United States

Customer of operation services in a service concession arrangement

FINANCIAL REPORTING INSIGHTS  | 

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 (for example, airports, roads, bridges, tunnels, prisons and hospitals) for a specified period of time. In a service concession arrangement within the scope of Topic 853 of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC), “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 ASC 605, “Revenue Recognition,” or ASC 606, “Revenue from Contracts with Customers.”

In applying the revenue guidance under ASC 605, stakeholders have noted that it is not clear whether the customer of the operation services 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 ASC 605. Similar issues also could arise under ASC 606.

To address this diversity in practice, the FASB recently issued Accounting Standards Update (ASU) 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies that the grantor is the customer of the operation services in all cases for service concession arrangements within the scope of ASC 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 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 ASC 606, the effective date and transition requirements for ASU 2017-10 generally are the same as the effective date and transition requirements for ASC 606 (and any other Topic amended by ASU 2014-09, Revenue from Contracts with Customers (Topic 606)).

For an entity that already has adopted ASC 606, the effective date for the amendments in the ASU is as follows:

  • 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, ASU 2017-10 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
  • For all other entities, ASU 2017-10 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

An entity that already has adopted ASC 606 is required to apply ASU 2017-10 using either (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or (b) a retrospective approach.