In May, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services. The amendments in this ASU clarify that for service concession arrangements (SCA) within the scope of Topic 853, the grantor is the operating entity’s customer in all cases. Infrastructure outsourcing arrangements under Topic 853 are common between governmental entities (grantor) and private companies (operating entity). No additional Topic 853 disclosures are required.
FASB has concluded that based on the specific scope criteria and related accounting requirements of Topic 853, the grantor is outsourcing the operation and general maintenance (operation services) of its infrastructure to the operating entity. While the operating entity may be exposed to third-party demand risk, e.g., the risk that third parties will not pay for the service, third parties are not parties to the SCA.
Infrastructure in a service concession agreement should not be accounted for as a lease or property, plant and equipment by the operating entity.
Operating entities of SCAs should account for revenue in accordance with Topic 605, Revenue Recognition, or Topic 606, Revenue from Contracts with Customers. This includes accounting for infrastructure enhancements, e.g., construction services for nonexistent infrastructure or major (capital-intensive) maintenance to existing infrastructure, as well as the operation services. The operating entity will refer to other topics to account for various other aspects of SCAs, e.g., to determine whether to capitalize maintenance not determined to be a separate deliverable under Topic 605 or a separate performance obligation under Topic 606.
In an SCA, the operating entity operates the grantor’s infrastructure for a specified period. The grantor is generally a governmental body (or an entity to which the responsibility to provide public service has been delegated). Example infrastructure includes airports, roads, bridges, tunnels, prisons and hospitals. The operating entity also may provide general or capital-intensive maintenance of the infrastructure to enhance or extend the infrastructure’s life.
FASB Accounting Standards Codification 853’s scope is limited to SCAs that:
- The grantor controls or can modify or approve the services the operating entity must provide with the infrastructure, to whom it must provide them and at what price.
- The grantor controls—through ownership, beneficial entitlement or otherwise—any residual interest in the infrastructure at the end of the arrangement’s term.
FASB’s Basis for Conclusions states, “The customer of the operation services is the grantor because the operating entity is acting as the grantor’s service provider (or outsourcer) to operate and maintain the infrastructure, which is controlled by the grantor, and the only parties to the executed service concession arrangement are the grantor and the operating entity.” Entities are cautioned against applying this conclusion by analogy to other transactions that are not within Topic 853’s scope. Likewise, arrangements where contract-related payments are made by an operating entity to a grantor are not solely applicable to SCAs under Topic 853.
Revenue Recognition Guidance in Topic 606 Has Not Been Adopted
For entities that have not adopted Topic 606, the effective date and transaction requirements for this ASU generally align with the effective date and transition requirements for Topic 606, including applying the same practical expedients to the extent possible. An entity that adopts Topic 606 after the issuance of ASU 2017-10—whether the adoption of Topic 606 is at the required effective date or earlier—should adopt Topic 606 and the amendments in this ASU concurrently, using the transition method elected for the application of Topic 606—including applying the same practical expedients, to the extent applicable—unless the entity elects to early adopt the amendments before adopting Topic 606.
Entities adopting ASU 2017-10 early are not permitted to use certain practical expedients they would be permitted to use if adopting ASU 2017-10 and Topic 606 concurrently. The election to apply the modified retrospective approach to either all contracts or only contracts that are not completed at the date of initial application is not considered a practical expedient for this purpose.
- For entities that have not adopted Topic 606, only one transition is expected for SCAs. Accordingly, entities that currently determine under Topic 605 that third-party users are the operation service’s customer are encouraged to consider the effects of identifying the grantor as the customer when implementing the five-step revenue recognition requirements. Identifying performance obligations in the contract will entail considering whether major maintenance is a separate performance obligation (as applicable) and whether toll collection, for example, is a performance obligation.
Revenue Recognition Guidance in Topic 606 Has Been Adopted
Public business entities, 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 U.S. Securities and Exchange Commission that have adopted Topic 606 before the issuance of ASU 2017-10 are required to adopt the amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim and annual periods thereafter.
The amendments to Topic 853 should be applied using either a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or a retrospective approach, irrespective of the transition method the entity used when initially applying Topic 606. An entity should use the same transition practical expedients that it used when initially applying Topic 606 to the extent possible. Transition disclosure requirements differ depending on the transition method selected.
Contact your BKD advisor for further information.