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Balfour Beatty considers that best practice for accounting for concessions under International Financial Reporting Standards (IFRS) is IFRIC (International Financial Reporting Interpretations Committee) Draft Interpretations D12 – D14.
The draft interpretations apply to service concession arrangements involving public service obligations. They apply to infrastructure used in such arrangements if:
If the operator provides infrastructure or other consideration in exchange for the right to the service concession, one of two accounting models applies to the rights received by the operator:
The financial asset model, which is described in Draft Interpretation D13, applies if the public sector client (rather than users of the infrastructure) has the primary responsibility to pay the operator for the concession services. The intangible asset model applies in all other cases, for instance where the operator collects revenue directly from the public.
All our concessions fall under the scope of the financial asset model.
From 1 January 2005 onwards, assets constructed by PFI/PPP concession companies are classified as “available-for-sale financial assets”. The financial asset comprises initial development costs, construction costs at a deemed constant margin and life cycle replacement costs at a deemed constant margin.
Income is recognised by allocating a proportion of total cash projected to be received over the life of the project to service costs, by means of a deemed constant rate of return on those costs. The residual element of projected cash is allocated to the financial asset, using the effective interest method, giving rise to interest income which is recognised in the income statement.
The application of the financial asset model under IFRS is similar to the contract debtor treatment adopted under UK GAAP FRS 5, Application Note F.
Balfour Beatty Capital's PPP/PFI subsidiary, joint venture and associate companies' share of available for sale financial assets at 31 December 2007 had a value of £1,437m. The fair value of the financial asset is measured at each balance sheet date by computing the discounted future value of the cash flows allocated to the financial asset. The movement in the fair value of the financial asset since the previous balance sheet date is taken to equity. A range of discount rates, varying from 6% to 11%, is used which reflect the prevailing risk-free interest rates and the different risk profiles of the various concessions.
While the financial income makes up the major part of revenues recognised under this model, a margin is applied to operating costs and construction, resulting in a relatively small amount of operating profit being generated.
During the construction period, Balfour Beatty expenses borrowing costs to the profit and loss account as incurred.
The following graph shows the typical profile of the concession company profit after tax resulting from the application of the financial asset model.
Comparison of annual and cumulative concession PAT
Balfour Beatty Capital's PPP/PFI subsidiary, joint venture and associate companies use derivative financial instruments (principally swaps) to manage the interest rate and inflation rate risks to which the concessions are exposed by their long-term contractual agreements. From 1 January 2005, these derivatives are recognised as assets and liabilities at their fair value and subsequently remeasured at each balance sheet date. The fair value of derivatives constantly changes in response to prevailing market conditions.
Subsidiaries are entities over which Balfour Beatty Capital has control, being the power to govern the financial and operating policies of the investee entity so as to obtain benefits from its activities. The results of subsidiaries acquired or sold in the year are consolidated from the effective date of acquisition or to the effective date of disposal, as appropriate. Four 100% owned Balfour Beatty Capital concessions, Derby Street Lighting, Sunderland Street Lighting, South Tyneside Street Lighting and Knowsley Schools are accounted for as subsidiaries.
Joint ventures are those entities over which Balfour Beatty Capital exercises joint control through a contractual arrangement. Associates are entities over which Balfour Beatty Capital is in a position to exercise significant influence but not control or joint control, through participation in the financial and operating policy decisions of the investee. The results, assets and liabilities of Balfour Beatty Capital's joint ventures and associates are incorporated in the financial statements using the equity method of accounting. Investments in joint ventures and associates are initially carried in the balance sheet at cost (including any goodwill and intangible assets arising on acquisition) and adjusted by post-acquisition changes in Balfour Beatty Capital's share of the net assets of the joint venture or associate, less any impairment in the value of individual investments. Losses of joint ventures or associates in excess of Balfour Beatty Capital's interest in those joint ventures and associates are not recognised.
Balfour Beatty Capital has four PPP/PFI concessions in which it holds a shareholding greater than 50%, but which are accounted for as joint ventures because Balfour Beatty Capital does not exercise control of the companies by virtue of the requirement in the shareholders' agreement for unanimity on all significant operational and financial matters. These concessions are Connect A30/A35 (85%), Connect A50 (85%) Connect M77 (85%) and Consort Healthcare (Edinburgh Royal Infirmary) (73.9%).
Balfour Beatty's road concessions typically comprise a mixture of new build roads and taking responsibility for the long-term maintenance of roads that the concession has not constructed ("assumed roads").
The receipts on roads concessions are generally directly related to the volume of traffic. However the public sector client has the primary responsibility to pay the operator, not the travelling public and so the accounting for the roads concessions therefore falls under the Financial Asset model.
Balfour Beatty's hospitals and schools concessions receive income based on the availability of the asset, rather than their actual usage, and the public sector client has the primary responsibility to pay the operator. The accounting for the hospital and school concessions therefore falls under the Financial Asset model.
The financial asset gives rise to an interest income calculation based on an appropriate rate of return for the asset concerned. The element of revenue relating to the financial asset is split between principal repayments, reducing the amount owed to the concession, and interest income, which is credited to the income statement as it is earned. The remaining element of revenue is allocated to the service activity at a deemed constant rate of return on service costs.
Revenue on the Aberdeen Environmental Services Limited (AES) concession is related to the volume and quality of the wastewater processed by the plant. The public sector client has the primary responsibility to pay the operator, therefore the accounting falls under the Financial Asset model.
EDF Energy Powerlink Limited (EDFEPL) operates the London Underground high voltage power network. There are some new assets that have been constructed, but these are a relatively small part of the network and construction has been subcontracted to another concession company, PADCo, also part owned by Balfour Beatty. Accordingly, EDFEPL does not fit into the IFRIC service concession arrangements and is therefore accounted for as a long-term contract. Revenue is recognised in proportion to progress on defined segments of the contract.
A separate concession company, Power Asset Development Company (PADCo), has been set up to construct the new assets required by EDFEPL as part of fulfilling its contract with London Underground. PADCo leases the completed assets to EDFEPL. The new assets are accounted for by PADCo under the Financial Asset model.
