Infrastructure transactions are currently classified according to Australian Accounting Standard 17 Accounting for Leases (AAS17). For accounting purposes, transactions involving the delivery of infrastructure can have the characteristics of a lease agreement, whereby the payments received by the operator are regarded as rental-type obligations that have to be classified in the accounts of the agency according to the nature of the obligation.
The standard requires that leasing-type arrangements be classified as either operating or finance leases. Because finance leases are essentially a loan to the lessee, the lease is recorded as a liability on the lessee's balance sheet. Lease payments under an operating lease, on the other hand, are recorded as an expense in the revenue and expense accounts.
While the accounting standards attempt to create a clear distinction between the two types of leases, for evaluation purposes most service contracts with the private sector under consideration by agencies will fall somewhere between the strict definitions of operating and finance leases.
The degree to which ownership risk is transferred between the owner of the infrastructure and the "lessee" agency is the critical variable in classifying payment obligations under public private partnerships. The methodology provided in these Guidelines has been developed to assist in the resolution of these issues.
Agencies should keep in mind that there is a fundamental tension between meeting the requirements of AAS17 for operating leases and achieving value for money. The fundamental objective of the partnerships procurement process is to achieve an efficient allocation of risk, not simply to transfer as much risk as possible in order to achieve an operating lease classification.
Where uncertainty exists as to the classification of a lease, the agency should contact the Department of Treasury and Finance for clarification.
General guidance for the accounting classification of infrastructure transactions is provided in Appendix 1.