Budgeting and Accounting for PPP: The Accounting Approach

1
Budgeting and Accounting for PPP The Accounting
Approach

• Prof. Dr. Andreas Bergmann
• Member of the IPSAS Board/Project Committee
  Member PPP-SCA
• andreas.bergmann_at_zhaw.ch

2
Budgeting and accounting for PPP

• The Accounting Approach
• Current lack of guidance
• IPSAS Board The essence ofService Concession
  Arrangement (SCA) Project
• Definition
• Analysis of existing approaches
• Proposed guidance
• Way forward

3
Current lack of guidance

• Not complete lack but limitations
• Public sector accounting standards
• United Kingdom Application Note F to FRS5 (also
  basis for AUS/NZ)
• South Africa Proposed guideline (September 2005)
• Financial Statistics
• Eurostat ESA95 Manual on Government Deficit and
  Debt ? additional chapter on long term
  contracts (2004)

4
Current lack of guidance

• Not complete lack but limitations (2)
• Private sector guidance
• IFRIC 12 Interpretation of IFRS
• Recognition and measurement
• Specifically only for operators (usually the
  private sector role) and not for grantors (the
  typical public sector role)
• SIC 29 Interpretation of IFRS
• Disclosure

5
IPSAS Board SCA project

• Project so far
• March 2007 Approval of the project. Support by
  National Standard-Setters (Big 4 plus 1),
  especially GASB, granted.
• May 2007 Kick-off
• October 2007 Sub-committee issues consultation
  paper
• November 2007 IPSAS-Board approves consultation
  paper with modifications
• Spring 2008 Consultation paper to be issued for
  comments

6
IPSAS Board SCA project

• Consultation paper
• Definitions
• Analysis of existing approaches
• Proposed guidance
• Assets
• Inflows of Resources
• Guarantees and Commitments
• Relationship between Consolidation and SCA
• Disclosures

7
IPSAS Board SCA project

• Definitions
• Limitation to Service Concession Arrangements
  (SCA)
• SCA is defined as an arrangement in which the
• Grantor (normally public sector) conveys to the
  operator (normally private sector)
• the right to provide services
• directly or indirectly to the public
• through the use of infrastructure or a public
  facility.
• For SCA additional guidance is needed

8
IPSAS Board SCA project

• Definitions
• Guidance is sufficient for other forms of PPP

9
IPSAS Board SCA project

• Analysis of existing approaches
• UK Economic risk rewards approach
• Eurostat Economic risk approach
• IFRIC Control approach
• South Africa Asset reversion approach
• Lease approach
• Unbundling approach

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IPSAS Board SCA project

• Analysis of existing approaches
• Essentially two groups of approaches
• Risk Rewards
• Control
• Slight preference given to Control Approach
• But both will be part of consultation

11
IPSAS Board SCA project

• Proposed guidance
• Assets
• Inflows of Resources
• Liabilities, Guarantees and Commitments
• Relationship between Consolidation and SCA
• Disclosures

12
IPSAS Board SCA project

• Proposed guidance Assets
• Grantor to report property/infrastructure as an
  asset, if control criteria are met
• Control criteria
• Control of the services to be provided (i.e. to
  whom, at what price range)
• Control of significant residual interest at the
  end of arrangement if there is any
• Follow guidance of IPSAS 17 Property, Plant and
  Equipment

13
IPSAS Board SCA project

• Proposed guidance Inflow of resources
• Recognize revenues once contingent event has
  occurred
• For upfront payments Recognize revenue over time
  of life of SCA arrangement beginning when
  infrastructure is fully operational
• Method reflecting economic consumption (e.g.
  straight line) and/or
• Time value of the money

14
IPSAS Board SCA project

• Proposed guidance Liabilities, Guarantees and
  Commitments
• Certain outflow of resources ? two possible
  approaches
• Financial Leasing (IPSAS 13) ? recognition of
  liability
• Financial Instruments (IAS 39) ? recognition of
  liability
• Measurement may or may not turn out different
  depending on approach taken, depending on
  circumstances

15
IPSAS Board SCA project

• Proposed guidance Liabilities, Guarantees and
  Commitments
• Uncertain outflow of resources Apply existing
  guidance in IPSAS 19 Provisions, Contingent
  Liabilities and Assets
• Provision, i.e. liability in the balance sheet,
  if
• Present obligation due to past event
• Outflow of resources is probable
• Reliable estimate possible
• Contingent liability, i.e. presentation in notes
  only, if outflow is not probable, but also not
  remote (or if reliable estimate is not possible
  which in my opinion does not apply to SCA)

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IPSAS Board SCA project

• Proposed guidance Consolidation
• Use guidance in IPSAS 6, 7 and 8 to determine if
  operator of SCA is a
• Controlled entity (IPSAS 6) ? Consolidation
• Associate (IPSAS 7) ? Equity method
• Joint venture (IPSAS 8) ? Quota method

17
IPSAS Board SCA project

• Proposed guidance Disclosure
• Required disclosure for
• Each individual SCA contract if material
• Aggregate of SCA contracts
• Information to be disclosed
• Future cash flows
• Terms related to renewal, termination, ownership,
  guarantees

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IPSAS Board SCA project

• What about budgeting?
• IPSAS is no budgeting standard
• If budget is prepared on same basis
• Accounting principles to be applied on budget
• Otherwise reconciliation for presentation of
  budget comparison required (IPSAS 24)

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Way forward

• Consultation paper is only first step
• Comments sought from you!
• Comments received will be discussed by IPSASB
• Possibly a Exposure Draft of a Standard to be
  developed
• Comments sought from you!
• Standard to be issued