IFRIC 18 and control of assets
A real estate company is building a residential development in an area that is not connected to the electricity network. In order to have access to the electricity network, the real estate company is required to construct an electricity substation that is then transferred to the network company responsible for the transmission of electricity. It is assumed in this example that the network company concludes that the transferred substation meets the definition of an asset. The network company then uses the substation to connect each house of the residential development to its electricity network. In this case, it is the homeowners that will eventually use the network to access the supply of electricity, although they did not initially transfer the substation.
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Alternatively, the network company could have constructed the substation and received a transfer of an amount of cash from the real estate company that had to be used only for the construction of the substation. The amount of cash transferred would not necessarily equal the entire cost of the substation. It is assumed that the substation remains an asset of the network company
In this example, the Interpretation applies to the network company that receives the electricity substation from the real estate company. The network company recognises the substation as an item of PP&E and measures its cost on initial recognition at its fair value or at its construction cost in the circumstances described in the preceding paragraph.
A house builder constructs a house on a redeveloped site in a major city. As part of constructing the house, the house builder installs a pipe from the house to the water main in front of the house. Because the pipe is on the house’s land, the owner of the house can restrict access to the pipe. The owner is also responsible for the maintenance of the pipe. In this example, the facts indicate that the definition of an asset is not met for the water company.
Alternatively, a house builder constructs multiple houses and installs a pipe on the commonly owned or public land to connect the houses to the water main. The house builder transfers ownership of the pipe to the water company that will be responsible for its maintenance. In this example, the facts indicate that the water company controls the pipe and should recognise it.