Accounting Standards

Disclosure - Service Concession Arrangements

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 1, Presentation of Financial Statements

1. An enterprise (the Concession Operator) may enter into an arrangement with another enterprise (the Concession Provider) to provide services that give the public access to major economic and social facilities. The Concession Provider may be a public or private sector enterprise, including a governmental body. Examples of service concession arrangements involve water treatment and supply facilities, motorways, car parks, tunnels, bridges, airports and telecommunication networks. Examples of arrangements that are not service concession arrangements include an enterprise outsourcing the operation of its internal services (e.g., employee cafeteria, building maintenance, and accounting or information technology functions).


2. A service concession arrangement generally involves the Concession Provider conveying for the period of the concession to the Concession Operator:
   1. the right to provide services that give the public access to major economic and social facilities, and
      
      
   2. in some cases, the right to use specified tangible assets, intangible assets, and/or financial assets, in exchange for the Concession Operator:
      
      
      1. committing to provide the services according to certain terms and conditions during the concession period, and
         
         
      2. when applicable, committing to return at the end of the concession period the rights received at the beginning of the concession period and/or acquired during the concession period.


3. The common characteristic of all service concession arrangements is that the Concession Operator both receives a right and incurs an obligation to provide public services.
   
   
4. The issue is what information should be disclosed in the notes to the financial statements of a Concession Operator and a Concession Provider.


5. Certain aspects and disclosures relating to some service concession arrangements are already addressed by existing Financial Reporting Standards (e.g., FRS 16 applies to acquisitions of items of property, plant and equipment, FRS 17 applies to leases of assets, and FRS 38 applies to acquisitions of intangible assets). However, a service concession arrangement may involve executory contracts that are not addressed in Financial Reporting Standards, unless the contracts are onerous, in which case FRS 37 applies. Therefore, this Interpretation addresses additional disclosures of service concession arrangements.

All aspects of a service concession arrangement should be considered in determining the appropriate disclosures in the notes to the financial statements. A Concession Operator and a Concession Provider should disclose the following in each period:

1. a description of the arrangement;
   
   
2. significant terms of the arrangement that may affect the amount, timing and certainty of future cash flows (e.g., the period of the concession, repricing dates and the basis upon which re-pricing or re-negotiation is determined);
   
   
3. the nature and extent (e.g., quantity, time period or amount as appropriate) of:
   
   
   1. rights to use specified assets;
      
      
   2. obligations to provide or rights to expect provision of services;
      
      
   3. obligations to acquire or build items of property, plant and equipment;
      
      
   4. obligations to deliver or rights to receive specified assets at the end of the concession period;
      
      
   5. renewal and termination options; and
      
      
   6. other rights and obligations (e.g., major overhauls); and
      
      
4. changes in the arrangement occurring during the period.