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Private-public service arrangement: Is it a service concession? · PwC's accounting podcast

• 0:00
  SPEAKER_02: Thought Leadership from PWC.
• 0:06
  SPEAKER_05: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_05: I'm Heather Horn.
• 0:11
  SPEAKER_05: Thanks so much for joining me as we continue our Tuesday series where one of our all-star podcast guests takes over the podcast, picks the topics for the month, and joins me on all the episodes.
• 0:23
  SPEAKER_05: For the month of April, our takeover guest is Pat Durbin, a deputy chief accountant in PwC's national office.
• 0:33
  SPEAKER_01: I sometimes refer to it as sort of the accidental concessionaire.
• 0:36
  SPEAKER_01: Like most of the time when we start having the conversations, people didn't realize they had a service concession because it just doesn't sometimes feel like that's what I'm doing.
• 0:47
  SPEAKER_04: There's a lot of surprises.
• 0:53
  SPEAKER_04: So I guess look carefully at the guidance after you've kind of looked carefully at all the rest of it.
• 0:59
  SPEAKER_05: That was Pat and Jay Sulliver, another one of our all-stars who'll be joining us for a month of his own later this year.
• 1:07
  SPEAKER_05: Pat and Jay are here to talk all about service concessions.
• 1:11
  SPEAKER_05: How do you account for the right or a concession to provide a service for the government?
• 1:16
  SPEAKER_05: Sometimes these arrangements are also called public-private partnerships or PPPs, especially outside the U.S.
• 1:24
  SPEAKER_05: With various infrastructure projects planned, it's important to understand the scope of the guidance as it may not always be readily apparent when it applies.
• 1:33
  SPEAKER_05: And in today's discussion, we'll also share some of the background of the genesis of this accounting model and for a bonus, even throw in a few US GAP and IFRS differences.
• 1:45
  SPEAKER_05: Obviously, we've got a lot to cover, so let's get started.
• 1:53
  SPEAKER_05: Pat, Jay, welcome to the podcast.
• 1:55
  SPEAKER_05: So nice to have you back.
• 1:57
  SPEAKER_05: And Jay, it's been a while, so definitely nice to have you back.
• 2:01
  SPEAKER_05: Now, um, I love today's topic because it's a topic that's near and dear to my heart coming from the power and utilities industry.
• 2:08
  SPEAKER_05: I think someplace we are seeing some of this, but we are definitely seeing a lot of legislation and commitment from the government in terms of improving the infrastructure.
• 2:18
  SPEAKER_05: And one of the areas we see this is in this um interestingly named area of we call service concessions.
• 2:26
  SPEAKER_05: And I thought we could start off by talking about how we think about these concessions, what they are, Pat, and why people should be caring right now.
• 2:37
  SPEAKER_01: Sure.
• 2:38
  SPEAKER_01: Thanks, Heather, and thanks for having me back.
• 2:40
  SPEAKER_01: Um and Jay, thanks for being here as my uh wingman on this topic.
• 2:44
  SPEAKER_01: It's a it's a tricky one.
• 2:45
  SPEAKER_01: Um I thought where you might have been going with your lead in, as we sometimes hear these referred to in the context of like public-private partnerships or where you're basically getting some sort of private enterprise participation in things that are really public services, public infrastructure.
• 3:01
  SPEAKER_01: So think of you know, toll roads, bridges, um, though those sorts of things.
• 3:06
  SPEAKER_01: That's sort of the context here.
• 3:08
  SPEAKER_01: From an accounting perspective, those are referred to as service concessions.
• 3:13
  SPEAKER_01: But as we'll talk a little bit further on, a lot of times the challenge really is identifying when you are involved in one of these arrangements.
• 3:21
  SPEAKER_01: Um, and that's where some of the accounting challenges come in.
• 3:25
  SPEAKER_01: But essentially we're focused on the private enterprise who's participating in one of these and how they need to account for these arrangements.
• 3:35
  SPEAKER_01: And essentially, it's in that context where a private business is operating public infrastructure.
• 3:43
  SPEAKER_01: I mentioned a couple of the classic examples like a toll road or a bridge.
• 3:46
  SPEAKER_01: Um, you might have public hospitals, prisons, airports, cruise ports.
• 3:52
  SPEAKER_01: Um, sometimes you you talked about the uh uh power and utility space.
• 3:56
  SPEAKER_01: Sometimes public universities may engage a private um enterprise, private business to operate their sort of in or on-campus plant for generating their um electricity and and power or steam in some cases.
• 4:12
  SPEAKER_01: So those are sort of the types of arrangements where we see this.
• 4:17
  SPEAKER_01: The other thing that makes these kind of challenging is you would imagine, right, these are assets that are going to be around for a very long time.
• 4:24
  SPEAKER_01: So a lot of times the arrangements to operate them will be very long-term arrangements, and so that can introduce some accounting challenges as well.
• 4:34
  SPEAKER_05: All right.
• 4:35
  SPEAKER_05: Thanks, Pat, for that background.
• 4:36
  SPEAKER_05: And yes, I was thinking about uh you know those types of generating facilities that are operated for a public enterprise by a private enterprise.
• 4:45
  SPEAKER_05: So definitely an interesting topic.
• 4:48
  SPEAKER_05: And I think sometimes we jump into these topics and then we never mention where they're covered in the accounting guidance.
• 4:52
  SPEAKER_05: So we're getting that in early here.
• 4:54
  SPEAKER_05: That is ASC 853.
• 4:57
  SPEAKER_05: But I guess, Jay, bringing you into the conversation, what does ASC 853 say about these types of arrangements?
• 5:05
  SPEAKER_04: Right.
• 5:05
  SPEAKER_04: Well, it's certainly great to be back in the studio with you, Heather.
• 5:08
  SPEAKER_04: And thanks, Pat, for inviting me in today as part of your month of taking over the uh the podcast waves.
• 5:14
  SPEAKER_04: Uh yeah, this is, you're right, it is pretty interesting guidance and a little bit tricky to sort of figure out who's in scope, what's in scope, uh, what type of arrangements you'd you'd think about in here.
• 5:25
  SPEAKER_04: Um but maybe sort of before diving into the details or the all the nuances of what's there, maybe maybe I'll just start with a rather high-level notion of like the who and the what that are in these arrangements.
• 5:36
  SPEAKER_04: And you know, Pat alluded certainly to the to the who side that's a government on the other side.
• 5:42
  SPEAKER_04: So the the the party that you're contracting with as a private operator, it has to be a government entity or a government agency of some sort.
• 5:51
  SPEAKER_04: Um there was consideration of whether that the guidance should also apply to contracts with private enterprises, because sometimes those could be similar, someone is running, I don't know, their own stadium or something like that in a private space, but but ultimately that's not what the guidance covers.
• 6:07
  SPEAKER_04: So it does have to be a governmental agency on the other side of it.
• 6:10
  SPEAKER_04: And from a what perspective, as you said, Pat, it has to involve running infrastructure on behalf of the government.
• 6:17
  SPEAKER_04: And that's not defined explicitly as to what that means, but I I would say you could tend to think of it as a relatively immovable large-scale assets like the roads or bridges that you were you were talking about.
• 6:30
  SPEAKER_04: And uh it's not just any service that's going on.
• 6:33
  SPEAKER_04: So, for example, if you're just being hired to clean a government office building, well that's not that's not what we're talking about in this guidance.
• 6:42
  SPEAKER_04: And it doesn't apply to just building the infrastructure.
• 6:45
  SPEAKER_04: So if all you do is hire to build a road or build a bridge, and that's it, that wouldn't be covered under this guidance either.
• 6:52
  SPEAKER_04: And we'll get more into the exact scoping considerations uh in a little bit, I'm sure.
• 6:56
  SPEAKER_04: But you know, those contracts would probably just be plain old revenue contracts, right?
• 7:00
  SPEAKER_04: A service contract to do cleaning or a uh construction contract to build a road or something like that.
• 7:07
  SPEAKER_04: So they'd certainly be just revenue contracts uh similar that we'll probably get into a lot of this stuff, but they wouldn't technically be service concession arrangements.
• 7:15
  SPEAKER_04: So once you then get into the actual guidance that you alluded to, um Heather, the the scope is described in sort of two ways.
• 7:21
  SPEAKER_04: So you're in the scope of this if you uh if you meet both of two criteria that are described.
• 7:27
  SPEAKER_04: The first one is that the the government agency or the grantor in this controls or has the ability to modify or approve the types of services that the operator has to provide, the prices that are going to get charged for it, and who the company has to provide those services to.
• 7:46
  SPEAKER_01: Yeah, and that's uh that can be quite a mouthful in terms of thinking about that.
• 7:51
  SPEAKER_01: But what they're really getting at is that ultimately the government really controls the key operating parameters.
• 7:58
  SPEAKER_01: So the pricing or the amount of the tolls, if there are particular hours of operations or service levels that need to be available to essentially serve the public interest, right?
• 8:09
  SPEAKER_01: It's the government ultimately, even though there might be some discretion on the part of the operator at various points or within certain ranges.
• 8:17
  SPEAKER_01: So it does get a bit judgmental, um, even if there are some decisions where the operator can influence it, but ultimately it's really getting back to the government is the one who's ultimately determining what needs to be provided when and in exchange for what amount of consideration.
• 8:36
  SPEAKER_04: Right.
• 8:37
  SPEAKER_04: So that sort of criterion gets to the notion of control during the contract period, control over the activities of what's going on.
• 8:44
  SPEAKER_04: And then the second criterion in the guidance talks about what happens at the end of the contract.
• 8:50
  SPEAKER_04: And in particular, it talks about whether the grantor, again the government entity, controls either through legal ownership, what's referred to in the guidance as beneficial entitlement, sort of the economics, or in some other way, any residual interest in the infrastructure at the end of the term.
• 9:09
  SPEAKER_04: So what does that mean?
• 9:10
  SPEAKER_04: In practice, it means that you know that the government gets control of the assets back at the end of the agreement and can direct what happens to them, you know, find the next buyer or the next operator of it in some cases.
• 9:22
  SPEAKER_04: Um, sometimes we do find, it's actually not at all uncommon, that during the operating period, which as you said, Pat can be 50, 60, 75 years in some cases, the title of the assets is often held by the operator, you know, especially if they're doing the construction, they actually have legal title, but then what often happens is that legal title reverts back to the government at the end.
• 9:44
  SPEAKER_04: And that's really what this guidance is getting at, that at the end of the day it all comes back to the government at the end.
• 9:50
  SPEAKER_04: Sometimes it just reverts automatically.
• 9:52
  SPEAKER_04: Sometimes it is an option for the government to buy it back from the operating entity, and that could even be at fair value.
• 9:59
  SPEAKER_04: It doesn't have to be at a discount, but that's still viewed to be having control of what goes on at the end, because the operator can't just unilaterally decide to keep it or decide to sell it to somebody else on their own, the government sort of has the first right to get it back.
• 10:14
  SPEAKER_05: So I have two follow-up questions.
• 10:16
  SPEAKER_05: First, I'll start at the end.
• 10:17
  SPEAKER_05: So, Jay, on the point you just discussed, as soon as you start talking about property being used by one entity, owned by another entity, and those types of things, leasing, of course, came to mind.
• 10:28
  SPEAKER_05: So do we have to intersect with leasing here, or if you're in this type of arrangement, you just follow this guidance?
• 10:37
  SPEAKER_04: Essentially you're out that what this guidance is telling you is that you're out of the leasing guidance.
• 10:42
  SPEAKER_04: And we'll get into that probably a little bit more as to why.
• 10:45
  SPEAKER_04: But um, but but it's telling you don't think of this as a lease, even though it has elements that sound like a lease, think of it as it's the government's asset and you're just being hired to run it for them.
• 10:55
  SPEAKER_05: Okay.
• 10:56
  SPEAKER_05: And then also I know we're I'm sure going to talk more about control and how you just to distinguish that.
• 11:03
  SPEAKER_05: But I guess if I'm thinking, if I'm just trying to figure out even should I consider if I'm in one of these arrangements, I have to start with there's a government involved and a private company.
• 11:13
  SPEAKER_05: And then if I'm the private company, then is this more than just sort of a routine service contract to provide some type of directed service, but instead I am doing something broader than that and operating something on behalf of the government.
• 11:28
  SPEAKER_05: Again, I know we need to look at the detail, but I'm just trying to figure, like try to give sort of uh benchmarks when people should even be thinking about this.
• 11:38
  SPEAKER_04: Right, right.
• 11:39
  SPEAKER_04: And as I said, it's not just building.
• 11:41
  SPEAKER_04: Yes.
• 11:41
  SPEAKER_04: Um sometimes they're build, many times they are build and operate.
• 11:45
  SPEAKER_04: But if it's just a build, you wouldn't be in this.
• 11:47
  SPEAKER_04: And the operate, it's the notion of well, uh are you running something big and substantive for the government, right?
• 11:54
  SPEAKER_04: So infrastructure, as I said, it's not really defined.
• 11:57
  SPEAKER_04: So sometimes you get into interesting questions of like, is are we running something that you know can be easily moved around and maybe it isn't really infrastructure as the guidance is talking about it.
• 12:08
  SPEAKER_04: But if you're uh if you're doing something with the government and it's a big immovable object effectively, then you probably at least have to think about are you in this guidance?
• 12:19
  SPEAKER_01: Yeah, I think one of the things that's interesting, and this is what makes it challenging, is in if you're trying to think about where do you see these.
• 12:25
  SPEAKER_01: It's like it's a big asset, like Jay was talking about, but it's also the users are the people that are paying you.
• 12:33
  SPEAKER_01: So, like your example, just like a normal service contract, well, the the government, like they're probably gonna just be paying me if it's like a normal service contract.
• 12:41
  SPEAKER_01: In a lot of cases here, what I'm getting is actually coming from the people using the asset, which is what makes this a little weird because it sort of feels like those should be your customers, but it's not my asset.
• 12:54
  SPEAKER_01: Like the government's letting me run it for them in exchange for what the users are going to pay me, which is really kind of what they probably are paying the government, but I'm allowed to keep it.
• 13:05
  SPEAKER_01: So those are that's I would say the classic of like, where do you see it?
• 13:08
  SPEAKER_01: It's sort of think about there's some user that's paying me for the use of not my asset.
• 13:15
  SPEAKER_05: Yeah.
• 13:15
  SPEAKER_05: So basically, I guess I could have put this together.
• 13:18
  SPEAKER_05: Your example of a toll road, the drivers paying the tolls are the ones that are paying the the toll road operator, basically, in that in that scenario.
• 13:28
  SPEAKER_04: Aaron Powell Although I I'd say that it's not limited to that, right?
• 13:32
  SPEAKER_04: That's not the only indication that you have one of these contracts.
• 13:35
  SPEAKER_04: Because, for example, like in your example of the public university hiring the a utility company to run the steam plant or the electric plant, well, the university is paying it.
• 13:46
  SPEAKER_04: The the individual students and professors aren't paying for it.
• 13:50
  SPEAKER_04: So um so it's not limited to a third, you know, a three-way arrangement.
• 13:54
  SPEAKER_04: It could just be a two-way arrangement.
• 13:56
  SPEAKER_05: All right, that's very helpful as well.
• 13:57
  SPEAKER_05: And since we mentioned utilities, I will point out for our listeners, the the niche listeners in the utility industry, that if you are in 980, then you get to apply that instead.
• 14:07
  SPEAKER_05: So keep that in mind.
• 14:08
  SPEAKER_05: But we won't talk about that further here, although maybe offline, Jay and Pat, I have some questions.
• 14:14
  SPEAKER_05: But uh with that said, so Pat, we talked a little bit about this, but I think it would be helpful to run through more detail some of the common types of arrangements we see just to help people again think through when this may apply.
• 14:28
  SPEAKER_01: Yeah, and I think we have kind of hit on the different flavors.
• 14:32
  SPEAKER_01: Um there are basically two types.
• 14:34
  SPEAKER_01: I mean, the most straightforward is you're just hired to operate the infrastructure.
• 14:40
  SPEAKER_01: The infrastructure already exists, and the government's hiring, or you're essentially bidding for the right to be able to operate that that infrastructure.
• 14:50
  SPEAKER_01: The other one is um you're hired to build and then subsequently operate it.
• 14:55
  SPEAKER_01: Those tend to be a little bit more complicated.
• 14:57
  SPEAKER_01: Um, oftentimes um you build it and then operate it, and the only time you get paid is during the operation phase.
• 15:05
  SPEAKER_01: But in that case, because you have the the build and the operate, you know, that's how you get into the service concession model.
• 15:12
  SPEAKER_01: As Jay, I think, has pointed out before, if you're just hired to build the asset, that's not a service concession arrangement.
• 15:20
  SPEAKER_01: You're just basically performing that build service for the government.
• 15:25
  SPEAKER_05: Well, and I guess to the point of the example you gave there, that you're building the asset and you don't start getting paid until the construction phase or the operation phase, that also means then you're financing the asset.
• 15:36
  SPEAKER_05: So there's lots of aspects of this here.
• 15:38
  SPEAKER_05: So then sort of with that, I guess, Jay, what how do we think about the accounting for these types of arrangements?
• 15:45
  SPEAKER_04: So I would say, Heather, what's really interesting about this guidance is that the guidance here tells you more about what a service concession isn't than what it is.
• 15:55
  SPEAKER_04: And you know, you touched on it a little bit before uh with your question about the leasing.
• 16:00
  SPEAKER_04: So we'll we'll hit that a little bit more uh more here in that the guidance does say explicitly it's not a lease because you don't really have uh full control of the asset, and you can decide what you want to do with the asset while you have uh possession of the toll road, let's say you know you're told what do you have to do, what do you have to charge.
• 16:21
  SPEAKER_04: So unlike just you leasing an asset that you can go make money on your own volition by finding other customers to use that asset or lease it from you, sublease it from you, you don't get to make those decisions.
• 16:32
  SPEAKER_04: So that's why this guidance said it's not a lease.
• 16:35
  SPEAKER_04: It also, maybe more significantly, says it's not your PPE.
• 16:40
  SPEAKER_04: So even if you're building it, so if you're hired to build a toll road, which will take three years to build and then operate it for the next 50 years, and you might even have a title to it, that if you're in the scope of this guidance, it's again viewed as it's the government's asset, because the government has control of it during its operation by setting all the terms, and then at the end of it by getting it, getting it back at the end.
• 17:02
  SPEAKER_04: And so you cannot record it as your PP ⁇ .
• 17:05
  SPEAKER_04: So it it tells you a lot about what you can't do.
• 17:09
  SPEAKER_05: All right.
• 17:10
  SPEAKER_05: So then I have a question though, because uh when we had when I've talked about this before, is there ever cases then in the operation of the asset that you may have assets that you purchase as part of that that you could capitalize?
• 17:22
  SPEAKER_04: Yeah, that's that's fair.
• 17:23
  SPEAKER_04: I mean, so separate from the big infrastructure, which is the toll road example, right?
• 17:27
  SPEAKER_04: You can't capitalize the toll road, but during the course of operating it, you're probably gonna need snow plows or other type of maintenance equipment.
• 17:36
  SPEAKER_04: And you're probably gonna buy a bunch of snowplows over the course of a 75-year contract, and you do get to decide when it's time to replace the snowplows.
• 17:45
  SPEAKER_04: And you know, those don't necessarily revert, certainly the ones along the way aren't gonna get given to the government at the end.
• 17:51
  SPEAKER_04: So the guidance does allow you to capitalize as your fixed assets to do your operation services, some of these more separable and uh you know rotational types of assets that you do kind of make the decisions over.
• 18:05
  SPEAKER_04: But the big picture, the bigger asset, is what you you're not allowed to capitalize.
• 18:10
  SPEAKER_05: All right.
• 18:10
  SPEAKER_05: That's definitely helpful.
• 18:11
  SPEAKER_05: So then if if we know it's not PP ⁇ and it's not a lease, uh then how do we think about these types of arrangements?
• 18:21
  SPEAKER_04: So basically the guidance says it sort of falls down to be a revenue contract under the 606, the ASC 606 revenue guidance.
• 18:30
  SPEAKER_04: It's you know basically viewed, as we've kind of alluded to, that the government has hired you to run, or in some cases, to build and run these assets on their behalf since they still have control of it.
• 18:42
  SPEAKER_04: Uh and so it's viewed that you're just providing services of various sorts to the government.
• 18:49
  SPEAKER_04: And as you said earlier, Pat, what what does become important here for a lot of the the application of the 606 revenue model is that the government is explicitly viewed as always being the customer, not the drivers, not the people um using a park, not the people using a cruise port or something like that.
• 19:06
  SPEAKER_04: It's the government that views your customer, and that's going to become important as we kind of you know play out the rest of the revenue model.
• 19:12
  SPEAKER_01: Yeah, and that's where I think it really um people tend to get tripped up here is because if you think about the day-to-day activities and what you're doing, you feel like you're providing a service to those users and they're paying for it, but this model sort of turns that around and says, no, the government's the customer.
• 19:28
  SPEAKER_01: So now you have to think about how to apply our revenue model to that arrangement.
• 19:34
  SPEAKER_01: Um so you know, maybe just a little bit of uh how we think through the revenue model for these arrangements, like any revenue contract, we start with identifying our performance obligations.
• 19:46
  SPEAKER_01: If it's just the operation services, we just have a single performance obligation.
• 19:53
  SPEAKER_01: Um becomes a little bit more straightforward.
• 19:55
  SPEAKER_01: We have only one element to allocate the consideration to.
• 20:01
  SPEAKER_01: If we have these build and operate arrangements, um that becomes a bit more complicated because generally speaking, that the build performance obligation will be separate from the operate obligation.
• 20:14
  SPEAKER_01: You can also get into a situation where you have those two, the build, the operate, and then you might say, well, there are some major maintenance activities that will need to occur.
• 20:25
  SPEAKER_01: It's possible that that could create a third or maybe multiple beyond that performance obligations that you would then need to think about allocating consideration among all those performance obligations.
• 20:37
  SPEAKER_01: So if we take an example in the major maintenance context, like we've been talking a lot about toll roads, that road's going to need to be resurfaced at some point, repaved.
• 20:46
  SPEAKER_01: Is that just sort of all part of the normal maintenance, like plowing the snow and patching the potholes, or is that really separate?
• 20:54
  SPEAKER_01: Is it sort of specifically called out in the contract?
• 20:57
  SPEAKER_01: Is there some notion that there might be an opportunity for increased um tolls at some point, you know, sort of acknowledges that maybe there's a real um distinct obligation there, or is there even some separate consideration perhaps coming from the government that that's possible as well?
• 21:16
  SPEAKER_01: So all those things sort of would feed into whether or not I have another performance obligation.
• 21:22
  SPEAKER_01: So that's sort of the first step.
• 21:24
  SPEAKER_01: And you know, once you have identified the performance obligations, then you can sort of move forward with the rest of the model.
• 21:32
  SPEAKER_05: All right.
• 21:32
  SPEAKER_05: And this already seems complicated enough if you have one performance obligation, but then adding this aspect of you could have multiple here, then how do you think about that, Jay, from like accounting perspective?
• 21:46
  SPEAKER_05: Aaron Powell Right.
• 21:46
  SPEAKER_04: No, you're right.
• 21:47
  SPEAKER_04: It certainly gets trickier.
• 21:48
  SPEAKER_04: And uh the next step after you've identified your performance obligations is to then figure out what your total transaction price is and allocate that between the performance obligations, which the Revenue guidance has to do based on the standalone selling price of those obligations.
• 22:04
  SPEAKER_04: Not that easy to come up with in these kinds of arrangements.
• 22:07
  SPEAKER_04: Some aspects may be easier than others, but certainly running a contract for a long period of time is hard to do.
• 22:15
  SPEAKER_04: And a lot of times, what's further complicates it is that the fees that you're getting, which let's say go back to the toll road, is all the tolls that you're going to get over a long period of time.
• 22:25
  SPEAKER_04: Well, those are all variable fees, right?
• 22:27
  SPEAKER_04: Because you don't know exactly how much you're going to get.
• 22:29
  SPEAKER_04: It's not a defined amount.
• 22:31
  SPEAKER_04: And so a lot of the stuff is variable.
• 22:34
  SPEAKER_04: There could be some fixed amounts.
• 22:35
  SPEAKER_04: The government might pay you some amount of money directly, certainly if it's a something that there's no users, like the steam plant or prison or something like that.
• 22:44
  SPEAKER_04: That might be more fixed fees.
• 22:45
  SPEAKER_04: Or they might give you some amount of money during the construction phase.
• 22:48
  SPEAKER_04: But remember, they're if they're hiring you to construct it, they probably don't want to have to lay out all the money.
• 22:53
  SPEAKER_04: So they're probably not going to give all that to you.
• 22:55
  SPEAKER_04: So there's a lot of uh variable fees.
• 22:58
  SPEAKER_04: And so under the revenue guidance, you have to assess all your fees you're going to get, both the fixed and the variable amounts, to come up with your transaction price.
• 23:06
  SPEAKER_04: And I know that's a whole nother podcast that you you've probably done, maybe together with Angela Ferguson talking about variable fees here.
• 23:14
  SPEAKER_04: So we won't get into that here.
• 23:15
  SPEAKER_04: Um, but but obviously that's complicated.
• 23:18
  SPEAKER_04: Now, if it's just an operate-only contract, so you're just operating it and you didn't do any building, it might be just a little bit easier because there is a bit of a practical expedient in the revenue guidance that says if you're getting variable fees to perform services that are just reflective of the services you just provided, you can kind of just follow the cash effectively as the activity takes place.
• 23:38
  SPEAKER_04: But in the build and operate scenarios, it's a lot more complicated than that.
• 23:42
  SPEAKER_04: You don't get that special expedient because some of the money you're getting to operate it, i.e.
• 23:47
  SPEAKER_04: the tolls, is really paying for the build activity that took place over the first couple of years of the contract.
• 23:53
  SPEAKER_04: So you don't meet that guidance, that practical expedient guidance.
• 23:57
  SPEAKER_04: So you do have to kind of go through your regular project out the variable fees, um, you know, subject to the constraint that that exists in the revenue guidance.
• 24:07
  SPEAKER_04: Um, you know, so it has to be appropriate, I'll say tempered, uh, can't be overly aggressive, but but you do have to still come up with an amount and then allocate that between the build piece and the operate piece, maybe the major maintenance piece, if that's a part of it as well.
• 24:20
  SPEAKER_04: So that that's where the hard part definitely comes in what we see these in practice.
• 24:24
  SPEAKER_05: Well, although I think I'm sure our listeners are thinking this whole thing seems very hard.
• 24:28
  SPEAKER_05: So I I don't think this is one we can say, oh, just this one aspect is.
• 24:32
  SPEAKER_05: But it particularly, Jay, because I'm thinking we keep talking about a toll road, which I think is all easy for all of us to sort of get our head around.
• 24:40
  SPEAKER_05: But I keep thinking like if I was operating an airport, for example, then there's tons of different fees that I'm collecting and all these different sources.
• 24:48
  SPEAKER_05: And then now if you said that this whole contract is 75 years and I have to estimate for 75 years how much the airlines are gonna pay me and the parking people and the concessions and everything else, it it feels a little mind-boggling.
• 25:02
  SPEAKER_05: So uh what do you do in that circumstance?
• 25:06
  SPEAKER_04: It's hard to do that.
• 25:08
  SPEAKER_04: And that is that is challenging and frustrating, I think, for for many of our clients, certainly to think about.
• 25:14
  SPEAKER_04: And you know, sometimes we do hear questions of, and there are some parts, some types of transactions in the revenue world where you might be able to say, gee, I just can't come up with an amount, or it's so dependent upon these external factors that I just can't come up with an estimate, and I just only kind of recognize them when it crystallizes.
• 25:33
  SPEAKER_04: But I think the general perspective here is that that's not a viable argument.
• 25:38
  SPEAKER_04: Um, you know, it's pretty challenging to say that nobody's gonna drive on the road, right?
• 25:42
  SPEAKER_04: Right.
• 25:44
  SPEAKER_04: You've done all these traffic studies.
• 25:46
  SPEAKER_04: There's a lot of data behind these things before a contract gets signed, and the there's often banks involved that are lending large sums of money off of these projections of future tolls or future airline fees or per passenger fees and things like that.
• 26:01
  SPEAKER_04: So there is a fair amount of data out there.
• 26:04
  SPEAKER_04: I mean, companies are putting aside the accounting, they're you know, from an economic perspective, they have to have uh spent a lot of due diligence figuring out does this project make sense on from both parties' perspective, and what's the right economic split.
• 26:17
  SPEAKER_04: So there's a fair amount of diligence that's been done around the projections.
• 26:20
  SPEAKER_04: Obviously, they're not easy to do and they're very much subject to change.
• 26:24
  SPEAKER_04: And if they change, the accounting has to change with it.
• 26:27
  SPEAKER_04: But we we generally find that you can't just say, I can't estimate it, and therefore I'm just not going to do any accounting for it.
• 26:34
  SPEAKER_05: So then, all right, let's say that you come up with your estimate, then how do you recognize the revenue?
• 26:40
  SPEAKER_01: Aaron Powell Well, that's that's why I think all these challenges really matter, um, because these are by definition some sort of service arrangement, right?
• 26:50
  SPEAKER_01: So we recognize the revenue over time.
• 26:53
  SPEAKER_01: And anytime you're recognizing revenue over time, then you have to figure out what is the pattern of transfer, you know, how have I allocated consideration, and then what's the pattern of transfer.
• 27:03
  SPEAKER_01: For the build piece of it, if you're doing the build, that's a pretty classic construction model.
• 27:09
  SPEAKER_01: Um, the hard part is estimating what consideration am I allocating to the build, but then I'm going to have an ability to measure my progress either based on my estimate of the total costs I expect to take or some other sort of physical progress that I'm estimating.
• 27:25
  SPEAKER_01: Then you get into the operation phase.
• 27:28
  SPEAKER_01: And in general, you would say, well, I'm operating it for a period of time.
• 27:31
  SPEAKER_01: It's sort of fundamentally kind of the same service over the period.
• 27:35
  SPEAKER_01: So you would think kind of a time-based measure.
• 27:38
  SPEAKER_01: And that's where you get into, well, if I have to estimate all the fees to figure out what my total consideration is and then allocate it to each unit of time, the hard part is the estimating part.
• 27:50
  SPEAKER_05: All right.
• 27:50
  SPEAKER_05: This is definitely making me wish I'd brushed up on my revenue accounting.
• 27:54
  SPEAKER_05: So definitely for the listeners, we will include in the show notes some references to some of the other podcasts that might be helpful if you're dealing with one of these arrangements.
• 28:03
  SPEAKER_05: But let me ask a question then, because it's thinking about these estimates of tolls or airline fees or otherwise.
• 28:09
  SPEAKER_05: And, you know, just from regular business perspective, or I'm thinking like what we saw during COVID when airports weren't being used at all.
• 28:17
  SPEAKER_05: They I presume then there's cases where we see that these contracts have to get modified.
• 28:22
  SPEAKER_05: If you have 75 years, things can change a lot in 75 years.
• 28:26
  SPEAKER_05: So how do we think about that?
• 28:28
  SPEAKER_01: Yeah, you're you're absolutely right.
• 28:29
  SPEAKER_01: I mean, it um they do get modified.
• 28:31
  SPEAKER_01: I mean, they might be modified because you're expanding the roadway, for example, you're adding additional lanes, you're adding additional runways, you're adding another wing to a hospital.
• 28:42
  SPEAKER_01: What, you know, all those things can happen, or you might modify the pricing terms, you know, less volume.
• 28:48
  SPEAKER_01: Well, if I'm gonna do the work, I'm gonna need then more, you know, up from each user or each usage fee.
• 28:55
  SPEAKER_01: Um and we have to go back then to the revenue standard and follow the contract modification guidance, and we've had some separate discussions on that.
• 29:03
  SPEAKER_01: You can spend a lot of time working your way through that framework.
• 29:07
  SPEAKER_01: But essentially, um, if you add additional elements to the arrangement and you're in some way, shape, or form adding additional consideration to pay for that, if that additional thing, the new lane on the toll road, we say that's distinct, the consideration that we're adding is also representative of the standalone selling price, again, kind of a hard judgment.
• 29:31
  SPEAKER_01: But if it is, we would just say, okay, well, that we're going to account for as sort of like almost an extension or an add-on to the contract.
• 29:38
  SPEAKER_01: It's, you know, it's a new performance obligation.
• 29:41
  SPEAKER_01: There's new consideration associated with it.
• 29:43
  SPEAKER_01: That's not that difficult.
• 29:45
  SPEAKER_01: If it's not a distinct performance obligation or the amount of consideration we're adding is not reflective of the standalone selling price for that, then we have to sort of merge it all back into the existing contract and adjust the allocation of revenue to the performance obligations I've already satisfied or am in process of satisfying, and also the consideration that I've recognized.
• 30:10
  SPEAKER_01: So we we call it sort of a cumulative catch-up type adjustment.
• 30:14
  SPEAKER_01: So it's it's a complicated area.
• 30:16
  SPEAKER_01: And to your point about the length of time involved, you know, you you can have some pretty big swings there.
• 30:22
  SPEAKER_01: Um, but I just say suffice to say, you're kind of stuck dealing with the um the contract modification framework and the revenue standards.
• 30:31
  SPEAKER_05: So your your point there, Pat, about standalone selling price.
• 30:35
  SPEAKER_05: I just want to walk through, make sure I understood this.
• 30:37
  SPEAKER_05: So if I'm operating an airport and it's very popular, or maybe, well, it would have to be a case that it's very popular probably if you're building another terminal, then so now I negotiate and I agree to build another another terminal.
• 30:51
  SPEAKER_05: The government and I come to some agreement.
• 30:54
  SPEAKER_05: What you're saying is, well, maybe the government will say, well, you're already over over-earning or making more money than you anticipated on that first part.
• 31:03
  SPEAKER_05: So I'm going to make you sort of reduce fees on on this new part or reduce fees across the board or otherwise, or maybe in the toll road case, if there hasn't been enough customers.
• 31:16
  SPEAKER_05: I'm just trying to think.
• 31:17
  SPEAKER_05: Basically, what you're saying is you can't just assume the change to the agreement is sort of like an arm's length transaction, I guess what I was getting at.
• 31:26
  SPEAKER_01: Yeah, or or that it's totally contained to just that new thing, right?
• 31:30
  SPEAKER_01: You know, if there's c if it's clear that there's kind of a sharing of economics between the existing and the new, that's that's where it gets more complicated.
• 31:37
  SPEAKER_05: Okay.
• 31:37
  SPEAKER_05: That's helpful.
• 31:38
  SPEAKER_05: So then one of the things that I have been in the back of my mind thinking about the whole time we were talking about revenue is I'm thinking of all these expenses that you built this huge asset or even these ongoing operating costs or you know, capital improvements and all these different types of things.
• 31:54
  SPEAKER_05: So obviously huge part of this.
• 31:56
  SPEAKER_05: So, Jay, where do we go thinking about expenses, particularly if it's not my asset?
• 32:02
  SPEAKER_05: Right.
• 32:02
  SPEAKER_04: It would be easy if it was your asset.
• 32:03
  SPEAKER_04: Exactly.
• 32:05
  SPEAKER_04: Exactly.
• 32:06
  SPEAKER_04: But right, since since it's not, and uh you know, as Pat said, you're recognizing revenue as you build it based on whatever amount of consideration you've allocated.
• 32:14
  SPEAKER_04: So generally speaking, the expenses are just going to be recognized in the income statement as they're incurred in this case.
• 32:22
  SPEAKER_04: Um, in some cases, at the beginning of the contract, there could be some cost to obtain the contract or maybe sort of set up the contract before and for the fulfillment purposes before it really gets going.
• 32:35
  SPEAKER_04: But that's we don't tend to find that to be very significant in these types of arrangements, and that certainly would not really apply during the construction or operating phase.
• 32:44
  SPEAKER_04: And so the construction costs would just get expensed as incurred, because usually you're measuring progress sort of as a proportion of your costs on a cost-to-cost basis.
• 32:53
  SPEAKER_04: So when you do that, you just recognize the costs as they happen as expense, and that drives your revenue recognition.
• 32:59
  SPEAKER_04: And then on the operating side, you're recognizing again the revenue over time, and just your expenses are just norm um as normal, they're just recognizing the income statement as they're incurred as well.
• 33:10
  SPEAKER_04: So for the most part, the expense side is actually pretty easy here compared to the revenue, that for the most part you are just recognizing the expenses as they happen.
• 33:17
  SPEAKER_05: Okay, so but let me actually uh ask a question about that, because you said it, but now that I really think about it when you mentioned the expenses.
• 33:25
  SPEAKER_05: So if you have a contract, let's go back to the toll road, because it's gonna be complicated enough, that you built a toll road and I don't know how much roads cost, but let's say it's like a billion dollars.
• 33:35
  SPEAKER_05: And then you estimate, okay, I'm gonna get these tolls, and that's going to pay for construction, and then the tolls are also paying for my ongoing operation.
• 33:44
  SPEAKER_05: And there might be some other um performance obligations, but let's keep it to those two.
• 33:49
  SPEAKER_05: What you're saying is then you have to estimate how much I in the future I'm going to be getting to build this billion-dollar toll robe because I'm going to recognize that revenue and the expense during the construction period, like those first couple years, including my profit margin.
• 34:07
  SPEAKER_05: And then I guess you wind up with like a huge deferred revenue on your books.
• 34:11
  SPEAKER_05: Actually a huge receivable.
• 34:13
  SPEAKER_05: Sorry, huge receivable, sorry, backwards.
• 34:15
  SPEAKER_05: Contract asset.
• 34:16
  SPEAKER_05: Yeah, contract asset on your books.
• 34:18
  SPEAKER_05: Wow.
• 34:18
  SPEAKER_05: So then collectability of that asset is going to be a huge thing for people who are giving you financing or otherwise.
• 34:24
  SPEAKER_05: And again, this is probably stating the obvious, but now I'm putting these pieces together.
• 34:28
  SPEAKER_01: Yeah, and I that's that's one of the other things that I think definitely catches people off guard because you know these things have been around for a while, but in a revenue world prior to the one we're in now, there was a notion that if you had contingent revenue, you didn't recognize anything.
• 34:47
  SPEAKER_01: Right.
• 34:47
  SPEAKER_01: So that was a really weird answer.
• 34:49
  SPEAKER_01: But now under 606, we say, well, if you can estimate it, you're gonna recognize the revenue, even if you're not gonna collect it in cash potentially for quite a long time.
• 34:59
  SPEAKER_05: All right.
• 35:00
  SPEAKER_05: Anything else then specific on those expenses, Jay?
• 35:05
  SPEAKER_05: Because I jumped in because I was putting all these pieces together.
• 35:08
  SPEAKER_04: I guess the only other thing I'd say about it is uh we get questions often about it, um, about you know, back to your leases point from earlier in the podcast, because a lot of times there is a legal lease involved in these.
• 35:22
  SPEAKER_04: And so the the accounting doesn't necessarily follow the legal contract.
• 35:27
  SPEAKER_04: So you have to kind of really understand all the economics.
• 35:30
  SPEAKER_04: We'll probably get into that a little bit more, but oftentimes there is a legal lease in this.
• 35:34
  SPEAKER_04: But even if there's a lease to payments to use the road or use the airport that the government articulates as a lease, because we're saying it's not a lease for accounting purposes, you don't call any of it lease expense.
• 35:48
  SPEAKER_04: It's just part of your cost of construction.
• 35:50
  SPEAKER_04: So it's your cost of revenue to build the contract, and it's your cost of revenue to operate the arrangement, but none of it is considered a lease expense as we tend to think of other leases.
• 36:00
  SPEAKER_01: Aaron Powell Or if you're actually making a payment to the government for that quote-unquote lease, because we've said the government's the customer and there's not a lease, it's actually just a payment to a customer.
• 36:13
  SPEAKER_01: And we haven't really talked a lot about that yet.
• 36:15
  SPEAKER_01: But a lot of times in these arrangements, there is sort of a notion of like, well, if you want the right to operate this and collect all these fees, I as the government want you to maybe pay for that right.
• 36:28
  SPEAKER_01: And I could make you pay for it sort of as we go.
• 36:31
  SPEAKER_01: Or in a lot of cases, we see the government say, well, if you if you want to have the right to operate this, you have to pay for it up front or pay me something up front, or it's the flip side of the, well, you build me the road and then I'll let you operate it.
• 36:45
  SPEAKER_01: Well, you've kind of paid for the road, right?
• 36:48
  SPEAKER_05: Right.
• 36:48
  SPEAKER_05: Right, right.
• 36:49
  SPEAKER_01: Um so economically it gets you to the same place.
• 36:51
  SPEAKER_01: But again, if you're making a payment directly to the government who's your customer, that's a payment to a customer.
• 36:58
  SPEAKER_01: So what do we do with payments to the customer?
• 37:00
  SPEAKER_01: Well, if they're not for a distinct good or service, which in general in most cases they're not, they're just gonna be for you know the sort of right to be part of this arrangement, that gets treated as a reduction of revenue, um, usually in accordance with the same pattern that you're recognizing revenue.
• 37:18
  SPEAKER_01: So if you make an upfront payment, that'll sort of get amortized as a reduction of revenue over the arrangement, or if you're making them as you go, same, same concept.
• 37:26
  SPEAKER_04: Aaron Powell Right.
• 37:27
  SPEAKER_04: And you know, and along with the fact that if it's a lease, you don't call it a lease lease expense, right?
• 37:31
  SPEAKER_04: You don't gross up the expense, you don't gross up that payment as an asset that amortizes to expense.
• 37:37
  SPEAKER_04: That is a surprise for a lot of companies that you end up with that answer effectively, but you don't you don't call that um you don't call that expense.
• 37:46
  SPEAKER_04: It's all kind of netted against it.
• 37:48
  SPEAKER_04: The other place we see that show up is um what we often see in agreements you know describe as like a revenue share type arrangement.
• 37:55
  SPEAKER_04: So maybe you're collecting tolls from drivers, but the arrangement is such that you, the operator, don't get to keep 100 percent of the tolls.
• 38:04
  SPEAKER_04: Maybe you give 10 percent to the government, or maybe it's a kind of a sliding scale depending on the volume and IRR over the life of the contract.
• 38:12
  SPEAKER_04: So sometimes you're sharing some of the money you're getting with the government.
• 38:16
  SPEAKER_04: And again, because the government's viewed as your customer and you're just sort of an agent for them to operate, you only record revenue for what you end up keeping in the arrangement.
• 38:25
  SPEAKER_04: So again, if if you collect$100, but you give$10 of revenue share to the government, that's not$100 of revenue and$10 of expense, it's just$90 of revenue in that example.
• 38:36
  SPEAKER_05: All right.
• 38:37
  SPEAKER_05: That's definitely a lot to think about.
• 38:39
  SPEAKER_05: And clearly companies should be thinking about accounting uh before they enter into one of these arrangements because uh this is not something that you're just able to sit down and you know do once a quarter.
• 38:50
  SPEAKER_05: So one question I want to I know there's differences under IFRS, so I do want to touch on those, but I actually have a maybe more conceptual question for you guys first.
• 38:58
  SPEAKER_05: So you may not know the answer, but do when did this guidance first come out?
• 39:05
  SPEAKER_05: Generally.
• 39:06
  SPEAKER_05: This is not stump the guest.
• 39:07
  SPEAKER_05: This is legitimately like when about when.
• 39:10
  SPEAKER_04: I think in the for the US gap guidance, it came out in either 2013, 2014, and it was effective a year or two later.
• 39:18
  SPEAKER_04: So it's been around not that old, but it's been around.
• 39:21
  SPEAKER_05: So sort of 606-ish time frame, around the same time.
• 39:26
  SPEAKER_01: It was out a little ahead of that, but sort of similar.
• 39:28
  SPEAKER_01: Yeah, you know.
• 39:29
  SPEAKER_05: Sort of anticipated it, it sounds like from the way the model works a bit.
• 39:34
  SPEAKER_05: I'll tell you why I'm asking.
• 39:35
  SPEAKER_05: Because the reason it's asking is thinking through, and obviously you can see if you take a step back, it fits in with the revenue model and you know, fits in with how we think about accounting, it is also very complicated.
• 39:47
  SPEAKER_05: And I'm just curious if either of you remember if there was a lot of other models they considered, or if this is, you know, it's because it is consistent with the revenue model and our broad philosophy of how we think about performance obligations and otherwise.
• 40:01
  SPEAKER_04: Well, maybe I'll I'll I'll take that.
• 40:02
  SPEAKER_04: And in fact, I think it you know the guidance that the FASBE issued actually was an EITF issue originally that the FASBE um issued a standard for was actually I think because we're trying to draw upon the international standard.
• 40:17
  SPEAKER_04: You're touching on the international guidance, and we can certainly touch on what the a couple of the key differences.
• 40:21
  SPEAKER_04: There are some key differences, as you said, but interestingly the IASB had addressed this first.
• 40:26
  SPEAKER_04: They had issued guidance back in like in the mid-2000s.
• 40:29
  SPEAKER_04: So like 2005-2006 time period.
• 40:32
  SPEAKER_04: Because as you said, Pat, these are these private public-private partnerships, PPPs have been around internationally for a lot longer.
• 40:41
  SPEAKER_04: I think it was just more elements of the government involving private enterprise and infrastructure uh in different parts of the world that the that from an IFRS perspective, they had addressed this some years ago, and they had reached the conclusion that it's not PPE.
• 40:58
  SPEAKER_04: I see not a lease.
• 41:00
  SPEAKER_04: And so actually uh the U.S.
• 41:03
  SPEAKER_04: GAAP guidance was building off of that.
• 41:06
  SPEAKER_04: Now, what's interesting, while you know those fundamental, the scope considerations were basically the same, and the sort of the fundamental point of it's not your asset, so it's not your PP and it's not your lease, are the same.
• 41:16
  SPEAKER_04: There are some differences um definitely between the two standards about you know really some of the revenue models that you were touching on, Pat, in that um in particular the the build and operate piece.
• 41:30
  SPEAKER_04: So we said under US GAAP, when you have to build and operate, you just have to take all the money you expect to get in cash, allocate it between the two, and recognize some amount of money as you build it and some amount of money as you operate it.
• 41:44
  SPEAKER_04: In the IFRS guidance for the most part, it is nuances, but for the most part, if you're doing that, you actually get to recognize revenue twice.
• 41:54
  SPEAKER_04: You actually recognize revenue as you build it for the intangible right to get those tolls or user fees in the future.
• 42:02
  SPEAKER_04: And then when you operate it and you get those tolls or user fees, you get that revenue as cash revenue and just amortize that intangible as expense.
• 42:09
  SPEAKER_04: So there is more of a gross-up of revenue and expense under the IFRS model that we have.
• 42:14
  SPEAKER_05: That's a lot of moving amounts.
• 42:16
  SPEAKER_04: Right.
• 42:16
  SPEAKER_04: That we don't do under U.S.
• 42:18
  SPEAKER_04: GAAP, because the thought was, well, we have a revenue model under U.S.
• 42:22
  SPEAKER_04: GAAP.
• 42:22
  SPEAKER_04: And actually, when it was first issued, I do believe it was before certainly the effective dates of 606.
• 42:28
  SPEAKER_04: So companies were applying the old 605 model, which definitely was a very different model for the contingent variable fees, as you said, Pat.
• 42:34
  SPEAKER_04: Uh, but then they acknowledge that, well, once 606 comes online, you're just gonna follow that.
• 42:38
  SPEAKER_04: So they basically said we just want to link it up with our existing revenue model as opposed to continuing or perpetuating or absorbing what the IFRS had already concluded.
• 42:48
  SPEAKER_04: So that that that is one key difference that definitely is out there.
• 42:52
  SPEAKER_04: And the other, kind of tied into that, is that they don't have that explicit notion that the government is always your customer.
• 42:59
  SPEAKER_04: That Pat, you said is the case under U.S.
• 43:01
  SPEAKER_04: GAAP, explicitly is the case under U.S.
• 43:04
  SPEAKER_04: GAAP.
• 43:05
  SPEAKER_04: And so those payments to the government aren't always considered a reduction of revenue.
• 43:09
  SPEAKER_04: It's little facts and circumstances beyond the scope probably of our discussion today, but but it is a potential difference between the two models.
• 43:16
  SPEAKER_04: Trevor Burrus, Jr.
• 43:17
  SPEAKER_01: Yeah, and I think one of the reasons why it's important to highlight the differences is as Jay mentioned, the these types of arrangements I'd say definitely have been around longer and probably on a larger scale outside the U.S.
• 43:30
  SPEAKER_01: And what we've seen is some of the companies that are engaged in these activities in the U.S.
• 43:36
  SPEAKER_01: are actually owned by parents that are headquartered outside the U.S.
• 43:39
  SPEAKER_01: So that creates even a greater challenge because now you have this arrangement that has some somewhat counterintuitive accounting implications.
• 43:49
  SPEAKER_01: And now you're coming from a frame of reference where maybe your parents looking at it through an IFRS lens, if you have to do U.S.
• 43:56
  SPEAKER_01: GAAP reporting, there's a different accounting for it.
• 44:00
  SPEAKER_01: So I think it's just important to be focused on that, that um this is a place where the two frameworks aren't really aligned.
• 44:07
  SPEAKER_05: All right.
• 44:07
  SPEAKER_05: Well, definitely a good reminder.
• 44:09
  SPEAKER_05: And I definitely did not expect that my question about where this was going was going to be the answer you gave that's from IFRS.
• 44:16
  SPEAKER_05: That was uh all tied together very well.
• 44:18
  SPEAKER_05: So I guess definitely interesting, very interesting topic, and I think one that many of our listeners this will be very new to.
• 44:27
  SPEAKER_05: So if you are talking to you know a PC engagement team or a client and this is the first time they've kind of thought about these types of arrangements, uh what types of advice would you give in in how to think about this?
• 44:42
  SPEAKER_05: And maybe Jay, I'll start with you and then Pat if you can chime in.
• 44:46
  SPEAKER_04: Well, I think we've certainly touched on it a fair bit here through the podcast, but but you know, as we've said, a lot of this stuff is just not very intuitive.
• 44:53
  SPEAKER_04: It's not doesn't just, you know, not that all accounting is intuitive, but a lot of times you at least kind of you know can understand when you follow the cash and follow the arrangements and follow the agreements, it it tends to uh follow logically.
• 45:05
  SPEAKER_04: And there's definitely a number of cases here where it's pretty nuanced and you know, in some cases leads you to places that you wouldn't have expected, like this notion of recording a bunch of revenue long before you get any cash, even though all the cash is coming in the future, or paying money up front to the government to get a right to something and having to treat that as a reduction of revenue over time.
• 45:26
  SPEAKER_04: Those are both of those areas are definitely as we've worked with companies in this, those are always real head-scratching moments, you know, as people who aren't as familiar with it kind of work their way through the models.
• 45:37
  SPEAKER_04: So there's a lot of surprises, there's a lot of large amounts of money in these contracts over long periods of time.
• 45:43
  SPEAKER_04: So I guess I'd uh leave listeners with the advice to you know look carefully at the guidance after you've kind of you know look carefully at all the rest of it.
• 45:51
  SPEAKER_05: All right.
• 45:52
  SPEAKER_05: Pat, how about from your perspective?
• 45:53
  SPEAKER_01: Aaron Powell Yeah, well it's interesting.
• 45:54
  SPEAKER_01: When you said when you're talking to engagement teams who are thinking about these types of arrangements, I think uh I sometimes refer to it as sort of the accidental concession error.
• 46:03
  SPEAKER_01: Like most of the time when we start having the conversations, people didn't realize they had a service concession because it just doesn't sometimes feel like that's what I'm doing.
• 46:14
  SPEAKER_01: It feels like I'm providing some sort of service in real time for in exchange for the fees people are paying.
• 46:19
  SPEAKER_01: It's not until you sort of step back and look at the fact that I'm really operating this infrastructure asset under the auspices of the government that you realize, oh, wait a minute, I have a service concession and now I have to rethink the model.
• 46:33
  SPEAKER_01: So I think it's um really having some awareness that these are out there and that you need to really think through, as Jay pointed out, like what are all the agreements and how do they intersect with the accounting guidance?
• 46:45
  SPEAKER_01: Um, because obviously being able to do that on the front end is a lot easier than realizing it later in the game.
• 46:51
  SPEAKER_05: Aaron Powell Well, and we talk about this a lot that you really do need to understand the contract, the economics of the contract.
• 46:56
  SPEAKER_05: And it sounds like, particularly in this case, making sure you understand all the economics of what's going on is going to be important for the correct accounting.
• 47:05
  SPEAKER_05: So clearly, this is not an accounting 101 topic.
• 47:09
  SPEAKER_05: Where would you recommend people go if they want to read more uh about this?
• 47:14
  SPEAKER_04: Well, we do have a whole chapter about service concession arrangements that's in our revenue recognition guide.
• 47:19
  SPEAKER_04: It's chapter 12 of that guide.
• 47:22
  SPEAKER_04: So that specifically deals with many of the things we've been talking about, but of course, it draws upon many other topics in the other chapters of the revenue recognition guide about figuring out variable fees and allocating transaction prices and all those other things.
• 47:34
  SPEAKER_04: So I'd certainly start with that.
• 47:36
  SPEAKER_04: And then to the extent you're dealing with the US GAAP and IFRIS differences that that we both talked about a little while ago, uh, we have a some discussion of that in chapter 15 of our similarities and differences guide between those two.
• 47:50
  SPEAKER_05: All right.
• 47:50
  SPEAKER_05: Well, definitely a great topic, and really appreciate you both joining me today.
• 47:54
  SPEAKER_05: Thank you.
• 47:54
  SPEAKER_03: Thanks, Heather.
• 47:55
  SPEAKER_03: Thanks for having us.
• 47:57
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• 47:59
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• 48:19
  SPEAKER_05: From Thought Leadership at PwC, I'm Heather Horn.
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