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Accounting For PPP Projects

Published on Tue, Sep 09,2014 | 16:59, Updated at Tue, Sep 09 at 16:59Source : 

By: Sunil  Kothari - Partner  &  Nikhil Kenjale - Manager, Deloitte Haskins & Sells

As of 31 March 2012, 390 Public Private Partnership (PPP) projects have been approved involving an investment of Rs. 305,010 crore. According to a report published by the World Bank, India has been the top recipient of PPP investment since 2006 and has accounted for almost half of the investment in new PPP projects implemented in the first half of 2011 in developing countries.

In addition to the traditional PPP contracts including Build Operate Transfer – (BOT) Toll and Build Operate Transfer – BOT Annuity, states have also undertaken innovative PPP models. For example, Tamil Nadu and Karnataka has adopted hybrid annuity model for its road projects which includes both grant and annuity.

PPP projects are complex in nature, involving substantial risk-sharing. Typically these are long duration projects involving very high funds requirements that expose the private partner to number of risks including cost escalations, penalties for delays, uncertainties in actual usage etc.

An accounting challenge arises when a private partner wears two hats i.e. construction of the asset/project and operator of the project. It is further complicated because both the roles are interrelated. In most of the cases, discharging obligation of constructing/upgrading the public utility asset gives a right to the private partner for receiving / sharing collection from the proposed use of the public utility.

The current largely prevailing practice is to account for the infrastructure as part of their fixed assets at the construction cost and recognise revenue after the infrastructure is ready and put to use.

Presently there is no mandatory accounting standard or guidance note under generally accepted accounting principles in India (I-GAAP) that prescribes specific accounting treatment for such arrangements. Elaborate guidance is available through IFRIC 12 Service Concession Arrangements*. Appendix A to the converged Indian Accounting Standard 11 (Ind AS 11) “Construction Contracts” is parallel to the said interpretation. However, the notification for this Appendix is deferred and effective date of its application is yet to be announced.

The main accounting aspects of such arrangements are discussed below. Technically there are two possibilities in terms of the revenue source for the private partner/operator:

•         through a right to charge for use of a public sector asset that it constructs or upgrades and then must operate and maintain for a specified period of time; and / or

•         through receiving an unconditional contractual right to receive a specified or determinable amount of cash from the government in respect of the public sector asset.

The public service obligation is an underlying criterion of the Service Concession Arrangements. For a public service obligation to exist, the services offered do not have to be made available to all members of the public. Rather, the services need to be available to benefit members of the public. For example, prisons only accommodate those individuals required to be incarcerated by law, and cannot be accessed by members of the public seeking accommodation. However, prisons would still be considered to provide services to the public. The accounting prescribed for the arrangement possibilities:

·         Intangible Asset Model - Where the operator has a contractual right to charge users of the public services, an operator recognises an intangible asset at the fair value to the extent that it has a contractual right to receive an intangible asset and is amortized over the period in which it is expected to be available for use by the operator.

·         Financial Asset Model - where the operator has a contractual right to receive cash or other financial asset from or at the direction of the grantor, an operator recognises a financial asset to the extent that it has a contractual right to receive cash or another financial asset. The receivable is initially measured at fair value and at amortized cost in the subsequent years.

·         Bifurcated Model - Use of a bifurcated model is prescribed when an operator receives a consideration partly in the form of a financial asset and partly in the form of an intangible asset. E.g. Toll road arrangement- the grantor pays a fixed payment based on availability during the first half of the concession period and then switches to usage payment.

It is important to note that the Operator’s rights over the infrastructure assets are different from owning the infrastructure assets. Hence, the infrastructure assets are not recognised as the property, plant or equipment (PPE) of the operator. This will have major impact on the present accounting by the private partners.

Revenue recognition and measurement will require application of AS – 7 (Construction Contracts) and AS – 9 (Revenue Recognition). AS – 7 shall be used for construction or upgrade services and/or AS – 9 shall be used for operation services, where the operator operates and maintains the public infrastructure.        

Specific cases where the application of the interpretation would be challenging are Take-or-pay arrangements, Payments for capacity availability, guarantee of NPV of revenue with extension of concession term, Guarantee of NPV of revenue with limited extension of concession term and final cash etc.

It is encouraging to note that some of the private players have voluntarily opted for early application of the above recognition, measurement and disclosure guidelines. Upon notification of Appendix A of Ind-AS 11, the implementation challenges pertain to having clear terms of agreement between the government and the private partners that enable identification of intangible assets or financial assets. Also arriving at the “Fair Value” of the consideration to be received is going to make the job further complicated and resultant difficulties for the auditors to establish that the fair values are appropriate.


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