The U.K. private finance initiative: An accounting retrospective

The Private Finance Initiative (PFI) in the U.K. has been the subject of considerable interest in government, professional and academic literature. This reflects its importance as one of the classic forms of Public Private Partnership, its adoption in other jurisdictions, the scale of infrastructure investment under PFI legislation and the extent of controversy that has accompanied its development and application. The financial reporting of PFI schemes has been one element of this controversy in view of its potential to limit public sector financial accountability by off-balance sheet financing and the potential for alternative interpretations of its accounting treatment. It is now an appropriate time to review the turbulent history of accounting for the PFI as U.K. public sector accounting is now based upon International Financial Reporting Standards. This has resulted in the redundancy of previous accounting guidance issued by the UK ASB and the Treasury which, at the time of being abandoned, contained unresolved inconsistencies. This paper uses a triangulation method of investigation linking the input to, and output from, the regulatory process to an analysis of public domain evidence of press coverage and letters submitted to the standard setter and interviews with key participants to the standard-setting process. This approach shows that hidden pressures were influential in the process of developing PFI accounting regulation. Different interpretations of the ASB's principles-based Application Note and the Treasury's more rules-based Technical Note created de-facto alternative accounting treatments. The pressure, from organisations such as the Financial Reporting Advisory Board, for reform of PFI accounting was only released by the government's decision to switch the U.K. public sector to IFRS-based accounting.