1. Query
Gamma Private Limited (hereinafter referred to as “the company”) is engaged in the business of operating and managing an airport under a long-term concession arrangement. In the course of its operations, the company enters into agreements with third-party concessionaires for providing specific services at the airport, including the operation and maintenance of certain equipment.
Under an earlier concession arrangement, a third party (old concessionaire) had installed and operated certain equipment at the airport. As per the terms of the agreement, the company had a contractual right to acquire such equipment at the end of the concession period at a value determined based on specified conditions. This right effectively enabled the company to obtain control over the equipment in future and is referred to as a reversionary right.
Subsequently, upon expiry of the earlier concession, the company entered into a new concession agreement with another party (new concessionaire) for the continuation of similar services. As part of this arrangement, the company agreed to transfer or relinquish its right to acquire the existing equipment in favour of the new concessionaire. In consideration for such relinquishment of rights, the company is entitled to receive a fixed amount of Rs. 100 crore from the new concessionaire at a future date.
In this background, the issue for consideration is what should be the appropriate accounting treatment, under Accounting Standards (AS), for the consideration receivable by the company on relinquishment of such reversionary rights?
2. Relevant Provisions
Accounting Standard 26 – Intangible Assets
Para 6.1 of AS 26
An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
Para 6.2 of AS 26
An asset is a resource:
(a) controlled by an enterprise as a result of past events; and
(b) from which future economic benefits are expected to flow to the enterprise.
Para 14 of AS 26
An enterprise controls an asset if the enterprise has the power to obtain the future economic benefits flowing from the underlying resource and also can restrict the access of others to those benefits. The capacity of an enterprise to control the future economic benefits from an intangible asset would normally stem from legal rights that are enforceable in a court of law.
Para 87 of AS 26
An intangible asset should be derecognised (eliminated from the balance sheet) on disposal or when no future economic benefits are expected from its use and subsequent disposal.
Para 88 of AS 26
Gains or losses arising from the retirement or disposal of an intangible asset should be determined as the difference between the net disposal proceeds and the carrying amount of the asset and should be recognised as income or expense in the statement of profit and loss.
3. Expert Advisory Committee Opinion
The issue under consideration relates to the nature of the right held by the company and the appropriate accounting treatment of consideration receivable on its relinquishment.
At the outset, it is necessary to determine whether the reversionary right held by the company qualifies as an asset. As per AS 26, an asset must be identifiable, controlled by the enterprise, and expected to generate future economic benefits.
In the present case, the company had a contractual right under the concession agreement to acquire the underlying equipment at the end of the concession period. This right is separable and has been transferred independently to another party, which indicates that it is identifiable in nature. Further, such a right arises from a legally enforceable agreement, thereby establishing control. The company also had the ability to derive economic benefits from this right, either by exercising it or by transferring it to another party.
Accordingly, the reversionary right satisfies the definition of an intangible asset under AS 26. Further, since the company appears not to have incurred any significant cost for acquiring this right, it would have been recognised at a nominal value in its books.
The next aspect relates to the accounting treatment of consideration receivable on the transfer of such a right. AS 26 provides that an intangible asset should be derecognised upon disposal, and any resulting gain or loss should be recognised in the statement of profit and loss as the difference between net disposal proceeds and the carrying amount.
In the present case, the company has agreed to transfer its reversionary right to the new concessionaire in exchange for a consideration of ₹100 crore. This transaction represents a disposal of an intangible asset. Since the carrying amount of such an asset is nominal, the difference between the consideration and the carrying amount would effectively represent the gain arising on disposal.
Further, it is also relevant to note that the acquisition of the underlying equipment by the new concessionaire from the old concessionaire is a separate transaction and does not affect the accounting treatment of the consideration receivable by the company for relinquishment of its rights.
Accordingly, the accounting treatment should be aligned with the principles relating to de-recognition of intangible assets as prescribed under AS 26.
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