Accounting for Service Concession Arrangements The New SORP Stephen Hall Consolidation Accountant

Overview The new SORP will change the way some agreements are treated within the accounts. Assets legally owned by others, which we use as part of an agreement may need to be included on the balance sheet. This process is designed to ensure : We are aware of the changes that affect Service Concession Agreements (SCA) under the new SORP We can identify what information is required at the stage when agreements are set up to decide whether the SCA criteria is met We can correctly account for any assets (and the resulting liabilities) for any SCA’s identified.

Current position Current accounting standards do not specifically prescribe accounting treatment for SCA’s Therefore at present the treatment is to expense the costs of any service agreements, and not recognise any such liability. New SORP position Agreements, whereby assets owned by an operator are utilised, which meet the strict criteria (set out in FRS102), will require capitalisation of the assets used as part of that agreement. The liability to make payments for that asset will need to be recognised in a similar fashion to finance leases. Payments made as part of the agreement are split into will need to be split between the ‘capital repayment’ and ‘interest repayment’ similar to those made for finance leases.

Definition of a Service Concession Arrangement ‘A Service Concession Arrangement is an arrangement whereby a public sector body, or a public benefit body (the grantor) contracts with a private sector entity to construct (or upgrade), operate and maintain infrastructure assets for a specified period of time (concession period)’ FRS Public sector entity contracts a private sector entity. Private sector entity constructs or upgrades infrastructure Private sector company then operates the infrastructure for an agreed period of time Private sector company therefore undertakes public services on behalf of the public sector entity Likely examples are halls of residences, catering or utility provision

FRS102 Criteria We control or regulate the services provided, specifically: – To who the service is provided – What service is provided – What price is charged And either: – We control any significant residual interest in the assets at the end of the arrangement – No significant residual value is left at the end of the arrangement (FRS A) Key Questions to ask: 1.Do we act as principal in an agency arrangement? 2.Do we regulate who uses the service? 3.Do we regulate what service is provided? 4.Do we regulate prices charged? 5.Do we guarantee a minimum payment to the operator? 6.If an asset remains at the end of the arrangement-do we own/control this? IF ALL ANSWERS ARE YES THEN IT IS A SCA.

Accounting treatment If the criteria is met, finance lease accounting applies for the asset: – An asset is brought onto the balance sheet based on the cost of the asset to the operator. – A finance lease liability is introduced based on the cost of the asset. – The additional amounts paid within each payment is deemed to be interest. – This is allocated over the life of the lease either through the sum of digits method or the actuarial method.

Process under the new SORP (1) A questionnaire will be available on the intranet going forward. This shall be filled out by school accountants prior to the signing of service agreements. This aims to assist school accountants with the decision for whether an SCA exists, and includes a decision tree for whether the agreement meets SCA criteria.

Process under the new SORP (2)

Process under new SORP (3) If the conditions are met: – Contact Corporate accounts to discuss the terms and confirm if a service concession exists. – Contact the capital team to notify them that a new asset will be accounted for. – The capital team will provide an SCA schedule showing the amount of each repayment to be allocated to interest/capital (similar to that with a lease) Account for asset, and liability based on the value of the asset received: – Dr 9035/ Service concession arrangements asset-cost (either land or equipment) X – Cr Service Concession creditorsX Account for the depreciation on the SCA asset going forward: – Dr 6509 – Depreciation – Service concessions X – Cr 9038/ Service concession arrangements depreciation (either land or equipment) X Account for the interest element based on the value of the repayment, and the SCA ‘lease schedule’ provided: – Dr Service concession creditors X – Dr Service concession interest cost X – Cr Cash and bank X