Fact pattern
As per an arrangement with the Civil Aviation Department
(CAD), Airport Co Ltd (ACO) shall construct an airport and provide Aeronautical
& Non-Aeronautical Services. The Aeronautical services are regulated by the
CAD, but Non-Aeronautical services are unregulated.
Aeronautical services (“Regulated activity”) include:
a) Provision of flight operation
assistance and crew support systems
b) Ensuring the safe and secure
operation of the Airport, excluding national security interest
c) Movement and parking of aircraft
and control facilities
d) Cleaning, heating, lighting and
air conditioning of public areas
e) Customs and immigration halls
f) Flight information and
public-address systems
g) X-Ray service for carry on and
checked-in luggage
h) VIP / special lounges
i) Aerodrome control services
j) Arrivals concourses and meeting
areas
k) Baggage systems including
outbound and reclaim
Non-Aeronautical Services (“Unregulated activity”) include:
a) Aircraft cleaning services
b) Duty free sales
c) Airline Lounges
d) Hotels and Motels
e) Car Park rentals
f) Bank/ ATMs
g) Telecom
h) Advertisement
i) Parking
j) Flight kitchen
k) Land and space
l) Ground handling
– ACO shall
recover charges for aeronautical services as determined or regulated by CAD
under an agreed mechanism i.e. “price cap mechanism” which is substantive in
nature. Thus, income from aeronautical services is considered as Regulated
income.
– ACO is free
to fix the charges for Non-Aeronautical Services, thus income earned on this
account is unregulated.
– ACO has
subcontracted/outsourced certain specialised non-aeronautical services to
separate entities i.e. joint ventures (between ACO and those specialised
service providers e.g. Duty free, parking and IT equipment operations) and for
certain services like shops, pharmacy, restaurant etc. directly to third
parties. ACO earns revenue share from these entities/concessionaires. ACO,
being the airport operator, continues to remain responsible for all the
activities at the Airport including the ones sub-contracted.
Revenue from Aeronautical and Non-aeronautical services
– To achieve
the overall purpose CAD allows non-aeronautical services, and that too at an
unregulated price to make the airport project as a whole viable for the
government, users and the operator. In light of the non-aeronautical services,
the government seeks to make the user charges for aeronautical services
affordable to the users (public).
– ACO
estimates that over the entire concession period, total non-aeronautical
revenue (unregulated) will be very significant and even greater than the
aeronautical revenue (regulated).
Is this arrangement a service concession arrangement (“SCA”)
under Ind-AS?
– Appendix A
to Ind AS 11 (“Appendix A”) contains provisions regarding what constitutes a
service concession arrangement (“SCA”) and accounting for the same.
– As per Para
5 of Appendix A an arrangement is a SCA if:
– The grantor
controls or regulates what services the operator must provide with the
infrastructure, to whom it must provide them, and at what price; and
– 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
– Para AG7 of
Application Guidance on Appendix A deals with scenario where the use of
infrastructure is partly regulated and partly un-regulated and provides
guidance on the application of control assessment principles as enunciated in
Para 5 above in such scenarios.
– It provides:
(a) Any infrastructure that is
physically separable and capable of being operated independently and meets the
definition of a cash-generating unit (CGU) as defined in Ind AS 36 shall be
analysed separately if it is used wholly for unregulated purposes. For example,
this might apply to a private wing of a hospital, where the remainder of the
hospital is used by the grantor to treat public patients.
(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 of
Appendix A, the existence of ancillary activities does not detract from the
grantor’s control of the infrastructure.
Author’s Analysis
The
condition with regard to control over the price of service that is provided
using the infrastructure asset is an important condition. If CAD does not
control the price of the services, the infrastructure asset will not be
subjected to SCA accounting.
– Para AG7 (a)
discussed above requires regulated activity and non-regulated activity to be
accounted separately if the separability test is met. In the above case, the
infrastructure i.e. Airport premises is being used both for regulated services
(aeronautical) and for providing unregulated services (non-aeronautical). There
is no distinct or separate infrastructure for providing regulated and
unregulated services. The regulated and unregulated services are highly
dependent on each other, and do not constitute separate CGU’s, thus failing the
separability test. The aeronautical and non-aeronautical services are
substantially interdependent and cannot be offered in isolation e.g. operations
like Duty free, IT services, foods and shops and Hotel around airport etc.
are dependent upon the passenger traffic generated by the aeronautical
activities. The sustainability of aeronautical and non-aeronautical services
gets significantly impacted by non-existence of the other. Thus, in the given
fact pattern, control test as enunciated above (Para 5 of Appendix A) needs to
be applied on the infrastructure as a whole.
– Para AG7 (b)
requires purely ancillary activities that are unregulated to be ignored, and
the control test should be applied as if those services did not exist.
Therefore, if the unregulated services are interpreted to be purely ancillary,
and control test is applied on that basis, CAD would have control over the
infrastructure and consequently SCA accounting would apply for the operator.
However, in the given fact pattern, the unregulated activities are very
significant and not “purely ancillary”.
– Appendix A
does not define the term “purely ancillary”, however, in normal parlance it is
understood to be an ‘activity that provides necessary support to the main
activity of an organisation. Some of the synonyms for the term “ancillary”
include, additional, auxiliary, supporting, helping, assisting, extra,
supplementary, supplemental, accessory, contributory, attendant, incidental,
less important, etc. One may argue that a user needs an airport to
travel from Point A to Point B. Seen from this perspective, the unregulated
activity is ancillary because it is only supporting the main activity of air
travel. However, if seen from the perspective of importance, the unregulated
activity is very important and should not be seen as ancillary and certainly
not as “purely ancillary”. This is because the unregulated activity
drives the airport feasibility, and is therefore very important from the
perspective of the public (users), government and the operator. Besides in the
given fact pattern, the unregulated income is very significant and estimated to
exceed regulated income over the concession period.
– As
discussed above since the separability test is not met, the regulated and
unregulated activity and the related infrastructure cannot be accounted for
separately.
Further, the unregulated
activity is not purely ancillary and hence cannot be ignored. Thus in the fact
pattern, the condition as mentioned above in para 5 that grantor control or
regulates the prices for services should be analysed considering the entire
infrastructure. This control criterion is not met for the entire
airport, and hence this is not a SCA.
– Also,
Appendix A does not deal with a situation where the separability test is not
met and the unregulated activity is not purely ancillary. Consequently, one
could argue that it is scoped out of Appendix A, and should be accounted as
Property, plant and equipment (PPE). On the other hand, one may argue that
since neither Ind AS 16 nor Appendix A prescribes any accounting in these
situations, one may voluntarily decide to apply Appendix A. Therefore the
author believes that there would be an accounting policy choice, which when
selected, should be consistently applied.
Whilst this discussion has been made in the context of modern
airports which have significant unregulated activity, it may be applied by
analogy to several other SCA which entail significant unregulated activity and
revenue. In most cases, careful analysis
would be required to determine if the arrangement is a SCA or not.
Author is of the view that either the Institute
or the National Financial Reporting Authority should issue guidance to avoid
use of alteration accounting.
