Chapter 31
Specialised activities

List of examples

Chapter 31
Specialised activities

1 INTRODUCTION

This chapter covers (unless stated otherwise below) the financial reporting requirements for entities applying FRS 102 involved in the following types of specialised activities:

  • Agriculture (see 2 below);
  • Extractive Activities (see 3 below);
  • Service Concession Arrangements (see 4 below);
  • Heritage Assets (see 5 below);
  • Public Benefit Entities, including incoming resources from non-exchange transactions, public entity business combinations and concessionary loans (see 6 below);
  • Financial Institutions (see Chapter 10 at 11.2.4); and
  • Funding Commitments (see Chapter 19 at 3.9).

These are all dealt with in Section 34 – Specialised Activities. Accounting by retirement benefit plans is outside the scope of this publication.

2 AGRICULTURE

2.1 Introduction

Section 34 sets out the recognition, measurement and disclosure requirements for agricultural activities. While these requirements are based on the IFRS for SMEs, the FRC included in FRS 102 an accounting policy choice to apply either a fair value model or a cost model.

Originally, the proposed requirements for agriculture were largely based on a fair value model in line with IAS 41 – Agriculture. It is observed in the Basis for Conclusions that respondents questioned the proposed requirements noting that previous accounting standards did not set out accounting requirements for these transactions and although the proposals included an exemption from applying fair value where there is undue cost or effort, the fair value information is inconsistent with the way most agricultural businesses are managed and would not benefit the users of financial statements. Therefore, an accounting policy choice between a cost model and a fair value model was introduced for biological assets. [FRS 102.BC.B34A.1-2].

Respondents in favour of the cost model also expected that the cost model would mean that both biological assets and agricultural produce should be measured at cost although both IFRS and the IFRS for SMEs require agricultural produce to be measured at the point of harvest at fair value less costs to sell. [FRS 102.BC.B34A.3]. The Basis for Conclusions further observes that agricultural produce, as opposed to biological assets, should be capable of being measured at fair value without undue cost or effort and should provide more relevant information to users. However, respondents argued that agricultural businesses often manage their business on the basis of cost information and agricultural produce should be permitted to be measured at cost. Therefore, use of the cost model for agricultural produce is limited to those entities that had chosen the cost model for biological assets. Such entities also have the choice of using the fair value model for their agricultural produce. [FRS 102.BC.B34A.4].

2.2 Key differences to IFRS

There are two principal measurement differences between Section 34 and IAS 41: the first relates to the measurement basis for biological assets and related agricultural produce and the second relates to the concept of bearer plants.

2.2.1 Measurement basis

Section 34 permits an accounting policy choice between the fair value model and the cost model. See 2.5 below.

IAS 41 requires the measurement of biological assets at fair value less costs to sell, unless at initial recognition the entity cannot reliably measure the fair value, in which case the entity would measure the biological asset or agricultural produce at historic cost less any accumulated depreciation and any accumulated impairment losses until fair value becomes reliably measurable. [IAS 41.12].

2.2.2 Bearer plants

Section 34 does not make a distinction between biological assets and bearer plants. Therefore, bearer plants are treated as biological assets and accounted for in accordance with Section 34.

IAS 41 does distinguish between biological assets and bearer plants. IAS 41 defines a bearer plant as a living plant which is used in the production or supply of agricultural produce, is expected to bear produce for more than one period and has a remote chance of being sold as agricultural produce, except for incidental scrap sales. [IAS 41.5]. Bearer plants are scoped out of IAS 41 and instead fall in the scope of IAS 16 – Property, Plant and Equipment. [IAS 41.1].

2.2.3 Government grants related to biological assets

Government grants related to biological assets are not within the scope of Section 34. Government grants are recognised and measured in accordance with Section 24 – Government Grants.

An unconditional government grant related to a biological asset measured at its fair value less costs to sell is within the scope of IAS 41. [IAS 41.34-35].

2.3 Definitions and scope

2.3.1 Definitions

The following terms are used in paragraphs 34.2 to 34.10A of Section 34 with the definitions specified. [FRS 102 Appendix I].

Term Definition
Agricultural activity The management by an entity of the biological transformation of biological assets for sale, into agricultural produce or into additional biological assets.
Agricultural produce The harvested product of the entity's biological assets.
Biological asset A living animal or plant.

Agricultural activity, as defined in the table above, covers a wide range of activities, such as, raising livestock, forestry, annual or perennial cropping, cultivating orchards and plantations, floriculture, and aquaculture (including fish farming). [IAS 41.6].

These definitions can be illustrated as follows: [IAS 41.4]

Biological assets Agricultural produce Products that are the result of processing after harvest
Sheep Wool Yarn, carpet
Trees in a plantation Felled trees Logs, lumber
Plants Cotton
Harvested cane 		Thread, clothing
Sugar
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Bushes Leaf Tea, cured tobacco
Vines Grapes Wine
Fruit trees Picked fruit Processed fruit

2.3.2 Scope

An entity that is engaged in agricultural activity should determine an accounting policy for each class of biological asset and its related agricultural produce. [FRS 102.34.2]. In addition, biological assets held by lessees under finance leases and biological assets provided by lessors under operating leases should be measured in accordance with Section 34. [FRS 102.20.1(d)].

Biological assets may be outside the scope of Section 34 when they are not used in agricultural activity. For example, animals in a zoo (or game park) that does not have an active breeding programme and rarely sells any animals or animal products would be outside the scope of the standard. Another example is activities in the pharmaceutical industry that involve the culture of bacteria. Such activity would not fall within the scope of Section 34. While the bacteria may be considered a biological asset, the development of a culture by a pharmaceutical company would not constitute agricultural activity.

Once harvested, agricultural produce is no longer within the scope of Section 34. At that point, it is measured at its fair value less costs to sell and this measurement becomes the cost at that date when applying Section 13 – Inventories – or another applicable section of FRS 102. [FRS 102.34.5].

Section 34 does also not apply to the following:

  • land used by the entity for agricultural activity. This falls within the scope of either Section 17 – Property, Plant and Equipment (see Chapter 15) or Section 16 – Investment Property (see Chapter 14);
  • plant and equipment related to agricultural activity. This falls within the scope of Section 17 (see Chapter 15);
  • intangible assets related to agricultural activity which fall within the scope of Section 18 – Intangible Assets other than Goodwill (see Chapter 16); and
  • leased biological assets held by a lessee under an operating lease which fall under Section 20 – Leases (see Chapter 18).

2.4 Recognition

An entity should recognise a biological asset or an item of agricultural produce only when:

  1. the entity controls the asset as a result of past events;
  2. it is probable that future economic benefits associated with the asset will flow to the entity; and
  3. the fair value or cost of the asset can be measured reliably. [FRS 102.34.3].

As discussed at 2.3 above, Section 34 only applies to agricultural produce (i.e. harvested crops) at the point of harvest and not prior or subsequent to harvest. Unharvested agricultural produce is considered to be part of the biological asset from which it will be harvested. Therefore, before harvest, agricultural produce should not be recognised separately from the biological asset from which it comes. For example, grapes on the vine are accounted for as part of the vines themselves right up to the point of harvest.

2.5 Measurement

For each class of biological asset and its related agricultural produce, Section 34 provides an entity an accounting policy choice to use either: [FRS 102.34.3A]

  1. the fair value model set out at 2.6 below; or
  2. the cost model set out at 2.7 below.

However, once an entity has elected to use the fair value model for a class of biological asset and its related agricultural produce, it is not subsequently permitted to change its accounting policy to the cost model. [FRS 102.34.3B].

The Regulations and the LLP Regulations state that if the fair value model is adopted by an entity, it must be adopted for all living animals and plants where their fair value can be reliably be determined. [1 Sch 39(2), 2 Sch 47(2), 3 Sch 33(2), 1 Sch 39(2)(LLP)]. However, the Note on legal requirements to FRS 102 states that the ability of an entity to subdivide biological classes such that some classes may be measured cost and others at fair value is consistent with the most reasonable and common sense interpretation of the Regulations. [FRS 102 Appendix III.37D].

2.6 Fair value model

2.6.1 Measurement

If an entity applies the fair value model, it should measure a biological asset on initial recognition and at each reporting date at its fair value less costs to sell. Changes in fair value less costs to sell should be recognised in profit or loss. [FRS 102.34.4]. Agricultural produce harvested from an entity's biological assets should be measured at the point of harvest at its fair value less costs to sell. This then becomes the cost at that date when applying Section 13 or another applicable section of FRS 102. [FRS 102.34.5].

Fair value less costs to sell is ‘the amount obtainable from the sale of an asset or cash-generating unit in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal.’ [FRS 102 Appendix I]. The costs of disposal would include costs that are necessary for a sale to occur but that would not otherwise arise, such as commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. [IAS 41.BC3].

2.6.2 Fair value hierarchy

Section 34 provides guidance on determining fair value and establishes a hierarchy that can be summarised as follows:

  1. the price for the asset in an active market (see 2.6.2.A below);
  2. absent an active market, one or more of the following types of market-based data (see 2.6.2.B below):
    1. the most recent market transaction price;
    2. adjusted market prices for similar assets; or
    3. sector benchmarks;
  3. the present value of expected net cash flows from the asset (see 2.6.2.C below).
2.6.2.A Active market

When an active market exists for a biological asset or agricultural produce in its present location and condition, the quoted price in that market is the appropriate basis for determining the fair value of that asset. [FRS 102.34.6(a)]. Under FRS 102, an active market is one in which all the following conditions exist: [FRS 102 Appendix I]

  1. the items traded in the market are homogeneous;
  2. willing buyers and sellers can normally be found at any time; and
  3. prices are available to the public.

If an entity has access to different active markets then it should use the price in the market that it expects to use. [FRS 102.34.6(a)].

2.6.2.B Market-based data in the absence of an active market

If there is no active market then an entity should consider the following types of market-based data in determining fair value: [FRS 102.34.6(b)]

  1. the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the end of the reporting period;
  2. market prices for similar assets with adjustment to reflect differences; and
  3. sector benchmarks such as the value of an orchard expressed per export tray, bushel, or hectare, and the value of cattle expressed per kilogram of meat.

The above market-based data may suggest different conclusions as to the fair value of a biological asset or an item of agricultural produce. In those cases, an entity considers the reasons for those differences, to arrive at the most reliable estimate of fair value within a relatively narrow range of reasonable estimates. [FRS 102.34.6(c)].

‘Relatively narrow range’ is not defined further but is presumably included to prevent outlying estimates from being used as a reasonable estimate.

2.6.2.C Fair value in the absence of market prices or data

Fair value may sometimes be readily determinable even though market determined prices or values are not available for a biological asset in its present condition. Therefore, an entity should consider whether the present value of expected net cash flows from the asset discounted at a current market determined rate results in a reliable measure of fair value. [FRS 102.34.6(d)].

The purpose of a calculation of the present value of expected net cash flows is to determine the fair value of a biological asset in its present location and condition. Therefore, in determining the present value of expected net cash flows, an entity includes the net cash flows that market participants would expect the asset to generate in its most relevant market. An entity should ensure that it uses assumptions for determining a discount rate that are consistent with those used in estimating the expected cash flows; this is to avoid double-counting or overlooking risks. In any case, the entity should exclude the cash flows for financing the assets, taxation or re-establishing biological assets after harvest, for example, the cost of replanting trees in a plantation after harvest.

2.6.2.D Fair value of a biological asset that is not reliably measurable

If an entity cannot measure the fair value of a biological asset reliably then it should apply the cost model (see 2.7 below) to that biological asset until such time that the fair value can be reliably measured. [FRS 102.34.6A].

For agricultural produce, the FRC's view is that agricultural produce should be capable of measurement at fair value without undue cost or effort, and should provide more relevant information for users'. [FRS 102.BC.B34A.4]. Nonetheless, Section 34 retains the choice of the fair value model or the cost model for agricultural produce, dependent on the treatment of the biological assets to which the agricultural produce is related (see 2.7.1.B below).

2.6.3 Disclosures

An entity should disclose the following information for each class of biological asset that is measured using the fair value model: [FRS 102.34.7]

  1. a description of each class of biological asset;
  2. the methods and significant assumptions applied in determining the fair value of each class of biological asset; and
  3. a reconciliation of changes in the carrying amount of each class of biological asset between the beginning and the end of the current period. The reconciliation should include:
    1. the gain or loss arising from changes in fair value less costs to sell;
    2. increases resulting from purchases;
    3. decreases attributable to sales;
    4. decreases resulting from harvest;
    5. increases resulting from business combinations; and
    6. other changes.

    This reconciliation need not be presented for prior periods.

A class of assets is a grouping of assets of a similar nature and use in an entity's operations. [FRS 102 Appendix I]. In grouping biological assets into classes in order to make the disclosures above, an entity may consider distinguishing between different types of assets, such as consumable biological assets, bearer biological assets or mature and immature assets. In particular, it should be noted that for the purposes of the reconciliation at (c) above, it would be unhelpful to combine information about annual crops (which are akin to inventory) with that on bearer plant or long-lived biological assets (which are more like property, plant and equipment).

If an entity measures any individual biological assets at cost because fair value cannot be measured reliably (see 2.6.2.D above), it should explain why fair value cannot be reliably measured. If the fair value of such a biological asset becomes reliably measurable during the current period an entity shall explain why fair value has become reliably measurable and the effect of the change. [FRS 102.34.7A].

Finally, an entity should disclose the methods and significant assumptions applied in determining the fair value at the point of harvest of each class of agricultural produce. [FRS 102.34.7B].

2.7 Cost model

2.7.1 Measurement

2.7.1.A Biological assets

An entity that applies the cost model should measure biological assets at cost less any accumulated depreciation and any accumulated impairment losses. [FRS 102.34.8].

‘Historical cost’ is the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of its acquisition. Amortised historical cost is the historical cost of an asset or liability plus or minus that portion of its historical cost previously recognised as an expense or income. [FRS 102.2.34(a)]. In determining cost and depreciated cost an entity should consider the guidance in Section 17 (see Chapter 15).

Impairment losses on biological assets measured under the cost model are within the scope of Section 27 – Impairment of Assets (see Chapter 24 at 3.1).

2.7.1.B Agricultural produce

Section 34 requires that in applying the cost model, agricultural produce harvested from an entity's biological assets should be measured at the point of harvest at either: [FRS 102.34.9]

  1. the lower of cost and estimated selling price less costs to complete and sell; or
  2. its fair value less costs to sell. Any gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell should be included in profit or loss for the period in which it arises.

That amount is then the cost at that date when applying Section 13 or another applicable section of this FRS.

In other words, if an entity elects to measure its biological assets under the cost model, it will still be allowed to measure agricultural produce under the fair value model. However, the converse would not be true, if an entity measures its biological assets under the fair value model then it must measure the resulting agricultural produce under the fair value model as well.

2.7.2 Disclosures

For each class of biological asset measured under the cost model, an entity should disclose the following: [FRS 102.34.10]

  1. a description of each class of biological asset;
  2. the depreciation method used;
  3. the useful lives or the depreciation rates used; and
  4. a reconciliation of changes in the carrying amount of each class of biological asset between the beginning and the end of the current period. The reconciliation shall include:
    1. increases resulting from purchases;
    2. decreases attributable to sales;
    3. decreases resulting from harvest;
    4. increases resulting from business combinations;
    5. impairment losses recognised or reversed in profit or loss in accordance with Section 27; and
    6. other changes.

    This reconciliation need not be presented for prior periods.

In addition, an entity should disclose, for any agricultural produce measured at fair value less costs to sell, the methods and significant assumptions applied in determining the fair value at the point of harvest of its agricultural produce. [FRS 102.34.10A].

The comments at 2.6.3 above regarding classes of assets apply here also.

2.8 Summary of GAAP differences

The following table shows the differences between FRS 102 and IFRS.

FRS 102 IFRS
Measurement Accounting policy choice of either the fair value model or the cost model. Entities must measure biological assets and agricultural produce at fair value less costs to sell unless the fair value cannot be reliably measured at initial recognition. In the latter case, the entity would measure at cost less accumulated depreciation and accumulated impairment losses.
Bearer plants Definition does not exist in Section 34. Defined as a living plant used in the production or supply of agricultural produce, expected to bear produce for more than one period and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. Such plants are accounted for under IAS 16.
Government grants Accounting for government grants related to biological assets is not in the scope of Section 34. Accounting for government grants related to biological assets measured at fair value less costs to sell is set out in IAS 41. Grants related to biological assets measured at cost are in the scope of IAS 20.

3 EXTRACTIVE ACTIVITIES

3.1 Introduction

An entity applying FRS 102 which is engaged in the exploration for and/or evaluation of mineral resources (extractive activities) must apply the requirements of IFRS 6 – Exploration for and Evaluation of Mineral Resources (as adopted in the EU). [FRS 102.34.11].

IFRS 6 covers the accounting for exploration and evaluation (E&E) expenditures which are ‘expenditures incurred by an entity in connection with the exploration for and evaluation of mineral resources before the technical feasibility and commercial viability of extracting a mineral resource are demonstrable’. E&E assets are defined as ‘exploration and evaluation expenditures recognised as assets in accordance with the entity's accounting policy’. [IFRS 6 Appendix A]. IFRS 6 is limited to accounting for E&E expenditures and does not address the other aspects of accounting for entities engaged in these activities. This section will therefore not apply to expenditures incurred before the exploration for, and evaluation of, mineral resources (e.g. expenditures incurred before the entity has obtained legal rights to explore in a specific area) or after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. [IFRS 6.5]. Equipment used in the E&E phase, e.g. property, plant and equipment and any other intangibles such as software, are not in the scope of IFRS 6, instead they are in the scope of Sections 17 and 18 respectively.

The scope and objectives of IFRS 6 are covered in further detail in Chapter 39 at 3.1 of EY International GAAP 2019.

Activities outside the E&E phase which are not covered by IFRS 6, may be covered by the following sections of FRS 102:

  • Section 13 – Inventories;
  • Section 17 – Property, Plant and Equipment;
  • Section 18 – Intangible Assets other than Goodwill; or
  • Section 20 – Leases.

In many of these sections ‘minerals and mineral reserves’ are excluded from their scope, although the exact wording of the scope exclusions differs between standards.

3.2 Requirements of Section 34 for extractive activities

As noted at 3.1 above, FRS 102 requires an entity engaged in extractive activities to apply the requirements of IFRS 6 to account for E&E expenditures. [FRS 102.34.11].

IFRS 6 is not discussed in detail in this publication. Instead, readers are referred to Chapter 39 of EY International GAAP 2019 which covers IFRS 6 in detail.

IFRS 6 contains within it a number of references to other standards. In applying FRS 102, the references within IFRS 6 should be taken to mean the relevant section or paragraph of FRS 102. [FRS 102.34.11A]. For example, paragraph 6 of IFRS 6 refers to IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. The relevant section of FRS 102 in this case would be Section 10.

However, when applying paragraph 21 of IFRS 6, which deals with the allocation of E&E assets to cash-generating units or groups of cash-generating units for the purpose of assessing such assets for impairment, Section 34 states that the cash-generating unit or group of cash-generating units should be no larger than an operating segment as defined by FRS 102 and the reference to IFRS 8 – Operating Segments – should be ignored. [FRS 102.34.11B].

If on first-time adoption, an entity determines that it is impractical to apply any of the requirements related to the assessment of exploration and evaluation assets for impairment to previous comparative amounts, an entity should disclose this fact. [FRS 102.34.11C].

On transition to FRS 102, an entity which previously accounted for exploration and development costs for oil and gas properties in the development or production phases under the full cost accounting method may elect to measure these assets on the following basis:

  • exploration and evaluation assets at the amount determined under the entity's previous GAAP; and
  • assets in the development or production phases at the amount determined for the cost centre under the entity's previous GAAP. The entity shall allocate this amount to the cost centre's underlying assets pro rata using reserve volumes or reserve values as of that date.

Both E&E assets and assets in the production and development phases should be tested for impairment, at the date of transition, in accordance with Section 34 (IFRS 6) or Section 27 respectively. [FRS 102.35.10(j)].

This transitional provision should eliminate the requirement for a restatement for companies which had previously adopted the full cost method and make the process of allocating E&E assets into cash-generating units required easier under FRS 102.

3.3 Practical implementation issues

Practical issues in the oil and gas industry are covered in Chapter 39 of EY International GAAP 2019.

4 SERVICE CONCESSION ARRANGEMENTS

4.1 Introduction

Service concession arrangements have been developed in many countries as a mechanism for procuring public services using private sector finance and management expertise. Under a service concession arrangement (SCA), private capital is used to provide major economic and social facilities for public use. The concept is that, rather than having bodies in the public sector taking on the entire responsibility and risk of funding and building infrastructure assets such as roads, bridges, railways, hospitals, prisons and schools, some of these should be contracted out to private sector entities from which the public sector bodies would rent the assets and buy services. In the UK, such arrangements are referred to as Public Private Partnerships and formerly as arrangements under the Private Finance Initiative.

Service concession arrangements are of great complexity and are often devised to meet political as well as purely commercial ends. SCAs are contractual arrangements between the public sector body and the private sector operator which set out in great detail the rights of each party, the related performance obligations and measures and the mechanisms for payment. The transactions involved in a typical service concession are wide-ranging and include the construction or refurbishment of infrastructure assets, the delivery of operating and maintenance services, collection of revenues from the public, and the receipt of payments from the public sector body (some of which may have been deferred). As a result, the accounting issues raised by service concessions range across a number of areas, including accounting for construction contracts, property, plant and equipment, leasing, intangible assets, financial instruments, revenue and borrowing costs (as these arrangements are often financed by borrowings of the operator).

The requirements of Section 34 related to service concessions require an entity to determine whether an arrangement meets the definition of a service concession and then directs that entity to the other sections of FRS 102 that should be applied to each component of the transaction. Central to the definition of an SCA is whether the public sector body (or grantor) has control over the infrastructure, by virtue of both its rights under the contract to direct how the assets are used during the concession and thereafter by controlling any significant residual interest in the assets. [FRS 102.34.12A].

An operator first applying FRS 102 can elect to retain the same asset classification (property, plant and equipment or financial asset) as it applied under previous UK GAAP for those service concession arrangements that were entered into before its date of transition and apply Section 34 to SCAs entered into after its date of transition. [FRS 102.35.10(i)]. However, no such relief is available to grantors.

Only minor changes to the Service Concessions part of Section 34 were made by the Triennial review 2017 of FRS 102 (see 4.3.4.A and 4.3.5 below), being:

  • to clarify that an entity is not prevented from classifying a financial asset as basic when payment is contingent on the operator meeting specified quality or efficiency conditions; [FRS 102.34.14] and
  • to require additional disclosures. [FRS 102.34.16B, 16C].

4.2 Key differences to IFRS

Under IFRS, two Interpretations apply to the treatment of service concession arrangements: IFRIC 12 – Service Concession Arrangements – and SIC-29 – Service Concession Arrangements: Disclosures.

Unlike IFRIC 12, FRS 102 sets out requirements for accounting by the public sector body in an SCA, requiring it to recognise a finance lease liability and related asset, to the extent that it has a contractual obligation to make payments to the operator in respect of the infrastructure assets. [FRS 102.34.12F]. IFRIC 12 does not specify the accounting by grantors. [IFRIC 12.9].

For operators in a service concession, Section 34 applies the same control criteria as IFRIC 12 (see 4.3.2 below). However, whilst the resulting accounting principles are very similar to those established in IFRIC 12, what is set out in FRS 102 is very much a simplification of the Interpretation and there is no guidance on how the control criteria might be interpreted in different situations; exactly what is meant by services ‘for the benefit of the public’; and how to classify arrangements where only part of the infrastructure is controlled by the grantor (see 4.3.2.A below). In addition, Section 34 does not consider situations where the following features exist in a service concession arrangement:

  • assets of the operator are used in the service concession;
  • payments are made by the operator to the grantor (for example rentals payable for assets retained by the grantor or for other services provided by the public sector body);
  • payments under the service concession contract are variable;
  • where both an intangible asset and a financial asset exists; and
  • major upgrade, replacement or maintenance works are required at intervals during the concession term.

IFRIC 12 also provides a number of examples, tables and flow charts to assist entities in implementing its requirements. None of these are included in Section 34.

As discussed at 4.3.4.G below, Section 10 implies that entities may also consider the requirements and guidance in IFRIC 12 in these circumstances, [FRS 102.10.6], which are discussed in Chapter 26 of EY International GAAP 2019.

4.3 Requirements of FRS 102 for service concession arrangements

4.3.1 Definitions used in Section 34 for service concession arrangements

The following terms are used in paragraphs 34.12 to 34.16C of Section 34 with the definitions specified. [FRS 102 Appendix I].

Term Definition
Borrowing costs Interest and other costs incurred by an entity in connection with the borrowing of funds.
Financial asset [extract] An asset that is:
  1. cash;
  2. a contractual right:
    1. to receive cash or another financial asset from another entity; or
    2. to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; …
Infrastructure assets Infrastructure for public services, such as roads, bridges, tunnels, prisons, hospitals, airports, water distribution facilities, energy supply and telecommunications networks.
Intangible asset An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
  • it is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
  • it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Public benefit entity An entity whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity's primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members.
Residual value (of an asset) The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
Revenue The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Service concession arrangement (SCA) An arrangement whereby a public sector body or public benefit entity (the grantor) contracts with a private sector entity (the operator) to construct (or upgrade), operate and maintain infrastructure assets for a specified period of time (the concession period).
Useful life The period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.

4.3.2 Scope

A SCA arises from a contractual agreement between a public sector body or public benefit entity (the grantor) and a private sector entity (the operator) to construct or upgrade, operate and maintain infrastructure assets for a specified period of time (the concession period). The operator is paid for its services over the period of the arrangement. [FRS 102.34.12]. Such payments are often referred to as ‘unitary charges’ because the amounts to be paid under the contract compensate the operator for both services in constructing or upgrading the infrastructure assets and for their maintenance and operation over a longer period.

A common feature of an SCA is the public service nature of the obligation undertaken by the operator, whereby the arrangement contractually obliges the operator to provide services to, or on behalf of, the grantor for the benefit of the public. [FRS 102.34.12]. This feature, that the operator is providing services to the public or for public benefit, is often applied to distinguish a service concession from the provision by a private sector entity of outsourcing, leasing or other services to a public sector body or public benefit entity (see 4.3.2.A below).

Specifically an arrangement is an SCA when the following conditions apply: [FRS 102.34.12A]

  1. the grantor controls or regulates what services the operator must provide using the infrastructure assets, to whom, and at what price; and
  2. the grantor controls, through ownership, beneficial entitlement or otherwise, any significant residual interest in the assets at the end of the term of the arrangement.

Where the infrastructure assets have no significant residual value at the end of the term of the arrangement (i.e. the concession is for the entire useful life of the related infrastructure), then the arrangement is accounted for as a service concession if the grantor controls or regulates the services provided using the infrastructure as described at (a) above. [FRS 102.34.12A].

For the purpose of condition (b) above, the grantor's control over any significant residual interest should both restrict the operator's practical ability to sell or pledge the infrastructure assets and give the grantor a continuing right of use throughout the concession period. [FRS 102.34.12A]. Control over the residual interest does not require that the infrastructure is returned to the grantor at the end of the concession. It is sufficient that the deployment of the infrastructure is controlled by the grantor, as illustrated in the example below.

FRS 102 states that a concession may contain a group of contracts and sub-arrangements as elements of the SCA as a whole. Such an arrangement is treated as a whole when the group of contracts and sub-arrangements are linked in such a way that the commercial effect cannot be understood without reference to them as a whole. Accordingly, the contractual terms of certain contracts or arrangements may meet both the scope requirements of an SCA under Section 34, as noted above, and a leasing contract under Section 20. Where this is the case, the requirements of Section 34 shall prevail. [FRS 102.34.12C].

4.3.2.A Judgements required in determining whether an arrangement is an SCA

Arrangements within scope will be those that meet the following criteria:

  • the arrangement is a contract between a public sector grantor and a private sector operator; [FRS 102.34.12]
  • the grantor controls or regulates the services; [FRS 102.34.12A(a)]
  • the grantor controls any significant residual interest; [FRS 102.34.12A(b)]
  • the infrastructure is constructed or upgraded in order to provide services to, or on behalf of, the public; [FRS 102.34.12] and
  • the operator has either a contractual right to receive cash from or at the direction of the grantor; or a contractual right to charge users of the service. [FRS 102.34.13].

If an arrangement meets all of these criteria then the concession is in scope of Section 34. The last criterion also determines which accounting model, financial asset or intangible asset, described at 4.3.4 below, should be applied by the operator.

Because of the commercial and contractual complexities of SCAs and seemingly similar arrangements, the determination of whether or to what extent these criteria are met is always likely to be a matter of judgement and there will be different views in practice. Section 34 acknowledges that some arrangements might more appropriately be classified as leases [FRS 102.34.12C] and, as noted at 4.3.2 above, where the operator is contracted to provide services to the grantor for its own benefit (rather than providing infrastructure services to the public), depiction of the arrangement as a lease could be more appropriate. For example, where a government department has outsourced its information technology function to a private sector operator, it would be more usual to account for this arrangement as an IT services contract rather than a service concession. However, where the arrangement could be judged to be either a lease or a service concession, it is accounted for using Section 34. [FRS 102.34.12C].

This, and a number of other judgements familiar to IFRS reporters trying to assess whether an arrangement falls within the scope of IFRIC 12, are not addressed in Section 34. These include:

  • Determining what constitutes services to the public. Do members of the public have to consume the services being provided (for example by using a road or bridge) or does a wider concept of public benefit apply (for example in the provision of services by private contractors to the Ministry of Defence)?
  • Deciding how to classify arrangements where the use of only part of the infrastructure is controlled under the terms of the contract, or for part of the time. For example, a private contractor might be given the contract to build and operate an airport. The services to be provided for passengers, for airport security and to airlines might be regulated under the contract; but the operator might have total freedom over the design, operation and pricing of the parking, retail and other space in the airport complex.

Section 10 of FRS 102 suggests that entities may also consider the requirements and guidance in IFRIC 12 in these circumstances. [FRS 102.10.6]. The scope of IFRIC 12 is discussed in Chapter 26 at 2 of EY International GAAP 2019.

4.3.2.B Accounting for arrangements determined not to be SCAs under FRS 102

Where an arrangement does not meet both the definition of an SCA and the control criteria noted at 4.3.2 above, Section 34 does not apply and the arrangement should be accounted for in accordance with Section 17, Section 18, Section 20 or Section 23 – Revenue, as appropriate, based on the nature of the arrangement. [FRS 102.34.12D].

4.3.3 Accounting by grantors – finance lease liability model

Section 34 requires a grantor to account for its interest in a service concession contract as a finance lease. This is because the grantor in an SCA controls both the use to which the infrastructure is put during the contract term as well as any significant residual interest in the infrastructure at the end of the concession. [FRS 102.34.12A]. The contract also requires the grantor to pay the operator for the construction and operation of the assets, or to establish arrangements for the users of the infrastructure to pay the operator themselves.

Therefore, the infrastructure assets are recognised as assets of the grantor together with a liability for its obligation under the concession. [FRS 102.34.12E]. The grantor should initially recognise the infrastructure assets and associated liability in accordance with paragraphs 9 and 10 of Section 20. [FRS 102.34.12F]. The liability is recognised as a finance lease liability and subsequently accounted for in accordance with paragraph 11 of Section 20. [FRS 102.34.12G]. Accounting for finance leases is discussed in Chapter 18.

The infrastructure assets are recognised as property, plant and equipment or as intangible assets, as appropriate, and subsequently accounted for in accordance with Section 17 or Section 18. [FRS 102.34.12H]. This includes the determination of useful lives and amortisation methods for the assets; the estimation of residual values, as discussed in Chapters 15 and 16 for property, plant and equipment and for intangible assets respectively. This also includes accounting for impairment as discussed in Chapter 24.

If the grantor is not required to recognise a liability to make payments to the operator, for example, because the operator is expected to charge the users of the infrastructure directly, the grantor shall not recognise the infrastructure assets. [FRS 102.34.12F]. In other words, the grantor recognises an asset only to the extent of its obligation to make payments to the operator for the construction of the infrastructure, its upgrade or its residual value at the end of the concession.

4.3.4 Accounting by operators

Accounting by the operator is more complicated, because its involvement in the concession comprises transactions relating to the construction of the infrastructure or its upgrade; the provision of services to the public using the infrastructure; and the collection of payments from either the grantor, users of the service or a combination of both.

Looking first at the infrastructure, because the grantor controls the use of the assets during the concession term and any significant residual interest in them after the contract has ended, [FRS 102.34.12A], an operator in an arrangement determined to be a service concession does not recognise the infrastructure assets as property, plant and equipment. The operator only has a right of access to the assets in order to provide the public service on behalf of the grantor in accordance with the terms specified in the concession. [FRS 102.34.12I].

A service concession contract gives the operator the right to receive payment in return for meeting its obligations to construct, upgrade, operate and maintain the infrastructure assets controlled by the grantor. Accordingly, Section 34 sets out two principal categories of concession:

  • in one, the operator receives a financial asset – an unconditional contractual right to receive a specified or determinable amount of cash or another financial asset from, or at the direction of, the grantor in return for constructing (or upgrading) the infrastructure assets and then operating and maintaining the asset for a specified period of time. This category includes guarantees by the grantor to pay for any shortfall between amounts received from users of the public service and specified or determinable amounts; [FRS 102.34.13(a)] and
  • in the other, the operator receives an intangible asset – a right to charge for the use of the infrastructure assets that it constructs (or upgrades) and then operates and maintains for a specified period of time. A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to which the public uses the service. [FRS 102.34.13(b)].

As noted above, sometimes an SCA may entitle the operator to receive payment from both the grantor and the users of the infrastructure. To the extent that the grantor has given an unconditional guarantee of payment for the construction (or upgrade) of the infrastructure assets, the operator has a financial asset; to the extent that the operator receives a right to charge the public for using the service, the operator has an intangible asset. [FRS 102.34.13].

No guidance is provided in Section 34 on the determination of whether the financial asset model or the intangible asset model is applied. The application of similar requirements under IFRIC 12 is discussed in Chapter 26 at 4.1.2 of EY International GAAP 2019. A comparison between the different models can be illustrated in the following table:

Arrangement Applicable model
 
1 Grantor pays – fixed payments Financial asset
2 Grantor pays – payments vary with demand Intangible asset
3 Grantor retains demand risk – users pay but grantor guarantees amounts Financial asset or bifurcated (part financial, part intangible)
4 Grantor retains demand risk – operator collects revenues from users until it achieves specified return Intangible asset
5 Users pay – no grantor guarantees Intangible asset
4.3.4.A Financial asset model

The operator shall recognise a financial asset to the extent it has an unconditional contractual right to receive cash or another financial asset from, or at the direction of, the grantor for the construction (or upgrade) services. The operator shall initially recognise the financial asset at the fair value of the consideration received or receivable, based on the fair value of the construction (or upgrade) services provided. Thereafter, it shall account for the financial asset in accordance with Section 11 – Basic Financial Instruments – and Section 12 – Other Financial Instruments Issues. [FRS 102.34.14].

Whether the financial asset represents a basic financial instrument within the scope of Section 11 or Section 12 will depend on the terms of the Concession and judgement is required (see Chapter 10). The following example is based on Illustrative Example 1 in IFRIC 12. An amendment to Section 34 following the Triennial review 2017 clarifies that in classifying the financial asset as basic or other, a payment being contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements does not prevent its classification as basic. [FRS 102.34.14].

4.3.4.B Intangible asset model

Under this accounting model, the operator recognises an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. The operator shall initially recognise the intangible asset at the fair value of the consideration received or receivable, based on the fair value of the construction (or upgrade) services provided. Thereafter, it shall account for the intangible asset in accordance with Section 18. [FRS 102.34.15]. The following example is based on Example 2 in IFRIC 12.

4.3.4.C Measuring the fair value of construction services

Under both the financial asset model and the intangible asset model, the asset that the operator initially recognises is measured at the fair value of the consideration received or receivable, based on the fair value of the construction (or upgrade) services provided. [FRS 102.34.14, 15]. The operator only recognises an asset in respect of the contractual obligations that have been satisfied at this stage, namely the provision of construction or upgrade services. Under Section 34, there is no suggestion that an operator would recognise an asset for the present value of all the contractual payments to be received under the contract (including for operating services).

Section 34 provides no guidance on the calculation of the fair value of the construction (or upgrade) services provided, and no guidance on the allocation of consideration between construction (or upgrade) services and operating services where the operator is paid under a single payment mechanism throughout the term of the concession.

Under IFRIC 12, the value of the construction services is determined in accordance with IFRS 15 – Revenue from Contracts with Customers. [IFRIC 12.14]. Applying a similar approach under FRS 102 would result in the fair value of the construction (or upgrade) services provided being calculated, and revenue recognised, in accordance with Section 23 (see Chapter 20). This approach has been applied in Examples 31.2 and 31.3 above, where an appropriate profit margin (5%) was added to the construction costs incurred. Under Section 23, revenue would be recognised by reference to the stage of completion of the construction (or upgrade) services.

4.3.4.D Operating services

Section 34 requires the operator to account for revenue relating to the operating services it performs in accordance with Section 23. [FRS 102.34.16]. Accordingly, revenue may be recognised on a straight-line basis over the contract period; or as the infrastructure is used; or as other performance obligations are determined to have been satisfied (see Chapter 20).

4.3.4.E Borrowing costs incurred during the construction or upgrade phase

Many operators will borrow funds to finance the up-front construction or upgrade costs associated with the SCA. Only under the intangible asset model will an operator have the option to capitalise any borrowing costs. Otherwise, borrowing costs attributable to the concession should be recognised as an expense. Entities should account for their borrowing costs in accordance with Section 25. [FRS 102.34.16A]. Accounting for borrowing costs is discussed in Chapter 22.

4.3.4.F Relief from retrospective application by operators of SCAs

An operator adopting FRS 102 for the first time is not required to apply Section 34 to SCAs that were entered into before the date of transition. Such concessions would continue to be accounted for using the same accounting policies that applied at the date of transition to FRS 102. [FRS 102.35.10(i)]. This means that for these contracts, the concession asset would continue to be classified and measured as property, plant and equipment or financial assets in accordance with FRS 5 Application Note F and any financial assets would be accounted for under previous UK GAAP (rather than Section 17 or Sections 11 and 12 of FRS 102). This exemption would continue to apply to those pre-transition date contracts in subsequent financial statements, until such time when the assets and liabilities associated with those transactions, events or arrangements are derecognised. [FRS 102.35.11A].

However, where a concession entered into before the date of transition is renegotiated in a way that significantly modifies the terms of the concession, such that had those terms existed at the outset a different classification would have resulted, then Section 35 requires that the operator should reassess the appropriateness of applying that exemption in the future. [FRS 102.35.11B]. This might result in the renegotiated concession being treated as a new arrangement, to which Section 34 would be applied. FRS 102 does not provide guidance on when such classification decisions should be revisited.

Section 34 is applied to all concessions entered into after the date of transition. [FRS 102.35.10(i)].

There are no transitional reliefs available to grantors.

4.3.4.G Aspects of SCA accounting not addressed in Section 34

As noted at 4.2 above, a number of features often seen in SCAs and familiar to IFRS reporters are not addressed in Section 34. These include accounting for the following features:

  • assets of the operator used in the service concession;
  • payments made by the operator to the grantor (for example rentals payable for assets retained by the grantor or for other services provided by the public sector body);
  • the existence of variable payment terms under the service concession contract;
  • where both an intangible asset and a financial asset exists; and
  • where a major upgrade, replacement or maintenance works are required at intervals during the concession term.

Section 10 of FRS 102 suggests that entities may also consider the requirements and guidance in IFRIC 12 in these circumstances. [FRS 102.10.6]. These features of service concession arrangements under IFRIC 12 are discussed in Chapter 26 at 4 and 5 of EY International GAAP 2019.

4.3.5 Disclosures relating to service concession arrangements

Section 34 did not originally specify any disclosures. The disclosure requirements introduced by the Triennial review 2017 are set out below.

An operator and a grantor should disclose information that enables users of the entity's financial statements to evaluate the nature and extent of relevant risks arising from service concession arrangements. This information shall typically include, but is not limited to:

  1. a description of the arrangement including any rights, obligations or options arising; and
  2. any significant terms of the arrangement that may affect the amount, timing and certainty of future cash flows. [FRS 102.34.16B].

In addition, an operator should disclose the amount of revenue, profits or losses and other income recognised in the period on exchanging construction services for a financial asset or an intangible asset. [FRS 102.34.16C].

Further detail on what disclosures may be made around the rights, obligations and options of the arrangement are given in SIC-29 for IFRS reporters. These include the rights to use specified assets; obligations to provide or rights to expect provision of services; obligations to acquire or build items of property, plant and equipment; obligations to deliver or rights to receive specified assets at the end of the concession period; renewal and termination options; and other rights and obligations (e.g. major overhauls). However, since this additional guidance is not provided within Section 34 it should be treated as suggested detail rather than a requirement.

Significant terms of the arrangement that may affect the amount, timing and certainty of future cash flows may include the period of the concession, re-pricing dates and the basis upon which re-pricing or re-negotiation is determined.

4.4 Summary of GAAP differences

The following table shows the differences between FRS 102 and IFRS.

FRS 102 IFRS
Accounting by Grantor Recognise a finance lease liability and related asset to the extent that there is a contractual obligation to pay for the infrastructure assets. Not specified in IFRIC 12.

5 HERITAGE ASSETS

Section 34 includes guidance on the accounting for heritage assets, defined as ‘Tangible and intangible assets with historic, artistic, scientific, technological, geophysical, or environmental qualities that are held and maintained principally for their contribution to knowledge and culture’. [FRS 102 Appendix I].

In summary, the recognition and measurement accounting requirements for heritage assets are the same as for property, plant and equipment or intangible assets. However, the disclosure requirements are different.

5.1 Key differences to IFRS

Unlike FRS 102, IFRS has no specific requirements for heritage assets. Therefore, heritage assets are accounted for according to their nature under either IAS 16, IAS 38 – Intangible Assets – or IAS 40 – Investment Property.

5.2 Requirements of FRS 102 for heritage assets

5.2.1 Terms used in Section 34 on heritage assets

Heritage assets are ‘tangible and intangible assets with historic, artistic, scientific, technological, geophysical, or environmental qualities that are held and maintained principally for their contribution to knowledge and culture’. [FRS 102 Appendix I].

5.2.2 Scope

FRS 102 defines heritage assets according to their intended use (‘maintained principally for their contribution to knowledge and culture’) rather than according to their nature as a tangible or intangible asset. Section 34 states that its paragraphs relating to heritage assets do not apply to investment property, property, plant and equipment or intangible assets that fall within the scope of Section 16, Section 17, and Section 18. [FRS 102.34.49]. This is a somewhat circular reference, since the scope of both Sections 17 and 18 (but not Section 16) state that they do not apply to heritage assets. [FRS 102.17.3, 18.3]. However, the intent of this wording appears to be clarification that property, plant and equipment and intangible assets with historic, artistic, scientific, technological, geographical or environmental qualities that are not held principally for their contribution to knowledge and culture cannot be heritage assets under Section 34. Investment property is defined as property held to earn rentals or for capital appreciation or both [FRS 102 Appendix I] and as such cannot at the same time be held and maintained for its contribution to knowledge and culture.

Section 34 further explains that works of art and similar objects held by commercial companies are not heritage assets as they are not maintained principally for their contribution to knowledge and culture. Instead, such assets should be accounted for in accordance with Section 17. Similarly, heritage assets used by the entity itself, for example historic buildings used for teaching by education establishments, shall also be accounted for under Section 17. The reason for this is that an operational perspective is likely to be most relevant for users of the financial statements. Section 34 goes on to recommend that entities that use historic buildings or similar assets for their own use may consider providing voluntarily the disclosures set out at 5.2.4 below for heritage assets. [FRS 102.34.50]. Given that heritage assets are recognised and measured in accordance with Section 17 (see 5.2.3 below), this distinction drawn by the FRC between heritage assets maintained for their contribution to knowledge and culture and heritage assets used for some other purpose affects only disclosure and not recognition and measurement.

5.2.3 Recognition and measurement of heritage assets

The general requirement of Section 34 is that heritage assets should be recognised and measured in accordance with Section 17 or Section 18, as appropriate (i.e. using either the cost model or revaluation model). [FRS 102.34.51]. Accounting for property plant and equipment and intangible assets is discussed in Chapters 15 and 16 respectively.

Heritage assets must be recognised in the statement of financial position separately from other assets. [FRS 102.34.52].

It is assumed that when heritage assets have previously been capitalised or are recently purchased that information on the cost or value of the asset will be available. However, when this information is not available, and cannot be obtained at a cost which is commensurate with the benefit to the users of the financial statements, the assets shall not be recognised. [FRS 102.34.53]. In those circumstances, additional disclosures are required explaining why the assets are not recognised, the significance and nature of those assets and information helpful in assessing the value of the assets (see 5.2.4 below). [FRS 102.34.55(d)].

At each reporting date, an entity shall apply the requirements of Section 27 to determine whether a heritage asset is impaired and, if so, how to recognise and measure the impairment loss. Section 34 states that physical deterioration, breakage or doubts arising as to an asset's authenticity are examples of impairment indicators for heritage assets. [FRS 102.34.54]. The requirements of Section 27 are discussed in Chapter 24.

5.2.4 Disclosures required for heritage assets

An entity should disclose the following for all heritage assets it holds: [FRS 102.34.55]

  1. an indication of the nature and scale of heritage assets held;
  2. the policy for the acquisition, preservation, management and disposal of heritage assets (including a description of the records maintained by the entity of its collection of heritage assets and information on the extent to which access to the assets is permitted);
  3. the accounting policies adopted for heritage assets, including details of the measurement bases used;
  4. for heritage assets that have not been recognised in the statement of financial position (see 5.2.3 above), the notes to the financial statements shall:
    1. explain the reasons why;
    2. describe the significance and nature of those assets;
    3. disclose information that is helpful in assessing the value of those heritage assets;
  5. when heritage assets are recognised in the statement of financial position the following disclosure is required:
    1. the carrying amount of heritage assets at the beginning of the reporting period and the reporting date, including an analysis between classes or groups of heritage assets recognised at cost and those recognised at valuation; and
    2. when assets are recognised at valuation, sufficient information to assist in understanding the valuation being recognised (date of valuation, method used, whether carried out by external valuer and if so their qualification and any significant limitations on the valuation);
  6. a summary of transactions relating to heritage assets for the reporting period and each of the previous four reporting periods disclosing;
    1. the cost of acquisitions of heritage assets;
    2. the value of heritage assets acquired by donations;
    3. the carrying amount of heritage assets disposed of in the period and proceeds received; and
    4. any impairment recognised in the period;

    The summary shall show separately those transactions included in the statement of financial position and those that are not;

  7. in exceptional circumstances when it is impracticable to obtain a valuation of heritage assets acquired by donation the reason shall be stated.

Disclosures can be aggregated for groups or classes of heritage assets, provided this does not obscure significant information.

Where it is impracticable to do so, the disclosure of the summary of heritage asset transactions for the reporting period and each of the previous four reporting periods (see above) need not be given for any accounting period earlier than the previous comparable period. If impracticability applies, then a statement shall be made to that effect. [FRS 102.34.56].

There are no additional company law matters particular to heritage assets.

5.3 Summary of GAAP differences

The following table shows the differences between FRS 102 and IFRS.

FRS 102 IFRS
Scope Applies to heritage assets which do not meet the definition of investment property, property, plant and equipment or intangible assets. No specific requirements for heritage assets. Accounting will follow the nature of the asset (e.g.: property, plant and equipment, intangible or investment property).
Recognition and measurement In accordance with Section 17 or Section 18 (which requires depreciated cost or fair value with valuation gains/losses through OCI). Not applicable.
Disclosures Separate disclosures are required for heritage assets. No specific disclosures for heritage assets.

6 PUBLIC BENEFIT ENTITIES

6.1 Introduction

In their advice to the FRC on the issue of the March 2013 version of the standard, the Accounting Council noted that a significant number of public benefit entities apply UK accounting standards, and would be within the scope of FRS 102. Accordingly, the requirements of FRS 102 apply to public benefit entities and other entities, not just to companies. However, FRS 102 includes paragraph numbers prefixed with ‘PBE’ that must only be applied by public benefit entities, and shall not be applied directly, or by analogy, by entities that are not public benefit entities, other than, where specifically directed, entities within a public benefit entity group. [FRS 102.1.2].

This section deals with the paragraphs in Section 34 preceded with ‘PBE’ which relate to Public Benefit Entities. Where not discussed elsewhere, the requirements of ‘PBE’ provisions in other Sections of FRS 102 are listed at 6.6 below.

IFRS does not have a separate section or standard dealing with public benefit entities. Therefore, public benefit entities using IFRS would measure assets and liabilities according to the applicable IFRSs.

6.2 Definitions used in Section 34 on public benefit entities

The following terms are used in Section 34 in relation to public benefit entities with the definitions specified. [FRS 102 Appendix I].

Term Definition
Non-exchange transaction A transaction whereby an entity receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.
Performance-related condition (in respect of finding commitments) A condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance.
Prevailing market rate The rate of interest that would apply to the entity in an open market for a similar financial instrument.
Public benefit entity An entity whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity's primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members.
Public benefit entity concessionary loan A loan made or received between a public benefit entity or an entity within a public benefit entity group and another party:
  1. at below the prevailing market rate of interest;
  2. that is not repayable on demand; and
  3. is for the purposes of furthering the objectives of the public benefit entity or public benefit entity parent.
Public benefit entity group A public benefit entity parent and all of its wholly-owned subsidiaries
Restriction A requirement that limits or directs the purposes for which a resource may be used that does not meet the definition of a performance-related condition.

Footnote 49 to Appendix I of FRS 102 elaborates that the term ‘public benefit entity’ does not necessarily imply that the purpose of the entity is for the benefit of the public as a whole. For example, many PBEs exist for the direct benefit of a particular group of people, although it is possible that society as a whole also benefits indirectly. In the FRC's view, the most important factor is what the primary purpose of such an entity is, and that it does not exist primarily to provide economic benefit to investors. Organisations such as mutual insurance companies, other mutual co-operative entities and clubs that provide dividends or other economic benefits directly and proportionately to their owners, members or participants are not PBEs.

The footnote goes on to state that some PBEs undertake certain activities that are intended to make a surplus in order to fund their primary activities and that consideration should be given to the primary purpose of an entity's (or group's) activities in assessing whether it meets the definition of a PBE. PBSs may have received contributions in the form of equity, even though the entity does not have a primary profit motive. However, because of the fundamental nature of public benefit entities, any such contributions are made by the equity holders of the entity primarily to enable the provision of goods and services to beneficiaries rather than with a view to a financial return for themselves. This is different from the position of lenders; loans do not fall into the category of equity. [FRS 102 Appendix I.fn49].

6.3 Incoming resources from non-exchange transactions

6.3.1 Introduction

FRS 102 defines a non-exchange transaction as one where an entity receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. [FRS 102 Appendix I.PBE34.65].

A non-exchange transaction that meets the definition of a government grant falls under the scope of Section 24, and these are covered in Chapter 21. [FRS 102.PBE34.64].

Where public benefit entities, or entities within a public benefit entity group, receive other resources by way of non-exchange transactions then Section 34 (and the additional guidance in its Appendix B) are applied to determine the appropriate accounting. [FRS 102.PBE34.65].

In this context, non-exchange transactions can include, but are not limited to, donations (of cash, goods, and services) and legacies (see 6.3.2.C below). [FRS 102.PBE34.66].

6.3.2 Recognition

An entity should recognise receipts of resources from non-exchange transactions as follows: [FRS 102.PBE34.67]

  1. Transactions that do not impose specified future performance-related conditions on the entity are recognised in income when the resources are received or receivable.
  2. Transactions that do impose specified future performance-related conditions on the entity are recognised in income only when the performance-related conditions are met.
  3. Where resources are received before the revenue recognition criteria are satisfied, the entity recognises a liability.

A ‘restriction’ is defined as ‘a requirement that limits or directs the purposes for which a resource may be used that does not meet the definition of a performance related condition’. [FRS 102 Appendix I]. A ‘performance condition’ is defined as ‘a condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance’. [FRS 102 Appendix I]. The existence of a restriction does not prohibit a resource from being recognised in income when receivable. [FRS 102.PBE34.68]. An example of a restriction would be a where a donor requires that a donation must be used to fund a specific activity but the donor does not set any requirements making the donation conditional on achieving specific outputs or service levels from the activity.

The receipt of resources will usually result in an entity recognising an asset and corresponding income for the fair value of resources when those resources become received or receivable. Instances when this may not be the case include where: [FRS 102.PBE34B.1]

  1. an entity received the resources in the form of services (see 6.3.2.A below); or
  2. there are performance-related conditions attached to the resources, which have yet to be fulfilled (see 6.3.2.B below).

When applying the above recognition requirements, an entity must take into consideration whether the resource being received can be measured reliably and whether the benefits of recognising the resource outweigh the costs. [FRS 102.PBE34.69].

Incoming resources should only be recognised when their fair value can be measured reliably. Hence, where it is impracticable to make a sufficiently reliable estimate of the value of the incoming resource, the related income should be recognised in the financial period when the resource is sold or distributed. A common example would be that of high volume, low value second-hand goods which have been donated for resale. [FRS 102. PBE34B.2, 4, PBE34.70].

Concepts of materiality, and the balance between cost and benefit (see Chapter 4) should be considered when deciding which resources received should be recognised in the financial statements. [FRS 102.PBE34B.3].

An entity should recognise a liability for any resource, previously received and recognised in income, when a subsequent failure to meet restrictions or performance-related conditions attached to it causes repayment to become probable. [FRS 102.PBE34.71].

6.3.2.A Services

Donations of services that can be reasonably quantified will usually result in the recognition of income and an expense rather than an asset because the service is consumed immediately. An asset will be recognised only when those services are used to produce an asset, in which case the services received will be capitalised as part of the cost of that asset in accordance with the relevant Section of FRS 102. [FRS 102.PBE34.72].

An example would be in the construction of a building where the plumbing and electrical services have been donated. Such donated services would be recognised as a part of the cost of that building provided they meet the recognition criteria in Section 17. [FRS 102.PBE34B.9].

Donated services that can be reasonably quantified should be recognised in the financial statements when they are received. [FRS 102.PBE34B.8]. Examples include donated facilities, such as office accommodation, are services that would otherwise have been purchased and services usually provided by an individual or an entity as part of their trade or profession for a fee. [FRS 102.PBE34B.10]. Additionally, it is expected that contributions made by volunteers cannot be reasonably quantified and therefore such services should not be recognised. [FRS 102.PBE34B.11].

6.3.2.B Performance-related conditions

Some resources come with performance-related conditions attached requiring the recipient to use the resources to provide a specified level of service to be entitled to retain the resources. An entity should not recognise income from those resources until these performance-related conditions have been met. [FRS 102.PBE34B.13].

However, some requirements are stated so broadly that they do not actually impose a performance-related condition on the recipient. In these cases the recipient should recognise income on receipt of the transfer of resources. [FRS 102.PBE34B.14].

6.3.2.C Legacies

Donations in the form of legacies should be recognised when it is probable that the legacy will be received and its value can be measured reliably. These criteria will normally be met following probate once the executors of the estate have established that there are sufficient assets in the estate, after settling liabilities, to pay the legacy. [FRS 102.PBE34B.5].

Evidence that the executors have determined that a payment can be made may arise on the agreement of the estate's accounts or notification that payment will be made. Where notification is received after the year-end but it is clear that the executors have agreed prior to the year-end that the legacy can be paid, the legacy is accrued in the financial statements. The certainty and measurability of the receipt may be affected by subsequent events such as valuations and disputes. [FRS 102.PBE34B.6].

Entities that are in receipt of numerous immaterial legacies for which individual identification would be burdensome are permitted to take a portfolio approach. [FRS 102.PBE34B.7].

6.3.3 Measurement

An entity should measure incoming resources from non-exchange transactions as follows: [FRS 102.PBE34.73]

  1. Donated services and facilities that would otherwise have been purchased should be measured at the value to the entity.
  2. All other incoming resources from non-exchange transactions should be measured at the fair value of the resources received or receivable.

The value to the entity in (a) above will be the price the entity estimates it would pay in the open market for an equivalent service or facility. [FRS 102.PBE34B.15].

In (b) the fair values are usually the price that the entity would have to pay on the open market for an equivalent resource. [FRS 102.PBE34B.16].

When there is no direct evidence of an open market value for an equivalent item a value may be derived from sources such as: [FRS 102.PBE34B.17]

  1. the cost of the item to the donor; or
  2. in the case of goods that are expected to be sold, the estimated resale value (which may reflect the amount actually realised) after deducting the cost to sell the goods.

As noted above, donated services are recognised as income with an equivalent amount recognised as an expense in income and expenditure, unless the expense can be capitalised as part of the cost of an asset. [FRS 102.PBE34B.18].

6.3.4 Disclosures regarding non-exchange transactions

An entity should disclose the following relating to non-exchange transactions: [FRS 102.PBE34.74]

  1. the nature and amounts of resources receivable from non-exchange transactions recognised in the financial statements;
  2. any unfulfilled conditions or other contingencies attaching to resources from non-exchange transactions that have not been recognised in income; and
  3. an indication of other forms of resources from non-exchange transactions from which the entity has benefited.

The disclosure required by (c) above would include the disclosure of unrecognised volunteer services. [FRS 102.PBE34B.12].

6.4 Public benefit entity combinations

These requirements in Section 34 apply only to public benefit entities entering into the following entity combinations (i.e. business combinations) which involve a whole entity or parts of an entity combining with another entity: [FRS 102.19.6, PBE34.75]

  • combinations at nil or nominal consideration which are in substance a gift; and
  • combinations which meet the definition and criteria of a merger.

In all other cases, in particular for combinations which are determined to be acquisitions, public benefit entities should apply the requirements of Section 19 – Business Combinations and Goodwill (see Chapter 17). [FRS 102.19.2A, PBE34.76].

6.4.1 Combinations that are in substance a gift

The Standard requires that a combination that is in substance a gift should be accounted for in accordance with Section 19 except for following matters: [FRS 102.PBE34.77]

  1. Any excess of the fair value of the assets received over the fair value of the liabilities assumed is recognised as a gain in income and expenditure. This gain represents the gift of the value of one entity to another and should be recognised as income. [FRS 102.PBE34.78].
  2. Any excess of the fair value of the liabilities assumed over the fair value of the assets received is recognised as a loss in income and expenditure. This loss represents the net obligations assumed, for which the receiving entity has not received a financial reward and should be recognised as an expense. [FRS 102.PBE34.79].

6.4.2 Combinations that are an acquisition

Any entity combination which is: [FRS 102.PBE34.81]

  • a combination that is in substance neither a gift nor a merger; or
  • for which merger accounting is not permitted under the statutory framework under which the public benefit entity reports;

should be accounted for as an acquisition in accordance with Section 19.

6.4.3 Combinations that are a merger

Unless it is not permitted by the statutory framework under which a public benefit entity reports, an entity combination that is a merger shall apply merger accounting as prescribed below. If merger accounting is not permitted, an entity combination shall be accounted for as an acquisition in accordance with Section 19. [FRS 102.PBE34.80].

The note on legal requirements to FRS 102 states that, for public benefit entities, the use of merger accounting has not been extended beyond its applicability in company law, or other relevant statutory framework. If a public benefit entity that is a company considers that, for the overriding purpose of giving a true and fair view, merger accounting should be applied in circumstances other than those set out in paragraph 10 of Schedule 6 to the Regulations, it may do so providing the relevant disclosures are made in the notes to the financial statements. [FRS 102 Appendix III.30A].

Under merger accounting the following procedures are applied: [FRS 102.PBE34.82-85]

  1. the carrying value of the assets and liabilities of the parties to the combination are not adjusted to fair value, although adjustments should be made to achieve uniformity of accounting policies across the combining entities;
  2. the results and cash flows of all the combining entities should be brought into the financial statements of the newly formed entity from the beginning of the financial period in which the merger occurs;
  3. the comparative amounts (marked as ‘combined figures’) should be restated by including the results for all the combining entities for the previous accounting period and their statement of financial positions for the previous reporting date; and
  4. all costs associated with the merger should be charged as an expense in the period incurred.

For each entity combination accounted for as a merger in the reporting period the following disclosures are required in the newly formed entity's financial statements: [FRS 102.PBE34.86]

  1. the names and descriptions of the combining entities or businesses;
  2. the date of the merger;
  3. an analysis of the principal components of the current year's total comprehensive income to indicate:
    1. the amounts relating to the newly formed merged entity for the period after the date of the merger; and
    2. the amounts relating to each party to the merger up to the date of the merger;
  4. an analysis of the previous year's total comprehensive income between each party to the merger;
  5. the aggregate carrying value of the net assets of each party to the merger at the date of the merger; and
  6. the nature and amount of any significant adjustments required to align accounting policies and an explanation of any further adjustments made to net assets as a result of the merger.

6.4.4 Relief from applying Section 34 to combinations before transition

A first-time adopter may elect not to apply the above requirements to public benefit entity combinations that were effected before the date of transition to FRS 102. However, if on first-time adoption a public benefit entity restates any entity combination to comply with this section, it shall restate all later entity combinations. [FRS 102.35.10(q)].

6.5 Public benefit entity concessionary loans

Public benefit entities and other members of a public benefit entity group that make or receive public benefit entity concessionary loans shall refer to the relevant paragraphs of Section 34 for the accounting requirements for such loans. [FRS 102.PBE11.1A, PBE12.1A].

These requirements address the recognition, measurement and disclosure of public benefit entity concessionary loans within the financial statements of public benefit entities or entities within a public benefit entity group. [FRS 102.PBE34.87].

Public benefit entity concessionary loans are defined as loans made or received between a public benefit entity, or an entity within the public benefit entity group, and another party at below the prevailing market rate of interest that are not repayable on demand and are for the purposes of furthering the objectives of the public benefit entity or public benefit entity parent. [FRS 102.PBE34.88].

The prevailing market rate is defined as the rate of interest that would apply to the entity in an open market for a similar financial instrument. [FRS 102 Appendix I].

6.5.1 Accounting policy choice

Entities making or receiving public benefit entity concessionary loans have a policy choice and should use either:

  1. the recognition, measurement and disclosure requirements in Section 11 or Section 12 (see Chapter 10); or
  2. the accounting treatment set out at 6.5.2 below.

A public benefit entity or an entity within a public benefit entity group should apply the same accounting policy to concessionary loans both made and received. [FRS 102.PBE34.89].

6.5.2 Accounting requirements

6.5.2.A Initial measurement

A public benefit entity or an entity within a public benefit entity group making or receiving concessionary loans should initially measure these arrangements at the amount received or paid and recognise them in the statement of financial position. [FRS 102.PBE34.90].

6.5.2.B Subsequent measurement

In subsequent years, the carrying amount of concessionary loans in the financial statements should be adjusted to reflect any accrued interest payable or receivable. [FRS 102.PBE34.91].

To the extent that a loan that has been made is irrecoverable, any impairment loss should be recognised as an expense. [FRS 102.PBE34.92].

6.5.2.C Presentation and disclosure

Concessionary loans made and concessionary loans received should be presented by the entity either as separate line items on the face of the statement of financial position or in the notes to the financial statements. [FRS 102.PBE34.93].

Concessionary loans should be presented separately between amounts repayable or receivable within one year and amounts repayable or receivable after more than one year. [FRS 102.PBE34.94].

The entity should disclose in its significant accounting policies the measurement basis used for concessionary loans and any other accounting policies which are relevant to the understanding of these transactions within the financial statements. [FRS 102.PBE34.95].

The entity should also disclose: [FRS 102.PBE34.96]

  1. the terms and conditions of concessionary loan arrangements, for example the interest rate, any security provided and the terms of the repayment; and
  2. the value of concessionary loans which have been committed but not taken up at the year end.

Concessionary loans made or received should be disclosed separately. However multiple loans made or received may be disclosed in aggregate, providing that such aggregation does not obscure significant information. [FRS 102.PBE34.97].

6.6 Other disclosures in FRS 102 relating to public benefit entities

The following requirements of FRS 102 are also relevant to public benefit entities:

  • A public benefit entity that applies the ‘PBE’ prefixed paragraphs shall make an explicit and unreserved statement that it is a public benefit entity. [FRS 102.PBE3.3A].
  • Property held primarily for the provision of social benefits, e.g. social housing held by a public benefit entity, shall not be classified as investment property and shall be accounted for as property, plant and equipment in accordance with Section 17. [FRS 102.16.3A].
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