What would be the position under all those agreements where the concession payments are linked to revenue as per the financial statements? There is an impending need to take up this issue with the IASB as the Concession Agreements are not solely for construction but with bundle of services mainly for improving operations.

In the case of financial asset the fair value of construction and operation cost is shown as income. In addition to the same, finance income is also recognised based on effective interest rate on the amount due from the grantor which is again a subjective one.

The better position is to negotiate with the IASB to drop this accrual of revenue during construction phase. Alternatively, we may make this adjustments to revenue and expenditure under the below-the-line item. This would achieve the twin objective under the erstwhile accounting and the IFRS. This again would be a temporary measure of presentation.

Let us discuss the second issue arising out of accruing construction revenue. When the revenue is accrued with mark up and the capital costs are taken as expenditure, the mark up is nothing but construction profit.

This negates the basic fundamental premise that there would not be any profitability during the construction phase. These profits would normally be taken under reserves in the balance sheet and questions arise, that these are free reserves backed by equivalent cash. Will it be eligible for paying dividend?

This is because the mark-up shown in the construction phase is nothing but the profits to be realised during operation phase under the present accounting norms which is skewed during the construction phase.

There would also be taxation issues arising out of these profits. In case the operator does not complete or fulfil the conditions and the contract is cancelled, what would be the position of the unrealised construction profit? These types of exceptions need to be covered in the guideline.

The Guidance note devolves on the premise that the assets built on by the concessionaire are returned back to the grantor after the lease period is completed and hence the same are not to be treated as fixed assets. These are financial or intangible assets based on the type of grant awarded.

If the grantor guarantees or pays fixed amounts then the same are treated as financial asset and the same are shown as debtors. The issue that arises is as the amounts due from the grantor over the concession period are shown as debtors in the initial year itself and which are not realisable within a year’s timeframe. Is it fair to show as debtors under current assets? If the licence is by way of charging the public users, then the same is shown as intangible assets.

The same is amortised over the life of the concession period. The better position would be to show as right to use under intangible asset in both the scenarios. In the concession contracts, at the end of the contract period, the assets get transferred at book value after claiming depreciation based on the Companies Act.

In these scenarios, there would be issues in determining the consideration for the transfer as we totally move away from the fixed assets concept. Generally, infrastructure concessions would be long term in nature which anyway would result in the diminution in value of the asset by normal depreciation route itself.

Hence, the need of disclosing as debtors or intangibles does not arise as the end result would be the same. Considering the Indian scenario, the Accounting Standard Board could take up the issue with the IASB and bring out uniformity in the disclosure.

Normally infrastructure assets enjoy high gearing ratio on account of long gestation. The lenders evaluate the cash accruals every year in relation to the project and the debt servicing capabilities. This Guidance note will play a spoilsport as the financial statements are to be made at fair value ignoring the accrual and the cash realisation concept.

Are the borrowers required to prepare different set of statements for each stakeholder? Even if it is considered there would be huge issues in evaluation and comparability in relation to each year. On account of changes in accounting, there would huge distortion in ratios even for normal comparison purposes.

The security is critical part in the infrastructure financing. Normally the project assets are pledged in favour of the lenders. On account of showing huge unrealised debtors and moving away from the fixed assets concept there would be issues in relation to comfort of the lenders.

The whole accounting hinges heavily on the fair value concept. World-over the fair value concept has thrown open wide variations based on each individual assessment.

The fair value at the time of construction stage changes from the potential usage of the asset and the value chain attached to it. To arrive at a scientific analogy for fair value is a difficult proposition. The performance may be distorted based on the assumptions considered for fair value concept.

With infrastructure concessions awarded for the long term, it is impossible to predict the revenues and the fair value return of the assets over the concession period and accrue the same in the first year itself.

We should also consider the bottlenecks which will be faced in relation to other statutes such as the Companies Act, wherein depreciation has to be charged as per Schedule XIV of the said Act. In the case of Income-Tax Act, the depreciation is based on the block of assets method. With the whole fixed assets concept going away, there would be huge differences in relation to the I-T Act.

Moreover, charging the construction costs as expenditure will lead to anomaly and requires restatement of income in deriving the profits as per the I-T Act.

Accounting Standard 9, which is on revenue recognition, needs amendment. The operator who is not a construction service provider will accrue the construction income which is against the principle of revenue recognition. The income is accrued based on fair value which is against the basic concept of certainty of income.

The standard on deferred taxation would also require necessary changes on account of the fair value concept. The auditor also faces a huge issue in recognising the fair value concept and computing the discount rate as it changes from asset to asset and time to time.

However, the critical aspect is that these concessions have been awarded. The business models were built based on the economic value criteria and the financial gains realisable. Changes to these parameters would certainly affect the present position in relation to various covenants of the contract which in some cases would affect the economic viability of the project.

With Indian companies going global, it is right time to leverage and place our requirements and negotiate with IASB.