FASB issues accounting standards update on service concession arrangements

In a new accounting standard issued Tuesday, 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 FASB Accounting Standards Codification (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, according to the standard. 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.

The provisions in the update are illustrated by an example in which a public-sector entity grantor (such as a government) enters into an arrangement with an operating entity that is to provide general maintenance of a toll road that is used by a third party (drivers). The update clarifies that the grantor (the government)—not the drivers—is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853.

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, according to the standard.

For entities that have not adopted Topic 606 before this update was issued, the effective date for the new amendments is the same as the date for Topic 606, whether that is early adoption or the required adoption date.

For entities that have adopted Topic 606, the effective date for this update varies. For certain entities—a public business entity; a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market; and an employee benefit plan that files or furnishes financial statements with or to the SEC—the standard is effective for fiscal years beginning after Dec. 15, 2017, including interim periods within those fiscal years.

For all other entities that have adopted Topic 606, the update is effective for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019.

—Anslee Wolfe is a freelance writer in Colorado Springs, Colo. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.