Some PFPs involve an initial contribution of assets by one party.
Application Note F indicates that contributions to a PFP by the purchaser may take a number of forms, including an up-front cash payment or the contribution of existing assets for development by the operator and that the accounting treatment of such contributions depends on whether they give rise to future benefits for the purchaser.
If the contribution of property by the purchaser results in lower service payments, the carrying amount of the contributed property should be reclassified as a prepayment and subsequently charged as an operating cost over the period of the reduced payments. If the contribution does not give rise to a future benefit for the purchaser, it should be charged as an expense when the contribution is made. For example, a capital grant might be given for which the operator would have qualified even if the transaction had not been part of the PFP, or short-life assets might be donated for no value. However, because PFPs represent a fair value exchange, it is unlikely that an up-front payment would be a grant.
Although Application Note F only deals with contributions by the purchaser to the operator, the same principles equally apply to contributions by the operator to the purchaser. This acknowledges that PFPs represent a fair value exchange and that all payments or other contributions by either party, either initially or over time, are part of the agreed exchange 'price'.
This principle is supported by analogous or otherwise relevant pronouncements:
• Accounting Standard AASB 117 Leases requires operating lease payments or income to be recognised as an expense or income on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the benefits arising from the leased asset (paragraphs 33 and 50).
• UIG Interpretation 115 Operating Leases - Incentives requires lease incentives under operating leases to be recognised, by both lessors and lessees, as a reduction of rental income or rental expense (respectively) over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the benefits arising from the leased asset (paragraphs 4 and 5).
• The Appendix accompanying Accounting Standard AASB 118 Revenue notes that franchise fee revenue in relation to the use of continuing rights is recognised as the rights are used (paragraph 18(c)) and that licence fee and royalty revenue is recognised in accordance with the substance of the agreement which, as a practical matter, may be on a straight-line basis over the life of the agreement (paragraph 20).
• UIG Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease requires a linked series of transactions involving the legal form of a lease to be accounted for as one transaction when the overall economic effect cannot be understood without reference to the series of transactions as a whole (paragraph 3).
Therefore this policy requires that where an up-front contribution, that is in substance part of a PFP, is made by one party to another, the contribution should be recognised progressively over the period of the reduced payments (ie the concession period), regardless of whether the contributor is the purchaser or the operator.
A public sector purchaser should initially treat up-front cash contributions from a private sector operator as unearned income (a liability) and subsequently recognise them progressively as income over the concession period.
A public sector purchaser should initially treat up-front cash contributions to a private sector operator as a prepayment (an asset) and subsequently recognise them progressively as an expense over the concession period.