ifac ipsasb 8 th annual oecd public sector accruals symposium public – private partnerships/...

IFAC IPSASBIFAC IPSASBIFAC IPSASBIFAC IPSASB

88thth Annual OECD Public Sector Accruals Annual OECD Public Sector Accruals Symposium Symposium

Public – Private Partnerships/ Service Concession Public – Private Partnerships/ Service Concession ArrangementsArrangements

IPSASB - Consultation PaperIPSASB - Consultation Paper

Richard J. Neville F.C.ARichard J. Neville F.C.A

March 2008


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BackgroundBackgroundPurpose of the Consultation Paper (CP)Purpose of the Consultation Paper (CP)

• This “This “Accounting and Financial Reporting for Service Accounting and Financial Reporting for Service Concession ArrangementsConcession Arrangements” CP has been under ” CP has been under development, as a collaborative effort between IPSASB development, as a collaborative effort between IPSASB and NSS, since November 2006. and NSS, since November 2006.

• Its purpose is:Its purpose is:– To determine which types of public-private To determine which types of public-private

partnerships need specific accounting and financial partnerships need specific accounting and financial reporting guidance; and reporting guidance; and

– To provide accounting and financial reporting guidance To provide accounting and financial reporting guidance to the public sector.to the public sector.

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What is a Public – Private Partnership?What is a Public – Private Partnership?

• No single definition for the term Public-Private Partnership (PPP) exists.No single definition for the term Public-Private Partnership (PPP) exists.

• Characteristics of PPP arrangements:Characteristics of PPP arrangements:

– Executed between public and private sector entities to deliver a public Executed between public and private sector entities to deliver a public sector asset and/or service;sector asset and/or service;

– Encompass diverse types of infrastructure, public facilities and Encompass diverse types of infrastructure, public facilities and associated services;associated services;

– Offer an alternative to traditional public sector procurement methods to Offer an alternative to traditional public sector procurement methods to accomplish a public duty or responsibility;accomplish a public duty or responsibility;

– Allocate/share risks between public and private sector entities; andAllocate/share risks between public and private sector entities; and

– Leverage benefits from partnering to achieve “improved value for Leverage benefits from partnering to achieve “improved value for money” for the public sector entity.money” for the public sector entity.

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Types of PPPs to be consideredTypes of PPPs to be considered

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1. Government

2. Service Contract

10. Privatization

3. Management Contract

4. Design-Build

5. Operations Concession

6. Design-Build-Operate-Maintain

7. Design-Build-Finance-Operate

8. Build-Own-Operate-Transfer

9. Build-Own-Operate

Degree of Private Sector Involvement

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Scope of the Consultation Paper (CP)Scope of the Consultation Paper (CP)

• This CP addresses public-private partnerships known as Service This CP addresses public-private partnerships known as Service Concession Agreements (SCAs).Concession Agreements (SCAs).

• An SCA is an arrangement in which:An SCA is an arrangement in which:

– a public sector entity (grantor) conveys to a private sector entity a public sector entity (grantor) conveys to a private sector entity (operator) the right to provide services to the public through the (operator) the right to provide services to the public through the use of infrastructure or a public facility; anduse of infrastructure or a public facility; and

– the operator assumes the obligation to provide services, in the operator assumes the obligation to provide services, in accordance with the grantor’s performance requirements. accordance with the grantor’s performance requirements.

• This CP focuses on providing guidance for the grantor; it does not This CP focuses on providing guidance for the grantor; it does not address accounting and financial reporting related to PPPs that do address accounting and financial reporting related to PPPs that do not involve SCAs (as sufficient guidance exists to address this). not involve SCAs (as sufficient guidance exists to address this).

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Scope of the Consultation PaperScope of the Consultation Paper

March 2008

1. Government

2. Service Contract

10. Privatization

3. Management Contract

4. Design-Build

5. Operations Concession

6. Design-Build-Operate-Maintain

7. Design-Build-Finance-Operate

8. Build-Own-Operate-Transfer

9. Build-Own-Operate

Degree of Private Sector Involvement

De

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Service Concession

Arrangements


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Financial reporting of underlying propertyFinancial reporting of underlying property

Numerous approaches were reviewed:Numerous approaches were reviewed:

• Economic Risks and Rewards – UK ASBEconomic Risks and Rewards – UK ASB

• Economic Risk – European Commission (EUROSTAT)Economic Risk – European Commission (EUROSTAT)

• Control Approach –IASB’s - IFRICControl Approach –IASB’s - IFRIC

• Asset Reversion Approach – South Africa ASBAsset Reversion Approach – South Africa ASB

• Leasing – IPSAS 13Leasing – IPSAS 13

• Unbundling/Components (rights/obligations) ApproachUnbundling/Components (rights/obligations) Approach

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The approach developed in this CP is based on the The approach developed in this CP is based on the definition of an asset in IPSAS 1:definition of an asset in IPSAS 1:

• Resources controlled by an entity as a result of past Resources controlled by an entity as a result of past events; andevents; and

• From which future economic benefits or service From which future economic benefits or service potential is expected to flow to the entity.potential is expected to flow to the entity.

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Financial reporting of underlying propertyFinancial reporting of underlying propertyControlControl

• Criteria in IFRIC 4, Criteria in IFRIC 4, Determining whether an Determining whether an Arrangement contains a Lease, Arrangement contains a Lease, used as the basis for used as the basis for determining control over the underlying property for determining control over the underlying property for this CP.this CP.

• An important aspect of control includes control over An important aspect of control includes control over any significant residual interest at the end of the any significant residual interest at the end of the arrangement. arrangement.

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Financial reporting of underlying propertyFinancial reporting of underlying propertyBenefit Benefit

• The flow of benefits are often based on potential for The flow of benefits are often based on potential for reward and assumption of risk.reward and assumption of risk.

• Grantor’s rewards often relate more to service Grantor’s rewards often relate more to service potential than economic benefit.potential than economic benefit.

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Financial reporting of underlying propertyFinancial reporting of underlying propertyControl and BenefitControl and Benefit

• The grantor remains accountable for the services provided The grantor remains accountable for the services provided through the use of the property.through the use of the property.

• The service potential to flow from the use of the property The service potential to flow from the use of the property to the grantor and the political risk associated with the to the grantor and the political risk associated with the property stem from the grantor’s accountability for the property stem from the grantor’s accountability for the services provided.services provided.

• Therefore, if the grantor controls the property, benefits Therefore, if the grantor controls the property, benefits would flow to the grantor.would flow to the grantor.

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Proposal Proposal • Grantor should report the property underlying an SCA as an Grantor should report the property underlying an SCA as an

asset if it controls the property for financial reporting asset if it controls the property for financial reporting purposes.purposes.

• Criteria for grantor control – the grantor:Criteria for grantor control – the grantor:– controls - or regulates - services the operator provides, to controls - or regulates - services the operator provides, to

whom they must be provided, and rates that can be whom they must be provided, and rates that can be charged for them; andcharged for them; and

– controls - through ownership, beneficial entitlement or controls - through ownership, beneficial entitlement or otherwise -residual interest in the property at the end of otherwise -residual interest in the property at the end of the arrangement.the arrangement.

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Proposal (cont’d)Proposal (cont’d)

• Regulation:Regulation:

– restricted to arrangements agreed upon by the grantor restricted to arrangements agreed upon by the grantor and the operator; andand the operator; and

– excludes generally legislated regulation that does not excludes generally legislated regulation that does not establish control for the purposes of financial reporting establish control for the purposes of financial reporting as concluded in IPSASs 6 & 23.as concluded in IPSASs 6 & 23.

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Ancillary accounting issues

• Grantor financial reporting when the proposed control criteria are met:

- Proposals

• Grantor financial reporting when the proposed control criteria are not met:

- Proposals

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Guarantees and CommitmentsGuarantees and Commitments

• Guarantees or commitments may be made by the Guarantees or commitments may be made by the grantor to the operator as part of an SCA including:grantor to the operator as part of an SCA including:

– Debt guarantees (contractual or constructive);Debt guarantees (contractual or constructive);

– Minimum revenue guarantees (contractual or Minimum revenue guarantees (contractual or constructive); orconstructive); or

– ““Step-in” commitments.Step-in” commitments.

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Guarantees and CommitmentsGuarantees and Commitments

ProposalProposal• Contractual guarantees related to the operator’s debt (meeting the Contractual guarantees related to the operator’s debt (meeting the

definition of a financial guarantee contract in IAS 39, definition of a financial guarantee contract in IAS 39, Financial Financial Instruments: Recognition and Measurement) Instruments: Recognition and Measurement) should be recognized should be recognized as a financial liability under the provisions of that Statementas a financial liability under the provisions of that Statement.

• Guidance in IPSAS 19, Guidance in IPSAS 19, Provisions, Contingent Liabilities and Provisions, Contingent Liabilities and Contingent AssetsContingent Assets should be applied to determine the accounting and should be applied to determine the accounting and financial reporting for other guarantees and commitments made by financial reporting for other guarantees and commitments made by grantors as part of SCAs. grantors as part of SCAs.

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Inflows of resources from SCAsInflows of resources from SCAs

• Two main opportunities exist for a grantor to receive Two main opportunities exist for a grantor to receive resources from SCAs: resources from SCAs:

– Revenue-sharing provisions; andRevenue-sharing provisions; and

– Contractually determined payments (often Contractually determined payments (often upfront payments).upfront payments).

• These usually result from the receipt of payment by These usually result from the receipt of payment by the operator from third-party users of the property.the operator from third-party users of the property.

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Inflows of resources from SCAsInflows of resources from SCAsrevenue sharingrevenue sharing

ProposalProposal

• Grantors should recognize revenue and receivables Grantors should recognize revenue and receivables gained through revenue-sharing provisions as they gained through revenue-sharing provisions as they are earned in accordance with the relevant are earned in accordance with the relevant agreement once contingent events, such as the agreement once contingent events, such as the achievement of a revenue threshold, have achievement of a revenue threshold, have occurred.occurred.

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Inflows of resources from SCAsInflows of resources from SCAs contractually determined (upfront) inflowscontractually determined (upfront) inflows

ProposalProposal• Recognize as revenue by the grantor over the life Recognize as revenue by the grantor over the life

of the SCA beginning at the of the SCA beginning at the commencementcommencement of of the concession term (when the property is fully the concession term (when the property is fully operational) and the operator can use the operational) and the operator can use the property to generate third-party usage fees. property to generate third-party usage fees.

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Inflows of resources from SCAsInflows of resources from SCAs contractually determined (upfront) inflows contractually determined (upfront) inflows (cont’d)(cont’d)

ProposalProposal• Recognize the contractually determined inflows as revenue Recognize the contractually determined inflows as revenue

using the straight-line method or a method that is more using the straight-line method or a method that is more reflective of the operator’s economic consumption of their reflective of the operator’s economic consumption of their access to the underlying property and/or the time value of access to the underlying property and/or the time value of money given the facts and circumstances of the SCA. money given the facts and circumstances of the SCA.

• Any consideration received from the operator in advance of Any consideration received from the operator in advance of performance should be reported by the grantor as a liability performance should be reported by the grantor as a liability until it is earned.until it is earned.

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ConsolidationConsolidation

ProposalProposal

• The relationship between the grantor and the operator should The relationship between the grantor and the operator should be evaluated using the guidance in IPSAS 6, be evaluated using the guidance in IPSAS 6, Consolidated and Consolidated and Separate Financial StatementsSeparate Financial Statements to determine whether the to determine whether the grantor controls the operator for purposes of inclusion in the grantor controls the operator for purposes of inclusion in the grantor’s reporting entity.grantor’s reporting entity.

• The guidance in IPSAS 7, The guidance in IPSAS 7, Investments in AssociatesInvestments in Associates and and IPSAS 8, IPSAS 8, Interest in Joint VenturesInterest in Joint Ventures should also be considered if should also be considered if the grantor has an ownership or equity interest in the operator. the grantor has an ownership or equity interest in the operator.

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Financial statement note disclosuresFinancial statement note disclosures

ProposalProposal

• Meaningful qualitative and quantitative disclosures Meaningful qualitative and quantitative disclosures related to SCAs to be included in the financial related to SCAs to be included in the financial statements of grantors; andstatements of grantors; and

• Aggregation of information should be considered, as Aggregation of information should be considered, as appropriate.appropriate.

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March 2008


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ifac ipsasb 8 th annual oecd public sector accruals symposium public – private partnerships/...

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