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The Interpretations Committee directed the staff to provide an analysis of the conceptual arguments underlying the accounting for variable payments in lease contracts and their applicability to variable payments for asset purchases

 08 September 2015


The Interpretations Committee received a request to clarify the accounting for contractual payments that are to be made by an operator under a service concession arrangement within the scope of IFRIC 12 Service Concession Arrangements. Specifically, the submitter asked the Interpretations Committee to clarify in what circumstances (if any) those payments should:

  1. be included in the measurement of an asset and a liability at the start of the concession; or
  2. be accounted for as executory in nature (ie be recognised as expenses as they are incurred over the term of the concession arrangement).

The Interpretations Committee had noted that when the payments to be made by the operator are variable, the issue is linked to the broader issue of variable payments for the purchase of property, plant and equipment (PPE) and intangible assets outside of a business combination. The Interpretations Committee discussed both these issues (ie accounting for payments made by an operator and variable payments for the acquisition of PPE and intangible assets) over several meetings between 2011 and 2013.

In its previous discussions on this issue, the Interpretations Committee could not reach a consensus on whether variable payments that are dependent on the purchaser’s future activity should be excluded from the initial measurement of the liability until that activity is performed. As accounting for variable payments is a topic that was discussed as part of the Leases and Conceptual Framework projects, a decision was made to reconsider this issue after the proposals in the Exposure Draft Leases (the ‘Leases ED’) had been redeliberated. Accordingly, the discussion on both these issues was put on hold.

The redeliberations of the technical proposals in the Leases ED have been substantially completed. At this meeting, the Interpretations Committee was presented with a summary of:

  1. previous discussions and tentative decisions;
  2. updates for recent developments in IFRS;
  3. outreach activities; and
  4. explanations of the consequences of applying the principles developed in the Leases project to the accounting for variable payments in asset acquisitions.

At this meeting, members of the Interpretations Committee expressed mixed views on applying the principles developed in the Leases project to the accounting for variable payments for asset purchases. Some members of the Interpretations Committee expressed concerns with applying those principles and noted that lease accounting is a specific accounting regime and the rationale for some of the decisions made in the Leases project may not be directly applicable to asset purchases. The Interpretations Committee directed the staff to provide an analysis of the conceptual arguments underlying the principles in accounting for variable payments in lease contracts and their applicability to accounting for variable payments for asset purchases. The Interpretations Committee also asked the staff to consider whether service concession arrangements represented a distinct and specific type of transaction that could be analysed separately.

Payments made by an operator to a grantor in a service concession arrangement in the scope of IFRIC 12

In its previous discussions on this issue, the Interpretations Committee had noted that:

  1. if the concession fee arrangement gives the operator a right to a good or service that is distinct from the service concession arrangement, the operator should account for that distinct good or service in accordance with the applicable Standard.
  2. when the concession payments are linked to the right of use of a tangible asset, judgement should be used to determine whether the operator obtains control of the right of use of the asset. If the operator controls the right of use of the asset, the arrangement would be considered to be within the scope of the leases Standard.
  3. when the payments are linked to the right of use of a tangible asset, but the arrangement does not represent an embedded lease, the payment should be analysed in the same way as a concession fee.
  4. if the concession fee arrangement does not give the operator a right to a distinct good or service or a right of use that meets the definition of a lease, the type of service concession arrangement should determine the accounting for the contractual payments to be made by the operator to the grantor:
  5. if the service concession results in the operator having only a contractual right to receive cash from the grantor (ie the financial asset model in IFRIC 12 applies), then the concession payment is an adjustment to the overall revenue consideration;
    1. if the service concession arrangement results in the operator having only a right to charge users of the public service (ie the intangible asset model in IFRIC 12 applies), then the concession payment represents consideration for the concession right (ie part of the cost of the intangible asset recognised); and
    2. if the operator has both a right to charge users of the public service and a contractual right to receive cash from the grantor, then the amount of the contractual right to receive cash from the grantor needs to be compared with the fair value of the operator’s services to determine whether the concession payment represents an adjustment to the overall revenue consideration or consideration for the concession right intangible asset.

At this meeting several members of the Interpretations Committee expressed a preference for retaining the previous tentative decisions on accounting for payments made by an operator to a grantor subject to resolving the broader issue of accounting for variable payments for asset purchases.

Next steps

The staff will present a paper at a future meeting analysing conceptual arguments underlying the principles in accounting for variable payments in lease contracts and their applicability to accounting for variable payments for asset purchases.




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