United States

Customer of operation services in a service concession arrangement


A service concession arrangement is an arrangement between a public-sector entity grantor and an operating entity whereby the operating entity will operate the grantor’s infrastructure (e.g., airports, roads, bridges, tunnels, prisons and hospitals) for a specified period of time. In a service concession arrangement within the scope of Topic 853, Service Concession Arrangements, the operating entity should refer to other Topics to account for various aspects of the service concession arrangement. For example, the 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.

In applying the revenue guidance under Topic 605, stakeholders have noted that it is not clear who is the customer of the operation services (that is, the grantor or the third-party users) for certain service concession arrangements. This uncertainty has resulted in diversity in practice when applying certain aspect of Topic 605. Similar issues also could arise under Topic 606.

To address this diversity in practice, the Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services. If finalized, the proposed ASU would clarify that an operating entity should consider the grantor to be the customer of its operation services in all cases for service concession arrangements within the scope of Topic 853. To illustrate, consider an example in which a public-sector entity grantor (government) enters into an arrangement with an operating entity under which the operating entity will provide operation services for a toll road that will be used by third-party users (drivers). Per the proposed ASU, the grantor (government), rather than the third-party drivers, would be the customer of the operation services.

For an entity that has not adopted Topic 606, the effective date and transition requirements for the amendments in the proposed ASU would be the same as the effective date and transition requirements for Topic 606. For 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, Topic 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. For all other entities, Topic 606 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The FASB will determine the effective date of the proposed ASU for entities that early adopt Topic 606, including whether to permit early adoption of the proposed amendments, after it considers stakeholder feedback. The proposed ASU is available for comment until January 6, 2017.