Public sector involvement in PFI is not driven by accounting considerations. Each scheme is assessed individually on its own merit and the Treasury emphasises that PFI projects must involve a genuine transfer of risk to private investors.
John Laing has adopted accounting policies that are compliant with International Financial Reporting Standards (IFRS,) in so far as it has been codified and endorsed by EU member states, and therefore is compliant with Article 4 of the EU International Accounting Standards (IAS) regulations. John Laing also complies with IFRS as issued by the IAS Board. Individual project companies, as unlisted entities, continue to account in accordance with UK GAAP.
Although individual project companies (SPCs) under PFI contracts may have different accounting policies depending on their investing partners, John Laing has adopted consistent accounting policies across its portfolio of projects.
The Group has three kinds of investments in project companies, with different accounting treatments for each:
- Subsidiaries (where we have control of the company)
- Joint ventures (where the company is under the joint control of two or more parties)
- Associates (where we have a significant influence but no control or joint control over the company)
The accounting treatments are as follows:
Subsidiaries - accounted for in accordance with IFRS 3 ‘Business Combinations' using the acquisition method, whereby 100% of the results, assets and liabilities of the subsidiary are consolidated on a line by line basis in the Group accounts from the effective date of acquisition to the effective date of disposal.
All intra-group transactions and balances are eliminated on consolidation.
Non-controlling interests in subsidiaries may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the subsidiaries’ net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity.
John Laing adjusts the results of the individual project companies in its consolidated results where there are material differences between the results under UK GAAP and IFRS.
Joint ventures and associates - accounted for in accordance with IAS 39 ‘Financial instruments: Recognition and Measurement' with changes in fair value in the period recognised in profit or loss. The fair value of investments in joint ventures and associates is calculated by discounting their future cash flows at an appropriate discount rate.
Financial Asset, Intangible Asset or Fixed Asset
In accordance with IFRIC12 (“Service Concessions”) and the various provisions of IFRS, the Group has determined the appropriate treatment of the principal assets of, and income streams from, PFI and similar contracts within the subsidiary PFI/PPP Project Companies. Results of all service concessions which fall within the scope of IFRIC12 conform to the following policies depending on the rights to consideration under the service concession.
Financial asset - where the Group, as operator, has an unconditional right to receive cash or another financial asset from or at the direction of the grantor, the asset created and/or provided under the contract is accounted for as a financial asset. These financial assets are designated as ‘available for sale’ in accordance with IAS 39.
During the construction phase, revenue is recognised at the fair value of construction services provided in the period and in accordance with IAS11 ‘Construction Contracts’. At this stage, the financial asset represents any unpaid construction services revenue. During the operational stage, the fair value of the financial asset is determined with reference to the total service revenue over the remaining life of the service concession arrangement, discounted at an appropriate discount rate. Changes in fair value are recognised in equity.
Cash received during the operational phase is allocated to services revenue based on its fair value, with the remainder being allocated between capital repayment of the financial asset and interest income using the effective interest method.
Intangible asset - where the Group, as operator, has a contractual right to charge users of the services and the amounts to be received are contingent on the extent that the services are used, the asset created and/or provided under the contract is accounted for as an intangible asset. The intangible asset represents the construction cost of assets which give rise to the contractual right of charge.
As an intangible asset is being recognised, it must be accounted for in accordance with IAS 38 ‘Intangible Assets’. The intangible asset is amortised to estimated residual value over the remaining life of the service concession on a straight line basis and tested each year for impairment.
During construction, revenue is recognised in respect of construction services provided. During the operational stage a second stream of revenue is generated on receipt of payment for usage of the asset/services provided.
