IFRIC 12 IE

Illustrative examples
These examples accompany, but are not part of, IFRIC 12.

Example 1: The grantor gives the operator a financial asset

Arrangement terms
IE1 The terms of the arrangement require an operator to construct a
road—completing construction within two years—and maintain and operate the
road to a specified standard for eight years (ie years 3–10). The terms of the
arrangement also require the operator to resurface the road at the end of year 8.
At the end of year 10, the arrangement will end. Assume that the operator
identifies three performance obligations for construction services, operation
services and road resurfacing. The operator estimates that the costs it will incur
to fulfil its obligations will be:

Table 1.1 Contract costs

Year CU(a)
Construction services 1 500
2 500
Operation services (per year) 3–10 10
Road resurfacing 8 100
(a) in this example, monetary amounts are denominated in ‘currency units (CU)’.

IE2 The terms of the arrangement require the grantor to pay the operator 200
currency units (CU200) per year in years 3–10 for making the road available to
the public.

IE3 For the purpose of this illustration, it is assumed that all cash flows take place at
the end of the year.

Revenue
IE4 The operator recognises revenue in accordance with IFRS 15 Revenue from
Contracts with Customers. Revenue—the amount of consideration to which the
operator expects to be entitled from the grantor for the services provided—is
recognised when (or as) the performance obligations are satisfied. Under the
terms of the arrangement the operator is obliged to resurface the road at the end
of year 8. In year 8 the operator will be reimbursed by the grantor for
resurfacing the road.

IE5 The total expected consideration (CU200 in each of years 3–10) is allocated to the
performance obligations based on the relative stand-alone selling prices of the
construction services, operation services and road resurfacing, taking into
account the significant financing component, as follows:

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Table 1.2 Transaction price allocated to each performance obligation

Transaction price allocation

(including effect of the significant
financing component)
CU
Construction services (over two
years)(a) 1,050
Operation services (over 8 years)(b) 96
Road resurfacing services (in
year 8)(c) 110

Total 1,256

Implied interest rate(d) 6.18% per year

(a) The operator estimates the relative stand-alone selling price by reference to the
forecast cost plus 5 per cent.
(b) The operator estimates the relative stand-alone selling price by reference to the
forecast cost plus 20 per cent.
(c) The operator estimates the relative stand-alone selling price by reference to the
forecast cost plus 10 per cent.
(d) The implied interest rate is assumed to be the rate that would be reflected in a
financing transaction between the operator and the grantor.

IE6 In year 1, for example, construction costs of CU500, construction revenue of

CU525, and hence construction profit of CU25 are recognised in profit or loss.

Financial asset
IE7 During the first two years, the entity recognises a contract asset and accounts for
the significant financing component in the arrangement in accordance with
IFRS 15. Once the construction is complete, the amounts due from the grantor
are accounted for in accordance with IFRS 9 Financial Instruments as receivables.

IE8 If the cash flows and fair values remain the same as those forecast, the effective
interest rate is 6.18 per cent per year and the receivable recognised at the end of
years 1–3 will be:

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Table 1.3 Measurement of contract asset/receivable

CU
Amount due for construction in year 1 525

Contract asset at end of year 1(a) 525

Effective interest in year 2 on contract asset at the end of year 1
(6.18% × CU525) 32
Amount due for construction in year 2 525

Receivable at end of year 2 1,082

Effective interest in year 3 on receivable at the end of year 2
(6.18% × CU1,082) 67
Amount due for operation in year 3 (CU10 x (1 + 20%)) 12
Cash receipts in year 3 (200)

Receivable at end of year 3 961

(a) No effective interest arises in year 1 because the cash flows are assumed to take
place at the end of the year.

Overview of cash flows, statement of comprehensive

income and statement of financial position
IE9 For the purpose of this illustration, it is assumed that the operator finances the
arrangement wholly with debt and retained profits. It pays interest at 6.7 per
cent per year on outstanding debt. If the cash flows and fair values remain the
same as those forecast, the operator’s cash flows, statement of comprehensive
income and statement of financial position over the duration of the
arrangement will be:

Table 1.4 Cash flows (currency units)

Year 1 2 3 4 5 6 7 8 9 10 Total

Receipts - - 200 200 200 200 200 200 200 200 1,600
Contract costs(a) (500) (500) (10) (10) (10) (10) (10) (110) (10) (10) (1,180)
Borrowing costs(b) - (34) (69) (61) (53) (43) (33) (23) (19) (7) (342)

Net inflow/(outflow) (500) (534) 121 129 137 147 157 67 171 183 78
(a) Table 1.1
(b) Debt at start of year (table 1.6) x 6.7%

Table 1.5 Statement of comprehensive income (currency units)

Year 1 2 3 4 5 6 7 8 9 10 Total

Revenue 525 525 12 12 12 12 12 122 12 12 1,256

Contract costs (500) (500) (10) (10) (10) (10) (10) (110) (10) (10) (1,180)
Finance income(a) - 32 67 59 51 43 34 25 22 11 344
Borrowing costs(b) - (34) (69) (61) (53) (43) (33) (23) (19) (7) (342)

Net profit 25 23 - - - 2 3 14 5 6 78
(a) Amount due from grantor at start of year (table 1.6) × 6.18%
(b) Cash/(debt) (table 1.6) × 6.7%

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Table 1.6 Statement of financial position (currency units)

End of year 1 2 3 4 5 6 7 8 9 10

Amount due
from
grantor(a) 525 1,082 961 832 695 550 396 343 177 -
Cash/(debt)(b) (500) (1,034) (913) (784) (647) (500) (343) (276) (105) 78

Net assets 25 48 48 48 48 50 53 67 72 78
(a) Amount due from grantor at start of year, plus revenue and finance income earned
in year (table 1.5), less receipts in year (table 1.4).
(b) Debt at start of year plus net cash flow in year (table 1.4).

IE10 This example deals with only one of many possible types of arrangements. Its
purpose is to illustrate the accounting treatment for some features that are
commonly found in practice. To make the illustration as clear as possible, it has
been assumed that the arrangement period is only ten years and that the
operator’s annual receipts are constant over that period. In practice,
arrangement periods may be much longer and annual revenues may increase
with time. In such circumstances, the changes in net profit from year to year
could be greater.

Example 2: The grantor gives the operator an intangible asset

(a licence to charge users)

Arrangement terms
IE11 The terms of a service arrangement require an operator to construct a
road—completing construction within two years—and maintain and operate the
road to a specified standard for eight years (ie years 3–10). The terms of the
arrangement also require the operator to resurface the road when the original
surface has deteriorated below a specified condition. The operator estimates
that it will have to undertake the resurfacing at the end of year 8. At the end of
year 10, the service arrangement will end. Assume that the operator identifies a
single performance obligation for construction services. The operator estimates
that the costs it will incur to fulfil its obligations will be:

Table 2.1 Contract costs

Year CU(a)
Construction services 1 500
2 500
Operating the road (per year) 3–10 10
Road resurfacing 8 100
(a) in this example, monetary amounts are denominated in ‘currency units (CU)’.

IE12 The terms of the arrangement allow the operator to collect tolls from drivers
using the road. The operator forecasts that vehicle numbers will remain
constant over the duration of the contract and that it will receive tolls of 200
currency units (CU200) in each of years 3–10.

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IE13 For the purpose of this illustration, it is assumed that all cash flows take place at
the end of the year.

Intangible asset
IE14 The operator provides construction services to the grantor in exchange for an
intangible asset, ie a right to collect tolls from road users in years 3–10. In
accordance with IFRS 15, the operator measures this non-cash consideration at
fair value. In this case, the operator determines the fair value indirectly by
reference to the stand-alone selling price of the construction services delivered.

IE15 During the construction phase of the arrangement the operator’s contract asset
(representing its accumulating right to be paid for providing construction
services) is presented as an intangible asset (licence to charge users of the
infrastructure). The operator estimates the stand-alone selling price of the
construction services to be equal to the forecast construction costs plus 5 per
cent margin, which the operator concludes is consistent with the rate that a
market participant would require as compensation for providing the
construction services and for assuming the risk associated with the construction
costs. It is also assumed that, in accordance with IAS 23 Borrowing Costs, the
operator capitalises the borrowing costs, estimated at 6.7 per cent, during the
construction phase of the arrangement:

Table 2.2 Initial measurement of intangible asset

CU
Construction services in year 1 525
Capitalisation of borrowing costs (table 2.4) 34
Construction services in year 2 525

Intangible asset at end of year 2 1,084

IE16 In accordance with IAS 38, the intangible asset is amortised over the period in
which it is expected to be available for use by the operator, ie years 3–10. The
depreciable amount of the intangible asset (CU1,084) is allocated using a
straight-line method. The annual amortisation charge is therefore CU1,084
divided by 8 years, ie CU135 per year.

Construction costs and revenue

IE17 The operator accounts for the construction services in accordance with IFRS 15.
It measures revenue at the fair value of the non-cash consideration received or
receivable. Thus in each of years 1 and 2 it recognises in its profit or loss
construction costs of CU500, construction revenue of CU525 and, hence,
construction profit of CU25.

Toll revenue
IE18 The road users pay for the public services at the same time as they receive them,
ie when they use the road. The operator therefore recognises toll revenue when
it collects the tolls.

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Resurfacing obligations
IE19 The operator’s resurfacing obligation arises as a consequence of use of the road
during the operating phase. It is recognised and measured in accordance with
IAS 37 Provisions, Contingent Liabilities and Contingent Assets, ie at the best estimate of
the expenditure required to settle the present obligation at the end of the
reporting period.

IE20 For the purpose of this illustration, it is assumed that the terms of the operator’s
contractual obligation are such that the best estimate of the expenditure
required to settle the obligation at any date is proportional to the number of
vehicles that have used the road by that date and increases by CU17 (discounted
to a current value) each year. The operator discounts the provision to its present
value in accordance with IAS 37. The charge recognised each period in profit or
loss is:

Table 2.3 Resurfacing obligation (currency units)

Year 3 4 5 6 7 8 Total
Obligation arising in
year (CU17
discounted at 6%) 12 13 14 15 16 17 87
Increase in earlier
years’ provision
arising from passage
of time 0 1 1 2 4 5 13

Total expense
recognised in profit or
loss 12 14 15 17 20 22 100

Overview of cash flows, statement of comprehensive income and

statement of financial position
IE21 For the purposes of this illustration, it is assumed that the operator finances the
arrangement wholly with debt and retained profits. It pays interest at 6.7 per
cent per year on outstanding debt. If the cash flows and fair values remain the
same as those forecast, the operator’s cash flows, statement of comprehensive
income and statement of financial position over the duration of the
arrangement will be:

Table 2.4 Cash flows (currency units)

Year 1 2 3 4 5 6 7 8 9 10 Total

Receipts - - 200 200 200 200 200 200 200 200 1,600
Contract costs(a) (500) (500) (10) (10) (10) (10) (10) (110) (10) (10) (1,180)
Borrowing costs(b) - (34) (69) (61) (53) (43) (33) (23) (19) (7) (342)

Net inflow/ (outflow) (500) (534) 121 129 137 147 157 67 171 183 78
(a) Table 2.1
(b) Debt at start of year (table 2.6) × 6.7%

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Table 2.5 Statement of comprehensive income (currency units)

Year 1 2 3 4 5 6 7 8 9 10 Total

Revenue 525 525 200 200 200 200 200 200 200 200 2,650
Amortisation - - (135) (135) (136) (136) (136) (136) (135) (135) (1,084)
Resurfacing expense - - (12) (14) (15) (17) (20) (22) - - (100)
Other contract costs (500) (500) (10) (10) (10) (10) (10) (10) (10) (10) (1,080)
Borrowing costs(a)(b) - - (69) (61) (53) (43) (33) (23) (19) (7) (308)

Net profit 25 25 (26) (20) (14) (6) 1 9 36 48 78

(a) Borrowing costs are capitalised during the construction phase.
(b) Table 2.4

Table 2.6 Statement of financial position (currency units)

End of year 1 2 3 4 5 6 7 8 9 10

Intangible asset 525 1,084 949 814 678 542 406 270 135 -
Cash/(debt)(a) (500) (1,034) (913) (784) (647) (500) (343) (276) (105) 78
Resurfacing
obligation - - (12) (26) (41) (58) (78) - - -

Net assets 25 50 24 4 (10) (16) (15) (6) 30 78

(a) Debt at start of year plus net cash flow in year (table 2.4)

IE22 This example deals with only one of many possible types of arrangements. Its
purpose is to illustrate the accounting treatment for some features that are
commonly found in practice. To make the illustration as clear as possible, it has
been assumed that the arrangement period is only ten years and that the
operator’s annual receipts are constant over that period. In practice,
arrangement periods may be much longer and annual revenues may increase
with time. In such circumstances, the changes in net profit from year to year
could be greater.

Example 3: The grantor gives the operator a financial asset and

an intangible asset

Arrangement terms
IE23 The terms of a service arrangement require an operator to construct a
road—completing construction within two years—and to operate the road and
maintain it to a specified standard for eight years (ie years 3–10). The terms of
the arrangement also require the operator to resurface the road when the
original surface has deteriorated below a specified condition. The operator
estimates that it will have to undertake the resurfacing at the end of year 8. At
the end of year 10, the arrangement will end. Assume that the operator
identifies a single performance obligation for construction services. The
operator estimates that the costs it will incur to fulfil its obligations will be:

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Table 3.1 Contract costs

Year CU(a)
Construction services 1 500
2 500
Operating the road (per year) 3–10 10
Road resurfacing 8 100
(a) in this example, monetary amounts are denominated in ‘currency units (CU)’.

IE24 The operator estimates the consideration in respect of construction services to

be CU1,050 by reference to the stand-alone selling price of those services (which
it estimates at forecast cost plus 5 per cent.

IE25 The terms of the arrangement allow the operator to collect tolls from drivers
using the road. In addition, the grantor guarantees the operator a minimum
amount of CU700 and interest at a specified rate of 6.18 per cent to reflect the
timing of cash receipts. The operator forecasts that vehicle numbers will remain
constant over the duration of the contract and that it will receive tolls of CU200
in each of years 3–10.

IE26 For the purpose of this illustration, it is assumed that all cash flows take place at
the end of the year.

Dividing the arrangement

IE27 The contractual right to receive cash from the grantor for the services and the
right to charge users for the public services should be regarded as two separate
assets under IFRSs. Therefore in this arrangement it is necessary to divide the
operator’s contract asset during the construction phase into two components—a
financial asset component based on the guaranteed amount and an intangible
asset for the remainder. When the construction services are completed, the two
components of the contract asset would be classified and measured as a
financial asset and an intangible asset accordingly.

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Table 3.2 Dividing the operator’s consideration

Year Total Financial Intangible

asset asset
Construction services in year 1 525 350 175
Construction services in year 2 525 350 175

Total construction services 1,050 700 350

100% 67%(a) 33%
Finance income, at specified rate
of 6.18% on receivable (see
table 3.3) 22 22 -
Borrowing costs capitalised
(interest paid in years 1 and 2 ×
33%) (see table 3.7) 11 - 11

Total fair value of the operator’s

consideration 1,083 722 361
(a) Amount guaranteed by the grantor as a proportion of the construction services

Financial asset
IE28 During the first two years, the entity recognises a contract asset and accounts for
the significant financing component in the arrangement in accordance with
IFRS 15. Once the construction is complete, the amount due from, or at the
direction of, the grantor in exchange for the construction services is accounted
for in accordance with IFRS 9 as a receivable.

IE29 On this basis the receivable recognised at the end of years 2 and 3 will be:

Table 3.3 Measurement of contract asset/receivable

CU
Construction services in year 1 allocated to the contract asset 350

Contract asset at end of year 1 350

Construction services in year 2 allocated to the contract asset 350
Interest in year 2 on contract asset at end of year 1 (6.18% ×
CU350) 22

Receivable at end of year 2 722

Interest in year 3 on receivable at end of year 2 (6.18% ×
CU722) 45
Cash receipts in year 3 (see table 3.5) (117)

Receivable at end of year 3 650

Intangible asset
IE30 In accordance with IAS 38 Intangible Assets, the operator recognises the intangible
asset at cost, ie the fair value of the consideration received or receivable.

IE31 During the construction phase of the arrangement the portion of the operator’s
contract asset that represents its accumulating right to be paid amounts in

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