This amendment has been updated by the agreed-upon vote of the seven members of the Financial Accounting Standard Boards that included the Chairman, vice chairman and other members. Certain observations by the stakeholders have revealed that there is diversity in the practice of determination of customers of the service operation for the transaction within the scope of Topic 853, Service Concession Arrangements. This update has identified the diversity of this “determination of customer” which modifies the scope of FASB.
The main feature of service concession arrangement is the ‘public service’ conducted by the private entity that was primarily entitled to the government. In many countries, infrastructures for public services such as roads, bridges prisons, tunnels, hospitals, airports, water distribution, energy supply and telecommunication facilities and the network project has been traditionally been constructed, operated and maintained by the public sector and financed through public budgets.
An arrangement within the scope of the previously mentioned interpretation typically involves a private sector entity who will construct or extend the infrastructure. These arrangements also involve a grantor who is also known as the party who grants the service arrangements and is a public sector entity.
As mentioned earlier, these services now have been brought under the contractual service arrangements with the private sector participation that in turn will be used in the development, financing, operating and maintenance of the mentioned infrastructures. Within the scope of the Topic-853, the operating entity should not account for the infrastructure as a lease or as property, plant, and equipment, but should account for revenue relating to construction, upgrade or operational services by the revenue recognition guidance. Although Topic 853 identifies the previously mentioned points, it does not address how it should determine the customers. For example, should a driver passing a toll booth be considered a customer (third party) or should the grantor (a government entity) be considered a customer of the operating entity?
An operating entity should account for revenues relating to construction, upgrade or operational services by Topic 605, revenue recognition or Topic 606, revenues from contracts with customers. Ultimately, this uncertainty has resulted in diversity in practice when applying certain aspects of the Topic 605.
According to the topic-853, the following conditions must exist in a service concession arrangement-
1. The grantor controls what services the operator must provide with the infrastructure to whom it must provide them and at what price the service should be presented.
2. The grantor controls through ownership, beneficial entitlement and any significant residual interest in the infrastructure at the end of the term of the arrangement.
Now regarding the judgment made by the FASB amendments, an operating entity shall consider the grantor to be the customer in every case for the operational services performed and for service concession arrangements within this modified scope of the Topic 853. Moreover, the operating entity shall also account for revenue according to the service concession arrangements with Topic 606 based on the contracts with customers.
In the concurrent scenario, the US GAAP (Generally accepted accounting principle) does not identify, who the customer is. So depending on the terms of service concession arrangement there was a sort discrepancy about the determination of the customers. This precariousness added complexity to the current condition. So the task force implemented by the FASB has come to a conclusion about the decision of the customer for the entity.
Consideration by the task force identified that the task force came to a consensus that no additional information would be necessary as the customer is now the grantor. One of the reasons for which the task force concluded that the customer is the grantor is for the reason that “operating entity is acting as the grantor’s service provider or outsourcer to operate and maintain the infrastructure, which is controlled by the grantor.”
The task force who were involved in the amendment process reached a consensus that the accepted notion is that the grantor is the customer for all construction operation purposes. Although the case is for the grantor and all aims to the grantor for the ultimate customer, some operating entities mentioned that for construction services the grantor the customer. According to some other operating entity, the customers depend on the terms of the service concession arrangements including who bears demand risk. This is an evaluation which is consistent with the IFRIC 12 standard. One other task force member noted that the customer is the grantor in all cases which is not consistent with IFRIC 12. In some other scenarios, whether the grantor will be the customer or the third party is determined by the terms of the service concession arrangements. Regardless of some of the points raised against the grantor being the customer that could arise from particular transaction the task force decided that the grantor is the customer of the operation services in all cases.
From a general point of view, the IFRIC 12 is similar to the scope of Topic 853 which concludes that the concession arrangements should not be accounted as a lease or as a property, plant, and equipment by the operating entity. This update was necessary because GAAP did not tackle with the fact on how the operating entities should determine their customer of the operation services for their transaction. From the research of the FASB emerging task force, it has been identified that there were operating entities who did not adopt the Topic 606 and there were those who did. There effective update will vary according to nature of the entity like whether it is a public business entity or a not-for –profit entity or whether they have issued certain bonds.