FASB Proposes New Rules on Service Concession Arrangementsby
A proposal issued by the Financial Accounting Standards Board (FASB) on Nov. 4 addresses diversity in practice in how operating entities determine the customer in service concession arrangements.
According to the FASB, a service concession arrangement is an arrangement between a public-sector entity grantor, such as a government, and an operating entity.
Typically, under this type of arrangement, the operating entity will operate – and sometimes maintain – the grantor’s infrastructure (such as airports, highways, bridges, tunnels, prisons, and hospitals) for a specified period of time.
In exchange, the operating entity may receive payments from the grantor to perform these services – either as the services are being performed or over an extended period of time. Additionally, the operating entity may be allowed to charge the public (third-party users) to use the infrastructure.
Under the scope of Topic 853, Service Concession Arrangements, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment, according to the FASB.
In applying the revenue guidance under Topic 605, Revenue from Contracts with Customers, operating entities have noted that they are not sure who the customer is – the grantor or the third-party users of the infrastructure – for certain service concession arrangements.
Take, for example, a toll road that will be used by drivers. Under the proposed Accounting Standards Update (ASU), the grantor, not the third-party drivers, would be the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853.
“The amendments would eliminate the diversity in practice that has been observed regarding the customer determination for the operation services,” the ASU states. “The amendments would also reduce complexity and enable more consistent application of other aspects of the revenue guidance, which are affected by this customer determination.”
Comments on the proposal are due to the FASB by Jan. 6, 2017. Instructions on how to submit comments can be found in the exposure draft.
The proposed ASU is a consensus of the FASB Emerging Issues Task Force.