How would you treat a fixed asset in the situation below?
The energy supplier operates a piece of equipment rented from the government for a defined period of time. In the end of the period the company should transfer the asset back to the government.
The energy supplier makes an agreement with the government, according to which the company makes some inseparable improvements to this equipment and the government reduces the rental fee by 50%. The improvements form a separate component of fixed assets.
The company capitalizes expenses for the new component construction, recognizes it as a separate fixed asset and depreciates it within the rent contract period.
The question is whether such treatment is correct?
Is IFRIC-12 Service Concession Arrangements applicable in this situation? If not, which standards guide the accounting treatment for the case?