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12.2 Scope of ASC 853
Publication date: 31 May 2023
us Revenue guide
ASC 853-10-15-2 describes the scope of ASC 853, while ASC 853-10-15-2 includes the criteria to be a service concession arrangement.
The guidance in [ASC 853] applies to the accounting by operating entities of a service concession arrangement under which a public-sector entity grantor enters into a contract with an operating entity to operate the grantor’s infrastructure. The operating entity also may provide the construction, upgrading, or maintenance services of the grantor’s infrastructure.
A public-sector entity includes a governmental body or an entity to which the responsibility to provide public service has been delegated. In a service concession arrangement, both of the following conditions exist:
(a) 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. (b) The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.
Inherent in the definition of a service concession arrangement is the premise that the arrangement involves both public infrastructure and the operation of that infrastructure by the private-sector operator. Although a typical service concession arrangement includes the provision of a public service, the scope of the standard is not focused on the nature of the services provided. The FASB observed in the basis for conclusions of the guidance that was ultimately codified in ASC 853 that a scope distinction based on the nature of the service would be overly subjective and therefore difficult to apply. Instead, ASC 853 focuses on the nature of the grantor (a public-sector entity), whether operation of infrastructure is involved, and whether the grantor controls the use and residual interest of the infrastructure.
If a reporting entity is only providing a service or selling a good to a government entity, that arrangement would typically not be in the scope of ASC 853. For example, an arrangement to build a courthouse, to build (but not operate) a bridge, or to provide cleaning services at a government office building would not be a service concession arrangement. In contrast, constructing and operating a water treatment facility or a prison owned by a government entity typically would be a service concession arrangement in the scope of ASC 853 as long as the government entity controls the services and the infrastructure (as described in ASC 853-10-15-3).
12.2.1 Control by the grantor
In a service concession arrangement, the grantor controls or has the ability to modify or approve the services provided by the operator. Typically, the grantor maintains involvement in key areas to protect the public interest, such as determining the nature of the services, to whom they must be offered, the hours of operation of the infrastructure assets, and the fees the operator may charge for use of the infrastructure assets. Importantly, however, the guidance does not indicate the extent of, or how much, control is required to meet this first condition. Therefore, judgment may be required, which could involve considerations beyond the terms of the contract, such as the impact of laws and regulations applicable to the infrastructure and services to be provided.
12.2.2 Residual interest in the infrastructure
Under ASC 853-10-15-3(b), the grantor must control the residual interest in the infrastructure at the conclusion of a service concession arrangement. In certain arrangements, title to the infrastructure never transfers from the grantor to the operator; therefore, this condition is automatically met. However, this condition is also met if title reverts back to the grantor upon conclusion or termination of the arrangement. Conversely, if the operator controls the residual interest in the infrastructure and can unilaterally choose what to do with the assets at the end of the arrangement, the arrangement is not a service concession arrangement under ASC 853.
In some arrangements, rather than an automatic transfer or reversion of ownership to the grantor at the end of the term, the grantor will have an option to buy the infrastructure (a call option) from the operator. In this case, the grantor is generally deemed to control the residual interest in the infrastructure, even if the call option is only exercisable at the then-current fair value of the asset, because the operator cannot unilaterally choose to continue to operate the assets or sell them to a third party.
12.2.3 Regulated operations
Some regulated operations are similar to service concession arrangements in that pricing for the services is determined by a governmental entity. However, in regulated operations, the infrastructure is typically controlled by the operator and is retained by the operator at the end of the arrangement. An arrangement that meets the scope criteria in ASC 980, Regulated Operations, is subject to that guidance and not the guidance in ASC 853.
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