Many PFPs provide for the infrastructure to transfer to the public sector purchaser at the end of the concession period for its then market value or for a nominal sum (including zero).
Where the transfer is to take place at market value, no accounting is required until the date of transfer as this represents future capital expenditure for the purchaser.
Where the purchaser has a right to receive the infrastructure at a nominal sum (including zero), the right represents consideration receivable by the Government in exchange for its granting a concession to the operator as part of the PFP. The right is an asset of the Government as it represents future economic benefits.
Application Note F requires the difference between
(i) the contractually-specified amount (including zero) at which the property will be transferred to the purchaser at the end of the contract and
(ii) the expected fair value of the residual estimated at the start of the contract,
to be built up over the life of the contract (see paragraph F56).
In other words, the right to receive the infrastructure for a nominal sum (including zero) at the end of the concession period is to be recognised as revenue and an asset whose value emerges during the concession period. The accumulated value of the right at the end of the concession period equates to the written down replacement cost of the infrastructure at that time.
Application Note F does not specify how the emerging interest is to be built up. Therefore, further guidance is needed.
While it might appear that such a right is an intangible asset within the scope of Accounting Standard AASB 138 Intangible Assets, that standard cannot practicably be applied to a right that will have a significant, quantifiable value at the end of its useful life and is likely to have an appreciating value in the interim.
It might appear that the right should be treated as a financial instrument within the scope of Accounting Standards AASB 132 Financial Instruments: Disclosure and Presentation and AASB 139 Financial Instruments: Recognition and Measurement. However, as the receivable is for infrastructure rather than cash it does not meet the definition of a financial asset. Where a nominal payment is required for the infrastructure, a financial liability may arise but it would be immaterial.
The right to receive the infrastructure could be recognised at its present value, which would increase in each year of the concession period until it equated to the written down replacement cost of the infrastructure at the end of the concession period. However, as the right to receive the infrastructure arises in exchange for the concession granted to the operator by the Government, it is part of the 'price' of the arrangement and relates to the entire concession period. Therefore, rather than determining the present value each year, it would be more appropriate to allocate the expected fair value of the right on a systematic basis over the concession period.
A straight line method could be used, thereby allocating an equal portion of the estimated future fair value to each year of the concession period. However, as the right typically has a long life and the value of money is likely to diminish substantially over that period, it would be desirable for the allocation method to correct for that decline. The use of an annuity formula achieves this.
Under an annuity approach, the ultimate value of the right to receive the property is treated as the compound value of an annuity that accumulates as a series of equal annual receipts together with notional compound interest thereon. The discount rate to be used is the NSW government bond rate applicable to the purchaser at the commencement of the concession period.
The annual annuity sum is determined by the formula:
a = St / CVIFa
where:
a | is the annual sum |
St | is the expected value of the infrastructure at the end of the concession period of t years |
CVIFa | is the compound value interest factor for an annuity (from tables) for a given discount rate and concession period. |
The accumulated value of the right as at any particular year during the concession period can be determined as the compound value of the annuity for that number of years, by using the following formula:
Sn = a × CVIFa
where:
Sn | is the value of the infrastructure after n years of the concession period have elapsed |
a | is the annual sum (calculated in the previous formula) |
CVIFa | is the compound value interest factor for an annuity (from tables) for a given discount rate and elapsed portion of the concession period. |
This policy requires that a right to receive infrastructure for a nominal sum (including zero) at the end of a Privately Financed Project (PFP) concession period is to be recognised as revenue and an asset whose value emerges during the concession period. The value is to be allocated during the concession period as if it were the compound value of an annuity discounted at the NSW government bond rate applicable to the purchaser at the commencement of the concession period.
The asset may also need to be revalued during the term of the PFP. Accounting Standard AASB 116 Property, Plant and Equipment provides an appropriate model for revaluing.
Where, during the concession period, the fair value of the right to receive infrastructure increases or decreases, the movement is to be recognised as a revaluation in accordance with Accounting Standard AASB 116 Property, Plant and Equipment as if the right were an item of property to which that standard applied.