PSAB Matters Article – Partnerships with Common Goals
Public sector entities may enter into a partnership with one or more parties outside the government reporting entity to achieve some significant common goals.
Section PS 3060, Government Partnerships, establishes standards on how to account for and report an entity’s interest in government partnerships.
What Is a Government Partnership?
A government partnership is a contractual arrangement between a public sector entity and one or more parties outside the government reporting entity that have all the following characteristics. The partners:
- co-operate toward achieving common goals;
- make a financial investment in the government partnership;
- share control of ongoing decision making related to the financial and operating policies of the government partnership; and
- share the significant risks and benefits associated with the operations of the government partnership on an equitable basis.
In most cases, government partnerships are bound by a contractual arrangement that establishes that the partners share control over the partnership. Contractual arrangements may be evidenced in various forms, like a contract, an enabling legislation or an article of incorporation. Activities conducted with no formal contractual arrangement – but having all the above characteristics – are in substance government partnerships.
Forms and Structures of Government Partnerships
Government partnerships may be structured as operations under shared control, assets under shared control or organizations under shared control.
Operations under Shared Control
The operations of some government partnerships may involve the use of the assets and other resources (such as expertise or employees) of the partners, rather than establishing an organization that is separate from the partners themselves. The assets remain under the ownership and control of the contributing partner and the employees or expertise remains those of the contributing partner.
Assets under Shared Control
Some government partnerships involve the shared control, and often the shared ownership, by the partners of one or more assets invested in, or acquired for and dedicated to the purposes of, the government partnership. Assets under shared control are used to obtain benefits for the partners and do not involve establishing an organization that is separate from the partners themselves.
Organizations under Shared Control
Unlike operations and assets under shared control, organizations under shared control involve establishing a separate organization in which each partner has an interest. Each partner usually contributes cash or other resources to the government partnership. The organization owns the assets of the government partnership and incurs liabilities and expenses. It may enter into contracts in its own name and raise financing for the purposes of the activities of the government partnership.
How to Account for an Entity’s Interest in Government Partnerships
How an entity accounts for its interest in a government partnership depends on whether the government partnership is a government business partnership. A government business partnership is a government partnership that:
- is a separate entity with the power to contract in its own name and that can sue and be sued;
- has been delegated the financial and operational authority to carry on a business;
- sells goods and services to individuals and organizations other than the partners as its principal activity; and
- can, in the normal course of its operations, maintain its operations and meet its liabilities from revenues received from sources other than the partners.
An entity recognizes its interest in a government partnership that is not a government business partnership using the proportionate consolidation method. It accounts for its interest in a government business partnership using the modified equity method, supplemented with disclosure of condensed financial information about the partnership.
How an entity accounts for its interest in a government partnership can change due to changes in circumstances resulting from new events or transactions.
How to Account for Investments of Assets in Government Partnerships
When an entity invests assets in a government partnership:
- it receives in exchange an interest in the partnership;
- any loss is recognized when the investment is initially made; and
- the other partners’ share of any gain is deferred.
For a government partnership that is not a government business partnership, the deferred gain is recognized as revenue when the partnership is dissolved.
For a government business partnership, the deferred gain is amortized. Any unamortized deferred gain is recognized as revenue when the invested assets are disposed or when the partnership is dissolved.
Investments of Tangible Capital Assets
When tangible capital assets are invested in a government partnership that is not a government business partnership, an entity treats:
- its investments as disposals; and
- its share of the assets invested by other partners as purchases.
Tangible capital assets invested in a government business partnership are reported in the one-line equity pickup.
What Information Is Disclosed
An entity discloses:
- a listing of government partnerships;
- a description of the nature and purpose of each government partnership;
- the method used in accounting for the entity’s interest in each government partnership;
- the entity’s share of interest in each government partnership;
- condensed supplementary financial information about each government partnership;
- the entity’s share of any contingencies and contractual obligations of the government partnerships; and
- the entity’s responsibility, if any, for the other partners’ share of the contingencies of the government partnerships.
Lydia So, CPA, CA
Principal, Public Sector Accounting Board
Phone: +1 (416) 204-3281