Construction contracts and Service Concession agreements. IFRS Ind AS

Transcription

1 Construction contracts and Service Concession agreements `

2 Section 1 Construction contracts

3 What are construction contracts? What is a construction contract? How does it differ from sale of goods? Slide 3

4 Construction contracts - Quick Quiz IAS 18 IAS 11 A sports car with air conditioning, flash gear box, large wheels, quadruple exhaust and 12 speakers A newspaper printing machine designed to meet the requirements of Big Business newspaper which is printed on triangular paper to give a more pointed view Contract with an architect to design an office building Contract for construction of a hospital for the government

5 Construction contracts Combining and segmenting contracts Contract covers a number of assets A group of contracts Optional additional asset in contract Only separate if: Separate proposals and negotiation Costs and revenues can be identified Combine if: Negotiated together Closely interrelated Performed concurrently or in continuous sequence Only separate if: Significantly different Price negotiated without regard to original contract Slide 5

6 Construction contracts Recognising Revenue Key Criteria Revenue can be measured reliably Probable that the economic benefits will flow to the entity Stage of completion can be measured reliably Fixed Cost Plus Price Contract Costs can be measured reliably

7 Section 1 IFRIC 15 and guidance on which standard applies

8 IAS 11 or IAS 18 Which standard applies CONSTRUCTION OF AN ASSET IFRIC 15 SPECIFICALLY NEGOTIATED A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use. Slide 8

9 IFRIC 15 Guidance Specify major structural elements Limited ability to influence design IAS 11 IAS 18 Slide 9

10 IAS 11 or IAS 18? Application by analogy example Entity A develops and sells tailored computer hardware Assume this development meets definition of construction contract in IAS 11 Entity A also sells software to run on computers it develops Software comprises a two year licence and after sales support for those two years Progress payments are required during hardware development Additional fee is payable at start of licence Conclusion IFRIC 15 is used by analogy Hardware development is accounted for under IAS 11 Software licence and after-sales support is under IAS 18 Slide 10

11 Section 3 IFRIC 12 Service concession arrangements

12 Introduction Applies to contractual arrangements in which a private sector operator participates in the development, financing, operation, and maintenance of infrastructure for public sector services. Public service nature of obligation eg. energy supply, road, railways, etc. Guidance on the accounting by Operators for public-to-private service concession arrangements. Key terms Built Operate Transfer (BOT) Rehabilitate Operate Transfer (ROT) Grantor Operator Slide 12

13 Scope A transaction is covered by IFRIC 12 when the following conditions are met: Cumulative Conditions 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 grantor controls through ownership, beneficial entitlement or otherwise any significant residual interest in the infrastructure at the end of the term of the arrangement. The operator is obliged to hand over the infrastructure to the grantor in a specified condition at the end of the arrangement. Infrastructure used for its entire useful life is within the scope if the control on the infrastructure asset is held by the grantor.

14 Decision Tree Does the grantor control or regulate what services the operator must provide with the infrastructure, to whom it must provide and at what price? No Yes OUTSIDE THE SCOPE OF IFRIC 12 Does the grantor control, through ownership, beneficial entitlement or otherwise, any significant residual interest in the infrastructure at the end of the service arrangement? No Yes Is the infrastructure constructed or acquired by the operator from a third party? Or is the infrastructure used in the arrangement for its entire useful life? Yes No No Is the infrastructure existing infrastructure of the grantor to which the operator is given access for the purpose of the service arrangement? Yes WITHIN THE SCOPE OF IFRIC 12 Operator does not recognise infrastructure as property, plant and equipment or as a leased asset. Slide 14

15 Typical public-to-private arrangements Category Lessee Service Provider Owner Typical Arrangement Types Lease (eg. operator leases asset from grantor) Service and/or maintenance contract (specific tasks eg. collection of debt) Rehabilitate Operate Transfer Build Operate Transfer Build Own Operate 100% Divestment/ Privatisation Corporation Asset Ownership Capital Investment Demand Risk Grantor Operator Operator and/or Grantor Typical Duration years Residual Interest Grantor Relevant IFRS IFRIC 12 Slide 15

16 Typical public-to-private arrangements Category Lessee Service Provider Owner Typical Arrangement Types Lease (eg. operator leases asset from grantor) Service and/or maintenance contract (specific tasks eg. collection of debt) Rehabilitate Operate Transfer Build Operate Transfer Build Own Operate 100% Divestment/ Privatisation Corporation Asset Ownership Grantor Grantor Operator Capital Investment Grantor Operator Operator Demand Risk Shared Grantor Operator and/or Grantor Operator Typical Duration 8-20 years 1-5 years years years Indefinite (or may be limited by license) Residual Interest Grantor Grantor Operator Relevant IFRS IAS 17 IAS 18 IFRIC 12 IAS 16 Slide 16

17 Recognition and measurement of Infrastructure assets Does the operator have a contractual right to receive cash or other financial asset from or at the direction of the grantor? Yes Operator recognises a FINANCIAL ASSET to the extent that it has a contractual right to receive cash or another financial asset. Initial Recognition Recognise the infrastructure assets as a) Loans or receivable, b) Available for sale, or c) FV through profit and loss Subsequent Measurement a) If infrastructure asset is recognised as Loans and receivables - Amortised Cost, b) If infrastructure asset is recognised as Available for sale or FV through Profit and loss - At Fair value. Does the operator have a contractual right to charge the users of the public services? Yes Operator recognises a INTANGIBLE ASSET to the extent that it has a contractual right to receive cash or another financial asset. Initial Recognition Recognise the infrastructure assets at cost in accordance with IAS 38, Intangible Assets till the construction activity, that is fair value of the construction services provided. Subsequent Measurement The infrastructure assets are measured at lower of : a) fair value or b) at cost less amortisation,, Infrastructure asset within the scope of IFRIC 12 is NOT recognised as property, plant and equipment of the operator as the arrangement does not convey the right to control the use of the infrastructure to the operator.

18 Quick Quiz Grantor pays operator specific or determinable payments and bears demand risk. Grantor pays operator based on usage and operator bears demand risk. User pays operator based on usage and operator bears demand risk Grantor pays operator variable amounts contingent on performance or availability. Users pay operator but price charged is varied by regulator to ensure that operator receives a substantially fixed return. Operator bears demand risk if that risk is low. Users pay operator and concession continues until operator has achieved its return on investments. Operator bears demand risk through the concession period. Users pay operator based on usage, but grantor guarantees that payment will not fall below a specified minimum (Shortfall guarantee). Demand risk shared between grantor and operator. Recognise as Financial or Intangible asset Slide 18

19 Particulars Technical Ref. Financial asset Intangible asset Construction revenue and cost incurred during the construction period Operating and maintenance revenue and cost incurred post construction period IAS 11 Percentage Completion Method As per IAS 18 Principles Finance income IAS 39 EIR Borrowing cost till construction phase IAS 23R Charged off to P & L Capitalise Contractual obligations to maintain or restore infrastructure IAS 37 PV of obligation based on best estimate Slide 19

20 IFRS 1 / Transition provision First-time adopters may elect to use the transitional provisions of IFRIC 12 rather than full retrospective application. When it is impractical for a company to apply IFRIC 12 retrospectively to the start of the earliest period presented, the IFRIC 12 transition provisions allow a company to: a. recognise financial assets and intangible assets that existed at the start of the earliest period presented; b. use the previous carrying amounts of those financial and intangible assets (however previously classified) as their carrying amounts as at that date; and c. test financial and intangible assets recognised at that date for impairment, unless this is not practicable, in which case the amounts shall be tested for impairment as at the start of the current period. Slide 20

21 Disclosure The disclosure requirements relating to Service concession arrangements are contained in SIC 29, Service concession arrangements: Disclosures. Disclosures required for each service concession arrangement or in aggregate for each class of service concession arrangement. SIC 29 states that the common characteristic of all service concession arrangements is that the operator both receives a right and incurs an obligation to provide public services. The disclosure requirements are centered round this requirement. Major ones are: Description of the arrangement along with significant terms of the arrangement Description of rights and obligations involved in the arrangement of the operator Any changes during the arrangement terms during the period. Classification of the arrangement. Disclosure of amount of revenue and profits or losses recognized in the period on exchanging construction services for a financial / intangible asset. Slide 21

22 Any questions? Thank You This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, Pratiq Shah or the Company for which he works, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior written permission of Pratiq Shah, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents.