construction contracts and service concession … 11 and ifric 12.pdf · construction contracts –...
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Construction contracts and
Service Concession agreements
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IFRS – Ind AS
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Section 1 – Construction
contracts
IFRS – Ind AS
Revenue recognition and related topics
What are construction contracts?
What is a construction contract?
IFRS – Ind AS Slide 3
How does it differ from sale of goods?
Revenue recognition and related topics
Construction contracts - Quick Quiz
IAS 18 IAS 11
A sports car with air conditioning, flash gear box, large
wheels, quadruple exhaust and 12 speakers
A newspaper printing machine designed to meet the
requirements of Big Business newspaper which is
IFRS – Ind AS
requirements of Big Business newspaper which is
printed on triangular paper to give a more pointed view
Contract with an architect to design an office building
Contract for construction of a hospital for the
government
Revenue recognition and related topics
Construction contracts – Combining and segmenting contracts
Contract covers a
number of assets
A group of contracts Optional additional
asset in contract
IFRS – Ind AS Slide 5
Only separate if:
� Separate proposals
and negotiation
� Costs and revenues
can be identified
Combine if:
� Negotiated together
� Closely interrelated
� Performed
concurrently or in
continuous
sequence
Only separate if:
� Significantly different
� Price negotiated
without regard to
original contract
Construction contracts
Recognising Revenue – Key Criteria
� Revenue can be measured reliably
� Probable that the economic
benefits will flow to the entity Fixed PriceCost Plus
Revenue recognition and related topics
IFRS – Ind AS
� Stage of completion can be
measured reliably
� Costs can be measured reliably
Fixed Price
Contract
Cost Plus
Contract
Section 1 – IFRIC 15 and guidance on which
standard applies
IFRS – Ind AS
CONSTRUCTION
OF AN ASSET
SPECIFICALLY
NEGOTIATEDIFRIC 15
Revenue recognition and related topics
IAS 11 or IAS 18 – Which standard applies
IFRS – Ind AS Slide 8
A construction contract is a contract specifically negotiated for
the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.
Revenue recognition and related topics
IFRIC 15 Guidance
Specify major
structural elements
Limited ability to
influence design
IFRS – Ind AS Slide 9
IAS 11 IAS 18
IAS 11 or IAS 18? – Application by analogy example
Entity A develops and sells tailored computer hardware
Assume this development meets definition of construction contract in IAS 11
Entity A also sells software to run on computers it develops
Software comprises a two year licence and after sales support for those two years
Revenue recognition and related topics
IFRS – Ind AS Slide 10
Software comprises a two year licence and after sales support for those two years
Progress payments are required during hardware development
Additional fee is payable at start of licence
Conclusion
IFRIC 15 is used by analogy
Hardware development is accounted for under IAS 11
Software licence and after-sales support is under IAS 18
Section 3 – IFRIC 12 – Service concession
arrangements
IFRS – Ind AS
Introduction
• Applies to contractual arrangements in which a private sector operator participates
in the development, financing, operation, and maintenance of infrastructure for
public sector services.
• Public service nature of obligation eg. energy supply, road, railways, etc.
• Guidance on the accounting by Operators for public-to-private service concession
arrangements.
Revenue recognition and related topics
IFRS – Ind AS
Built Operate
Transfer (BOT)
Rehabilitate
Operate
Transfer (ROT)
Grantor Operator
Key terms
Slide 12
Scope
A transaction is covered by IFRIC 12 when the following
conditions are met:
Cumulative Conditions
Revenue recognition and related topics
IFRS – Ind AS
&
The grantor controls—through ownership,
beneficial entitlement or otherwise—any
significant residual interest in the
infrastructure at the end of the term of the
arrangement.
The grantor controls or regulates what
services the operator must provide with
the infrastructure, to whom it must
provide them, and at what price.
Infrastructure used for its entire useful life is within the scope if the control on the
infrastructure asset is held by the grantor.
The operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the arrangement.
Does the grantor control or regulate what services
the operator must provide with the infrastructure, to
whom it must provide and at what price?
Does the grantor control, through ownership,
beneficial entitlement or otherwise, any significant
residual interest in the infrastructure at the end of
OUTSIDE THE SCOPE
OF IFRIC 12Yes
No
No
Decision Tree
Revenue recognition and related topics
IFRS – Ind AS
residual interest in the infrastructure at the end of
the service arrangement?
Is the infrastructure constructed or acquired by the
operator from a third party? Or is the infrastructure
used in the arrangement for its entire useful life?
Is the infrastructure existing
infrastructure of the grantor to which
the operator is given access for the
purpose of the service arrangement?
WITHIN THE SCOPE OF IFRIC 12
Operator does not recognise infrastructure as property, plant and equipment or as a leased asset.
Yes
Yes Yes
No
No
Slide 14
Category Lessee Service Provider Owner
Typical
Arrangement
Types
Lease (eg.
operator leases
asset from
grantor)
Service and/or
maintenance contract
(specific tasks eg.
collection of debt)
Rehabilitate
Operate
Transfer
Build
Operate
Transfer
Build Own
Operate
100%
Divestment/
Privatisation
Corporation
Asset Ownership Grantor
Typical public-to-private arrangements
Revenue recognition and related topics
IFRS – Ind AS
Capital Investment Operator
Demand Risk Operator and/or Grantor
Typical Duration 25-30 years
Residual Interest Grantor
Relevant IFRS IFRIC 12
Slide 15
Category Lessee Service Provider Owner
Typical
Arrangement
Types
Lease (eg.
operator leases
asset from
grantor)
Service and/or
maintenance contract
(specific tasks eg.
collection of debt)
Rehabilitate
Operate
Transfer
Build
Operate
Transfer
Build Own
Operate
100%
Divestment/
Privatisation
Corporation
Asset Ownership Grantor Grantor Operator
Typical public-to-private arrangements
Revenue recognition and related topics
IFRS – Ind AS
Capital Investment Grantor Operator Operator
Demand Risk Shared Grantor Operator and/or Grantor Operator
Typical Duration 8-20 years 1-5 years 25-30 years25-30
years
Indefinite (or
may be limited
by license)
Residual Interest Grantor Grantor Operator
Relevant IFRS IAS 17 IAS 18 IFRIC 12 IAS 16
Slide 16
Does the operator have a contractual right to
receive cash or other financial asset from or at
the direction of the grantor?
Operator recognises a FINANCIAL ASSET to
the extent that it has a contractual right to
receive cash or another financial asset.
Yes
Recognition and measurement of Infrastructure assets
Does the operator have a contractual right to
charge the users of the public services?
Operator recognises a INTANGIBLE ASSET to
the extent that it has a contractual right to
receive cash or another financial asset.
Yes
Revenue recognition and related topics
IFRS – Ind AS
Initial RecognitionRecognise the infrastructure assets as
a) Loans or receivable,
b) Available for sale, or
c) FV through profit and loss
Subsequent Measurementa) If infrastructure asset is recognised as Loans
and receivables - Amortised Cost,
b) If infrastructure asset is recognised as
Available for sale or FV through Profit and
loss - At Fair value.
Initial RecognitionRecognise the infrastructure assets at cost in
accordance with IAS 38, Intangible Assets till
the construction activity, that is fair value of the
construction services provided.
Subsequent MeasurementThe infrastructure assets are measured at lower
of :
a) fair value or
b) at cost less amortisation,,
Infrastructure asset within the scope of IFRIC 12 is NOT recognised as property, plant and equipment of the operator
as the arrangement does not convey the right to control the use of the infrastructure to the operator.
Quick QuizRecognise as Financial
or Intangible asset
Grantor pays operator specific or determinable payments and
bears demand risk.
Grantor pays operator based on usage and operator bears
demand risk.
User pays operator based on usage and operator bears
demand risk
Grantor pays operator variable amounts contingent on
performance or availability.
Revenue recognition and related topics
IFRS – Ind AS
performance or availability.
Users pay operator but price charged is varied by regulator to
ensure that operator receives a substantially fixed return.
Operator bears demand risk if that risk is low.
Users pay operator and concession continues until operator has
achieved its return on investments. Operator bears demand risk
through the concession period.
Users pay operator based on usage, but grantor guarantees that
payment will not fall below a specified minimum (Shortfall
guarantee). Demand risk shared between grantor and operator.
Slide 18
ParticularsTechnical
Ref.
Financial
asset
Intangible
asset
Construction revenue and cost incurred during the
construction periodIAS 11
Percentage
Completion Method
Operating and maintenance revenue and cost
incurred post construction periodAs per IAS 18 Principles
Finance income IAS 39 EIR
Borrowing cost till construction phase IAS 23RCharged off
to P & LCapitalise
Revenue recognition and related topics
IFRS – Ind AS
to P & L
Contractual obligations to maintain or restore
infrastructureIAS 37
PV of obligation based on
best estimate
Slide 19
IFRS 1 / Transition provision
� First-time adopters may elect to use the transitional provisions of IFRIC 12
rather than full retrospective application.
� When it is impractical for a company to apply IFRIC 12 retrospectively to the
start of the earliest period presented, the IFRIC 12 transition provisions allow
a company to:
a. recognise financial assets and intangible assets that existed at the start of the
Revenue recognition and related topics
IFRS – Ind AS Slide 20
a. recognise financial assets and intangible assets that existed at the start of the
earliest period presented;
b. use the previous carrying amounts of those financial and intangible assets
(however previously classified) as their carrying amounts as at that date; and
c. test financial and intangible assets recognised at that date for impairment, unless
this is not practicable, in which case the amounts shall be tested for impairment as
at the start of the current period.
Disclosure
�The disclosure requirements relating to Service concession arrangements are
contained in SIC 29, ‘Service concession arrangements: Disclosures’.
�Disclosures required for each service concession arrangement or in aggregate for
each class of service concession arrangement.
�SIC 29 states that the common characteristic of all service concession arrangements
is that the operator both receives a right and incurs an obligation to provide public
Revenue recognition and related topics
IFRS – Ind AS
is that the operator both receives a right and incurs an obligation to provide public
services. The disclosure requirements are centered round this requirement. Major
ones are:
• Description of the arrangement along with significant terms of the arrangement
• Description of rights and obligations involved in the arrangement of the operator
• Any changes during the arrangement terms during the period.
• Classification of the arrangement.
• Disclosure of amount of revenue and profits or losses recognized in the period on
exchanging construction services for a financial / intangible asset.
Slide 21
Any questions?
Thank You
IFRS – Ind AS
Thank [email protected]
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