The impact of IFRS on accounting for PFI is as yet uncertain. There is a widely held view that the application of International Financial Reporting Interpretations Committee's Interpretation 12 (IFRIC 12) by PFI contractors will have the consequence that PFI schemes involving the creation of single purpose assets will not be accounted for on balance sheet by the PFI contractor, except where they take significant residual value risk. Further, it is argued that, since the government has in the past been uncomfortable at the prospect of PFI schemes not being on anyone's balance sheet, they will issue guidance indicating that IFRIC 12 should also be used by the public sector to account for PFI schemes, with the effect that the great majority of schemes will be on balance sheet for the public sector (i.e. where the assets do not appear on the balance sheet of the PFI contractor).
On the other hand, it has been pointed out that any government guidance on the application of IFRS to PFI should consider not only of IFRIC12, but also European System of National and Regional Accounts (ESA 95) and any standards developed by the International Public Sector Accounting Standards Board. Running alongside the debate about the application of IFRS there has been an underlying view in some quarters that, even under FRS5 and the relevant Application Note1 most PFI schemes should be classified as on-balance sheet.
That discussion has centred on HM Treasury's Technical Note2, with some commentators speculating that the FRAB was to recommend its withdrawal. Other participants in the debate argue that, even if the Technical Note were withdrawn, there would still be sound arguments for classifying a good number of PFI schemes as off-balance sheet, relying on FRS5 and the Application Note.
Whatever the exact conclusion of these debates, and the results of the FRAB consultation, it looks safe to assume that the majority of PFI schemes will be on balance sheet going forward. What impact will this have on the public sector's propensity to use PFI as a method of procurement?
It should have little or no impact in most central government departments where for some years the majority (though by no means all) of PFI schemes have been classified as on-balance sheet for the public sector. The position in local government is less clear. Off balance sheet classification has been a pre-condition for the award of PFI Credits which have constituted a strong fiscal incentive to use PFI. Much depends on the structure and amount of any PFI Credit scheme going forward, and on what criteria are used to distribute PFI credits in an on-balance sheet world.
While accounting treatment has been used as a test for PFI Credits, it is clear that there is no necessary link between the two. Off-balance sheet treatment has, in effect, been used as a proxy to indicate appropriate risk transfer, but other indicators could be found. In Australia, for example, very few projects have ever been off-balance sheet, but this has not stopped the Victorian Government from pursuing a robust PPP policy, or from devising ways of identifying those genuine PPP projects which deserve support (see Case Study 1, page 3).
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1 FRS5 - Application Note F 'The Private Finance Initiative and similar contracts' (effective from September 1998)
2 Treasury Taskforce PFI Technical Note Number 1(Revised): 'How to account for PFI transactions' The Treasury have recently published a list of PPP and PFI projects, including details of their balance sheet treatment on its website: http://www.hm-treasury.gov.uk./documents/public_private_partnerships/ppp_pfi_stats.cfm