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Infrastructure Insights
Stay on top of accounting challenges in construction and infrastructure
4 minute read
15 July 2021
Large-scale infrastructure projects including utilities (power, water, gas and telecoms), transportation (railroads, roads, ports and airports) and social infrastructure (hospitals and schools) can play a direct role in supporting economic growth, enabling development and creating jobs. The provision of infrastructure also helps with housing construction further supporting economic growth and social needs.
With construction activity increasing in both the private and public sectors, now is a good time to remember the key accounting issues to look out for.
Capitalising costs
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 developer’s balance sheet during the construction phase?
What is the accounting when these public assets are handed over to the local government?
Publicly funding support
Projects that are supplemented with public money, of which there are many in the current environment, have their own unique challenges. Questions to consider here are:
Is the public money a government grant?
Is it an ownership interest in the asset?
Is it non-exchange or exchange revenue, or could it be a loan?
The answer, and therefore the accounting, may depend on whether you are applying the International Financial Reporting Standards (IFRS) or Public Benefit Entity accounting standards (PBE Standards).
Infrastructure funding models
We are seeing different funding models in the industry. For example, Public Private Partnerships (PPPs) have been used in New Zealand for roading and school projects (e.g. Transmission Gully expressway, Pūhoi to Warkworth state highway, the Hobsonville schools to mention some of the more recent larger projects). PPPs often meet the criteria to be a service concession arrangement, the accounting for which can be complex.
It is key to understand the accounting implications of the terms of the arrangement early in the negotiating process to avoid any surprises. Small differences in those terms can result in significantly different accounting outcomes.
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 your directors and board in signing the financial statements. This will also help you through a smooth audit process and provide a fast response to the regulator or other stakeholders should questions be raised.
Hear more from Mariann
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Infrastructure insights video
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Chief Markets Officer and Infrastructure Leader, PwC New Zealand
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