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@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

10. 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)

16. 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

18. 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)

19. 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