Ind AS 115 | Service Concession Arrangements | Accounting Treatment

About Service Concession Arrangements

Ind AS 115 | Such types of arrangements involve the construction of infrastructure used to provide public services. It also involves operating and maintaining that infrastructure for a specified period of time.

It is also called the "Build-operate-transfer" or "Public-to-Private" service concession arrangement.

It is of the public service nature because it has some involvement of infrastructure which is used by the general public. It can be bridges, roads, national highways, etc.

Accounting Principles

Treatment of the operator's rights over the infrastructure

Infrastructure under this arrangement shall not be recognized as Property-Plant-and- Equipment (PPE).  It is because this type of arrangement does not give the right to control the use of the public service infrastructure to the operator.

But yes, the operator has access to operate the infrastructure to provide the public service on behalf of the granter in accordance with the terms specified in the contract.

Recognition and Measurement

As we know that the operator is acting as a service provider, he shall recognize revenue in accordance with Indian Accounting Standard (Ind AS) 115.

Oh yes, if the operator is performing more than one service under a single contract, the consideration received from the customer shall be allocated based on the fair value of the services provided.

Consideration given by the granter to the operator

The granter can provide the operator with the consideration which shall be recognized at fair value. 

The consideration may be:

Right to a financial asset: It can be an unconditional right to receive cash or another financial asset from or at the direction of the granter for the construction services.

Right to an intangible asset: It is a right to charge users of the public service. It is an unconditional right because it is based on the usage of the service of infrastructure.

Contractual Obligation to restore the infrastructure to a specified level of serviceability

Borrowing costs incurred by the operator

Unless the consideration is a right to intangible assets, the borrowing cost incurred after the construction phase is over shall be expensed off in the profit and loss statement of the operator.

But do remember, borrowing cost attributable to the arrangement shall be capitalized during the construction phase of the arrangement

Recognition of Financial Asset and Intangible Asset

To recognize the financial assets, an entity is required to apply Ind AS 32, Ind AS 107, and Ind AS 109. 

On the other hand, in the case of recognizing an intangible asset, one has to apply Ind AS 38 for guidance on measuring intangible assets acquired in exchange for a non-monetary asset or assets.

Such consideration received from granter in exchange for a non-monetary asset shall be treated as government grant as defined in Ind AS 20.

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DISCLAIMER 

The information provided in this article is for general informational purposes only. All efforts have been made to provide accurate information in this document, however, it should not be perceived as professional or legal advice. The reader should consult a professional before making any decision based upon this document. Under no circumstance, the author or the publisher shall have any liability to you for any loss or damage of any kind incurred as a result of the use of this information.