The MGDD guidance is clear that assets can only be considered off the balance sheet of the public sector where "there is strong evidence that the private sector is bearing most of the risk attached to the asset in question". As set out in section 3.2, the assessment should be undertaken with reference to the MGDD primary risk factors and an assessment of the financing of the project.
However, in cases where the MGDD primary risk tests, or elements associated with those key risk tests, are shared it may be necessary to consider other aspects of the transaction.
The MGDD states that residual value risk may be considered in these circumstances but that it should not be considered as a primary risk test; rather it should be used to provide an additional indicator of the economic ownership of the assets that underlie the project. The MGDD states:
"If the assets remain the property of the partner at the end of the project, whatever their economic value at this time, then classification on the partner's balance sheet would have an additional justification."
The guidance is also clear that an option for the public sector to purchase the asset at market value provides supporting evidence that the assets are not on the public sector balance sheet for the purposes of the National Accounts as the effect is that the residual value risk is with the private sector. The guidance states that where either of the following two criteria are met then recording the assets as public sector assets could be appropriate. Note however, that the criteria should only be considered if the private sector has not been demonstrated to hold the majority of the risks when the project has been assessed against the MGDD primary risk factors. The two criteria contained in the MGDD guidance are as follows:
• "the predetermined price is obviously higher than the economic value of the assets; or
• "the price paid by government is lower than the economic value (or even nil) but government has already paid for the right to acquire the assets throughout the contract by making regular payments that reached a total amount very close to the full economic value of the assets."
When considering the second criteria, the test in IAS 17 (leases) may be considered, which seeks to compare the present value of the asset-only related cashflows to the fair value of the asset at the beginning of the contract, using the discount rate inherent in the transaction (see the FREM for further guidance).
Note, the criteria should only be considered if the private sector has not been demonstrated to hold the majority of the risks as assessed against the MGDD primary risk factors.