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FASAB looks to increase P3 risk transparency

As the FASAB seeks to ensure that P3s are appropriately disclosing risks to taxpayers, some worry that over-disclosure could discourage P3 pursuits by private entities.

In light of the increasingly popular use of public-private partnerships (PPPs; P3s) in US infrastructure over the past decade, the Federal Accounting Standards Advisory Board (FASAB) is looking to create a framework for ensuring P3 projects are adequately reporting risk with its latest guidance.

The FASAB first discussed introducing P3 guidance in 2012, according to executive director Wendolyn Payne, who explained during a telephone interview that current guidance says that judgements about what should be disclosed rest mostly with preparers and auditors of financial statements, which the board struggles with considering the potential impact on taxpayers.

With that in mind, the board's staff hopes to establish reasonable reporting standards that are of benefit to both taxpayers and the process of P3 procurement – especially in cases of long-term contracts and where Special Purpose Vehicles (SPVs) and other sponsorships, partnerships and trust situations are used.

The draft calls for the establishment of disclosure standards, and defined containment of operating risk and budgetary integrity as the two most important objectives for P3 reporting, since the federal government is accountable to citizens for proper administration of resources.

“We became aware that there were increasing numbers of [P3s], and there was some concern that people weren't fully analyzing and understanding the accounting issues, so we started a broad project on P3s and have now focused in this exposure draft on [risk] disclosures,” Payne said.

To formulate their guidance, the FASAB commissioned a multidisciplinary task force of federal agency and private industry representatives who looked to best practice recommendations issued by agencies such as the United Nations and the World Bank.

The task force concluded that by increasing transparency in the procurement and budgeting process, P3s may become more attractive to taxpayers, as is noted in UN and World Bank guidance.

But some investment professionals, such as Chris Voyce, senior managing director at Macquarie Capital, are concerned that the FASAB's guidance could lead to a discouraging climate of over-disclosure, with Voyce noting that “the accounting treatment doesn't reflect risk transfer,” which he said is the most attractive feature of P3s versus other procurement methods.

“How you communicate the difference between designing, building, financing, operating and maintaining a major project on a balance sheet with all of the risks that entails and entering into a long-term, fixed-price contract with private financing is important,” Voyce said. “If the accounting treatment is similar, then people can't see a difference.”

Payne said she understands that the proposed guidance creates a dilemma, specifically when it comes to materiality, as current guidance does not specify how entities view materiality and allows them to set their own probability thresholds for remote risk.

The FASAB has previously defined 'probable' risk as more likely than not – or 50 percent or higher – with 'reasonably possible' somewhere below that mark, and Payne said that in their current guidance, 'remote' risk is located on the very low end of the risk spectrum. So she believes a key question is whether such low probability risks warrants a higher materiality threshold.

A board representative explained that the spirit of the standard is not for agencies to disclose all of their remote risks (“that would be nonsensical”), however a majority of board members and some of the exposure draft respondents believe that even if there is a low probability event – or, remote risk – with high potential for quantitatively and qualitatively significant material impact, an agency should be required to disclose.

“These are very difficult things to flush out and I don't think the accounting community at large, not just the federal community, has really given prescriptive guidance there,” Payne said.

Last week, the FASAB began reviewing public comments on their exposure draft and plans to again discuss possible changes in the late spring or early summer, a representative said. Under the current proposed time frame, the agency's guidance would be effective for implementation by as early as September 2017.