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Who this affects

• All public‑sector grantors preparing general purpose financial statements under Australian Accounting Standards, including public entities that operate on a for‑profit basis (BC15; see also "Comparison with international pronouncements").
• Auditors and preparers responsible for valuing infrastructure and public‑service assets, separating asset and service components of payments, and applying financial instruments and revenue standards by cross‑reference (AASB 13, 116, 138, 9, 15, 16, 1058, 136, 137 are all referenced).
• Entities with PPPs, shadow‑toll arrangements, concessions that transfer rights to operators (eg toll roads, private wings in public hospitals, parking concessions), and those reclassifying existing assets or recognising previously unrecognised intangible assets (paras B37–B39).

Why it matters (claimed purpose and practical effects)

• Official purpose: make accounting for grantors of service concession arrangements consistent and transparent, so users of financial statements can see the assets, liabilities, revenues and timing/uncertainty of cash flows arising from PPP‑type contracts (Objective, para 1; para 28). The Standard is explicitly based on IPSAS 32 but contains Australian differences ("Comparison with international pronouncements" section).

• Practical financial effects:

  • Balance sheet: grantors who meet the control tests will recognise service concession assets and matching liabilities at current replacement cost, increasing reported assets and liabilities (paras 5–13, B49–B61).
  • Profit and loss timing: if compensation is by granting rights to earn third‑party revenue (GORTO), revenue is recognised over time as the unearned liability is reduced (paras 21–23, B71). If compensation is by payments, the liability is a financial liability and interest/finance charges follow financial instrument rules (paras 15–20, B64–B69).
  • Reclassifications: previously unrecognised intangible assets (eg customer lists) and land under roads can be recognised as service concession assets when reclassified; these are measured at current replacement cost and any uplift treated like a revaluation (paras 8, B38–B39).

Costs, incentives and trade‑offs (what the Standard changes in behaviour)

• Who pays: recognising assets and matching liabilities brings future operator compensation (cash payments or the value of rights given away) onto the grantor’s financial statements. That makes the fiscal cost of engaging private operators more visible to users and may affect budget reporting and political scrutiny (paras 11–13, 15–23, BC5/BC109).

• Measurement and valuation effort: initial measurement at current replacement cost (cost approach under AASB 13) places a valuation burden on preparers (paras 7, B49–B59, BC62–BC66). For complex infrastructure this is resource‑intensive and may require external valuation specialists.

• Incentives and contract design: because the grantor must recognise a liability for shadow tolls and other contingent payment structures (paras 16, B63–B66, BC73–BC74), governments may prefer compensation structures that minimise on‑balance‑sheet recognition (eg GORTO vs direct payments) — though GORTO also produces a liability (paras 21–23). The Standard reduces accounting arbitrage between models by prescribing measurement approaches.

• Implementation and compliance burden: the Standard contains many cross‑references to other AASB Standards (AASB 13, 116, 138, 9, 15, 16, 1058, 136, 137) and stepwise tests (control criteria; hybrid allocation; transition choices). That increases complexity and audit cost (see "Complexity factors").

• Discretion and audit risk: judgments are concentrated in:

  • control tests (who sets prices/services/recipients; whether third‑party regulation constitutes control — paras 5, B16–B24);
  • estimating current replacement cost and useful lives for valuation and depreciation (paras 7–10, B49–B59, BC62–BC69);
  • allocating payments between asset and service components and dividing hybrid liabilities (paras 18–20, 24–25, B53–B54, B73–B74);
  • transition choices and the modified retrospective calculations (Appendix C, C3–C6; amendments discussed in BC6–BC16). These require significant judgement and hence create implementation risk and potential for divergent outcomes between entities.

Testing the stated rationale against costs and trade‑offs

• The Standard's objective is increased transparency of public‑sector obligations (para 1, BC5). The main cost is the valuation and judgment burden described above (B49–B59, BC62–BC69). Those costs fall on preparers (grantors) and their auditors. The Standard reduces a particular accounting asymmetry relative to earlier practice (some grantors recognised assets and liabilities; others did not) at the expense of higher implementation costs.

• The Standard prefers the cost approach (current replacement cost) as a consistent basis for initial measurement across different compensation models so that like assets are measured consistently regardless of whether the operator is paid by the grantor or by users (BC63–BC66). The trade‑off is that this prescriptive choice departs from the valuation‑technique flexibility in AASB/IFRS 13 and can affect comparability with IFRS for for‑profit public entities (BC124–BC127).

• The Standard expands recognition relative to IPSAS 32 (for example, it applies to for‑profit public entities and permits recognition of previously unrecognised intangible assets and land under roads) — this widens the population of entities and assets that will show the fiscal obligations, but also broadens implementation scope and cost ("Comparison with international pronouncements", BC113–BC121).

Immediate practical considerations for a grantor (who decides, who pays, and actions to take)

• Who decides: management of the grantor determines whether the control tests are met, the valuation technique inputs, classification of payments (asset vs service), and transition approach. Those judgments must be documented (paras 5–6, B15–B22, C3–C6).
• Who pays: preparers and auditors carry the costs of valuations, systems changes, and additional disclosures. Grantors will 'pay' in the sense of time, assurance and potential changes to reported fiscal positions.
• Behaviour changes: procurement and concession drafting may be influenced by the need to recognise liabilities or reclassify assets — governments might alter contract pricing, guarantees, or whether to grant operators rights to third‑party revenues depending on fiscal‑reporting preferences (paras 14–24, BC72–BC81).

Implementation risks and mitigations

• Risk: inconsistent application of the control test or valuation method across jurisdictions. Mitigation: use the detailed application guidance and illustrative examples (Appendix B, Implementation Guidance, Examples).
• Risk: large differences between on‑balance recognition under this Standard and budgets/GFS. Mitigation: reconcile and disclose differences, and coordinate with fiscal/treasury reporting teams (BC109–BC111).

Selected authoritative references in the Standard (where to look)

• Control test for recognizing an asset: paragraph 5 (and B15–B24 for guidance).
• Initial measurement requirement (current replacement cost): paragraphs 7–9; B49–B59.
• Liability recognition and models: paragraphs 11–25; B60–B74.
• Disclosures required: paragraphs 28–29; B79–B80.
• Transition options and the modified retrospective method: Appendix C (C1–C7) and the Implementation Guidance/Examples (IE41–IE45 and later amendments).

Bottom line summary in one sentence

• AASB 1059 makes grantors recognise and measure many PPP‑type arrangements on their balance sheets (assets at current replacement cost and matching liabilities), prescribes distinct accounting for cash‑paying and revenue‑right compensation models, and provides detailed guidance and transition options — increasing transparency of public‑sector obligations while imposing valuation, judgment and implementation costs (paras 5–13, 15–25, B49–B74, C3–C6).

Contents

COMPARISON WITH INTERNATIONAL PRONOUNCEMENTS

ACCOUNTING STANDARD

AASB 1059 Service Concession Arrangements: Grantors

from paragraph

Objective 1

Scope 2

Recognition and measurement of service concession assets 5

Recognition and measurement of liabilities 11

Financial liability model 15

Grant of a right to the operator model 21

Dividing the arrangement 24

OTHER LIABILITIES, COMMITMENTS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 26

OTHER REVENUES 27

PRESENTATION AND DISCLOSURE 28

Commencement of the legislative instrument

Appendices

A Defined terms

B Application guidance

C Effective date and transition

D Amendments to other Standards

E Australian simplified disclosures for Tier 2 entities

IMPLEMENTATION GUIDANCE

ILLUSTRATIVE EXAMPLES

COMPILATION DETAILS

BASIS FOR CONCLUSIONS

BASIS FOR CONCLUSIONS ON AASB 2019-2

BASIS FOR CONCLUSIONS ON AASB 2021-4

Australian Accounting Standard AASB 1059 Service Concession Arrangements: Grantors (as amended) is set out in paragraphs 1 – 29 and Appendices A – E. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard. AASB 1059 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations, and AASB 1057 Application of Australian Accounting Standards. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.

Comparison with international pronouncements

AASB 1059 Service Concession Arrangements: Grantors as amended applies to all public sector entities, irrespective of whether they are for-profit or not-for-profit entities.

AASB 1059 and IPSAS

AASB 1059 is based on IPSAS 32 Service Concession Arrangements: Grantor. However, public sector entities that comply with AASB 1059 may not be in compliance with IPSAS 32 because of differences between the Standards. The more significant differences include the following:

(a) AASB 1059 applies to public sector entities in both the for-profit and not-for-profit sectors, whereas IPSAS 32 applies only to not-for-profit public sector entities;

(b) AASB 1059 requires the grantor to initially measure a service concession asset provided by the operator at current replacement cost in accordance with the cost approach to fair value in AASB 13 Fair Value Measurement. IPSAS 32 specifies measurement at fair value generally;

(c) an existing asset of the grantor, including a previously unrecognised identifiable intangible asset or land under roads, that is reclassified as a service concession asset is measured at fair value (current replacement cost) at the date of reclassification under AASB 1059. IPSAS 32 does not permit such remeasurement or the recognition of previously unrecognised identifiable intangible assets or land under roads;

(d) AASB 1059 requires the grantor to recognise a financial liability where the grantor has a contractual obligation to pay cash to the operator for third-party usage of a service concession asset, with or without guaranteeing a minimum amount to the operator. IPSAS 32 refers to such an arrangement as a ‘shadow toll’ arrangement and requires the grantor to account for the payments as an expense when paid instead of recognising a financial liability at the commencement of the arrangement;

(e) AASB 1059 provides more guidance on the term ‘public service’ than IPSAS 32; and

(f) IPSAS 32 includes additional application guidance for other revenues. Other revenues relate to compensation by the operator to the grantor for access to the service concession asset by providing the grantor with a series of predetermined inflows of resources such as an upfront payment or a stream of payments (eg rent payments) and revenue-sharing provisions.

AASB 1059 and IFRS Standards

Public sector entities, including for-profit entities, that comply with AASB 1059 may not be in compliance with International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). The IASB has issued an IFRIC Interpretation addressing the accounting by private sector operators of service concession arrangements but has not issued a pronouncement regarding the accounting by grantors.

AASB 1059 requires a grantor to initially measure a service concession asset at current replacement cost in accordance with the cost approach to fair value in AASB 13. However, AASB 13 and the corresponding IFRS 13 Fair Value Measurement do not specify which valuation technique to use. Instead IFRS 13 requires the use of valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Three widely used valuation techniques set out in IFRS 13 are the market approach, the cost approach and the income approach. The requirement of AASB 1059 to initially measure a service concession asset at current replacement cost in accordance with the cost approach may not be compliant with IFRS 13.

AASB 1059 requires a grantor to recognise an identifiable intangible asset as a service concession asset where the grantor controls the asset as set out in paragraph 5 or 6, even if the asset does not qualify for recognition under AASB 138/IAS 38 Intangible Assets. This Standard also permits revaluation of the asset in the absence of an active market.

AASB 15 Revenue from Contracts with Customers requires a licensor of intellectual property to recognise revenue from granting the licence using either the right-to-use or right-to-access methods, depending on the specific facts and circumstances. The general requirement in AASB 1059 to recognise revenue from granting a right to the operator over the term of the service concession arrangement on an appropriate basis may not be compliant with IFRS 15 Revenue from Contracts with Customers.

Consequently, a public sector grantor that is a for-profit entity may not be able to state that its financial statements comply with IFRS Standards.

Accounting Standard AASB 1059

The Australian Accounting Standards Board made Accounting Standard AASB 1059 Service Concession Arrangements: Grantors under section 334 of the Corporations Act 2001 on 14 July 2017.

This compiled version of AASB 1059 applies to annual reporting periods beginning on or after 1 January 2022. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 20 December 2021 (see Compilation Details).

Accounting Standard AASB 1059

Service Concession Arrangements: Grantors

Objective

1 The objective of this Standard is to prescribe the accounting for a service concession arrangement by a grantor that is a public sector entity.

Scope (paragraphs B1–B3)

2 This Standard shall be applied to service concession arrangements, which involve an operator:

(a) providing public services related to a service concession asset on behalf of a grantor; and

(b) managing at least some of those services under its own discretion, rather than at the direction of the grantor.

3 Arrangements outside the scope of this Standard include those that do not involve the delivery of a public service, those where the operator manages the public services merely as an agent of the grantor, and those that involve service and management components where the asset is not controlled by the grantor as described in paragraph 5, or paragraph 6 for a whole-of-life asset.

4 This Standard does not specify the accounting by operators. Guidance on accounting for service concession arrangements by private sector operators can be found in AASB Interpretation 12 Service Concession Arrangements.

Recognition and measurement of service concession assets (paragraphs B14–B59)

5 The grantor shall recognise an asset provided by the operator and an upgrade to or a major component replacement for an existing asset of the grantor as a service concession asset if the grantor controls the asset. The grantor controls the asset if, and only if:

(a) the grantor controls or regulates what services the operator must provide with the asset, to whom it must provide them, and at what price; and

(b) the grantor controls – through ownership, beneficial entitlement or otherwise – any significant residual interest in the asset at the end of the term of the arrangement.

6 The grantor shall recognise an asset that will be used in a service concession arrangement for its entire economic life (a ‘whole-of-life’ asset) if the conditions in paragraph 5(a) are met. In this case, the condition in paragraph 5(b) is not relevant and therefore the grantor controls the whole-of-life asset if the conditions in paragraph 5(a) are met.

7 The grantor shall initially measure the service concession asset recognised in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset) at current replacement cost in accordance with the cost approach to fair value in AASB 13 Fair Value Measurement.

8 Where an existing asset of the grantor meets the conditions specified in paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall reclassify the existing asset as a service concession asset and shall measure the asset at current replacement cost in accordance with the cost approach to fair value in AASB 13 as at the date of reclassification. The grantor shall recognise any difference at that date between the carrying amount of the asset and its fair value (current replacement cost) as if it is a revaluation of the asset. This approach does not mean that the grantor has adopted the revaluation model.

9 After initial recognition or reclassification, the grantor shall account for a service concession asset during the term of the service concession arrangement as follows:

(a) depreciate or amortise the depreciable amount of the asset over the useful life in accordance with AASB 116 Property, Plant and Equipment or AASB 138 Intangible Assets, as appropriate, with any impairment recognised in accordance with AASB 136 Impairment of Assets; and

(b) references to fair value in other Standards shall be read as references to current replacement cost for service concession assets. For example, this means that current replacement cost is the basis for fair value measurement of service concession assets under a revaluation model. Furthermore, the active market requirements in AASB 138 for the revaluation of an intangible asset shall not apply.

10 The grantor shall account for a service concession asset after the end of the term of the service concession arrangement in accordance with other Accounting Standards and as specified below. In particular:

(a) the grantor reclassifies the asset based on its nature or function;

(b) references to fair value in other Standards shall no longer be read as references to current replacement cost. For example, any of the approaches in AASB 13 to fair value measurement may be applied to the asset under a revaluation model, as appropriate. Furthermore, the active market requirements in AASB 138 for the revaluation of an intangible asset shall apply; and

(c) the grantor derecognises the asset in accordance with AASB 116 or AASB 138, as appropriate, only when the grantor loses control of the asset. For example, internally generated intangible assets that were recognised as service concession assets (including those that do not qualify for recognition under AASB 138) are not derecognised at the end of the term of the service concession arrangement, unless the grantor loses control of the asset at that time.

Recognition and measurement of liabilities (paragraphs B60–B74)

11 Where the grantor recognises a service concession asset in accordance with paragraph 5 (or paragraph 6 for a whole-of-life asset), the grantor shall also recognise a liability. The grantor shall not recognise a liability when an existing asset of the grantor is reclassified as a service concession asset in accordance with paragraph 8, except in circumstances where additional consideration is provided by the operator, as noted in paragraph 12.

12 The liability recognised in accordance with paragraph 11 shall be initially measured at the same amount as the service concession asset, adjusted by the amount of any other consideration (eg the transfer of an existing asset) from the grantor to the operator, or from the operator to the grantor.

13 The nature of the liability recognised is based on the nature of the consideration exchanged between the grantor and the operator. The nature of the consideration given by the grantor to the operator is determined by reference to the terms of the contract.

14 In exchange for the service concession asset, the grantor might compensate the operator for the service concession asset by any combination of:

(a) making payments to the operator (the ‘financial liability’ model); and

(b) compensating the operator by other means (the ‘grant of a right to the operator’ model), such as granting the operator:

(i) the right to earn revenue from third-party users of the service concession asset; or

(ii) access to another revenue-generating asset for the operator’s use (eg a private wing of a hospital where the remainder of the hospital is used by the grantor to treat public patients or a private parking facility adjacent

This is an opening excerpt, not the complete document.