17RU-004 Service concessions: grantor accounting
17RU-004 Service concessions: grantor accounting
AASB 1059 Service Concession Arrangements: Grantor has been issued by the AASB. It provides accounting guidance for public sector entities (grantors) who have entered into service concession arrangements with private sector operators. The standard was issued to address the divergence in practice and requires grantors to recognise a service concession asset and a corresponding liability on the balance sheet. The initial balance sheet accounting as well as the ongoing profit or loss impacts could have implications for grantors.
New era for grantors of service concessions
The Australian Accounting Standards Board (AASB) has issued AASB 1059 Service Concession Arrangements: Grantor (AASB 1059) which provides accounting guidance for public sector entities (grantors) who enter into service concession arrangements with private sector operators.
The standard is applicable to public sector entities (both for-profit and not-for-profit) for years beginning on or after 1 January 2019.
AASB 1059 was developed to address the divergence in current practice and requires grantors to recognise a service concession asset and, in most cases, a corresponding liability on the balance sheet. The standard follows a control approach to assessing service concession arrangements.
The initial balance sheet impact, as well as the subsequent profit and loss impact, is a significant change to current practice and could have wider implications for grantors.
AASB 1059 will not apply to private sector concession operators. These entities will continue to apply Interpretation 12 Service Concession Arrangements where appropriate.
"We believe that this standard will have a significant impact on public sector balance sheets, including the need to reassess the accounting for many existing contractual arrangements which may currently be treated as leases or executory contracts.”
Scope of AASB 1059
AASB 1059 applies to arrangements that meet the following criteria:
- involve a service concession asset an operator has access to in order to provide public services
- within which the operator is responsible for the management of at least some of those services for a period of time
- the operator receives compensation for its services and
- the grantor controls the service concession asset.
Grantor accounting requirements
Service concession assets
Under AASB 1059, the grantor recognises a service concession asset in a service concession arrangement where it controls the asset (see decision tree in our Reporting Update [PDF 285KB]).
Where the asset is provided by the operator, or is an upgrade to or a major component replacement of an existing asset of the grantor, the asset is recognised at current replacement cost based on AASB 13 Fair Value Measurement principles.
Where the asset is an existing asset of the grantor, the asset is reclassified as a service concession asset and remeasured at current replacement cost at the date of reclassification. This requirement applies to, for example, previously unrecognised intangible assets, excluding goodwill, and land under roads. Any difference between the previous carrying amount and current replacement cost is recognised as if it is a revaluation of the asset. AASB 1059 clarifies that this does not mean that the grantor has adopted the revaluation model and is the prescribed accounting for the difference on reclassification only.
Subsequent to initial recognition
Subsequent to initial recognition or reclassification, the grantor accounts for the asset under either AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets, with any impairment recognised in accordance with AASB 136 Impairment of Assets. The depreciation or amortisation expense is recognised over the asset’s useful life, not the concession term. Where the grantor follows the revaluation model, fair value is determined using current replacement cost as the measure of fair value. Furthermore, for the duration of the arrangement, the active market requirements of AASB 138 for revaluation of intangible assets do not apply.
At the end of the arrangement
At the end of the service concession arrangement:
- the grantor accounts for the asset in accordance with other Accounting Standards, with the grantor reclassifying the asset based on its nature or function
- reference to fair value reverts from the mandated current replacement cost under AASB 1059 to any of the approaches in AASB 13 and
- the asset is only derecognised when the grantor loses control of the asset in accordance with AASB 116 or AASB 138 (and not necessarily at the end of the term of the service concession arrangement).
Service concession liabilities
The grantor recognises a liability relating to the service concession asset, except when the asset is an existing asset of the grantor, and no additional consideration is provided by the operator.
Depending on the nature of the consideration given to the operator, the grantor applies either the “financial liability” model or the “grant of right” model.
The arrangement is a hybrid arrangement where the compensation model is partly a financial liability model and partly a grant of a right model. In such cases, the grantor splits the liability and accounts for each part separately in accordance with the relevant requirements.
An entity may choose to adopt the new standard either:
(a) fully retrospectively to each prior period or
(b) by recognising and measuring the service concession assets and related liabilities at the date of initial application (DIA). The DIA is the beginning of the earliest period for which comparative information is presented in the financial statements.
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