IFRIC 12, service concession arrangements and related accounting policies

VINCI – Annual report – 31 December 2018

 Industry: utilities. concessions, construction

F. Concession and PPP contracts
Accounting policies
Under the terms of IFRIC 12 “Service Concession Arrangements”, a concession operator may have a twofold activity:
• a construction activity in respect of its obligations to design, build and finance a new asset that it delivers to the grantor;
• an operating and maintenance activity in respect of concession assets.
Revenue from each activity is recognised in accordance with IFRS 15.

In return for its activities, the operator receives remuneration from:
users: in this case, the intangible asset model applies. The operator has a right to receive tolls (or other forms of remuneration) from users in consideration for the financing and construction of the infrastructure. This model also applies whenever the concession grantor remunerates the concession operator based on the extent of use of the infrastructure by users, but with no guarantees as to the amounts that will be paid to the operator (under a simple “pass through” or “shadow toll” agreement).

Under this model, the right to receive toll payments (or other forms of remuneration) is recognised in the concession operator’s balance sheet under “Concession intangible assets”, net of any investment grants received. This right corresponds to the fair value of the asset under concession plus the borrowing costs capitalised during the construction phase. It is amortised over the term of the arrangement in a manner that reflects the pattern in which the concession asset’s economic benefits are consumed by the entity, starting from the entry into service of the asset.

This treatment applies to most infrastructure concessions, in particular the concessions of VINCI Autoroutes in France, the main airports managed by VINCI Airports Group and certain bridges.

The motorway concession companies ASF, Cofiroute, Escota, Arcour and Arcos, along with most of the Group’s airport concession companies, use the straight-line method for amortising concession intangible assets.

the grantor: in this case, the financial asset model applies. The operator has an unconditional contractual right to receive payments from the concession grantor, irrespective of the amount of use made of the infrastructure.

Under this model, the operator recognises a financial asset, attracting interest, in its balance sheet, in consideration for the services it provides (design and construction). Such financial assets are recognised in the balance sheet under “Other financial assets”, in an amount corresponding to the fair value of the infrastructure on first recognition and subsequently at amortised cost. The receivable is settled by means of the grantor’s payments received. The income calculated on the basis of the effective interest rate is recognised under operating income (revenue from ancillary activities).

In the case of bifurcated models, the operator is remunerated partly by users and partly by the grantor. The part of the investment that is covered by an unconditional contractual right to receive payments from the grantor (in the form of grants or rental) is recognised as a financial receivable up to the amount guaranteed. The unguaranteed balance, of which the amount is dependent on the extent of use of the infrastructure, is recognised under “Concession intangible assets”.

2. Breakdown of revenue by geographical area (extract)
Accounting policies
The Group’s consolidated revenue corresponds to revenue from the Contracting business lines, the Concessions business and VINCI Immobilier. The Group has applied IFRS 15 since 1 January 2018. It requires a contract as well as the various performance obligations contained in the contract to be identified. The number of performance obligations depends on the types of contracts and activities. Most of the Group’s contracts involve only one performance obligation.

IFRS 15’s fundamental principle is that the recognition of revenue from contracts with customers must reflect:
• the rate at which performance obligations are fulfilled, corresponding to the transfer to a customer of control of a good or service;
• the amount to which the seller expects to be entitled as consideration for its activities.

The way in which transfer of control of a good or service is analysed is crucial, since that transfer determines the recognition of revenue. The transfer of control of a good or service may take place continuously (revenue recognition on a progress towards completion basis) or on a specific date (recognition on completion).

The method for recognising revenue under concession contracts is explained in Notes F “Concession and PPP contracts”. This revenue consists of:
• tolls for the use of motorway infrastructure operated under concession, revenue from airport service concessions, and ancillary income such as fees for the use of commercial installations, rental of telecommunications infrastructure and advertising space; and
• revenue in respect of the construction of new infrastructure under concession recognised on a progress towards completion basis in accordance with IFRS 15, corresponding to work done by companies outside the Group.

Consolidated revenue of the Contracting business (VINCI Energies, Eurovia and VINCI Construction) is recognised in accordance with IFRS 15. It includes the total of the work, goods and services generated by the consolidated subsidiaries pursuing their main activity and the revenue for construction work on infrastructure under concession.

In the French property sector, revenue arising on lots sold is recognised as the property development proceeds, in accordance with IFRS 15 and statutory provisions relating to off-plan sales. In that respect, to measure progress towards completion of works, VINCI Immobilier uses the cost-based method. The cost of land is included in the progress towards completion calculation at the start of each contract.

The method for recognising revenue under construction and service contracts is explained in Note G.15 “Construction and service contracts (Contracting business and VINCI Immobilier)”.

Revenue from ancillary activities mainly comprises revenue from leases, sales of equipment, materials and merchandise, study work and fees.

G. Construction and service contracts (Contracting business and VINCI Immobilier) (extract)
15. Information on construction and service contracts
Accounting policies
Consolidated revenue relating to construction and service contracts is recognised in accordance with IFRS 15.

In view of the Group’s main activities, the majority of construction and service contracts involve only one performance obligation, which is fulfilled as contract execution progresses.

Where a contract includes several distinct performance obligations, the Group allocates the overall price of the contract to each performance obligation in accordance with IFRS 15. That price corresponds to the amount of the consideration to which it expects to be entitled. Where the price includes a variable component, the Group only recognises that consideration from the time its receipt is regarded as highly probable.

To measure the progress towards completion of construction and service contracts, the Group uses either a method based on physical progress towards completion or a cost-to-cost method depending on the type of activity.

Contract amendments (relating to the price and/or scope of the contract) are recognised when approved by the client. Where amendments relate to new goods or services regarded as distinct under IFRS 15, and where the contract price increases by an amount reflecting “stand-alone selling prices” of the additional goods or services, those amendments are recognised as a distinct contract.

Where a third party (such as a subcontractor) is involved in the supply of a distinct good or service, the Group determines whether it obtains control of that good or service before it is transferred to the client. Where control is obtained before transfer to the client, the Group recognises as revenue the gross amount to which it expects to be entitled in exchange. Where control is not obtained, the Group takes the view that it is not the principal in the transaction and only recognises as revenue the amount corresponding to its remuneration as intermediary.

The cost of winning the contract that would not have been incurred if the Group had not won the contract is recognised as an asset where it is recoverable and amortised over the estimated contract term. At the Group level, the cost of winning contracts, capitalised and amortised over a period of more than one year, is not material.

The Group’s trade receivables represent the unconditional right to receive consideration (“a payment”) when the goods or services promised to the customer in the contract have been transferred. In accordance with IFRS 15, the opening and closing balances of trade receivables are presented in Note H.18 “Working capital requirement and current provisions”. However, where the right is dependent on the transfer of other goods or services and/or the completion of milestones or stages defined in the contract, the Group regards the amount representing that “conditional” right as a contract asset. Amounts relating to any Group obligation to transfer goods or services for which it has already received a payment, or for which the right to such payment is enforceable, are regarded as contract liabilities under IFRS 15.

Within the Group, contract assets correspond to invoices not yet raised, advances paid to subcontractors and retention payments. In accordance with IFRS 9, contract assets are analysed to assess any risk of non-recovery (“credit risk”). Contract liabilities mainly consist of advances received
and prepaid income.

If the estimate of the final outcome of a contract indicates a loss, a provision is made for the loss on completion in accordance with IAS 37, regardless of progress towards completion, and based on the best estimates of income, including, if need be, any rights to additional revenue or claims, where it is regarded as highly probable and can be reliably estimated. Provisions for losses on completion, which fall outside the scope of IFRS 15, are shown under liabilities on the balance sheet (see Note H.18.3 “Breakdown of current provisions”).

18.3 Breakdown of current provisions (extract)
Accounting policies
Current provisions are provisions directly linked to each business line’s own operating cycle, whatever the expected time of settlement of the obligation. They are recognised in accordance with IAS 37. They also include the part at less than one year of provisions not directly linked to the operating cycle.

These provisions are recognised at their present value. The effect of discounting provisions is recognised under “Other financial income and expense”.

Provisions are taken for contractual obligations to maintain the condition of concession assets, principally by the motorway concession operating companies to cover the expense of major road repairs (surface courses, restructuring of slow lanes, etc.), bridges, tunnels and hydraulic infrastructure. They also include expenses to be incurred by airport concession companies (repairs to runways, traffic lanes and other paved surfaces). Provisions are calculated on the basis of maintenance expense plans spanning several years, which are updated annually. These expenses are reassessed on the basis of appropriate indexes (mainly the TP01, TP02 and TP09 indexes in France). Provisions are also taken whenever recognised signs of defects are encountered on identified infrastructure.

Provisions for after-sales service cover Group entities’ commitments under statutory warranties relating to completed projects, in particular the 10-year warranty on building projects in France. They are estimated statistically on the basis of expenses incurred in previous years or individually on the basis of specifically identified events.

Provisions for losses on completion of contracts and construction project liabilities are set aside mainly when end-of-contract projections, based on the most likely estimated outcome, indicate a loss, and those covering work yet to be carried out in respect of completed projects under completion warranties.

Provisions for disputes connected with operations relate mainly to disputes with customers, subcontractors, joint contractors or suppliers.

Restructuring provisions include the cost of plans and measures for which there is a commitment whenever these have been announced before the period end.

Provisions for other current liabilities comprise mainly provisions for other risks related to operations.