ASU 2014-05 – Agreeing on Service Concessions Agreements
The Bottom Line
Published January 23rd, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2014-05, Service Concession Arrangements (Topic 853) — a consensus of the FASB Emerging Issues Task Force, in response to an increase in public sector entities (i.e. governmental bodies) entering into service concession agreements with operating entities who follow U.S. GAAP. The overall conclusion of this ASU is that these types of arrangements should not be considered leases within the scope of ASC 840.
What is a Service Concession Arrangement?
A service concession arrangement (“SCA”) is an arrangement between a public sector entity (the grantor) and an operating entity (the grantee), where the grantee operates the grantor’s infrastructure (ex. airport, bridge, toll booth, prison) in exchange for payments to perform those services. In many circumstances, the operating entity also may provide the construction, upgrading or maintenance services of the grantor’s infrastructure. In most cases, however, the grantor retains ownership of the property and related assets.
Interesting. Give me the nitty-gritty of ASU 2014-05.
As SCAs have grown more popular due to the government trying to find ways to more efficiently provide these services or to reduce costs, there has been confusion as to whether these agreements would qualify for lease treatment. Introducing new criteria that specifically exclude treating SCA’s as leases, ASU 2014-05 should alleviate most of this confusion.
ASU 2014-05 applies to operating entities in a SCA with a public sector entity when the arrangement meets both of the following conditions:
- 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.
- The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.
If these two conditions are met, the SCA will not qualify as a lease under ASC 840. In addition, the infrastructure subject to the SCA is not to be recognized as property, plant and equipment since the grantor controls any residual interest.
Government entities have also seen a new pronouncement (GASB 60) giving additional guidance on the accounting and reporting related to service concession agreements.
When do I have to do something?
Early adoption is permitted, so you can do something right now if you’d like. If you’re more of a traditionalist, you have some time. The amendments are effective for a public business entity for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For an entity other than a public business entity, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015.