Fixed Asset vs. IFRIC 12 – A Practical Accounting Comparison

Purpose

This financial model illustrates the distinct accounting treatments and financial implications of IFRIC 12 Service Concession Arrangements under both Financial Asset and Intangible Asset models, compared with traditional Fixed Asset arrangements per IAS 16. The guide enhances understanding of recognition, measurement, and presentation differences affecting the Statement of Comprehensive Income and Balance Sheet.

Applicable Terms/Facts for All Arrangements

Parameter	Value
Construction Costs	USD 1,000 million (USD 500M annually, Years 1–2)
Revenue	USD 200 million per annum during Years 3–10
Cash Flow Timing	All cash flows occur at year-end
Financing	Operator finances through debt and retained earnings at 6.7% annual interest
Working Capital	Zero payables and receivables days

IFRIC 12 Decision Framework

The IFRIC 12 flowchart-based classification determines whether a concession arrangement should be accounted for as an intangible asset or a financial asset, based on:

• Demand risk assessment — who bears the usage/volume risk
• Cash flow rights analysis — how the operator is compensated
• Asset ownership determination — who controls the underlying asset
• Residual value allocation — who receives residual interest at concession end

Classification results in either intangible asset, financial asset, or neither (Fixed Asset treatment under IAS 16).

IFRIC 12 – Intangible Asset Arrangement

Arrangement Facts

• Construction completion: 2 years
• Operation period: 8 years (Years 3–10)
• Major maintenance required: end of Year 8
• Operator collects user fees
• Forecasted annual fees: USD 200 million (Years 3–10)
• Concession terminates at Year 10

Nature of Asset

• Operator bears demand risk
• Right to charge infrastructure users
• Grantor retains asset ownership
• Residual interest transfers to Grantor at arrangement end
• Operator provides capital investment

Revenue Recognition

Construction Phase (Years 1–2):

• Construction revenue: USD 525 million annually
• Construction costs: USD 500 million annually
• Construction profit: USD 25 million annually
• Recognized per IFRS 15 based on stage of completion

Operation Phase (Years 3–10):

• User fee revenue: USD 200 million annually
• Revenue recognized as services are rendered

Borrowing Costs

During construction, borrowing costs (6.7%) are capitalized under IAS 23 when the operator has contractual rights to an intangible asset.

Intangible Asset Measurement

• Initially measured at contract asset cost
• Subsequently measured at cost less accumulated amortization and impairment (IAS 38)
• Useful life equals concession term
• Amortization begins when asset becomes available for use

Key Journal Entries

Year	Entry	Debit (USDmm)	Credit (USDmm)
1	Contract asset / Construction revenue	525	525
1	Capitalized borrowing costs	34	34
2	Reclassification to intangible asset	1,084	1,084
3+	Amortization expense	135	135

IFRIC 12 – Financial Asset Arrangement

Arrangement Facts

• Construction completion: 2 years
• Operation period: 8 years (Years 3–10)
• Major maintenance: end of Year 8 (revenue-generating)
• Grantor pays operator USD 200 million annually (Years 3–10)
• Arrangement ends at Year 10

Nature of Asset

• Operator bears no demand risk
• Unconditional contractual right to receive cash from Grantor
• Grantor retains asset ownership
• Residual interest transfers to Grantor
• Operator provides capital investment

Revenue Recognition

Construction Phase (Years 1–2):

• Construction revenue: USD 525 million and construction costs: USD 500 million annually
• Significant financing component exists due to deferred payment structure
• Finance income recognized at effective interest rate of 6.18%

Operation Phase (Years 3–10):

• Accounted for per IFRS 9 as receivables
• Costs adjusted for profit margin to determine fair value
• Profit margins applied: construction (5%), operations (20%), maintenance (10%)

Borrowing Costs

Under IAS 23, borrowing costs are expensed when the operator has rights to a financial asset — no capitalization applies.

Interest Income

Effective interest rate methodology applies, discounting cash flows for services and Grantor receipts throughout the concession period.

Financial Asset Measurement

Per IFRS 9, subsequent measurement options include:

• Amortized cost — the primary method used in this model
• Fair value through other comprehensive income (FVTOCI)
• Fair value through profit or loss (FVTPL)

Key Journal Entries

Year	Entry	Debit (USDmm)	Credit (USDmm)
1	Contract asset / Construction revenue	525	525
2	Reclassification to financial asset	1,082	1,082
3	Cash receipt	—	200
3	Operations revenue	12	—
3	Finance income	67	—
3	Financial asset reduction	121	—

Fixed Asset (IAS 16) Arrangement

Arrangement Facts

• Construction completion: 2 years
• Operation period: 8 years (Years 3–10)
• Major maintenance: end of Year 8
• Owner collects user fees: USD 200 million annually (Years 3–10)
• Owner retains control and all residual interests

Nature of Asset

• Demand risk borne by Owner
• Asset ownership retained by Owner
• Residual interest retained by Owner
• Capital investment by Owner

Revenue Recognition

Construction Phase:

• Costs capitalized as infrastructure under construction
• No revenue recognized during construction

Operation Phase (Years 3–10):

• Annual fee revenue: USD 200 million

Fixed Asset Measurement

Two measurement methods available under IAS 16:

Cost Model: Asset carried at cost less accumulated depreciation and impairment losses.

Revaluation Model: Asset carried at fair value on revaluation date less subsequent depreciation and impairment losses.

Depreciation

• Commences when asset is available for use
• Useful life aligned to concession term for comparison
• Annual depreciation expense: approximately USD 129 million

Key Journal Entries

Year	Entry	Debit (USDmm)	Credit (USDmm)
1	Construction in progress	500	500
1	Capitalized borrowing costs	34	34
2	Reclassification to fixed asset	1,034	1,034
3+	Depreciation expense	129	129

Key Distinctions Summary

Aspect	Intangible Asset	Financial Asset	Fixed Asset (IAS 16)
Construction Revenue	Recognized	Recognized	Not recognized
Asset Type	Intangible (IAS 38)	Financial (IFRS 9)	PPE (IAS 16)
Borrowing Costs	Capitalized	Expensed	Capitalized
Amortization/Depreciation	From operations start	N/A (amortized cost)	From operations start
Demand Risk	Operator	Grantor	Owner
Finance Income	None	Yes (EIR method)	None

Conclusion

Understanding the differences between these three models is essential for anyone involved in concession arrangements or infrastructure projects. The classification under IFRIC 12 fundamentally changes how assets, revenues, and costs appear on the financial statements.

Resource: Download the accompanying Excel workbook from modelxcel.com demonstrating all three accounting approaches with complete financial modeling.