Proposal:How SCAs are dealt with within public sector accounting.

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Chapter 1Introduction




The Public-Private Partnership Model is a new phenomenon around the world

  1. Background to the Study

The aim of this dissertation is to shed light on how Service Concession Arrangements (SCAs) are dealt with within the sphere of public sector accounting.

A clear distinction between the public and private sectors in mandatory. The private sector is composed of organisations owned by private individuals, and do not form part of a governmental body. The private sector includes corporations set up both for profit and non-profit purposes, and includes partnerships and charities. These entities are owned and operated independently from the government or from governmental entities. Local bodies which form part of the private sector include private and church schools, private hospitals, and private homes for the elderly.

In opposition, the public sector is composed of organisations that are controlled and operated by the Government. This includes both the state as well as local governance, public corporations and other governmental entities, authorities and agencies which form part of an operational activity administered by the central unit. Public bodies in Malta include the Education Department, healthcare bodies and the healthcare services provided through national hospitals and local policlinics, along with police and prison services, and homes for the elderly operated and administered by a government branch.

  1. Service Concession Arrangements (SCAs)

The term Service Concession Arrangement (SCA) can be used interchangeably with the term Public-Private Partnership (PPP). It is important to point out that according to terminology there is not much difference between SCAs and PPPs; in fact they have frequently been used interchangeably to refer to one and the same thing. Thus, in this thesis the two terms are taken to hold the same meaning.

SCAs are being introduced as an alternative to the traditional procurement or privatisation processes, which have for a long time been used by governments to accomplish a public duty. PPPs can also address the problem of limited public funding by gaining upon alternative approaches to public procurement whilst encouraging projects that are essential for economic competitiveness and growth.

Such a transition has also been spurred because most of the risks associated with the underlying projects were still being borne by the Government through procurements. However in a PPP these risks are allocated between the two parties in play. The allocation of risk can be quite complex, and thus in order to determine the proper accounting treatment of these arrangement and the assets and liabilities associated with these transactions, the need was felt to draft standards which cater for these concessions.

The emergence of PPPs heralds collaboration between the public and private sectors across differing levels of policy fields, such as transportation, healthcare, housing, education and leisure activities, to name a few. In Malta, PPPs were introduced as a means of gaining efficiency cost savings so as to lower the country’s deficit, whilst helping to spur public service efficiency and service quality. In Malta SCAs have taken place in healthcare and elderly care, along with transportation and infrastructural projects, and agreements concerning leisure activities.

  1. Public Sector Accounting in Malta

As outlined by Mula (2012, p. 1), there exists discrepancy in accounting by Ministries to accounting by private bodies, by government entities and by Local Councils;

“Currently, the accounting methodology used by the Central Government of Malta is the cash basis, using the Departmental Accounting System (DAS) […] On the other hand, most of the government entities and agencies, such as MCAST, University of Malta and Junior College, use accrual based accounting system complying with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU).”

(Mula, 2012, p. 1)

However, given this divergence the Maltese government is committed to implement modern financial methods in managing public finance. This commitment stems from the inclination to generate meaningful financial information that will enable comprehensive understanding of the overall financial situation of the local government, thus providing the footing for constructive long-term financial projections and strategies. This commitment has translated into a decision to introduce gradually accrual accounting in all Ministries and their respective departments.

The first move to introduce accrual accounting system in the Maltese public service took place back in 1998 (Mula, 2012, p. 1). However in Malta such a transition has been hindered, and until recently minimal developments have taken place. The matter of financial reporting by the public sector has attained importance in view of the introduction of the Malta Government Accounting Standards (MGASs), the intent of which was to serve as guidelines applicable to all public sector entities when reporting to the Treasury. These standards were predominantly based upon the requirements of the International Public Sector Accounting Standards (IPSAS), whilst focusing on the accounting requirements of the public sector (Grant Thornton, n.d.).

The majority of governments today still rely on cash accounting, which has been along the years the principal accounting method used by the public sector. Such form of accounting has its basis on cash payments and cash receipts which are recorded as they occur. However it fails to capture information with regards to assets owned and liabilities owed by the public sector. As a result cash accounting is only capable of presenting a very short-term view of public finances.

On the other hand under the accrual basis of accounting, transactions and economic events are recorded as they happen, regardless of when cash inflows or outflows occur. This gives rise to a comprehensive view of the government’s assets and liabilities along with an overview of its financial performance and cash flow. IPSAS are often taken as a reference point for governments wishing to incorporate accrual accounting as their basis for bookkeeping.

At present, the Treasury Department (TD) has issued accrual accounting circulars which deal with specific line-items, amongst them inventory and control of debtors and creditors. These circulars explain the accounting methodology to be used on an accruals basis. Based on these circulars, Ministries are to provide accrual information to the TD, so as to enable it to formulate accrual financial statements for internal purposes. Furthermore, it is to be noted that Government entities and Local Councils presently apply IFRS in their compilation of accounting information, forwarding this information to the TD. Therefore, although the transition for Ministries preparing accrual financial statements is still in the pipeline, the government is overall at present preparing accounting statements based on a mix of cash and accrual information.

As purported by Mula (2012, p. 2), the Accounting Methodology and Compliance Unit is still pursuing the introduction of accrual accounting methodology as a platform to provide a more refined level of financial control throughout the Maltese government, its Ministries and Departments.

  1. International Public Sector Accounting Standards (IPSAS)

IPSAS are issued by the International Public Sector Accounting Standards Board (IPSASB) which is an independent standard setting body and a branch of the International Federation of Accountants (IFAC). These standards explain the recognition criteria, measurement basis, and the presentation and disclosure requirements that public sector entities need to adhere to when preparing financial statements. One of the aims of the IPSAS is to aid in smoothening the transition from cash based accounting to an accrual basis of accounting through the application of transitional provisions, which are to be implemented until the public sector fully applies accrual accounting.

This dissertation deals with the application of IPSAS 32, which is a standard drafted by the IPSASB, dealing principally with SCAs. IPSAS 32 mirrors the application of IFRIC 12, which was issued by the International Financial Reporting Interpretations Committee (IFRIC). Whilst the latter deals with the accounting requirements for the private sector operator in an SCA, the former tackles SCAs from the point of view of the public sector entity. Since the aim is to hold the same application both in IPSAS 32 and in IFRIC 12, “the scope, principles for recognition of an asset, and terminology [found in IPSAS 32] are consistent with the applicable guidance in IFRIC 12”, (IPSASB, 2013, p. 1414). IPSAS 32 also draws upon SIC 29, which is additional interpretation guidance provided by the Standing Interpretations Committee (SIC) upon the matter.

  1. Need for the Study

As outlined by IFAC (2008), due to the general complexity of the transactions involved in SCAs, the financial reporting of assets and obligations for both the public and private sector entities was rather unclear. IFAC attributes this lack of clarity to the fact that until recently there was little in the way of accounting and financial reporting guidance specific to SCAs.

Furthermore, IFAC is of the opinion that lack of specific guidance for SCAs has caused divergences in how the property in these arrangements is accounted for. This in some cases has led to assets being left out of the books of either the public sector entity, or of the private sector entity. In shady circumstances, SCAs have been used by public sector entities as a means to fulfil their infrastructural needs and provide civic services whilst not recognising the property, any related expenses, and any other means of financing liabilities in their financial statements, thereby giving the illusion that the government has met its fiscal targets.

The benefits which could be reaped through SCAs and through the PPP process in general are numerous. However, although such potential is widely accepted and strived for in Malta, there is still room for improvement. Moreover, locally there still exist some unexploited areas of study when it comes to partnerships between the private and public sectors; and one such area of study is concerned with the accounting treatment of SCAs.

Adding the above factors with the present situation in Malta whereby the resources within the government’s departments dealing with corporate services are still scarce, it comes to no surprise that research in this area is still in its infancy stage. Therefore the rationale behind this research is to serve as a guide by inducing awareness, especially in view that IPSAS 32 has become effective in the year 2014. Moreover, should the Maltese central government adopt an accrual accounting methodology as its reporting basis, then IPSAS 32 would be applicable. As mentioned above, government entities already use accrual accounting[1] and reference IFRS, however there is no IFRS which deals specifically with SCAs, and thus these may need to refer to IPSAS 32.

  1. Aims and Objectives of the Study

The aim of this study is to anticipate the impact of IPSAS 32 on accounting for SCAs entered into by the Government of Malta.

The objectives in achieving such an aim are;

  1. To identify the process currently set-up by the Maltese Government when it comes to SCAs;
  2. To analyse what is being proposed with regards to SCAs at a European and international level through IPSAS 32;
  3. What is the way forward; and what problems could be encountered through this transition.
  1. Dissertation Layout

The following are the chapters which make up this dissertation along with a brief description of each:

  • Chapter 1 provides a general indication of the topic as well as to serve as a background and introduction, and to explain the need of the study along with its aims and objectives.
  • Chapter 2 analyses the theory and standards which focus on SCAs, and highlights issues regarding accounting for SCAs in the public sector.
  • Chapter 3 discusses the research methodology used to collect the relevant information for the study
  • Chapter 4 examines and analyses the findings which emerged from the research carried out
  • Chapter 5 discusses the findings in the light of information uncovered by other researchers
  • Chapter 6 wraps up the dissertation with a summary of the study, together with the conclusions reached and recommendations

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[1] Refer to Section 1.3 p.5