Service concessions: grantor accounting Reporting Update 4 August 2017, 17RU-004 Highlights New era for grantors of service concessions Scope of AASB 1059 Grantor accounting requirements Transition requirements Other matters New era for grantors of service concessions AASB 1059 applies to the public sector entities as grantors in service concession arrangements Control approach followed in AASB 1059 The Australian Accounting Standards Board (AASB) has issued AASB 1059 Service Concession Arrangements: Grantor (AASB 1059) which provides accounting guidance for public sector entities (grantors) who enter into service concession arrangements with private sector operators. The standard is applicable to public sector entities (both for-profit and not-forprofit) for years beginning on or after 1 January 2019. AASB 1059 was developed to address the divergence in current practice and requires grantors to recognise a service concession asset and, in most cases, a corresponding liability on the balance sheet. The standard follows a control approach to assessing service concession arrangements. The initial balance sheet impact, as well as the subsequent profit and loss impact, is a significant change to current practice and could have wider implications for grantors. AASB 1059 will not apply to private sector concession operators. These entities will continue to apply Interpretation 12 Service Concession Arrangements where appropriate. We believe that this standard will have a significant impact on public sector balance sheets, including the need to reassess the accounting for many existing contractual arrangements which may currently be treated as leases or executory contracts. Andrew King CFO Advisory Patricia Stebbens Department of Professional Practice 1
Scope of AASB 1059 AASB 1059 applies to arrangements that meet the following criteria: involve a service concession asset an operator has access to in order to provide public services; within which the operator is responsible for the management of at least some of those services for a period of time; the operator receives compensation for its services; and the grantor controls the service concession asset. The decision tree below assists in considering the scope of arrangements that would be accounted for under AASB 1059. * Service Concession Asset is an asset (other than goodwill, and to which the operator has a right of access) that is: Constructed, developed or acquired from a third party by the operator; or An upgrade / major component replacement; or An existing asset of the operator; or An existing asset of the grantor (including a previously unrecognised identifiable intangible asset and land under roads). 2
Grantor accounting requirements Grantors recognise a service concession asset and a corresponding financial liability and/or grant of right liability Service concession assets Under AASB 1059, the grantor recognises a service concession asset in a service concession arrangement where it controls the asset (see decision tree above). Initial recognition Where the asset is provided by the operator, or is an upgrade to or a major component replacement of an existing asset of the grantor, the asset is recognised at current replacement cost based on AASB 13 Fair Value Measurement principles. Remeasure existing assets at current replacement cost Recognise previously unrecognised intangible assets at current replacement cost Where the asset is an existing asset of the grantor, the asset is reclassified as a service concession asset and remeasured at current replacement cost at the date of reclassification. This requirement applies to, for example, previously unrecognised intangible assets, excluding goodwill, and land under roads. Any difference between the previous carrying amount and current replacement cost is recognised as if it is a revaluation of the asset. AASB 1059 clarifies that this does not mean that the grantor has adopted the revaluation model and is the prescribed accounting for the difference on reclassification only. Subsequent to initial recognition Subsequent to initial recognition or reclassification, the grantor accounts for the asset under either AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets, with any impairment recognised in accordance with AASB 136 Impairment of Assets. The depreciation or amortisation expense is recognised over the asset s useful life, not the concession term. Where the grantor follows the revaluation model, fair value is determined using current replacement cost as the measure of fair value. Furthermore, for the duration of the arrangement, the active market requirements of AASB 138 for revaluation of intangible assets do not apply. At the end of the arrangement At the end of the service concession arrangement: the grantor accounts for the asset in accordance with other Accounting Standards, with the grantor reclassifying the asset based on its nature or function; reference to fair value reverts from the mandated current replacement cost under AASB 1059 to any of the approaches in AASB 13; and the asset is only derecognised when the grantor loses control of the asset in accordance with AASB 116 or AASB 138 (and not necessarily at the end of the term of the service concession arrangement). KPMG observation For arrangements where the operator constructs a service concession asset, the timing of the balance sheet impact for the grantor could be earlier than current practice. The standard requires recognition of service concession assets during the construction/development phase, which may be earlier than when most grantors would currently be recognising such assets. 2
Service concession liabilities The grantor recognises a liability relating to the service concession asset, except when the asset is an existing asset of the grantor, and no additional consideration is provided by the operator. Classification of liability will depend on nature of the consideration exchanged Depending on the nature of the consideration given to the operator, the grantor applies either the financial liability model or the grant of right model. Operator receives specified or determinable amounts from the grantor* Grantor provides the operator with a right to charge users of the asset Financial liability Grant of right liability recognised as unearned portion of revenue Recognise interest expense over the term of the concession period as payments are made Recognise revenue and reduce the liability according to economic substance of service concession arrangement * Determinable amounts include payments made by grantor for third-party usage of a service concession asset, with or without guaranteeing a minimum amount to the operator. The arrangement is a hybrid arrangement where the compensation model is partly a financial liability model and partly a grant of a right model. In such cases, the grantor splits the liability and accounts for each part separately in accordance with the relevant requirements. KPMG observation The accounting for service concession arrangements based on a control approach may result in an increase in the recognition of assets and liabilities by grantors. For example, in-scope arrangements where third-party users pay for the asset (i.e. economic infrastructure arrangements) would now be recognised. In certain jurisdictions, these type of arrangements are not generally being recognised by grantors at present. Disclosures The standard requires specific disclosures to enable an understanding of the nature, amount, timing and uncertainty of assets, liabilities, revenue and cash flows arising from service concession arrangements. Transition requirements An entity may choose to adopt the new standard either: a. fully retrospectively to each prior period; or b. by recognising and measuring the service concession assets and related liabilities at the date of initial application (DIA). The DIA is the beginning of the earliest period for which comparative information is presented in the financial statements. Under (b), the asset will be recognised at deemed cost which is the current replacement cost in accordance with AASB 13 at that date. Any associated grant of right liability is measured as the fair value of the related asset, adjusted to reflect the remaining period of service relative to the economic life of the service concession asset. For hybrid arrangements, any related financial liabilities are also separately recognised from the grant of right liability. The net difference between the assets and liabilities recognised is reflected as an adjustment to opening retained earnings. 3
Application of AASB 1059 may require the derecognition or adjustment of any service concession assets or liabilities recognised under previous accounting policies. Any net difference is reflected as an adjustment to opening retained earnings. Other matters Compliance with IFRS Public sector entities that enter into service concession arrangements may no longer be able to state compliance with IFRS Public sector entities applying AASB 1059 may not be able to state compliance with IFRS due to the following: the requirement to recognise intangible assets on entering a service concession arrangement that would not have met the recognition requirements under AASB 138; and the requirement to recognise revenue based on the economic substance of the arrangement under the grant of a right model which may not be consistent with the requirements of AASB 15. Whilst not necessarily causing non-compliance with IFRS, AASB 1059 requires grantors applying the revaluation model to measure the fair value using current replacement cost, rather than other allowable methods under AASB 13. This requirement narrows the measurement bases previously available under AASB 13 principles, and may cause non-compliance where another valuation technique maximises the use of relevant observable inputs and minimises the use of unobservable inputs which is the requirement of AASB 13. Comparison to IPSAS 32 Service Concession Arrangements: Grantor The standard is broadly consistent with IPSAS 32 Service Concession Arrangements: Grantor issued by the International Public Sector Accounting Standards Board (IPSASB) other than the exceptions to compliance with IFRS above, which are similarly relevant for IPSAS 32. Additional exceptions to IPSAS 32 include that AASB 1059 applies also to for profit grantors, does not have additional guidance for other revenues and requires obligations for shadow tolls (where payments are made directly by the grantor to the operator) to be recognised as a financial liability rather than expensed when paid. Contacts Andrew King T: (02) 9455 9080 E: aking1@kpmg.com.au Patricia Stebbens T: (03) 9288 6261 E: pstebbens@kpmg.com.au Heather Watson T: (02) 9455 9438 E: hwatson4@kpmg.com.au Etienne Gouws T: (03) 9838 4221 E: egouws1@kpmg.com.au Emma Pratt T: (07) 3233 9775 E: epratt1@kpmg.com.au The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise). 4