Governments need to decide whether and when PPP commitments should be recognized-that is, formally recorded in financial statements as creating public assets, liabilities or expenses. This is important because limits or targets are often set on the government's liabilities and expenditures. Whether or not PPP commitments are recognized as expenses or liabilities can therefore influence a government's decision to pursue PPPs, or how to structure them, in a way that is not driven by achieving value for money. Section 1.3.1 describes how some governments have used PPPs to circumvent limits on liabilities.
The financial standards mentioned in Box 2.9: Types of Government Financial Reporting vary in their treatment of PPP fiscal commitments. A few standards specifically address when and how direct liabilities and assets of PPP projects should be recognized by the contracting governments:
• International Public Sector Accounting Standards 32-introduced in 2011, IPSAS-32 defines when PPP assets and liabilities should be recognized, assuming a government is following IPSAS accrual accounting standards. Under IPSAS-32, PPP assets and liabilities appear on the government's balance sheet, provided (i) the government controls or regulates the services the operator must provide with the PPP asset, to whom, and at what price; and (ii) the government controls any significant residual interest in the asset at the end of the contract. Under this definition, 'government-pays' PPPs would appear on the government's balance sheet; the treatment of 'user-pays' PPPs is less clear, and depends on the details of the contract [#153, #154]. Moreover, IPSAS standards and associated guidance notes assume full accrual accounting (for example, such that the government prepares a full balance sheet capturing both assets and liabilities)-it is less clear how the principles of this standard can be applied where governments are practicing cash accounting
• Recent updates to the IMF's Government Finance Statistics Manual set out criteria for classifying PPP assets and liabilities for statistical reporting purposes. Under these criteria, PPP assets and liabilities are accounted for in the government's balance sheet if the government bears most of the project's risks and rewards-for example, taking into consideration the degree to which the government controls the design, quality, size, and maintenance of the asset, and bears construction risk; as well as the allocation of demand risk, residual value and obsolescence risk, and availability risk
• Eurostat guidelines-Eurostat requires European governments to recognize PPP liabilities in debt statistics where the government retains construction risk or demand or availability risk. Rougemont's article on Accounting for PPPs [#214, pages 256-268] provides more detail. Since PPPs transfer those risks to the private party, under this rule most PPPs remain off the government's balance sheet.
Most accounting and reporting standards do not require governments to recognize contingent liabilities, including those arising from accepting risk under PPP contracts. Cebotari's report on contingent liabilities [#44, Annex I] describes one limited exception: IPSAS standards for governments implementing accrual accounting require contingent liabilities to be recognized, only if it is more likely that not that the underlying event will occur, and the amount of the obligation can be measured with sufficient reliability. In this case, the net present value of the expected cost of the contingent liability should be recognized as a liability and as an expense (a provision) when the contract is signed.