Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Availability Payment Arrangements

Introduction

GASB 94 provides guidance for accounting and financial reporting for Availability Payment Arrangements (APA). An APA is an arrangement in which the state agency (transferor) compensates the operator for activities that may include designing, constructing, financing or maintaining and operating an underlying nonfinancial asset for a period of time in an exchange or exchange-like transaction. The payments by the state agency (transferor) are based entirely on the asset’s availability for use rather than on tolls, fees (or similar revenues) or other measures of demand. Availability for use may be based on specified criteria (such as the physical condition of the asset, construction milestones or the achievement of certain availability measures).

In accordance with GASB 94, APAs are different from public-private or public-public partnerships (PPPs) because:

• The transferor retains both demand risk and responsibility for collecting fees.
• The transferor does not grant the operator the right to provide public services to third parties for compensation — instead, the operator is paid directly by the transferor for access to the asset or for the services provided.

In an APA, the state agency is effectively procuring a capital asset and/or related services rather than receiving compensation from another entity to deliver public services.

Design, Construct and Finance

APA contracts that include components related to designing, constructing, or financing a nonfinancial asset must be evaluated to determine if the arrangement results in the acquisition of an asset by the state agency. When ownership of the underlying asset transfers to the agency by the end of the contract, the arrangement is accounted for as the acquisition of a capital asset and the incurrence of a corresponding liability.

At the commencement of the APA, the agency must recognize:

• An asset representing its right to access or control the underlying nonfinancial asset
  –AND–
• A liability measured as the present value of payments expected to be made to the operator over the term of the arrangement.

The discount rate used must be the interest rate implicit in the arrangement, if readily determinable; otherwise, the agency’s incremental borrowing rate must be used.

For APA contracts involving multiple underlying nonfinancial assets with differing contractual terms, each asset must be accounted for as a separate component. In addition, assets that belong to different major classes must be accounted for separately. Agencies must account for APAs in the LTLN web application and disclosed in Note 5–Long-Term Liabilities.

Subsequent Measurement

After initial recognition, the:

• APA liability must be reduced over time as payments are made, with a portion of each payment recognized as interest expense.
• Asset must be amortized over the shorter of the asset’s useful life or the term of the arrangement, depending on whether ownership transfers.

Changes in expected payments or other key assumptions require remeasurement of the liability. When remeasurement occurs, the liability is recalculated and the corresponding adjustment is made to the related asset.

Operation and Maintenance

An APA related to operating or maintaining a nonfinancial asset must be reported by the state agency as an outflow of resources, expensed, in the reporting period to which the payments relate.

GASB 94 requires state agencies that engaged in an APA containing multiple components to recognize each component as a separate arrangement. If a state agency enters into an APA that contains both a component related to the design, construction or financing of a nonfinancial asset and a component related to providing services for the operation or maintenance of a nonfinancial asset, the state agency must account for those components as separate contracts.

Allocation of Multiple Components

To allocate the contract price to the different components, the state agency must use any prices for individual components that are included in the contract if the price allocation does not appear to be unreasonable based on the terms of the contract and professional judgment. This is accomplished by maximizing the use of observable information (for example, using readily available observable stand-alone prices). Stand-alone prices are those that would be paid or received if the:

• Same or similar nonfinancial assets were acquired individually
• Same or similar services for the operation or maintenance of the nonfinancial assets were contracted individually

Some contracts provide discounts for including multiple assets or asset and service components together in one contract. Those discounts may be considered when determining whether individual component prices do not appear to be unreasonable. For example, if the individual component prices are discounted by the same percentage as normal market prices, the discount included in those component prices would not appear to be unreasonable.

If a contract does not include prices for individual components, an agency must use professional judgment to determine its best estimate for allocating the contract price to those components, maximizing the use of observable information. If it is not practicable to determine a best estimate for price allocation for some or all components in the contract, the state agency must account for those components as a single contract.

If multiple components are accounted for as a single contract, the accounting for that APA must be based on the primary component of the contract.

Remeasurement and Modifications

The state agency must reassess APA arrangements throughout their term. Remeasurement of the APA liability is required when there are changes in the amount or timing of expected payments, including:

• Contract modifications
• Changes in performance requirements
  –OR–
• Revisions to payment structures

When remeasurement occurs:

• The liability is recalculated using updated assumptions and discount rates as appropriate
• The corresponding adjustment is made to the related asset

Disclosure Requirements

GASB 94 requires comprehensive disclosures for APAs. At a minimum, agencies must disclose:

• A general description of the APA, including the nature and purpose of the underlying asset
• The terms and duration of the arrangement
• The amount of the asset and related liability recognized
• A schedule of future payments to be made under the arrangement
• Information about variable or contingent payments
• Significant assumptions used in measurement
• Provisions related to termination, renewal or extension

In addition, agencies must evaluate APA arrangements under GASB 102 to determine if the arrangement introduces significant risks or constraints that require disclosure in Note 17 – Risk Management.

Sample — Design, Build, Finance and Operate a Bridge

On Jan. 2, 20X0, the Texas Department of Transportation (TxDOT) (the transferor), enters an arrangement with a corporation to design, build and finance the construction of a bridge (the Kotzman Bridge). The corporation will collect all tolls for the bridge for 40 years and remits those tolls to TxDOT. TxDOT pays the corporation $10 million at the start of the project and another $10 million on the date the bridge is placed into service. Additionally, TxDOT pays the corporation $2 million annually for each of the 40 years the corporation will operate the bridge (to compensate the corporation for designing, building and financing the bridge) beginning in the reporting period in which the bridge is placed into service. TxDOT also remits $100,000 per month during the 40 years to compensate the corporation for collecting the tolls. The bridge is placed into service on Oct. 31, 20X1. After payment of the $10 million for completion of the project, the present value of future payments to the corporation are $40 million.

Accounting at the Commencement of the APA

TxDOT must report an asset for the initial payment of $10 million to the corporation.

Accounting effect of above entries:

Accounting in Future Years

• On the date the Kotzman bridge is placed into service, TxDOT must recognize a capital asset for the bridge in the amount of $60 million. This amount consists of $10 million at the start of the project, $10 million at the date the bridge is placed into service, $40 million present value of future payments.
• TxDOT must apply existing capital asset guidance (including depreciation) to the bridge.
• TxDOT also must recognize a liability in the amount of $40 million to the corporation for the present value of the future annual payments to the corporation.

TxDOT must record the current and noncurrent portions of the APA installment payments each year. Each payment must record the principal and interest expenditures which totals the APA obligation payment. The recorded amounts are based on the Amortization Schedule Example table shown at the end of this section.

Business-Type Activities

Accounting effect of above entries:

Government Activities

Accounting effect of above entries

Business-Type Activities

Accounting effect of above entries:

Government Activities

Accounting effect of above entries:

APA Installment Amortization Schedule at 3.93% Discount Rate