accounted for as
expenses in the statement of financial performance under finance costs.
 In our scenario, the grantor uses the “grant of a right to the operator model” therefore no
finance costs will be recognized.
 Cost model under IPSAS 17 requires each part of an item of property; plant & equipment
to be with a cost that is significant in relation to the total cost of the item to be
depreciated separately.
 Since the grantor adopted the cost model to recognize a service concession asset as
property; plant and equipment-infrastructure assets (IPSAS 17), annual depreciation
charge of $7.5 million shall be recognized in the statement of financial performance for
the period year 2.

PRESENTATION AND DISCLOSURE OF SERVICE CONCESSION

ARRANGEMENTS (ASSETS, LIABILITIES, REVENUE & EXPENSES)

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 The grantor presents information in accordance with IPSAS 1.

An extract of the statement of financial position as at Year 1 & 2-Grantor

Yr1 Yr2
Non-current assets $(000 000) $(000 000)
Property; plant & equipment-infrastructure assets 300 292.5
Non-current liabilities
Service Concession Liability- unearned revenue (300) (290)

An extract of the statement of financial performance for the Year 2: Grantor

Yr2
$(000 000)
Revenue (reduction of a liability) 10
Depreciation (7.5)

 A grantor discloses the following:

a) A description of the arrangement (Skyline Pvt Ltd to construct and operate a new
Tollgate along Harare-Masvingo highway).
b) Significant terms of the arrangement that may affect the amount, timing, and certainty of
future cash flows; (the SCA runs for 30 years and the asset has a fair value of $300m and
is available at end of year 1)

c) The nature and extent of rights to use specified assets; rights to expect the operator to
provide specified services in relation to the service concession arrangement;

d) The carrying amount of service concession assets recognized at the end of the reporting
period, including existing assets of the grantor reclassified as service concession assets;
($292.5 million at end of year 2)
e) Obligations to provide the operator with access to service concession assets or other
revenue generating assets; and

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f) Changes in the arrangement occurring during the reporting period.

The End.

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