My letter here mirrors my response to Mr Christopher Ram’s article “Berbice Bridge Company Inc. – Not really a profit” on your website (October 16, 2011). At the risk of using an outdated view based on an exposure draft (http://www.standardsetter.de/drsc/docs/IFRICD14.pdf) rather than the final guidance it does sound like Mr Ram’s logic that under IFRS that construction costs under a concession agreement should be treated as an intangible amortised over the life of the concession is correct.
We should not lose sight of the fact that depreciation and amortisation are purely book entries passed by accountants in order that the books reflect the economic cost of replacing an asset as it is used. By advocating this approach what the IFRIC guidance is in effect saying is that the Berbice Bridge Company will only have generated a profit over the life of the concession agreement if it generates sufficient revenue to fund a replacement bridge at the end of it!
This has some unpalatable consequences – per Section 50 of the Companies Act dividends on ordinary shares (and presumably preference shares too) can only be paid out of profits. Thus if the construction costs were amortised in this way in order to provide a return to the shareholders tolls would need to be increased in order to generate the accounting profit required to allow dividends to be paid.
Mr Ram does not discuss the cash flow statement, but assuming that cash income is balancing cash outgo (and it is my understanding that the tolls are set in a manner for that) such an increase in tolls would manifest itself as a large build up in cash which would then be distributed in a windfall payment to the shareholders when the concession ended and the bridge is handed back to the government. I rather expect that the “fudging that is taking place” is more to with avoiding an arbitrary transfer of wealth from the users of the bridge to the shareholders than any desire to cook the books to show an economic profit. Given the amount of subsidies that had to be thrown at it, if accounting for the bridge on an economic basis means a replacement basis, then I probably wouldn’t expect the Berbice Bridge Company to make profit on that basis.
Even the IFRIC’s own example shows the entity operating the concession generating over 758m currency units in operating cash flow in the first 6 years following construction yet accumulated profit has failed to break even by that time and the firm is also insolvent (i.e. its liabilities exceed assets). A strange basis on which to account indeed.
Patrick van Beek