Accounting treatment of infrastructure assets

Transcription

1 Accounting treatment of infrastructure assets EPSAS WG Meeting Lisbon, The better the question. The better the answer. The better the world works.

2 Contents Introduction Objectives of the Issue Paper Background Methodology Findings regarding definition, recognition and measurement of infrastructure assets IPSAS IFRS EU Accounting Rules ESA 2010 National public sector accounting frameworks Discussion matters Page 2

3 Introduction Methodology Findings Discussion matters Page 3

4 Introduction Objectives of the Issues Paper Aim of the Issue Paper: To develop an analysis of the accounting treatment of infrastructure assets with a view to financial reporting requirements under the future EPSAS Main issues addressed in the paper: Problematic points/issues with regards to definition, recognition and measurement and advantages and disadvantages of existing approaches to recognition and measurement Categories of infrastructure assets that should be treated by future EPSAS standards taking into account materiality and comparability considerations Whether a future EPSAScontribute to the EC s priority on investment Page 4

5 Introduction Background (1) Why are infrastructure assets significant for public sector accounting? Currently one of the most material items within property, plant and equipment Specialized immovable assets with significant service potential and/or economic benefits Supporting investment in these assets is one of the Commission s top priorities Challenges for the accounting of infrastructure assets On an international level no specific standard on the accounting of infrastructure assets exists IPSAS 17 is seen by some MS as problematic for the accounting and measurement of public infrastructure, e.g. component approach Accounting for infrastructure in accordance with IPSAS is seen as cumbersome (e.g. stocktaking, impairment) Page 5

6 Introduction Background (2) Page 6

7 Introduction Methodology Findings Discussion matters Page 7

8 Methodology (1) Described the current accounting guidance on accounting for infrastructure assets (IPSAS, IFRS, EU Accounting Rules, statistical reporting) Analysed national public sector accounting frameworks, i.e. two member states (France and Austria) and City of Essen based on an analysis of legal requirements, interviews, financial statements as well as secondary literature Page 8

9 Methodology (2) 1. Taking stock of infrastructure assets 2. Componentization of infrastructure assets 3. Categorization of infrastructure assets on the face of the statement of financial position 4. Recognition of infrastructure assets e.g. is a separate standard on infrastructure needed? 5. Measurement issues 6. Impairment 7. Disclosures 8. Financing of infrastructure assets Page 9

10 Introduction Methodology Findings Discussion matters Page 10

11 Recognition and measurement of infrastructure assets - IPSAS 17/21/26 (1) Applicable IPSASs IPSAS 17 Property, plant and equipment, IPSAS 21/26, Impairment of cash-/non-cash generating assets Definition of infrastructure assets IPSAS 17 does not define infrastructure assets but provides characteristics of infrastructure assets: Part of a system or network Specialized in nature and do not have alternative uses Immovable Subject to constraints in disposal Examples of infrastructure assets: Road networks Sewer systems Water and power supply systems; and Communication networks. Page 11

12 Recognition and measurement of infrastructure assets - IPSAS 17/21/26 (2) Recognition IPSAS 17 requires the application of the general recognition criteria for property, plant and equipment also to infrastructure assets Costs incurred after initial recognition are divided into three groups for recognition purposes: Repairs and maintenance expenditure Replacement parts Costs of major inspections Not recognized in the carrying amount of the asset recognized if it meets the recognition criteria recognized if these are a condition of continuing to operate the asset Measurement IPSAS 17 requires the application of the general measurement rules for PP&E also to infrastructure assets Subject to impairment according to IPSAS 21/26 No exception in terms of application of the component approach Page 12

13 Recognition and measurement of infrastructure assets - IPSAS 17/21/26 (3) What is the component approach? Approach requires each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item to be depreciated separately (IPSAS 17.59) In principle measurement approach, but with implications also to recognition: Application of the component approach requires to identify the different items at initial recognition of infrastructure assets E.g. different layers of a road are recognized and depreciated separately based on its respective useful live Component approach gives a more precise view of the resource consumption Page 13

14 Recognition and measurement of infrastructure assets IFRS and EAR Applicable IFRS: No specific standard on infrastructure assets exists Infrastructure assets (such as roads owned by a private sector entity) are to be accounted for using the same principles as those applied to other assets held by entities, which are provided in IAS 16 Property, plant and equipment Applicable EAR: No separate rule exists on infrastructure assets Accounting rule 7 Property, plant and equipment does not define infrastructure assets and as a consequence has no specific accounting requirement for these assets Page 14

15 Recognition and measurement of infrastructure assets ESA 2010 (1) Categorization of infrastructure assets Infrastructure assets are not explicitly identified as a separate asset category under ESA In general, infrastructure assets are primarily included in the subcategory other structures (AN.1122) within the category produced non-financial assets (AN.1) Recognition of infrastructure assets Investments in infrastructure assets by a government are not only recorded in the balance sheet but also in the capital account, and thus reflected in government surplus/deficit Financing of that investment is also recorded in the financial account for the same amount Measurement of infrastructure assets General rule: to value each item as if it were being acquired on the date to which the balance sheet relates Page 15

16 Recognition and measurement of infrastructure assets ESA 2010 (2) Measurement of infrastructure assets (continued) Specific rules for fixed assets: Fixed assets should be measured at market prices if possible or basic prices in the case of own-account production of new assets or If not possible, at current purchasers prices reduced for the accumulated consumption of fixed capital (written-down replacement cost) It is assumed that most fixed assets can be measured at written-down replacement cost In those cases where no direct information on the stock of fixed assets is available, the perpetual inventory method should be used in order to estimate current market value Under the perpetual inventory model: Expenditures that increase the useful life of the assets (e.g. major structural works) can be capitalized as investments Ordinary maintenance and repairs are not capitalized as it is seen as intermediate consumption rather than an investment. Page 16

17 Recognition and measurement of infrastructure assets Country analysis (1) Austria France City of Essen Definition of infrastructure assets No specific definition Characteristics are listed Disaggregated on the face of the statement of financial position into two categories. No specific definition Part of the classes and subclasses of PP&E Not disaggregated on the face of the statement of financial position, No specific definition Guidelines only list examples Disaggregated on the face of the statement of financial position into six categories Disaggregated into three categories in the notes Recognition General PP&E to be applied General PP&E to be applied. General PP&E to be applied Additional guidance is provided to determine economic ownership of infrastructure assets Recognition of subsequent expenditure Expensed unless it prolongs the asset's useful life or adds functionality Expensed if these do not improve the original asset. If the depreciated replacement cost is used, expenses related to preventive maintenance or rehabilitation is capitalized. Additional guidance is provided Page 17

18 Recognition and measurement of infrastructure assets Country analysis (2) Measurement Component approach Austria France City of Essen Initially measured at cost Cost model for subsequent measurement Initially measured at cost (exchange transaction) or at fair value (non-exchange transaction) Cost model for subsequent measurement Initially measured at cost Cost model for subsequent measurement Not applied Not applied Applied but not to all infrastructure assets Page 18

19 Introduction Methodology Findings Discussion matters Page 19

20 Discussion matters (selection) 1. Componentization of infrastructure assets 2. Financing of infrastructure assets 3. Need for supplementary guidance to what is currently foreseen under IPSAS and format of that guidance Page 20

21 Discussion matters Componentization of infrastructure assets Faithful representation in the statement of financial position Application of component approach Each component will be depreciated over its specific useful life resulting in a faithful representation of the infrastructure assets net book value Component approach not applied Depreciation of the full asset over its useful life as such may not result in a faithful representation of the infrastructure assets net book value in the case of multi-component assets with heterogeneous components Comparability Cost versus benefit Ease of application Comparability achieved if all Member States apply the component approach. However, there can be discretion in defining components. Useful lives of components might vary between entities due to entity-specific circumstances Higher implementation cost More complex to apply in practice due to volume, complexity etc. Comparability achieved if none of the Member States apply the component approach. Lower implementation cost Easy to apply Advantage Disadvantage Neutral Page 21

22 Discussion matters Financing of infrastructure assets Upfront grants or pre-financing for/of assets in cases without a clear condition under IPSAS precludes allocating revenues over the period of depreciation => distorts financial position/performance of an entity Member States have regulations in place where entities have to recognize the liability described above at the beginning of lifetime of the related asset irrespective of the fact whether a condition is attached to the grant or not Possible difficulties at first-time adoption: The collection and determination of the relevant grant approval letters for the relevant measurement period was challenging; and The allocation of grants to respective investments/infrastructure assets was very complicated for roads Reference to IPSASB s project on Revenues (IPSASB will likely issue a Consultation Paper in first half of 2017) Page 22

23 Discussion matters Need for supplementary guidance to what is currently foreseen under IPSAS and format of that guidance Is a separate standard on infrastructure assets needed under EPSAS or should additional guidance be included in an EPSAS standard on property, plant and equipment? EY: Supplementary guidance is needed either in the form of a standard or a separate interpretation document; Supplementary guidance should cover the following matters: Componentization of infrastructure assets at initial recognition Economic ownership of infrastructure assets Recognition of subsequent expenditures Accounting for grants used to finance infrastructure assets Impairment Disclosures Narrowing down of options: Option in IPSAS 17 to apply either the cost or the revaluation model Due to the complexity, service concession arrangements should be separately discussed in an issue paper Page 23

24 Discussion Matters Summary Based on the issues paper we have identified the following main discussion matters: Is a separate standard on infrastructure assets needed under EPSAS or should additional guidance be included in an EPSAS standard on property, plant and equipment or should there be no specific guidance on accounting for infrastructure assets? Should the component approach be required for the accounting of infrastructure assets under EPSAS? Please note that the EPSAS Cell on FTI recommended to not apply the component approach for the OBS, but for subsequent accounting (i.e. prospective application of the component approach, see EPSAS Cell on First Time Implementation: Revised Draft Final Report, 2016, p. 11) Do you agree that there should be detailed guidance under EPSAS on how to account for upfront grants or pre-financing for infrastructure assets? Are there additional discussion matters not considered so far? Page 24

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