Power BreakfastRefresher on Interpretation of FinancialAccounting Standards No. 16 (ServiceConcession Arrangements)

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1. The relevance of ISAK 16

2. How the standard is affecting IndonesianIPPs

3. Key learning points

Agenda

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Overview of Service Concession Accounting

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It’s an IFRS standard. ISAK 16 isadopted from IFRIC 12, ‘Serviceconcession arrangements. ’

It applies to public to privatepartnership arrangements.

Government (regulator)controls the infrastructure tobe used in serving public

service obligation.

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The Relevance of Service Concession Accounting

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Difference between fixed asset powerplant Vs financial (or intangible)asset on balance sheet

Determines howrevenues & expensesare recorded

Affects key financial ratiosand timing of dividenddistribution

Interaction with tax and deferredtax accounting

Why do youneed to workout theaccountingbefore youstart theproject …

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Public service obligation to provide electricityIPPs play an important role in this supply chain

A number of laws and regulations task PLN with a public service obligation to provideelectricity to general public (including Electricity Law No. 30/ 2009).A number of laws and regulations task PLN with a public service obligation to provideelectricity to general public (including Electricity Law No. 30/ 2009).

IPP’s power plants are integrated to PLN’s electricity supply chain.IPP’s power plants are integrated to PLN’s electricity supply chain.

Generation Transmission Distribution Retail

Public Service ObligationIntegral infrastructure

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Control of power plants by PLN (grantor)ISAK 16 specifies a few factors to establish control

IPP

1 Does PLN control the outputs of the power plant?

2 Does the government control prices of electricity?

3 Is the power plant built & operated by a privatesector?

4 Will PLN (or government) receive residualinterest of the power plant?

Sell all electricityproduced

MoEMR regulationson prices

O&M service

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Multiple element approach to record revenueRevenue from sale of electricity is split across its multiple elements

A. Capital cost recovery

Dividingelectricitytariff to its

differentcomponents

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Construction CoD Operations

A. Construction revenue isrecognised up to COD

B. O&M income isrecognised as the IPPperforms its services

C. Energy payments arerecognised for fuel torun the power plant(pass through)

D. O&M income isrecognised as the IPPperforms its services

E. PLN may ask IPP tobuild a special facility(e.g. transmission line)

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ISAK 16 requires IPP to record a financial (orintangible) asset

Who bearsdemand risk?

Features of PPAssigned with PLN

IPP ISAK 16 assets

PLN pays fixed, determinable,amounts (e.g. take-or-pay)

1 Financial asset

PLN purchases all outputs produced(e.g. must pay based on availability)

2Likely financialasset

PLN pays based on usage3 Intangible asset

PLN guarantees to pay a certainamount (take-or-pay) in the first fewyears and will pay based on usage inlater years

4Hybrid – financial& intangible asset

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Year

A comparison of revenue profileISAK 16 Vs traditional owner operated model

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Revenue from sale of electricity

Revenue from construction

Interest income

Construction Operation

O&M income

Traditionalowner

operatedISAK 16

Constructionphase

Revenue -

Operationphase

Revenue

O&M income -

EBITDA

Depreciation -

Financeincome

-

PBT

O&MIncome

Construction

Financeincome

Sale ofelectricity

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Year

A comparison of cumulative profits profileISAK 16 Vs traditional owner operated model

$

Traditional owner operated

ISAK 16

Construction Operation

ISAK 16cumulativeprofits build upgradually overtime

Some assumptions are simplified for illustrativepurposes only

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Mapping the terms of your PPAThe terms of your PPA will determine the accounting model

Category Power is supplied to PLN

Typicalarrangement

Service /maintenancecontract

Build-own-operate- transfer ("BOOT")* Build-own-operate ("BOO")

Asset ownership PLN (grantor) IPP

Capital investment PLN (grantor) IPP (operator)

Demand risk PLN (grantor) PLN (grantor)Both PLN and IPPare responsible fordemand risk

IPP (operator) PLN IPP

Take-or-payarrangement

- YesOnly during aspecified period ofthe PPA

- Yes -

Typical duration < 5 years 25 - 30 years (life of the asset)Over the economic life of the asset or shorter, ranges from 5 - 30years

Residual interestbelongs to

PLN (grantor) IPP

Relevant PSAKs(IFRSs)

PSAK 23 (IAS18) on revenue

ISAK 16 (IFRIC 12) - service concessionarrangement

ISAK 8 (IFRIC 4) andPSAK 30 (IAS 17) on leasing

Accounting model

Power plantbelongs to PLN,privatecontractorsimply recordsO&M revenues

IPP records afinancial assetfor the amountsguaranteed byPLN

A hybrid offinancial asset &an intangible assetmodel. Financialreceivable isrecognised up tothe guaranteedamount by PLN,the remainingportion is recordedas intangible asset

Intangible assetis recorded byIPP based onthe fair value ofthe power plant

Assessment of terms and conditions of the contracts are necessary.

Where the offtake period only covers less than half of the economiclife of the power plant, it is likely that it is an operating lease.

On the contrary, where (1) the offtake period covers substantially allof the economic life of the asset, (2) there is a minimum amountguaranteed by PLN, and (3) almost of all the capital investment canbe recovered from the PPA; it is likely for the IPP to have a financelease. It is also possible for IPP to conclude that ISAK 16 (IFRIC 12)applies in this case.

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Key learning pointsIssues that all investors should look out for …

Pay attention to the key terms of your PPA. Not all PPAs willhave the same accounting treatment.

If you are not in ISAK 16 (IFRIC 12), you may still have touse ISAK 8 (IFRIC 4) lease accounting model.

POJK No. 6/2017 provides some reliefs from complexaccounting for listed entities. Not expected to be many.

If you need more information, reach out to your PwCconsultants.

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Q & A

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Thank you

This content is for general information purposes only, and should not be used as a substitute for consultation withprofessional advisors.

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