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

Statement No. 60 Released December 16, 2010 Released December 16, 2010 Addresses Service Concession Arrangements (SCAs) Addresses Service Concession Arrangements (SCAs) Effective for periods beginning after December 15, 2011 Effective for periods beginning after December 15, 2011

3 Service Concession Arrangements Scope: What is an SCA? An arrangement in which all of the following criteria are met: a transferor conveys to an operator the right and related obligation to provide services to the public through the use and operation of a capital asset (facility) in exchange for significant consideration a transferor conveys to an operator the right and related obligation to provide services to the public through the use and operation of a capital asset (facility) in exchange for significant consideration the operator collects and is compensated by fees from third parties the operator collects and is compensated by fees from third parties the transferor is entitled to significant residual interest in the service utility of the facility at the end of the arrangement the transferor is entitled to significant residual interest in the service utility 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 provided To whom the services will be provided The prices or rates that will be charged The prices or rates that will be charged

Transferor 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 reports Transferor reports 1) A new facility or improvements as capital asset at fair value when placed into operation, 2) Any contractual obligations as liabilities, 3) And a corresponding deferred inflow of resources equal to the difference between (1) and (2).

Transferor Accounting Up-front or installment payments Up-front or installment payments Transferor reports: Transferor reports: 1) An up-front payment or the present value of installment payments as an asset, 2) Any contractual obligations as liabilities, 3) And a corresponding deferred inflow of resources equal to the difference between (1) and (2).

Transferor Accounting A liability is recorded at present value if a contractual obligation exists AND if it meets either of the following criteria: A liability is recorded at present value if a contractual obligation exists AND if it meets either of the following criteria: (1) The contractual obligation directly relates to the facility. (for example, capital improvements, insurance, or maintenance) (1) The contractual obligation directly relates to the facility. (for example, capital improvements, insurance, or maintenance)OR (2) The contractual obligation relates to a commitment by the transferor to maintain a minimum or specific level of service in connection with the operation of facility. (for example, police or emergency services, maintenance around facility) (2) The contractual obligation relates to a commitment by the transferor to maintain a minimum or specific level of service in connection with the operation of facility. (for example, police or emergency services, maintenance around facility)

Transferor Accounting Revenue is recognized in a systematic and rational manner over the term of arrangement as the deferred inflow is reduced. Revenue is recognized in a systematic and rational manner over the term of arrangement as the deferred inflow is reduced. Liability is reduced as transferors obligations are satisfied. Liability is reduced as transferors obligations are satisfied. When obligation is satisfied, a deferred inflow is reported and related revenue is recognized in systematic and rational manner over the term of the arrangement. When obligation is satisfied, a deferred inflow is reported and related revenue is recognized in systematic and rational manner over the term of the arrangement.

Transferor Accounting After initial measurement, the capital asset is subject to existing requirements for depreciation, impairment, and disclosures. After initial measurement, the capital asset is subject to existing requirements for depreciation, impairment, and disclosures. Improvements made to the facility during the arrangement would increase the transferors asset. Improvements made to the facility during the arrangement would increase the transferors asset. Transferor does NOT depreciate if the agreement requires operator to return facility in its original or enhanced condition. Transferor does NOT depreciate if the agreement requires operator to return facility in its original or enhanced condition.

Governmental Operator Reports an intangible asset for the right to access and use the property Reports an intangible asset for the right to access and use the property Measured by the amount of up-front payment or contributed asset Measured by the amount of up-front payment or contributed asset Amortized over the life of the arrangement Amortized over the life of the arrangement Improvements made to the facility by the government operator increases the government operators intangible asset if the improvements increase the capacity of efficiency of the facility. Improvements made to the facility by the government operator increases the government operators intangible asset if the improvements increase the capacity of efficiency of the facility. Reports a liability to restore facility to a specified condition if required by agreement and the facility is not in the expected condition. Reports a liability to restore facility to a specified condition if required by agreement and the facility is not in the expected condition.

Revenue Sharing Arrangements Transferor reports only its portion of revenues and expenses Transferor reports only its portion of revenues and expenses Recognized when earned in accordance with the terms of the arrangement Recognized when earned in accordance with the terms of the arrangement Unconditional payments to transferor treated like installment payments discussed earlier Unconditional payments to transferor treated like installment payments discussed earlier Governmental operator reports all revenues earned and expenses incurred Governmental operator reports all revenues earned and expenses incurred

Note Disclosures Both the transferor and government operator: Both the transferor and government operator: A general description of the arrangement A general description of the arrangement Nature and amounts of assets, liabilities, and deferred inflows of resources related to the SCA recognized in the financial statements. Nature and amounts of assets, liabilities, and deferred inflows of resources related to the SCA recognized in the financial statements. Nature and extent of rights retained by the transferor or granted to the government operator. Nature and extent of rights retained by the transferor or granted to 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 individually or in the aggregate for those that involve similar facilities and risk. Disclosures for multiple SCAs may be provided individually or in the aggregate for those that involve similar facilities and risk.

Illustration of a SCA Facts and Assumptions: A transferor enters into a service concession arrangement with a governmental operator involving a bridge. A transferor enters into a service concession arrangement with a governmental operator involving a bridge. 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 50 years. 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 50 years. Transferor receives an up-front payment of $100 million from the government operator, in return for the right to operate the bridge and collect and retain toll revenues for a period of 20 years. Transferor receives an up-front payment of $100 million from the government operator, in return for the right to operate the bridge and collect 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 the bridge over the course of the arrangement. The present value of the cost of providing this maintenance is estimated to be $10 million. Under this arrangement, the transferor is contractually obligated to maintain the bridge over the course of the arrangement. The present value of the cost of providing this maintenance is estimated to be $10 million.

Illustration of a SCA Accounting at Commencement of the Arrangement Transferor Continue to report the bridge as a capital asset Record $100 million up-front payment, $10 million liability for the maintenance obligation, and $90 million deferred inflow of resources (the difference between the up- front payment and the maintenance liability). Government Operating Record an intangible asset in the amount of $100 million

Illustration of a SCA Accounting at in Future Years Transferor Continue to apply existing capital asset guidance, including depreciation, if applicable, to the bridge. Continue to apply existing capital asset guidance, including depreciation, if applicable, to the bridge. If the use the straight-line method is elected, recognize $4.5 million (the up-front payment less the maintenance obligation, divided by 20 years) in revenue and reduce the related deferred inflow of resources in the same amount each year of the arrangement. If the use the straight-line method is elected, recognize $4.5 million (the up-front payment less the maintenance obligation, divided by 20 years) in revenue and reduce the related deferred inflow of resources in the same amount each year of the arrangement. Recognize revenue and expenses and reduce the liability as it satisfies its obligation to maintain the bridge over the course of the arrangement. Recognize revenue and expenses and reduce the liability as it satisfies its obligation to maintain the bridge over the course of the arrangement. Government Operator If the use the straight-line method of amortization is elected, amortize the intangible asset and recognize expense in the amount of $5 million each year ($100 million cost divided by 20 years). If the use the straight-line method of amortization is elected, amortize the intangible asset and recognize expense in the amount of $5 million each year ($100 million cost divided by 20 years). Recognize revenue and expenses on bridge operations based on applicable revenue and expense recognition guidance. Recognize revenue and expenses on bridge operations based on applicable revenue and expense recognition guidance.