CERTIFICACION ISO 9001

The accounting impact for the project will be assessed for both the Council’s accounts and for the National Account purposes. Following the introduction of IFRS, the Scottish Government confirmed that the applicable standards for assessing the accounting treatment for the Moray project were:

 To use IFRIC12 for the local authority reporting, as outlined within the Financial Reporting Manual; and

 For the purposes of the Scottish Government’s budgetary regime to assess the balance sheet status of the assets under the European System of Accounts 1995 (ESA95) which form the basis for the National Accounts. From the Scottish Government’s perspective, this was the applicable requirement to secure revenue support funding. Revenue Support

The accounting treatment for the National Accounts is one of the key considerations in securing revenue support from the Scottish Government. The key areas of the assessment under ESA95 and agreed approach are summarised below. The full accounting assessment is appended to the FBC as Appendix B.

National Accounting for new PPP projects

The basis for making an assessment for the purposes of the National Accounts are laid out in Part IV 4.2 of the Manual on Government Deficit and Debt (MGDD) which has been supplemented by specific guidance issued by the Treasury in September 2009 “Technical Guidance on the Application of the Standards used in the production of National Accounts to PFI and Similar Transactions.” The detailed guidance indicates that it should be applied to:

 All bodies classified to the public sector by the Office for National Statistics. This includes both Moray Council and the Scottish Government; and

 “Long term contracts between government units and non-government partners (public private partnerships),” where there are “services purchased by government on the basis of dedicated assets.” It is expected that this guidance will be applied to the majority of PFI and similar transactions.

The Moray Council Schools project meets both the criteria noted above especially as it follows SOPC4 principles as embedded in the standard NPD contract in Scotland. The application of the Detailed Guidance is also consistent with the direction provided by the letter from Scottish Government.

Treasury Guidance on the Application of MGDD to PFI and similar transactions

The Technical Guidance issued by the Treasury in September 2009 outlines the following steps3 _{in the analysis:}

1. Step 1: Is the project within scope of the Technical Guidance?

- Is the project a contract for services that depends on the provision of dedicated assets?

- Is the public sector procuring authority, the end user or another third party the main purchaser of the services provided by the provision of the dedicated assets?

2. Step 2: Having determined the transaction is within the scope of this guidance, is there strong evidence that the private sector is bearing most of the risk attached to the dedicated assets in question?

This includes consideration of three primary risk factors namely, construction risk, demand risk and availability risk all of which are defined within the Technical Guidance Note. If “the private sector holds construction risk, and one of either demand or availability risk the assets are not considered to be on the public sector balance sheet for the purposes of the National Accounts.” Initially this analysis should be undertaken on a qualitative basis however, if this does not indicate a clear position a quantitative analysis will be required. If there is still doubt as to which party holds the above risks then reference should be made to residual value risk as the determining factor.

3. Are the financing arrangements consistent with this analysis?

This considers the impact any capital injections or public sector guarantees may have on the transfer of risk which is the basis of the determination of the appropriate accounting treatment for national accounts purposes.

Approach

The key issue in considering the accounting treatment for the Moray Schools NPD project for National Accounts purposes is to consider which balance sheet the assets, and associated liabilities should appear. The relevant accounting guidance concentrates on where specific significant risks and rewards lie within the contracts signed (i.e. the economic ownership).

The approach taken follows the structure included within the Treasury’s Technical Guidance and outlined above. In order to undertake the analysis the following steps will take place:

3 _{Per Section 3.3, Technical Guidance on the Application of the Standards used in the production of} National Accounts to PFI and Similar Transactions

1. confirm through detailed reference to the contractual structure and nature of the transaction that the Moray project should be accounted for under the Treasury guidance noted above; and

2. Undertake a qualitative assessment of whether the Project Agreement transfers the risks associated with construction demand and availability (as defined within the Technical Guidance Note) to a sufficient degree to allow a conclusion to be made on the basis of the appropriate accounting treatment for national accounting purposes. In the event that the qualitative review does not provide a definitive view Monte Carlo analysis will be undertaken to establish a quantitative estimate of the risk transfer. In the unlikely event that sufficient risk is not transferred under the three primary risk factors, consideration will be given to the Residual Value Risk in accordance with the Treasury guidance.

The analysis will not take the form of an opinion of the appropriate accounting treatment for national accounts purposes. It will provide an analysis of the contract within the context of the Treasury’s Technical guidance to provide an indication of the appropriate accounting treatment within the context of Moray’s project.

The sign off for the appropriate accounting treatment will be given by Scottish Government and this has been confirmed with the relevant departments.