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Comments from ACCA
June 2005

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the draft Interpretations D12, D13 and D14 which all relate to the above subject. The draft interpretations were considered at a recent meeting of ACCA’s Financial Reporting Committee.

Our overall view is that the interpretations should not be published in their existing form. We appreciate the requests for guidance by preparers and others involved in applying IFRS when these service concessions are material to the financial statements. There are, however, fundamental aspects of the approach of these interpretations which need to be readdressed and it would be better if official guidance on the subject were got right, than if something unsatisfactory was available now. The withdrawal and replacement of guidance once it has been issued tends to be difficult. Even if these interpretations cannot be issued, there might be some practices that IFRIC could clearly state as not in accordance with IFRS and then go on to more comprehensive guidance at a later stage. Given the range of the issues that need to be addressed, the guidance would probably be better as a standard than as IFRIC interpretations.

D12 Determining the accounting model

Q1. Scope

We think that the scope of application is too narrow. There will be important arrangements for the provision of assets for the public sector by the private sector, which will already (or will be engineered to) fall outside the scope. This will lead to different accounting treatments for economically very comparable arrangements and a lack of guidance on these other sorts of arrangements.
D12-14 are limited to cases where the assets are controlled by the public sector. This boundary is determined by control of the service provided and an interest in the residual value as set out in paragraph 5. There are no other considerations of the exposure to risks and rewards – particularly demand risk. If the operator retains the demand risk essentially in our view they should include the asset as its property under IAS16, and if not they should have a financial asset.

It seems anomalous that only one sort of risk (that of the residual value) is considered. The UK’s standard in this area Application Note F to FRS5 depends primarily on an assessment of the balance of risks, rather than an assessment of control. Application Note F includes a series of risks to help decide whether the balance of risk lies with the operator or the grantor.

• Demand risk
• The extent of third party revenue and who gets the benefit from it
• Design risk and control over specification
• Cost variations in construction and operation
• Risk of underperformance of the asset
• Risk of obsolescence
• Residual value

Even taking the existing narrow conditions in D12 there may be uncertainties over the degree of control over to whom and at what price the service is provided. Paragraph C3 though helpful in this regard, sets out rather extreme positions whereas practice is less likely to be so clear cut.

The other issue of scope which might inappropriately restrict the guidance is the need for a public service obligation in paragraph 2. There might be public-to-private contracts that did not meet this public service obligation – leases for assets used by governments in carrying out administrative functions. The definition of what is a public service will vary from country to country and therefore forms no basis for comparability.

Q2. Financial asset or intangible asset

We are concerned that the accounting is being driven by form and not by the economic substance.

• The financial reporting is very different in D13 from that in D14, as is made clear with an example identical in facts except for the payer of the ‘tolls’. In one the government pays shadow tolls dependent on usage. In the other example the tolls are paid by the public using the asset. The revenue figures are very different with the two models as are the profile of the profits earned over the life of the project.
• In the basis for conclusions even where the return of the operator is guaranteed by the grantor (paragraphs BC40 to 43) the model used would still be different from the example where the grantor pays the operator.

There will be cases where receipts are partially from the government and partly from users, and we are not sure that these are adequately addressed.

Q3. Use of substance in determining the identity of the payer

Given for example the guidance on guaranteed returns noted above, we are unclear what is meant by paragraph 13 and BC44.

Q4. Application date

It is difficult to see how an interpretation of existing standards can have anything but an immediate effect. The press release refers to existing practices can continue in the meantime as long as they are not inconsistent with IFRS. These interpretations supposedly set this out, so again it is difficult to see how preparers can really do anything other than follow this interpretation (if it is published).

D13 – the financial asset model

Q1 Revenue from different contractual obligations

The interpretations should address the general question of the different elements within a single contract (e.g. to provide the asset, maintain it and provide associated services) and when there should be an unbundling of these or not as the case may be.

Q2. Different profit margins on different elements

We agree. If different components are to be unbundled, then it must be right to recognise potentially different profit margins on which they are provided.

D14 – the intangible assets model

Q1. Recognition of the exchange transaction of the asset’s construction

As noted in our answer to D12 Q1 we think the whole approach to service concessions needs to be reconsidered, including the intangible asset model. If, however, the approach is accepted then the accounting treatment proposed flows logically from that.

Q2. Timing of the recognition of the intangible asset

Accepting the intangible asset approach, it is unsatisfactory for guidance on the timing of recognition of the intangible asset not to be provided. Of the 3 options (a) seems to recognise an executory contract that is not normal practice. Option (b) assumes you have an intangible asset in proportion to construction progress, and it is not clear whether part of a licence exists at that time. Option (c) would seem most appropriate.

Q3. Recognition of maintenance and repair obligations

We do not agree that IAS37 has necessarily been interpreted correctly. In the example (paragraphs IE1 and IE11) it is not clear whether you can have part of an obligation to resurface a road. If there is an obligation its fair value is not likely to rise directly in line with usage, but would reflect the likelihood that it would be triggered and its timing. Until the road has deteriorated below the specified condition there may be no existing obligation, and there may remain possibilities for the operator to avoid it altogether.

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