184.108.40.206 Assessing whether major maintenance activities are distinct
It is common for operators to agree to perform major maintenance activities related to the infrastructure during the term of a service concession arrangement. The operator should base its assessment of whether the major maintenance activities are distinct on the underlying principles of ASC 606
; however, the following considerations may also be relevant:
- Are the major maintenance activities specified in the contract?
- Does the arrangement contain incremental consideration associated with the major maintenance?
- How significant is the cost of the major maintenance to the concession arrangement?
- How integral is major maintenance to the ongoing operation of the grantor's infrastructure?
- How frequently is major maintenance expected to be performed?
These factors are not an exhaustive list or individually determinative and should also not be used as a checklist. Refer to RR 3
for additional guidance on identifying performance obligations.
Example RR 12-1 illustrates the assessment of whether planned major maintenance should be accounted for as a separate performance obligation.
EXAMPLE RR 12-1
Assessing whether planned major maintenance is a separate performance obligation
OperatorCo enters into a service concession arrangement with State Government to construct and operate a toll road for a period of thirty years. The agreement specifies that OperatorCo will be responsible for:
- construction of the toll road,
- operation of the toll road during the operating period, and
- resurfacing the toll road every fifteen years during the operating period.
OperatorCo will collect tolls from users (drivers) and will remit a portion of the tolls to State Government. Given the significance of the resurfacing costs compared to the overall costs of operating and maintaining the toll road, OperatorCo will reduce the amount of tolls that would otherwise be remitted to the government by the costs of the resurfacing.
How many performance obligations are present in the service concession arrangement?
Although judgment is required, OperatorCo would likely conclude that the arrangement contains three separate performance obligations: construction, operation, and resurfacing.
OperatorCo should assess whether the promises in the contract are distinct based on the criteria in ASC 606-10-25-14
through ASC 606-10-25-22
(“capable of being distinct” and “separately identifiable”). The construction services are distinct because the customer can benefit from the services separately and the promise to perform those services is separately identifiable from other promises in the contract. Similarly, the operation services are distinct because the customer can benefit from the services separately and the promise to perform those services is separately identifiable from other promises in the contract.
The assessment of whether the resurfacing services are distinct requires judgment. In this fact pattern, the resurfacing services would likely be considered distinct because resurfacing does not occur frequently, the cost of resurfacing is significant compared to the overall costs, and OperatorCo effectively receives incremental consideration for resurfacing in the form of a reduction to the amount of tolls remitted to State Government. These factors indicate that the customer could benefit from the resurfacing services separate from the construction and operation services and that the resurfacing services are separately identifiable in the arrangement.