Questionnaire EFFECT STUDY ON IFRIC 12 SERVICE CONCESSION ARRANGEMENTS

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Beverly Stevenson
6 years ago
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1 Questionnaire EFFECT STUDY ON IFRIC 12 SERVICE CONCESSION ARRANGEMENTS Please provide the following details together with your response: X Preparer User Other (please specify) REN- Redes Energéticas Nacionais (SGPS), S.A. Short description of the general activity of our organization: REN Group is the provider of transportation and management services for the electricity national system and natural gas national system, on behalf of the Portuguese Government. These activities are regulated by concession arrangements. REN Group has 4 concession arrangements: 1 Concession for transportation, and overall management of the SEP (Public Electricity Supply System. 2 - Concession for transportation, and overall management of the SNGN (National Natural Gas System) 3 Concession for reception, storage, and treatment of Liquefied Natural Gas 4 Concession for natural gas underground storage The arrangement referred above in point 1, is supported by a concession contract for a 50 year period. According to this contract Group REN is required to construct the infrastructure assets, used to provide the above mentioned services. Under the concession arrangement and the regulatory terms, Group REN is entitled to an annual permitted result calculated based on the remuneration of the average net book value of the assets allocated to this activity, according to the interest rates determined annually by the regulator. The Concession arrangements referred in point 2, 3 and 4 are supported by concession contracts for a 40 year period. According to these contracts Group REN is required to construct/ acquire the infrastructure assets, used to provide the above mentioned services. According to concession arrangements referred above in point 2 and 3 and regulatory terms, Group REN is entitled to a permitted result estimated for the total concession period, comprising the concession assets allocated to this activity depreciation charge recovery and a remuneration determined by the regulator. Under the concession arrangement referred above in point 4 and the regulatory terms, Group REN is entitled to a permitted result calculated based on the remuneration of the average net book value of the assets allocated to this activity, according to the interest rates determined annually by the regulator.

2 Country where our organization is located: Portugal Contact details incl. address: REN Redes Energéticas Nacionais, SGPS, S.A. Av. Estados Unidos da América, LISBOA Telephone: Please indicate whether you submitted comments to IASB and/or EFRAG during their consultations on exposure drafts, comment letters or endorsement advice related to IFRIC 12 X No In case we need further details on the submitted information we will take the liberty to contact the relevant respondent. Information from preparers Markets where your company is listed: X European Union US Others (please specify) Size on group level: Total assets: Revenues: Employees: General questions on IFRIC 12 a) Do you think it is necessary to clarify the accounting treatment to be applied to service concessions arrangements under IFRS? X Yes Due to service concession arrangements specific terms, several issues arise relating to the accounting treatment under IFRS, especially in what refers to concession assets control and ownership, and revenue recognition. b) Do you think that IFRIC 12 will result in relevant, reliable, comparable and understandable information?

3 Relevant X Partly Reliable X Partly Comparable X Partly Understandable X Partly The adoption of IFRIC 12 may impact the relevance of financial statement if we consider that information about financial position and past performance is frequently used as the basis for predicting future financial position and performance and other matters in which users are directly interested, such as dividend. In what concerns Group REN the adoption of IFRIC 12, impacts mainly balance sheet with the recognition of an intangible asset and a financial asset, instead of recognizing fixed assets. Group REN major concern refers to the fact that construction services are provided continuously during the concession period, with the recognition of an increasingly amount of assets residual value as a financial asset. Since the financial assets are measured at present value, questions arise about the discount rate to use and the comparability of assets recognised in the balance sheet at each period with the value of assets used to determine the concession return allowed by the regulator. c) Overall, do you think that IFRIC 12 provides an appropriate solution to the accounting for service concession arrangements? X No From our point of view IFRIC tried to issue an interpretation broad enough to apply to different types of service concession arrangements. However, from our analysis it seems that the accounting treatment foreseen in IFRIC 12 is some how limited to situations where there is no obligation to make significant and systematic investments during the concession period, instead of having the one or two first years of the concession as the construction period with only periodic maintenance obligations for the remaining period. Additionally IFRIC 12 does not give much guidance about the applicable discount rates to measure a financial asset, when financial asset model applies, especially when the concession arrangement does not have a business case at concession arrangement inception date. d) Would you have preferred a standard to address this issue? X Yes

4 The issuance of a new standard would require further studying on several aspects of the concession arrangements, especially in what refers to transitional treatment for existing old concession arrangements, discount rates, etc. e) If you answered yes to question 1d, would you consider that endorsement of IFRIC 12 is necessary or useful in the meantime? Necessary Useful X Neither of them f) What do you consider are the main costs and benefits of IFRIC 12 and what importance would you assign to each of them? Being the service concession arrangements strongly regulated, the adoption of IFRIC 12, will impact significantly on the presentation of the Group Balance Sheet and its traceability to regulated accounts, since it is not expected that the Regulator considers IFRIC 12 impacts for the determination of tariffs. This situation will increase the work load on the conciliation and explanation of the differences between Group s financial statements and regulated accounts. Additionally, the adoption of IFRIC 12 implies a change in the market/ investors mind set, since the expected return from Group s activities is linked to the expected regulated return on assets. The fact that the concession s right is accounted partly as a financial asset, subject to a discount rate does not reflect the amount that must be considered for the determination of assets remuneration. 2. Questions for preparers a) Can you explain how significant service concession arrangements are for your business? X Significant t significant Additional information, if possible: Turnover related to service concession arrangements (amount in millions Euros, % of the total turnover) Group REN significant activities (corresponding to more than 90% of turnover) are all performed under concession arrangements, as described above. b) Are you currently applying IFRIC 12 or expecting to apply it in the short term? applying forecasting X Neither of them Group REN did not apply IFRIC 12 since this has not been endorsed by European Union until this date. We also expect more clarification and analysis on the impacts of adopting this IFRIC, to our concession contracts.

5 c) If you are currently not applying IFRIC 12, could you describe current accounting treatment applied to service concession arrangements? The concession s assets are recognised as fixed assets, measured according to its construction/acquisition cost and subject to depreciation according to its expected useful lives, as the current practice for this industry in Portugal and several European countries. d) Do you think that IFRIC provides/would provide useful information for internal purposes or other than issuing general purpose financial statements purposes? X No For internal purposes the assets acquired/constructed under the concession arrangement are operationally managed as fixed assets. This is an historical approach that approximates regulated accounts. The adoption of IFRIC 12 would impact mainly the external reporting. 3. Questions for users a) Can you explain what kind of information you need to analyse companies with service concession arrangements? b) Do you think that IFRIC 12 provides you with the kind of information you are looking for? c) Do you think that IFRIC 12 will help you to better assess a company's management stewardship and relative performance compared to others? 4. Other Questions a) Can you provide any information that has been generated by field studies, research work, internal analysis carried out in your organization, jurisdiction? According to the internal analysis performed about this subject, we conclude that our concession arrangements are within the scope of IFRIC 12, and should be accounted for according to the mix-model, with the recognition of an intangible asset for the right to charge users and a financial asset for the right to receive the concession s assets net book value, at concession term (grantor has a call option). However, several issues arise relating to: i) accounting treatment for assets constructed along the concession period;

6 ii) iii) discount rate to be used to calculate present value of concession assets residual value, to be received from the grantor in the concession term; the accounting treatment of borrowing costs, when concession assets residual value is accounted for as a financial asset. b) If you have any further comments on this consultation please provide them to us.

Questionnaire EFFECT STUDY ON IFRIC 12 SERVICE CONCESSION ARRANGEMENTS. Please provide the following details together with your response:

Questionnaire EFFECT STUDY ON IFRIC 12 SERVICE CONCESSION ARRANGEMENTS Please provide the following details together with your response: X Preparer User Other (please specify) Name of your organization