The existing UK accounting requirements on service concessions are largely contained in FRS 5 ‘Reporting the Substance of Transactions’, particularly in Application Note F ‘Private Finance Initiative and similar contracts’. There is no equivalent to Application Note F in the IASB’s existing literature; nor indeed is there any equivalent to FRS 5. This has concerned the ASB, which was pleased when the IASB decided that research was needed on the accounting treatment of service concessions.

The IASB asked a group comprising representatives of the standard-setters of Australia, France, Spain and the UK to carry out the research. The group reported back in April this year. It recommended that the IASB carry out a long-term comprehensive project to address the issues relating to recognition, components, executory contracts and accounting for licences— all issues that need to be addressed if an optimal accounting treatment for service concessions is to be developed. However, recognising that such a project would take some time, the group also recommended that the IASB ask its interpretations committee, IFRIC, to clarify how aspects of the existing literature apply to service concessions. The ASB supported both these recommendations.

IFRIC’s first discussion of the subject took place at the end of September. The main objective of that discussion was to identify the issues that IFRIC should address, the order in which they might be addressed, and the form any output should take.

The main issues that IFRIC tentatively decided to address were:

1. the extent to which IAS 17’s lease accounting model is relevant, and the extent to which other models are also relevant.

2. if the lease accounting model is relevant, how the model should be applied to service concession arrangements. For example, how should it be applied to transactions that appear to involve several asset transfers and separate asset components? Should it be applied to the transaction as a whole or to each component of each transfer, for example? And is the conceptually correct approach capable of practical implementation? Is additional guidance needed to make that possible?

3. are all the obligations that arise from service concession arrangements obligations that relate to equally unperformed executory contracts (such as lease obligations)? If not, how should they be accounted for?

4. is it sometimes appropriate for the concession operator to apply the percentage of completion method when accounting for concession income and expenses? Similarly, is it sometimes appropriate to recognise as an asset the operator’s right to recover its costs?

The ASB believes that it is essential that IFRIC’s project progresses quickly and that its guidance is in place in time for 2005. The ASB is therefore doing all that it can to help IFRIC in its work.