AASB 1059

The objective of this Standard is to prescribe the accounting for a service concession arrangement by a grantor that is a public sector entity.

This Standard shall be applied to service concession arrangements, which involve an operator:

(a) providing public services related to a service concession asset on behalf of a grantor; and

(b) managing at least some of those services under its own discretion, rather than at the direction of the grantor.

Arrangements outside the scope of this Standard include those that do not involve the delivery of a public service, those where the operator manages the public services merely as an agent of the grantor, and those that involve service and management components where the asset is not controlled by the grantor as described in paragraph 5, or paragraph 6 for a whole-of-life asset.

This Standard does not specify the accounting by operators. Guidance on accounting for service concession arrangements by private sector operators can be found in AASB Interpretation 12 Service Concession Arrangements.

The grantor shall recognise an asset provided by the operator and an upgrade to or a major component replacement for an existing asset of the grantor as a service concession asset if the grantor controls the asset. The grantor controls the asset if, and only if:

(a) the grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and

(b) the grantor controls – through ownership, beneficial entitlement or otherwise – any significant residual interest in the asset at the end of the term of the arrangement.

The grantor shall recognise an asset that will be used in a service concession arrangement for its entire economic life (a ‘whole-of-life’ asset) if the conditions in paragraph 5(a) are met. In this case, the condition in paragraph 5(b) is not relevant and therefore the grantor controls the whole-of-life asset if the conditions in paragraph 5(a) are met.

The grantor shall initially measure the service concession asset recognised in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset) at current replacement cost in accordance with the cost approach to fair value in AASB 13 Fair Value Measurement.

Where an existing asset of the grantor meets the conditions specified in paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall reclassify the existing asset as a service concession asset and shall measure the asset at current replacement cost in accordance with the cost approach to fair value in AASB 13 as at the date of reclassification. The grantor shall recognise any difference at that date between the carrying amount of the asset and its fair value (current replacement cost) as if it is a revaluation of the asset. This approach does not mean that the grantor has adopted the revaluation model.

After initial recognition or reclassification, the grantor shall account for a service concession asset during the term of the service concession arrangement as follows:

(a) depreciate or amortise the depreciable amount of the asset over the useful life in accordance with AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets, as appropriate, with any impairment recognised in accordance with AASB 136 Impairment of Assets; and

(b) references to fair value in other Standards shall be read as references to current replacement cost for service concession assets. For example, this means that current replacement cost is the basis for fair value measurement of service concession assets under a revaluation model. Furthermore, the active market requirements in AASB 138 for the revaluation of an intangible asset shall not apply.

The grantor shall account for a service concession asset after the end of the term of the service concession arrangement in accordance with other Accounting Standards and as specified below. In particular:

(a) the grantor reclassifies the asset based on its nature or function;

(b) references to fair value in other Standards shall no longer be read as references to current replacement cost. For example, any of the approaches in AASB 13 to fair value measurement may be applied to the asset under a revaluation model, as appropriate. Furthermore, the active market requirements in AASB 138 for the revaluation of an intangible asset shall apply; and

(c) the grantor derecognises the asset in accordance with AASB 116 or AASB 138, as appropriate, only when the grantor loses control of the asset. For example, internally generated intangible assets that were recognised as service concession assets (including those that do not qualify for recognition under AASB 138) are not derecognised at the end of the term of the service concession arrangement, unless the grantor loses control of the asset at that time.

Where the grantor recognises a service concession asset in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall also recognise a liability. The grantor shall not recognise a liability when an existing asset of the grantor is reclassified as a service concession asset in accordance with paragraph 8, except in circumstances where additional consideration is provided by the operator, as noted in paragraph 12.

The liability recognised in accordance with paragraph 11 shall be initially measured at the same amount as the service concession asset, adjusted by the amount of any other consideration (eg the transfer of an existing asset) from the grantor to the operator, or from the operator to the grantor.

The nature of the liability recognised is based on the nature of the consideration exchanged between the grantor and the operator. The nature of the consideration given by the grantor to the operator is determined by reference to the terms of the contract.

In exchange for the service concession asset, the grantor might compensate the operator for the service concession asset by any combination of:

(a) making payments to the operator (the ‘financial liability’ model); and

(b) compensating the operator by other means (the ‘grant of a right to the operator’ model), such as granting the operator:

(i) the right to earn revenue from third-party users of the service concession asset; or

(ii) access to another revenue-generating asset for the operator’s use (eg 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).

Where the grantor has a contractual obligation to deliver cash or another financial asset to the operator for the construction, development, acquisition or upgrade of a service concession asset, the grantor shall account for the liability recognised in accordance with paragraph 11 as a financial liability.

The grantor has a contractual obligation to pay cash if it has agreed to pay the operator specified or determinable amounts, such as payments relating to the following:

(a) third-party usage of a service concession asset, with or without guaranteeing a minimum amount to the operator; or

(b) the shortfall, if any, between amounts received by the operator from users of the service concession asset and any other specified or determinable amounts payable by the grantor, even if the payment is contingent on the operator ensuring that the service concession asset meets specified quality or efficiency requirements.

AASB 9 Financial Instruments, AASB 132 Financial Instruments: Presentation and AASB 7 Financial Instruments: Disclosures apply to the financial liability recognised under paragraph 11, except where this Standard specifies otherwise.

The grantor shall allocate the payments to the operator under the contract and account for them according to their substance as payments relating to the liability recognised in accordance with paragraph 11 or charges for services provided by or to be provided by the operator (including the future replacement of components of the service concession asset).

Charges for services provided by the operator (other than replacement components) in a service concession arrangement determined in accordance with paragraph 18 shall be accounted for in accordance with other relevant Standards.

Where the asset and service components of a service concession arrangement are separately identifiable, the service component of payments from the grantor to the operator shall be allocated accordingly (see paragraph B53). Where the asset and service components are not separately identifiable, the service component of payments from the grantor to the operator shall be determined using estimation techniques (see paragraph B54).

Where the grantor does not have a contractual obligation to pay cash or another financial asset to the operator for the construction, development, acquisition, or upgrade of a service concession asset, and instead grants the operator the right to earn revenue from third-party users or access to another revenue-generating asset, the grantor shall account for the liability recognised in accordance with paragraph 11 as the unearned portion of the revenue arising from the exchange of assets between the grantor and the operator.

The grantor shall recognise revenue, and accordingly reduce the liability noted in paragraph 21, according to the economic substance of the service concession arrangement (see paragraph B71).

Where the grantor compensates the operator for the service concession asset and the provision of services by granting the operator the right to earn revenue from third-party users of the service concession asset or access to another revenue-generating asset, the exchange is regarded as a transaction that will generate revenue for the grantor. As the right granted to the operator to access the grantor’s underlying service concession asset is effective for the period of the service concession arrangement, the grantor does not recognise revenue from the exchange immediately. Instead, a liability is recognised for revenue that is not yet earned. The revenue is then recognised according to the economic substance of the service concession arrangement, and the liability is reduced as revenue is recognised.

If the grantor compensates the operator for the provision of a service concession asset partly by incurring a financial liability and partly by the grant of a right to the operator, it is necessary to account separately for each part of the total liability recognised in accordance with paragraph 11. The amount initially recognised for the total liability shall be the same amount as that specified in paragraph 12.

The grantor shall account for each part of the liability referred to in paragraph 24 in accordance with paragraphs 15–23. The financial liability part shall be measured first, and the remainder of the total liability allocated to the part related to the grant of the right to the operator (see paragraphs B73 and B74).

The grantor shall account for other liabilities, commitments, contingent liabilities and contingent assets arising from a service concession arrangement in accordance with AASB 9, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, and any other relevant Standards.

The grantor shall account for revenues arising from a service concession arrangement, other than those specified in paragraphs 21–23, in accordance with AASB 15 Revenue from Contracts with Customers or AASB 1058 Income of Not-for-Profit Entities, as appropriate.

The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of assets, liabilities, revenue and cash flows arising from service concession arrangements. To achieve this, an entity shall consider disclosing qualitative and quantitative information about its service concession arrangements, including the following:

(a) a description of the arrangements;

(b) significant terms of the arrangements that may affect the amount, timing and uncertainty of future cash flows (eg the period of the arrangement, re-pricing dates and the basis upon which re-pricing or renegotiation is determined);

(c) the nature and extent (eg quantity, time period, or amount, as appropriate) of:

(i) rights to receive specified services from the operator;

(ii) the carrying amount of service concession assets as at the end of the reporting period, including separate disclosure for existing assets of the grantor reclassified as service concession assets during the reporting period;

(iii) rights to receive specified assets at the end of an arrangement;

(iv) renewal and termination options;

(v) other rights and obligations (eg major overhaul of service concession assets); and

(vi) obligations to provide the operator with access to service concession assets or other revenue-generating assets; and

(d) changes in arrangements occurring during the reporting period.

The disclosures provided by an entity in accordance with paragraph 28 are provided individually for each material service concession arrangement or in aggregate for service concession arrangements involving services of a similar nature, in addition to disclosures required by AASB 116 and AASB 138. Service concession assets of a similar nature may form a subset of a class of assets disclosed in accordance with AASB 116 or AASB 138 or may be included in more than one class of assets disclosed in accordance with AASB 116 or AASB 138. For example, for the purposes of AASB 116, a toll bridge may be included in the same class as other bridges, and for the purposes of paragraph 28 may be included with service concession assets reported in aggregate as toll roads.

[Repealed]

An agreement between two or more parties that creates enforceable rights and obligations.

The entity that grants the right to access the service concession asset to the operator.

The entity that has a right of access to the service concession asset to provide public services.

A contract effective during the reporting period between a grantor and an operator in which:

(a) the operator has the right of access to the service concession asset (or assets) to provide public services on behalf of the grantor for a specified period of time;

(b) the operator is responsible for at least some of the management of the public services provided through the asset and does not act merely as an agent on behalf of the grantor; and

(c) the operator is compensated for its services over the period of the service concession arrangement.

An asset (other than goodwill) to which the operator has the right of access to provide public services on behalf of the grantor in a service concession arrangement that:

(a) the operator constructs, develops, upgrades or replaces major components, or acquires from a third party or is an existing asset of the operator; or

(b) is an existing asset of the grantor, including a previously unrecognised identifiable intangible asset and land under roads, or an upgrade to or replacement of a major component of an existing asset of the grantor.

This Standard is informed by AASB Interpretation 12, which sets out the accounting requirements for the private sector operator in a service concession arrangement. For example, the principles for recognition of a service concession asset are broadly consistent with AASB Interpretation 12. However, because this Standard deals with the accounting by the public sector grantor, this Standard addresses the issues identified in AASB Interpretation 12 from the grantor’s point of view, as follows:

(a) the grantor recognises a financial liability when it is obliged to make a payment or series of payments to the operator for provision of a service concession asset (ie constructed, developed, acquired or upgraded). Under paragraphs 12, 14 and 20 of AASB Interpretation 12, the operator recognises revenue for the construction, development, acquisition, upgrade and operation services it provides. Under paragraph 16 of AASB Interpretation 12, the operator recognises a financial asset;

(b) the grantor recognises a liability when it grants the operator the right to earn revenue from third-party users of the service concession asset or another revenue-generating asset. Under paragraph 17 of AASB Interpretation 12, the operator recognises an intangible asset; and

(c) the grantor derecognises an asset it grants to the operator and over which it no longer has control and reduces the liability recognised under paragraph 11 of this Standard. Under paragraph 27 of AASB Interpretation 12, the operator accounts for the asset as part of the transaction price if the asset forms part of the consideration payable by the grantor for the services.

Paragraph 2 of this Standard specifies that an arrangement within the scope of this Standard involves an operator providing a public service related to a service concession asset on behalf of a grantor. In many jurisdictions, governments have introduced contractual service arrangements to attract private sector participation in the development, financing, operation and maintenance of infrastructure and other assets used to provide public services. The assets may already exist, or may be constructed or upgraded during the period of the service arrangement. An arrangement within the scope of this Standard typically involves an operator constructing the assets used to provide the public services or upgrading the assets (for example, by increasing their capacity) and operating and maintaining the assets for a specified period of time. Such arrangements are often described as build-operate-transfer or rehabilitate-operate-transfer service concession arrangements or public-private partnerships (PPPs).

Paragraph 3 of the Standard illustrates the types of arrangements that are outside the scope of this Standard, such as arrangements that do not deliver a public service (for example, assets used for commercial purposes), arrangements where the operator does not provide and manage at least some of the public services under its own discretion (for example, outsourcing service agreements where the public sector entity has control of the asset) and arrangements that involve service and management components where the asset is not controlled by the grantor (for example, privatised assets that are subject to price regulation).

Appendix A defines a service concession arrangement. A feature of a service concession arrangement is the public service nature of the obligation to be undertaken by the operator in a commercial transaction. The public service nature of the services to be provided using the service concession asset is assessed irrespective of the identity of the party that operates the services. A service concession arrangement contractually obliges the operator to provide some, if not all, of the services to the public on behalf of the public sector entity. Other common features of a service concession arrangement within the scope of this Standard are:

(a) the grantor is a public sector entity;

(b) 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;

(c) the arrangement sets or limits the initial prices to be levied by the operator and regulates price revisions over the period of the service concession arrangement;

(d) 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; and

(e) the arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes.

Appendix A defines a service concession asset. Examples of service concession assets include roads (and land under roads), bridges, tunnels, prisons, hospitals, airports, water distribution facilities, energy supply and telecommunication networks, permanent installations for military and other operations, registries and databases, and other tangible or intangible assets that are expected to be used during more than one reporting period in delivering public services.

Assessing whether an asset provides public services requires judgement, taking into account the nature and relative significance of each component and the services provided. For example, a courthouse building provides multiple services, such as courts, administrative offices and associated services. However, the primary purpose of the building is to provide court services, which are considered to be public services. The court services are necessary or essential to the general public and are generally expected to be provided by a public sector entity in accordance with government policy or regulation. The court services are accessible to the public, even if it is a subset of the community that uses the services. The services provided by the administrative offices may be unrelated to the court services and therefore considered ancillary if they are insignificant to the arrangement as a whole, and in that case would not affect the assessment that the building provides public services. However, if the unrelated administrative services were significant to the arrangement as a whole, the courthouse building might be assessed as not providing public services.

If an arrangement provides public services principally through a primary asset, and a secondary asset is used or is mainly used to complement the primary asset, such as student accommodation for a public university, the secondary asset would be regarded as providing public services as well. As another example, a hospital car park constructed by an operator as part of the arrangement to construct a hospital that largely provides public services would be considered part of the hospital service concession arrangement. The car park may provide limited ancillary services without affecting the assessment that the car park is used to provide public services. However, if the car park was not constructed as part of the hospital service concession arrangement (eg subsequent to the construction of the hospital or with a different party) and is largely of a commercial nature (eg car parking is available to the general public, including hospital patrons), the car park would be regarded as an asset that does not provide public services, and therefore outside the scope of this Standard.

Where the services provided by an asset are used wholly internally by a public sector entity for the purpose of assisting the public sector entity to deliver public services, but managed by an external party, the arrangement is likely to be an outsourcing arrangement or a lease, rather than a service concession arrangement. For example, the provision of information technology services to a government department providing emergency services to the public is likely to be an outsourcing contract, which may contain a lease of the information technology hardware. The accompanying Implementation Guidance also illustrates common types of arrangements.

For an asset to provide public services, it is not necessary for the public to have physical access to the asset. For example, a military base provides public services (defence activities) even though the public is unlikely to have physical access to the military base.

For an arrangement to be within the scope of this Standard, the operator must be responsible for providing public services through the service concession asset and for managing at least some of the public services and related services, and not act merely as an agent on behalf of the grantor through an outsourcing arrangement. For example, an operator in an arrangement to construct and operate a hospital in accordance with the grantor’s directions would need to provide services more managerial in nature than cleaning, building maintenance and security services for the hospital after its construction in order for the arrangement to be considered a service concession arrangement. Cleaning, building maintenance and security services would generally be regarded as relatively insignificant to the public services provided by the hospital. Therefore, if the operator is responsible only for constructing the hospital and then providing all or any of those services, the operator is unlikely to be considered to be responsible for some of the management of the public services provided by the hospital. However, if after constructing the hospital the operator also provides scheduling of staff and resources (even if provided by the grantor), the operator is likely to be responsible for some of the management of the hospital public services, and not acting like an agent of the grantor. In contrast, if the maintenance contributes significantly to the public services provided by the asset, then the operator would be responsible for at least some of the management of the public services provided by the asset. For example, this would be the case for an arrangement where an operator constructs and maintains (at its discretion) a toll road on behalf of the grantor, because maintenance services are a significant component of the public services provided by the toll road.

A grantor assesses at the commencement of an arrangement whether an asset provides public services and whether the operator is responsible for providing and managing at least some of the public services provided through the asset and does not act merely as an agent on behalf of the grantor. The initial assessment applies for the duration of the service concession arrangement. Where there is a significant modification to the terms and conditions of the arrangement, the arrangement should be reassessed to determine whether the asset still provides public services, and whether the operator is responsible for providing and managing at least some of the public services provided through the asset under its own discretion – and therefore whether the arrangement is still within the scope of this Standard. If service concession accounting is no longer appropriate, the grantor determines whether the service concession asset and liabilities continue to be recognised and accounted for under other Accounting Standards or else derecognised.

Appendix A also defines a contract. The term ‘agreement’ in the definition of a ‘contract’ encompasses an arrangement entered into under the direction of another party (eg when assets are transferred to an entity with a directive that they be deployed to provide specified services).

Contracts can be written, oral or implied by an entity’s customary practices in performing or conducting its activities. For not-for-profit entities, Appendix F to AASB 15 includes guidance regarding when an agreement creates enforceable rights and obligations.

A service concession arrangement typically includes many assets, rather than one asset. References in this Standard to a service concession asset apply to all of the assets encompassed by the arrangement. If a service concession arrangement encompasses a business as defined in AASB 3 Business Combinations, the grantor shall recognise the assets (including any identifiable intangible assets) and liabilities of the business when the conditions in paragraph 5 or 6 are satisfied. Goodwill shall not be recognised by the grantor.

Paragraph 5 of this Standard specifies the conditions under which an asset, other than a whole-of-life asset, is recognised by the grantor. Paragraph 6 of the Standard specifies the condition under which a whole-of-life asset is recognised by the grantor. The assessment of whether a service concession asset should be recognised in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset) is made on the basis of all of the facts and circumstances of the arrangement.

The fundamental principle reflected in paragraphs 5 and 6 is determining whether the grantor controls the underlying asset or assets of a service concession arrangement. The ability to exclude or regulate the access of others to the benefits of an asset is an essential element of control that distinguishes an entity’s assets from public goods that all entities can access and benefit from. If the service concession arrangement provides for the grantor to control the price (for example, the contract may set the initial prices to be levied by the operator and regulate price revisions over the period of the service concession arrangement), the services to be provided and to whom the services must be provided, then the grantor controls the service concession asset regardless of whether there is any regulation by a third-party regulator.

Control should be distinguished from management. If the grantor has both the degree of control described in paragraph 5(a) and any significant residual interest in the asset (as noted in paragraph 5(b)), the operator is only managing the asset on the grantor’s behalf – even though, in many cases, it may have wide managerial discretion.

The control or regulation referred to in paragraph 5(a) could be by contract, or otherwise. If the contract specifies that the grantor controls or regulates the price, the services to be provided and to whom the operator must provide the services, the conditions specified in paragraph 5(a) are met.

If a service concession contract by itself does not result in the grantor having explicit control over the services and/or pricing of the services, the grantor might still have control of the service concession asset as a result of regulation by a third party. Regulation of what services the operator must provide, to whom it must provide them, and at what price, in the manner specified in paragraph 5(a), is a means by which a grantor can demonstrate control of the substantive benefits of the service concession asset. Grantor control of a service concession asset through regulation does not require the contract to refer to the regulation or the grantor to control or be related to the regulator. The third-party regulator might, for example, regulate other entities that operate in the same industry or sector as the grantor. This includes circumstances in which the grantor buys all of the services as well as those in which some or all of the services are bought by other users.

Control or regulation of the pricing of the services is one of the three factors set out in paragraph 5(a) to be considered in determining whether the grantor controls an asset and should recognise it as a service concession asset. For example, a regulated price includes a specified price, which may be zero, that the operator can charge for the services of the asset. The grantor would also have to control the services to be provided and the recipients of the services in order to recognise a service concession asset. This approach is consistent with the fundamental principle in paragraph B16 of an entity controlling an asset if it has the ability to exclude or regulate the access of others to the benefits of the asset. For example, for the purpose of paragraph 5(a), the grantor does not need to have complete control of the price: it is sufficient for the price to be regulated by the grantor, or by a third-party regulator (eg by a capping mechanism). Prices are regarded as controlled by the grantor in a regulated environment when a third-party regulator regulates the pricing of the services provided with a service concession asset. The regulation removes the ability of the operator to determine the price and, for the purpose of paragraph 5(a), the pricing of the services is considered to be set implicitly by the grantor as the contract between the grantor and the operator effectively incorporates the price regulation. In some cases, the grantor could have specified an alternative pricing regime but has chosen not to do so, effectively asserting ‘passive’ control of the pricing. If the contract specifies the grantor controls the services and the recipients of the services, the third-party regulation of the pricing of the services means that the operator does not control the pricing or the other criteria specified in paragraph 5(a), and accordingly the grantor controls the asset. If the operator is able to determine to whom the services are provided, but is subject to grantor control over what services may be provided and the pricing, the grantor does not control the asset. The accompanying Implementation Guidance illustrates common types of arrangements where the grantor or the operator might control the various factors.

Where a third-party regulator regulates the pricing or the services that the asset must provide (as specified in paragraph 5(a)), it is not essential for the grantor to control or direct the activities of the third-party regulator for the grantor to have control of the service concession asset. For example, a State grantor in a service concession arrangement might meet the regulated pricing condition specified in paragraph 5(a) even though the relevant regulation is carried out by an independent Commonwealth regulator. Furthermore, it is not necessary for the grantor to refer to the regulator in the contract. The grantor might rely on the regulator exercising its powers within the parameters applicable to the regulator at the inception of the contract.

Governments often have the power to regulate the behaviour of entities operating in certain sectors of the economy, either directly or through specifically created agencies. For the purpose of paragraph 5(a), such broad regulatory powers do not constitute control. In this Standard, the term ‘regulate’ is intended to be applied only in the context of the terms and conditions of the service concession arrangement. For example, a regulator of rail services may determine rates that apply to the rail industry as a whole. Depending on the legal framework in a jurisdiction, such rates may be implicit in the contract governing a service concession arrangement involving the provision of railway transportation, or they may be specifically referred to therein. However, in both cases, the control of the pricing of the service concession asset is derived from either the contract or the specific regulation applicable to rail services, without considering whether the grantor is related to the regulator of rail services.

Where a service concession arrangement does not clearly fall within an existing regulatory framework (eg where there is more than one possible source of regulation), the contract will need to incorporate the specific regulatory framework that stipulates the services, the users and/or the pricing to be charged for the services in order for the requirements of paragraph 5(a) to be met.

For a grantor to control any of the factors listed in paragraph 5(a) through third-party regulation, the regulation must be substantive. Non-substantive features, such as a cap that will apply only in remote circumstances, shall be ignored. Conversely, if, for example, an arrangement purports to give the operator freedom to set prices but any excess profit is returned to the grantor, the operator’s return is capped and the price element of the control test is met.

Sometimes the use of a service concession asset is partly regulated in the manner described in paragraph 5(a) and partly unregulated. These arrangements may take a variety of forms, such as:

(a) any asset that is physically separable and capable of being operated independently and meets the definition of a cash-generating unit as defined in AASB 136 is analysed separately to determine whether the conditions set out in paragraph 5(a) are met if it is used wholly for unregulated purposes (eg this might apply to a private wing of a hospital, where the remainder of the hospital is used to treat public patients); and

(b) when purely ancillary activities (such as a hospital shop) are unregulated, the control tests shall be applied as if those services did not exist, because in cases in which the grantor controls the services in the manner described in paragraph 5(a), the existence of ancillary activities does not detract from the grantor’s control of the service concession asset.

There may be arrangements that include unregulated services that are neither purely ancillary nor delivered by using a physically separable portion of the total asset. For example, a grantor may control prices charged to children and seniors at a sports facility but the amounts charged to adults are not controlled. The same facilities are being used by all, regardless of the amount they pay. Alternatively, prices could be regulated by the grantor for services provided at certain times of the day rather than for different classes of users. In such cases, it will be a matter of judgement whether enough of the service is regulated in order to demonstrate that the grantor has control of the asset.

The operator may have a right to use the separable asset described in paragraph B25(a), or the facilities used to provide ancillary unregulated services described in paragraph B25(b). In either case, there may in substance be a lease from the grantor to the operator; if so, it shall be accounted for in accordance with AASB 16 Leases.

If an asset meets the conditions in paragraph 5 (or paragraph 6), the grantor controls the use of the asset and therefore recognises the asset in accordance with this Standard. An asset that does not meet the control criteria of this Standard is assessed to determine whether it is recognised under another Accounting Standard, such as AASB 16, AASB 116 or AASB 138. The Implementation Guidance accompanying this Standard contains a table that highlights the continuum of typical arrangements and relevant accounting requirements.

Assessment of whether long-term leasing, outsourcing, service and privatisation arrangements are within the scope of this Standard addresses whether the ‘grantor’ entity controls the underlying asset(s) of the arrangement in accordance with the control criteria of paragraph 5 (or paragraph 6). For example:

(a) if the grantor does not retain control of an existing asset under such an arrangement, the grantor considers whether to derecognise the asset as a sale or privatisation; or

(b) if the grantor retains control of an existing asset and gives the ‘operator’ the right to use the asset, or the operator controls an asset and gives the grantor the right to use the asset, the grantor considers whether to recognise a lease in relation to the asset as lessor or lessee respectively. This contrasts with a service concession arrangement, where the grantor provides the operator with the right to access the service concession asset, rather than a right to use the asset.

The grantor’s control of the service concession asset may change during the term of the service concession arrangement. The change in the grantor’s control of the asset may arise from changes in the terms of the service concession contract, or changes in third-party regulation of the price and/or services.

Where there is a change in facts or circumstances that indicate the grantor’s control of the asset may have changed, the grantor assesses whether the asset is still within the scope of this Standard or should be reclassified within the scope of another Standard. Where the grantor no longer has control of the asset in accordance with this Standard, the grantor determines whether the asset continues to be recognised and accounted for under other Accounting Standards or else derecognised, except internally generated identifiable intangible assets initially recognised by the grantor under a service concession arrangement continue to be recognised by the grantor while control is retained, rather than derecognised under AASB 138.

The grantor must also control through ownership, beneficial entitlement or otherwise any significant residual interest in the asset at the end of the term of the arrangement (paragraph 5(b)).

For the purpose of paragraph 5(b), the grantor’s control over any significant residual interest would both restrict the operator’s practical ability to sell or pledge the asset (by acknowledging the grantor’s residual interest in the asset) and effectively give the grantor control of the asset throughout the period of the service concession arrangement. Consequently, where the grantor has substantive, rather than merely protective, rights to prevent the operator selling or pledging the asset during the service concession arrangement (eg the grantor must formally approve the transferee, rather than being able to refuse merely on the grounds that the transferee is not fit and proper), then the grantor is likely to have control of any significant residual interest in the asset.

The residual interest in the asset is the estimated fair value (current replacement cost) of the asset, determined at the inception of the arrangement, as if it were already of the age and in the condition expected at the end of the service concession arrangement.

Paragraph 5 identifies whether the asset, including any replacements required, is controlled by the grantor for the whole of its economic life, beyond the term of the service concession arrangement. For example, if the operator has to replace part of an asset during the period of the arrangement (eg the top layer of a road or the roof of a building), the asset shall be considered as a whole. Thus the condition in paragraph 5(b) is met for the whole of the asset, including the part that is replaced, if the grantor controls any significant residual interest in the final replacement of that part. However, replacements of major components are treated as a separate service concession asset (see paragraphs B38 and B48).

For the purpose of paragraph 6, a whole-of-life asset is an asset that will be used in a service concession arrangement for either its entire economic life or the major part of its economic life. In both cases, there is no significant residual interest in the asset at the end of the arrangement, so that the condition in paragraph 5(b) is not relevant.

The arrangement may involve an existing asset (tangible or intangible) of the grantor:

(a) to which the grantor gives the operator access for the purpose of the service concession arrangement; or

(b) to which the grantor gives the operator access for the purpose of the operator generating revenues as compensation for the service concession asset.

Existing assets of the grantor used in the service concession arrangement shall be classified under this Standard (paragraph 8) as service concession assets. This includes identifiable intangible assets and land under roads of the grantor that have not been recognised previously by the grantor. The grantor shall recognise the upgrade of an existing asset of the grantor (eg an increase in capacity) or the replacement of a major component of an asset as a service concession asset in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset). The grantor also recognises a corresponding liability, when the upgrade or replacement occurs.

In applying paragraphs 8–10 and B38 to an identifiable intangible asset or land under roads that has not been recognised previously by the grantor, the grantor shall:

(a) initially recognise the asset as a service concession asset, measured at current replacement cost in accordance with the cost approach to fair value in AASB 13. In accordance with paragraphs 8 and 11, the grantor shall account for the recognition of the asset at fair value (current replacement cost) as if it is a revaluation of the asset (ie as a revaluation surplus) and shall recognise a liability only to the extent of additional consideration provided by the operator;

(b) after initial recognition of the asset and while controlled by the grantor, account for the asset in accordance with AASB 116 or AASB 138, as appropriate, subject to paragraph 9, as follows:

(i) depreciate or amortise the depreciable amount of the asset over its useful life; and

(ii) if applying the revaluation model to the asset, current replacement cost continues to be used as the basis for fair value measurement without applying, in the case of an intangible asset, the active market requirements in AASB 138; and

(c) after the end of the service concession arrangement, account for the asset in accordance with other Accounting Standards. This requires the grantor to reclassify the asset, continue to recognise the intangible asset while controlled by the grantor, and account for depreciation or amortisation over its useful life and revaluation in accordance with the other Standards and derecognise the asset in accordance with AASB 116 or AASB 138 only when control is lost. For example, this means that an internally generated intangible asset is not derecognised under AASB 138 until control is lost, even if the asset would not have satisfied the initial recognition criteria in AASB 138.

In applying the impairment tests to service concession assets accounted for under the cost model in AASB 116 or AASB 138, as appropriate, the grantor does not necessarily consider the granting of the service concession to the operator as a circumstance that causes impairment, unless there has been a change in use of the asset that affects its future economic benefits or service potential. The grantor shall refer to AASB 136 to determine whether any of the indicators of impairment have been triggered under such circumstances. AASB 136 does not apply to primarily non-cash-generating specialised assets of not-for-profit entities that are regularly revalued to fair value (current replacement cost) under the revaluation model in AASB 116 or AASB 138.

Subject to paragraph B39(c), if the asset no longer meets the conditions for recognition in paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall follow the principles in AASB 116 or AASB 138, as appropriate. For example, if control of the asset is transferred to the operator on a permanent basis, it shall be derecognised. Alternatively, the grantor may be required to derecognise the asset when it or a third-party regulator no longer regulates the pricing, but rather allows the operator to freely set prices for the services provided through the service concession asset.

If control of the asset is transferred on a temporary basis, the grantor considers the substance of this term of the service concession arrangement in determining whether the asset should be derecognised. In such cases, the grantor shall also consider whether the arrangement is a lease transaction or a sale and leaseback transaction that should be accounted for in accordance with AASB 16.

The operator may provide an asset for use in the service concession arrangement that it has not constructed, developed, or acquired for the purpose of the arrangement. If the arrangement involves an existing asset of the operator that the operator uses for the purpose of the service concession arrangement, the grantor shall determine whether the asset meets the conditions in paragraph 5 (or paragraph 6 for a whole-of-life asset). If the conditions for recognition are met, the grantor shall recognise the asset as a service concession asset and account for it in accordance with this Standard.

When a constructed or developed asset meets the conditions in paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall recognise and measure the asset in accordance with this Standard. This recognition also depends on the asset meeting the recognition criteria in AASB 116 or AASB 138:

(a) AASB 116 requires that the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:

(i) it is probable that future economic benefits associated with the asset will flow to the entity; and

(ii) the cost of the item can be measured reliably;

(b) AASB 138 requires that an intangible asset shall be recognised if, and only if:

(i) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and

(ii) the cost of the asset can be measured reliably.

Those criteria, together with the terms and conditions of the contract, need to be considered by the grantor in determining whether to recognise the service concession asset during the period in which the asset is constructed or developed. For property, plant and equipment and intangible assets, if the recognition criteria are met during the construction or development period, the grantor recognises the service concession asset to the appropriate extent during that period.

The first recognition criterion requires the flow of economic benefits to the grantor. According to the Framework for the Preparation and Presentation of Financial Statements, as identified in AASB 1048 Interpretation of Standards, for not-for-profit entities, future economic benefits are synonymous with the notion of service potential. From the grantor’s point of view, the primary purpose of a service concession asset is to provide service potential on behalf of the public sector grantor. Similar to an asset the grantor constructs or develops for its own use, the grantor would assess, at the time the costs of construction or development are incurred, the terms of the contract to determine whether, in addition to retaining control of the land on which the service concession asset is being developed, economic benefits embodied in the service concession asset are controlled by the grantor at that time.

The second recognition criterion requires that the cost of the asset can be measured reliably. Accordingly, to meet the recognition criteria in AASB 116 or AASB 138, as appropriate, the grantor must have reliable information about the cost of the asset during its construction or development. For example, if the service concession arrangement requires the operator to provide the grantor with progress reports during the asset’s construction or development, the costs incurred may be measurable, and would therefore meet the recognition criteria in AASB 116 for constructed assets or in AASB 138 for developed intangible assets. Also, where the grantor has little ability to avoid accepting an asset constructed or developed to meet the specifications of the service concession arrangement, the costs shall be recognised as progress is made towards completion of the asset. Thus, the grantor shall recognise a service concession asset and an associated liability.

The grantor shall recognise an upgrade, or the replacement of a major component, of (1) an existing asset of the grantor, or (2) an asset constructed, developed, acquired or otherwise provided by the operator, as a separate service concession asset in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset). The grantor shall also recognise the related liability in accordance with paragraph 11 when the upgrade or replacement occurs.

Paragraph 7 requires service concession assets recognised in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset) to be measured initially at current replacement cost. This is in accordance with the cost approach to fair value in AASB 13. In particular, the cost approach 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. The requirement to measure the asset at current replacement cost also applies to existing assets, both tangible and intangible, of the grantor that are reclassified as service concession assets, in accordance with paragraph 8 of this Standard. The use of fair value (current replacement cost) on initial recognition or reclassification of a service concession asset does not constitute a revaluation under AASB 116 or AASB 138. Therefore, future revaluations of the asset are not required unless the entity adopts the revaluation model under the relevant Standard.

Service concession arrangements are rarely, if ever, the same: technical requirements vary by sector and by jurisdiction. Furthermore, the terms of the arrangement may also depend on the specific features of the overall legal framework, including contract law, of the particular jurisdiction.

Depending on the terms of the service concession arrangement, the grantor may compensate the operator for the service concession asset and service provision by any combination of the following:

(a) making payments (eg cash) to the operator; and

(b) compensating the operator by other means, such as:

(i) granting the operator the right to earn revenue from third-party users of the service concession asset; or

(ii) granting the operator access to another revenue-generating asset for its use.

When the grantor compensates the operator for the service concession asset by making payments to the operator, the asset and service components of the payments may be separately identifiable (eg the contract specifies the amount of the predetermined payment or series of payments to be allocated to the service concession asset). The asset and service components of the service concession arrangement are accounted for separately, in accordance with paragraph 20.

A service concession arrangement may have separately identifiable asset and service components of the payments in a variety of circumstances, including, but not limited to, the following:

(a) part of a payment stream that varies according to the availability of the service concession asset itself and another part that varies according to usage or performance of certain services can be identified;

(b) different components of the service concession arrangement run for different periods or can be terminated separately. For example, an individual service component can be terminated without affecting the continuation of the rest of the arrangement; or

(c) different components of the service concession arrangement can be renegotiated separately. For example, the upgrade or replacement of major components of a service concession asset are addressed separately, or a service component is market tested and some or all of the cost increases or reductions are passed on to the grantor in such a way that the part of the payment by the grantor that relates specifically to that service can be identified.

For the purpose of applying the requirements of this Standard, payments and other consideration required by the arrangement are allocated at the inception of the arrangement or upon a reassessment of the arrangement into those for the service concession asset and those for other components of the service concession arrangement (eg maintenance and operation services) on the basis of their relative fair values. The fair value (current replacement cost) of the service concession asset represents amounts related to the asset and excludes other components of the service concession arrangement. In some cases, identifying payments for the asset and payments for other components of the service concession arrangement will require the grantor to use an estimation technique. For example, a grantor may estimate the payments related to the asset by reference to the fair value of a comparable asset in an agreement that contains no other components, or by estimating the payments for the other components in the service concession arrangement by reference to comparable arrangements and then deducting these payments from the total payments under the arrangement.

The types of compensation transactions referred to in paragraph 14(b) are non-monetary exchange transactions. Paragraph 24 of AASB 116 and paragraph 45 of AASB 138, as appropriate, provide guidance on these circumstances.

When the operator is granted the right to earn revenue from third-party users of the service concession asset, or from another revenue-generating asset, or receives non-cash compensation from the grantor, the grantor does not incur a cost directly for acquiring the service concession asset. These forms of consideration to the operator may be intended to compensate the operator both for the cost of the service concession asset and for operating it during the term of the service concession arrangement. The grantor therefore needs to initially measure the asset component in a manner consistent with paragraph 7.

A service concession asset is an asset that is obtained through construction, development, upgrade, major component replacement or acquisition, an existing asset or upgrade or major component replacement of an existing asset, to provide public services in a service concession arrangement. The capacity or service potential of the asset is used to achieve public service objectives irrespective of whether the cost of the asset will be recovered by the expected cash flows that the asset may generate. The asset is initially measured at fair value, which is the current replacement cost under the cost approach. The current replacement cost reflects the amount that would be required at the time to replace the service capacity of an asset. The asset is measured at current replacement cost whether the related liability is measured under the financial liability model, the grant of the right to the operator model, or both.

For consistency with the approach to the initial measurement of service concession assets recognised in accordance with this Standard, references to fair value in other Standards shall be read as references to current replacement cost for service concession assets, during the term of the service concession arrangement. If the grantor retains control of the asset after the end of the service concession arrangement, any fair value measurement of the asset is no longer restricted to the cost approach in AASB 13.

After initial recognition, a grantor applies AASB 116 or AASB 138 to the subsequent measurement and derecognition of a service concession asset and to subsequent costs incurred. For the purposes of applying AASB 116 or AASB 138, service concession assets of a similar nature may form a subset of a class, or classes, of assets. Subsequent costs include lifecycle costs incurred to maintain the asset during the operating and maintenance phase of the service concession arrangement. However, upgrades or replacements of major components of service concession assets would be recognised as service concession assets in accordance with paragraph B48. AASB 136 is also applied in considering whether there is any indication that a service concession asset is impaired. The reference to fair value in AASB 136 for such assets refers to the current replacement cost of the asset.

The grantor recognises a liability in accordance with paragraph 11 when a service concession asset is recognised in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset). The nature of the liability recognised in accordance with paragraph 11 differs in the circumstances described in paragraphs B51(a) and B51(b) according to their substance. However, in each case, the liability recognised in accordance with paragraph 11 shall be initially measured at the same amount as the service concession asset, being the fair value (current replacement cost) of the asset in accordance with AASB 13.

The grantor also recognises a liability in accordance with paragraph 11 when an existing asset of the grantor is reclassified as a service concession asset and the operator provides additional consideration to the grantor. The grantor first recognises the reclassification of its existing asset as a service concession asset in accordance with paragraph 8, treating any difference between the carrying amount of the asset and its fair value (current replacement cost) as if it is a revaluation of the asset. The second step for the grantor is to recognise the additional consideration provided by the operator (cash or other assets), and a financial liability or a liability under the grant of a right to the operator model or both, depending on the nature of the service concession arrangement.

Payments made by an operator to a grantor that are separate from the service concession arrangement are accounted for based on the nature of the payments. If the payments are:

(a) for a right to goods or services, the grantor accounts for the payments as other revenues in accordance with AASB 15 or AASB 1058, as appropriate; or

(b) for the right to use an asset, the grantor assesses whether the arrangement contains a lease. If the arrangement contains a lease, the grantor accounts for the payments in accordance with AASB 16 (paragraph B29(b)).

When the grantor has a contractual obligation to make a predetermined series of payments to the operator, the liability is a financial liability as defined in AASB 9. The grantor has a contractual obligation if it has little, if any, discretion to avoid the obligation, which is usually the case because a contract with an operator normally is enforceable by law. For example, when an arrangement involves the grantor making payments to the operator for third-party usage of the service concession asset, the grantor accounts for the liability in the arrangement as a financial liability, regardless of whether the grantor has contractually agreed to provide a minimum guaranteed amount to the operator.

When the grantor provides compensation to the operator for the cost of the service concession asset and service provision in the form of a predetermined payment or series of payments, an amount reflecting the fair value (current replacement cost) of the service concession asset is recognised as a liability in accordance with paragraph 11. The grantor shall use the contractually specified interest rate in the arrangement to initially measure the financial liability component of a hybrid arrangement in accordance with AASB 9. If it is not practicable to determine the contractually specified interest rate, the grantor shall determine an appropriate rate using the prevailing market rate(s) of interest for a similar instrument with a similar credit rating. Examples of rates for a similar instrument include the operator’s cost of capital specific to the service concession asset, the grantor’s incremental borrowing rate, or another rate appropriate to the terms and conditions of the arrangement.

After initial recognition, the grantor applies AASB 9 to the subsequent measurement of a financial liability. For example, when the financial liability is measured at amortised cost and there is a difference between the expected payments and the actual payments by the grantor to the operator based on third-party usage of the service concession asset, the amortised cost is recalculated based on revised estimated cash flows discounted at the original effective interest rate. The adjustment is recognised in profit or loss as income or expense.

When the grantor makes any payments to the operator in advance of the service concession asset being recognised, the grantor accounts for those payments as prepayments.

When the financial liability is subsequently measured at amortised cost in accordance with AASB 9, the finance charge is determined based on the effective interest method. When the financial liability is subsequently measured at fair value through profit or loss, AASB 9 requires the fair value movements in the financial liability to be recognised as a gain or loss in profit or loss.

The finance charge (if any) related to the liability in a service concession arrangement is presented consistently with other finance charges in accordance with AASB 101 Presentation of Financial Statements, AASB 123 Borrowing Costs and AASB 7 Financial Instruments: Disclosures.

The financial liability does not include the grantor’s payments to the operator for service components identified in paragraph 18. The service component of payments is normally recognised as expenses (and as liabilities prior to payment) as the services are provided.

Under the grant of a right to the operator model, the grantor compensates the operator for the service concession asset and service provision by granting the operator the right to earn revenue from third-party users of the service concession asset.

Revenue is not recognised immediately by the grantor at the inception of the service concession arrangement. Instead, a liability is recognised (as noted in paragraph 21) and subsequently reduced as revenue is recognised in accordance with paragraph 22 based on the economic substance of the service concession arrangement. Revenue is usually recognised as access to the service concession asset is provided to the operator over the term of the service concession arrangement. Paragraph B51 states that the grantor may compensate the operator by a combination of payments and granting a right to earn revenue directly from third-party users. In cases where the operator’s right to earn third-party revenues significantly reduces or eliminates the grantor’s predetermined series of payments to the operator, the liability related to the grant of the right to the operator usually would still be reduced (and revenue recognised) over the term of the arrangement as access is provided to the operator.

When the grantor compensates the operator for the service concession asset and services by the provision of a revenue-generating asset, other than the service concession asset, the liability related to the grant of the right to the operator is reduced and revenue relating to the remaining liability is recognised in a manner similar to that described in the previous paragraph. In such cases, the grantor also considers the derecognition requirements in AASB 116 or AASB 138, as appropriate. If the grantor derecognises the revenue-generating asset, the grantor recognises a gain or loss for the difference between the carrying amount of the asset and its fair value (current replacement cost), and reduces the service concession liability accordingly.

If the operator is compensated for the service concession asset partly by a predetermined payment or series of payments and partly by receiving the right to earn revenue from third-party use of either the service concession asset or another revenue-generating asset, it is necessary to account separately for each portion of the total liability related to the grantor’s consideration. In these circumstances, the consideration to the operator is divided into a financial liability portion for the payments and a liability portion for the right granted to the operator to earn revenue from third-party use of the service concession asset or another revenue-generating asset.

Arrangements described in paragraph B73 are commonly referred to as hybrid arrangements. Consistent with paragraph 12, the total liability recognised for a hybrid arrangement is initially measured at the same amount as the fair value (current replacement cost) of the service concession asset. The financial liability portion of the liability under the hybrid arrangement is measured first, with the remainder of the fair value (current replacement cost) of the service concession asset allocated to the portion of the liability relating to the grant of the right to the operator model. The financial liability portion is measured initially in accordance with paragraph B64.

Service concession arrangements may include various forms of financial guarantees (eg a guarantee, security, or indemnity related to the debt incurred by the operator to finance construction, development, acquisition or upgrade of a service concession asset) or performance guarantees (eg a guarantee of minimum revenue streams, including compensation for shortfalls).

The grantor determines whether guarantees provided by the grantor as part of a service concession arrangement meet the definition of a financial guarantee contract. If so, the grantor applies AASB 7, AASB 9 and AASB 132 in accounting for the financial guarantee. Where the financial guarantee is regarded as an insurance contract, the grantor can elect to apply AASB 4 Insurance Contracts or AASB 1023 General Insurance Contracts instead if it has previously used accounting applicable to insurance contracts for such guarantees.

Guarantees and commitments that do not meet the requirements in AASB 9 and AASB 132 relating to financial guarantee contracts and are not accounted for as insurance contracts are accounted for in accordance with AASB 137.

Contingent assets or liabilities may arise from disputes over the terms of the service concession arrangement. Such contingencies are accounted for in accordance with AASB 137.

Disclosures relating to various aspects of service concession arrangements may be addressed in other Standards. This Standard addresses only the additional disclosures relating to service concession arrangements. Where the accounting for a particular aspect of a service concession arrangement is addressed in another Standard, the grantor follows the relevant disclosure requirements of that Standard in addition to those set out in paragraphs 28 and 29. The grantor also applies the relevant presentation and disclosure requirements in other Standards as they pertain to assets, liabilities, revenues, and expenses recognised under this Standard.

AASB 101 requires finance costs (if any) to be presented separately in the statement of profit and loss and other comprehensive income. Finance charges (if any) determined in accordance with paragraph B67 that are expensed are included in this item.

An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2020. Earlier application is permitted for periods beginning before 1 January 2020. If an entity applies this Standard for an earlier period, it shall disclose that fact.

For the purposes of the transition requirements, the date of initial application is the beginning of the earliest reporting period for which comparative information is presented in the financial statements.

A grantor shall apply this Standard either:

(a) retrospectively to each prior period presented in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; or

(b) retrospectively by recognising and measuring service concession assets and related liabilities at the date of initial application.

If a grantor elects to apply this Standard retrospectively in accordance with paragraph C3(b), the grantor shall:

(a) measure the deemed cost of a service concession asset (including an existing asset of the grantor reclassified as a service concession asset) at fair value (current replacement cost) at the date of initial application;

(b) measure a financial liability arising under a service concession arrangement at fair value at the date of initial application;

(c) measure a liability representing the unearned portion of any revenue arising from the receipt of a service concession asset under the grant of a right to the operator model at the fair value (current replacement cost) of the related service concession asset at the date of initial application, adjusted by:

(i) deducting the carrying amount of any consideration transferred by the grantor to the operator recognised as an asset;

(ii) adjusting the resulting amount to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement; and then

(iii) deducting any related financial liabilities measured in accordance with paragraph (b);

(d) measure a liability representing the unearned portion of any revenue arising from the receipt of additional consideration from the operator for access to an existing asset of the grantor that has been reclassified as a service concession asset at the proceeds received, adjusted to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement;

(e) recognise any net adjustments to the amounts of assets and liabilities as an adjustment to the opening balance of accumulated surplus (deficiency) at the date of initial application; and

(f) disclose that it has applied this transition approach and information relating to the measurement of the assets and liabilities in support of the disclosure objective in paragraph 28.

Retrospective application of this Standard in accordance with either paragraph C3(a) or C3(b) may require the derecognition or adjustment of any service concession assets and liabilities recognised under previous accounting policies or the initial recognition of service concession assets and liabilities. Any net adjustment on initial application of this Standard is recognised as an adjustment to the opening balance of accumulated surplus (deficiency). If the grantor applies the revaluation model in AASB 116 or AASB 138 as its accounting policy, the net adjustment is included in accumulated surplus (deficiency) and not revaluation surplus.

The initial measurement of service concession assets at fair value (current replacement cost) does not mean that the assets are measured under the revaluation model. Subsequent revaluations are not required unless the grantor applies the revaluation model as its accounting policy.

If a grantor applies this Standard retrospectively in accordance with paragraph C3(b), the measurement of liabilities arising under the financial liability model at the date of initial application is addressed in paragraph C4(b). Paragraph C4(c) addresses liability measurement under both the grant of a right to the operator model and hybrid arrangements, as it requires the measurement of the liability relating to the grant of a right to the operator to exclude any related financial liabilities.

If an entity applies this Standard but does not yet apply AASB 9, any reference in this Standard to AASB 9 shall be read as a reference to AASB 139 Financial Instruments: Recognition and Measurement.

If an entity applies this Standard but does not yet apply AASB 15 or AASB 1058, any reference in this Standard to those Standards shall be read as a reference to AASB 118 Revenue or AASB 1004 Contributions, as appropriate.

If an entity applies this Standard but does not yet apply AASB 16, any reference in this Standard to AASB 16 shall be read as a reference to AASB 117 Leases.

Paragraphs 28, 29, B79 and B80 do not apply to entities preparing general purpose financial statements that apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

The purpose of this Implementation Guidance is to illustrate certain aspects of the requirements of AASB 1059. Except in respect of arrangements that are concluded to be service concession arrangements, the implementation guidance identifies the parties to an arrangement as the grantor and the operator for convenience, without reference to the definitions in Appendix A.

The diagram below summarises some of the key decisions in determining whether an arrangement is a service concession arrangement within the scope of AASB 1059. It does not address the period of time or operator compensation requirements of the definition of a service concession arrangement.

The guidance examples below illustrate the key decisions outlined in the diagram in paragraph IG2 for assessing whether an arrangement is a service concession arrangement – and therefore within the scope of AASB 1059, assuming that the period of time and operator compensation requirements are met – in the following circumstances:

(a) the operator provides limited services for the asset; and

(b) the operator has management responsibilities for some services.

In this example, the relevant terms of the arrangement for assessing whether it is within the scope of AASB 1059 are:

(a) a grantor enters into an arrangement that involves the operator constructing a school;

(b) the school provides public services as the basic purpose of the school is to provide education services that are necessary or essential to the general public. The education services provided by the school are accessible to the public, even if it is a subset of the community that uses the services. The assessment of the public service nature of the school is consistent with paragraph B6;

(c) the grantor is responsible for the services relating to the delivery of education and operational services such as the recruitment of teachers and administration staff, and the maintenance of the school facilities; and

(d) the operator is responsible for cleaning and security services for the school.

Based on these facts and circumstances, the grantor concludes the operator does not access the school to provide public services as its provision of cleaning and security services does not constitute management of at least some of the public services provided by the school (refer paragraph B10). Accordingly, the arrangement is not a service concession arrangement and is outside the scope of AASB 1059 (paragraph 2). The cleaning and security services represent an outsourced service to the grantor to enable it to provide the public services through the school.

In this example, the facts in Example 1 apply, except that the operator is also responsible for maintenance of the school facilities by maintaining the school to a specified condition. The operator has discretion as to when and how it conducts maintenance of the school facilities.

Based on the facts and circumstances, whilst the operator provides maintenance of the school facilities, facility maintenance does not represent a significant component of the public services provided by the school. Therefore, the operator’s responsibility for maintenance does not involve the operator in managing the school services (refer paragraph B10). Accordingly, the arrangement is not a service concession arrangement and is outside the scope of AASB 1059 (paragraph 2). The maintenance services represent an outsourced service to the grantor to enable it to provide the public services through the school.

In this example, the facts in Example 1 apply, except that the operator is also responsible for certain operational services, in determining how many staff are required and organising classes, teachers and administrative staff, and for maintenance of the school facilities by providing upgrades and maintaining the school to a specified condition. The operator has discretion as to when and how it carries out these responsibilities.

Based on these facts and circumstances, the grantor concludes the operator accesses the school to provide public services and is responsible for at least some of the management of the school services. The operator fulfils this management responsibility through its significant operational and maintenance responsibilities, even though the staff are provided by the grantor (refer paragraph B10). Accordingly, the arrangement is a service concession arrangement within the scope of AASB 1059.

The diagram below summarises the recognition and measurement requirements for assets (other than goodwill) and service concession arrangements subject to AASB 1059.

The table below sets out the typical types of arrangements for private sector participation in the provision of public sector services and provides references to Accounting Standards that may apply to those arrangements. The list of arrangement types is not exhaustive. The purpose of the table is to highlight the continuum of arrangements. It is not the AASB’s intention to convey the impression that bright lines exist between the accounting requirements for various types of arrangements.

The shaded text shows arrangements within the scope of AASB 1059.

The table below compares the key features of various common types of arrangements for private sector participation in the provision of public services. This table presents simple arrangements, however the classification of an arrangement as a construction contract with a service outsourcing contract, lease, service concession arrangement, or sale or privatisation will depend on the specific terms and conditions of the arrangement.

The guidance examples below illustrate the features of the types of arrangements for private sector participation in the provision of public services that are outlined in the table in paragraph IG13:

(a) an arrangement that is a construction contract with a service contract;

(b) an arrangement that contains a lease;

(c) an arrangement that contains a service concession arrangement that is partly regulated and partly unregulated; and

(d) an arrangement that is a sale or privatisation.

This example illustrates an arrangement that involves the operator agreeing to construct an asset or group of assets (a school) for the grantor with a contract for the provision of cleaning and security services over a specified period of time. The example is based on the facts and circumstances in Example 1 (paragraphs IG4–IG5). The grantor:

(a) in accordance with paragraph 2 – determines the arrangement for the construction of the school and the provision of the services is outside the scope of AASB 1059, consistent with paragraphs IG4–IG5; and

(b) assesses whether it controls the school or has a right to use the school for recognition under another Accounting Standard. In making this assessment, the grantor considers that:

• the services the operator provides with the school would be based on the service contract agreed by the grantor and the operator; and

• the control of or right to use the asset would depend on the service contract, including who has title to the land on which the school is built, the terms of the arrangement and the disposition of any residual interest.

Example 4 illustrates an arrangement that involves the operator agreeing to construct an asset or group of assets for the grantor with a contract for the provision of services or maintenance (including facilities maintenance) of the asset(s) over a specified period of time. The arrangement is partly regulated and unregulated by the grantor. The relevant terms of the arrangement are:

(a) a grantor enters into an arrangement that involves the operator constructing a hospital and then maintaining the hospital buildings. The grantor determines the hospital is capable of being operated with separately identifiable public and private wings;

(b) the public wing of the hospital is expected to provide health services to the general public for no cost to the patients. The grantor is responsible for the services relating to the delivery of medical services and operational services, including setting key performance requirements, but the operator is responsible for the employment of the doctors, nurses and administration staff and scheduling the various services;

(c) the private wing of the hospital is expected to provide health services to private patients of the hospital. The operator is responsible for the services relating to the delivery of medical services and operational services, including the employment of doctors, nurses and administration staff. The operator also determines the pricing of the services charged to patients;

(d) the hospital is considered to provide public services, as the basic purpose of the hospital is to provide health services that are necessary or essential to the general public. The health services provided by the hospital are accessible to the public, even if it is a subset of the community that uses the services and notwithstanding that the private wing of the hospital is to be used by private patients. The assessment of the public service nature of the hospital is consistent with paragraph B6;

(e) the operator is responsible for the cleaning and security services and facility maintenance of both the public wing and the private wing of the hospital. The operator has discretion as to when and how it conducts the facility maintenance of providing upgrades and maintenance of the hospital to a specified condition;

(f) the grantor is entitled to the residual interest in both the public wing and the private wing of the hospital at the end of the term of the arrangement, as both wings will transfer to the grantor. During the term of the arrangement, the grantor’s residual interest and the requirement for the grantor to specifically approve any transferee restricts the operator from selling or pledging the hospital; and

(g) both the public and private wings are built on government land, leased to the operator for a nominal fee.

The grantor assesses separately (consistent with paragraphs B6–B7) whether the public wing and the private wing are within the scope of AASB 1059.

Based on the facts and circumstances, the grantor determines:

(a) the operator accesses the public wing of the hospital to provide public services and is responsible for at least some of the management of the hospital services. The operator fulfils this management responsibility by employing the staff and scheduling services; and

(b) the public wing of the hospital is a service concession arrangement that is within the scope of AASB 1059, in accordance with paragraph 2.

Based on the facts and circumstances, the grantor determines it controls the underlying asset (the public wing of the hospital) in the service concession arrangement, as the arrangement entered into by the grantor and the operator specifies:

(a) the grantor controls or regulates (as required by paragraph 5(a)):

• the services provided by the public wing of the hospital – the grantor is responsible for the delivery and standard of performance of the medical and operational services;

• the recipients of the services – the public wing of the hospital is expected to provide health services to the general public; and

• the pricing of the services – the public wing of the hospital is to provide health services at no cost to the patients; and

(b) the grantor controls the significant residual interest in the asset (the public wing of the hospital) at the end of the arrangement in accordance with paragraph 5(b), as the grantor is entitled to this residual interest. Additionally, during the term of the arrangement, the operator is restricted from selling or pledging the public wing of the hospital (refer paragraphs B32–B33).

Given the public wing of the hospital is within the scope of AASB 1059 (paragraph 2) and the grantor controls the asset in accordance with paragraphs 5(a) and (b), the grantor recognises the public wing of the hospital provided by the operator as a service concession asset.

Based on the facts and circumstances, the grantor determines:

(a) the operator uses the private wing of the hospital to provide services to private patients of the hospital. The operator is also responsible for the management of the private wing by providing the medical and operational services and staff; and

(b) the private wing of the hospital is not a service concession arrangement, in accordance with paragraph 2, because the services in the private wing are not being provided to the public on behalf of a public sector entity.

Notwithstanding the grantor cannot recognise the private wing of the hospital as a service concession asset, the grantor assesses whether it controls the asset (the private wing of the hospital) under another Accounting Standard, such as AASB 16. In this example, as the grantor controls the land on which the private wing is located, which provides legal control of the private wing, and the operator is prevented from selling or pledging its interest in the private wing, the grantor controls the private wing. However, the arrangement provides the operator with the right to use the private wing, because the private wing is a separately identifiable asset and the operator controls the services provided, which patients will be admitted, and the prices to be charged during the specified arrangement term. Accordingly:

(a) where the grantor retains substantially all the risks and rewards incidental to ownership, the grantor is the lessor in an operating lease; or

(b) where the operator has substantially all the risks and rewards incidental to ownership, the grantor derecognises the asset and recognises a receivable in accordance with the accounting for a finance lease.

In this example, the wings of the hospital are capable of being separated into a public wing (regulated portion) and a private wing (unregulated portion). However, some service concession arrangements may involve a hospital that is partly regulated and partly unregulated based on the number of patients that are admitted as a public patient or a private patient, instead of being physically separate as per paragraph IG16(a). In such circumstances, judgement will be required as to the relative significance of the regulated versus unregulated activities in order to determine whether the grantor has control of the asset and/or has granted a right of use to the operator. For example, if the hospital admissions are expected to comprise substantially public patients, then the admission of private patients would be considered as ancillary (unregulated) activities of the hospital and the hospital considered to be used wholly for regulated purposes in addressing the accounting for the service concession asset. In addition, a lease from the grantor to the operator requires a specifically identifiable asset with a right of use granted for a specified time, so in these circumstances it is unlikely a lease could be identified.

This example illustrates an arrangement that involves a public sector entity (a State Government – the grantor) selling an asset (electricity distribution business) to a private sector entity (the operator). The relevant terms of the arrangement are:

(a) in exchange for the sale of the electricity distribution business, the grantor receives cash relating to the sale of its interest in the net assets of the business, and settlement by the operator of the liabilities of the business;

(b) the operator is able to operate the electricity distribution business subject to regulation by a third-party regulator of electricity distributors. Additionally, although the operator has discretion to set the prices of the electricity services, the operator must seek the third-party regulator’s approval for changes in pricing; and

(c) the operator controls:

• the operating activities of the electricity distribution business, including decisions to expand or modify the distribution network or to continue providing electricity services, subject to protective rights of the grantor to ensure electricity supply in certain circumstances. If the operator decides to discontinue providing electricity services, the grantor has an option to buy back the business from the operator at fair value; and

• the recipients of the services – the operator can expand the distribution network beyond the network existing at the time of entering the contract without requiring the grantor’s approval.

Based on the facts and circumstances, the grantor concludes the arrangement for the electricity distribution business is outside the scope of AASB 1059 (paragraph 2) – although electricity distribution would be regarded as public services, the operator does not provide the services on behalf of the grantor and the arrangement is not for a specific period of time. The grantor’s protective rights do not mean that the operator provides the services on behalf of the grantor. The protective rights would have the same impact as for an operator that had developed its own electricity network rather than purchasing it from a grantor – the rights do not give the grantor control of the distribution network.

The grantor would also be unable to recognise a service concession asset in these circumstances, because the grantor is able to control or regulate only some of the aspects addressed in paragraph 5(a), as follows:

(a) the grantor controls the pricing of the services provided by the operator, as the requirement for the operator to seek approval from the third-party regulator removes the operator’s ability to regulate the pricing and, for the purpose of paragraph 5(a), the pricing of the services is therefore considered to be set implicitly by the grantor (refer paragraph B20);

(b) the operator controls the services to be provided by the business. The grantor’s protective rights and option to buy back the business from the operator, in the event the operator decides to discontinue the provision of electricity services, do not prevent the operator determining the services to be provided; and

(c) the operator controls the recipients of the services as outlined in paragraph IG24(c).

There is no residual interest in the arrangement, as the sale is not limited to a specified period, and so the grantor would also not satisfy the requirements of paragraph 5(b). Furthermore, the grantor’s buy-back option is exercisable only at fair value and so does not give the grantor any significant residual interest. As the asset need not be used for the provision of public services for its entire remaining economic life (the operator has discretion as to how to use the asset) and the criteria in paragraph 5(a) are not met, the conditions in paragraph 6 for a whole-of-life asset are not met.

Although the grantor cannot recognise a service concession asset, the grantor assesses whether it controls the electricity distribution network, has the right to use the network, or controls any other rights requiring recognition under another Accounting Standard. In making this assessment, the grantor takes into account the factors noted in the previous paragraphs.

Based on the assessment in paragraphs IG26–IG27, the grantor determines that it does not control the asset or have a right to use the asset subsequent to the sale of the electricity distribution business. The grantor therefore derecognises the asset under another Accounting Standard, such as AASB 116.

In this example, the facts in Example 5(a) apply, except that:

(a) the State Government (the grantor) enters into an arrangement with a private sector entity (the operator) to operate the electricity distribution business for 100 years, instead of the operator purchasing the business from the grantor; and

(b) at the end of the arrangement (ie in 100 years’ time), the distribution network reverts to the grantor. The operator must maintain the electricity distribution network to the specified age and condition at the end of the arrangement.

Based on the facts and circumstances, the grantor determines:

(a) the arrangement for the operator to operate the electricity distribution network is outside the scope of AASB 1059, as the grantor’s protective rights to ensure electricity supply in certain circumstances do not mean that the operator provides the services on behalf of the grantor;

(b) even if the arrangement was a service concession arrangement, it does not control the asset for recognition under paragraph 5(a), for the reasons outlined in paragraphs IG26(a)–(c); and

(c) it controls the significant residual interest at the end of the arrangement, as the electricity distribution network reverts to the grantor at the end of the arrangement. Accordingly, the arrangement is a privatisation and not a sale.

Based on the assessment in the previous paragraph, the grantor determines that it does not control the asset (the electricity distribution network) or have a right to use the asset under the arrangement. The grantor’s protective rights do not give the grantor any more significant interest in the distribution network than it would have with those same rights in relation to an operator that had developed its own network. The grantor therefore derecognises the asset under another Accounting Standard, such as AASB 116, and determines whether it controls any other rights requiring recognition under another Accounting Standard.

These examples consider only three of many possible types of service concession arrangements. Their purpose is to illustrate the accounting treatment for some features that are commonly found in practice. To make the illustrations as clear as possible: ,

(a) It is assumed in Examples 6–7 that the term of the service concession arrangement is only ten years and that the operator’s annual receipts are constant over that period. In practice, terms may be much longer and annual revenues may increase over time;

(b) Examples 6 and 7 do not illustrate the accounting by the grantor for existing assets of the grantor used in the service concession arrangement, such as land under roads; and

(c) Example 8 presents only relevant terms of the arrangement that illustrate the requirements for dividing the liability under a hybrid service concession arrangement into the financial liability and the grant of the right to the operator liability.

In these examples, monetary amounts are denominated in ‘currency units’ (CU) – rounded to the nearest unit.

These terms are common to the two examples that follow.

The terms of the arrangement require an operator to construct a road on land owned by the grantor – completing construction within two years – and maintain and operate the road to a specified standard for eight years (ie years 3–10). The arrangement is within the scope of this Standard and the road meets the conditions for recognition of a service concession asset in paragraph 5.

The terms of the arrangement also require the operator to resurface the road when the original surface has deteriorated below a specified condition. The operator estimates that it will have to undertake the resurfacing at the end of year 8 at a fair value (current replacement cost) of CU110. The compensation to the operator for this service is included in the predetermined series of payments and/or the revenue the operator has the right to earn from the service concession asset or another revenue-generating asset granted to the operator by the grantor. The compensation to the operator also covers the annual operating costs of CU12.

It is assumed that the original road surface is a separate component of the service concession asset and meets the criteria for recognition specified in AASB 116 when the service concession asset is initially recognised. The road surface is therefore recognised as a separate component of the initial fair value (current replacement cost) of the service concession asset and depreciated over years 3–8. This depreciation period is shorter than that for the road base, and takes into account that resurfacing would ordinarily occur every six years, compared with replacing the road base in 25 years. During the construction phase, it is assumed that only the road base is constructed in year 1, and that the road only becomes ready to use at the end of year 2.

The replacement of a major component of the road as a separate component of the service concession asset occurs in year 8, and is recognised as a new service concession asset when the resurfacing work is performed. This also results in an increase in the liability recognised by the grantor, in accordance with paragraph B48. Where the liability relates to the grant of a right to the operator model, additional revenue in respect of this increase is recognised evenly over the remaining term of the arrangement. However, if the expenditure represented an improvement in service potential such as a new traffic lane rather than restoration to original service capability then it would be appropriate to instead recognise revenue relevant to that improvement only once it has occurred.

At the beginning of year 3, the total fair value (current replacement cost) of the road is CU1,082, comprised of CU972 related to the base layers (including implied funding costs due to the extended construction period) and CU110 related to the surface layers. The fair value of the surface layers is used to estimate the fair value of the resurfacing (which is treated as a replacement component in accordance with AASB 116). The estimated life of surface layers (ie six years) is also used to estimate the depreciation of the replacement component in years 9 and 10.

The road base has an economic life of 25 years. Annual depreciation is recognised by the grantor on a straight-line basis. It is therefore CU39 (CU972/25) for the base layers. The surface layers are depreciated over 6 years (years 3–8 for the original component, and starting in year 9 for the replacement component). Annual depreciation related to the original surface layers and the replacement surface layers is CU18 (CU110/6).

The effective interest rate in the service concession arrangement is 6.18 per cent per year.

It is assumed that all cash flows take place at the end of the year.

It is assumed that the time value of money is not significant.

At the end of year 10, the arrangement will end and the operator will transfer the operation of the road to the grantor.

The total compensation to the operator under each of the two examples is inclusive of each of the components of the service concession arrangement and reflects the fair values (current replacement cost) for each of the assets and services, which are set out in Table 6.

The grantor’s accounting policies include:

(a) service concession assets (property, plant, and equipment) – measured initially at fair value (current replacement cost) and subsequently in accordance with the cost model. Impairment is recognised when the carrying amount exceeds the current replacement cost;

(b) financial liabilities – subsequently measured at amortised cost using the effective interest method; and

(c) borrowing costs – expensed in the period incurred regardless of how the borrowings are applied.

Table 6 Fair values of the components of the arrangement (currency units)

The terms of the arrangement require the grantor to pay the operator CU200 per year in years 3–10 for making the road available to the public. The total consideration (payment of CU200 in each of years 3–10) reflects the fair values (current replacement cost) for each of the assets and services indicated in Table 6. These payments are intended to cover the cost of constructing the road, annual operating costs of CU12 and reimbursement to the operator for the cost of resurfacing the road in year 8 of CU110.

The grantor initially recognises the service concession asset as property, plant, and equipment at its fair value, measured at current replacement cost (total CU1,082, determined as CU940 related to construction of the base layers, CU110 related to construction of the original surface layers and CU32 for funding costs related to the costs incurred in year 1 for base layers). The asset is recognised as it is constructed (CU525 in year 1 and CU557 in year 2). Depreciation is recognised annually (CU57, comprised of CU39 (CU972/25) for the base layers and CU18 (CU110/6) for the surface layers), starting from year 3.

The grantor initially recognises a financial liability equal to the fair value (current replacement cost) of the service concession asset under construction at the end of year 1 (CU525). The liability is increased at the end of year 2 to reflect both the fair value of the additional construction (CU525) and the finance charge (CU32) on the outstanding financial liability. Because the amount of the predetermined payment related to the service component of the service concession arrangement is known, the grantor is able to determine the amount of the annual payment that reduces the liability each period. A finance charge at the effective interest rate of 6.18 per cent is recognised annually. The liability is subsequently measured at amortised cost, that is, the amount initially recognised plus the finance charge on that amount calculated using the effective interest method, minus repayments. The initial liability excludes the annual operating costs of CU12 and the compensation for the road resurfacing, as these components of the arrangement represent equally proportionately unperformed contracts.

The compensation for the road resurfacing is included in the predetermined series of payments. There is no additional direct cash flow impact related to the road resurfacing beyond the predetermined payments; however, the grantor recognises the resurfacing as an asset when the work is undertaken and recognises depreciation expense of CU110/6 = CU18, beginning in year 9. When the resurfacing occurs, the grantor also recognises the related liability.

The compensation for maintenance and operating the road (CU12) is also included in the predetermined series of payments. There is no additional cash flow impact related to this service expense beyond those payments; however, the grantor recognises an expense annually.

The grantor’s cash flows, statement of profit and loss and other comprehensive income, and statement of financial position over the duration of the arrangement will be as illustrated in Tables 6.1 to 6.3. In addition, Table 6.4 shows the changes in the financial liability.

Table 6.1 Cash flows (currency units)

Table 6.2 Statement of profit and loss and other comprehensive income (currency units)

Table 6.3 Statement of financial position (currency units)

Table 6.4 Changes in the financial liability (currency units)

The terms of the arrangement allow the operator to collect tolls from drivers using the road. The operator forecasts that vehicle numbers will remain constant over the duration of the arrangement and that it will receive tolls of CU200 in each of years 3–10. The total consideration (tolls of CU200 in each of years 3–10) reflects the fair values (current replacement cost) for each of the assets and services indicated in Table 6, and is intended to cover the cost of constructing the road, annual operating costs of CU12 and reimbursement to the operator for the cost of resurfacing the road in year 8 of CU110.

The grantor initially recognises the service concession asset as property, plant, and equipment at its fair value (current replacement cost) (total CU1,082, determined as CU940 related to construction of the base layers, CU110 related to construction of the original surface layers and CU32 for implied funding costs related to the costs incurred in year 1 for base layers). The asset is recognised as it is constructed (CU525 in year 1 and CU557 in year 2). Depreciation is recognised annually (CU57, comprised of CU39 (CU972/25) for the base layers and CU18 (CU110/6) for the surface layers), starting from year 3.

As consideration for the service concession asset, the grantor recognises a liability under the grant of a right to the operator model for granting the operator the right to collect tolls of CU200 in years 3–10. The liability is recognised as the asset is recognised. The liability is measured initially at the same amount as the asset, which includes an implied funding cost in the measurement of the current replacement cost.

The liability is reduced over years 3–10, and the grantor recognises revenue on that basis because access to the service concession asset is expected to be provided evenly over the term of the service concession arrangement from the point at which the asset is capable of providing economic benefits.

The compensation for the road resurfacing is included in the tolls the operator expects to earn over the term of the service concession arrangement. There is no additional cash flow impact related to the road resurfacing; however, the grantor recognises the resurfacing (the replacement of a major component of the road) as a service concession asset when the work is undertaken and recognises depreciation expense of CU110/6 = CU18, beginning in year 9. When the resurfacing occurs, the grantor also recognises the related liability.

The compensation for maintenance and operating the road (CU12) is also included in the tolls the operator expects to earn over the term of the service concession arrangement. There is no financial statement impact related to this service expense. It does not affect cash flow because the grantor has no cash inflow or outflow. It is not recognised as an operating expense because the fair value (current replacement cost) of the asset and liability initially recognised do not include any service costs the operator may incur.

The grantor’s cash flows, statement of profit and loss and other comprehensive income, and statement of financial position over the duration of the arrangement will be as illustrated in Tables 7.1 to 7.2. In addition, Table 7.3 shows the changes in the liability.

Because no payments are made by the grantor to the operator, there are no cash flow impacts for this example.

Table 7.1 Statement of profit and loss and other comprehensive income (currency units)

Table 7.2 Statement of financial position (currency units)

Table 7.3 Changes in the liability (currency units)

Example 8 illustrates the requirements in paragraphs 24–25 and B73–B74 for dividing a hybrid service concession arrangement by measuring the financial liability part first and then allocating the remainder of the total liability to the part related to the grant of the right to the operator.

The relevant terms of the arrangement in the example are:

(a) the operator is required to construct a road on land owned by the grantor – completing construction within two years – and maintain and operate the road to a specified standard for eighteen years (ie years 3–20);

(b) the grantor is required to pay the operator CU100 each year for eight years (ie years 3–10) for making the road available to the public. These payments are intended to partially cover the cost of constructing the road. It is assumed all cash flows take place at the end of the year. The contractually specified interest rate in the arrangement is 4% per annum. The present value of the payments is CU673. However, unlike a typical loan, the grantor incurs the liability two years before cash payments commence from year 3. Consequently, the effective interest rate for the financial liability is 3.2% per annum, reflecting this timing difference. The grantor’s accounting policy for the financial liability is to subsequently measure the financial liability at amortised cost using the effective interest method;

(c) the operator is permitted to collect tolls from drivers using the road for eighteen years (ie years 3–20);

(d) the initial fair value (current replacement cost) of the construction cost of the service concession asset is CU1,800, once construction is complete at the end of the second year; and

(e) at the end of year 20, the arrangement will end, and the operator will transfer the operation of the road to the grantor.

The arrangement is within the scope of this Standard and the road meets the conditions for recognition as a service concession asset in paragraph 5 (or paragraph 6 for a whole-of-life asset).

It is necessary to divide the grantor’s consideration to the operator into two parts – the financial liability for the predetermined payments and the liability related to the grant of the right to the operator to charge tolls.

The grantor recognises:

(a) the service concession asset as property, plant and equipment at current replacement cost in accordance with the cost approach to fair value (current replacement cost) in AASB 13 totalling CU1,822 at the end of year 2, related to construction of the road (CU900 in both year 1 and year 2) and funding costs related to the financial liability recognised in year 1 (CU22 in year 2);

(b) the total liability equal to the same amount as the current replacement cost of the service concession asset (total CU1,822). The total liability is allocated:

(i) in year 1 – first to the financial liability measured at present value under AASB 9. In this example, the present value of the grantor’s payments to the operator is CU673. Second, the remainder of the CU900 is allocated to the liability under the grant of the right to the operator model for the right to collect tolls (CU227);

(ii) in year 2 – to the liability under the grant of the right to the operator model for the right to collect tolls (CU900) as the remainder of the liability related to the construction costs; and

(iii) in year 2 – the borrowing costs of CU22 are allocated to the financial liability;

(c) a finance charge expense (CU22) in year 2 relating to the financial liability in year 1, in accordance with the grantor’s accounting policy; and

(d) a revaluation surplus of CU22 to reflect the inclusion of funding costs relating to the construction period in the current replacement cost of the service concession asset.

The journal entries for the accounting treatment set out in paragraph IE34 are:

Example 9 illustrates the requirements in paragraphs B14 and B39(a) for the initial recognition of the assets of a business that is subject to a service concession arrangement, including identifiable intangible assets.

The relevant terms of the arrangement in the example are:

(a) a grantor enters into an arrangement that involves an operator providing public services related to a business, on behalf of the grantor. The business is a business as defined in AASB 3 Business Combinations, with customer lists and property, plant and equipment. The customer lists are intangible assets as they would meet the separability criterion in AASB 3. They were developed and are owned by the grantor;

(b) the initial fair value (current replacement cost) of the business and the identifiable assets of the business are set out in Table 9;

(c) the operator has the right to collect revenue in relation to updating the customer lists; and

(d) at the commencement of the arrangement, the operator provides the grantor with cash consideration of CU300.

Table 9 Fair values of the components of the arrangement (currency units)

The arrangement is within the scope of this Standard and, as existing assets of the grantor, the property, plant and equipment and customer lists meet the conditions for a service concession asset in paragraph 5 (or paragraph 6 for a whole-of-life asset).

The grantor has not previously recognised the customer lists as an intangible asset as they are precluded from recognition as an intangible asset under AASB 138. As a result of entering into the service concession arrangement, the grantor recognises the assets of the business, excluding any internally generated goodwill, as service concession assets. Therefore the grantor initially:

(a) reclassifies the property, plant and equipment as a service concession asset and recognises the asset at fair value (current replacement cost) (CU100), representing a revaluation surplus of CU40 over the carrying amount of CU60;

(b) reclassifies the customer lists as an intangible service concession asset and recognises the asset at fair value (current replacement cost) (CU150) and a corresponding amount as revaluation surplus; and

(c) recognises a liability under the grant of a right to the operator model for the additional consideration (CU300) provided by the operator.

The journal entries for the accounting treatment set out in paragraph IE39 are:

In accordance with the transition requirements set out in Appendix C of the Standard, a grantor may elect to apply the Standard retrospectively by recognising and measuring service concession assets and related liabilities at the date of initial application (paragraph C3(b)). The date of initial application is the beginning of the earliest reporting period for which comparative information is presented in the financial statements.

This example illustrates the approach set out in paragraph C4(c) to measuring a liability under the grant of a right to the operator model at the date of initial application. The liability related to the grant of a right to the operator is required to be measured at the fair value (current replacement cost) of the related service concession asset at the date of initial application, adjusted (1) for any consideration transferred by the grantor to the operator that is recognised as an asset and (2) to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement, (3) less any related financial liabilities.

Assuming that the service concession arrangement in this example has not required any payments or other consideration from the grantor to the operator and does not give rise to a financial liability for the grantor, the information needed for measuring the liability is illustrated in the following table:

Table 10 Estimates at the date of initial application

If the service concession arrangement is a hybrid arrangement, the carrying amount of any consideration transferred by the grantor to the operator that has been recognised as an asset is first deducted from the fair value (current replacement cost) of the service concession asset. The resulting amount is then apportioned for the remaining service concession period. Any outstanding financial liability (measured separately under the financial liability model at fair value at the date of initial application) would then be deducted from the apportioned amount for the liability re the grant of rights to the operator in order to derive the amount to be recognised for the liability.

The measurement approach illustrated in this example is a simplified transition method, as it does not require the service concession asset or the liability to be measured at the inception of the service concession arrangement, as would be required under the full retrospective transition method in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors.