Changes to Accounting for PFIs
Public Finance Initiatives (PFIs) may become less viable under new accounting standards
which are to be introduced for the public sector.
Background
On March 12 2008 the Budget Report announced the Government’s
intention to delay the introduction of International Financial Reporting Standards
(IFRS) for the public sector from 2008/09 until 2009/2010. The delay is partly to
assist the Ministry of Defence and the Department of Health, neither of which were
prepared for the earlier introduction. The new accounting system is likely to have a significant impact on the way the public sector accounts for PFIs.
The current accounting method for PFI projects is based on establishing which party
has the greatest risk and reward in the PFI contract. Although as yet there is no
specific guidance for the public sector on how to account for PFI under IFRS, it
is thought, that it will follow the guidance by the International Financial Reporting
Interpretations Committee (IFRIC) in “IFRIC 12 – Interpretation on Service Concession
Arrangements”. Although IFRIC 12 does not apply specifically to the public sector
side of public to private service concession arrangements, the suggestion is that
the property should be placed on the public sector’s balance sheet.
Impact on PFIs
The consequence of placing PFI contracts “on-balance sheet”
may be substantial especially in local government. An incentive for using PFI in
the past has been its off-balance sheet status and the loss of this may make PFI
projects less attractive. The Treasury in “PFI: Strengthening long term partnerships”
emphasised that the decision to enter into PFI projects is to be based on value
for money principles, rather than any off-balance sheet provisions.
A further consequence of moving PFI on-balance sheet is that it will place any debts
for the project on the public sector’s balance sheet. This may lead to increased
costs and increases the risk that some PFI projects will become too expensive. There is also concern that by placing PFI projects on-balance sheet then the additional liabilities will mean that the Government breaks its sustainable investment rule,
which puts a 40% cap on the ratio of public debt to gross domestic product.
The effect of IFRS on PFI is currently hard to gauge. If the Government is committed
to PFI as a value for money option then the switch to IFRS should not be the setback
that some predict. Alternatively, the implications of a probable move to on-balance
sheet accounting may be that less PFI projects are approved.
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For More Information Contact:
Graham Burns
TPP Law Limited
53 Great Suffolk Street
London SE1 ODB
t 020 7620 0888
f 020 7620 0778
e info@tpplaw.co.uk
Email:
Graham
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