Statement No. 60: Accounting and Financial Reporting for Service Concession Arrangements.

Statement No. 60:Statement No. 60:Accounting and Financial Reporting Accounting and Financial Reporting

for Service Concession for Service Concession ArrangementsArrangements

Statement No. 60Statement No. 60

Released Released December 16, 2010December 16, 2010

Addresses Service Addresses Service Concession Concession Arrangements (SCAs)Arrangements (SCAs)

Effective for periods Effective for periods beginning after beginning after December 15, 2011December 15, 2011

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Service Concession ArrangementsService Concession Arrangements

Scope: What is an SCA?Scope: What is an SCA?An arrangement in which An arrangement in which allall of the following criteria are met: of the following criteria are met: a transferor conveys to an operator the right and related obligation a transferor conveys to an operator the right and related obligation

to provide services to the public through the use and operation of a to provide services to the public through the use and operation of a capital asset (“facility”) in exchange for capital asset (“facility”) in exchange for significant considerationsignificant consideration

the operator collects and is compensated by fees from third partiesthe operator collects and is compensated by fees from third parties the transferor is entitled to significant residual interest in the service the transferor is entitled to significant residual interest in the service

utility of the facility at the end of the arrangementutility of the facility at the end of the arrangement the transferor determines or has the ability to modify or approve:the transferor determines or has the ability to modify or approve:

What services the operator is required to provide What services the operator is required to provide To whom the services will be providedTo whom the services will be provided The prices or rates that will be charged The prices or rates that will be charged

Transferor AccountingTransferor Accounting

Existing facility:Existing facility:● Transferor continues to report existing facility as capital asset.Transferor continues to report existing facility as capital asset.

New facility or improvements to existing facility:New facility or improvements to existing facility:● Transferor reportsTransferor reports

1)1) A new facility or improvements as capital asset at fair value A new facility or improvements as capital asset at fair value when placed into operation,when placed into operation,

2)2) Any contractual obligations as liabilities,Any contractual obligations as liabilities,

3)3) And a corresponding deferred inflow of resources equal to And a corresponding deferred inflow of resources equal to the difference between (1) and (2).the difference between (1) and (2).

Transferor AccountingTransferor Accounting

Up-front or installment paymentsUp-front or installment payments● Transferor reports:Transferor reports:

1)1) An up-front payment or the present value of installment An up-front payment or the present value of installment payments as an asset,payments as an asset,

2)2) Any contractual obligations as liabilities,Any contractual obligations as liabilities,

3)3) And a corresponding deferred inflow of resources equal to And a corresponding deferred inflow of resources equal to the difference between (1) and (2).the difference between (1) and (2).

Transferor AccountingTransferor Accounting

A liability is recorded at present value if a contractual A liability is recorded at present value if a contractual obligation exists AND if it meets either of the following obligation exists AND if it meets either of the following criteria:criteria:

● (1) The contractual obligation directly relates to the (1) The contractual obligation directly relates to the facility. facility. (for example, capital improvements, (for example, capital improvements, insurance, or maintenance)insurance, or maintenance)

OROR● (2) The contractual obligation relates to a (2) The contractual obligation relates to a

commitment by the transferor to maintain a minimum commitment by the transferor to maintain a minimum or specific level of service in connection with the or specific level of service in connection with the operation of facility. operation of facility. (for example, police or (for example, police or emergency services, maintenance around facility)emergency services, maintenance around facility)

Transferor AccountingTransferor Accounting

Revenue is recognized in a systematic and rational Revenue is recognized in a systematic and rational manner over the term of arrangement as the deferred manner over the term of arrangement as the deferred inflow is reduced.inflow is reduced.

Liability is reduced as transferor’s obligations are Liability is reduced as transferor’s obligations are satisfied.satisfied. When obligation is satisfied, a deferred inflow is reported and When obligation is satisfied, a deferred inflow is reported and

related revenue is recognized in systematic and rational manner related revenue is recognized in systematic and rational manner over the term of the arrangement.over the term of the arrangement.

Transferor AccountingTransferor Accounting

After initial measurement, the capital asset is subject to After initial measurement, the capital asset is subject to existing requirements for depreciation, impairment, and existing requirements for depreciation, impairment, and disclosures.disclosures.

Improvements made to the facility during the Improvements made to the facility during the arrangement would arrangement would increaseincrease the transferor’s asset. the transferor’s asset.

Transferor does Transferor does NOTNOT depreciate if the agreement depreciate if the agreement requires operator to return facility in its original or requires operator to return facility in its original or enhanced condition.enhanced condition.

Governmental OperatorGovernmental Operator

Reports an Reports an intangible assetintangible asset for the right to access and for the right to access and use the property use the property

Measured by the amount of up-front payment or contributed Measured by the amount of up-front payment or contributed assetasset

Amortized over the life of the arrangementAmortized over the life of the arrangement Improvements made to the facility by the government Improvements made to the facility by the government

operator increases the government operators intangible operator increases the government operators intangible asset if the improvements increase the capacity of asset if the improvements increase the capacity of efficiency of the facility.efficiency of the facility.

Reports a liability to restore facility to a specified Reports a liability to restore facility to a specified condition if required by agreement and the facility is not condition if required by agreement and the facility is not in the expected condition.in the expected condition.

Revenue Sharing ArrangementsRevenue Sharing Arrangements

TransferorTransferor reports only its portion of revenues and reports only its portion of revenues and expensesexpenses

Recognized when earned in accordance with the terms of the Recognized when earned in accordance with the terms of the arrangementarrangement

Unconditional payments to transferor treated like installment Unconditional payments to transferor treated like installment payments discussed earlierpayments discussed earlier

Governmental operator Governmental operator reports all revenues earned and reports all revenues earned and expenses incurredexpenses incurred

Note DisclosuresNote Disclosures

Both the transferor and government operator:Both the transferor and government operator: A general description of the arrangementA general description of the arrangement Nature and amounts of assets, liabilities, and deferred inflows of Nature and amounts of assets, liabilities, and deferred inflows of

resources related to the SCA recognized in the financial resources related to the SCA recognized in the financial statements.statements.

Nature and extent of rights retained by the transferor or granted to Nature and extent of rights retained by the transferor or granted to the government operator.the government operator.

Disclosures should be made about guarantees and commitments.Disclosures should be made about guarantees and commitments.

Disclosures for multiple SCAs may be provided Disclosures for multiple SCAs may be provided individually or in the aggregate for those that involve individually or in the aggregate for those that involve similar facilities and risk. similar facilities and risk.

Illustration of a SCAIllustration of a SCA

Facts and Assumptions:Facts and Assumptions: A transferor enters into a service concession arrangement with a A transferor enters into a service concession arrangement with a

governmental operator involving a bridge. governmental operator involving a bridge. The bridge is an asset currently reported by the transferor in an enterprise The bridge is an asset currently reported by the transferor in an enterprise

fund in the amount of $50 million. The bridge has a remaining useful life of fund in the amount of $50 million. The bridge has a remaining useful life of 50 years. 50 years.

Transferor receives an up-front payment of $100 million from the Transferor receives an up-front payment of $100 million from the government operator, in return for the right to operate the bridge and collect government operator, in return for the right to operate the bridge and collect and retain toll revenues for a period of 20 years. and retain toll revenues for a period of 20 years.

The arrangement meets all criteria of this Statement to qualify as a SCA. The arrangement meets all criteria of this Statement to qualify as a SCA. Under this arrangement, the transferor is contractually obligated to maintain Under this arrangement, the transferor is contractually obligated to maintain

the bridge over the course of the arrangement. The present value of the the bridge over the course of the arrangement. The present value of the cost of providing this maintenance is estimated to be $10 million. cost of providing this maintenance is estimated to be $10 million.

Illustration of a SCAIllustration of a SCAAccounting at Commencement of the ArrangementAccounting at Commencement of the Arrangement

TransferorTransferor Continue to report the bridge Continue to report the bridge

as a capital assetas a capital asset RecordRecord

$100 million up-front $100 million up-front payment, payment,

$10 million liability for the $10 million liability for the maintenance obligation, maintenance obligation, andand

$90 million deferred inflow $90 million deferred inflow of resources (the of resources (the difference between the up-difference between the up-front payment and the front payment and the maintenance liability).maintenance liability).

Government OperatingGovernment Operating Record an intangible asset in Record an intangible asset in

the amount of $100 millionthe amount of $100 million

Illustration of a SCAIllustration of a SCAAccounting at in Future YearsAccounting at in Future Years

TransferorTransferor Continue to apply existing capital asset Continue to apply existing capital asset

guidance, including depreciation, if guidance, including depreciation, if applicable, to the bridge. applicable, to the bridge.

If the use the straight-line method is elected, If the use the straight-line method is elected, recognize $4.5 million (the up-front payment recognize $4.5 million (the up-front payment less the maintenance obligation, divided by less the maintenance obligation, divided by 20 years) in revenue and reduce the related 20 years) in revenue and reduce the related deferred inflow of resources in the same deferred inflow of resources in the same amount each year of the arrangement. amount each year of the arrangement.

Recognize revenue and expenses and Recognize revenue and expenses and reduce the liability as it satisfies its reduce the liability as it satisfies its obligation to maintain the bridge over the obligation to maintain the bridge over the course of the arrangement.course of the arrangement.

Government OperatorGovernment Operator If the use the straight-line method of If the use the straight-line method of

amortization is elected, amortize the amortization is elected, amortize the intangible asset and recognize expense in intangible asset and recognize expense in the amount of $5 million each year ($100 the amount of $5 million each year ($100 million cost divided by 20 years). million cost divided by 20 years).

Recognize revenue and expenses on bridge Recognize revenue and expenses on bridge operations based on applicable revenue and operations based on applicable revenue and expense recognition guidance.expense recognition guidance.