For the past decade, US public infrastructure spending has exceeded $400 billion per year1 and trends suggest that even greater investment will be needed to maintain and upgrade aging roads, bridges, ports, and airport facilities. As governments and public sector entities look for ways to outsource costly public services, they are increasingly turning to service concession arrangements. In a service concession arrangement, a governmental entity grants an operator the right (a concession) to operate an infrastructure asset and to charge and collect fees (e.g., tolls). The fees can be paid by users or directly by the government.
While not all contracts related to infrastructure with a governmental entity are service concession arrangements, it is important to know when they are, because there could be accounting consequences.
1 Shifting into an era of repair: US infrastructure spending trends by Kane and Tomer, Brookings Institute, May 10, 2019
In a service concession arrangement, a company is operating an infrastructure asset controlled by a governmental entity. So operating a toll road or an airport likely would be a service concession arrangement. On the other hand, providing a service or selling a good to a governmental entity (e.g., building a courthouse or providing information technology outsourcing) is typically not a service concession. Judgment is often necessary.
To be a service concession arrangement, an arrangement must involve the use of infrastructure assets, and the government must control both the terms of the services to be provided through the use of the infrastructure and any residual interest in the infrastructure at the end of the arrangement.
If the government has the ability to modify or approve the services that the operator must provide under the arrangement (including to whom it must provide them and what price), it controls the services. Typically, the government maintains the authority to determine 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.
The government controls the residual interest in the infrastructure at the conclusion of the arrangement if:
Under ASC 853, a service concession arrangement is accounted for as an outsourcing contract with the government to operate and maintain (and, in some arrangements, construct or improve) the government’s assets. Compared to the reporting for an entity that builds and operates its own asset, service concession reporting may produce significantly different, and unexpected, outcomes for the operator, including:
What qualifies as a service concession arrangement under US GAAP is generally consistent with international accounting standards. However, the accounting can be quite different. See chapter 15 of PwC’s IFRS and US GAAP: similarities and differences guide for information about the differences.