The Intangible Asset Model – recording the construction asset
Arrangement terms
The terms of a service arrangement require an operator to construct a road – completing construction within two years – and maintain and operate the road to a specified standard for eight years (i.e. years 3-10). The terms of the arrangement also require the operator to resurface the road when the original surface has deteriorated below a specified condition. The operator estimates that it will have to undertake the resurfacing at the end of the year 8. At the end of year 10, the service arrangement will end. The operator estimates that the costs it will incur to fulfil its obligations will be:
Table 1 Contract costs
|
Year |
€ |
|
|
Construction services (per year) |
1-2 |
500 |
|
Operation services (per year) |
3-10 |
10 |
|
Road resurfacing |
8 |
100 |
The terms of the arrangement allow the operator to collect tolls from drivers using the road. The operator forecasts that vehicle numbers will remain constant over the duration of the contract and that it will receive tolls of €200 in each of years 3-10.
For the purpose of this illustration, it is assumed that all cash flows take place at the end of the year.
Intangible asset
The operator provides construction services to the grantor in exchange for an intangible asset, i.e. a right to collect tolls from road users in years 3-10. In accordance with IAS 38, the operator recognises the intangible asset at cost, i.e. the fair value of consideration received or receivable.
During the construction phase of the arrangement the operator’s asset (representing its accumulating right to be paid for providing construction services) is classified as an intangible asset (licence to charge users of the infrastructure). The operator estimates the fair value of its consideration received to be equal to the forecast construction costs plus 5 per cent margin. It is also assumed that the operator adopts the allowed alternative treatment in IAS 23 and therefore capitalises the borrowing costs, estimated at 6.7 per cent, during the construction phase:
Table 2 Initial measurement of intangible asset
|
ε |
|
|
Construction services in year 1 (€500 X (1 + 5%)) |
525 |
|
Capitalisation of borrowing costs |
34 |
|
Construction services in year 2 (€500 X (1 + 5%)) |
525 |
|
Intangible asset at end of year 2 |
1,084 |
The intangible asset is amortised over the period in which it is expected to be available for use by the operator, i.e. years 3-10. In this case, the directors determine that it is appropriate to amortise using a straight-line method. The annual amortisation charge is therefore €1,084 divided by 8 years, i.e. €135 per year.
Construction costs and revenue
The operator recognises the revenue and costs in accordance with IAS 11 i.e. by reference to the stage of completion of the construction. It measures contract revenue at the fair value of the consideration received or receivable. Thus in each of years 1 and 2 it recognises in its income statement construction costs of €500, construction revenue of €525 (cost plus 5 per cent) and, hence, construction profit of €25.
Toll revenue
The road users pay for the public services at the same time as they receive them, i.e. when they use the road. The operator therefore recognises toll revenue when it collects the tolls.