How to Account for a Service Concession Arrangement

A service concession arrangement (SCA) is a long-term agreement between a public sector entity and a private company, used to build, upgrade, and operate major infrastructure like toll roads, airports, or hospitals. The purpose is to leverage private sector financing and expertise to deliver public services.

Under these agreements, a private company handles a significant portion of the project’s lifecycle, from construction to daily operations and maintenance, for a specified period. In return, the company is compensated either through direct payments from the public entity or by being granted the right to charge the public for using the asset. This structure allows governments to develop infrastructure without bearing the full upfront cost and operational burden. The accounting for these complex arrangements is specific and depends on the defined roles of each party.

Core Components and Criteria

Every service concession arrangement involves two parties: the grantor and the operator. The grantor is the public sector entity, such as a government agency, that holds ultimate authority over the infrastructure. The operator is the private company contracted to provide the public service by constructing, operating, and maintaining the asset. A detailed contract governs the relationship and outlines the obligations of both entities.

For an agreement to be classified as an SCA under Accounting Standards Codification Topic 853, two criteria must be met. First, the grantor must control or regulate the services the operator provides, including to whom the services are delivered and at what price. For instance, in a toll road agreement, the government would set or approve toll rates and define operational standards.

The second condition is that the grantor must control any significant residual interest in the infrastructure at the end of the arrangement’s term. This means the public entity retains the primary benefit of the asset once the contract expires, with control reverting fully to the grantor. If both conditions are met, the operator cannot recognize the infrastructure as its own property, plant, and equipment.

Operator Accounting Models

An operator’s accounting treatment is determined by the nature of its compensation. The operator does not record the physical infrastructure as its own asset but instead recognizes an asset representing its contractual rights. There are two primary models for this accounting: the Financial Asset model and the Intangible Asset model.

The Financial Asset model is used when the operator has an unconditional contractual right to receive a specified amount of cash from the grantor. This means the grantor bears the demand risk, and the operator is guaranteed payment for its services, regardless of public use. For example, if a company operates a hospital and the government agrees to pay a fixed annual sum for its availability, the operator would use this model. The operator recognizes a financial asset, measured initially at the fair value of the construction services provided.

Conversely, the Intangible Asset model applies when the operator is compensated by receiving the right to charge the public for using the service. In this scenario, the operator bears the demand risk, as its revenue is tied to usage by drivers on a toll road or passengers at an airport. The operator recognizes an intangible asset representing its right to collect these fees, also measured at the fair value of the construction services.

Some contracts require bifurcation when compensation is a mix of guaranteed payments and public fees. In such cases, the operator must split the accounting, recognizing a financial asset for the guaranteed portion and an intangible asset for the portion subject to public demand.

Revenue Recognition for the Operator

An operator recognizes revenue in distinct phases over the contract’s life, with the accounting linked to the balance sheet model established. The process involves recognizing revenue during the initial construction phase and then separately during the operational phase.

During the construction or upgrade phase, the operator provides building services to the grantor. Revenue from these services is recognized in accordance with ASC 606, Revenue from Contracts with Customers, by measuring progress toward completion over that period.

Once the infrastructure is ready for public use, the operational phase begins. If the operator has a financial asset, it will recognize interest revenue over the arrangement’s term on the asset’s carrying amount. This is separate from any revenue for ongoing operational duties, which is recognized as those services are performed.

If the operator has an intangible asset, it will recognize revenue from fees collected from the public as they are earned. The intangible asset itself is amortized over the term of the concession arrangement, which is reflected as an expense on the income statement. This amortization reflects the consumption of the economic benefits from the right to operate the asset.

Grantor Accounting Treatment

The public sector entity’s accounting for an SCA is governed by Governmental Accounting Standards Board Statement No. 94. The grantor’s primary responsibility is to recognize the infrastructure asset on its own financial statements, ensuring the public asset remains on the government’s books.

When an operator builds or improves an asset, the grantor reports the new facility as a capital asset at its fair value when it is placed into service. If the arrangement requires the grantor to make payments to the operator, the grantor recognizes a corresponding liability. This liability reflects the government’s obligation and is recorded at the present value of the future payments, aligning with the operator’s Financial Asset model.

In cases where the grantor gives the operator the right to collect fees, it recognizes a deferred inflow of resources instead of a liability. This deferred amount is equal to the fair value of the infrastructure asset. The grantor then recognizes revenue by reducing this deferred inflow in a systematic and rational manner over the term of the SCA, which mirrors the operator’s Intangible Asset model.

Required Disclosures

Both the operator and the grantor must provide detailed disclosures in their financial statements to clarify the nature and financial implications of the SCA.

For the operator, disclosures include:

• A general description of the arrangement, its terms, and the obligations of each party.
• The amount of revenue recognized each period and the methods used to determine it.
• Details on the carrying amount of the financial or intangible asset on its balance sheet.
• The amortization period and method used for any intangible assets.

The grantor’s disclosures include:

• A description of the arrangement.
• The fair value of the infrastructure asset recognized.
• Details about any associated liabilities or deferred inflows of resources.
• Significant assumptions used in its accounting, such as discount rates for liabilities.
• Information about risks and uncertainties that could impact the arrangement.