The effect of budgetary mechanisms on accounting treatment

3.20 Thus up to April 2009, the accounting treatment of local Government projects had a major impact on the budgets of central Government Departments. Guidance for local Government stresses that accounting treatment should be determined at an early stage. The Treasury Project Review Group assesses the suitability of PFI projects requiring PFI credits. Its reviewers check the accounting treatment and whether the balance of risks lies with the private sector (so that under UK GAAP it is off-balance sheet).

3.21 Until 2005, some departmental guidance indicated that local public authorities should ensure that PFIs were off-balance sheet:

(a) The Department of Health's guidance stated that "the assessment of the accounting treatment of a scheme is a helpful guide to assessing the level of risk transfer and hence value for money in a PFI scheme. Schemes will normally be expected to be able to demonstrate that they will not be on an NHS Trust's balance sheet."48 It set out how to allocate risk to ensure off-balance sheet treatment.

(b) The Department for Education and Skills guidance stated that "This guidance also includes an early warning mechanism for LEAs to apply to their schemes to identify those schemes that have a higher risk of bring considered on-balance sheet". And later "DfEE provides funding to LEAs for PFI schemes through the mechanism of PFI credits. However, PFI credits can only be provided where a scheme is judged to be off-balance sheet."49

3.22 Such departmental guidance was retracted by Departments in 2005 as part of a drive by Treasury to ensure compliance with its Value for Money Guidance.50 Yet many public authority project and programme managers have continued to tell us that they feel pressure to shape projects so that they are off-balance sheet.

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48 Public Private Partnerships in the National Health Service: the Private Finance Initiative. Former section 3: technical issues, NHS Executive (1999). Section no longer extant.

49 The accounting treatment of schools PFI projects, Department for Education and Skills (2002). Section no longer extant.

50 Financial Reporting Advisory Board Paper, Private Finance Initiative (PFI): Consistency of Accounting treatment adopted by the public and private sectors, progress report, Financial Reporting Advisory Board (72) 02, HMT (March 2005).