Appendix B (AASB1059_07-17_COMPdec21_01-22)

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.