FASB Issues an Update to the Standard Dealing with Service Concession Arrangements
The Financial Accounting Standards Board (FASB) has recently issued an Accounting standards update (ASU) with regards to service concession arrangements. The purpose of the ASU No. 2017-10 is to provide guidance with regards to how an operating entity should determine the customer in a service concession arrangement.
A service concession arrangement (SCA) is an arrangement between a business entity and a grantor in which a business entity agrees to run the operation of facilities such as roads, airports, bridges, tunnels, hospitals and prisons, on behalf of the grantor. Normally these operational facilities are built and owned by local or state government. In most of the cases the grantor retains the right to run and control the operation of facilities given to the business entity as part of the SCA.
According to FASB Accounting Standards Codification Topic 853, the operating entity should not account for the infrastructure or operating facility as a property, plant & equipment or as a lease. Although, the operating entity should recognize the revenue resulting from construction, upgrade, maintenance or operation services in accordance with the requirements of Topic 605 – Revenue Recognition or Topic 606 – Revenue from Contracts with Customers. Now some of the users of the standards issued by the FASB got confused when applying Topic 605 and Topic 606 as to who is the customer of the operation services, the grantor or the third-party users. Therefore this uncertainty resulted in diversity in practice.
The provisions in the ASC No 2017-10 is illustrated through an example in which a grantor (for example a government) enters in to an agreement with a business entity to provide maintenance services with regards to a toll road that is to be used by a third-party (car drivers). As per the update the grantor (the government) is the customer and not the third-party (car drivers) to the operation services transactions in all cases for service concession arrangements. The update takes effect in accordance with the new revenue recognition standard.
A service concession arrangement (SCA) is an arrangement between a business entity and a grantor in which a business entity agrees to run the operation of facilities such as roads, airports, bridges, tunnels, hospitals and prisons, on behalf of the grantor. Normally these operational facilities are built and owned by local or state government. In most of the cases the grantor retains the right to run and control the operation of facilities given to the business entity as part of the SCA.
According to FASB Accounting Standards Codification Topic 853, the operating entity should not account for the infrastructure or operating facility as a property, plant & equipment or as a lease. Although, the operating entity should recognize the revenue resulting from construction, upgrade, maintenance or operation services in accordance with the requirements of Topic 605 – Revenue Recognition or Topic 606 – Revenue from Contracts with Customers. Now some of the users of the standards issued by the FASB got confused when applying Topic 605 and Topic 606 as to who is the customer of the operation services, the grantor or the third-party users. Therefore this uncertainty resulted in diversity in practice.
The provisions in the ASC No 2017-10 is illustrated through an example in which a grantor (for example a government) enters in to an agreement with a business entity to provide maintenance services with regards to a toll road that is to be used by a third-party (car drivers). As per the update the grantor (the government) is the customer and not the third-party (car drivers) to the operation services transactions in all cases for service concession arrangements. The update takes effect in accordance with the new revenue recognition standard.
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