Accounting for Infrastructure Assets Procured Through Public-Private Partnership Agreement (PSAB Exposure Draft 3160)

The information value or perspective function of accounting is perhaps the most important and transformative in the decisions to allocate capital and entrusts resources to entities efficiently and timely for economic growth and development through the operations of the capital markets. Therefore, the setting of accounting standards must be of high quality, transparency, and comparability in order to assist users to make good economic decisions. Any emerging standards should at least address the different needs of users. This requires standards that meet certain criteria regarding the use of accounting information as “public goods” having “distributive effects” embedded with defined principles base on the notions of neutrality and fair representation.

These are the defining principles upon which policymakers and stakeholders should evaluate the new Public Sector Accounting Board (PSAB) Exposure Draft 3160; Accounting for Service Concession Agreements in Public-Private Partnership (PPP). Public Sector Accounting Board (PSAB) is part of the Canadian Institute of Chartered Accountants which introduces and proposes new accounting rules and guidelines affecting how the public sector in Canada prepares its annual financial reports.  In 2007 the Public Sector Accounting Board (PSAB) under rules 3150, required all local governments in Canada to report infrastructure assets in their annual financial statements. It is clear from the new exposure draft PSAB 3160, that there are residual issues arising out of the 2007 implementation of accounting for infrastructure assets in the public sector under PSAB 3150. The guidance for implementing capital asset accounting in Canada should have been drawn from the International Accounting Standard (IAS16) rules as adopted by Australia Accounting Standard Board (AASB 116) and other governments around the world.

However, what was not clearly defined in the various public sector accounting guidelines and exposure drafts is the question of ownership and subsequently the flow of benefits and the assumption of risks between the public and private interests. Hence, the argument cannot rest solely on the transfer of risks but rather on the totality of risks and rewards that flows from these procurement arrangements. The new exposure draft PSAB 3160 is relying on the guidelines already established under the International Public Sector Accounting Standards Board (IPSASB) issued; Service Concession Arrangements (IPSASB 32), prescribing accounting treatment for grantor (Public Agency) of service concession agreements.

The convergence of IPSAS and International Accounting Standards and affiliated entity, International Financial Reporting Standards (IFRS) involves "IPSASB developing accrual-based International Public Sector Accounting Standards (IPSAS) to address public sector financial reporting issues in two different ways: (1) By addressing public sector financial reporting issues (a) that have not been comprehensively or appropriately dealt with in existing International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB), or (b) for which there is no related IFRS; and (2) By developing IPSAS that are converged with IFRSs by adapting them to the public sector context." Another jurisdiction such as Australia Accounting Standard Board (AASB) is currently reviewing the international standard to assess its suitability for adoption in Australia. AASB often incorporates IAS although it is not mandatory.

The ambiguity regarding ownership of publicly procured infrastructure assets under the PPP arrangements across the various accounting standard boards seems to be the inability or lack of interest in defining and measuring intrinsic values often referred to as social costs and benefits associated with the provision of public goods and services. There are two main issues identified in international jurisdictions such as AASB 16 and IAS 16 (Property, Plant and Equipment) in assessing whether an infrastructure asset is controlled by the grantor that is recorded in public sector consolidated financial statements. The first deals with the issue of when control of specific public sector assets arise relating to the recognition and measurement of infrastructure as non-financial assets and subsequent amortization and depreciation under specific arrangements in a service concession agreement, and secondly, the application of fair value measurement explained in AASB 13 and IFRS 13 in determining the initial measurement of infrastructure assets recognized by the grantor under service concession arrangement.

The uncertainty of ownership and control as well as determining fair value when assets are recognized by the grantor under service concession arrangements could be attributed also in part to the very nature of accounting information in that the information contained in financial reports cannot be user-specific, hence standard setters must ensure that the principle of neutrality be preserved when issuing accounting guidelines. "We believe IFRS 13 is unclear about whether the notion of public service benefit can be applied in these circumstances in determining the highest and best use of the asset. We believe this is a significant issue that has not been adequately addressed either in Australia or internationally in the context of applying IPSAS 32 (we note that the IPSASB does not yet have a direct equivalent to IFRS 13). Moreover, we believe the issue is not confined to the measurement of infrastructure assets recognized under service concession arrangements but potentially has broader implications for accounting for non-financial assets by public sector entities, for example, valuation of social infrastructure, and, possibly, by regulated entities; for example, in the area of accounting for contributed assets by regulated entities."

Yet users, especially in the capital market are demanding more clarity in order to identify potential negative impacts in assessing the implications of the emerging public-private capital and ownership structures in accounting for infrastructure assets under service concession arrangements. "As currently drafted these are likely to have a negative effect on the quantity and quality of PPP transactions in Canada. It is of great concern to the Canadian Council for Public-Private Partnerships (CCPPP) that under the proposed Exposure Draft the accounting treatment for the following transactions would be the same (assuming the same construction cost)": 

1.       A Design-Build, paid entirely by government through milestone construction payments and/ or substantial completion payments (DBF),

2.       An availability payment based PPP concession with performance-based payments made over 30 years (DBFOM)

3.       A user pay transaction, where no payments are made directly by government but revenues are created by the right to levy a charge on users.

CCPPP believes the three types of contracts outlined, "have very different risk profiles and liabilities for the public sector and to record, the same asset and liability for each seems prima facie wrong. It is important that accounting treatment is able to distinguish between these and provide for a fair representation of the financial exposure of the public entity." 

The issues identified and are now being addressed in the new exposure draft will advance the debate over emerging issues of ownership and control, as well as fair value measurement, since prior reviews were done outside the context of evolving at public policies at the time. Bill 135 in 1993 and the Alternative Financing and Procurement (AFP); Ontario's Public-Private Partnership Policy Framework in 2004 were advancements in public policies that should have provided the context for the application of tangible capital asset accounting especially for concession arrangements already in place.

The financial landscape was also changing as the world was reacting to the largest financial meltdown in history. The government was perhaps feeling the onset of a changing economic and financial landscape prior to 2008 collapse of the US economy. Public bureaucrats were extremely averse to the assumption of any liabilities arising out of existing or future Public-Private Partnership. Transferring of risks and keeping the infrastructure deficits off the public's balance sheet were the main concerns then as ownership came with risk and liabilities.

Now the new exposure draft PSAB 3160 looms large over those unresolved issues of ownership and control in Canada's Service Concession Arrangements and by extension international debates and subsequent adoption of IPSAS guiding principles prescribing accounting treatment for grantor (Public Agency) of service concession agreements, under which the question of ownership and control of infrastructure assets remained unclear ."Interpretation 12 was issued by the International Financial Reporting Interpretations Committee in 2006 and was subsequently endorsed by the Australian Accounting Standards Board. The Interpretation deals with an operator’s accounting for service concession arrangements that fall within the scope of the Interpretation. IPSAS 32 essentially mirrors Interpretation 12 in relation to its scope, principles for recognizing an asset and terminology. However, as yet no definitive guidance for grantors of service concession arrangements has been issued by either the IASB or the AASB."

In 2007, AASB debated and considered the following approaches regarding the operation of service concession arrangements having implication for accounting policies selected by the grantor:

1.       The risk/reward approach suggests that a party will recognize an asset on its balance   sheet  when the party has access to the full benefits and inherent risk of ownership.

2.       The control approach implies that the recognition of the asset and subsequent         measurement at fair value is based on who exert full control over the use of the asset.

3.       The rights and obligation approach implies that shared ownership of the asset with the   grantor recognizing a smaller unit of account than the operator.

4.       The control or regulation approach suggests that the party who controls or regulates the   use of an asset would recognize the asset on its balance sheet.

Australia (AASB) proactive role in debating these issues within the broader context of accounting principles and guidelines concluded that "the first three approaches outlined are appropriate bases for grantors to formulate an accounting policy because they are founded on existing accounting principles; the risks and rewards approach reflects IAS 17, the control the approach is aligned with the principles of IAS 16 and the rights and obligations approach is considered to be similar to the principles in IAS 39/AASB 139 Financial Instruments: Recognition and Measurement (IAS 39). However, the Panel indicated its preference for either the risks and rewards approach or the control approach."

PSAB 3160 should, therefore, seek guidance based on the Australian approach by evaluating accounting principles already established in international standards to define and clarify ownership and control of infrastructure assets within the context of the two predominant structures for service concession arrangements; the availability and user-pay structures. These accounting guidelines can be found in the following standards:

·         IAS 17 is to be superseded by IFRS 16 dealing with the classification of leases. IFRS 16 classifies leases into two types; a finance lease if the lease transfers substantially all the risks and rewards incidental to ownership; and an operating lease if the lease does not transfer substantially all the risks and rewards incidental to ownership.

·         IAS 16 establishes principles for the recognition of non-financial or non-current (recognizing property, plant, and equipment) assets, defining their initial measurement and subsequent valuation to including depreciation charges and impairment losses to be recognized.

·         IAS 39 is to be superseded by IFRS 9. "IAS 39 establishes principles for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items. It also prescribes principles for derecognizing financial instruments and for hedge accounting." IFRS 9 requires the classification of financial assets into three (3) categories for the purpose of determining the appropriate measures, namely; fair value through profit and loss, amortized cost and fair value through other comprehensive income. It also defines non-equity financial assets for the purpose of recognition and measurement.

Service concession arrangements have typically been considered to be either; the availability- to-use structures, where the operator builds, operates and finances a project in exchange for a payment stream from the grantor, or user-pay structures, where the operator builds, operates and finances a project in exchange for a right to charge users.

However, the implementation of this new exposure draft (PSAB 3160) to deal with issues of ownership and control within service concession arrangements under the framework of a public-private partnership must contend with a number of challenges dealing with the emergence of hybrid structures. Hybrid service concessions are often a combination of the available-for-use and the user-pay models created to effectively share demand risk among public and private interests.

Additionally, the preponderance of state power to act in the interest of public health and safety especially in the context of eminent domain is the proverbial "elephant in the room". These challenges are even more problematic in the delivery of social infrastructures like prisons and hospitals when not only trade is global but diseases are pandemics and the ever-increasing risks of climate change are real. These social and environmental challenges will no doubt shape the outcome of the current debate surrounding service concession arrangements in public infrastructure delivery as it relates to the questions of risk and rewards, rights and obligations in defining ownership and control of public infrastructure assets procured through Public-Private Partnership Agreements.