IFRS Institute Webcast Accounting for Service Concession Arrangements July 17, 2012 Administrative Continuing Professional Education (CPE) regulations require online participants take part in online questions. Participants are required to respond to a minimum of four questions in order to be eligible for CPE credit Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization Send questions via the Ask a Question button Help Desk: 1-877-398-1471 or outside the United States at 1-954-969-3342 1 1
Today s presenters John McGaw Partner Accounting Advisory Services Paul Munter Audit Partner U.S. International Financial Reporting Standards (IFRS) Professional Practice Leader Holger Erchinger Audit Partner Department of Professional Practice 2 Learning objectives By completing this module, you should be able to: 1. Understand what constitutes a service concession arrangement 2. Explain the basic principles for the operator to account for service concession arrangements in accordance with IFRS Interpretations Committee (IFRIC) 12 3. Understand the differences between the requirements of IFRIC 12 and U.S. Generally Accepted Accounting Principles (GAAP) 4. Explain the requirements in first-time adoption of IFRS for transitioning from U.S. GAAP to IFRS with respect to service concession arrangements 5. Understand the disclosure requirements for service concession arrangements in accordance with SIC 29 3 2
Introduction Introduction IFRIC 12 issued November 2006 Response to Diversity in practice Calls for guidance IFRIC 12 focuses on Build-Operate-Transfer (BOT) type arrangements Rehabilitate-Operate-Transfer type arrangements IFRIC 12 Addresses accounting by the operator Does not address accounting by the grantor of the concession 5 3
Example of a BOT service concession arrangement Construction Phase Operation Phase 0 Year 5 Year 30 Service: construct a road Cash inflow: none Cash outflow: construction costs Service: operate and maintain a road Cash inflow: road tolls Cash outflow: operating costs Key framing question: What kind of asset, if any, should the operator recognize? 6 Scope 4
Scope General Applies to public-to-private service concession arrangements Does not define but describes common features Infrastructure re is used to deliver er public services A contractual arrangement specifies nature and pricing of services Private sector operator supplies at least some of infrastructure maintenance and related services Infrastructure is returned to the grantor at the end of the concession period or concession period is for whole of infrastructure s useful life Provides guidance on accounting by operator Does not provide guidance on accounting by grantors 8 Scope Criteria An arrangement is within scope of IFRIC 12 if The grantor controls what services are provided using the infrastructure, to whom and at what price AND The grantor controls any significant residual interest in the infrastructure at the end of the term, or the infrastructure is used for all of its useful life 9 5
Knowledge check 1 Which of the following statements is correct? A. IFRIC 12 provides accounting guidance for service concession arrangements for the grantor of an arrangement B. U.S. GAAP defines service concession arrangements and refers to IFRIC 12 in the absence of guidance under U.S. GAAP C. Service concession arrangements as defined in IFRIC 12 do not exist in the United States, which is the reason why there is no specific guidance under U.S. GAAP D. IFRIC 12 provides accounting guidance for service concession arrangements for the operator of an arrangement 10 Knowledge check 1 Debrief: Correct answer is D Incorrect, IFRIC 12 addresses the accounting by the operator, not the grantor of the service concession arrangement Incorrect, U.S. GAAP has no guidance specific to service concession arrangements Incorrect, service concession arrangements do exist in the United States, but there is no specific U.S. GAAP guidance on the accounting for such arrangements. As such, entities need to determine applicable U.S. GAAP for such arrangements Correct, IFRIC 12 provides accounting guidance for service concession arrangements for the operator of an arrangement 11 6
Accounting by the operator Operator s rights over the infrastructure Operator does not recognize the concession infrastructure as its property, plant, and equipment (PPE) Operator does not control the infrastructure Applies irrespective of the extent to which operator bears demand risk of the service concession IFRIC 12 does not apply to operator s own PPE used to carry out its responsibilities under the arrangement 13 7
Construction/upgrade services Account for construction services under/(ias) 11, Construction Contracts Generally, recognize revenue as services performed Allocate total consideration to multiple services based on their relative fair values Revenue (measured at fair value) for construction phase is recognized irrespective of the of the type of asset recognized (next slide) 14 Consideration for construction/upgrade services The operator recognizes compensation for construction/upgrade services as: A financial asset, to the extent that it has an unconditional right to receive cash without regard to usage of the infrastructure (i.e., operator does not bear demand risk) AND/OR An intangible asset, to the extent consideration is dependent on usage of the infrastructure (i.e., operator bears demand risk) 15 8
Borrowing costs If the operator will receive an intangible asset, the intangible asset constitutes a qualifying asset and, in accordance with IAS 23, borrowing costs attributable to the arrangement are capitalized If the operator will receive a financial asset, borrowing costs are expensed as incurred 16 Operation revenue Operation revenue is accounted for in accordance with IAS 18, Revenue Intangible Asset Model: Revenue as earned (i.e., as infrastructure is used and operator has the ability to charge for its use) Costs generally recognized as expense as incurred Intangible asset accounted for in accordance with IAS 38 (amortization/impairment) Additional deliverables accounted for separately (e.g., expansion of infrastructure) Financial Asset Model: Payments received are allocated between principal i (i.e., reduction of the financial i asset) and compensation for operation services (i.e., interest) Costs generally recognized as expense as incurred Disclosure requirements of IFRS 7 apply 17 9
Maintenance obligations Contractual obligations to maintain or restore infrastructure are recognized and measured in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets May be appropriate to recognize obligation as the infrastructure deteriorates Other approaches may be acceptable Any upgrade element is accounted for as a separate revenuegenerating activity 18 Knowledge check 2 Which of the following statements is not correct? A. Under IFRIC 12, the operator does not recognize concession infrastructure as its property, plant and equipment B. Under IFRIC 12, the operator recognizes concession infrastructure as its property, plant and equipment C. Contractual obligations to maintain or restore infrastructure are recognized and measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets D. Borrowing costs attributable to the service concession arrangement is capitalized during the construction phase of the arrangement in accordance with IAS 23 when the operator receives an intangible asset 19 10
Knowledge check 2 Debrief: Correct answer is B A. Incorrect, operator would not recognize the concession infrastructure as its PPE B. Correct, under IFRIC 12, the operator does not recognize concession infrastructure as its property, plant and equipment C. Incorrect, contractual obligations for maintenance and restoration are recognized and measured in accordance with IAS 37 D. Incorrect, borrowing costs are capitalized on the construction phase under the intangible asset model 20 Example Intangible asset and financial asset Municipality A contracts with Entity B to build a toll road and to operate the toll road for five years once the road is constructed The road will take one year to build and the estimated cost to Entity B is $275,000. The estimated fair value of the construction services is $350,000 Municipality A sets the toll at $10 per vehicle throughout the five-year period Municipality A guarantees that Entity B will receive at least $60,000 per year for operating the concession Actual usage during the five-year concession period (years 2 6) is: Year 2 4,800 vehicles Year 3 7,800 vehicles Year 4 9,600 vehicles Year 5 8,400 vehicles Year 6 9,000 vehicles The applicable interest rate for a receivable from Municipality A is 5% Fair value of the financial asset is $259,769 as of 12/31/Year 1 21 11
Example Intangible asset and financial asset (continued) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Amount received $ 60,000 $ 78,000 $ 96,000 $ 84,000 $ 90,000 Revenue $350,000 $ 18,000 $ 36,000 $ 24,000 $ 30,000 Finance income $ 12,988 $ 10,638 $ 8,170 $5,578 578 $ 2,857 Amort $ 18,046 $ 18,046 $ 18,046 $ 18,046 $ 18,047 Construct Expense $275,000 Financial Asset, 12/31 $259,769 $212,757 $163,395 $111,565 $ 57,143 Intangible Asset, 12/31 $ 90,231 $ 72,185 $ 54,139 $ 36,093 $ 18,047 22 Potential IFRS/U.S. GAAP differences 12
Potential IFRS/U.S. GAAP differences Operator s rights over the infrastructure Operator would first consider whether the arrangement contains a lease. If so, lease is classified as capital or operating in accordance with ASC 840, which may result in the recognition of PPE (if a capital lease) Recognition of construction revenue Operator evaluates construction and upgrade services as separate deliverables to determine whether they constitute separate units of accounting or a single unit of accounting If the construction deliverable constitutes a separate unit of accounting, revenue would be allocated to each deliverable based on relative stand-alone selling price basis In arrangements to which the intangible model the contingent revenue provisions of U.S. GAAP would result in little, if any, arrangement consideration being recognized on the construction deliverable Operator should consider whether deferral of construction costs is appropriate in those circumstances 24 Knowledge check 3 Which of the following statements is not correct? A. Under U.S. GAAP, the operator evaluates construction and upgrade services as separate deliverables to determine whether they constitute separate units of accounting or a single unit of accounting B. Under U.S. GAAP, the operator does not evaluate construction and upgrade services as separate deliverables because they constitute a single unit of accounting C. If the construction deliverable constitutes a separate unit of accounting, then revenue recognition generally would be based on the percentage of completion method D. In arrangements to which the intangible model under IFRS would apply, the contingent revenue provisions under U.S. GAAP would result in little, if any, arrangement consideration being recognized during the construction deliverable phase 25 13
Knowledge check 3 Debrief: Correct answer is B A. Incorrect, the operator would evaluate each element to determine whether it is a separate unit of accounting under U.S. GAAP B. Correct, under U.S. GAAP, the operator would evaluate construction and upgrade services to determine whether they are separate units of accounting C. Incorrect, if the construction deliverable is a separate unit of accounting, then revenue would be recognized using the percentage of completion method in accordance with ASC 605-35 D. Incorrect, generally arrangements that are accounted for under the intangible asset model under IFRS will have little if any revenue recognized during the construction phase due to the contingent revenue provisions of ASC 605-25 26 Application of IFRIC 12 to first-time adoption of IFRS 14
Application of IFRIC 12 by first-time adopters of IFRS IFRIC 12 was initially effective for annual periods beginning on or after January 1, 2008 with fully retrospective application required unless retrospective application was impracticable in accordance with IAS 8 A first-time adopter of IFRS may apply the transitional provisions of IFRIC 12. If retrospective application is impracticable, upon first-time adoption of IFRS, entities may: (1) Reclassify assets recognized under U.S. GAAP as a financial asset or intangible asset at the date of transition to IFRS measured using the previous U.S. GAAP carrying amount (2) Test the financial assets and intangible assets for impairment at the date of transition, or if impracticable, at the start of the current reporting period 28 Knowledge check 4 Which of the following statements is correct? A. The transition requirements under IFRIC 12 are not available for first-time adopters of IFRS B. A first-time adopter of IFRS has no optional exemption with respect to the accounting for service concession arrangements C. A first-time adopter of IFRS can elect to continue U.S. GAAP accounting for a service concession arrangement that existed as of the date of transition to IFRS D. The transition requirements under IFRIC 12 are available for first-time adopters of IFRS 29 15
Knowledge check 4 Debrief: Correct answer is D A. Incorrect, the transition provisions of IFRIC 12 are available to a first-time adopter of IFRS B. Incorrect, IFRS 1 does provide an optional exemption for service concession arrangements C. Incorrect, a first-time adopter of IFRS cannot continue to use its previous U.S. GAAP accounting for service concession arrangements D. Correct, the transition requirements of IFRIC 12 are available for first-time adopters of IFRS 30 Disclosure 16
Disclosure requirements for service concession arrangements An operator is required to disclose the following in each period (individually for each significant arrangement or otherwise aggregated by class of arrangements): (1) A description of the arrangement (2) Significant terms of the arrangement that may affect the amount, timing, and certainty of future cash flows (3) The nature and extent of: Rights to use specified assets Obligations to provide or rights to expect provision of services Obligations to acquire or build items of PPE Obligations to deliver or rights to receive specified assets at the end Renewal and termination options Other rights and obligations (e.g., major overhauls) (4) Changes in the arrangement occurring during the period (5) How the service arrangement has been classified (6) Revenue and profit/loss recognized in the period for exchanging construction services for a financial asset or intangible asset 32 Knowledge check 5 Which of the following disclosures are not required for an operator of a service concession arrangement: A. A description of the arrangement B. Changes in the arrangement occurring during the period C. How the service arrangement has been classified D. Details about the grantor of the arrangement (including credit ratings and key financial performance metrics) 33 17
Knowledge check 5 Debrief: Correct answer is D A. Incorrect, the operator is required to provide a description of the arrangement B. Incorrect, the operator is required to describe changes in the arrangement that occurred during the period C. Incorrect, the operator is required to disclose how the arrangement is classified D. Correct, details about the grantor of the arrangement (including credit ratings and key financial performance metrics) are not a required disclosure for the operator 34 KPMG Institutes and training About the KPMG IFRS Institute The KPMG IFRS Institute, part of the KPMG Institute Network, has been created as an open forum where board and audit committee members, executives, management, stakeholders, academia, and government representatives ti can share knowledge, gain insight, i and access thought leadership about the evolving global financial reporting environment. To visit the IFRS Institute, go to www.kpmginstitutes.com/ifrs-institute. Executive Education www.execed.kpmg.com Group live, instructor-led CPE Credit accounting courses, seminars, workshops, and update conferences for corporate accountants and financial executives. 35 18
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