IFRIC 12 · Service Concession Arrangements · Worked example
When you build infrastructure for a government, you don’t own a road — you own a promise to be paid or a right to earn. Which one decides everything below.
A private operator builds a road, runs it for eight years, and hands it back. The cash is simple. The accounting splits into two completely different stories — the Financial Asset Model and the Intangible Asset Model. This walks through both, line by line, on the same numbers.
Start here
IFRIC 12 says the operator is not the owner of the road — it’s a service provider that builds and runs an asset the grantor controls. So the road never sits on the operator’s books as property, plant & equipment. Instead, the construction effort turns into one of two assets, and the choice is driven by a single question: is the operator guaranteed its money, or does it have to earn it from how the asset gets used?
You’re effectively a lender. The grantor has promised you a fixed, determinable amount regardless of usage. You hold a receivable — and like any loan, it earns interest and gets paid down.
Applies when payment is unconditional (an availability fee, or a guaranteed shortfall top-up).
You own a licence to earn. You get the right to charge for use of the asset, and you carry demand risk. You hold an intangible asset that you amortise as you consume it.
Applies when income depends on usage (real tolls, traffic, throughput).
The grantor here pays a fixed CU 200 availability fee whether one car uses the road or a million. That is an unconditional right to cash — so the Financial Asset Model is the technically correct one. We still build the Intangible version in full, because seeing the same deal both ways is the fastest way to understand what each model actually does.
The number that makes the receivable work
Under the Financial Asset Model, the receivable from the grantor is a financial instrument carried at amortised cost. That means finance income has to be recognised using the effective interest method — and for that you need one rate: the rate implicit in the arrangement. The standalone IRR (here 7.61%) is exactly that rate.
You compute it by treating the receivable on its own — strip the deal down to the capital you put in versus the net return you get back:
Build the cash-flow series, then solve for the rate that makes its NPV zero.
| Year | Availability fee | − Operating service value | = Net return |
|---|---|---|---|
| 1 | 0 | (525) | (525) |
| 2 | 0 | (525) | (525) |
| 3 | 200 | (12) | 188 |
| 4 | 200 | (12) | 188 |
| 5 | 200 | (12) | 188 |
| 6 | 200 | (12) | 188 |
| 7 | 200 | (12) | 188 |
| 8 | 300 | (122) | 178 |
| 9 | 200 | (12) | 188 |
| 10 | 200 | (12) | 188 |
| Total | 1,700 | (1,256) | 444 |
| Internal rate of return | 7.61% | ||
The operating service value is the fair value of the service you are still providing each year, stripped out before solving the financing return. In this example it is derived as service cost plus margin: construction is 500 + 5% = 525 in each build year; normal O&M is shown at 12; and Year 8 includes normal O&M of 12 plus the resurfacing service of 110, giving 122. The remaining net return column is the financing leg used to solve the 7.61% IRR.
So the purpose is threefold: it gives you the rate to accrue finance income on the receivable each year; it separates the financing return from the operating margin (the O&M service is priced and recognised on its own); and it’s the rate that makes the receivable unwind to exactly zero by Year 10, when the last cheque clears. “Standalone” simply means you isolate the financing leg and look at it by itself.
Think of yourself as the grantor’s bank. You financed a road for them; now they owe you. Every year the debt grows by the interest they owe and shrinks by the cash they pay — until it hits zero.
One account does all the work: the amount due from the grantor. Three things move it each year.
| Year | Opening | + Service rev | + Finance inc | − Cash | Closing |
|---|---|---|---|---|---|
| 1 | – | 525 | – | – | 525 |
| 2 | 525 | 525 | 40 | – | 1,090 |
| 3 | 1,090 | 12 | 83 | (200) | 985 |
| 4 | 985 | 12 | 75 | (200) | 872 |
| 5 | 872 | 12 | 66 | (200) | 750 |
| 6 | 750 | 12 | 57 | (200) | 619 |
| 7 | 619 | 12 | 47 | (200) | 479 |
| 8 | 479 | 122 | 36 | (300) | 337 |
| 9 | 337 | 12 | 26 | (200) | 175 |
| 10 | 175 | 12 | 13 | (200) | – |
| Total | 1,256 | 444 | (1,700) | – |
Year 8 carries the resurfacing: service revenue is 122 (12 normal + 110 for the resurfacing service) and the cash is 300 (200 fee + 100 reimbursement). Notice the construction margin shows up immediately in Years 1–2 (revenue 525 vs cost 500), while the bulk of the profit — the finance income of 444 — is recognised across the whole life, heaviest early when the balance is largest.
Journal entries · during construction (Years 1–2)
1 · Recognise the construction service
| Account | Dr | Cr |
|---|---|---|
| Amount due from grantor | 525 | |
| Construction revenue | 525 |
You’re a contractor: book revenue at the fair value of the build (cost 500 + 5% margin). The other side is a receivable, not a road — the asset belongs to the grantor.
2 · Record what the build actually costs
| Account | Dr | Cr |
|---|---|---|
| Construction costs (P&L) | 500 | |
| Bank / payables | 500 |
The real spend. Revenue 525 less cost 500 = a 25 construction margin in each of Years 1 and 2.
3 · Accrue interest on the receivable (Year 2)
| Account | Dr | Cr |
|---|---|---|
| Amount due from grantor | 40 | |
| Finance income | 40 |
The grantor already owes you 525 going into Year 2. 7.61% × 525 ≈ 40 of interest accrues, even though no cash has changed hands yet.
Journal entries · during operation (typical year, e.g. Year 3)
1 · Bill the year’s operating service
| Account | Dr | Cr |
|---|---|---|
| Amount due from grantor | 12 | |
| Operation revenue | 12 |
Running the road is a service worth 12 (cost 10 + margin). It’s added to the running receivable.
2 · Accrue finance income
| Account | Dr | Cr |
|---|---|---|
| Amount due from grantor | 83 | |
| Finance income | 83 |
7.61% × 1,090 opening ≈ 83. This is the heart of the model — most of the early “profit” is interest on the money you fronted.
3 · Receive the grantor’s payment
| Account | Dr | Cr |
|---|---|---|
| Bank | 200 | |
| Amount due from grantor | 200 |
The CU 200 is not revenue — it’s the grantor repaying the debt. It pays down the receivable (12 + 83 added, 200 taken out → balance falls).
4 · Record the O&M spend
| Account | Dr | Cr |
|---|---|---|
| Operating costs (P&L) | 10 | |
| Bank | 10 |
The real cost of maintenance. Year 8 adds a resurfacing layer: service revenue +110 and cost +100, with cash received of 300.
The receivable table is the accounting. Separately, the operator has to actually fund the build — usually by borrowing. This table tracks the real cash and the operator’s own cost of debt (say 6.7%): you go deep into overdraft building the road, then the availability fees pull you back out.
| Year | Opening | Cost | Interest @6.7% | Receipts | Closing |
|---|---|---|---|---|---|
| 1 | – | (500) | – | – | (500) |
| 2 | (500) | (500) | (34) | – | (1,034) |
| 3 | (1,034) | (10) | (69) | 200 | (913) |
| 4 | (913) | (10) | (61) | 200 | (784) |
| 5 | (784) | (10) | (53) | 200 | (646) |
| 6 | (646) | (10) | (43) | 200 | (500) |
| 7 | (500) | (10) | (33) | 200 | (343) |
| 8 | (343) | (110) | (23) | 300 | (176) |
| 9 | (176) | (10) | (12) | 200 | 2 |
| 10 | 2 | (10) | 0 | 200 | 192 |
| Total | (1,180) | (328) | 1,700 | 192 |
Closing +192 That final balance is the lifetime cash profit. The receivable accrues at 7.61% (the rate baked into the deal) while you fund at 6.7% — the gap is your financing margin. The single journal entry hiding in here each year is Dr Finance cost / Cr Bank for the overdraft interest.
Now imagine you weren’t promised a fee — you were handed a licence to earn from the road, and you carry the risk. You capitalise that licence as an intangible asset, then write it down as you use it up. The fees you collect are straight revenue.
The build creates an intangible asset (your right to operate). Borrowing cost during construction is capitalised into it; then it’s amortised straight-line over the eight operating years.
| Year | Opening | + Additions | + Cap. int. | − Amortise | Closing |
|---|---|---|---|---|---|
| 1 | – | 525 | – | – | 525 |
| 2 | 525 | 525 | 34 | – | 1,084 |
| 3 | 1,084 | – | – | (135) | 948 |
| 4 | 948 | – | – | (135) | 813 |
| 5 | 813 | – | – | (135) | 677 |
| 6 | 677 | – | – | (135) | 542 |
| 7 | 542 | – | – | (135) | 406 |
| 8 | 406 | – | – | (135) | 271 |
| 9 | 271 | – | – | (135) | 135 |
| 10 | 135 | – | – | (135) | – |
| Total | 1,050 | 34 | (1,084) | – |
No finance income lives here — there’s no receivable. Instead the asset is consumed evenly (about 135.5 a year, rounded in the table). The resurfacing in Year 8 isn’t capitalised into this asset; it runs through P&L and is reimbursed via that year’s receipt.
The cash funding is the same economic overdraft as in the Financial Asset Model: the operator borrows to build, pays O&M and resurfacing, receives the fees, and ends with the same lifetime cash profit. The difference is presentation: during construction, the Year 2 borrowing cost is capitalised into the intangible asset; after operations begin, borrowing cost is expensed.
| Year | Opening | Cost | Interest @6.7% | Receipts | Closing |
|---|---|---|---|---|---|
| 1 | – | (500) | – | – | (500) |
| 2 | (500) | (500) | (34) | – | (1,034) |
| 3 | (1,034) | (10) | (69) | 200 | (913) |
| 4 | (913) | (10) | (61) | 200 | (784) |
| 5 | (784) | (10) | (53) | 200 | (646) |
| 6 | (646) | (10) | (43) | 200 | (500) |
| 7 | (500) | (10) | (33) | 200 | (343) |
| 8 | (343) | (110) | (23) | 300 | (176) |
| 9 | (176) | (10) | (12) | 200 | 2 |
| 10 | 2 | (10) | 0 | 200 | 192 |
| Total | (1,180) | (328) | 1,700 | 192 |
Closing +192 The cash result is unchanged. The accounting split is what changes: CU 34 of Year 2 borrowing cost is capitalised into the intangible asset during construction, while the remaining borrowing cost after the asset is available for use is expensed.
Journal entries · during construction (Years 1–2)
1 · Recognise the construction service
| Account | Dr | Cr |
|---|---|---|
| Intangible asset | 525 | |
| Construction revenue | 525 |
Same construction revenue as before — but the other side is the intangible asset (the licence), not a receivable.
2 · Record what the build actually costs
| Account | Dr | Cr |
|---|---|---|
| Construction costs (P&L) | 500 | |
| Bank / payables | 500 |
Identical to the other model — the construction margin of 25/year is the same.
3 · Capitalise borrowing cost (Year 2)
| Account | Dr | Cr |
|---|---|---|
| Intangible asset | 34 | |
| Bank / interest payable | 34 |
Key difference: the asset is still being built, so interest is a borrowing cost capitalised into it (NAS 23), not expensed. That’s why the asset peaks at 1,084, not 1,050.
Journal entries · during operation (typical year, e.g. Year 3)
1 · Recognise the fee as revenue
| Account | Dr | Cr |
|---|---|---|
| Bank | 200 | |
| Revenue | 200 |
The big contrast: here the CU 200 is revenue. There’s no debt to pay down — you’re earning from operating the asset.
2 · Amortise the intangible
| Account | Dr | Cr |
|---|---|---|
| Amortisation expense | 135 | |
| Intangible asset | 135 |
You consume the licence evenly over 8 years (1,084 ÷ 8). This replaces the finance-income line from Model 1.
3 · Record the O&M spend
| Account | Dr | Cr |
|---|---|---|
| Operating costs (P&L) | 10 | |
| Bank | 10 |
Same real maintenance cost as the other model.
4 · Expense the borrowing cost
| Account | Dr | Cr |
|---|---|---|
| Finance cost (P&L) | 69 | |
| Bank / overdraft | 69 |
Once the asset is in use, the build is finished — so interest is now expensed, not capitalised (Year 3: 6.7% × 1,034).
In Model 1 the grantor’s payment is Cr Receivable — settling a debt, never touching revenue. In Model 2 the identical payment is Cr Revenue. That one difference cascades into wildly different income statements, which is the whole point of the comparison below.
The payoff
Because the underlying cash never changes, lifetime profit is identical at CU 192 under both models. What changes is the shape of the financial statements — and that shape drives revenue figures, EBITDA, margins, and the asset base that analysts and lenders actually look at.
| Over the full 10 years | Financial Asset | Intangible Asset |
|---|---|---|
| Reported revenue | 1,256 | 2,750 |
| Finance income | 444 | – |
| Total income recognised | 1,700 | 2,750 |
| Operating & construction costs | (1,180) | (1,180) |
| Amortisation | – | (1,084) |
| Finance (borrowing) cost | (328) | (294) |
| Lifetime profit | 192 | 192 |
| Asset on the balance sheet | Receivable | Intangible |
Why does the Intangible model report so much more revenue (2,750 vs 1,256)? Because every CU 200 fee is grossed up into revenue and then offset by 1,084 of amortisation — a big top line and a big expense that net to the same bottom line. The Financial model keeps the fees off the income statement (they repay a receivable) and shows the return as finance income instead. In Model 2 the borrowing cost is slightly lower in P&L (294 vs 328) because 34 of it was capitalised into the asset.
Both assets start at 525, peak around 1,090 / 1,084 at the end of construction, and reach zero at Year 10 — but they get there differently. The receivable curves (interest keeps refilling it as cash drains it); the intangible falls in a straight line (steady amortisation).
This single chart keeps all four lines together. Income is plotted above zero; expenses are plotted below zero as negative amounts. The Financial Asset Model shows a financing-return pattern, while the Intangible Asset Model shows higher gross revenue offset by amortisation and finance cost.
In one line
The model is not a choice of presentation — it’s dictated by the contract. If the grantor unconditionally owes you a determinable amount (an availability fee, or a guaranteed top-up of any user-collection shortfall), you have a financial asset. If your money rides on usage, you have an intangible asset. Where part is guaranteed and part is usage-based, you split the two (the mixed model).
This worked example pays a fixed availability fee → it’s a Financial Asset Model case. That’s the same logic that decides how an availability-based transmission line is accounted: paid for being available rather than for power flowing, the licensee books a receivable from the off-taker — finance income and an unwinding balance — not property, plant & equipment.
Worked example based on the structure of IFRIC 12 Service Concession Arrangements (and its NFRS / Ind AS equivalents). Construction revenue assumes cost + 5% margin; operating-service and resurfacing margins as implied by the figures; all amounts in currency units (CU). Illustrative and educational — confirm final treatment against the executed contract with your auditors.