Public-Private and Public-Public Partnerships (PPP)

3 Accounting

3.4 Liabilities

3.4.22 Public-Private and Public-Public Partnerships (PPP)

3.4.22.10 Public-Private and Public-Public Partnership (PPP) Definition

A Public-Private and Public-Public Partnership (PPP) is an arrangement in which a government (the transferor) contracts with an operator to provide public services by conveying control of the right to operate or use a nonfinancial asset, such as infrastructure or other capital asset (the underlying PPP asset), for a period of time in an exchange or exchange-like transaction. You may also know these as Service Concession Arrangements; however, the accounting is the same.

3.4.22.20 Transferor Accounting and Reporting

Transferors will report revenue as it is receipted. Transferors do not report any liabilities on the Schedule of Liabilities.

To receipt payments, use either BARS Code 34P.PP or 362.00. If the PPP activity is related to the primary operation/function of the fund that the payment is being receipted into, then use BARS Code 34P.PP which is a Charge for Services code.

The “P” stands for prescribed numbers that are related to the function of the activity. Review the chart of accounts to identify the applicable function and determine the full BARS Code.

If the PPP activity is not related to the primary operation/function of the fund that the payment is being receipted into, then use BARS Code 362.00.

3.4.22.30 Operator Accounting and Reporting

At the start of the PPP, operators will not report any inflows or outflows on the Schedule 01. Operators will record actual payments made to the transferor on the Schedule 01 using BARS Code 591.PP.70.

The “P” stands for prescribed numbers that are related to the function of government the PPP is supporting. Review the chart of accounts for your government to identify the applicable function and determine the full BARS Code.

Operators are also required to include a note disclosure about their PPP activity in the Notes to the Financial Statements. See template note at Note X – PPP (Operator).

3.4.22.30 Variable and other non-PPP payments

Variable payments should be excluded from the PPP liability calculation. Variable payments are those that depend on future performance of the government, usage of the underlying asset, or number of users.

However, if the variable payment is fixed in substance, it should be included in the calculations. For example, if an operator is required to remit the greater of 10% of their sales or $5,000 each month, then the $5,000 payment is fixed in substance because the operator will always be required to pay at least $5,000.

Some contracts include additional fees or taxes. Only the portion of the payment that is related to the right to use the underlying PPP asset should be included in the liability calculation. For example, if a PPP contract also includes maintenance and sales tax, those are non-PPP payments and should be excluded from the liability.

BARS Code 591 should only be used for the PPP payments that are related to the right to use the underlying PPP asset. The variable and non-PPP payments should be coded to regular, functional BARS expense codes.  

3.4.1.52 Contract rate increases  

Some contracts include clauses to increase the rates over time. There are two types of rate increases, known rate increases and variable rate increases. An example of a variable rate increase is an increase based on the Consumer Price Index (CPI) where the amount of the increase will vary depending on the CPI. An example of a known rate increase is a flat 3% annual increase where the increase amount is known and can be calculated for each period.  

If the contract includes a variable rate increase, that rate increase should be ignored for purposes of calculating the liability on the Schedule 09, since the increase amount is unknown at the time of calculation.  

For example, there is a 5-year PPP contract that charges $500 per month for the first year and each subsequent year the payment will be reevaluated and increased based on the CPI. The PPP liability is $30,000, which is $500 multiplied by 60 months (5 years). Since we do not know what the CPI increase will be for each subsequent year, the CPI increase is not factored into our calculation.  

When making the monthly payment, only the original $500 used to calculate the liability should be coded to BARS 591.XX.70. For example, if the PPP payment increased to $550 in the second year, the payment would be split into two different BARS codes: $500 would be charged to BARS 591.XX.70 and the remaining $50 would be charged to a functional BARS expense code.  

Conversely, if a PPP payment increases based on a flat rate, that should be factored into the liability. For example, there is a 5-year PPP contract that charges $500 per month for the first year and each subsequent year the payment will be increased by 3%. The PPP liability is $31,855 as shown below:  

This increase is factored into the total liability because it is known and can be accurately calculated at the beginning of the PPP contract.  

3.4.22.50 Schedule of Liabilities (Schedule 09) Reporting

Operators will report a PPP liability on the Schedule 09 measured at the total amount of future payments. See Schedule 09 reporting instructions.

In the year of implementation, any existing PPPs should report a beginning balance on the Schedule 09. The beginning balance reported should be the total amount of payments that were remaining as of the beginning of the year. In subsequent years, the beginning balance should match the prior year ending balance.

Any new PPP contracts that are entered into during the year will be reported as an addition on the Schedule 09. The addition will be the total amount of future payments.

Reductions are the amount the PPP liability is reduced during the year, which is typically the amount of  payments made.

If the PPP liability is remeasured for any of the items listed in Section 3.4.22.70, the change in the PPP liability should be reported as either an addition or reduction on the Schedule 09.

3.4.22.60 PPP Term

To calculate the total amount of future PPP payments for the Schedule 09, governments need to know how many payments will be made, which depends on the PPP term. Here is what should be included in the PPP term:

• The period during which the operator has a non-cancelable right to use the underlying PPP asset

  • plus periods covered by the operator’s or transferor’s option to extend the PPP (if reasonably certain the option will be exercised)

  • and periods covered by the operator’s or transferor’s option to terminate the PPP (if reasonably certain the option will not be exercised)

• PPP term excludes periods for which both the operator and transferor each have the option to terminate or both parties must agree to extend.

Determining whether an extension or termination option is reasonably certain of being exercised requires professional judgement and should take into consideration the specific facts and circumstances at your government. Examples of items to consider in this analysis:

• A significant economic incentive, such as contractual terms and conditions for the optional periods that are favorable compared with current market rates.

• A significant economic disincentive, such as costs to terminate the PPP and sign a new PPP arrangement (for example, negotiation costs, relocation costs, abandonment of significant underlying PPP asset improvements, costs associated with returning the underlying PPP assets in a contractually specified condition or to a contractually specified location, or a substantial cancellation penalty).

• The history of exercising options to extend or terminate.

• The extent to which the underlying PPP asset is essential to the provision of government services.

3.4.22.70 Remeasuring the PPP Liability

The PPP liability reported on the Schedule 09 must be remeasured (recalculated) if any of the following happen:

• Change in PPP term
  The PPP term might change if the government was previously not going to exercise an extension option, but then later determines it will extend the PPP contract (or vice versa). In that case, the PPP liability must be recalculated to include the additional payments related to extending the PPP term.

• Contingency for variable payments is resolved.
  If the PPP payments were variable and later all of the remaining PPP payments become known (no longer variable), then the liability must be recalculated using the known amounts.