7. IFRIC 12 provides guidance to the private sector operator on the recognition and measurement of revenues receivable under service concession arrangements, once it has been demonstrated that the arrangement is within the scope of IFRIC 12. To be within the scope, the arrangement contractually obliges the operator to provide the services related to the infrastructure to the public on behalf of the grantor (the public sector) (IFRIC 12.3). The private sector operator will apply IFRIC 12 to those arrangements where:
• the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them and at what price; and
• the grantor controls - through beneficial entitlement or otherwise - any significant residual interest in the infrastructure at the end of the term of the arrangement.
8. IFRIC 12 (Application Guidance paragraph 3) notes that, in determining the applicability of the first condition, non-substantive features (such as price capping that would apply only in remote circumstances) should be ignored and the substance of the arrangement considered.
9. IFRIC 12 applies to arrangements where the infrastructure is used for its entire useful life, to infrastructure that the operator constructs or acquires from a third party and to infrastructure that the grantor provides to the operator for the purpose of the concession. It does not specify the accounting for infrastructure that was held and recognised as an asset by the operator prior to entering the arrangement (IFRIC 12.6-8). Where the infrastructure asset is used for its entire useful life, and there is little or no residual interest, the arrangement would fall within the scope of IFRIC 12 where the grantor controls or regulates the services as described in the first condition in paragraph 7 above.
10. DBFO-type PPP contracts appear to exhibit the characteristics of service concession arrangements covered by IFRIC 12. The infrastructure assets created under such schemes are used to provide a public service - health care, custodial care, education, etc., although normally these services are provided free at the point of use (or any revenues generated are owned by the public sector). Instead of setting the price that the operator can charge, in these cases the government contracts to pay a unitary charge in return for the operator making the infrastructure available for use. Other schemes where the grantor has provided an existing asset to the operator for the purpose of providing a public service also appear to fall within the scope of IFRIC 12 as far as the operator is concerned. One would therefore expect the private sector operator of such PPP contracts accounting under IFRS to apply IFRIC 12.
11. It might be argued that it is less clear that an operator uses infrastructure assets to provide a public service in the case of, for example, the management of headquarters buildings, which one might characterise as being analogous to serviced offices. However, IAS 16 Property, Plant and Equipment includes assets held for administrative purposes in its definition of property, plant and equipment and, therefore, by applying that definition more widely, accommodation contracts of this type fall within the scope of IFRIC 12 (provided they meet the criteria set out in paragraph 7 above), given that the public sector uses these assets as inputs into the production of public services.
12. An initial analysis would also suggest that some PPP contracts are not service concession arrangements as defined in IFRS because the type of contract does not meet the definitions in IFRIC 12. Contracts that do not involve the transfer or creation of an infrastructure asset for the purpose of the contract fall outside the scope of IFRIC 12.
13. Other PPP arrangements might not be service concession arrangements within the meaning of IFRIC 12. For example, where the private sector operator uses or constructs his own infrastructure to fulfil the concession and retains ownership of the infrastructure at the end of the contract, that arrangement will be outside the scope of IFRIC 12. In such a case, the public sector grantor will need to consider how to account for the arrangement under IFRS - which will include consideration of whether or not the arrangement contains a lease in line with IFRIC 4. If there is an implicit lease, then the grantor will use the guidance in IAS 17 to determine whether it is a finance lease or an operating lease. If the arrangement does not contain a lease, then the grantor will recognise expenditure as it falls due under the arrangement.