AASB Standard | AASB 2021-4 |
[AASB 1059]
This Standard is available on the AASB website: www.aasb.gov.au.
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Phone: (03) 9617 7600
E-mail: standard@aasb.gov.au
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ISSN 1036-4803
PREFACE
ACCOUNTING STANDARD
AASB 2021-4 Amendments to Australian Accounting Standards – Modified Retrospective Transition Approach for Service Concession Grantors
from paragraph
APPLICATION 2
AMENDMENTS TO AASB 1059 5
COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT 6
BASIS FOR CONCLUSIONS
Australian Accounting Standard AASB 2021-4 Amendments to Australian Accounting Standards – Modified Retrospective Transition Approach for Service Concession Grantors is set out in paragraphs 1 – 6. All the paragraphs have equal authority.
This Standard makes amendments to AASB 1059 Service Concession Arrangements: Grantors (July 2017).
The AASB received comments from a stakeholder regarding the modified retrospective method for measuring the Grant of a Right to the Operator (GORTO) liability set out in paragraph C4(c) of AASB 1059 when implementing the Standard. The stakeholder noted that the Standard is unclear how financial contributions paid by the grantor to the operator prior to the date of initial application should be treated when calculating the GORTO liability under the modified retrospective transition approach. The stakeholder noted that if these financial contributions were not adjusted in the grantor’s liability calculation, the GORTO liability at the date of initial application would be likely to be overstated, which in turn would lead to the overstatement of revenue in subsequent periods as the GORTO liability is unwound over the period of the service concession arrangement.
The AASB considered the stakeholder’s comments and decided to amend AASB 1059 to address the issue.
Main requirements
This Standard makes amendments to AASB 1059 to change the modified retrospective method for measuring the Grant of a Right to the Operator (GORTO) liability set out in paragraph C4(c) of AASB 1059 so that the GORTO liability is initially measured based on the fair value (current replacement cost) of the service concession asset at the date of initial application, adjusted by:
(a) deducting the carrying amount of any consideration transferred by the grantor to the operator recognised as an asset;
(b) adjusting the resulting amount to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement; and then
(c) deducting any outstanding related financial liabilities.
Application date
This Standard applies to annual periods ending on or after 30 June 2021, with earlier application permitted.
The Australian Accounting Standards Board makes Accounting Standard AASB 2021-4 Amendments to Australian Accounting Standards – Modified Retrospective Transition Approach for Service Concession Grantors under section 334 of the Corporations Act 2001.
| Keith Kendall |
Dated 21 June 2021 | Chair – AASB |
Amendments to Australian Accounting Standards – Modified Retrospective Transition Approach for Service Concession Grantors
1 This Standard amends AASB 1059 Service Concession Arrangements: Grantors (July 2017) to change the modified retrospective method for measuring the Grant of a Right to the Operator (GORTO) liability set out in paragraph C4(c) of AASB 1059.
2 The amendments set out in this Standard apply to entities and financial statements in accordance with the application of AASB 1059 set out in AASB 1057 Application of Australian Accounting Standards.
3 This Standard applies to annual periods ending on or after 30 June 2021. Earlier application of this Standard is permitted.
4 This Standard uses underlining, striking out and other typographical material to identify some of the amendments to AASB 1059, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material. Amended paragraphs are shown with deleted text struck through and new text underlined. Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.
5 Paragraph C4(c) and paragraphs IE42–IE44 in the accompanying illustrative examples are amended as follows. Paragraph C4(b) is not amended, but is included for context.
C4 If a grantor elects to apply this Standard retrospectively in accordance with paragraph C3(b), the grantor shall:
(a) …
(b) measure a financial liability arising under a service concession arrangement at fair value at the date of initial application;
(c) measure a liability representing the unearned portion of any revenue arising from the receipt of a service concession asset under the grant of a right to the operator model at the fair value (current replacement cost) of the related service concession asset at the date of initial application, adjusted by:
(i) deducting the carrying amount of any consideration transferred by the grantor to the operator recognised as an asset;
(ii) adjusting the resulting amount to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement,; and then
(iii) deducting less any related financial liabilities measured in accordance with paragraph (b);
(d) …
Example 10: Transition – measuring the liability under the grant of a right to the operator model at the date of initial application
…
IE42 This example illustrates the approach set out in paragraph C4(c) to measuring a liability under the grant of a right to the operator model at the date of initial application. The liability related to the grant of a right to the operator is required to be measured at the fair value (current replacement cost) of the related service concession asset at the date of initial application, adjusted (1) for any consideration transferred by the grantor to the operator that is recognised as an asset and (2) to reflect the remaining period of the service concession arrangement relative to the total period of the arrangement, (3) less any related financial liabilities.
IE43 Assuming that the service concession arrangement in this example has not required any payments or other consideration from the grantor to the operator and does not also give rise to a financial liability for the grantor, the information needed for measuring the liability is illustrated in the following table:
Table 10 Estimates at the date of initial application
Parameter | Amount or period |
Fair value (current replacement cost) of the | CU1,200 |
Total period of the arrangement | 20 years |
Remaining service concession period | 10 years |
Apportionment for the liability re grant of rights | CU1,200 x 10/20 = CU600 |
IE44 If the service concession arrangement is a hybrid arrangement, the carrying amount of any consideration transferred by the grantor to the operator that has been recognised as an asset is first deducted from the fair value (current replacement cost) of the service concession asset. The resulting amount is then apportioned for the remaining service concession period. Any outstanding then the financial liability would be (measured separately under the financial liability model at fair value at the date of initial application). The amount of the financial liability would then be deducted from the apportioned amount for the liability re the grant of rights to the operator as per the table in order to derive the amount to be recognised for the liability.
6 For legal purposes, this legislative instrument commences on 29 June 2021.
Basis for Conclusions
This Basis for Conclusions accompanies, but is not part of, AASB 2021-4 Amendments to Australian Accounting Standards – Modified Retrospective Transition Approach for Service Concession Grantors.
Introduction
BC1 This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard. It sets out the reasons why the Board developed the Standard, the approach taken to developing the Standard and the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.
Background
Reasons for issuing this Standard
BC2 The Board received comments from the Treasury office in one jurisdiction regarding an issue applying the modified retrospective method to measure the Grant of a Right to the Operator (GORTO) liability, as stated in paragraph C4(c) of AASB 1059 Service Concession Arrangements: Grantors. The Board considered the stakeholder’s comments and decided to propose amendments to AASB 1059 to address the issue.
Issue of Fatal-Flaw Review version of the Standard
BC3 In May 2021, the Board issued a Fatal-Flaw Review version of the Standard for public comment. The Board received three submissions and informal comments from another stakeholder. All respondents were supportive of the Board changing the modified retrospective method to measure the GORTO liability stated in paragraph C4(c) of AASB 1059.
BC4 One stakeholder noted that the changes to AASB 1059 paragraph C4(c) proposed in the Fatal-Flaw Review version of the Standard specifically addressed only financial consideration paid by the grantor to the operator prior to the date of initial application of the Standard. The stakeholder commented that the GORTO liability and subsequent revenue would also be likely to be overstated if the grantor had provided non-financial consideration prior to the date of initial application that was not adjusted in determining the grantor’s GORTO liability.
BC5 The Board considered the feedback received and decided to amend AASB 1059 to address the issues. The Board decided that expanding the scope of the amendments to include non-financial consideration was appropriate, based on the principles and approach proposed in the Fatal-Flaw Review version.
Consideration transferred to the operator prior to the date of initial application
BC6 The Treasury office commented in raising the issue for the AASB’s consideration that AASB 1059 did not specify how consideration paid by the grantor to the operator prior to the date of initial application (i.e. that was not a financial liability at the date of initial application) should be treated under the modified retrospective transition approach. The stakeholder noted that if such consideration is not adjusted in the grantor’s GORTO liability calculation, the GORTO liability at the date of initial application would be likely to be overstated, which in turn would lead to the overstatement of revenue in subsequent periods as the GORTO liability is unwound over the period of the service concession arrangement. The Board concluded that the GORTO liability and subsequent revenue would be overstated whether the grantor had provided financial or non-financial consideration prior to the date of initial application that was not adjusted in determining the grantor’s GORTO liability.
BC7 The Board noted that consideration transferred by the grantor to the operator in respect of a service concession asset does not represent a liability or revenue for the grantor and therefore would not be recognised appropriately as part of the GORTO liability on transition. Under paragraph 12 of AASB 1059, such consideration is required to be adjusted when measuring the grantor’s liability at initial recognition based on the current replacement cost of the service concession asset. This requirement is also applicable for entities applying the full retrospective transition approach to the implementation of AASB 1059.
BC8 The Board considered amending the GORTO liability calculation under the modified retrospective transition approach has merit. The current drafting of the modified retrospective transition approach could result in overstatement of the GORTO liability for affected grantors at the initial application date and of the subsequent revenue recognition, which would continue throughout the remaining period of the affected service concession arrangements. Considering the potential public interest in and user information needs regarding service concession arrangements, these overstatements could be considered qualitatively material and might mislead users of the financial statements for a long period of time.
BC9 The Board decided that changing the modified retrospective transition approach is justified under the AASB Not-for-Profit Entity Standard-Setting Framework (October 2020), paragraph 30(e). This is because the existing modified retrospective GORTO liability calculation – which would make no adjustment for the grantor’s own contributions to a service concession asset prior to the initial application date – would appear to result in reported financial performance or financial position not reflecting economic reality.
Options for addressing the issue
BC10 The stakeholder advised that, prior to application of AASB 1059, grantor financial contributions to service concession arrangements have been capitalised as a prepayment, which is recognised as an expense over the concession periods.
BC11 The Board considered four possible options for amending the modified retrospective GORTO liability calculation in relation to grantor contributions prior to the initial application date. Options 1–3 differ only in what is first deducted from the fair value (current replacement cost) of the service concession asset in calculating the liability.
BC12 The Board was concerned that if a contribution was made close to the inception of the arrangement and the capitalised grantor contribution has a low carrying amount on the initial application date because it has been amortised over a number of periods, Option 1 could result in a similar outcome to the current modified retrospective transition approach. However, this effect would be moderated since the higher the number of years of amortisation to the date of initial application, the smaller the remaining period of the arrangement, which would reduce the calculated GORTO liability.
BC13 The Board rejected Option 2. This is because the modified retrospective transition approach requires the service concession asset and any outstanding financial liability to be measured at fair value as at the initial application date. Deducting the sum of historical amounts – ignoring the time value of money for the consideration paid prior to the initial application date – from the fair value of the asset might not result in an appropriate GORTO liability amount. The time value of money would be particularly relevant for consideration paid by instalments under the arrangement.
BC14 The Board decided against Option 3 because estimation of the fair value of historical consideration transferred might not be a straightforward exercise and further guidance might be required to assist grantors in identifying the factors a market participant would consider when pricing such historical consideration, such as the appropriate interest rate. Such guidance would be unlikely to be finalised in time for entities applying AASB 1059 to the annual reporting period ending 30 June 2021, which is the initial mandatory application of the Standard for most (if not all) Australian public sector grantors.
BC15 Under Option 4, applying the proportion of the GORTO liability relative to the total liability calculated at the inception of the service concession arrangement would limit the basic GORTO liability amount at the date of initial application, which is then apportioned again to reflect the remaining period of the arrangement. However, in order to calculate the proportion of the GORTO liability relative to the total liability at inception, an entity would need to know the estimated value of the service concession asset that the operator agreed to provide, as well as the contributions that the grantor agreed to provide to the operator. The Board was concerned that it might be difficult for auditors to obtain sufficient appropriate audit evidence to support the estimation of the fair value of the service concession asset at inception. Option 4 also does not factor in any changes to the service concession asset, such as improvements or additions to the asset between inception and the date of initial application of AASB 1059.
(a) the stakeholder advised that most of the affected hybrid service concession arrangements would still be in the construction phase as at the date of initial application, so that the capitalised grantor contributions would not yet have been amortised. Therefore, the concern described in paragraph BC12 would not be a significant issue in practice;
(b) deducting the carrying amount of the capitalised grantor contributions from the current replacement cost of the service concession asset conceptually is similar to the way other existing assets of the grantor are treated when calculating the grantor’s liability under the general requirements in AASB 1059 paragraph 11 – when existing assets of the grantor are reclassified as service concession assets, the grantor does not recognise a liability in relation to the reclassified assets; and
(c) it is the most straightforward option to apply out of the four options considered. Since the carrying amount of the capitalised contributions typically would have been subject to audit in prior periods, it is expected that affected grantors would be able to provide sufficient evidence (based on their accounting policy) to support the carrying amount of the capitalised contributions as at the date of initial application.
BC17 The Board acknowledged that, on conceptual grounds, Option 1 might not be the most appropriate option to apply due to the concern described in paragraph BC12. However, it noted that this is not an ongoing issue, as paragraph C4(c) is not expected to be applied in any period later than the annual reporting period ending 30 June 2021, and the stakeholder advised that the concern described in paragraph BC12 does not appear to be a significant issue in practice. Since there was a need to amend the current GORTO liability calculation in paragraph C4(c) promptly prior to the preparation of grantors’ 30 June 2021 financial statements, for practical reasons the Board decided to amend paragraph C4(c) based on Option 1.