As Malaysia moves to an accrual accounting system under the MPSAS framework, Ramesh Ruben Louis looks at service concession arrangements by the grantor
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This article was first published in the November/December 2018 Malaysia edition of Accounting and Business magazine.
In this third edition of the Malaysian Public Sector Accounting Standards (MPSAS) series (see the September issue for the second part), we take a close look at the accounting for service concession arrangements by the grantor, a public sector entity, as prescribed by MPSAS 32 Service Concession Arrangements: Grantor.
The spirit behind this standard is to mirror Interpretation 12 of the International Financial Reporting Interpretations Committee, Service Concession Arrangements (IFRIC 12), which sets out the accounting requirements for the private sector operator in a service concession arrangement. As such, the scope, principles for recognition of an asset and terminology are consistent with the applicable guidance in IFRIC 12. However, because MPSAS 32 deals with the grantor’s accounting issues, it addresses the issues identified in IFRIC 12 from the grantor’s point of view.
The standard also contains extracts from SIC Interpretation 29, Service Concession Arrangements: Disclosures.
A service concession arrangement is a binding arrangement between a grantor and an operator (usually a private sector entity) in which the operator uses the service concession asset to provide a public service on behalf of the grantor for a specified period of time and the operator is compensated for its services over the period of the service concession arrangement.
Common features of a service concession arrangement are:
- The grantor is a public sector entity.
- The operator is responsible for at least some of the management of the service concession asset and related services and does not merely act as an agent on behalf of the grantor.
- The arrangement sets the initial prices to be levied by the operator and regulates price revisions over the period of the service concession arrangement.
- The operator is obliged to hand over the service concession asset to the grantor in a specified condition at the end of the period of the arrangement, for little or no incremental consideration, irrespective of which party initially financed it.
- The arrangement is governed by a binding arrangement that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes.
Service concession assets
Service concession arrangements commonly evolve around assets, known as service concession assets. These are assets used to provide public services in a service concession arrangement that is provided by the operator. The operator constructs, develops, or acquires the asset from a third party or it is an existing asset of the operator. It could also be provided by the grantor as an existing asset of the grantor or an upgrade to an existing asset. Examples of service concession assets include highways, airports, sea ports, water distribution facilities, energy supply and telecommunication networks and other non-current tangible or intangible assets used for administrative purposes in delivering public services.
The grantor recognises concession assets if:
- It regulates or controls what services the operator must provide with the asset, to whom it must provide them and at what price.
- It controls any significant residual interest in the asset; through ownership, beneficial entitlement or otherwise, at the end of the term of the arrangement.
For a ‘whole-of-life’ asset (an asset used in a service concession arrangement for its entire useful life), only the condition (a) needs to be met.
Service concession assets are measured initially at fair value. In particular, fair value is used to determine the cost of a constructed or developed service concession asset or the cost of any upgrades to existing assets, on initial recognition, except for an existing asset of the grantor that meets the conditions of a service concession asset as mentioned above. For existing assets, the grantor shall reclassify the existing asset as a service concession asset to be accounted for in accordance with MPSAS 17 Property, Plant, and Equipment or MPSAS 31 Intangible Assets, as appropriate.
The use of fair value on initial recognition does not constitute a revaluation under MPSAS 17 or MPSAS 31. The fair value of a service concession asset determined on initial recognition largely depends on the type of compensation exchanged between the grantor and the operator. Where payments are made by the grantor to the operator, the fair value on initial recognition of the asset represents the portion of the payments paid to the operator for the asset. Where the grantor does not make payments to the operator for the asset, the asset is accounted for in the same way as an exchange of non-monetary assets in MPSAS 17 and MPSAS 31.
After initial recognition or reclassification, service concession assets shall be accounted for as a separate class of assets in accordance with MPSAS 17 or MPSAS 31, as appropriate.
Service concession liability
Where the grantor recognises a service concession asset, it also recognises a liability. However, no liability is recognised when an existing asset of the grantor is reclassified as a service concession asset as discussed earlier, except in circumstances where additional consideration is provided by the operator. The liability recognised is initially measured at the same amount as the service concession asset measured, adjusted by the amount of any other consideration (for example, cash) from the grantor to the operator, or from the operator to the grantor.
The grantor recognises concession liability depending on the way the grantor compensates the operator. This is determined by reference to the terms of the binding arrangement and, when relevant, contract law.
In exchange for the service concession asset, the grantor may compensate the operator for the asset by any combination of these two models or approaches:
- Financial liability model
The grantor compensates the operator for the construction, development, acquisition, or upgrade of a service concession asset by making a predetermined series of payments. The MPSAS standards relating to financial instruments (MPSAS 28, 29 and 30) apply to the measurement, recognition and presentation and disclosures of this financial liability
- Grant of a right to the operator model
The grantor compensates the operator for the construction, development, acquisition or upgrade of a service concession asset and related services by granting the operator the right to earn revenue from third-party users of the service concession asset or another revenue-generating asset (for example, a private wing of a hospital where the remainder of the hospital is used by the grantor to treat public patients, or a private parking facility adjacent to a public facility). The grantor accounts for this liability as the unearned portion of the revenue arising from the exchange of assets between the grantor (a service concession asset) and the operator (an intangible asset).
The grantor’s treatment of revenues and expenses depends on these models. Under the financial liability model, the grantor allocates payments to the operator according to their substance as a reduction in the liability, a finance charge, and charges for services provided by the operator.
Under the grant of a right to the operator model, the grantor earns the benefit associated with the assets received in the service concession arrangement in exchange for the right granted to the operator over the period of the arrangement. The grantor recognises revenue and reduces the liability according to the economic substance of the service concession arrangement.
The following information in respect of service concession arrangements in each reporting period is to be disclosed by the grantor:
- A description of the arrangement.
- Significant terms of the arrangement that may affect the amount, timing, and certainty of future cashflows (for example, the period of the concession, repricing dates, and the basis upon which repricing or renegotiation is determined)
- The nature and extent (quantity, time period, or amount, as appropriate) of:
- Rights to use specified assets.
- Rights to expect the operator to provide specified services in relation to the service concession arrangement.
- Service concession assets recognised as assets during the reporting period, including existing assets of the grantor reclassified as service concession assets.
- Rights to receive specified assets at the end of the service concession arrangement.
- Renewal and termination options.
- Other rights and obligations (such as major overhaul of service concession assets)
- Obligations to provide the operator with access to service concession assets or other revenue-generating assets.
- Changes in the arrangement occurring during the reporting period.
The disclosures above are provided individually for each material service concession arrangement or in aggregate for each class of service concession arrangements. A class is a grouping of service concession arrangements involving services of a similar nature such as toll collections, telecommunications, or water treatment services).
Ramesh Ruben Louis, professional trainer and consultant in audit and assurance, risk management and corporate governance, corporate finance and public practice advisory
CPD technical article
"The MPSAS 32 standard addresses the issues identified in IFRIC 12 from the grantor’s point of view arrangement."