The English ICA this week backed the Accounting Standards Board inlications. its battle with the Treasury over accounting for the private finance initiative (PFI).
Responding to the central issue raised by the ASB’s exposure draft amendment to FRS5, the institute said it agreed with the proposals. In essence, the proposals seek to determine liability for PFI projects such as roads, prisons and hospitals, and to show them on the relevant organisation’s balance sheet.
Robert Hodgkinson, chairman of the institute’s financial reporting committee, said: ‘We support the thrust of the proposals, which would require a buyer to recognise as a liability the amounts paid to an operator that cover the cost of an asset.
‘We also support the detailed approach to achieving this, which is to start by identifying any separate elements of a contract relating to services, on the basis of economic substance rather than legal form.’
In adopting this stance the institute pits itself against the Treasury, which is unlikely to favour these proposals as they shift the majority of PFI schemes on to the balance sheet. Bankers, construction leaders and Big Six accountants have all spoken out against the ASB’s proposals.
But Andy Simmons, who chaired the institute’s working party, said: ‘Under the ASB proposals the public sector will be seen as properly accountable for the assets it controls and the liabilities it assumes. The accounting treatment should reflect the economic substance of PFI contracts.’
The Scots ICA has also announced support for the ‘overall thrust’ of the ASB’s proposals, but its accounting standards committee has asked for more detail. ‘PFI can’t be treated as one category,’ said a Scots spokesman. ‘The exposure draft should be expanded to reflect the differences in the nature and type of PFI contracts,’ he said.
COMMENT: ROBERT HODGKINSON
Comments were due last Friday on the Accounting Standards Board’s exposure draft on the Private Finance Initiative (PFI), setting out how the parties to a PFI contract should analyse risks in order to answer the ASB’s key question: ‘Should the balance sheets of private-sector operators show assets such as roads, hospitals, prisons and IT systems, or should public-sector purchasers report them along with a matching debt owed to the private sector?’
The English ICA fundamentally agrees with the ASB’s analysis of how to apply existing accounting standards to PFI contracts. If that means reporting fewer privatised assets and more debt from public-sector purchasers, then so be it. Anyone minded to overrule the ASB and to advocate adoption of earlier Treasury guidance should think of the wider effects. If PFI accounting is fudged, outsourcing deals in the private sector could become a new off-balance sheet black hole.
For a PFI asset, risks can arise from changes in demand, availability, residual value, operating costs and technology. Moving an individual asset into a private operator’s accounts requires the transfer of that asset’s most important risks. It is a matter of commercial and accounting judgement to determine the risks and whether they can and have been transferred.
The ASB rightly distinguishes risks related to asset from risks relating to the quality of the services they are used to provide. To help the public sector get value for money, risks arising from poor care, cleaning or catering services can be transferred to the private sector through performance-related payments or penalties. They have no impact on who records the asset.
However, what is clear is that having an asset on or off-balance sheet gives only a crude indication of who bears what risks.
It seems a waste for operators and purchasers to carry out the ASB’s analysis of PFI risks solely to answer a bookkeeping question, not as a basis for making disclosures. But fuller reporting of risks and related actions and measures is urged in Financial Reporting of Risk: Proposals for a statement of business risk, issued by the institute for comment by 30 April.
Applying the institute proposals on risk reporting to PFI contracts would mean reporting material risks relating both to assets and service, the actions taken to control them or make the other party responsible and the performance indicators used to manage them. Such reporting is not a substitute for getting the bookkeeping right, but it would allow private and even public sector entities to present the full substance of their PFI contracts and their subsequent management.
Robert Hodgkinson is a partner in Arthur Andersen’s UK Professional Standards Group and chairs the English ICA’s Financial Reporting Committee.
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