146/98
9 September 1998
GEOFFREY ROBINSON WELCOMES ACCOUNTING CLARIFICATION OF PFI
Paymaster General Geoffrey Robinson today welcomed the long awaited publication of the ASB's guidance on accounting for Private Finance Initiative (PFI) contracts.
Mr Robinson said:
"When we took office I was determined that the PFI should be reinvigorated. One of the key problems spotlighted in the review I commissioned from Malcolm Bates was the absence of clear accounting guidance and in response the Treasury published interim guidance on the accountancy treatment of PFI transactions last September".
"Since then, we have worked closely and constructively with the ASB and there has been a convergence of views. I welcome and accept the principles published today by the ASB, giving greater clarification about how the asset underpinning the service to be delivered should be accounted for."
"I am putting in hand the preparation of new guidance that will apply these principles in a way that will ensure consistency and cost effective compliance throughout the public sector. We shall be consulting widely with the Office for National Statistics, accounting profession, the public sector and contractors. The aim will be to make the new guidance effective from 1 January 1999. Until then the existing Treasury guidance will continue to apply."
"There will be no retrospective changes to signed deals and those out to "Best and Final Offers" will not be affected. For newer projects, even with good procurement and delivery times, any changes following the new principles would not have a significant impact until after 2001 - 02 at the earliest.
"Above all, PFI is driven by value for money and not by the accounting treatment."
The approach taken in the Application note is not dissimilar to that contained in the Treasury's own guidance. The main difference is that the ASB considers that judgements about capitalisation should exclude those stemming purely from the service. During the period of consultation the Board has clarified its position to indicate a broader view of the interaction between service risks and the design, construction and operation of the asset.
The Treasury's initial view, given the broadening of view taken on asset related risks in the Application Note, is that substantially all the risks transferred to the private sector will continue to be recognised in the determination of accounting treatment. While neither HM Treasury nor those drafting the Application note have worked out how their principles will be applied in practice, the Treasury does not expect capitalisation judgements to change greatly and that the private sector contractor's ownership of the asset will in most instances continue to be recognised.
NOTES TO EDITORS
1. The ASB guidelines seek to determine the balance sheet treatment on the basis of the relative risks borne by the principals to the PFI contract. The assessment of risk is, essentially, based on the potential for variation in payment/revenue streams over the life of the contract. The principle is not dissimilar to that adopted in the interim Treasury guidance but is narrower in practical application in that the ASB, in looking for variability, exclude the commercial consequences of purely service related risks within the contract, whereas the Treasury and, some members of the accounting profession and the industry preferred a more integrated approach which looked at all risks inherent in the contract.
2. The Application note is the first time that guidance has been published on this issue for PFI type contracts within the private sector.
3. It is important to note that under generally accepted accounting principles, deals meeting a set of relevant criteria fall to be capitalised only when an asset is commissioned or the contracted services come into operation, and not when the contract for them is signed. Typically, a PFI contract signed today may not come into operation until 2 years hence. It is for this reason that the Treasury's assessment is that if there were to be any major changes in balance sheet treatment as a result of following the ASB lead, the impact would be containable in the aggregate within the significantly increased provision for capital spending during the period covered by the Comprehensive Spending Review.