This approach is based on proposed major revisions to the leasing standard AASB117. The existing leasing standard is currently closely aligned to many PPP arrangements. The IASB has tentatively agreed that accounting for leases should be based on an analysis of the assets and liabilities that arise from contractual rights and obligations.392
A discussion paper on the proposed new leasing standard is yet to be released by the IASB. The Committee understands, however, that the standard would not only determine which party discloses the physical asset, but would also focus on the respective rights and obligations of each party to a leasing arrangement by 'unbundling' the arrangements to determine the respective assets and liabilities of both parties.
The most important right is the right of the operator (lessee) to use or exploit the leased property to obtain economic benefits. The projected economic benefits embodied in the asset would be capitalised in the books of the operator, although it is unclear as to what measurement basis would be used to value the assets. The major liabilities of the operator would be the borrowings involved in the project. The government in many of these arrangements would be seen as having a 'reversionary right', where control of the asset would revert back to the government at the end of the lease.
Construction of a tollway is a good illustration of this concept. The government usually acquires the land, the value of which is written off as a state asset once the concession arrangement is entered into, and the operator assumes control of the land for the length of the concession period. The legal ownership of the land will remain with the government, but it will not assume control of the asset along with the tollway until the concession arrangement expires. Under the existing concept of control the operator would 'de-recognise' the asset at that stage. Conversely, the government would recognise the asset, probably at fair value and reflecting future economic benefits. An alternative valuation method could be depreciated replacement cost, ignoring the land value, where market value data is not available.
Recognition of an asset at the end of the concession period could have a distorting effect on the government's financial reports. Under the rights and obligations approach, the intention is for the government to progressively recognise the emerging asset many years before it actually takes control of it. Conversely, the operator would presumably amortise the asset over the period of the concession agreement. Under this arrangement the progressive take-up of the asset by the government would avoid the distorting effect of recognising potential billion dollar assets overnight.
The Committee understands that the above principles have been accepted by the Heads of Treasury (HoTARAC), although practice in terms of the progressive measurement of the emerging assets is still to evolve. The proposed introduction of the new international reporting standard on leases could provide some guidance on valuation methodology.
The Committee noted that HoTARAC's response in its submission to the IFRIC endorsed a 'risk and rewards' approach, but stated that the IFRIC should investigate a rights and obligations approach prior to making any financial decision on a new accounting standard for PPPs.393
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392 International Accounting Standards Board, Research Project - Leasing, project update, October 2005
393 Australian Heads of Treasury Accounting and Reporting Advisory Committee, response to the International Financial Reporting Interpretations Committee Draft Interpretation, D12 – Service Concession Arrangements, p.17