Construction contracts and Service Concession … 11 and IFRIC 12.pdf · Construction contracts – Combining and segmenting contracts Contract covers a number of assets A group of

Construction contracts and

Service Concession agreements

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IFRS – Ind AS

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Section 1 – Construction

contracts

IFRS – Ind AS

Revenue recognition and related topics

What are construction contracts?

What is a construction contract?

IFRS – Ind AS Slide 3

How does it differ from sale of goods?


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

IFRS – Ind AS

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


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

Construction contracts

Recognising Revenue – Key Criteria

� Revenue can be measured reliably

� Probable that the economic

benefits will flow to the entity Fixed PriceCost Plus


IFRS – Ind AS

� Stage of completion can be

measured reliably

� Costs can be measured reliably

Fixed Price

Contract

Cost Plus

Contract

Section 1 – IFRIC 15 and guidance on which

standard applies

IFRS – Ind AS

CONSTRUCTION

OF AN ASSET

SPECIFICALLY

NEGOTIATEDIFRIC 15


IAS 11 or IAS 18 – Which standard applies


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.


IFRIC 15 Guidance

Specify major

structural elements

Limited ability to

influence design


IAS 11 IAS 18

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



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

Section 3 – IFRIC 12 – Service concession

arrangements

IFRS – Ind AS

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.


IFRS – Ind AS

Built Operate

Transfer (BOT)

Rehabilitate

Operate

Transfer (ROT)

Grantor Operator

Key terms

Slide 12

Scope

A transaction is covered by IFRIC 12 when the following

conditions are met:

Cumulative Conditions


IFRS – Ind AS

&

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 grantor controls or regulates what

services the operator must provide with

the infrastructure, to whom it must

provide them, and at what price.

Infrastructure used for its entire useful life is within the scope if the control on the

infrastructure asset is held by the grantor.

The operator is obliged to hand over the infrastructure to the grantor in a specified

condition at the end of the arrangement.

Does the grantor control or regulate what services

the operator must provide with the infrastructure, to

whom it must provide and at what price?

Does the grantor control, through ownership,

beneficial entitlement or otherwise, any significant

residual interest in the infrastructure at the end of

OUTSIDE THE SCOPE

OF IFRIC 12Yes

No

No

Decision Tree


IFRS – Ind AS

residual interest in the infrastructure at the end of

the service arrangement?

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?

Is the infrastructure existing

infrastructure of the grantor to which

the operator is given access for the

purpose of the service arrangement?

WITHIN THE SCOPE OF IFRIC 12

Operator does not recognise infrastructure as property, plant and equipment or as a leased asset.

Yes

Yes Yes

No

No

Slide 14

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

Typical public-to-private arrangements


IFRS – Ind AS

Capital Investment Operator

Demand Risk Operator and/or Grantor

Typical Duration 25-30 years

Residual Interest Grantor

Relevant IFRS IFRIC 12

Slide 15

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

Typical public-to-private arrangements


IFRS – Ind AS

Capital Investment Grantor Operator Operator

Demand Risk Shared Grantor Operator and/or Grantor Operator

Typical Duration 8-20 years 1-5 years 25-30 years25-30

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

Does the operator have a contractual right to

receive cash or other financial asset from or at

the direction of the grantor?

Operator recognises a FINANCIAL ASSET to

the extent that it has a contractual right to

receive cash or another financial asset.

Yes

Recognition and measurement of Infrastructure assets

Does the operator have a contractual right to

charge the users of the public services?

Operator recognises a INTANGIBLE ASSET to

the extent that it has a contractual right to

receive cash or another financial asset.

Yes


IFRS – Ind AS

Initial RecognitionRecognise the infrastructure assets as

a) Loans or receivable,

b) Available for sale, or

c) FV through profit and loss

Subsequent Measurementa) 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.

Initial RecognitionRecognise 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 MeasurementThe 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.

Quick QuizRecognise as Financial

or Intangible asset

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.


IFRS – Ind AS

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.

Slide 18

ParticularsTechnical

Ref.

Financial

asset

Intangible

asset

Construction revenue and cost incurred during the

construction periodIAS 11

Percentage

Completion Method

Operating and maintenance revenue and cost

incurred post construction periodAs per IAS 18 Principles

Finance income IAS 39 EIR

Borrowing cost till construction phase IAS 23RCharged off

to P & LCapitalise


IFRS – Ind AS

to P & L

Contractual obligations to maintain or restore

infrastructureIAS 37

PV of obligation based on

best estimate

Slide 19

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



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.

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


IFRS – Ind AS

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

Any questions?

Thank You

IFRS – Ind AS

Thank [email protected]

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

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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

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Documents

Construction contracts and Service Concession … 11 and IFRIC 12.pdf · Construction contracts – Combining and segmenting contracts Contract covers a number of assets A group of