4.8 In order to determine whether a PPP scheme will be off balance sheet it is necessary to consider the accounting treatment and seek the advice of financial advisers and Board auditors, where appropriate, from an early stage in the development of any scheme. In particular, advice should be considered before a scheme is advertised in OJEU, and when the Invitation To Participate in Dialogue is being prepared. In analysing the key risks in the transaction and assessing the commercial effect of these risks, the NHS body needs to demonstrate that the private sector partner benefits or suffers, as appropriate, from the risks and rewards of ownership of property related assets. In other words, that the private sector partner can receive both upside gains and downside losses.
4.9 The NHS body should be clear when deciding on the proposed allocation of risks and drawing up the contract structure and payment mechanism what the effect on the accounting treatment of the scheme will be. During negotiations with bidders, the impact on the accounting treatment of any changes to the contract structure must be understood before they are agreed. The balance sheet treatment is determined after weighing up a number of factors including the level of risk transfer and payment mechanisms. Any changes to these factors may affect the accounting treatment of the scheme.
4.10 The NHS body will be required to obtain written confirmation from its external auditors that they have no objection to the proposed accounting treatment of the scheme. This should be discussed with external auditors from an early stage.
4.11 The key issues that auditors consider in determining whether the transaction is off balance sheet include whether the substance of the contract provides for the provision of services both building related and non building related (i.e. in the form of a unitary payment) and whether payment is variable depending upon the level and quality of services provided.
4.12 Indicators that the private sector operator is taking commercial risk associated with a scheme and which are important in the assessment of the accounting treatment of the scheme include:
• availability and performance risk;
• pricing risk;
• operating cost risk;
• design risk;
• demand risk;
• residual value risk.
4.13 These factors are detailed further in HM Treasury's PFI Technical Note No 1. Chapter 2 of this Section of the guidance on risk allocation and evaluation discusses further the analysis of risks which are relevant to the determination of the accounting treatment of schemes.
4.14 NHS bodies should consider related areas of contract debtor/finance debtor impact on accounting classification and associated treatment of licences/leases in respect of land.
4.15 Depending upon the scope of projects, more than one accounting opinion may be required, for example, where schemes have a managed equipment service within their scope.