Service concession arrangements and build-operate-transfer model accounting issues

Governments make contracts included partnership with private sector to finance, operate and maintain an infrastructure. The most frequently used model is Build-Operate-Transfer among these agreements that are called public-private-partnership, especially to run projects that require large investment. Accounting issues for such contracts that include service concession became apparent by the increased use of these contracts. It was began to inquired how the asset constructed/developed also the right and obligations of private sector under a BOT and similar contracts must be recognized. In this thesis, first the concept of public private partnership is explained thereafter Build-Operate-Transfer model discussed and the course of proceeding of the model is presented. In the scope of IFRIC 12, deal with accounting for service concession arrangements, Build-Operate-Transfers examined. Afterwards the details of accounting principles for building phase and operating phase revealed for the specific transactions with in the concept of financial asset, intangible asset and bifurcated model. A Build-Operate-Transfer contract that is limited by the specific economic transactions is recognized as a financial asset, an intangible asset or both financial and intangible asset. Because of a Build-Operate and Transfer contract can only be a financial asset, intangible asset or both of them, accounting application made by changing the term of the contract which differentiate model while the other terms are ceteris paribus. It is concluded that the kind of the asset recognize by the private sector is differentiated according to the party who bears the demand risk of the public service because of being party to an Build-Operate-Transfer contract. Cash flow of the contract is also related to the party who bears the demand risk and what kind of asset the contract is represent. If the party who bears the demand risk is grantor, Build-Operate-Transfer contract is represent a financial investment for the private party because of unconditional contractual right to receive cash or other financial asset from grantor. On the contrary, if the demand risk is bore by the private sector, the contract grants the private party operating the infrastructure like a license and recognized as an intangible asset. When the demand risk is shared between parties, Build-Operate-Transfer contract is recognized partly as a financial asset and an intangible asset. This approach completely changes the point of view for Build-Operate-Transfer contracts in Turkey. Contracts are recognized as an leasing contracts in Turkey. Viewpoint of the IFRIC 12 is more suitable than the applications in Turkey according to the economic substance of the transactions for Build-Operate-Transfer contracts. It is also provide more faithful representation for user of financial statements. On the other hand, sometimes the use of estimations may be a problem for application of the approach. For the reason it is important disclosure the assumptions to the user of financial statements by the way of notes. The aim of the thesis is to reveal how to account Build-Operate-Transfer contracts according to the existing accounting standards and offer solutions for the probable problems to be occurred in the accounting process.