G.3 ITC 16 Request for comment on the IPSASB consultation paper on Accounting and Financial Reporting for Service Concession Arrangements

The AASB has released an invitation to comment on the IPSASB consultation paper on ITC 16. The International Public Sector Accounting Standards Board (the IPSASB) proposes a grantor that controls the property underlying a PPP arrangement should recognise that property as an asset in its financial statements.

HoTARAC endorsed the involvement of IPSASB in PPP accounting and supported the use of the control test to determine which party owns the underlying assets, but not the proposed tests on the grounds that they were not principles-based (rather rule-based), and appear to be too limited.

The resulting IPSASB's consultation paper is the first step of a project undertaken to address internationally the accounting for PPPs by public sector grantors.

Within the scope of the IPSASB consultation paper, PPPs are described as transactions in which the government (the grantor) conveys to a private sector entity (the operator) the right to provide services directly or indirectly to the public through the use of infrastructure or a public facility. The operator in turn assumes an obligation to provide the services in accordance with performance requirements set by the grantor.

The IPSASB proposes that a grantor that controls the property underlying a PPP should recognise that property as an asset in its financial statements. The criteria for assessing control are:

• the grantor controls or regulates what services the operator must provide, to whom they are provided and the price ranges or rates that can be charged; and

• the grantor controls the residual interest in the property at the end of the arrangement.

The reference to "regulates" in the first limb of the control criteria is restricted to arrangements agreed upon by the grantor and the operator and excludes generally legislated regulation that does not establish control for the purposes of financial reporting.

If both criteria are satisfied, the asset is recognised along with a liability reflecting the obligation to provide cash or other compensation to the operator. The ITC includes proposals on the timing for recognition and measurement of the asset and liability, how it would be recognised and how it would be measured.

The following table illustrates a scenario when one criterion is satisfied.

Arrangement	Grantor controls use	Grantor controls residual	Proposed accounting
New asset Existing asset	√	X	Grantor might: • account for the property as a lessee if the definition of a lease is met; or • if the definition of a lease is not met; - recognise the property (and potentially a liability if the arrangement involves newly constructed property) until the property is transferred to the operator; or - expense outlays as they are incurred.
New asset	X	√	• Progressively recognise an asset over the period of the arrangement for the excess of the expected fair value of the property at the end of the arrangement over the grantor payments for the property to be made on its reversion to the grantor.
Existing asset	X	√	Grantor might: • apply the guidance for lessors in relation to existing property if the definition of a lease is met; or • if the definition of a lease is not met, derecognise existing property under the arrangement and recognise an asset for the operator's obligation to return the property at the end of the arrangement. This asset should be recognised at the expected fair value of the property at the end of the SCA. The net derecognition amount should be reported as a gain or loss in the period in which the SCA was entered into.

If neither criterion is satisfied, the grantor should not recognise the property underlying the SCA and grantor payments should be expensed as the services are rendered by the operator.

Any existing property should be derecognised and accounted for as a disposal.

The consultation paper also includes proposals for areas commonly encountered in PPPs including:

• Guarantees and commitments by a grantor should be accounted for under either IAS 39 Financial Instruments: Recognition and Measurement if the definition of a financial guarantee contract is met or otherwise under IPSAS 19 Provisions, Contingent Liabilities and Contingent Asset.

• Revenue from revenue-sharing arrangements would be recognised as it is earned, once any contingent event is deemed to have occurred.

• Revenue from contractually-determined inflows would be recognised from the beginning of the concession term on a straight-line basis or another basis that better reflects the consumption of access to the property or the time value of money.

• Issues regarding whether an operator is controlled by a grantor.

This paper does not yet have the same authority as the AASB Framework or AASB Standards and is for guidance only. The Procuring Agency should consult the relevant Finance and/or Treasury Department to ensure that the accounting treatment for PPP transactions is being correctly applied in accordance with jurisdictional requirements.