Main principles of 605, it is noted by stakeholders

Main discussion area of this amendment is Stakeholders of IFRS observed that there is diversity in practice in how an operating entity determines the customer of the operation services for transactions within the scope of Topic 853, Service Concession Arrangements. This recent Update deals with that diversity or dilemma. This recent update illustrates a contradictory picture between current amendment & IFRS. In a service concession arrangement (within topic 853), the operating entity (service provider) should not consider for the infrastructure as a lease, property or plant rather it should account for earned revenue related to construction, upgrade, or operation services of the infrastructure in accordance with Topic 605 (the earlier version). Under the principles of 605, it is noted by stakeholders that the idea is not clear whether the customers of the operation services is the grantor or the third-party users (example-bridge or road users) for specific service concession arrangements in business world. In turn, this uncertainty stemmed in diversity in practice when applying certain aspects or features of Topic 605 & 606. Currently GAAP does not address how an operating entity should determine the customer of the operation services for transactions within the scope of Topic 853, which led to diversity in determining the customer either grantor or Third-party.

Main Discussion:

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By definition “service concession agreement” is an arrangement between a grantor (particularly Govt. body) and an operating entity whereby the operating entity will operate the grantor’s infrastructure for a particular period of time. The operating entity also may continue maintaining the infrastructure itself, and it also may be required to arrange for periodic capital-intensive maintenance to improve the life of the infrastructure. According to my understanding, an operating entity will provide operation services (which include operation and general maintenance of the infrastructure) for a toll road that will be used by third-party users (drivers). The amendments in this Update will clarify that the grantor (government), rather than the third-party drivers, is the customer of the operation services in all cases for service concession arrangements within the scope of Topic 853 defined by recent amendments. In the amendments the effective transition of adoption of new amendments has also been illustrated. For an entity that has not adopted Topic 606 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update generally are the same as the effective date and transition requirements for Topic 606 for this type of entities. An entity that adopts Topic 606 after the issuance of this recent Update should adopt the amendments in this Update at the same time that the entity adopts Topic 606 and the entity should apply the amendments in this Update using the same transition system elected for the application of Topic 606. For an entity that has adopted Topic 606 before the issuance of this update like for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. To be frank, in a typical service concession arrangement, an operating entity operates and maintains the property of the grantor for a period of time which will be used to provide a public service. In exchange, the operating entity may also receive payments from the grantor to perform those services. Those service payments may be paid during the period as the services are performed or over an extended period of time. Additionally, the operating entity may be given a right to charge the public (the third-party users) to use the built infrastructure. The service arrangement also may contain an unqualified guarantee from the grantor (government) under which the grantor ensures a guaranteed minimum payment if the fees collected from the third-party users do not reach a specified minimum target-level. An operating entity shall consider for revenue from service concession arrangements in accordance with Topic 605 on revenue recognition or Topic 606 on revenue from contracts with customers, as & when applicable. In applying Topic 605 or Topic 606, an operating entity shall account the grantor (Government) to be the customer of its operation services in all cases for service concession arrangements within the scope of this Topic. The operating entity recognizes a financial asset (ex-infrastructure) to the extent it receives an unconditional contractual right to receive cash or another form of financial asset in return for construction, maintenance or upgrade services which is performed. The performing operating entity distinguishes an intangible asset to the extent it receives from the grantor the right to charge users (third-party) for the use of the infrastructure in return for construction or upgrade services performed. There are two sets of inflows and outflows.  In the first, the construction services or arrangement are exchanged for the intangible asset in a barter transaction with the grantor. In the second case, the intangible asset received from the grantor is used up to generate cash flows from charging the users of the public service.