Radar CBG · Editorial line 01 · Business & Intangibles Valuation
Nine recurring errors under ICPC 01, from scoping the contract to the end of the concession.
ICPC 01, the Brazilian interpretation of IFRIC 12, supplemented by the guidance in OCPC 05, starts from a simple observation. When the grantor controls or regulates which services the concessionaire must provide, to whom and at what price, and retains the significant residual interest in the infrastructure at the end of the contract, that infrastructure is not the concessionaire's property, plant and equipment. It is the means through which a service is provided over a fixed term.
The accounting consequence runs through the whole life of the contract. In place of property, plant and equipment, the concessionaire recognises the right it has actually acquired. That right may be an intangible asset, when the return depends on demand, a financial asset, when there is an unconditional right to receive cash from the grantor, both in proportions set by the contract, or a contract asset, while the right to cash still depends on the concessionaire's own performance.
The subject affects companies in sectors such as toll roads, airports, port terminals, water and sanitation, electricity transmission and distribution, public lighting and public-private partnerships in general. In all of them, the concession asset tends to be the largest line on the balance sheet and the base on which amortisation, the maintenance provision, impairment testing and covenants are calculated.
That is why a decision taken without proper criteria at the start of the contract does not correct itself. It carries through twenty-five or thirty years of financial statements, and resurfaces in every audit review, every rebalancing of the contract and every corporate transaction involving the concessionaire.
The sector adds a complication of its own. The same number is read by different audiences for different purposes. The auditor examines compliance with the standard, the regulator looks at the economic and financial balance of the contract, lenders monitor covenants built on these balances and, in a corporate transaction, the buyer redoes the whole calculation. Lenders in particular tend to work with an adjusted EBITDA that excludes construction revenue and cost, because those amounts pass through profit or loss without generating cash, and covenants that are poorly defined on this point can be met or breached purely as an accounting effect.
In this edition we set out the nine errors we see most often in accounting for concession assets, from the initial scoping of the contract to the end of its term.
The root error is to skip the scope question. Infrastructure falls within ICPC 01 when the grantor controls or regulates the service, its recipients and the price, and controls the significant residual interest at the end of the term. Outside those conditions, the contract may be a lease under CPC 06 (IFRS 16), the entity's own property, plant and equipment under CPC 27 (IAS 16), or an ordinary service arrangement. We see both deviations often. Infrastructure clearly under concession is recorded as property, plant and equipment, and contracts that do not meet the criteria are treated as concessions out of sector habit.
In the audit. A request for the scoping memorandum, with the contractual analysis that supports the classification, clause by clause.
How to avoid it. Prepare that memorandum when the contract is signed, or at the first reporting date after the concessionaire is acquired, and revise it with every amendment that changes the term, tariff, scope or reversion conditions, reflecting the conclusion in the disclosures required by ICPC 17 (SIC 29).
Within the scope of the interpretation, the model follows from who bears demand risk. There is a financial asset when the concessionaire has an unconditional contractual right to receive cash from the grantor, regardless of the use of the infrastructure, and there is an intangible asset when the return comes from the right to charge users. Contracts that combine a cash payment from the grantor with tariffs, a guaranteed minimum revenue or contractual compensation for reversible assets give rise to the bifurcated model, with both components on the balance sheet. There is also the contract asset, under CPC 47 (IFRS 15), for the portion whose right to cash depends on the fulfilment of performance obligations. This is the treatment the CVM set out for electricity transmission concessions in Circular Letter SNC/SEP 04/2020, under which the remuneration only becomes a financial asset after the credit notice from the National Electric System Operator (ONS) that authorises billing. The same classification appears in the construction phase of many concessionaires under the intangible model, which present investment in progress as a contract asset and transfer it to intangible assets when operations begin. Treating everything as intangible, which is the most common reflex, erases finance income, creates amortisation where there should be none and applies the impairment test to a base the standard does not recognise.
In the audit. A reconciliation between the remuneration clauses and the composition of the recorded asset, with attention to revenue guarantees and compensation rules.
How to avoid it. Map the contract's sources of remuneration and quantify the unconditional portion before deciding the classification, keeping the calculation documented for subsequent reviews.
Does the grantor control the service, the price and the residual interest?
ICPC 01 scope test, carried out clause by clause
no
Outside ICPC 01
lease or own property, plant and equipment
How is the concessionaire paid?
demand risk and collection conditions define the model
Financial asset
unconditional right to cash from the grantor, under CPC 48 (IFRS 9)
Contract asset
right conditional on performance obligations, under CPC 47 (IFRS 15)
Bifurcated model
guaranteed and demand-based portions coexist, each with its own measurement
Intangible asset
right to charge users, amortised by consumption up to the end of the contract
Every model carries the maintenance provision, impairment testing over a finite term and the treatment of reversible assets.
When the contract provides for fixed concession fee payments (outorga fixa) over the term, the established practice in the sector, with clear examples in airport concessions, is to recognise at signing an intangible asset against a liability for the present value of the instalments, with inflation adjustment and interest taken to profit or loss over time. Expensing each instalment when it is paid shifts cost between periods, leaves a material obligation off the balance sheet and distorts the leverage indicators that lenders monitor. The variable fee, calculated on each period's revenue, follows a different logic and is expensed as incurred. It is also common to discount the obligation at a rate that does not reflect the concessionaire's borrowing cost at the date of recognition.
In the audit. The present value calculation at initial recognition, the rationale for the rate and a reconciliation of the liability with the contractual schedule of payments and adjustments.
How to avoid it. Recognise the intangible asset and the liability at signing with a documented rate, and reconcile the liability at each reporting date with the instalments paid, the inflation adjustment and the interest accrued.
The interpretation requires revenue and cost of construction or upgrade services to be recognised under CPC 47 (IFRS 15), and the margin applied must reflect the economic substance of the arrangement. A zero margin is appropriate when the concessionaire merely passes the construction through and bears no significant risk, and it becomes a distortion when the concessionaire manages the works, is accountable for schedule and cost and is paid for that role. Because the amount recognised in the construction phase forms the base of the intangible asset, a margin set without support contaminates amortisation, provisions and impairment for the whole term of the contract.
In the audit. A request for evidence supporting the margin adopted, with an analysis of construction risk, the subcontracting structure and a comparison with returns on similar services.
How to avoid it. Document the decision based on the contract and the delivery arrangement, and revisit it whenever the concessionaire changes the way it contracts the works.
The contractual obligation to maintain or restore the infrastructure to a specified level of operation, such as the resurfacing cycles of a toll road, is a provision under CPC 25 (IAS 37), recognised over the period in which the deterioration occurs. Routine maintenance follows a different logic, is expensed as incurred and is not part of the provision. Three failures tend to appear together. The first is recording the nominal amount of the future intervention, without discounting it when the effect of the time value of money is material, which inflates the liability and hides the finance expense from the unwinding of the discount. The second is freezing the schedule and the rate, with no review at each reporting date. The third is mixing mandatory maintenance works with expansion or upgrade works in the same provision. Expansion and upgrade works give rise to a new asset and fall outside the provision.
The order of magnitude shows up quickly. An intervention estimated at R$ 120.0 million, expected in five years and discounted at 8.0% a year, a pre-tax rate that should reflect the risks specific to the obligation, is worth R$ 81.7 million today. The R$ 38.3 million difference does not disappear. It runs through the period as finance expense from the unwinding of the discount, rather than as maintenance cost.
In the audit. A breakdown of the physical schedule of interventions, the source of the cost estimates and a demonstration of the discount rate used.
How to avoid it. Build the provision from the contractual maintenance plan, with costs estimated per intervention, explicit discounting and a clear separation between maintaining and expanding.
When part of the remuneration is unconditional, the portion recorded as a financial asset is an instrument under CPC 48 (IFRS 9), measured according to the business model and the characteristics of the contractual cash flows. In most cases this means amortised cost at an effective interest rate set at initial recognition, with finance income over the whole contract. There are relevant exceptions, such as the indemnifiable asset of electricity distributors, which is usually measured at fair value through profit or loss because its cash flow, updated by new replacement value, does not consist solely of payments of principal and interest. Two deviations appear often. The first is recording the nominal amount receivable and treating the difference as income when the cash comes in. The second is ignoring the expected credit loss estimate, on the grounds that the debtor is a public entity, when the standard creates no such exemption and recent experience of delays in grantor payments does not support it.
In the audit. The effective rate calculation, a test of the discounted contractual cash flow and the expected loss policy applied to the public counterparty.
How to avoid it. Set the effective rate at inception with a supporting calculation, classify the asset according to the contract's business model, including the possibility of assignment, and review expected losses at each reporting date.
CPC 04 (IAS 38) requires the amortisation method to reflect the expected pattern of consumption of the intangible asset's economic benefits. In concessions with a rising traffic or volume curve, the straight-line method brings expense forward into the early years and reduces it precisely when the asset is used most, which distorts results throughout the first half of the contract. The units-of-production method tends to represent that consumption best. A revenue-based method, by contrast, carries a rebuttable presumption in the standard that it is inappropriate, which can be overcome only in the specific situations the standard allows, among them a concession in which revenue is the limiting factor of the right. Then there is the term, which ends at contractual expiry. An extension is included only when there is evidence that it will be obtained without significant cost, which rarely applies to early extensions, usually conditional on new investment.
In the audit. A comparison between the amortisation curve and the demand projection that supports the business plan and the impairment test itself.
How to avoid it. Derive amortisation from the same physical projection that drives the concession's economic model, and revise it when the demand curve changes materially.
The compensation due at the end of the contract is determined asset by asset, according to the criteria of the contract and the regulator, on the portion not yet amortised. When the register is kept by project, by batch or by investment order, with no unitisation identifying each asset with its in-service date, cost and assigned life, the concessionaire reaches the final phase unable to demonstrate what it is entitled to receive, and negotiates at a disadvantage. The same register supports amortisation, the maintenance provision, insurance cover and the impairment test itself, which multiplies the effect of keeping it weak.
In the audit. A reconciliation between the accounting register and the assets tied to the concession, with a calculation of the indemnifiable value by class.
How to avoid it. Unitise each project when it enters service, with a classification aligned to the compensation criteria, and keep periodic physical and accounting reconciliations throughout the contract.
The CPC 01 (IAS 36) test in a concession has a geometry of its own. The cash flow ends at contractual expiry, with no terminal value in perpetuity, and releases working capital in the final period. Compensation for reversible assets must be consistent with the classification made at inception. If it was recognised as a financial asset, it is already outside the intangible asset and does not return to the test cash flow. If it forms part of the intangible asset, because it depends on conditions not yet met, it enters the final period at its expected value. Using a perpetuity for an asset the concessionaire hands back to the grantor is the most visible error, and the quickest to be flagged. The definition of the cash-generating unit also matters, and as a rule the unit is the concession itself. So does the treatment of rebalancing claims not yet recognised by the grantor, which are contingent assets and enter the cash flow only with adequate support.
In the audit. Verification of the cash flow ending at contractual expiry, of the compensation calculation and of the absence of perpetual growth.
How to avoid it. Model the concession to the end of the term with a calculation of the indemnifiable value by class of reversible asset, keeping that calculation updated together with the asset register.
Classification always follows from the contract, and contracts in the same sector may be treated differently. Even so, the practice observed in the financial statements of Brazilian companies shows patterns that help to place each concessionaire before the clause-by-clause analysis.
| Sector | Predominant model | Most frequent area of focus |
|---|---|---|
| Toll roads | Intangible | Provision for resurfacing cycles and amortisation by the traffic curve |
| Airports | Intangible, with the fixed concession fee recorded as a liability | Present value and indexation of the concession fee obligation |
| Ports | Intangible in port lease contracts (arrendamentos) within public ports | Private-use terminals operate under authorisation and keep their own property, plant and equipment |
| Water and sanitation | Intangible, with a contract asset during construction | Compensation for unamortised investment and universal coverage targets |
| Electricity transmission | Contract asset until billing is authorised | Performance obligations and the effect of availability deductions (Parcela Variável) |
| Electricity distribution | Bifurcated, with an indemnifiable financial asset | Fair value measurement of the indemnifiable asset at new replacement value |
| PPPs with grantor payments | Financial or bifurcated | Expected losses on the public counterparty |
Consider a toll road concession with a 25-year term and an intangible asset of R$ 1,000.0 million recognised at the end of the construction phase. Projected traffic starts at 60 million equivalent vehicles in the first year and reaches 140 million in the last, totalling 2,500 million over the contract. Straight-line amortisation allocates R$ 40.0 million a year. The units-of-production method allocates the asset in proportion to each year's traffic.
| R$ million | Straight-line | Units of production | Difference |
|---|---|---|---|
| Amortisation in year 1 | 40.0 | 24.0 | 16.0 |
| Amortisation in year 10 | 40.0 | 36.0 | 4.0 |
| Amortisation in year 25 | 40.0 | 56.0 | (16.0) |
| Cumulative, first five years | 200.0 | 133.3 | 66.7 |
| Cumulative, first ten years | 400.0 | 300.0 | 100.0 |
Illustrative figures. Traffic was projected with uniform growth to keep the comparison readable. Under both methods the asset is fully amortised by the end of the contract.
Both methods consume the same R$ 1,000.0 million by the end of the concession, and the difference lies in how the expense is spread over time. Under the straight-line method, the first decade absorbs R$ 100.0 million more amortisation than the asset's economic consumption indicates, with a direct effect on profit, the tax base, dividend distributions and covenant indicators at a time when the concessionaire is usually most leveraged.
CBG Valuation Services is an independent boutique dedicated exclusively to valuation, working across Business & Intangibles Valuation, Real Estate Appraisal and Machinery & Equipment, with a strong team of consultants based in its Rio de Janeiro and São Paulo offices. In concessions, we carry out the scope and model diagnosis under ICPC 01, the measurement of the concession intangible and of the concession fee obligation, the calculation of the maintenance provision with a demonstrated schedule and discounting, impairment testing with cash flows that end at contractual expiry, the determination of the indemnifiable value of reversible assets and the unitisation of the asset register that supports all of these figures.
If your concessionaire is reviewing assumptions for the year-end close, discussing a rebalancing or preparing a corporate transaction, these numbers will be examined by auditors, regulators and counterparties at the same time. We would be glad to present our approach in a short conversation.
Carlos Bernardo Gonçalves, MRICS, is Managing Partner of CBG Valuation Services.
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This material is for information only and does not constitute accounting, tax or legal advice, nor an opinion of value on any specific asset or transaction. The standards referred to are those in force at the date of publication. The numerical examples are illustrative. Application to specific cases requires case-specific analysis.
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