Reporting on concessions of infrastructure projects

A service concession typically involves a public sector entity (‘the grantor’) entering a contract with a private sector entity (‘the operator’) for the provision of a service that provides the public access to crucial economic and social facilities and infrastructure.

In many countries, infrastructure for public services such as roads, bridges, tunnels, prisons, public hospitals, airports, water distribution facilities, energy supply and telecommunication networks are developed, financed, operated, and maintained through public-private partnerships (PPPs).

The operator provides services to construct or upgrade the infrastructure and operate and maintain the infrastructure for the concession period. The grantor pays the operator for its services or grants it the right to charge users of the service during the arrangement period. It could also be a combination of both.

Usually, at the end of the concession arrangement period, the operator transfers the infrastructure to the grantor in a specified condition. Some of the financial reporting challenges with these arrangements include the treatment of the operator’s rights over the infrastructure, the recognition and measurement of the arrangement compensation together with the operation service, borrowing costs and many more.

IFRIC 12, Service Concession Arrangements, is the interpretation in IFRS that specifies the accounting by the operator only. Furthermore, organisations can draw insights into the expected accounting and reporting of the grantor.

Two reporting models

The operator in a service concession arrangement, which is the entity charged with financing, building, maintaining, and operating the infrastructure during the concession period, applies either of two reporting models depending on the nature of the compensation given by the grantor to the operator. The two reporting models are the Financial asset and the Intangible asset model.

In the financial asset model, the operator recognises a receivable on its balance sheet 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. This right arises where the grantor has little or no discretion to avoid payment, usually because the agreement is enforceable by law.

The operator recognises an intangible asset on the balance sheet to the extent that it has a right to charge users for the public service. It is not an unconditional right to receive cash because the amounts collected are contingent on the level of use of the service. There are also arrangements where the operator recognises both a financial asset and an intangible asset.

There are complexities to applying each reporting model. They include separating the revenue for operation services from the construction revenue or the treatment of borrowing costs which can be capitalised in the intangible asset model but expensed in the financial asset model.

Determining which reporting model applies to an arrangement can be a complex process that might require the use of experts.

Identifying these arrangements

Based on the two models discussed earlier, we see why it is pertinent for an organisation to identify service concession arrangements correctly.

This identification process requires the organisation to answer several questions like, what is a public service obligation? Who controls the infrastructure before, during and after the concession period? Which party controls or regulates the public service and pricing of the public service? This list is not exhaustive but highlights the complexities of identifying service concession arrangements.

As the operator does not recognise the infrastructure on its balance sheet, one insight to draw from these arrangements for grantors is that grantors usually will have the infrastructure on their balance sheet. It is one of many indicators for service concession arrangement that confirm whether the appropriate reporting model was applied.

Akinyemi Awodumila is an Associate Director at PwC Kenya. An author who writes and speaks widely on corporate reporting topics.