F55 In some PFI transactions, all or part of the property (eg the land element) will pass to the purchaser at the end of the contract. Where the contract specifies that this transaction should take place at market value at the date of transfer, no accounting is required until the date of transfer, as this represents future capital expenditure for the purchaser.
F56 Where the contract specifies the amount (including zero) at which the property will be transferred to the purchaser at the end of the contract, the specified amount will not necessarily correspond with the expected fair value of the residual estimated at the start of the contract. Any difference must be built up over the life of the contract in order to ensure a proper allocation of payments made between the cost of services under the contract and the acquisition of the residual. At the end of the contract the accumulated balance (whether positive or negative), together with any final payment, should exactly match the originally estimated fair value of the residual. For example, if the expected residual value at the end of a 30-year contact is £20 million, but the contract specifies that £30 million should be paid by the purchaser for that residual at that date, then a credit balance of £10 million should be accrued over the life of the contract, with the corresponding charge each year being included in the service expense. The payment Of £30 million at the end of the contract will extinguish the balance of £10 million and establish an asset of £20 million, representing the value of the residual.
F57 If, during the life of the contract, expectations change so that the expected value of the residual falls (but there are no changes to the payments scheduled under the contract), then consideration should be given to whether there has been an impairment. Ultimately, a positive difference may become negative, in which case a provision is required. Using the example in paragraph F56, if the expected residual value fell to zero after five years, then an expense and a liability of £20 million would be recorded immediately. The remaining £10 million is still accrued over the life of the contract, giving a final liability of £30 million which is paid at the end of the contract.