The Australian Accounting Standards Board's Framework for the preparation and presentation of financial statements was implemented on 1 January 2005 and acknowledges that 'the substance of transactions or other events is not always consistent with their legal or contrived form'. Such circumstances must be accounted for and presented in accordance with their substance and economic reality, and not merely in their legal form.
This is often the situation with PPPs. In the case of toll roads, for example, legal ownership of the land usually rests with the government and the land is subsequently nominally leased to the operator. Under the concession arrangement, however, the economic benefits in the form of user charges (tolls) invariably flow to the tollway operator. In turn, the toll revenue is used by the private operator to repay borrowings associated with the construction of the tollway. Current practice means that the asset is recognised in the books of the private operator, on the basis of control, because the private sector operator receives the economic benefits in return for assuming the majority of the risks associated with the project.
The framework supports the above concept and further states:387
In determining the existence of an asset, the right of ownership is not essential, for example, property held on a lease is an asset if the entity controls the benefits which are expected to flow from the property.
An asset is recognised in the balance sheet when it is probable that the future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably.
The Committee observes that in most circumstances where the cost of construction of PPP assets is recouped by the operator from user charges such as tolls, the framework clearly suggests that the asset should be recognised by the operator rather than by the government.
In contrast, the draft document released by the IFRIC states:388
The Grantor (government) should be considered to control a property owned by the operator when the Grantor:
• controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them to, and at what price; and
• will control, through ownership, beneficial entitlement or otherwise, the residual interest in the infrastructure at the end of the concession agreement.
In effect, the draft IFRIC document states that if the government has the power to regulate the services provided and will assume ownership at the end of the contract (which may be for periods of up to 50 years), the asset should be recognised by the government in its annual financial report. The IFRIC view, if adopted, establishes totally new concepts of control that are not provided for in existing accounting standards and concepts.
Responses to the draft IFRIC document invariably did not support the above definition of control for a range of reasons (discussed later). Despite the IFRIC's assertion that its definition of control was consistent with the framework's definition, HoTARAC's response to the draft document disagreed, pointing out that:389
• design and construction of the asset is the responsibility of the operator. Given this degree of control, the asset should be recognised by the operator; and
• the definition of control by IFRIC is very simplistic, whereas PPP arrangements are typically very complex, particularly in respect of defining all risks and benefits. A party cannot be exposed to risk unless they have the ability to mitigate the risk. Accordingly, if the majority of the risks were assumed by the operator, with the operator mitigating those risks as far as possible, then the operator would be regarded as having control of the asset in return for the benefits available.
The Committee also observed that the private sector operator will invariably enter into substantial borrowings to finance the construction of infrastructure assets. If the IFRIC proposal is adopted, this would create an anomalous situation. The private sector operator would be disclosing a very large liability representing borrowings in its financial reports, with the asset for which the borrowings were undertaken being separately disclosed in the financial reports of government. The private sector operator would need to recognise a receivable in terms of its contractual right to recoup the cost of the asset from users. Measurement of the receivable, which could be described as either a financial asset or an intangible asset, would be particularly difficult given that toll revenue is largely unpredictable. And it would be unlikely for the government to provide a guarantee as to the receivable because the revenue risk would be seen as being borne by the operator.
The IFRIC document asserts that the government exercises control over the assets through its regulatory powers. In practice, the concession arrangement invariably allows the operator considerable discretion as to how future economic benefits may be derived, for example, an operator may have the ability to sublet part of the asset to other commercial operators. The regulatory powers that can be exercised by the government are invariably restricted to emergency powers only in restricted circumstances, or regulatory powers imposed on private sector operators with a monopoly, such as the generation of electricity or the setting of health benefit premiums. Regulatory powers of this nature do not affect the day to day operations.
While the Committee is unable to offer an opinion on whether the IFRIC document complies or conflicts with the framework, the issues raised by HoTARAC must be addressed by IFRIC if a credible accounting standard is to be issued. The Committee would be concerned if the IFRIC adopted concepts that conflicted with those contained in the framework.
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387 Australian Heads of Treasury Accounting and Reporting Advisory Committee, response to the International Financial Reporting Interpretations Committee Draft Interpretation, D12 - Service Concession Arrangements, p.6
388 International Financial Reporting Interpretations Committee, D12 - Service Concession Arrangements - Determining the Accounting Model, p.6
389 Australian Heads of Treasury Accounting and Reporting Advisory Committee, response to the International Financial Reporting Interpretations Committee Draft Interpretation, D12 - Service Concession Arrangements, pp.7-18