The delay in implementing international accounting standards will leave government departments and local authorities to chose between two 'competing' standards when accounting for PFI, the Treasury has been warned

The confusion opens the way for public bodies to exploit the 'arbitrage' potential of the two standards - or use the one that best suits their agendas.

The loophole was revealed in a Commons Treasury committee report expressing 'disappointment' over the delay to IFRS, which it blamed on the Treasury having misjudged the complexity of the issues involved, 'in particular the issue of accounting for PFI assets'.

The Committee warned it is 'concerned' at the continuing possibility of arbitrage 'creating the potential for different interpretations of appropriate PFI accounting treatment'.

MPs were warned in evidence that there is already 'a wide variation' in the treatment of PFI assets held off balance sheet across government, with the National Audit Office much more rigid about balance sheet treatment than private sector auditors appointed by the Audit Commission.

The root problem is the existence of both the standard 5A, published by the Accounting Standards Board, and a revised Treasury Technical Note 1, which has effectively become a competitor standard.

The committee report said the Financial Reporting Advisory Board had been pushing the Treasury to remove its technical note, but the decision in the 2007 Budget to move to international accounting standards appeared to render both treatments obsolete.

The problem has been resurrected by this year's Budget decision to delay IFRS implementation, which could mean both FRS 5A and Treasury Technical Note 1 could still be in use until 2009-10.

The Treasury committee this week called on the FRAB to ensure PFI accounting under IFRS is implemented across the public sector in a consistent, effective and
transparent manner.

MPs were told the delays to IFRS came because of problems at the MOD over the number of PFI assets needing to be reviewed, and in the NHS where allocations for 2008/09 had already been made raising the risk of placing many health bodies in breach of their statutory financial obligations if the plans for international standards had gone ahead.