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Accounting by infrastructure companies
December, 31st 2007

In the absence of sufficient elaboration, many companies executing BOT contracts have treated infrastructure as fixed asset rather than as an intangible or financial asset.

Dolphy DSouza

Infrastructure not only forms a significant component of Indias economic activity but is also a major thrust area that can provide the necessary impetus for the double digit GDP growth.

But unfortunately, the accounting guidance to account for infrastructure projects is insufficient and ambiguous.

Accounting for such arrangements under IFRS is done in accordance with IFRIC Interpretation 12, Service Concession Arrangements.

In this article, the broad requirements of IFRIC 12, the guidance under Indian GAAP and a key tax implication are discussed.

BOT Contracts

Governments world over have introduced contractual service arrangements to attract private sector participation in the development, financing, operation and maintenance of public infrastructure.

In India too these arrangements are frequently used in roads and bridge infrastructure and are referred to as BOT (Built, Operate, Transfer) contracts.

The arrangement typically involves a private sector entity (an operator) constructing an infrastructure used to provide public service and operating and maintaining that infrastructure for a specified period of time.

The arrangement is executed with the Government, corporation or a public sector company, often referred to as grantor.

Contractual Service

Under IFRIC 12, expenditure incurred by the operator in developing the infrastructure is not recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator.

The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract.

The question is if the operator has constructed the asset and cannot recognise the construction as fixed asset, then how is the amount spent on the construction recognised?

Under IFRIC 12, if the operator provides construction services the consideration received or receivable by the operator shall be recognised at its fair value. The consideration may be rights to (i) a financial asset or (ii) an intangible asset.

Contractual right

The operator shall recognise a financial asset to the extent that it has an unconditional contractual right to receive cash, for example, where the grantor has to contractually pay the operator the shortfall, if any, between amounts received from users of the public service as against the returns guaranteed by the grantor.

The operator shall recognise an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service.

Under Indian GAAP there is some guidance contained in paragraph 34 of AS-26, which states that An intangible asset may be acquired in exchange or part exchange for another asset. In such a case, the cost of the asset acquired is determined in accordance with the principles laid down in this regard in AS 10, Accounting for Fixed Assets.


This requirement along with paragraph 22 of AS 10 should lead one to the same accounting treatment under IFRIC 12.

However, in the absence of sufficient elaboration of these principles in India, many companies executing BOT contracts have treated the infrastructure as fixed asset rather than as intangible asset or financial asset, as the case may be, despite the fact that most banks that finance such projects are quite clear that the asset in question is an intangible asset and not a tangible asset of the operator.

It is expected that the ICAI will soon issue IFRIC 12 in India to address this issue, but even if this does not happen, the convergence to IFRS in 2011 will automatically take care of the same.

The financial asset model works similar to accounting of lease receivables, where lease rentals received are adjusted against capital recovery and interest income computed based on the effective interest method.

Similarly in the case of BOT contracts, the cash received from user/grantor is similarly treated as adjusting the capital investment made by the operator and generating interest income.

Under the intangible asset model the entire amount received from users is treated as revenue but are subjected to a higher charge by way of amortisation of the intangible. Eventually either model would at the end of the project generate the same amount of cash and income, however, on a year-by-year basis, the income recognised under the two models may be significantly different, for reasons explained above.

Tax consequences

Under IFRIC 12, the operator recognises a financial asset or intangible asset, as the case may be, in lieu of the investment in developing the infrastructure.

This is accounted as if the operator is providing construction services to the grantor and is receiving in exchange the financial asset or intangible asset at fair value. The recognition of revenue on construction services by the operator even before the project is commissioned would have significant tax consequences, since the tax holiday commences only when the operator develops and begins to operate the facility.

Whether the profits even before the project is commissioned would be taxable? How are the income-tax authorities going to deal with such book profits? These are questions of debate and guidance from the income-tax authorities is imperative before a standard like IFRIC 12 is introduced in India.

(The author is Partner, Ernst & Young Pvt. Ltd. The views are personal.)
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