IFRIC 12 - Service Concession Agreement

A public sector entity as described in IFRIC 12 is a public sector entity, including a governmental body, or a private sector entity to which the responsibility for the service has been devolved e.g electricity board, NHAI etc. Panchayat can not be treated as grantor for the purpose of IFRIC 12.

Hi Jaswanth,

Pls let me know the transaction between the co. and the panchayat e.g. what type of service contract. terms and conditions od the contrat, what is the recovery mechanism etc.

A Pvt. Ltd Co. enters in to a Concession agreement with Village Panchayats for construction of Water Center (WC). These WC's are owned and controlled by WHIN to provide potable water to the Community. The access to land for construction of WC is provided by Village Panchayat.

The Co. adopts BOOT Model for the construction of WC. The Co. doesnot receive any fees during the initial construction phase.The only revenue that the Co. will receive is from sale of water after completion of construction. The Co. will construct the WC within a particular time, generally 90 days and hand over the site to the village panchayat. The ownership of equipment gets transferred to the Village panchayat at the end of the 10 years, which essentially signifies the end of concession arrangement.

The Co. proposes to adopt IFRIC 12 for this model. The entity needs to account for revenue during the construction period in accordance with IAS 11, which is based on stage of completion of the services and is measured by reference to the fair value of the consideration receivable. Fair value of construction services are estimated at cost plus reasonable profit margin based on historical experience in implementing similar projects. The Co. recognises consideration receivable for providing construction / upgrade  services as an INTANGIBLE asset to the extent that its consideration is dependent on usage of the infrastructure i.e. The Co. bears the demand risk of sale of water to villagers.

Given the above background, is it appropriate for the company to adopt IFRIC - 12 and recognise the revenue of Intangible Asset to the extent of consideration ??? I contend that such Agreement entered with Gram Panchayat doesn;t come under the Purview of Public-Private Agreeement which IFRIC - 12 is applicable for....

Based on the facts given above, it appears that IFRIC 12 may be applicable for the concession agreement if all the conditions therein are satisfied. Pls clarify the following points:

1. It is not clear who is deciding the price, what is the basis for determination of the same?

2. Who is operating the asset?

3. if plant is not available for production, who will bear the risk? Whether the co. will receive any payment towards fixed cost recovery?

4. If plant is available but no sale takes place, who will bear the risk? Whether any payment will be made towards fixed cost?

5. After 10 years at the time of tranfer of asset back to the panchayat, is there any consideration for the same?

6. Whether company can sell the plant to a third party before 10 years?

7. Whether the water can be used for the captive consumption by the co.?

Thanks.

1. It is not clear who is deciding the price, what is the basis for determination of the same?   ---- The Co. had calculated the fair value of Intangible Asset as estimated cost plus a reasonable profit margin.

2. Who is operating the asset? ----- The Asset is operated by The Co. Itself. As per the Agreement with Panchayat it has been expressly clarified that the possession is only given to gram panchayat, while the exclusive title deeds remain with the Pvt. Co.

3. if plant is not available for production, who will bear the risk? Whether the co. will receive any payment towards fixed cost recovery? --- All the plant costs are incurred by the Co. itself.

4. If plant is available but no sale takes place, who will bear the risk? Whether any payment will be made towards fixed cost? ---- Untill the time of agreeement the company recoginises the cost as intangible asset and hence is accounted in the books of accounts. there are no payments received by the co. from panchayat towads fixed costs. At the end of the agreement period, the plant is only transferred but is not sold to gram panchayat.

5. After 10 years at the time of tranfer of asset back to the panchayat, is there any consideration for the same? --- No consideration is not received from Panchayat. It is only a transfer....

6. Whether company can sell the plant to a third party before 10 years? --- As per the agreement the company cant sell to third party.

7. Whether the water can be used for the captive consumption by the co.? --- The company doesn't come under the purview of Excise. Either ways, the company doesn;t use the water for captive consumption. (im not sure on this but will confirm you).

Further to the above, i have a query.

The company at the end of 10yrs only transfers the WC to Panchayat. The consideration is also not paid by the panchayat at the end of 10th year. 

The company tells that, it can recognise the cost of asset as revenue as per IFRIC 12 at Fair Value.

I dont have a very good knowledge on IFRIC 12, and hence i posted this in CCI for quick response.  As far as any accounting convention goes, my doubt is as to why would a Company recognise revenue for which there wont be any consideration ??? Just because IFRIC 12 says that Cost (fair value) can be recognised as revenue in the books of accounts, can the company do so?? I need a good opinion on this to enable me to conduct the audit properly.

Thank you for the replies so far....

Awaiting your reply.

we can discuss the issue over phone.