Appendix A Background

•  Historically, the application of UK GAAP based accounting standards in the public sector has been seen to align with the approach set out in ESA 95, including for PFI and similar transactions. As a result, the ONS have used the UK GAAP based accounting determination reached under FRS 5 / TTF TN1, in assessing the assets that underlie a PFI deal for National Accounts determination and to record the subsequent impacts (except that the ONS calculate their own measure of depreciation / capital consumption).

•  This practice pre-dates specific guidance from Eurostat on PFI and similar transactions, and was deemed appropriate on the grounds that ESA 95 takes a risks and rewards based approach to assessing who is owner of an asset or liability, as does the UK GAAP based approach utilised in public sector accounts until the end of 2008/09 (with the move to IFRS from 1 April 2009). In support of this approach ESA 95 Annex II concludes that when considering lease transactions the commercial accounting definitions provide an appropriate methodology for assessing whose balance sheet an asset should appear on.

•  On 11 February 2004, Eurostat issued specific guidance to EU Member States ("MS") on accounting for "public private partnership" transactions that involve "dedicated assets", as a new Part IV (4.2) to the MGDD. The Eurostat guidance exclusively deals with the impact on government deficit and debt of certain types of projects which are deeded to be public private partnerships, which the guidance terms services purchased by government on the basis of dedicated assets.

•  The guidance stated that the approach under GAAP (including UK GAAP) appears consistent with the substance of ESA 95 requirements and as such that national statisticians may rely on the GAAP based determination, although the guidance is clear that it is for national statisticians and not accountants to make this determination.

•  Following the issuance of the Eurostat guidance, the ONS continued to use the accounting determination when making an assessment of the balance sheet classification of the assets that underlie PFI and similar transactions. This position was reached on the basis that the judgements of government and company accountants, and their independent auditors, are seen as being consistent with the Eurostat guidelines.

•  Post the introduction of IFRS, the ONS can no longer use the accounting determination to assess the treatment of assets that underlie PFI and similar transactions for the purposes of the National Accounts. This is on the basis that, in contrast to the UK GAAP based approach, the control based approach required under IFRS is not deemed by the ONS to be consistent with the principles that underpin ESA 95 and the production of the National Accounts. This is on the grounds that the ESA 95 principles are based on a risks and rewards based methodology when considering which party to a PFI should account for the underlying assets and associated liabilities.

•  The effect of this change is that the determination of the balance sheet classification of assets that underlie PFI and similar transactions within the financial statements of public sector entities can no longer be used when considering the impact of these types of transactions on the National Accounts and the reported fiscal position.

•  The public expenditure budgeting system, as defined within the Consolidated Budgeting Guidance ("CBG"), has two stated aims. Firstly, to protect the reported fiscal position and secondly to place appropriate incentives on public sector managers.  It follows that the budgeting system needs to reflect the effect that PFI and similar transactions have on the National Accounts, which may be different to the financial accounts.

•  As mentioned in the HM Treasury 24 April 2009 letter to Finance Directors [HMT to add reference], and as a result of historic reliance on the UK GAAP based determination, there is no requirement to reassess PFI and similar transactions signed prior to 1 April 2009. However, Public Sector Bodies signing PFI and similar transactions post 1 April 2009 will be required to undertake an ESA 95 based assessment both of initial recognition and subsequent transactions, alongside their IFRS assessment.

•  Where there is a difference between the IFRS accounting treatment and the budgeting treatment, whether based on a UK GAAP assessment or the ESA 95 assessment, this creates the need for dual recording of projects.

•  The different frameworks will interact as follows:

The table shows that dual reporting (via the COINS database, see PES 2009 (7)) will only be required where transactions are considered to be service concessions that are controlled by the public sector within the meaning of IFRIC 12 but nonetheless pass sufficient risk to the private sector under the MGDD guidance, i.e. the ESA 95 assessment produces a different answer to the IFRIC 12 assessment with respect to the balance sheet treatment of the underlying asset.