HM Treasury News Release
146/98 9 September 1998
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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.
# = pounds sterling