The objective of IFRIC 12 is to clarify how certain aspects of the IASB`s existing literature apply to service concession contracts. Concession contracts are sometimes used to take advantage of other nations. For example, foreign countries and companies forced China to make various concessions in the 19th and early 20th centuries. These concessions have given foreign companies the right to develop and operate railways and ports in China. In addition, citizens of other countries often enjoyed extraterritoriality as part of their concessions. Extraterritoriality meant that foreign laws and courts settled legal disputes between Chinese and foreigners in concessions. Of course, the decisions of these courts tended to be directed against Chinese companies and consumers. IFRIC 12 distinguishes between two types of service concession contracts. Apart from these requirements, ASU 2014-05 does not provide further guidance on the review of service concession agreements, but rather refers operational entities to guidance contained elsewhere in the CSA. For example, business units should recognize revenues and costs related to construction, modernization or operating services in accordance with CFS Topic 605 for revenue recognition. The provisions of ASU 2014-05 should apply retroactively to service concession contracts in force at the beginning of an undertaking`s acceptance exercise.
The modified retrospective approach requires that the cumulative effect of the application of these provisions to agreements in force at the beginning of the introduction period be recognised as an adjustment to the opening balance sheet of retained earnings for the annual adoption period. ASU 2014-05 applies to a public company for seasonal and intermediate periods during those seasonal periods beginning after December 15, 2014. For an entity that is not a public company, ASU 2014-05 applies to fiscal years beginning after December 15, 2014 and to interim periods of seasonal periods beginning after December 15, 2015. Early adoption is allowed. The full text of ASU 2014-05 can be found here. The operator recognises a financial asset to the extent that it has an unlimited contractual right to receive money or other financial assets from the licensor for or at the direction of the licensor. The operator has an unlimited right to cash payment if the licensor contractually guarantees to pay the operator IFRIC 12 does not deal with the balancing on the state side of the service concession agreements. IFRS is not designed to apply to charitable activities in the private or public sector.
However, the International Public Sector Accounting Standards Board (IPSASB) has launched its own draft service concession agreement, which will seriously review accounting by licensors. The principles applied in IFRIC 12 will be taken into account in the project. The operator of a service concession contract shall recognise and measure revenue in accordance with IAS 11 and 18 for the services it provides. IFRIC 12 allows the possibility that both types of agreements can exist under a single contract: to the extent that the government has provided an unconditional payment guarantee for the construction of the public sector asset, the operator has a financial asset; To the extent that the Operator must rely on the public to use the Service in order to receive payment, the Operator has an intangible asset. A concession contract is a contract that gives a company the right to operate a particular business in the jurisdiction of one government or on the ownership of another company under certain conditions. Concession contracts often involve contracts between the non-governmental owner of a facility and a concession owner or concessionaire. The agreement grants the concessionaire the exclusive right to operate his business in the factory for a certain period of time and under certain conditions. If these conditions are met, ASU 2014-05 specifies that the operating entity shall not recognise a service concession agreement as a lease under item 840 of the Consolidation of Accounting Standards (ASC). This requirement is intended to eliminate confusion and diversity in practice, as service concession contracts can be structured in different ways and, depending on the terms and in the absence of asU 2014-05 guidelines, an operating entity may have concluded that the agreement meets the criteria for a lease. In addition, ASU 2014-05 stipulates that infrastructure that is the subject of a service concession contract should not be recognised as a tangible asset of the operating entity, as the grantor controls the residual interest in the infrastructure.
This is in line with the guidelines of GASB Declaration No. 60, which requires public sector concessionaires to continue to declare infrastructure covered by a service concession contract as an investment. These payments may be made during the provision of the services or over a longer period. In addition, the operating company may be granted the right to charge the public (third-party users) for the use of the infrastructure. Service concession agreements are becoming more common in the United States as public entities look for other ways to provide public services more efficiently and cost-effectively. As a result, in November 2010, the Government Accounting Standards Board (GASB) issued GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Agreements, which sets out accounting and financial reporting requirements for concessionaires and public sector operating entities. Concession contracts typically define operating life and insurance requirements, as well as fees. Payments to a landlord may include site rent, a percentage of sales proceeds, or a combination of both. .