Service Concession

Agreements
IFRIC 12
Introduction

• Infrastructure for public services may be developed and financed

by private sector through “build-operate-transfer” (BOT)
arrangement.

Under the Philippine Laws, the fixed term shall not exceed 50 years and, in case of infrastructure or
development facility whose operation requires a public utility franchise, the proponent must be a
Filipino or, if a corporation, must be duly registered with the SEC and owned up to at least 60% by
Filipinos.
Sample BOT Arrangements

• Concession arrangement for water and wastewater services

between MWSS (government) and Maynilad Water Services Inc.
(Private Company)
• Concession arrangement for the operation of NLEX between the
government and Manila North Tollways Corporation (private
company)
Scope of IFRIC 12

• Its scope is limited to public-to-private service concession

arrangements in which:
• the grantor (i.e., government) controls or regulates the use of the
infrastructure; 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.
Controlling the use of the infrastructure

• The grantor is considered to control the use of the infrastructure

when it controls or regulates:
• the services to be provided with the infrastructure;
• to whom those services must be provided; and
• the price to be charged for those services. This control could be by contract
or otherwise (e.g. through a regulator).
Significant residual interest

• For this condition, 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.
Where a significant residual interest will exist in the infrastructure
at the end of the service concession arrangement, that residual
interest must revert to the grantor for the arrangement to be
within the scope of the Interpretation.
Accounting Issues

• IFRIC 12 deals with the accounting for the following:

• 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.
Treatment of the operator’s right over the
infrastructure

• The operator does not recognize the infrastructure in a BOT as PPE

because the operator does not control the infrastructure but only
has access to operate the infrastructure to provide a public service
in behalf of the grantor.
Recognition and measurement of
arrangement consideration

• The operator in a BOT acts as a service provider. Such services

may be:
• Construction or upgrade services
• Operation services

• The operator accounts for both services using PFRS 15 – Revenue

from Contracts with Customers.
Construction or Upgrade Services

• If the operator provides construction or upgrade services, the

operator recognizes the consideration in the contract using PFRS
15. The consideration may be rights to:
• Financial asset, or
• Intangible asset.
Financial Asset

• A financial asset is recognized if the operator has an unconditional

contractual right to receive cash or another financial asset form
the grantor, such as when the grantor agrees to pay the operator
specified or determinable amounts or the shortfall, if any,
between a specified amount and the amount received from users
of the public service.

• It is accounted for using PFRS 9 – Financial Instruments

Intangible Assets

• An intangible asset is recognized if the operator receives a right

( a license) to charge users of the public service.

• The operator accounts for the intangible assets (license) using PAS
38 – Intangible Assets.
Repairs and maintenance

• IFRIC 12 requires that any obligation to maintain or restore the

infrastructure under the terms of the arrangement be recognised
and measured in accordance with the requirements of IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
Borrowing Cost incurred by the Operator

• Borrowing costs incurred in connection with an arrangement

falling within the scope of IFRIC 12 will be expensed as incurred,
unless the operator has recognised an intangible asset under the
Interpretation.
Accounting model

• The requirements of IFRIC 12 regarding the nature of the asset to

be recognised can be summarized as follows:
Illustration 1: Consideration in the form of
financial asset

Arrangement terms:
The terms of the arrangement require the operator to:
a. Construct a road – completing construction within 2 years
b. Maintain and operate the road for three years
c. Resurface the road at the end of Year 4

- The government pays the operator P100 per year in Years 3-5 for making
the road available to the public
- The road is turned-over to the government at the end of Year 5
Illustration 2: Consideration in the form of
Intangible Asset

Arrangement terms:
The terms of the arrangement require the operator to:
a. Construct a road – completing construction within 2 years
b. Maintain and operate the road for three years
c. Resurface the road when the original surface has deteriorated below a
specified condition

- The government grants the operator the right to collect toll fees from road
users
- The contract ends in Year 5
Disclosure

• IFRIC 12 does not contain any disclosure requirements.

• Requirements for disclosing information about service concession arrangements
are set out in SIC 29 Service Concession Arrangements: Disclosures (previously
titled “Disclosure – Service Concession Arrangements”). Consequential
amendments to SIC 29 replace the terms “Concession Operator” and
“Concession Provider” with “operator” and “grantor” respectively, to bring the
terminology into line with IFRIC 12.
• In addition, SIC 29 will require the operator to disclose the following after the
implementation of IFRIC 12:
• how the service arrangement has been classified; and
• the amount of revenue and profits or losses recognised in the period on exchanging
construction services for a financial asset or an intangible asset.