Search within this section
Select a section below and enter your search term, or to search all click Revenue from contracts with customers, global edition
Favorited Content
12.3 Recognition of revenue
Publication date: 31 May 2023
us Revenue guide
12.3.1 Identifying the contract and the customer
Service concession arrangements typically involve multiple parties, including the grantor, the operator, and the users of the infrastructure. For example, the operator of an airport will have an agreement with the grantor but will also have relationships with the airlines, retail and food vendors, and travelers. Similarly, the operator of a toll road or bridge will have relationships with the grantor as well as drivers who pay tolls.
ASC 853 stipulates that the grantor (the governmental entity) is always the customer in a service concession arrangement. Because the scope only includes arrangements in which the grantor controls the infrastructure, the grantor has effectively hired the operator to construct and/or operate the assets on its behalf. Thus, the grantor is the customer in the arrangement even if the operator collects a portion of its fee from the users of the infrastructure (for example, airline gate fees or tolls from drivers).
A service concession arrangement often includes both construction and operation services, and the terms of these services may be governed by separate contracts. In many cases, separate contracts for construction and operation services will be combined for purposes of applying ASC 606 because one or more of the criteria for combining contracts (refer to RR 2.8) are met (for example, the contracts are negotiated as a package with a single commercial objective).
12.3.2 Identifying performance obligations
In many service concession arrangements, the operator constructs or renovates the infrastructure for the grantor and then operates the infrastructure after construction or renovation is complete. In such a scenario, the service concession arrangement contains multiple performance obligations, including both the construction or renovation of the infrastructure and the subsequent operation services.
There may also be other specified activities in the arrangement, such as specific improvements, additions or upgrades to the infrastructure assets, or major maintenance activities at various points during the arrangement. Judgment will be required to determine whether these additional specified activities are separate performance obligations or whether they should be combined with the construction or operation components of the arrangement. The assessment of whether goods or services are distinct is based on the principles in ASC 606 (refer to RR 3.4). ASC 853 does not provide additional interpretive guidance in this regard for service concession arrangements.
12.3.2.1 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
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?
Analysis
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.
12.3.3 Determining and allocating the transaction price
In some service concession arrangements, the grantor pays fixed fees for the operation of the infrastructure assets at inception of the arrangement or as milestones are achieved. In others, the operator has the right to collect payment from the end users of the public services (for example, tolls) over the operating period. Both are considered payments from the customer (the grantor), although one is received directly and the other indirectly.
The operator should include both fixed and variable amounts when determining the transaction price. The amounts received from end users are variable consideration since they vary based on usage of the infrastructure. Those variable amounts will need to be estimated at inception of the arrangement for the entire term of the contract and included in the total transaction price, subject to the constraint on variable consideration; that is, such variable consideration is included in the transaction price only to the extent that a significant reversal in the cumulative amount of revenue recognized is not probable. The operator will need to update its estimate of variable consideration at each reporting date throughout the contract period. In some arrangements, the grantor guarantees a fixed minimum amount for the operator. Fixed minimums are not variable consideration and should be included in the transaction price in their entirety. See RR 4 for further discussion of estimating and constraining variable consideration.
The transaction price is allocated to the separate performance obligations in the arrangement based on their relative standalone selling prices. Variable consideration is generally allocated to all performance obligations in a contract based on their relative standalone selling prices. However, operators would allocate variable consideration to one or more, but not all, of the performance obligations in an arrangement if specific requirements are met (refer to RR 5.5.1). Changes in the estimate of transaction price (for example, changes in variable consideration) are allocated on the same basis used to allocate consideration at contract inception. Changes in the estimate of variable fees could therefore result in additional revenue being recognized related to the construction performance obligation well after construction is complete.
An operator might not be required to estimate future variable fees if the contract only includes a promise to provide operation services (that is, a single performance obligation). In that case, if the fees collected in a period are commensurate with the value of the services provided during the period, the operator could apply the “right to invoice” practical expedient to measure progress for the single performance obligation as described in RR 6.4.1.1. This would result in recognizing revenue each period equal to the fees collected. If the operation services are determined to be a series of distinct goods or services (refer to RR 3.3.2), it may be appropriate to allocate variable consideration to individual distinct goods or services within the series (for example, individual time increments of performing a distinct service) if certain criteria are met (refer to RR 5.5.1.1), which would also provide relief from the requirement to estimate variable consideration at contract inception.
12.3.4 Recognizing revenue
As described in RR 12.3.3, the transaction price could include consideration received from the grantor and other parties (for example, end users of the infrastructure). Revenue from all sources is recognized as performance occurs based on the amount of the estimated transaction price allocated to the performance obligations being satisfied. For example, revenue recognized during the construction of the infrastructure might be based, at least in part, on an estimate of variable fees to be collected from end users in the future.
Revenue is often recognized in a service concession arrangement over time because (1) control of the infrastructure transfers as construction is performed and (2) control of the operations services transfers as the services are rendered. Operators will need to identify a measure of progress that best depicts the transfer of control of goods or services to the grantor. Refer to RR 6 for additional guidance on recognizing revenue and measures of progress.
12.3.5 Principal versus agent considerations
When multiple parties are involved in providing services to the grantor, the operator must consider whether it is the principal or agent for each distinct service. For example, an operator may utilize subcontractors to construct the grantor’s infrastructure or perform some of the maintenance activities. Refer to RR 10 for additional guidance on determining if a reporting entity is the principal or an agent in an arrangement.
12.3.6 Consideration payable to a customer
It is common in service concession arrangements for the operator to make a significant upfront payment to the grantor upon being awarded the concession contract, particularly if the infrastructure already exists. Since the grantor is considered the operator’s customer in the arrangement, the upfront payment represents a payment to a customer. Consideration payable to a customer is recorded as a reduction of the transaction price and therefore, a reduction of revenue, unless the payment is in exchange for a distinct good or service. Securing the rights to a revenue contract, on its own, is not a good or service that is distinct from the underlying revenue contract.
In some arrangements, the operator makes ongoing payments to the grantor for the use of the infrastructure assets. These payments may be characterized as a “lease payment,” “fee sharing,” or some other type of remuneration. Any such payments are generally a reduction of the operator’s revenue under the arrangement (unless they are made in exchange for a distinct good or service) because the grantor is the operator’s customer. Use of the grantor’s infrastructure as part of an arrangement in the scope of ASC 853 is not considered a lease (refer to RR 12.4).
Refer to RR 4.6 for additional guidance on accounting for consideration payable to a customer.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
