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15.28 Service concession arrangements
Publication date: 28 Feb 2022
us IFRS & US GAAP guide
Service concession arrangements may be in the scope of ASC 853, Service Concession Arrangements, for US GAAP or IFRIC 12, Service Concession Arrangements, for IFRS if they meet certain criteria. The authoritative literature provides guidance on the accounting by private entity operators for public-to-private service concession arrangements (for example, airports, roads, and bridges) that are controlled by the public sector entity grantor. The operator also may provide construction, upgrading, or maintenance services in addition to operations. Under both US GAAP and IFRS, the infrastructure used in these arrangements should not be recognized as property, plant, and equipment by the operator. ASC 853 does not specify how an operator should account for the various aspects of a service concession arrangement other than to refer the operator to follow other applicable US GAAP. IFRIC 12 requires the operator to follow specific existing IFRS for various aspects of a service concession arrangement and provides additional guidance for other aspects.
US GAAP | IFRS |
The operator should not account for these arrangements as leases.
For the operator’s revenue and costs relating to the construction, upgrade, or operation services, the standard refers the operator to the revenue recognition and other applicable guidance.
In the absence of specific guidance, the operator needs to determine if it is able to recognize an asset for the consideration to be received by the operator in exchange for construction and upgrade services, and/or defer the costs associated with such services. An intangible asset would not be recognized as the consideration received for construction services.
| Generally, the operator would not account for these arrangements as leases, unless the operator has a right to use some physically separable, independent, and cash generating portion of the infrastructure, or if the facilities are used to provide purely ancillary unregulated services. In these cases, there may in substance be a lease from the grantor to the operator, which should be accounted for in accordance with IFRS 16.
The operator will account for construction or upgrade services and operation services in accordance with IFRS 15.
The consideration to be received by the operator in exchange for construction or upgrade services may result in the recognition of a financial asset, an intangible asset or a combination of both. It is necessary to account for each component separately.
The operator recognizes a financial asset to the extent that it has an unconditional right to receive a specified or determinable amount of cash or other financial assets for the construction services.
The operator recognizes an intangible asset to the extent that it has a right to charge fees to users of the public services.
Accordingly, determining who is the customer in a service concession arrangement depends on the nature of the consideration received by the operating entity and the facts and circumstances of the arrangement.
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Additionally, in some of these arrangements, the operator will pay the grantor to enter into an operating agreement. This would be considered consideration payable to a customer under US GAAP because the grantor is determined to be the customer of the operating services in all service concession arrangements. This may result in an asset that will be amortized against revenue over the term of the operating agreement.
| Additionally, in some of these service concession arrangements, the operator will make payments to the grantor.
If payments are for a right to a separate good or service, the operator applies the applicable IFRS guidance for that good or service.
If payments are for the right to use a separate asset, the operator assesses whether the arrangement contains a lease.
If the service concession arrangement results in the operator having only a contractual right to receive cash from the grantor, the operator accounts for those payments as a reduction of the transaction price under IFRS 15.
If the service concession arrangement results in the operator having only a right to charge users of the public service, the operator has received an intangible asset in exchange for the payments to be made to the grantor.
The operator may have a contractual obligation to maintain or restore the infrastructure to a specified condition before it is returned to the grantor at the end of the arrangement, which should be recognized and measured in accordance with IAS 37.
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