This article shares and discusses the accounting requirements for service concession agreements from the grantor’s perspective. In the private sector, reporting entities are the parties who enter into the service concession arrangements with the government or public sector entities (known as the grantor) to provide public service on their behalf. The private sector entities are known as the operator under the service concession arrangement.
For an arrangement to be under this standard, the service arrangement must involve:
- Providing or delivery of public services by the operator; and
- The service and management component of the asset is controlled by the grantor.
This standard aims at “mirroring” the accounting requirements in IC Interpretation 12 Service Concession Arrangements (“IFRIC 12”). IFRIC 12 stipulates the accounting requirements for private sector as operator while this standard deals with the grantor accounting. Accordingly, the scope, the principles for recognition of an asset, and the terminology used are consistent with IFRIC 12.
Summary of IFRIC 12 Service Concession Arrangements
Before we can appreciate the accounting requirements for grantor under the service concession arrangement, let us first understand what are the accounting requirements for service concession operator under IFRIC 12.
IFRIC 12 is applied for public-to-private service concession arrangement if both are met:
- The grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them and at what price the services are provided.
- 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. This is regardless of whether the infrastructure is (i) constructed or acquired from a third party by the operator for the purpose of the service arrangement; and (ii) existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.
As for the accounting requirements for the operator, IFRIC 12 stipulates that:
- Treatment for the service concession infrastructure – The operator will not recognise the service concession infrastructure as its property, plant and equipment. This is because the contractual service arrangement does not convey the right for the operator to control the use of the infrastructure. The operator only has the right to operate or access the infrastructure in order to provide public service on behalf of the grantor.
- Treatment for the consideration received – The operator will need to measure and recognise revenue for the services it performed in accordance with MFRS 15 Revenue from Contracts with Customers. In service concession arrangements, the operator constructs or upgrades infrastructures as well as operates and maintains that infrastructure for a specified period of time. Consideration received or receivables by the operator may either be a right to a financial asset or an intangible asset, depending on the contractual rights (i.e., the contract terms and relevant contract law) of the operator as stated in the service concession agreement.
What are the accounting requirements in MPSAS 32 Service Concession Arrangements for grantor?
As now we know that under IFRIC 12, the operator does not recognise the service concession asset as the grantor controls any significant residual interest in the asset at the end of the term of the arrangement. On the grantor’s side, MPSAS 32 then requires the grantor to recognise the service concession asset at its fair value, except where the service concession asset is the existing asset of the grantor. In such a situation, the grantor is required to reclassify the existing asset as a service concession asset and is accounted in accordance with MPSAS 17 Property, Plant and Equipment or MPSAS 31 Intangible Assets.
MPSAS 32 further states that where the grantor recognises a service concession asset, it should also recognise a liability as the corresponding entry. This does not apply if the service concession arrangement involves the existing asset of the grantor. In such a situation, no liability is recognised when the asset is reclassified as a service concession asset.
To compensate the operator for the service concession asset, the grantor may either:
- Making payments to the operator (known as the “financial liability” model);
- Compensation by other means such as granting the operator the right to earn revenue from third-party users of the service concession asset or other revenue-generating assets for the operator’s use (known as “grant of a right to the operator” model); or
- Combination of (1) and (2) above.
The financial liability model is built on the basis that the grantor has an unconditional obligation to pay cash or another financial asset to the operator for the service concession asset. This, in contrast, reflects the operator’s right to receive cash or other financial assets from the grantor (i.e. financial asset model adopted by the operator). The financial liability model is applied if the grantor has guaranteed to the operator to pay either (i) specified or determinable amounts, or (ii) the shortfall between amounts received by the operator from the users and specified or determinable amounts in the contract. The payments made to the operator will need to be allocated between amount to reflect the reduction in the liability, a finance charge and charges for services provided by the operator. Finance charge and charges for services will be accounted for by the grantor as expenses.
As for the “grant of a right to the operator” model, it is only applied when the grantor does not have an unconditional obligation to pay cash or another financial asset to the operator for the service concession asset. The liability recognised is treated as an unearned portion of revenue arising from the exchange of assets between the grantor and the operator – exchange of the service concession asset against the right to earn revenue. The liability is reduced when the grantor recognises revenue based on the economic substance of the service concession arrangement.
In a situation where the grantor pays or compensate the operator using the combination of the above methods (i.e., partly by incurring financial liability and partly by the grant of a right to the operator), MPSAS 32 requires entities to account for them separately for each part of the total liability recognised.
What are other accounting considerations under MPSAS 32 Service Concession Arrangements – Grantor?
In addition to the accounting requirements discussed earlier, MPSAS 32 also states that the grantor shall also consider and account for other liabilities, commitments, contingent liabilities and contingent assets which may arise from a service concession arrangement. The grantor should account for such item in accordance with the requirements in the relevant MPSAS such as MPSAS 19 Provisions, Contingent Liabilities and Contingent Assets.
Where the grantor also entitles to revenues from a service concession arrangement besides those specified earlier, the grantor should account for such revenue in accordance with MPSAS 9 Revenue from Exchange Transactions. MPSAS 32 also stipulates presentation and disclosure requirements that the grantor needs to take note.
The full details of MPSAS 32 Service Concession Arrangements – Grantor is available on the Accountant General’s Department of Malaysia’s website for your reference.
We will continue to discuss on other MPSASs in our upcoming articles. Meantime, please enjoy reading other articles in the Financial Accounting section.