accounting for service concession agreements (ppps) · 2016-07-27 · accounting for service...
TRANSCRIPT
Accounting for Service Concession agreements (PPPs) Seminar on Accounting reforms in the Public
Sector: IPSAS/EPSAS
Brussels, May 13, 2016
Thomas Müller-Marqués Berger, EY Germany
Page 2
Agenda
► Overview of service concession arrangements (SCAs) or public-
private partnerships (PPPs)
► IPSAS 32: Accounting for SCAs/PPPs
Page 4
What do we mean by “Infrastructure”?
Two key types of Infrastructure investment
(c. US$60 trillion over next 10
years)
(c.US$300bn refinancing in 2014 alone)
New build
infrastructure
(“Greenfield”)
Built infrastructure
(“Brownfield”)
Real Estate /
Construction
Social
infrastructure Transport Oil & Gas
Power &
Utilities
Mining &
Metals Defence Telecoms
Page 5
What are the key trends driving global infrastructure investment and activity?
Changing
technology,
patterns and
smart
infrastructure
Rapid growth in
emerging
markets
Decommissioning
of Infrastructure
Resilient
cities
Globalization
of supply
chains
Clean energy
and renewables
Digital agenda
Major
events
Capital Agenda
Page 6
Growing market: GDP growth in emerging markets and growth economies are driving future investment
Projected Global
Infrastructure
spending (2010-2030):
US$40 - US$50trillion
$60bn p.a. Addressable Market with a Whole-of-firm approach
(c.1% of spend)
c.US$6 - US$8tr
Americas
c.US$24tr –
US$29tr
Asia Pacific
c.US$10 –
US$13tr
Europe, Middle
East, Africa
…Over $6 trillion in global capital
investment per annum between 2015
and 2025…
Source: Oxford Economics
Page 7
What’s driving governments to use PPPs?
Key Trends
► Growth. Population growth and urbanisation continue to spur demand
for infrastructure and services
► Funding Gap. Inability of governments to finance current and future
infrastructure assets
► Budgetary pressure. Achievement of community expectations whilst
avoiding debt or adverse budgetary impacts
► Maintenance. Governments must upgrade, replace, and build out
essential infrastructure assets for the community
► Investment. Diversifying financial portfolios with investors seeking
asset classes for long-term investments yielding steady, positive
returns
► Innovation. Innovation and technology have allowed private sector to
bring expertise and new practices to the public sector
Page 9
Possible funding and financing options
► From operations/general reserves
► From special rates/charges
► From developer contributions, sale of assets, asset
transfers
► Federal/state government grants
► Borrowings from treasuries, private institutions
► Public to private partnership arrangements - long term
private sector debt financing
Page 10
Financial reporting of service concession arrangements – international perspective
Public Sector (“Grantor”) Private sector (“Operator”)
IFRIC 12
Statistics Accounting
SNA 2008/GFSM 2011/PSDSG 2013
IPSAS 32
Control- Approach
Risk and Rewards-Approach
Control- Approach
IPSAS 32 mirrors IFRIC 12
Page 11
Accounting approaches for PPPs Risks and rewards vs control
Risk and Rewards Approach
Control Approach
Accounting ownership of an asset lies with the party that:
► carries the risks, benefits and burden in connection with the asset.
Accounting ownership of an asset lies with the party that:
► controls what services the private sector partner must provide, to whom and what price and
► has control over the residual value of the asset
Accounting Ownership Relevant Standards
► IFRIC 4/IAS 17
► IPSAS 13
► GFSM 2010
► ESA 95/2010
►IFRIC 12
►IPSAS 32
Typically construction risk
and asset availability risk are
transferred to the private
sector entity; while service
demand risk is not
=> In that case PPP scheme
is booked as service
arrangement, i.e. no service
concession asset, no liability
E.g. IPSAS 32 requires:
► Recognition of service concession asset based upon ‘power to control and regulate’ the use of the asset
► Recognition of obligations as either a financial liability or as deferred income
Accounting in Practice
Page 12
Key Risks Phases in PPP that can determine Accounting Treatment
Where most of the project risk has been transferred to the non-government
partner, the assets involved in the PPP are deemed to be “off” the public sector
balance sheet.
Type of Risks Considered:
Construction risk
Potential risks related to:
delays in delivery, execution
of the contract without
meeting specified standards,
significant additional cost,
technical deficiency etc.
Who is the owner of
construction risks of the
project?
Availability risk
Projects where payment is
based on the delivery of
assets and services.
Who is the party
responsible for delivery of
assets and services?
Demand Risk
Projects where an element of
user demand funds the
underlying assets or services.
Is the party taking demand
risk on the project to fund
assets or services?
► BUT the key premise of PPP is to transfer risk to the party best able to manage
that risk. Accounting treatment MUST NOT drive Risk Allocation
Page 13
“On” and “Off” Balance Sheet Treatment
Off-Balance sheet
► Implies accounting only for the annual
payments it makes to the PPP
operator, and not for the assets and
liabilities of the project, including its
debt
► It is attractive as long-term obligations
under PPPs do not appear under
government’s financial
statements/budget and help to keep
government net debt within the
reference value
► However credit rating agencies are
now challenging this view in
government ratings
On-Balance sheet
► On-balance sheet treatment implies
the recording of total liabilities when
the project commences or at
commercial acceptance
► Typically reported through “liability”
(deferred revenue) with the investment
in PPP assets recorded from the
outset and amortized over the project
life
► Implies that it consequently increases
gross liabilities recognised on balance
sheet. Net-effect is balanced by
recognition of an asset
Page 15
Accounting requirements of IPSAS 32 Overview Under IPSAS 32, SCAs would result in infrastructure assets being regarded as
controlled by government
Scope
► IPSAS 32 applies to all public sector entities other than Government Business
Enterprises
► Arrangements within the scope of IPSAS 32 must involve the operator
providing public services related to the service concession asset on behalf of
the grantor
► Examples of arrangement that are outside the scope of IPSAS 32 are those
► that do not involve the delivery of public services;
► where arrangements that involve service and management components where the
asset is not controlled by the grantor;
► include outsourcing, service contracts or privatization:
Page 16
Accounting requirements of IPSAS 32 Overview Definitions
► Service Concession Arrangement is a binding arrangement between a
grantor and an operator in which
► the operator uses the service concession asset to provide a public service on
behalf of the grantor for a specified period of time; and
► the operator is compensated for its services over the period of the service
concession arrangement.
► A grantor is the entity that grants the right to use the service
concession asset to the operator
► An operator is the entity that uses the asset to provide public
services subject to the grantor´s control of the asset
► A service concession asset is an asset used to provide public
services in a service concession arrangement that
► is provided by the operator (construct/develop/acquire or existing asset)
► is provided by the grantor (existing asset or update)
Page 17
Accounting requirements of IPSAS 32 Overview - What is a service concession asset?
►An asset used to provide public services in a service
concession arrangement that is
Provided by the operator which
• Constructs, develops or acquires from a third party Or
• Is an existing asset of the operator
Provided by the grantor which
• Is an existing asset of the grantor Or
• Is an upgrade to an existing asset of the grantor
Page 18
Accounting requirements of IPSAS 32 Accounting for service concession asset Recognition
► A government recognizes an asset in its financial statements
when (IPSAS 32.9):
► The grantor controls or regulates the services to be provided by the
operator
and
► The grantor controls any significant residual interest in the asset at the
end of the arrangement
► However: the recognition criteria in IPSAS 17/ IPSAS 31 have
to be fulfilled
► it is probable that future economic benefits associated with the item will
flow to the entity
► the cost or fail value of the item can be measured reliably
-> e.g. during construction period: progress reports by the operator (AG23).
Page 19
Accounting requirements of IPSAS 32 Accounting for service concession asset
Measurement
► Initial measurement of the asset is at fair value does not
constitute revaluation under IPSAS 17 Property, Plant and
Equipment / IPSAS 31 Intangible Assets (IPSAS 32.11)
► After initial recognition, the asset shall be accounted for as a
separate class of assets in accordance with IPSAS 17 or
IPSAS 31, as appropriate
► historical cost method
► revaluation method
► In cases where an existing asset is subject to a SCA, the
grantor shall reclassify the asset
► the requirement of IPSAS 32.11 does not apply to reclassifications,
i.e. no re-measurement at fair value in this case (AG24)!
Page 20
Recognition – key principle:
► Where the grantor recognizes an asset in accordance with
IPSAS 32.9, he should also recognize a liability (IPSAS 32.14).
► but: do not recognize liability when an existing asset is reclassified!
► Nature of the liability – depending on the nature of the
consideration exchanged between grantor and operator
► payments to the operator financial liability model
► compensating the operator by other means:
► granting the right to earn revenue from users; or
► granting access to another revenue-generating asset
grant of a right to the operator model
Accounting requirements of IPSAS 32 Accounting for liabilities
Page 21
Accounting requirements of IPSAS 32 Accounting for liabilities
► If government compensates the operator for construction
by making a predetermined series of payments during the
life of the PPP (a government-funded PPP):
► Government recognizes the assets and a financial
liability equal to the full value of the assets
► If government compensates operator for construction by
granting the operator the right to earn revenues from
users (a user-funded PPP):
► Government recognizes the assets and deferred
revenue equal the full value of the asset
Page 22
Accounting requirements of IPSAS 32 Accounting for liabilities
Measurement:
► The liability recognized shall be initially measured at the same
amount as the service concession asset (IPSAS 32.15)
It is likely that the government’s gross debt increases by the amount of the
liability, while net worth remains unchanged
► Subsequent measurement is depending on the nature of
the liability
► Financial liability model: measurement according to IPSAS 29 (IPSAS
32.20)
► Grant of a right model: the grantor shall account for the liability as the
unearned portion of the revenue arising from the exchange of assets with
the operator (IPSAS 32.24).
► For mixed arrangements: it is necessary to account separately for each
part of the total liability recognized (IPSAS 32.27).
Page 23
Accounting requirements of IPSAS 32 Accounting for liabilities – financial liability model
Analysing the payment stream
► The grantor shall allocate the payments to the operator and
account for them according to their substance (IPSAS 32.21)
Amortization
= reduction of the liability
(IPSAS 32.21)
Finance Charge
= expense
(IPSAS 32.22)
Service Charge
= expense
(IPSAS 32.22)
Total payment stream
Page 24
Accounting requirements of IPSAS 32 Accounting for liabilities – financial liability model
How to allocate the payment streams (IPSAS 32.23):
► Asset and service components are separately identifiable:
► service components shall be allocated by reference to the relative fair
values of the asset and the services
► Asset and service components are not separately identifiable:
► the service component of payments to the operator is determined using
estimation techniques (similar transactions observable?)
► i.e. the fair value of the asset (IPSAS 32.11) is determined by using
estimation techniques (AG31) assessment of comparable assets
► Service component is recognized evenly over the term of the
arrangement – best correspondents to service provision
► only in cases when specific expenses are required to be separately
compensated, and timing is known, these are recognized as incurred
(AG46)
Page 25
► SCA is an exchange transaction – IPSAS 9 applies
Background information from the Basis for Conclusions:
► revenue recognition according to IPSAS 9: exchange is regarded as transaction that
generates revenue if and as it results in an increase in the net assets of the grantor
(BC35).
► in general: economic substance of an SCA provides an increase in net assets, so
revenue accrues and should be recognized (BC29).
► Key question: to which period(s) has the revenue to be allocated?
timing is over period of arrangement. Until the criteria for revenue recognition have
been satisfied, credit is recognized as liability (BC39).
Accounting requirements of IPSAS 32 Accounting for liabilities – Grant of a Right Model
Grantor
► controls asset
► allows operator to generate revenue
Operator
► builts asset
► operates and charges users
Rights
Asset
exchanged assets
are dissimilar
Page 26
Accounting requirements of IPSAS 32 Accounting for liabilities – grant of a right model
► General principle (IPSAS 32.24): the grantor shall account for
the liability recognized in accordance with para.14 as the
unearned portion of the revenue arising from the exchange of
assets
► As the right granted to the operator is effective for the period of the
arrangement, the grantor does not recognize revenue from the
exchange immediately (IPSAS 32.26; under ED 43: “performance
obligation”)
the grantor earns the benefit associated with the assets received in
exchange for the right granted to the operator over the period of the
arrangement (AG47)
► The revenue is recognized according to the economic substance
of the service concession arrangement, and the liability is reduced
as revenue is recognized
Page 27
EY Contacts
Thomas, Global Leader of EY’s IPSAS Sector
Group, was the German Board Member of the
IPSASB (2009-2014), since 2016 he is the
Chairman of the IPSASB CAG. Besides that,
Thomas is Chairman of the Public Sector
Committee (PSC) of the Federation of Euro-
pean Accountants (Fédération des Experts
Comptables Européens - FEE).
Thomas has many years of worldwide exper-
ience in auditing and advising governments as
well as public and municipal companies, and
European organisa-tions including Eurostat. In
2009-2010 he was also appointed as external
IPSAS expert for the temporary “DAS Think
Tank” of the European Court of Auditors. Since
2013, Thomas is a member of the Accounting
Advisory Group of the European Commission.
As FEE PSG chair, he contributed to both Euro-
stat Task Forces “EPSAS Governance” and
“EPSAS Standards”. Currently, he represents
FEE at the EPSAS Working Group and Cells.
Thomas Müller-Marqués Berger German Certified Public Accountant
Partner
Global Leader International Public Sector
Accounting
Phone: +49 711 9881 15844
Mobile: +49 160 939 15844
Fax: +49 181 3943 15844
thomas.mueller-marques.berger
@de.ey.com
Ernst & Young GmbH
Wirtschaftsprüfungsgesellschaft
Mittlerer Pfad 15
70499 Stuttgart
ey.com