In a newly issued accounting standard, FASB hopes to provide clarity on how an operating entity determines the customer of the operation services for transactions.
Accounting Standards Update No. 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force), addresses what stakeholders observed as diversity in practice regarding ASC Topic 853.
The issue stems from service concession arrangements between a grantor and an operating entity. The operating entity will operate the grantor's infrastructure—such as airports, roads, bridges, tunnels, prisons, and hospitals—during a specified time frame. The infrastructure may be preexisting or constructed by the operating entity during this time.
As part of the arrangement, the operating entity may maintain the infrastructure, and periodic major maintenance may be required to enhance or extend the life of the infrastructure.
Topic 853 applies to operating entities when they enter into a service concession arrangement with a public-sector grantor who both:
- Controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.
- Controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.
In a service concession arrangement within the scope of Topic 853, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment. Instead, the operating entity should refer to other ASC topics to account for various aspects of a service concession arrangement.
For example, an operating entity should account for revenue relating to construction, upgrade, or operation services in accordance with Topic 605, Revenue Recognition, or Topic 606, Revenue From Contracts With Customers.
This update is needed because GAAP did not address how an operating entity should determine the customer of the operation services for transactions, which led to diversity in practice.