Infrastructure such as utilities (e.g. water), transportation (e.g. roads and airports) and social infrastructure (e.g. affordable and social housing) play a direct role in supporting economic growth, enabling development and creating jobs and in addressing the challenges of growing populations and climate change writes Mariann Trieber, Director of PwC New Zealand.
Local government plays an important role in providing the infrastructure to meet these needs. If your organisation is embarking on a large infrastructure project, it is important to remember the key accounting issues to look out for. Accounting should not change the economic decisions of key stakeholders, but it is critical to understand the accounting implications early on in the process to avoid any surprises in the future.
Infrastructure and construction projects are complex and often require significant investment in getting the projects off the ground, with a planning phase that can span multiple years. Costs directly attributable to the construction are eligible for capitalisation. Any costs that cannot be capitalised have to be expensed as soon as they are incurred, which will impact the entity’s bottom line. For example, feasibility costs are typically expensed. In practice, it can be challenging to identify where the line is drawn.
Public infrastructure built as part of a private development
Private developers may be asked to construct or renew public infrastructure assets, for example stormwater pipes, roads or even parks, as part of a larger development. If this is the case, key questions to consider include:
- Should these assets be on the local government’s or developer’s balance sheet during the construction phase?
- What is the accounting when these public assets are vested to the local government?
Public funding support
Projects supplemented by funding from the central government have their own unique challenges. Questions to consider here are:
- Is the funding a government grant?
- Is it an ownership interest in the asset?
- Is it non-exchange or exchange revenue, or could it be a loan?
Infrastructure funding models
Different types of funding models are being used to address challenges of funding and financing large infrastructure investments. For example, special purpose entities be used to fund large projects with the objective of achieving an ‘off-balance sheet’ treatment.
The key is to understand the accounting implications of the terms of the arrangement early in the negotiating process to avoid any surprises at year end. Small differences in terms can result in significantly different accounting outcomes that may result in an unexpected or undesirable accounting position.
Key message for finance teams
These are just some of the possible accounting challenges in the construction and infrastructure sector. Good documentation of your accounting policies, including any significant judgements and estimates, is critical to support the Council and management in signing the financial statements. This will also help you through a smooth audit process and provide a fast response to your stakeholders should questions be raised.
We appreciate that the sector is primarily focussed on the implications of Three Waters Reform and the Future for Local Government review, and the accounting considerations outlined above need to be a feature of those deliberations. But, regardless of the future direction of local government, these issues will continue to be relevant.
By Mariann Trieber, Director, PwC New Zealand