A service concession usually entails a public sector entity (‘the grantor’) getting into a contract with a non-public sector entity (‘the operator’) for the availability of a service that gives the general public entry to essential financial and social services and infrastructure.
In lots of nations, infrastructure for public companies resembling roads, bridges, tunnels, prisons, public hospitals, airports, water distribution services, vitality provide and telecommunication networks are developed, financed, operated, and maintained by public-private partnerships (PPPs).
The operator gives companies to assemble or improve the infrastructure and function and keep the infrastructure for the concession interval. The grantor pays the operator for its companies or grants it the appropriate to cost customers of the service through the association interval. It may be a mixture of each.
Often, on the finish of the concession association interval, the operator transfers the infrastructure to the grantor in a specified situation. Among the monetary reporting challenges with these preparations embrace the therapy of the operator’s rights over the infrastructure, the popularity and measurement of the association compensation along with the operation service, borrowing prices and plenty of extra.
IFRIC 12, Service Concession Preparations, is the interpretation in IFRS that specifies the accounting by the operator solely. Moreover, organisations can draw insights into the anticipated accounting and reporting of the grantor.
Two reporting fashions
The operator in a service concession association, which is the entity charged with financing, constructing, sustaining, and working the infrastructure through the concession interval, applies both of two reporting fashions relying on the character of the compensation given by the grantor to the operator. The 2 reporting fashions are the Monetary asset and the Intangible asset mannequin.
Within the monetary asset mannequin, the operator recognises a receivable on its steadiness sheet to the extent that it has an unconditional contractual proper to obtain money or one other monetary asset from, or on the path of, the grantor for the development companies. This proper arises the place the grantor has little or no discretion to keep away from cost, normally as a result of the settlement is enforceable by regulation.
The operator recognises an intangible asset on the steadiness sheet to the extent that it has a proper to cost customers for the general public service. It isn’t an unconditional proper to obtain money as a result of the quantities collected are contingent on the extent of use of the service. There are additionally preparations the place the operator recognises each a monetary asset and an intangible asset.
There are complexities to making use of every reporting mannequin. They embrace separating the income for operation companies from the development income or the therapy of borrowing prices which will be capitalised within the intangible asset mannequin however expensed within the monetary asset mannequin.
Figuring out which reporting mannequin applies to an association is usually a complicated course of which may require the usage of consultants.
Figuring out these preparations
Primarily based on the 2 fashions mentioned earlier, we see why it’s pertinent for an organisation to establish service concession preparations accurately.
This identification course of requires the organisation to reply a number of questions like, what’s a public service obligation? Who controls the infrastructure earlier than, throughout and after the concession interval? Which get together controls or regulates the general public service and pricing of the general public service? This checklist isn’t exhaustive however highlights the complexities of figuring out service concession preparations.
Because the operator doesn’t recognise the infrastructure on its steadiness sheet, one perception to attract from these preparations for grantors is that grantors normally may have the infrastructure on their steadiness sheet. It’s one among many indicators for service concession association that affirm whether or not the suitable reporting mannequin was utilized.
Akinyemi Awodumila is an Affiliate Director at PwC Kenya. An writer who writes and speaks broadly on company reporting matters.