A new standard issued by the Financial Accounting Standards Board (FASB) on May 16 clarifies how a company determines who the customer is in a service concession arrangement.
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 the grantor’s infrastructure (such as airports, roads, bridges, tunnels, prisons, and hospitals) for a specified period of time. That infrastructure could already exist or be constructed by the operating entity during the period of the service concession arrangement.
In addition, the operating entity may be required to maintain the infrastructure as part of the arrangement and provide major maintenance to enhance or extend the infrastructure’s life.
In exchange, the operating entity may receive payments from the grantor to perform those services – either as the services are performed or over an extended period of time. The operating entity also may be allowed to charge the public (third-party users) to use the infrastructure.
But here’s the problem: Current US GAAP doesn’t address how an operating entity should determine the customer of the operation services for transactions within the scope of Topic 853, Service Concession Arrangements, which has led to diversity in practice.
And when applying the revenue guidance under Topic 605, Revenue Recognition, stakeholders noted that they weren’t sure who the customer is – the grantor or third-party users of the infrastructure – for certain service concession arrangements. Similar issues could also arise under Topic 606, Revenue from Contracts with Customers.
Under 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), the FASB ruled that the grantor is the customer of the operation services in all cases for those arrangements.
So, for example, when a public-sector entity grantor enters into an arrangement with an operating entity for a toll road that will be used by drivers, the customer is the grantor, not the drivers, according to the FASB.
This enables “more consistent application of other aspects of the revenue guidance, which are affected by this customer determination,” the FASB said.
The new standard goes into effect at the same time as the FASB’s revenue recognition standard.