IFRIC 12

Traditionally, in many countries around the world, public infrastructure such as roads, bridges, hospitals, prisons, wastewater treatment plants and power facilities, was built, operated and maintained by the public sector, financed through government budgets. In recent decades, however, service concession arrangements have emerged as a mechanism by which governments encourage private-sector participation in the construction, financing and operation of such public infrastructure.

Under these arrangements, the government (the grantor) utilises private capital to develop and operate infrastructure for public benefit, without having to exceed its own budgetary limits. Economically, the rationale is that the public sector does not bear the full burden of construction, financing and operation, but rather delegates some of these responsibilities to private entities under government oversight.

These arrangements are known by several names, including PPP (Public–Private Partnership), PFI (Private Finance Initiative) and BOT (Build–Operate–Transfer). In many such agreements, the operator builds the infrastructure, operates it for a defined period, and then transfers it back to the government. In other cases, such as BOO (Build–Operate–Own), the infrastructure remains with the operator after the concession period ends.

In some arrangements, the operator is not required to build new infrastructure but instead uses existing assets – either assets it built previously, or assets made available by the public entity — while being responsible for operation and maintenance during the concession period.

Key characteristics of service concession arrangements include:

The service provided is one that the grantor would otherwise be responsible for delivering to the public.
The operator is not merely an agent but assumes partial responsibility for managing the infrastructure and delivering the related public services.
Price and rate changes are subject to regulatory oversight and are usually defined within the concession agreement.
At the end of the concession period, the operator must return the infrastructure to the grantor, typically in a predefined condition and without, or only nominal, consideration.

Modern accounting framework – IFRIC 12

IFRIC 12 provides the accounting guidance for such agreements. Since the infrastructure is in most cases transferred back to the grantor at the end of the concession period (except in BOO arrangements), the infrastructure is not recognised as property, plant and equipment by the operator. Instead, the operator shall determine whether consideration for construction services should be recognised as:

a financial asset, representing an unconditional right to receive cash or another financial asset from the grantor, or
an intangible asset, representing the right to charge users of the infrastructure.

In certain cases, the arrangement may involve a hybrid model, combining both a financial asset and an intangible asset. One of the main challenges addressed by IFRIC 12 is how the operator shall reflect arrangements where the grantor controls, either wholly or partially, the type of service, the pricing and the beneficiaries, while retaining ownership of the infrastructure at the end of the concession period.

Under IFRIC 12, infrastructure within its scope shall not be recognised as PP&E in the operator’s financial statements. Instead, it shall be classified as a financial asset, an intangible asset or both, depending on the nature of the operator’s rights and obligations.

Accounting Treatment in the grantor’s financial statements

IFRIC 12 does not prescribe the accounting treatment for the grantor, as it is primarily intended for private-sector entities. However, when the grantor prepares financial statements under IFRS (for example, a government business entity), the grantor should generally apply a mirror approach:

If the grantor controls the infrastructure during the concession period (and any residual value), it should recognise the asset as property, plant and equipment.
In return for the construction services received, the grantor should recognise a liability, classified as a financial liability, deferred income, or a combination thereof, depending on the arrangement’s substance.

In summary, IFRIC 12 reflects the economic substance of public–private partnerships: the operator is not the owner of the infrastructure but rather a service provider compensated through rights or payments,
while the grantor retains ultimate control and ownership of the public asset.