IFRIC draft Interpretations on Service Concessions

On 3 March, IFRIC published three draft Interpretations on service concession arrangements, with a consultation period ending on 31 May. As reported in previous editions of Inside Track, these have significant potential implications for the UK, given the scale of Private Finance Initiative (PFI) contracts.

The three IFRIC draft Interpretations are:
- D12: Determining the Accounting Model;
- D13: The Financial Asset Model; and
- D14: The Intangible Asset Model.

In summary, the draft Interpretations deal only with the accounting by operators. They do not specify the accounting by grantors. The draft Interpretations are also restricted to public-to-private service concession arrangements involving public service obligations where:

1. the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price. For the purpose of this condition, the grantor does not need to have complete control of the price: it is sufficient for the price to be regulated by the grantor, for example by a capping mechanism; and
   
   
2. the grantor controls - through ownership, beneficial entitlement or otherwise - the residual interest in the infrastructure at the end of the concession, and the residual interest is significant.

D12 specifies how an operator should account for its rights under a service concession arrangement. Given that the draft is restricted to circumstances in which the operator is deemed not to control the use of the infrastructure, D12 proposes that the operator should not recognise that infrastructure as its own property, plant and equipment. Instead, it should account for the rights it receives in return for providing construction services to the grantor.

D12 proposes that the classification of the operator's rights should depend on who is required to pay the operator for the concession services:

1. if the grantor itself has the "primary responsibility" to pay for those services (ie the operator looks first to the grantor for payment), the operator has a contractual right to receive cash in exchange for the construction services. D12 proposes that such a right to receive cash meets the definition of a financial asset and should be accounted for as such. The proposed accounting for the financial asset model is set out in D13; or
   
   
2. if the users of the concession services pay - for example, by paying tolls to use a road - D12 proposes that the operator does not have a contractual right to receive cash. Rather, it has a right to charge users as and when they use the concession services - a right that meets the definition of an intangible asset. The proposed accounting for the intangible asset model is set out in D14.

The ASB is responding to the drafts and is working with EFRAG on its response. The ASB has a number of concerns with the drafts, including:

• the limited scope of application, which will mean that many service concession arrangements, including private-to-private concessions, will not be covered;
  
  
• the way in which IFRIC has defined 'control' and the ruling out of any assessment of risks and rewards as a basis for determining control;
  
  
• the distinction of whether the operator has a financial asset or an intangible asset on the basis of who pays, which can lead to very different accounting for arrangements that are economically very similar; and
  
  
• the requirement under the financial asset model to revalue the asset at fair value where the future cash flows are subject to operating risks.

Copies of the draft Interpretations are available to download from the IASB website at www.iasb.org/current/ifricdrafts.asp.

Employee Share Purchase Plans

A draft UITF Abstract 'Changes in Contributions to Employee Share Purchase Plans' was issued on 14 February for comment by 24 March (see Information Sheet 73). The draft sets out the text of draft IFRIC Interpretation D11, addressing the accounting under FRS 20 (IFRS 2) 'Share-based Payment' when a member of an SAYE scheme withdraws from the scheme or changes from one scheme to another.

The main practical effect of the interpretation in D11 is that, if an employee withdraws from a SAYE plan (without starting another), the whole of the charge that would have been recognised over the vesting period had the employee remained in the plan would be recognised immediately in the profit and loss account. The UITF concluded that the proposed accounting was unsatisfactory and, in its response to IFRIC, asked IFRIC to reconsider its conclusions.

After considering respondents' comments, the IFRIC was unable to reach a consensus. Instead the IASB will be asked to amend IFRS 2 to clarify whether the requirements relating to cancellations apply to both cancellations by the entity and by the employee. If, as indicated, the IFRIC does not issue a final Interpretation, the UITF will not issue an Abstract.

Embedded derivatives

A draft UITF Abstract 'Reassessment of Embedded Derivatives' was issued on 31 March 2005 for comment by 31 May (see Information Sheet 75). The draft sets out the text of draft IFRIC Interpretation D15, clarifying when an entity should assess whether an embedded derivative meets the conditions requiring it to be accounted for separately from the host contract under FRS 26(IAS 39) 'Financial instruments: Measurement'.

Hyperinflation

The IFRIC is expected shortly to issue IFRIC Interpretation 6 'Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies'. IFRIC 6 will provide guidance on how to apply the requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency (where that economy was not hyperinflationary in the prior period).

The UITF decided not to develop an equivalent Abstract because it expects the Interpretation will have very limited relevance to the circumstances of entities preparing their financial statements in accordance with UK standards.

Status of other draft Abstracts

Emission Rights. IFRIC 3 'Emission Rights' was issued in December 2004 and is effective for periods beginning on or after 1 March 2005. The UITF announced in December that it would not issue a UITF Abstract based on IFRIC 3 (see Information Sheet 71). EFRAG has proposed to advise the EU Commission not to endorse IFRIC 3. The IFRIC is considering ways of changing the accounting that results from IFRIC 3, including an amendment to IAS 38 'Intangible Assets' that would require emission allowances traded in an active market to be measured at fair value with gains and losses recognised in profit or loss.

Retirement Benefits. In July 2004 the UITF issued a draft Abstract 'Retirement Benefit Schemes with a Promised Return on Contributions or Notional Contributions', an adapted version of IFRIC D9 (in Information Sheet 67). The IFRIC is considering the comments to D9.

Waste Electrical and Electronic Equipment. In November 2004 the UITF issued a draft Abstract 'Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment', setting out the text of IFRIC D10. A final IFRIC Interpretation is expected to be issued shortly.