Companies like Antony Waste Handling Cell Ltd. have very special types of commercial arrangements with some Govt / quasi-Govt entity. Anything Govt / quasi-Govt dampens my interest to learn more since it truly cannot be a fair arrangement (atleast in India).
The essential substance of these arrangement is that the Govt wants to build and provide certain services but does not have the capability and to a certain degree, capital; but has a certain kind of monopoly power over services (like giving public utilities) and basic resources like land. Businesses have the capability to build and provide these services but want to seek a fair profit for the risk they undertake. So a public-private partnership is envisaged.
In such partnerships, the transaction runs as follow:
Govt says, “I will give you the authority to build and run this to provide services to my citizens.”.
The business will say, “This will cost Rs xxx at today’s price to build and subsequently operate; and I need to make atleast n% profit”.
The Govt will then say, “OK, I will give you Rs yyy (less than Rs xxx) at today’s price; the rest you can charge from my users as you wish within some guardrails”
Thus the business, which spends Rs xxx at today’s price finds that it can enter into a transaction where it will get Rs yyy at today’s price from the Govt and will recover the rest by charging for usage from its users. The former is a financial transaction (there are no risks other than financial risks) and the latter is a non-financial transaction (meaning there are risks besides financial risks)
Here Rs yyy is treated as a financial asset and balance i.e. Rs yyy – xxx is treated as an intangible asset. This is the substance of accounting these arrangements. Each such arrangement will have nuances and situations relevant to it; and that will be negotiated.
Consequently revenue is recognized for “creation of the financial asset” including embedded interest as if it were a construction contract, till the value of the asset reashes Rs yyy in today’s price. Subsequently revenue is for creating the intangible asset (no embedded interest here) at cost; which is xxx – yyy at today’s price. (Intangible asset under development)
When the ‘build’ is over, the ‘Intangible assets under development’ becomes ‘Intangible assets’.
When the usage of this service starts; then revenue is recognized on usage as per the terms and the Intangible asset gets depleted. If they don’t match over time the Intangile asset is revised.
That’s all. You may read chapter 6 (pages 41 / 42 ) for a concrete example; though I would recommend you read the whole IFRIC 12 document. 1102ifric12guide.pdf (241.0 KB)
For a business the real risk is in demand+price combination that could delay revenues; which inturn puts more pressure because you now have to recover more in nominal terms; and that would in turn affect demand.
Disc: Not invested
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