Accounting & Auditing

FASB Clarifies Service Concession Arrangements Accounting

March 2014

U.S. generally accepted accounting principles (GAAP) lack accounting guidance on accounting for service concession contracts. As a result, some entities account for the transaction as a lease and apply the guidance in Accounting Standards Codification (ASC) Topic 840, Leases, while others account for rights in the contract as an intangible asset, financial asset or both.

Accounting Standards Update (ASU) 2014-05, Service Concession Arrangements, provides clarification. Reporting entities subject to a service concession arrangement with a public sector grantor that controls or can modify or approve the services should not account for the agreements as a lease under Topic 840, nor should they recognize the infrastructure used in a service concession arrangement as property, plant and equipment. Instead, the reporting entity should refer to other U.S. GAAP guidance to account for various aspects of a service concession arrangement.

For an entity other than a public business entity, the effective date is for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. The update is effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014. Entities should use the modified retrospective basis for service concession arrangements that exist as of the beginning of the fiscal year of adoption, which would result in an adjustment to the opening retained earnings balance that year. Early adoption is permitted.

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