Revenue Recognition in Highway Construction Under Ind AS 115

1. Question

Urban Infra Limited (herein after referred to as “the company/Operator”) entered into a 20-year service concession arrangement with the State Highway Authority (herein after referred to as “the grantor”) to design, construct, operate, and maintain a new toll road. As per the terms, the company is required to complete the construction of the highway within three years and thereafter operate and maintain it for the remaining 17 years. At the end of the concession period, the road will be handed back to the grantor in a specified condition. The arrangement provides that the company will not receive any direct payments from the grantor; instead, its consideration will be in the form of rights to collect tolls from users of the road. The grantor, however, continues to regulate what services must be provided, to whom, and at what price (toll charges).

The management of the company is seeking expert advice on the appropriate method of revenue recognition under Ind AS 115, specifically with respect to the recognition of revenue from construction services during the building phase, as well as revenue from operation and maintenance services over the concession period, in line with the requirements of the standard.

2. Relevant Provisions

Ind AS 115: Revenue from contracts with customers

Para 31: An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

Para 35: An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

(a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs B3-B4);

(b) the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced (see paragraph B5); or

(c) the entity’s performance does not create an asset with an alternative use to the entity (see paragraph 36) and the entity has an enforceable right to payment for performance completed to date (see paragraph 37).

Appendix D

Para 11: Infrastructure within the scope of this Appendix shall not be recognised as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract.

Para 12: Under the terms of contractual arrangements within the scope of this Appendix, the operator acts as a service provider. The operator constructs or upgrades infrastructure (construction or upgrade services) used to provide a public service and operates and maintains that infrastructure (operation services) for a specified period of time.

Para 13: The operator shall recognise and measure revenue in accordance with Ind AS 115 for the services it performs. The nature of the consideration determines its subsequent accounting treatment. The subsequent accounting for consideration received as a financial asset and as an intangible asset is detailed in paragraphs 23-26 of this Appendix.

Para 16 : The operator shall recognise a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services; the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator (a) specified or determinable amounts or (b) the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements.

Para 17: The operator shall recognise an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service.

Para 26: Ind AS 38 applies to the intangible asset recognised in accordance with paragraphs 17 and 18 of this Appendix. Paragraphs 45-47 of Ind AS 38 provide guidance on measuring intangible assets acquired in exchange for a non-monetary asset or assets or a combination of monetary and non-monetary assets.

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