Question Tag: Service Concession

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  • 10 Marks

PSAF – July 2023 – L2 – Q4b – International public sector accounting standards

Discuss the recognition of service concession assets under IPSAS 32 and determine whether a hostel facility qualifies as a service concession asset.

A public university has engaged a private estate developer to construct a hostel for its candidates under a Build-Operate-Transfer arrangement over 25 years. Under the arrangement, the university reserves the right to fully control services the operator offers and any significant residual interest. The hostel can only be used to provide accommodation for candidates of the university. The university prepares its financial statements in compliance with the International Public Sector Accounting Standards (IPSAS). The Director of Finance is uncertain whether the hostel facility is a service concession asset or not.

Required:

i) In reference to the above, explain the term “service concession asset” under IPSAS 32: Service Concession Arrangement: Grantor. (1 mark)

ii) Discuss TWO (2) conditions necessary for the recognition of a service concession asset, and indicate whether the hostel facility qualifies for recognition under IPSAS 32. (6 marks)

iii) Outline THREE (3) disclosures that the grantor should make in the notes to the financial statements in respect of concession assets. (3 marks)

i) Explanation of “Service Concession Asset” under IPSAS 32:

A service concession asset is an asset used to provide public services in a service concession arrangement, where the asset is either provided by the operator or is an existing asset of the grantor, and where the grantor controls the asset, including what services the operator must provide with the asset, to whom it must provide them, and at what price.

ii) Conditions for Recognition of a Service Concession Asset under IPSAS 32:

Under IPSAS 32, a grantor shall recognize an asset provided by the operator as a service concession asset if:

  1. Control of Services: The grantor controls or regulates what services the operator must provide with the asset, to whom they must be provided, and at what price.
  2. Control of Residual Interest: The grantor controls, through ownership, beneficial entitlement, or otherwise, any significant residual interest in the asset at the end of the term of the arrangement.

Application to the Hostel Facility: The hostel facility qualifies as a service concession asset because:

  • The university controls the services provided by the operator (accommodation for students) and the fees charged for these services.
  • The university also retains control over the residual interest in the hostel after the 25-year arrangement period.

Therefore, the hostel facility should be recognized as a service concession asset under IPSAS 32.

iii) Disclosures in the Financial Statements under IPSAS 32:

The grantor should disclose the following information in respect of service concession arrangements:

  1. Description of the Arrangement: A detailed description of the service concession arrangement, including the nature of the services provided and the terms of the arrangement.
  2. Significant Terms: Significant terms of the arrangement that may affect the amount, timing, and certainty of future cash flows, such as the duration of the concession, re-pricing dates, and the basis for re-pricing or renegotiation.
  3. Nature and Extent of Rights and Obligations: Information on the rights to use specified assets, the rights to receive specified services, and any obligations to provide the operator with access to service concession assets or other revenue-generating assets.
  • 8 Marks

PSAF – May 2016 – L2 – Q4c – Public sector financing initiatives

This question explores the objectives and guiding principles of Public Private Partnership (PPP) agreements in Ghana.

i) State ONE objective of a public private partnership agreement?

ii) Explain THREE factors that the Government would consider before entering into a public private partnership agreement?

iii) Explain the following terms used as guiding principles in IPSAS 13 and 32 – Accounting for Public Private Partnership:

  • Service Concession Arrangement
  • Lease
  • Recognition of Revenue
  • Economic Life of an Asset

i) Objective of PPP Agreement: Leverage public assets and funds with private sector resources to accelerate investment in infrastructure and services.

ii) Factors considered before entering into a PPP include:

  • Value for Money: Ensuring the PPP gives greater value than the best realistic public sector alternative.
  • Risk Allocation: Optimizing risk transfer to the party best able to manage it.
  • Ability to Pay: Considering end-user affordability and government budgetary sustainability.

iii) Explanation of terms:

  • Service Concession Arrangement: A binding arrangement where the operator provides a public service on behalf of the grantor using the service concession asset.
  • Lease: An agreement where the lessor conveys the right to use an asset to the lessee in return for payment.
  • Recognition of Revenue: Revenue is recognized evenly over the term of the arrangement as a reduction of liability.
  • Economic Life of an Asset: The period over which an asset is expected to yield economic benefits or service potential.
  • 4 Marks

PSAF – Mar 2023 – L2 – Q4c – Public sector financing initiatives

Explains the financial liability model and grant of right to operator model under IPSAS 32 for recognizing liability in service concession arrangements.

Explain the following models of recognition of liability under a service concession arrangement under IPSAS 32: Service Concession-Grantor:

i) Financial liability model
ii) Grant of right to operator model

i) Financial Liability Model:
The financial liability model is applied when the grantor (government or public sector entity) has an unconditional obligation to pay cash or another financial asset to the operator for the construction, development, acquisition, or upgrade of a service concession asset. This obligation may arise when the grantor guarantees to pay the operator specified or determinable amounts or the shortfall, if any, between amounts received by the operator from users of the public service and the specified or determinable amounts. Even if the payment is contingent on the operator ensuring that the service concession asset meets specified quality or efficiency requirements, the obligation to pay makes it a financial liability.

ii) Grant of Right to Operator Model:
Under the grant of right to operator model, the grantor recognizes the liability as the unearned portion of the revenue arising from the exchange of assets between the grantor and the operator. This model is applicable where the grantor does not have an unconditional obligation to pay cash or another financial asset to the operator. Instead, the grantor gives the operator the right to earn revenue from third-party users of the service concession asset, or from another revenue-generating asset. For example, if an operator constructs a road and is given the right to toll the road for a specified period to recoup the investment, the grantor accounts for this as a liability under the grant of right to operator model.

  • 20 Marks

PSAF – April 2022 – L2 – Q4 – Public Procurement

Discuss reasons for tender failure, explain procurement terms, and account for elements under IPSAS 32: Service Concession - Grantor.

a) Banky Construction Ltd has tendered for several contracts that were advertised, but in each case, they failed to win these contracts. The company is now worried about their situation, as it may lead to the liquidation of the company. They have just contacted you for advice on how to reverse this unfortunate downturn.

Required:
Explain FOUR (4) challenges that are likely to be the reason why they are failing to win contracts. (4 marks)

b) Explain the following terms and practices as used in Public Procurement:
i) Tender Security
ii) Least Cost Selection
iii) Tender Evaluation Panel
iv) Board of Survey
(6 marks)

c) Discuss how each of the elements of Financial Statements listed below are recognized and measured under IPSAS 32: Service Concession – Grantor:
i) Service concession asset
ii) Liability
iii) Revenue
(10 marks)

a) Challenges Banky Construction Ltd is Facing in Winning Contracts
Banky Construction Ltd may be failing to win contracts due to the following reasons:

  • Lack of Professional and Technical Qualifications: The company may not possess the necessary professional and technical qualifications and competence required to meet the tender specifications.
  • Inadequate Financial Resources: The company might not have adequate financial resources to successfully execute the contracts, making them less competitive compared to other bidders.
  • Insufficient Equipment and Physical Facilities: The company may lack the necessary equipment and other physical facilities required for the performance of the procurement contract.
  • Managerial Capability and Experience: The company may not have the managerial capability, reliability, or relevant experience in the procurement object, which is crucial in winning tenders.
  • Legal Capacity and Compliance Issues: If the company does not possess the legal capacity to enter into contracts, or if it is in receivership, bankrupt, or facing legal proceedings, this could disqualify them from winning contracts.
  • Unfulfilled Obligations: Failure to fulfill obligations such as paying taxes and social security contributions can also be a reason for disqualification from tender processes.

b) Explanation of Public Procurement Terms
i) Tender Security:
Tender security refers to an amount provided by a contractor, supplier, or consultant to secure the fulfillment of any obligation under the tendering process. It typically takes the form of a financial deposit, a surety bond, or an irrevocable letter of credit.

ii) Least Cost Selection:
Least cost selection is a procurement method used for small value assignments where the assignment is standard or routine in nature, and well-established practices and standards exist. This method selects the lowest evaluated bid that meets the technical and financial requirements.

iii) Tender Evaluation Panel:
A Tender Evaluation Panel is an ad hoc committee set up by the Entity Tender Committee to evaluate tenders. The panel assesses the bids and makes recommendations to the Entity Tender Committee, which uses these recommendations to award contracts.

iv) Board of Survey:
A Board of Survey is a committee established to examine the condition of government stores or assets that are to be disposed of. The board assesses the condition of the assets and submits a report to the head of the Entity Tender Committee, recommending the best method for disposal.

c) Recognition and Measurement under IPSAS 32: Service Concession – Grantor

i) Service Concession Asset (SCA):

  • Initial Recognition:
    The grantor shall recognize a service concession asset provided by the operator if:

    • The grantor controls or regulates the services the operator must provide, to whom, and at what price.
    • The grantor controls any significant residual interest in the asset at the end of the term.
    • For a whole life asset, the grantor recognizes the asset even if it is used up completely during the arrangement period.
  • Subsequent Recognition:
    After initial recognition, service concession assets are accounted for as a separate class of assets under IPSAS 17 (Property, Plant, and Equipment) or IPSAS 31 (Intangible Assets).
  • Measurement:
    The service concession asset is initially measured at fair value. If it is an existing asset reclassified as a service concession asset, it is measured at its carrying amount according to IPSAS 17 or IPSAS 31.

ii) Service Concession Liability:

  • Recognition:
    When a grantor recognizes a service concession asset, a corresponding service concession liability is also recognized.
  • Measurement:
    The liability is initially measured at the same amount as the service concession asset (fair value), adjusted for any other consideration exchanged between the grantor and the operator.

iii) Revenue Recognition:

  • Revenue Recognition:
    The grantor recognizes revenue from the service concession arrangement, other than revenue from granting rights to the operator, in accordance with IPSAS 9 (Revenue from Exchange Transactions).

    • The operator may compensate the grantor through upfront payments, a series of payments, revenue-sharing provisions, reduced payment requirements, or rent payments.
    • The timing of revenue recognition depends on the specific terms of the service concession arrangement.

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