1. When determining the appropriate accounting treatment for a PFI transaction, it is generally accepted that, when the assets associated with the deal appear on the balance sheet of the private sector contractors' financial accounts, but not on that of the procuring Department, the greater proportion of the risks and benefits associated with the project have been passed to (and accepted by) the private sector contractors.
2. In January 1999, consultants engaged by DVTA to advise on the likely accounting treatment for the MOT2 project stated that the contract sought to make provision for not just vehicle testing equipment, but rather "a comprehensive vehicle testing service incorporating information technology services," and that the commercial effect of this was "to transfer most significant rights to benefits and exposure to risks from DVTA to the private sector." Consequently, the consultants concluded that the new equipment could be treated as off balance sheet from the perspective of DVTA.
3. In February 1999, DVTA sought our opinion on this advice. We concluded that, under the interim Treasury guidance available at the time12, the project could be accounted for as off balance sheet. However, we also noted that:
• because the proportion of equity in the contractors' funding structure (10 percent) was at the lower end of the range of what could be considered normal for a PFI project of this nature, any decision to account for the project off balance sheet could be construed as a borderline one; and
• the credibility of risk analysis within the full business case would have been considerably enhanced if probabilities (ranging from best case, to most likely outcome, to worst case) had been attached to the various scenarios.
4. Since contract signature in March 2001, the MOT2 equipment has not been accounted for as an asset in either DVTA's accounts or those of the private sector contractors. Our examination of the DVTA accounts for 2003-04 and 2004-05 has reiterated our initial opinion that, under the terms of the PFI contract, the correct accounting treatment for the MOT2 equipment is that it should be off the DVTA balance sheet. However, as the equipment has not been accounted for on the contractors' balance sheet either, the issue of the transfer of the greater proportion of the risks and benefits associated with the PFI contract has not been fully substantiated.
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12. Guidance on the interpretation of FRS5 in a PFI context, issued by Treasury in September 1997.