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Implications Of Ind AS On Aviation

Published on Thu, Aug 27,2015 | 15:39, Updated at Thu, Aug 27 at 16:45Source : 

By: Madhusudan Kankani, Partner - Accounting Advisory Services, KPMG India

Ind AS implications on airport operators

The coming financial year will usher in a new financial reporting framework in India,  Indian Accounting Standards (Ind AS) that are converged with International Financial Reporting Standards (IFRS) come into effect. One of the sectors that is expected to be notably influenced is the aviation sector, one of national importance that contributes significantly to the process of economic development and enables the enhancing of productivity and efficiency in both public transportation, as well as that of goods and services. Airport operators are significant constituents of this sector. They frequently enter into distinct transactions/arrangements including public-private partnerships  (also referred to as service concessions), complex leasing and service arrangements, revenue sharing arrangements, etc. for which the new Ind AS provide specific guidance, which may be particularly different from the current accounting practices.

Service Concession Arrangements (SCAs)
The private operators of an airport enter into a SCA whereby the government grants a company the exclusive right and privilege to carry out the development, design, financing, construction, commissioning, maintenance, operation and management of an airport. Indian GAAP does not provide any guidance on the accounting for SCAs. However, Ind AS 115 lays down the accounting models to be followed, which depends on whether the airport operator is exposed to demand risk or not. When the demand risk lies with the operator, it recognises the cost of developing the airport (together with a margin) as an intangible asset representing a right to collect fees from users of the facilities.  As a result, the amortisation of intangible assets over the concession period as well as revenue recognition of the SCA could be significantly impacted.

Revenue model
The revenues of an airport operator can be broadly classified into aeronautical and non-aeronautical revenues. The aeronautical revenues include 'Passenger Service Fee' (PSF), 'User Development Fee' (UDF), 'landing charges' and 'parking charges'. PSF and UDF are collected as part of the passenger fare by the airline operators and are remitted to the concerned airport operators. These charges are regulated by the Ministry of Civil Aviation.

The non-aeronautical revenues include those of cargo, fuel, retail, food and beverages, advertising, taxi, vehicle parking, among others. Revenue is also collected from leases provided to different vendors to establish their businesses in airports, which may take the form of embedded leases under Ind AS.

Rate Regulated Activities (RRA)
As per the Indian regulatory conditions, the airport operators submit a multi-year tariff proposal to the authority, for determination of the tariff in advance for a period of time. This is an ongoing regulatory process wherein these charges will be revised by the authority on a time to time basis. The aviation sector has to consider the implications of the ‘Guidance Note’ and the applicability of RRA in Ind AS financial statements.  These may have an impact on revenue realisation, recognition of regulatory assets and liabilities and disclosures.

Government grants
Many operators often receive state support and a moratorium period to repay the financing facilities provided by the government. These contracts are for a very long duration and hence, applying the provision of discounting and ascertaining the fair value of the grant may be challenging. Certain land contracts with the government are expected to be for a multi-decade period. Since Ind AS provides specific guidance on land leases, companies have to evaluate these contracts for accounting under these standards.

Airport operators may be eligible for a deduction under Section 80-IA of the Income Tax Act, 1961 (IT Act), subject to the conditions specified therein. This benefit is available to the operator who is either ‘developing’, ’'developing and maintaining’ or ’developing, operating and maintaining’ an infrastructure facility. Section 80-IA specifies the period for which the deduction is available. A demonstration of the period of benefit can lead to a lot of accounting challenges in evaluating the adequacy of tax provisions. Even though an airport operator may be eligible to claim benefit under Section 80-IA of the IT Act, the provisions of Minimum Alternate Tax (MAT) would apply.

In a nutshell the move to Ind AS will impact the net worth, characterisation of the balance sheet and recognition of income and expenses for a company. The transition is expected to enhance the quality of and transparency in financial reporting by Indian aviation companies.


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