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16 Feb. 2017

New Accounting Requirements for Grantors of Service Concession Arrangements – Fatal-Flaw Review Draft Available for Comment

New accounting requirements for public sector grantors of service concession arrangements are now available for comment to the AASB as a ‘fatal-flaw’ draft until 14 March 2017.

These new requirements will address the lack of a specific Australian Accounting Standard for the accounting for Service Concession Arrangements (SCA) from the grantor’s perspective. The requirements could result in significant assets and liabilities being added to government balance sheets.

Key New Requirements

Asset Recognition

If a grantor controls service concession assets, the draft Standard requires that they recognise the assets. The draft Standard specifies that a grantor controls a service concession asset if: 

  • the grantor controls or regulates the public services that the operator must provide with the asset, to whom the operator must provide the services, and at what price; and
  • the grantor controls any significant residual interest in the asset at the end of the term of the arrangement.

Asset Measurement at Current Replacement Cost

Another new requirement is the initial measurement of the service concession asset at ‘current replacement cost’ in accordance with the cost approach to fair value under AASB 13 Fair Value Measurement, with corresponding liabilities recognised at the same amount. An existing grantor asset that is reclassified as a service concession asset would also be measured at current replacement cost, with the difference to the carrying amount accounted for as a revaluation at the reclassification date. 

The initial measurement of service concession assets at fair value (current replacement cost) does not mean the assets are measured under the revaluation model.

Liability Recognition

Service concession liabilities would be recognised using either the financial liability model or the ‘grant of a right to the operator’ (GORTO) model (or both, in a hybrid arrangement). The financial instrument Standards, including AASB 9 Financial Instruments, apply to the recognised financial liability. The GORTO model is relevant where the operator has the right to earn revenue from third-party users of a service concession asset or from another asset.

Extensive application guidance and examples have been developed to illustrate the requirements of the Standard. Transition relief is also available.

The final Standard is expected to be released in May 2017. The Standard will be effective from 1 January 2019, with earlier application permitted.