8 th Annual OECD Public Sector Accruals Symposium

1. 8th Annual OECD Public Sector Accruals Symposium Public – Private Partnerships/ Service Concession Arrangements IPSASB - Consultation PaperRichard J. Neville F.C.A March 2008

2. BackgroundPurpose of the Consultation Paper (CP) • This “Accounting and Financial Reporting for Service Concession Arrangements” CP has been under development, as a collaborative effort between IPSASB and NSS, since November 2006. • Its purpose is: • To determine which types of public-private partnerships need specific accounting and financial reporting guidance; and • To provide accounting and financial reporting guidance to the public sector. March 2008

3. What is a Public – Private Partnership? • No single definition for the term Public-Private Partnership (PPP) exists. • Characteristics of PPP arrangements: • Executed between public and private sector entities to deliver a public sector asset and/or service; • Encompass diverse types of infrastructure, public facilities and associated services; • Offer an alternative to traditional public sector procurement methods to accomplish a public duty or responsibility; • Allocate/share risks between public and private sector entities; and • Leverage benefits from partnering to achieve “improved value for money” for the public sector entity. March 2008

4. Types of PPPs to be considered March 2008

5. Scope of the Consultation Paper (CP) • This CP addresses public-private partnerships known as Service Concession Agreements (SCAs). • An SCA is an arrangement in which: • a public sector entity (grantor) conveys to a private sector entity (operator) the right to provide services to the public through the use of infrastructure or a public facility; and • the operator assumes the obligation to provide services, in accordance with the grantor’s performance requirements. • This CP focuses on providing guidance for the grantor; it does not address accounting and financial reporting related to PPPs that do not involve SCAs (as sufficient guidance exists to address this). March 2008

6. Scope of the Consultation Paper March 2008

7. Financial reporting of underlying property • Numerous approaches were reviewed: • Economic Risks and Rewards – UK ASB • Economic Risk – European Commission (EUROSTAT) • Control Approach –IASB’s - IFRIC • Asset Reversion Approach – South Africa ASB • Leasing – IPSAS 13 • Unbundling/Components (rights/obligations) Approach March 2008

8. Financial reporting of underlying property • The approach developed in this CP is based on the definition of an asset in IPSAS 1: • Resources controlled by an entity as a result of past events; and • From which future economic benefits or service potential is expected to flow to the entity. March 2008

9. Financial reporting of underlying propertyControl • Criteria in IFRIC 4, Determining whether an Arrangement contains a Lease, used as the basis for determining control over the underlying property for this CP. • An important aspect of control includes control over any significant residual interest at the end of the arrangement. March 2008

10. Financial reporting of underlying propertyBenefit • The flow of benefits are often based on potential for reward and assumption of risk. • Grantor’s rewards often relate more to service potential than economic benefit. March 2008

11. Financial reporting of underlying propertyControl and Benefit • The grantor remains accountable for the services provided through 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 property stem from the grantor’s accountability for the services provided. • Therefore, if the grantor controls the property, benefits would flow to the grantor. March 2008

12. Financial reporting of underlying property • Proposal • Grantor should report the property underlying an SCA as an asset if it controls the property for financial reporting purposes. • Criteria for grantor control – the grantor: • controls - or regulates - services the operator provides, to whom they must be provided, and rates that can be charged for them; and • controls - through ownership, beneficial entitlement or otherwise -residual interest in the property at the end of the arrangement. March 2008

13. Financial reporting of underlying property • Proposal (cont’d) • Regulation: • restricted to arrangements agreed upon by the grantor and the operator; and • excludes generally legislated regulation that does not establish control for the purposes of financial reporting as concluded in IPSASs 6 & 23. March 2008

14. 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 14 March 2008

15. Guarantees and Commitments • Guarantees or commitments may be made by the grantor to the operator as part of an SCA including: • Debt guarantees (contractual or constructive); • Minimum revenue guarantees (contractual or constructive); or • “Step-in” commitments. 15 March 2008

16. Guarantees and Commitments • Proposal • Contractual guarantees related to the operator’s debt (meeting the definition of a financial guarantee contract in IAS 39, Financial Instruments: Recognition and Measurement) should be recognized as a financial liability under the provisions of that Statement. • Guidance in IPSAS 19, Provisions, Contingent Liabilities and Contingent Assets should be applied to determine the accounting and financial reporting for other guarantees and commitments made by grantors as part of SCAs. March 2008

17. Inflows of resources from SCAs • Two main opportunities exist for a grantor to receive resources from SCAs: • Revenue-sharing provisions; and • Contractually determined payments (often upfront payments). • These usually result from the receipt of payment by the operator from third-party users of the property. 17 March 2008

18. Inflows of resources from SCAsrevenue sharing • Proposal • Grantors should recognize revenue and receivables gained through revenue-sharing provisions as they are earned in accordance with the relevant agreement once contingent events, such as the achievement of a revenue threshold, have occurred. March 2008

19. Inflows of resources from SCAscontractually determined (upfront) inflows • Proposal • Recognize as revenue by the grantor over the life of the SCA beginning at the commencement of the concession term (when the property is fully operational) and the operator can use the property to generate third-party usage fees. March 2008

20. Inflows of resources from SCAscontractually determined (upfront) inflows (cont’d) • Proposal • Recognize the contractually determined inflows as revenue using the straight-line method or a method that is more reflective of the operator’s economic consumption of their access to the underlying property and/or the time value of money given the facts and circumstances of the SCA. • Any consideration received from the operator in advance of performance should be reported by the grantor as a liability until it is earned. March 2008

21. Consolidation • Proposal • The relationship between the grantor and the operator should be evaluated using the guidance in IPSAS 6, Consolidated and Separate Financial Statements to determine whether the grantor controls the operator for purposes of inclusion in the grantor’s reporting entity. • The guidance in IPSAS 7, Investments in Associates and IPSAS 8, Interest in Joint Ventures should also be considered if the grantor has an ownership or equity interest in the operator. March 2008

22. Financial statement note disclosures • Proposal • Meaningful qualitative and quantitative disclosures related to SCAs to be included in the financial statements of grantors; and • Aggregation of information should be considered, as appropriate. March 2008

23. Keep up to date on IPSASB projects • IPSASB Project Pages – all IPSASB projects http://www.ifac.org/PublicSector/ • IFAC eNews – Free electronic newsletter • Enroll at www.ifac.org March 2008

24. International Federation of Accountantswww.ifac.org