What IPSAS 32 Is About
Governments often need a road, a hospital or a water plant, but lack the cash to build it now. So they bring in a private company to build it and run it for a number of years, and to recover its money over that time. These deals are called service concession arrangements, and most people know them as public-private partnerships. Not every public-private partnership falls under IPSAS 32, though. It applies only where the operator provides a public service with the asset and the grantor controls that asset.
IPSAS 32 is written for one side of the deal: the government side, which the standard calls the grantor. It answers two questions. Should the public infrastructure go on my books even though a private company built and paid for it? And if it does, what do I owe in return?
The big idea in two lines
If the government controls the service and gets the asset back at the end, the asset is its own, even before it has paid for it.
The moment the asset is recognised, a matching liability is recognised too, for the way the operator is paid: cash, the right to charge users, or both.
IPSAS 32 is the public-sector mirror of IFRIC 12 in the IFRS world. IFRIC 12 looks at the operator, the private firm. IPSAS 32 looks at the grantor, the government. The operator’s financial asset and intangible asset models in IFRIC 12 line up with the grantor’s financial liability and grant of a right models here.
The Cast and the Key Terms
| Term | Who or what it is | In our case |
|---|---|---|
| Grantor | The public entity that grants the right to use the asset | The National Roads Authority |
| Operator | The private company that builds and runs the asset | A private build-and-operate road firm |
| Service concession asset | The infrastructure used to deliver the public service | The new bypass road |
| The arrangement | The binding deal: the operator serves the public for a set period and is paid | A 10-year build, operate and transfer deal |
The Northern Bypass
The National Roads Authority needs a new bypass but has no cash today. A private operator will build it and run it for ten years, then hand it back. The facts are these:
| Fact | Detail |
|---|---|
| Who controls it | The Authority sets the toll rates and who may use the road; the road reverts to the Authority at the end of year 10 |
| How it is built | The operator builds the base layers in year 1 and the surface in year 2, so the road opens at the end of year 2 |
| What it is worth | Base layers KSh 940 million (25-year life); surface KSh 110 million (6-year life); total KSh 1,050 million |
| Upkeep | The operator maintains the road; the surface must be relaid at the end of year 6 of use, and operating service costs KSh 12 million a year |
| Finance rate | The rate built into the deal is 6.18% |
| Land | The Authority already owns the land along the route and an old feeder road section |
| On the side | The operator also builds and runs a service station beside the road, which it prices freely |
All figures are in KSh million.
How a Service Concession Works, Step by Step
A service concession runs through four steps, in order.
| Step | The question the grantor asks | Where it leads |
|---|---|---|
| 1. Control | Do I control the service and get the asset back? | If yes, recognise the asset |
| 2. The asset | At what amount do I bring it on? | At fair value, then depreciate it |
| 3. The liability | What do I owe in return? | A matching liability for the same amount |
| 4. How I pay | Cash, or let the operator charge users? | Financial liability, grant of a right, or both |
Stage 1: Does the Bypass Go on the Authority’s Books?
The grantor recognises the road as its own service concession asset only when it passes a control test with two parts, and both parts must hold.
The two-part control test
Service control: the grantor controls or regulates what services the operator provides, to whom, and at what price.
Residual control: the grantor controls any significant residual interest in the asset at the end of the term.
Apply it to the bypass:
Service control? Yes: the Authority sets the toll rates and who may use the road.Residual control? Yes: the road reverts to the Authority at the end of year 10.Both parts met, so the bypass is a service concession asset of the Authority.
Control is not the same as management. The operator runs the road day to day, but it is only managing it on the Authority’s behalf, because the Authority keeps both parts of the test. If the road were fully worn out inside the ten years with nothing left to hand back, it would be a whole-of-life asset, and only the service-control part would need to be met.
Stage 2: Bringing the Bypass On, in Pieces
The grantor recognises the asset at its fair value as the operator builds it. The bypass is built over two years, so it comes on in two pieces.
End of year 1 (base layers built):Dr Service concession asset 525 Cr Liability to the operator 525End of year 2 (surface built, plus 32 finance charge on the year 1 balance):Dr Service concession asset 525Dr Finance charge (expense) 32 Cr Liability to the operator 557
The 525 and 525 are the construction recognised as it happens. They are not the same split as the 940 and 110. The 940 and 110 are the component split, used only to depreciate the road once it opens.
Two components, two lives
A road does not wear out evenly. The base layers last 25 years, the surface only 6. So from year 3 the Authority depreciates each component over its own life: KSh 38 million a year on the base (940 over 25) and KSh 18 million a year on the surface (110 over 6). At the end of year 6 of use the worn surface is fully depreciated and the operator relays it. The old surface comes off the books and the new surface goes on as a fresh component, with the liability raised to match, then depreciated over its own life.
Stage 3: The Matching Liability
As the road is built, a liability rises alongside the asset, because the Authority has received a valuable asset it has not yet paid for. By the time the bypass opens, the asset stands at KSh 1,050 million and the liability at KSh 1,082 million, the extra 32 being the finance charge that built up during construction. The asset and the liability start together. The only time no liability arises is when an asset the grantor already owns is merely reclassified, which is Stage 5.
Stage 4: How the Operator Is Paid
The same bypass can be paid for in three ways, and the way it is paid decides how the liability behaves.
| Model | How the operator is paid | What the liability is |
|---|---|---|
| Financial liability | The Authority pays the operator in cash over the term | A financial liability, settled by the payments |
| Grant of a right | The Authority lets the operator collect tolls from users | Unearned revenue, released to revenue over the term |
| A combination | Part cash from the Authority, part tolls from users | Split into both of the above |
Way A: the Authority pays cash (financial liability model)
The Authority pays the operator KSh 200 million a year in years 3 to 10 for making the road available. Each payment splits three ways: a finance charge for the money owed, a service charge for upkeep, and the rest reduces the liability. The finance charge and the service charge are expenses. Take year 3, where the liability brought forward is KSh 1,082 million:
Finance charge = 1,082 x 6.18% = 67 Service expense = 12 Reduces the liability = 200 – 67 – 12 = 121
Dr Finance charge 67Dr Service expense 12Dr Liability to the operator 121 Cr Cash 200
Each later year the finance charge is smaller, because it is 6.18% of a smaller liability, so more of the fixed payment pays down the liability. The relay of the surface at the end of year 6 of use adds KSh 110 million back to the asset and the liability. Over the whole deal the liability rolls forward to zero:
| Year | Opening | + Finance 6.18% | + Asset added | – Net payment | Closing |
|---|---|---|---|---|---|
| 1 | 0 | 0 | 525 | 0 | 525 |
| 2 | 525 | 32 | 525 | 0 | 1,082 |
| 3 | 1,082 | 67 | 0 | 188 | 961 |
| 4 | 961 | 59 | 0 | 188 | 832 |
| 5 | 832 | 51 | 0 | 188 | 695 |
| 6 | 695 | 43 | 0 | 188 | 550 |
| 7 | 550 | 34 | 0 | 188 | 396 |
| 8 | 396 | 25 | 110 | 188 | 343 |
| 9 | 343 | 22 | 0 | 188 | 177 |
| 10 | 177 | 11 | 0 | 188 | 0 |
Net payment of KSh 188 million is the KSh 200 million cash less the KSh 12 million service charge. The liability builds up while the road is constructed, then runs down to zero by the last year.
Way B: the operator collects tolls (grant of a right model)
Now the Authority pays no cash. Instead it lets the operator collect tolls from drivers during the eight operating years, years 3 to 10. The Authority has still received the road, so it still recognises a liability, but the liability is unearned revenue. It has, in substance, sold the operator the right to earn toll income in exchange for the road. It does not take that revenue to surplus at once. It releases the liability to revenue over the term, as the right is used, and it still depreciates the road.
At the start, recognise the asset and the unearned revenue:Dr Service concession asset 1,050 Cr Deferred revenue 1,050Each operating year (years 3 to 10), release a slice to revenue: 1,050 / 8 = 131.25Dr Deferred revenue 131 Cr Revenue 131
The Authority also depreciates the road each year. It shows depreciation and a slice of revenue of about KSh 131 million, with a small rounding adjustment in the final year so the deferred revenue clears to zero by the end of the term.
Watch the timing
Release the deferred revenue on a basis that reflects the substance. A flat straight line is fine where access is provided evenly and the time value of money is not significant. For long deals or large upfront flows, an annuity or similar basis fits better.
Way C: part cash, part tolls (a combination)
Many real deals do both. Say half the operator’s pay is fixed cash from the Authority and half is the right to collect tolls. The Authority splits the liability in two and runs each half under its own model.
Dr Service concession asset 1,050 Cr Financial liability (cash half) 525 Cr Deferred revenue (tolls half) 525
The cash half then behaves like Way A, each payment split into liability, finance charge and service. The tolls half behaves like Way B, released to revenue over the term. Together the two halves still equal the KSh 1,050 million asset. If the road is still being built, the cash half also accrues finance charges before the payments begin, just as in Way A. The tolls half is released to revenue over the operating years.
Stage 5: The Land and the Old Section the Authority Already Owns
The bypass is not built on empty air. The Authority already owns the land along the route and an old feeder section. An asset the grantor already owns is not recognised afresh. It is reclassified as a service concession asset, and no new liability arises.
Reclassify the land and the old section (no liability, no gain):Dr Service concession asset (land) 80 Cr Land 80Dr Service concession asset (old road) 120 Cr Roads 120
Two things matter here. First, the land is not depreciated, so it stays at its carrying amount while the road on top of it is depreciated. Second, only an upgrade that adds capacity is brought on as a fresh asset with a liability. If the operator widens the old section, adding KSh 50 million of capacity, that upgrade is recognised, with a matching liability.
Recognise the widening of the old section (an upgrade, so a liability arises):Dr Service concession asset 50 Cr Liability to the operator 50
Stage 6: The Service Station on the Side
Beside the road the operator builds a service station and prices the fuel and food as it likes. The Authority does not control that service or its price, and the station can stand on its own. So the Authority applies the control test to each part. The road passes and is a service concession asset. The service station does not, so it is looked at on its own, and the right to use that strip of land may in substance be a lease to the operator under IPSAS 43. A purely ancillary activity, like a small kiosk, would simply be ignored when applying the test.
Other Situations That Come Up
| Situation | How the grantor handles it |
|---|---|
| Whole-of-life asset | The asset is fully used up inside the deal, so only the service-control part of the test must be met |
| Which finance rate to use | The operator’s cost of capital; if that is not practical, the rate implicit in the deal, or the grantor’s borrowing rate |
| Shadow tolls | If the grantor guarantees fixed or shortfall amounts, it is a financial liability; if it pays only for actual use, that is a usage expense, not a liability for the asset |
| Guarantees and other liabilities | Account for guarantees, provisions and contingencies under IPSAS 19 and the financial instruments standards |
| Other revenues | Revenues beyond the unearned revenue above follow IPSAS 47 |
Stage 7: The End of the Deal
When the operator hands the road back at the end of year 10, the Authority records nothing new. It recognised the road and the liability at the start, so by the last day the liability is already zero and the road already sits on its books at its depreciated amount. The operator simply stops running the road, and the Authority keeps it as ordinary property, plant and equipment and goes on depreciating whatever life remains. There is no gain on receiving the road, because the Authority never lost it.
Presentation and Disclosure
The road is a physical asset, so the Authority classifies it as property, plant and equipment under IPSAS 45 and depreciates it. Only where the asset itself is intangible, such as a software or licensing system, would it sit under IPSAS 31 as an intangible asset instead.
| Item | Where it sits |
|---|---|
| The bypass | Inside Roads or Infrastructure under PPE; the note discloses how much is held under a concession |
| The land | Inside Land under PPE, not depreciated; not renamed |
| The obligation | Its own line: a financial liability, or deferred revenue, kept separate from ordinary payables |
So the road does not become a new category called a service concession road on the face of the statements. It is a road under PPE, and the note tells the reader it is held under a concession. The liability, on the other hand, really is its own named line. The notes also describe each significant arrangement: what it covers, its terms and duration, the rights and obligations of each side, and the changes in the asset and the liability over the year.
Common Mistakes
| Mistake | The correct position |
|---|---|
| Leaving the asset off because a private firm built it | If the control test is met, the grantor recognises the asset |
| Recognising the asset but forgetting the liability | The asset and the liability start at the same amount |
| Depreciating the whole road over one life | Split it into components; the surface wears out long before the base |
| Taking all the toll revenue up front | Release it to revenue over the term as the right is used |
| Treating the whole annual payment as one expense | Split it into liability reduction, finance charge and service |
| Depreciating the land | Land is not depreciated; only the structures on it are |
| Booking a big asset or gain at the end of the deal | The asset was recognised at the start; nothing new arises at handover |
Practice Questions and Solutions
Try each before opening the solution.
Question 1: Does the asset go on the books?
A regulatory authority lets a private firm build and operate a testing laboratory for twelve years. The authority sets which tests are offered and the fees charged, and the laboratory reverts to the authority at the end. Does the authority recognise the laboratory?Show worked solution
Apply the two-part test. Service control is met, because the authority sets the tests and the fees. Residual control is met, because the laboratory reverts. Both hold, so the authority recognises the laboratory as a service concession asset and a matching liability.
Question 2: Split a payment under the financial liability model
A water authority has recognised a treatment plant at KSh 500,000,000 and will pay the operator KSh 95,000,000 a year, of which KSh 9,000,000 is for operating services. The finance rate is 9%. Show the split and the entry for the first year.Show worked solution
Finance charge is KSh 500,000,000 at 9%, which is KSh 45,000,000. Service is KSh 9,000,000. The amount that reduces the liability is 95,000,000 less 45,000,000 less 9,000,000, which is KSh 41,000,000.
Dr Finance charge (expense) 45,000,000Dr Service expense 9,000,000Dr Service concession liability 41,000,000 Cr Cash 95,000,000
Question 3: Revenue under the grant of a right model
A public university grants an operator the right to build and run student housing and to charge rents for fifteen years, after which it reverts to the university. Assume the university controls who may use the housing, the service levels and the rents. The housing is recognised at KSh 360,000,000 and access is even. Show the yearly revenue and the entry.Show worked solution
Release the liability evenly: KSh 360,000,000 over 15 years is KSh 24,000,000 a year.
Dr Service concession liability 24,000,000 Cr Revenue 24,000,000
Question 4: What happens at the end of the deal?
A national hospital concession ends. The liability is now zero and the hospital block sits on the books at KSh 300,000,000 with twenty years of useful life left. The operator hands it back. What does the grantor record at handover?Show worked solution
Nothing for the handover itself. The grantor recognised the block at the start, so it brings on no new asset or gain now. It keeps the block as property, plant and equipment and continues depreciating the KSh 300,000,000 over the remaining twenty years, KSh 15,000,000 a year.
Question 5: A combination deal
A ministry builds a stadium with a fair value of KSh 1,200,000,000, and the control test is met. Sixty percent of the operator’s pay is fixed cash from the ministry, and forty percent is the right to sell tickets. Show the entry at completion.Show worked solution
Split the liability sixty-forty. The cash half is KSh 720,000,000, the rights half KSh 480,000,000.
Dr Service concession asset 1,200,000,000 Cr Financial liability (60%) 720,000,000 Cr Deferred revenue (40%) 480,000,000
Key Lines to Remember
- A service concession is a public-private deal; IPSAS 32 is the grantor’s, the government’s, side of it.
- Recognise the asset when the grantor controls the service and the residual interest.
- When the asset is first recognised, a liability is recognised for the same asset amount; after that it changes with finance charges, payments, revenue release or further asset additions.
- Recognise the asset as it is built, split it into components, and depreciate each over its own life.
- Financial liability model: the grantor pays cash, split each payment into liability, finance charge and service.
- Grant of a right model: the operator charges users, and the liability is released to revenue over the term.
- A combination splits the liability into both kinds; an existing asset is reclassified with no new liability.
- The road sits in Roads under PPE and the land in Land, not depreciated; the liability is its own line.
- At the end there is no new entry: the asset was always the grantor’s, so it just keeps depreciating it.
