B21 The overall principle set out in FRS 5 is that a party must account for the economic substance of a transaction, rather than simply its legal form. In order to reflect this economic reality, the financial reporting standard insists that a party that will reap the benefits and bear the balance of risks of ownership of a property 'has an asset of the property' and must report this on its balance sheet.
B22 When a property has been built through conventional procurement methods, the public sector is almost always considered to bear the risks of ownership, and the capital invested in that property is booked as an asset in the Government's accounts. Future maintenance and other service charges associated with the property are, of course, not booked but expensed in the year they are incurred and no disclosure of those likely future costs is made.
B23 PFI provides value for money to the Government by transferring the risks associated with a capital project - risks around design, construction or ownership - to the party best able to manage them. This transfer of risks is reflected in the terms of the PFI contract, and in the payment of an annual unitary charge across the life of the contract with deductions made when the property is unavailable (for instance if unfinished) or for poor performance. If, as a result of this transfer of risks, the Government did not enjoy the potential rewards accruing from ownership (not merely use) of the property - for example from renting out unused space to a third party - nor did it bear the risk associated with owning the property - for example the risk attached to the anticipated value of the property at the end of the contract term - then it would be inaccurate for the Government to book that property as an asset.
B24 It is important to note that the risks of ownership are only a subset of the risks that may be transferred under a PFI contract. For example, FRS 5 does not take into account whether a party bears the risks involved with building a property. So it may be that a PFI contract delivers value for money through transferring significant risk to the private sector, but that the accounting principles require the public sector to score the property concerned on its balance sheet.