FASB Releases Update on Determining the Customer in a Service Concession Arrangement

Chris Gaetano
Published Date:
May 18, 2017

The Financial Accounting Standards Board (FASB) has released an update that aims to end diversity of practice in determining who is the customer in a service concession arrangement. 

In a service concession agreement, a grantor and an operating entity make an arrangement where the entity operates the grantor's infrastructure (such as airports, roads, bridges, tunnels, prisons or hospitals) for a specified period of time. Current guidance under Topic 853 says that the operating entity should not account for the infrastructure as a lease or as property, plant and equipment but instead should refer to other Topics to account for the various aspects of a service concession agreement. In certain cases, this means consulting Topic 606, which concerns revenue from contracts with customers, or 605, which concerns revenue recognition. In applying the guidance in 605, however, stakeholders have noted that there's some confusion as to whether the customer of the operation services is the grantor or the third party users for certain service concession arrangements.

So, imagine if a state government makes an agreement with a private corporation to run a toll road: is the customer the state government who made the agreement, or the drivers who use the road? The FASB update says the answer is the grantor, not the third-party users. This would mean that, under the new update, it's the government who's the customer, rather than the drivers. 

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