PFRIC 12: Service

Concession
Arrangements (Build,
Operate and Transfer)
CHAPTER 23
Introduction

On the other hand, there is no specific I(P)FRS that applies to public-to-private service concession
arrangements for delivery of public services. I(P)FRIC 12 “Service Concession Arrangements”
interprets various standards in setting out the accounting requirements for service concession
arrangements while SIC 29 “Services concession arrangements: Disclosures” contains disclosure
requirements. PFRIC 12 applies to public-to-private service concession arrangements in which the
government/public sector body (the grantor) controls and/or regulates the services provided with the
infrastructure by the private sector entity (the operator).
Public-Private Partnership Program of the Philippines

Guided by the principles of transparency, accountability and sustained partnerships with the private
sector, the Public-Private Partnership Program of the Philippines was established as a flagship program
to realize the Philippine Public Investment Program that, in turn, supports the Philippine Development
Plan 2011 to 2016.

The program intends to provide the public with adequate, safe, efficient, reliable, and reasonably-
priced infrastructure and development facilities while affording the private sector a level playing field,
reasonable returns and appropriate sharing of risks. Government sees this as a reliable and solid
strategy to efficiently deliver its services, create more job opportunities through a dynamic and solid
infrastructure program.

Under the PPP Agenda, implementing agencies and local government units will be continually enabled
to undertake PPP projects through the provision of technical and capacity building support in all
aspects of the PPP project development and implementation cycle.
The Public-Private Partnership Center serves as the main agency tasked to pursue this PPP project
facilitation, coordination, and monitoring mandate. It is envisioned to be the champion of PPPs for
inclusive growth and sustainable development

In the Philippines, infrastructure for public services, such as Light Railway Transit (LRT), airports,
integrated transport system (ITS), roads connector, and bridges which were traditionally constructed,
operated and maintained by the public sector (directly or indirectly by the governments), have been
privatized (private entities).

The governments in those infrastructure programs would enter into contractual service arrangement to
attract private sector participation in the development, financing, operation and maintenance of such
infrastructure.
Typically, the arrangement would involve a private sector entity (an operator) constructing the infrastructure
used to provide public service or upgrading it (for example, by its capacity), operating and maintaining that
infrastructure for a specified time period. The operator is paid or obtains economic benefits for its services over
the period of the arrangement.

The arrangement is governed by a contract between the operator and the government (the grantor) that sets
out performance standards, mechanisms for adjusting prices or rates and arrangement for arbitrating disputes.

Such arrangements are often described as a “build-operate-transfer” (BOT) arrangement, a “rehabilitate-

operate-transfer” (ROT) or “public-to-private” service concession arrangement.

A significant feature of most service concession arrangements is the public service nature of the obligation
undertaken by the private operator i.e. the services related to the infrastructure are to be provided to the public,
irrespective of the identity of the party that operates the services.

The operator of the infrastructure is obliged to provide the services to the public, regardless of whether a fee
or rate is charged, on behalf of the government such as North or South Luzon Expressway.
Other features may include:
• the operator’s responsibility for management of the infrastructure and related services,
including maintenance and upgrading; and
• the operator is obliged to hand over the infrastructure to the grantor in a specified
condition at the end of the period of the arrangement (the concession period), for little
or no incremental consideration, irrespective of which party initially financed it.
Scope [PFRIC 12 (Philippine Financial Reporting Interpretations Committee 12)]

This Interpretation provides guidance on the accounting by operators for public-to-private service
concession arrangements. It does not deal with private-to-private service concession arrangements.

The PFRIC 12 applies only 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.
What is a Service Concession Arrangement?

A service concession arrangement is an arrangement whereby a government or other public

sector body contracts with a private operator to develop (or upgrade), operate and maintain
the grantor's infrastructure assets such as roads, bridges, tunnels, airports, energy
distribution networks, prisons or hospitals.

The grantor controls or regulates what services the operator must provide using the assets, to
whom, and at what price, and also controls any significant residual interest in the assets at the
end of the term of the arrangement.
The objective of PFRIC 12 is to clarify how certain aspects of existing IASB literature are to be
applied to service concession arrangements.

Two Types of Service Concession Arrangements (Consideration Given by the Grantor to the
Operator)
 
For providing the construction or upgrade services, the consideration received or receivable by the
operator shall be recognized at its fair value.

The nature of the consideration given by the grantor to the operator shall be determined by reference to
the contract terms and, when it exists, relevant contract law.
Example 1: Consideration Given
In a power supply concession arrangement, the operator is normally given a right to
receive payments in the form of guaranteed recognizes this right as a financial asset. In
contrast, for a highway or tunnel concession arrangement, the operator is given a license
to charge users for the use of the highway or tunnel. In this arrangement, the operator
recognizes an intangible asset as the license given by the grantor represents a right to
collect toll from the users of the infrastructure.
PFRIC 12 draws a distinction between two types of service concession arrangement.

In relation to the service, the consideration may be rights to:

• a financial asset; or
• an intangible asset.

Financial Asset

• The operator receives a financial asset, specifically an unconditional contractual right to receive a specified or determinable
amount of cash or another financial asset from the government in return for constructing or upgrading a public sector asset,
and then operating and maintaining the asset for a specified period of time.
• This category includes guarantees by the government to pay for any shortfall between amounts received from users of the
public service and specified or determinable amounts.

Intangible Asset
• The operator receives an intangible asset – a right to charge for use of a public sector asset that it constructs or upgrades and
then must operate and maintain for a specified period of time.
• A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to
which the public uses the service.

PFRIC 12 allows for the possibility that both types of arrangement may exist within a single contract: to the extent that the
government has given an unconditional guarantee of payment for the construction of the public sector asset, the operator has a
financial asset; to the extent that the operator has to rely on the public using the service in order to obtain payment, the operator has
an intangible asset.
Accounting – Financial Asset Model

The operator recognizes a financial asset to the extent that it has an unconditional contractual right to receive cash
or another financial asset from or at the direction of the grantor for the construction services.

The grantor has title, if any discretion to avoid payment, usually because the agreement is enforceable by law.

The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator:
• specified or determinable amounts or
• the shortfall, if any, between amounts received from users of the public services and specified or determinable
amount, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality
or efficiency requirements.

Under this category, the payments received by the operator are recognized as partial repayments of the financial asset.
 
The amount due from or at the direction of the grantor is accounted for in accordance with PFRS 9, Financial
Instruments, as:
• At amortized cost; or
• At fair value through profit or loss

If the amount due from the grantor is accounted for at amortized cost, PFRS 9 requires interest calculated using the
effective interest method to be recognized in profit or loss.
Accounting – Intangible Asset Model

The operator recognizes an intangible asset to the extent that it receives a right (a license) to charge users of
the public service. A right to charge users of the public service is not an unconditional right to receive cash
because the amounts are contingent on the extent that the public uses the service. The operator measures the
intangible asset at fair value.

PFRIC 12, allows that both types of arrangement may exist within a single contract, that is, to the extent that the
government has given an unconditional guarantee of payment for the construction of the public sector asset, the
operator has a financial asset; and to the extent that the operator has to rely on the public using the service in
order to obtain payment, the operator has an intangible asset.

If the operator is paid for the construction service partly by a financial asset and partly by an intangible asset,
it is necessary to account separately for each component of the operator’s consideration.

The consideration received or receivable for both components of the operator’s consideration. The
consideration received or receivable for both components shall be recognized initially at fair value of the
consideration.

The nature of the consideration given by the grantor to the operator shall be determined by reference to the
contract terms and, when exists, relevant contract law.
Operating Revenue

The operator of a service concession arrangement recognizes and measures revenue in accordance with PFRS 15 for the
services it performs.

Accounting by the Government (Grantor)

PFRIC 12 does not address accounting for the government side of service concession arrangements. PFRSs are not
designed to apply to not-for-profit activities in the private sector or the public sector. However, the International Public
Sector Accounting Standards Board (IPSASB) has started its own project on service concession arrangements, which will
give serious consideration to accounting by grantors. The principles applied in PFRIC 12 will be considered as part of the
project.

Issues Addressed

This Interpretation provides the accounting principles for recognizing and measuring the obligations and related rights in
service concession arrangements. The issues addressed are:
• treatment if the operator’s right over the infrastructure;
• recognition and measurement of arrangement consideration;
• construction or upgrade services;
• operation services;
• borrowing costs;
• subsequent accounting treatment of a financial asset and an intangible asset; and
• items provided to the operator by the grantor.
Treatment of the Operator’s Right over the Infrastructure

The interpretation specifies that the infrastructure shall not be recognized as property, plant and
equipment of the operator because the contractual service arrangement does not convey the right to
control the use of the public service infrastructure to the operator.

The operator has access to operate the infrastructure to provide the public service on behalf of the
grantor, in accordance with the terms specified in the contract.

Recognition and Measurement of Arrangement Consideration

The grantor may also provide other items to the operator that the operator can keep or deal with as it
wishes. If such assets form part of the consideration payable by the grantor for the services, they are
not government grants as defined in PAS 20, Accounting for Government Grants and Disclosure of
Government Assistance. They are recognized as assets of the operator, measured at fair value on initial
recognition. The operator shall recognize liability in respect of unfulfilled obligation it has assumed in
exchange for the assets.
Under the terms of the contractual arrangement, the operator acts as a service provider by constructing or
upgrading the infrastructure (construction or upgrade services) used to provide a public service, and operates
and maintains that infrastructure (operation services) for a specified period of time.

The operator shall recognize and measure revenue in accordance with PFRS 15 (as previously mentioned) for
the services it needs to perform. If the operator performs more than once service (i.e. construction or upgrade
services and operation services) under a single arrangement, consideration received and receivable shall be
allocated by reference to the relative fair values of the services delivered, when the amounts are separately
identifiable.

The nature of the consideration determines its subsequent accounting treatment, which may be a financial asset
or an intangible asset.

The operator may have contractual obligations it must fulfill as a condition of its license:
a. to maintain the infrastructure to a specified level of serviceability;
b. to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of
the service arrangement. At the end of the service arrangement, the residual interest in any
infrastructure constructed as part of the arrangement is controlled by the grantor, not the operator.
Construction or Upgrade Services

The operator shall account for revenue and costs relating to construction or upgrade services in accordance with PFRS 15, generally
using the stage of completion method.

Operation Services

The operator shall account for revenue and costs relating to operation services in accordance with PFRS 15.
Example 2: Operation Services
When the operator is required to supply electricity to users or the grantor and it needs to buy
materials such as coal, etc. to supply the service, it accounts for the operation services of the
supply of electricity separately from the construction or upgrade services on the infrastructure.
Contractual Obligation to restore the Infrastructure to a Specified Level of Serviceability

The terms of the contractual arrangement may require the operator:

• to maintain the infrastructure to a specified level of serviceability or
• to restore the infrastructure to a specified condition before it is handed over to the grantor at the end of the service
arrangement. These contractual obligations to maintain or restore infrastructure, except for any upgrade element, shall be
recognized and measured in accordance with PAS 37, as a provision at the best estimate of the expenditure that would be
required to settle the present obligation at the end of the reporting period.
Example 3: Contractual Obligation
In a highway service concession arrangement, any major resurfacing of the roads and other restoration costs
that the operator needs to incur during or towards the end of the concession period shall be recognized as a
provision and measured at the present value of the future expenditure using the operator’s current
borrowing cost.
Borrowing Costs Incurred by the Operator

In accordance with PAS 23, borrowing costs attributable to the arrangement shall be
recognized as an expense in the period in which they are incurred, unless the operator has a
contractual right to receive an intangible asset (a right to charge users of the public service).

In this case borrowing costs attributable to the arrangement shall be capitalized (as a
component of the intangible asset) during the construction phase of the arrangement in
accordance with PAS 23.