1 / 47

PFI AND IFRS IN LOCAL GOVERNMENT

PFI AND IFRS IN LOCAL GOVERNMENT. The CIPFA Perspective – SORP 2009 Appendix E. Roman Haluszczak, Manager, CIPFA Finance Networks E mail: Roman.Haluszczak@cipfa.org.uk. Progress on SORP 2009 Appendix E. SORP 2009 ED – considered as part of SORP 2009 ITC – Autumn 2008

enan
Download Presentation

PFI AND IFRS IN LOCAL GOVERNMENT

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. PFI AND IFRS IN LOCAL GOVERNMENT The CIPFA Perspective – SORP 2009 Appendix E Roman Haluszczak, Manager, CIPFA Finance Networks E mail: Roman.Haluszczak@cipfa.org.uk

  2. Progress on SORP 2009 Appendix E • SORP 2009 ED – considered as part of SORP 2009 ITC – Autumn 2008 • In light of the consultation – amended slightly to take account of central government IFREM dimension • Approved by CIPFA LASAAC in March 2009 and CAPE in May 2009 • Final Version (Part of this event package) approved by the ASB on 21 May 2009 without amendment • Appendix E SORP 2009 – Forms the basis of accounting for PFI schemes in Local Government from 2009/10 onwards • Detailed guidance notes will be due out later in 2009

  3. PFI – The Background • “An arrangement where the public sector contracts to purchase quality services on a long-term basis so as to take advantage of private sector management skills incentivised by having private finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining, enhancing or constructing the necessary infrastructure.” - HM Treasury PFI meeting the Investment Challenge July 2003 • Government estimated the level of PFI unitary charge payments in its Financial Statement and Budget Report • Unitary payment = Single annual payments made by the procuring authority to the private sector which cover all the costs, both capital and service, of PFI projects which are to be made under all signed PFI contracts

  4. PFI – Pre-IFRS Accounting Arrangements (1) • The specific accounting treatment of the government’s PFI investments followed UK GAAP developed by the independent ASB. • The accounting standard most applicable to PFI was the ASB’s ‘Financial Reporting Standard 5 (FRS5) – Reporting the Substance of Transactions: Application Note F – Private Finance Initiative and other similar contracts.’ • This reporting standard was supplemented by a Treasury Taskforce Technical Note (TTN1 Revised) that set out how Application Note F was to be followed in the public sector. • The crucial PFI accounting issue, was whether, on balance, to regard any resulting PFI property as an asset of the Public Sector or as a stream of unitary charge payments of expenditure in the year in which they occur.

  5. PFI – Pre-IFRS Accounting Arrangements (2) • FRS 5 states that the party that will reap the benefits and bear the balance of risks of ownership of a property ‘has an asset of the property’ and must report this on its balance sheet. • The PFI operating partner generally did not enjoy the risks and rewards of the property ( Public sector carried the demand risk, for example) - so the building was not shown on its balance sheet. • Main asset of the PFI operating partner was the finance debtor (The long term contractual obligation of the public sector to pay for the property) • For the public sector, payment of a unitary charge for both the property and its maintenance was often sufficient for it to be classed as a revenue item, so neither the property nor the long-term payment obligation appeared on the public sector’s balance sheet

  6. PFI – Unitary Charges and Capital Values • PFI unitary charges include payments to cover the cost of capital expenditure (money to repay the principal and interest charges, including hedging costs, incurred in building a large capital asset), the services needed to run and repair that asset, like maintenance work and costs of supporting soft services like catering, cleaning and hospital portering • April 2009 Signed PFI Projects – Total Capital value PFI projects circa £63.8bn (circa £25.0bn of these – (40%) on balance sheet) • April 2009 – DCLG PFI schemes £1.979bn all off balance sheet – DCSF PFI schemes £5.284bn – all off balance sheet • March 2008 – WAG PFI schemes £538m (Virtually all off balance sheet) – Scottish Government PFI schemes £5.926bn (nearly all off balance sheet) – Home Office PFI schemes £799m all off balance sheet • Signed PFI Projects as at April 2009 http://www.hm-treasury.gov.uk/d/pfi_signed_projects_list.xls

  7. PFI – Latest ONS Position on PFI • Although PFI projects will most probably be included within local authority balance sheets – their cost will not count against public sector net debt. • ONS measurement of central government debt will adhere to EU accounting standards focusing on risk and reward of PFI projects. • Therefore there will still be a “fiscal advantage” for government PFI schemes. • There are 110 PFI projects in the pipeline – worth circa £13bn (£3.5bn (27%) waste and environmental projects, £3.1bn (23%) transport schemes and £2.4bn (18%) schools projects). • These will now move forward and will no longer be stalled.

  8. Upcoming Local Authority IFRS -- Key Dates and Considerations

  9. SORP 2009 – Appendix E Accounting for PFI and Similar Transactions

  10. SORP 2009 – Appendix E – PFI - Terminology • Following terminology is used throughout the Appendix • Property is the term used to refer to the assets provided by the operator to deliver the PFI service (which may or may not be recognised on an authority’s balance sheet); examples include roads, street lighting, schools, telecommunications networks and fixed assets used for administrative purposes in delivering services to the public. • Construction payments element refers to the finance lease elements (liability and interest) of the payment made; only applies where the service element and the construction element (liability and interest) can be separated rather than estimated. • Asset is reserved for assets to be recognised on the local authority balance sheet

  11. SORP 2009 – Appendix E – PFI – Accounting IFRIC 12 Control Tests • The accounting treatment set out in this Appendix shall apply where: (a) The local authority controls or regulates what services the operator must provide with the property, to whom it must provide them, and at what price; and where (b) The local authority controls - through ownership, beneficial entitlement or otherwise - the significant residual interest in the property at the end of the term of the arrangement. • Where the property is used for its entire life, and there is little or no residual interest, the arrangement would fall within the scope of IFRIC 12 where the authority controls or regulates the services as described in the first condition ( (a) )

  12. SORP 2009 – Appendix E – PFI – Accounting IFRIC 12 Control Tests – Not Met • Where neither (a) nor (b) is met -- the expenditure shall be recognised as it is incurred. • Where test (a) is met but test (b) is not, the authority will determine whether the arrangement is in substance a lease and will account for it as such (Please see SSAP 21 for 2009/10) • Where test (b) is met but test (a) is not, an authority shall recognise as an asset the excess of the expected fair value of the property at the end of the arrangement over any amount it may be required to pay the operator upon reversion. This asset shall be built up from payments made by the authority to the operator over the life of the arrangement.

  13. SORP 2009 – Appendix E – PFI – Recognising Assets and Liabilities • Property used in a PFI arrangement will be recognised as an asset of the authority after passing the aforementioned IFRIC12 control tests. • A related liability shall also be recognised in the balance sheet at the same time as the asset. It shall be measured at the value of the related asset and subsequently shall be calculated using the same actuarial method as for finance leases under the SORP • The asset shall be recognised in accordance with the SORP when the asset is made available for use (unless the local authority bears an element of the construction risk.) • Standard PFI contract terms usually do not recognise that an authority will bear the construction risk • Separate assets shall be recognised in respect of land and buildings where appropriate (possible?)

  14. SORP 2009 – Appendix E – PFI – Enhancements and Components • Where the operator enhances property already recognised on the balance sheet of the local authority, the local authority shall recognise the fair value of the enhancement in the carrying value of the property. • A new liability shall be recognised or the existing liability increased to reflect the authority's requirement to pay for the enhancement • The SORP requires the different components of an asset be accounted for separately if they have a substantially different useful life, and this approach shall be adopted where appropriate ( From now for PFI -- not prospective from April 2010 for non PFI assets)

  15. SORP 2009 – Appendix E – PFI – Separation\Non-Separation • Where a PFI arrangement can be separated into a service element and a property element, the service element shall be expensed as incurred, and the property element accounted for as if it were a finance lease. • Where a PPP\PFI arrangement cannot be separated into a service element and a construction element, the property and related liability shall be measured at the fair value of the property in accordance with paragraph 3.113 of the SORP. • Payments under the (above) non –separation arrangement shall be allocated between (a) repayment of the liability, (b) an imputed finance charge (based on the interest rate implicit in the contract), and (c) operating costs to reflect the service element of the arrangement.

  16. SORP 2009 – Appendix E – PFI – Existing Local Authority Assets not used in PFI’s and Similar Contracts • A local authority may provide the operator with access to existing assets of the authority that are not to be used in the PFI arrangement in exchange for reduced or eliminated payments. • Where the arrangement involves a permanent transfer of an asset to the operator, the local authority shall account for the disposal of the asset. • Where the arrangement does not involve a permanent transfer of the assets to the operator, a local authority shall account for the arrangement as a lease (finance or operating)

  17. SORP 2009 – Appendix E – PFI – LA Assets not used in the PFI leased to an operator • Where the asset provided by the authority is provided in the form of an operating lease, there is not a disposal of the asset, which remains on the authority’s balance sheet. • The authority may receive consideration from the operator for granting the operating lease in the form of property provided by the operator. Such property shall be recognised on the authority’s balance sheet along with a matching liability, representing the obligation of the authority to pay for the property. • Over the period of the operating lease, the authority shall recognise income from the operating lease in the Income and Expenditure Account along with a corresponding reduction in the liability to pay for the property. • Where the asset provided by the authority to the operator is provided in the form of a finance lease, the local authority shall account for the disposal of the asset. (see previous slide)

  18. SORP 2009 – Appendix E – PFI – LA Depreciation, MRP and CFR • Once recognised on the balance sheet, property under a PFI contract is depreciated and impaired in the same way as for any other fixed asset (Remember SMGFB treatment). Similar treatment to finance leases. • Assets acquired under a PFI arrangement are subject to MRP (England and Wales) or financing charges (Scotland) in the same way as assets acquired using other forms of borrowing. Under regulations and statutory guidance, MRP charges can match the repayment of the liability (England and Wales). • Where PFI schemes and similar arrangements come ‘on-balance sheet’ as a result of the IFRIC 12 approach, the liability that would be recognised would need to be taken account of in an authority’s prudential indicators (authorised and operational boundaries). • Latest MRP regulations – please see http://www.local.communities.gov.uk/finance/capital/statguidmrp.pdf -- more on this in a later presentation

  19. SORP 2009 – Appendix E – PFI – LA Additional Disclosures The following information shall be disclosed in relation to PFI arrangements, in addition to the disclosures relating to assets and liabilities required elsewhere in the SORP: • The value of assets held under PFI arrangements at each balance sheet date, and an analysis of the movement in those values. • The value of liabilities resulting from PFI arrangements at each balance sheet date, and an analysis of the movement in those values. • Details of the payments due to be made under PFI arrangements (separated into repayments of liability, interest and service charges): * within one year * within 2 - 5 years * within 6 - 10 years; and * in each additional 5 year period.

  20. PFI – BVACOP 2008 Implications – PFI Grant • No longer allocate in full the government grant to the service revenue account as it is in effect a specific PFI grant • Will have to apportion grant in line with the 3 elements (repayment of liability, interest and service charges). • Amount relating to interest should be credited corporately outside the net cost of services. • Remainder credited to service revenue account – because the service revenue account will be charged with a service charge and depreciation (relating to the repayment of the liability). • Revamp of PFI grant rules has meant that this grant largely covers principal and interest elements only now – not service elements – need to take this into account • Scottish approach is different to this.

  21. SORP 2009 – Appendix E –PFI – Prior Year Processes

  22. SORP 2009 – Appendix E Para’s 23-26 – Restate Opening Balance Sheet (Step 1)- 1st April 2008 (A) • Authority shall recognise the fair value of the PFI asset and the corresponding PFI liability at the point in time the PFI asset was made available for use (FRS15 refers) • The fair value of the asset shall be used in the initial measurement of both the asset and liability. The value of the asset shall then be re-valued if required by the authority’s accounting policy and paragraphs 3.124 – 3.132 of the SORP. • Depreciation on the assets acquired under the PFI contract will need to be charged from the commencement of the arrangement until 31 March 2008. (in accordance with an authority's depreciation policies) • In England and Wales any MRP that is required by regulation or statutory guidance to be charged to the General Fund in respect of the PFI prior to 31 March 2008 shall be transferred from the Capital Adjustment Account.

  23. SORP 2009 – Appendix E Para’s 23-26 – Restate Opening Balance Sheet (Step 1)- 1st April 2008 (B) • Payments made from the inception of the PFI until the 31st of March 2008 – will need to be allocated to liability, interest and service charge elements – Previous unitary charge accounting treatment needs to be reversed • Where the IFRIC12 tests have been passed any previous disposal of assets to the PFI operator for use in the PFI (contributed assets) needs to be reversed. • Depreciation\Valuation on these returning assets will need to be charged up until 31st of March 2008 The previous disposal of the asset would not have changed the amount of MRP to be paid in England and Wales, so no adjustments to MRP will be required in respect of these contributed assets. • Accounting for any reversionary interest will need to be reversed and no obligatory re-instatement of written off GGD balances on disposals

  24. SORP 2009 – Appendix E Para’s 27-31 (Step 2) Restate 2008-09 Comparatives (Contracts commencing prior to 1st of April 2008) • PFI Schemes commencing prior to the 1st of April 2008 – include transactions occurring on them in 2008-09 to roll them on to the end of 2008-09, including as previously; • Recognition of assets and liabilities – all those recognised in step 1 -- associated depreciation and MRP will need to be charged to 31st March 2009 • Payments made in 2008-09 allocated between liability, interest and service charge up to 31st of March 2009 • Contributed assets – where reinstated as in step 1, depreciation will still need to be recognised on those assets (but not MRP) entries up to 31st of March 2009 • Dowry payments – reduces long term liability entries up to 31st of March 2009 • For new PFI schemes taken out in 2008-09 please see step 3 overleaf

  25. SORP 2009 – Appendix E Para’s 32-36 (Step 3) Restate 2008-09 Comparatives (Contracts commencing during 2008-09) • PFI Schemes commencing during 2008-09-- The opening Balance Sheet (1 April 2008) will not require amendment, • However 2008/09 performance statements and the balance sheet as at 31 March 2009 shall be restated. • Separate entries will be required for the service revenue accounts and corporate accounts (e.g. interest payable) when adjusting the 2008/09 performance statements. • Other approaches as in the previous slides for steps 1 and 2

  26. SORP 2009 – PFI Practical Implications • Review PFI scheme contracts / documentation. • Apply IFRIC 12 tests – To determine what comes onto BS & what does not. • Identify opening asset values and corresponding liabilities and interest rates. • Take out the old transactions and put in new transactions. • Separate between MRP, interest, service charges and principal repayments. • Account as if the PFI scheme was always on our Balance sheet, depreciation etc. • General fund Impacts ? – Finance charges coming back into I + E.

  27. SORP 2009 – PFI a possible process (1) • Take out all the unitary payment debits that were previously charged payments to revenue. • Get back to the starting point of the PFI. • What was the capital value of the PFI at its inception? • Split it capital value between Land, Service Charges and Property elements if possible. • Reconstruct the payments from the inception date of the PFI till now • Land element -- if it is possible to split out the land element then it too will most likely be a finance lease (unless the land does not revert back to the grantor) • Building element – will most likely be a finance lease • Service charges – will be a charge to revenue

  28. SORP 2009 – PFI a possible process (2) • For the service elements ensure the debits hit revenue as before • For the building element ensure that the principal element reduces the balance sheet liability amount and the interest hits revenue. • There will now be an additional MRP element which will hit revenue ( which can match the principal repayment amount within the PFI under a specific MRP option) Please be careful to ensure that any future calculation of MRP takes into account the fact that MRP may have previously been accounted for under the capital financing regulations if authorities have opted for the choice of ensuring that MRP charge = the repayment of liability. Please ensure there is no double counting of the MRP in the SMGFB. Will the amount hitting the general fund will be similar to what it was before?

  29. PFI – A Selection of Graded Accounting Transition Examples – Based On SORP 2009 Appendix E Approaches

  30. Graded Simplified Accounting transition - examples Base Data Fair value of Asset/Liability = £15m Interest rate inherent in the PFI contract = 5% 3 years of accounting entries to be considered up until step 1 Opening Balance Sheet at 1st of April 2008

  31. Graded Example 1 – To opening Balance Sheet at 1st of April 2008 -- Conditions • New assets provided by the operator • No donated assets or dowry payments • No residual or reversionary assets or prepayments ( Unitary charge taken in full to the GF) - £1.2m per annum • Initial recognition – Asset £15m and liability £15m • Depreciation at £500k per annum • Principal repayments from slide 30 schedule are: yr1 - £314k, yr2- £330k and year £346k

  32. Graded Example 1 – To Opening Balance Sheet at 1st of April 2008 – Example entries

  33. Graded Example 2 – To opening Balance Sheet at 1st of April 2008 -- Conditions • New assets provided by the operator • No donated assets or dowry payments • LA is now building up a residual asset on its balance sheet – Unitary charge of £1.2m per annum (£0.2m of which goes to build up the asset) • Initial recognition – Asset £15m and liability £15m • Depreciation at £500k per annum • Principal repayments from schedule are: yr1 - £314k, yr2- £330k and year £346k • The asset is re-valued by £2.5m

  34. Graded Example 2 – To opening Balance Sheet at 1st of April 2008 – Example Entries

  35. Graded Example 3 – To opening Balance Sheet at 1st of April 2008 -- Conditions • New assets provided by the operator • No donated assets or dowry payments • LA is now building up a prepayment on its balance sheet – Unitary charge of £1.2m per annum (£0.2m of which goes to build up the asset) • LA receives £930k of PFI grant per annum -- £750k is credited to revenue (GF) and £180k is deferred to fund deferred expenditure • Initial recognition – Asset £15m and liability £15m • Depreciation at £500k per annum • Principal repayments from schedule are: yr1 - £314k, yr2- £330k and year £346k • The asset is re-valued by £2.5m

  36. Graded Example 3 – To opening Balance Sheet at 1st of April 2008 – Example Entries

  37. Graded Example 4 – To opening Balance Sheet at 1st of April 2008 -- Conditions • New assets provided by the operator • No donated assets or dowry payments • Up front dowry payment funded by capital receipts of £2m ( See next slide) • No residual or reversionary assets or prepayments ( Unitary charge taken in full to the GF) - £1.2m per annum • Deferred contributions written out at £100k per annum – Debit GF £100k and Cr deferred contributions £100k per annum and Cr GF £100k and Dr CAA £100k per annum ( 3 years of entries) • Initial recognition – Asset £15m and liability £15m • Depreciation at £500k per annum • Principal repayments from schedule are: yr1 - £314k, yr2- £330k and year £346k

  38. Graded Example 4 – To opening Balance Sheet at 1st of April 2008 – Example Entries – Dowry Payment

  39. Graded Example 4 – To opening Balance Sheet at 1st of April 2008 – Example Entries – Further entries (Post dowry payment)

  40. Graded Example 5 – To opening Balance Sheet at 1st of April 2008 -- Conditions • Assets donated to the Operator for use in the PFI scheme • Phase 1 – Position at the start of the Contract and donation of assets to the operator • Phase 2 – Entries covering unwinding of the Deferred Contribution and the Reversionary Interest • Phase 3 - Extra Entries moving towards an IFRS Position from a SORP position – Re-instatement of the Asset

  41. Graded Example 5 – To opening Balance Sheet at 1st of April 2008 – Phase 1 – Contract Start

  42. Phase 2 Unwinding of Reversionary Interest and Deferredcontribution

  43. Graded Example 5 – To opening Balance Sheet at 1st of April 2008 – Phase 3 – Moving From SORP to IFRS Position

  44. Questions?

  45. Additional Information for Delegates

  46. IFRIC – Interpretation 12 – Service Concession Arrangements (1) • Paragraph 2 -- A typical arrangement involves a private sector entity (an operator) constructing the infrastructure used to provide the public service or upgrading it (for example, by increasing its capacity) and operating and maintaining that infrastructure for a specified period of time. • The operator is paid for its services over the period of the arrangement. The arrangement is governed by a contract that sets out performance standards, mechanisms for adjusting prices, and arrangements for arbitrating disputes. • Such an arrangement is often described as a ‘build-operate-transfer’, a ‘rehabilitate-operate-transfer’ or a ‘public-to-private’ service concession arrangement. • A feature of these service arrangements is the public service nature of the obligation undertaken by the operator.

  47. IFRIC – Interpretation 12 – Service Concession Arrangements (2) • Para 5 -This Interpretation applies to public-to-private service concession arrangements if:   • (a) the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and • (b) the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of the arrangement. • Para 7-This Interpretation applies to both:  (a) infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement; and • (b) existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement. • Para 9 – This interpretation does not specify accounting by grantors

More Related