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HMRC internal manual

Business Income Manual

Measuring the profits (particular trades): Private Finance Initiative (PFI): accounting: FRS5 ‘Reporting the substance of transactions’

Where the accounting treatment of a private sector operator in a PFI project is governed by FRS5 Application Note F, those who prepare and audit the financial statements have to determine whether the operator bears the benefits and risks inherent in the PFI property. The key test involves them considering the extent to which the operator bears variations in profits or losses in the property (see BIM64095).

Where the benefits and risks in the property lie with the operator, it is accounted for as a fixed asset on the operator’s balance sheet. Where the risks and benefits in the property lie elsewhere, it is accounted for as a financial asset on the operator’s balance sheet.

An operator may have ownership of a property, e.g. a freehold or leasehold interest in the land on which the property is built. However, under FRS5, if the operator’s exposure to the risks in the property is low, that interest may not be shown as a fixed asset on its balance sheet. In such circumstances, the property is often termed as ‘off balance sheet’ to the operator (see examples 1 and 3 at BIM64100 and BIM64110).

What this means is that the operator is viewed, for accounting purposes, as having a financial asset that is reflected in its accounts as a debt due from the purchaser, rather than a fixed asset. This financial asset is often referred to as a ‘finance asset receivable’, a ‘contract debtor’, or a ‘finance debtor’.

Conversely, if under a PFI agreement significant risk in a property rests with, or is transferred to, the operator the property is shown as a fixed asset on its balance sheet, even where the operator does not own the property. In these circumstances the property is normally referred to as ‘on balance sheet’ to the operator (see example 2 at BIM64105).

If the property is off balance sheet to the operator, it is likely to be on the balance sheet of the purchaser and vice versa. However, the risk and reward analysis is subjective and different parties can view the same risks differently. Therefore, it is possible that there will be other outcomes. The fixed asset could be on both, or neither, balance sheets.