In January 2014, the Financial Accounting Standards Board (FASB) issued an update for accounting guidance of Service Concession Arrangements No. 2014-05.
This amendment specifically applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions:
- The grantor controls or has the ability to modify or approve the services that 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 term of the arrangement.
A service concession arrangement is an arrangement between a public-sector entity grantor and an operating entity under which the operating entity operates the grantor’s infrastructure. Examples of infrastructure that might be operated by an operating entity under a service concession arrangement include airports, roads and bridges. The operating entity may also provide the construction or upgrades and maintenance to the infrastructure.
The amendments specify that an operating entity should not account for a service concession arrangement that is within the scope of this update as a lease in accordance with Topic 840. An operating entity should refer to other Topics as applicable to account for various aspects of a service concession arrangement. The amendments also specify that the infrastructure used in a service concession arrangement should not be recognized as property, plant and equipment of the operating entity.
How do the main provisions differ from current USGAAP and why are they an improvement?
Current USGAAP does not contain specific guidance for the accounting for service concession arrangements. Depending on the terms of a service concession arrangement, an operating entity may or may not conclude that a service concession arrangement meets the lease criteria in Topic 840. Consequently, the amendments in this update will improve financial reporting by clarifying that a service concession arrangement within the scope of this update should not be accounted for as a lease in accordance with Topic 840 and, thereby, alleviating the confusion that arises for preparers when determining whether a service concession arrangement is a lease.
The amendments will be effective for annual period beginning after December 15, 2014 and should be applied to a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. Early adoption of this amendment is permitted.
