IFRIC 12: Service Concession Arrangements

IFRIC 12 provides guidance on accounting for service concession arrangements, where a government or public sector entity (the "grantor") contracts a private entity (the "operator") to develop, operate, and maintain infrastructure assets for public services.

Understanding IFRIC 12 is crucial for businesses involved in highways, airports, hospitals, and utilities. The right accounting treatment can make a difference in financial reporting and investor confidence.

?Key Take aways:

1.?????? The following type of contract falls under IFRIC 12:

BOT (Build Operate Transfer)-The operator builds the asset and operates it for a specified period before transferring it back to the grantor.

BOOT (Build Own Operate Transfer)-Only difference from BOT is that the operator owns the asset during the concession period.

ROT (Rehabilitate Operate Transfer)-The operator rehabilitates and operates the asset before transferring back to grantor.

2.?????? Operator does not recognize Infrastructure as a Fixed Asset, Instead, it follows either of the below three Accounting Models:

Financial Asset Model- Used if the operator has an unconditional contractual right to receive cash or another financial asset from the grantor. The financial asset is measured at fair value and subsequently through amortized cost or fair value through profit or loss.

Intangible Asset Model- Used if the operator receives the right to charge users for the service. The intangible asset is initially measured at fair value and amortized over its useful life.

Hybrid approach- A combination of both models may be used if the arrangement includes both guaranteed payments and user charges.?

3.?????? Revenue is recognized based on IFRS 15 (Revenue from Contracts with Customers), considering construction, operation, and maintenance services separately.

4.?????? Costs of maintenance and operation should be expensed as incurred.

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