Comments on Exposure Draft – Guidance Note on Accounting for Service Concession Arrangements by Concessionaires

Thanking you.

Bombay Chartered Accountants ‘ Society

Nitin Shingala                                                                                         Harish N. Motiwalla
President                                                                                                Chairman
                                                                                                Accounting & Auditing Committee

Comments on Exposure Draft – Guidance Note on Accounting for Service Concession Arrangements by Concessionaires Para 14 Here it is stated as follows:

“The concessionaire should recognize and measure revenue in accordance with Accounting Standard (AS) 7, Construction Contracts, and Accounting Standard (AS) 9, Revenue Recognition, for the construction or upgrade and operating the services it performs, respectively. If the concessionaire performs more than one service under a single contract or arrangement, consideration received or receivable should be allocated by reference to the relative fair values of the services delivered.”

Comment
If the concessionaire performs service and books its income on the basis of its performance, the consideration received or receivable should also be allocated by reference to the relative fair values of the services performed and not delivered.

As such, there may be difference between the services performed and considered as delivered, which would be the billed revenue. However, there is a possibility where the concessionaire would consider certain services being already performed and accordingly would book the same as revenue though, the difference between the income recognized as performed and delivered would be treated as Unbilled Revenue.

In view of the adoption of new IFRS 15 – Revenue Recognition, which replaces IAS 11 – Construction Contracts as well as IAS 18 – Revenue Recognition, when a contract contains more than one distinct performance obligation, an entity allocates the transaction price to each distinct performance obligation on the basis of relative stand alone selling price.

Considering the above scenario, kindly provide guidance as to whether the concessionaire can allocate consideration by reference to the fair values of the services on the basis of the Input Method (on the basis of the cost incurred towards each distinct performance obligation to the overall cost of the contract).

Para 18
Here it is stated as follows:

“AS 10, Accounting for Fixed Assets, requires that ‘when a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. It may be appropriate to consider also the fair market value of the asset acquired if this is more clearly evident’. Thus, in accordance with AS 10, service concessions arrangement which is compensated by grant of a right to collect fees from users of the public service would require the acquired ‘intangible asset’ to be recorded at a value which represents the fair value of the construction services rendered.”

Comment
As per AS 26 – Intangible Assets, Para 23 states “An intangible asset should be measured initially at cost.” Hence if there is to be capitalization of cost incurred for receiving a right to charge users of the public service by the concessionaire, the same has to be on the basis of the identifiable component of cost incurred which can be categorized for the receipt of such rights. The reference is the Guidance should be through AS 26 which is the standard specifying treatment for intangibles.

The reference to AS 10, it is felt deals with situation of exchange of tangible asset with a tangible asset. In the case of concessionaire, the cost incurred may not be creation of any tangible asset, since the ownership will be with the operator. Hence the determination of fair value on the basis of treating the cost incurred for construction of a certain asset which does not belong to the concessionaire and treating the said cost towards exchange for another asset which is also not a tangible asset, seems to be faulty.

Para 23
Here it is stated as follows:

“………These contractual obligations to maintain or restore infrastructural facilities, except for any upgrade element (see paragraph 14), ……..”

Comment
Reference to “(see paragraph 14)” should be “(see paragraph 15)”.

Para 25 & 26

“Receivable

25 The amount due from or at the direction of the grantor is accounted for as a receivable

26 In case of an annuity, interest element should be segregated and should be recognized in the statement of profit and loss at the rate implicit in the annuity contract.”

Comment
Clarification in cases where the Concessionaires have already recognized financial asset in accordance with 2008 Guidance note in its financial statements.

The 2014 Guidance Note deals only with accounting of Receivable and not financial asset except in cases where the amounts are in nature of Annuity Para 26 of GN provides the segregation of interest.

However since there may be Concessionaires who may have early adopted the 2008 Guidance note (as early adoption was allowed), in cases where such entities have recognized Financial asset in accordance with Para 23 to 25, it will be required to derecognize the same under 2014 GN as no similar provisions have been made. Guidance Note should provide the manner in which such changes will be incorporated in financial statements.

Para 28
Here it is stated as follows:
“The,  depreciable amount of the intangible asset recognized according to paragraph 27 should be allocated on a systematic basis over the best estimate of its useful life.”
 
Comment
Intangible asset has to be amortized over its useful life and hence the word “depreciable amount” should be replaced with “amortizable amount”.

Para 28 & 29
Here    it    is    stated    as    follows:
“28  the depreciable amount of the intangible asset recognized according to paragraph 27 should be allocated on a systematic basis over the best estimate of its   useful life.

29  the amortisation method used should be in accordance    with    the    principles    laid    down    in    AS    26.”

Point 16 of Example 2 of Illustration
Here    it    is    stated    as    follows:
“16         In    accordance    with    AS    26,     the     intangible asset    is amortized over the period in which it is expected to be available for use by the concessionaire, i.e. years 3–10. for the purpose of this example, the depreciable amount of the intangible asset (rs.1, 084) is allocated using the straight-line method.  the annual amortization charge is therefore  rs.1, 084 divided by 8 years, i.e.  Rs.135   per year.”

Comment
Para    28/29    of    GN    prescribes    the    method    of    amortization    as    per    AS    26    (para    73).    Point    16    of    Example    2    provides     the    amortization on straight line method over the concession period.     However,     Schedule     II     of     Companies     Act     2013    specifically     provides     that     the     amortization     will     be     in    
accordance expected revenue for the year as compared to the total revenue during the concession period.  to this extent the Gn will have to be amended for the Concessionaires who are covered by the provisions of the Companies   act, 2013

Para 33
Here    it    is    stated    as    follows:
“in those service concession arrangements, where the concession fees or periodic premium payable to the grantor is of the nature of  revenue sharing arrangement, i.e., the concessionaire acts as the agent of the grantor as a collector of fees from the users of the public service, the amount of fees collected is adjusted for the concession fees or premium paid to the grantor.”

Comment
If the concessionaire is acting as an agent, guidance and clarity is sought as to whether the fees collected by the concessionaire should be accounted on gross basis or on Net basis.