PPP hospital concession arrangements: financial asset versus intangible asset model

PPP hospital concessions fundamentally change the balance sheet: an operator that wrongly recognizes the hospital as its own PP&E masks the true nature of its exposure (financial asset credit/interest-rate risk versus intangible-asset demand/usage risk), which misleads investors and lenders about the risk profile and cash-flow drivers of what looks like, but is not, a conventional owned-and-operated hospital.

Does the grantor control or regulate what services the operator must provide, to whom, and at what price, while retaining a significant residual interest in the hospital infrastructure at the end of the concession, the two conditions that trigger IFRIC 12? Does the operator hold an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor regardless of usage, pointing to the financial asset model, or does it bear demand/usage risk, pointing to the intangible asset model? Could the arrangement contain both models simultaneously if different parts of the infrastructure or services are compensated on different bases?

1) Assess whether the IFRIC 12 scope criteria are met: does the grantor (government/health authority) control or regulate what services the operator must provide, to whom, and at what price, and does it retain a significant residual interest in the hospital infrastructure at the end of the concession? 2) If both conditions are met, do not recognize the concession infrastructure constructed or upgraded by the operator as its own property, plant and equipment. 3) Recognize construction/upgrade services performed for the grantor as revenue under IFRS 15 as the services are performed (a separate performance obligation from ongoing operations). 4) Classify the consideration received or receivable as a financial asset to the extent the operator has an unconditional contractual right to receive cash (or another financial asset) from or at the direction of the grantor regardless of usage (the financial asset model). 5) Classify it as an intangible asset to the extent the operator's recovery depends on usage/demand risk, i.e. a right to charge users (the intangible asset model). 6) Where different parts of the arrangement are compensated differently, apply a bifurcated model, splitting the consideration between the two classifications accordingly.

Measure the financial asset component at amortized cost (or fair value through profit or loss/OCI as applicable under IFRS 9's classification criteria) with interest income accreted over the concession term using the effective interest method; measure the intangible asset (right to charge users) at cost, amortized over the concession period on a basis reflecting the pattern of consumption of the economic benefits (e.g. usage-based or straight-line); reassess the classification only if the underlying payment mechanism of the concession is contractually modified.

Disclose the nature and key terms of the concession arrangement including the grantor, service obligations and concession period; disclose the classification applied (financial asset, intangible asset, or a bifurcated model) and the basis for that conclusion; disclose revenue and profit recognized separately for construction/upgrade and operation phases; disclose the remaining concession term and renewal/termination provisions; disclose the measurement basis (amortized cost, etc.) and interest income accretion for any financial asset component.

• Recognizing the hospital building and equipment as the operator'
• s own PP&
• E and depreciating it directly, ignoring the IFRIC 12 control criteria that redirect it to a financial or intangible asset model
• failing to separately recognize and measure the construction-phase revenue and margin distinct from the operating-phase service revenue
• applying the financial asset model when the operator in substance bears demand risk (which should be the intangible asset model), or vice versa
• omitting interest income accretion on a recognized financial asset component.