GROUP MEMEBERS
1.PRECIOUS T PHIRI R206181S
2.CHIYEDZA CHICHEWO R205581Q
3.RUFARO E CHOUROMBO R204051T
4. LESTINENCE MUFUTUMARI R204059F
5.TAPIWANASHE C SHARARA R205591Y
AFA ASSIGNMENT 1 AND 2 SOLUTIONS
PART 1: USING YOUR KNOWLEDGE OF WHAT CONTIGENT LIABILITIES ARE, AND
HOW THEY ARE ACCOUNTED FOR, CLEARLY EXPLAIN HOW CONTIGENT
LIABILITIES ARE CREATED IN PPPs ARRANGEMENTS AND DISCUSS HOW SUCH
COSTS HAVE BEEN MANAGED AND ACCOUNTED FOR IN DIFFERENT
JURISDICTIONS WERE THESE PPPs HAVE BEEN USED
1. DEFINITION OF CONTIGENT LIABILLITIES IN PPPs
IAS37 defines a contingent liability as a possible obligation that arises from past events and
whose existence will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity or a present obligation that
arises from past events but is not recognised because:
(i) it is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
Public-Private Partnerships (PPPs) are increasingly being utilized by governments worldwide to
finance infrastructure projects and deliver public services. While PPPs offer significant benefits,
they also create contingent liabilities for the public sector. Contingent liabilities are potential
obligations that may arise from future events, such as early contract termination, minimum usage
guarantees, or performance-based payments.
IAS37 requires that contingent liabilities should not be recognized in the statement of financial
position but should instead be disclosed in the notes, unless the possibility of an outflow of
economic benefits is remote.
Creation of Contingent Liabilities in PPPs
Contingent liabilities are recorded as journal entries. Contingent liabilities require a credit to the
accrued liability account and a debit to an expense account. Once the obligation is realized, the
balance sheet’s liability account is debited and the cash account is credited.
• In PPPs, contingent liabilities typically emerge from the risks associated with the
project and are allocated between the public and private sectors. These risks can
include construction delays, cost overruns, performance issues, or changes in legal or
regulatory frameworks.
• Early Contract Termination: Governments may face contingent liabilities if they
prematurely terminate a PPP contract, potentially leading to compensation payments
to the private partner.
• Minimum Usage Guarantees: Governments may provide guarantees to ensure the
private partner receives a minimum level of revenue from the PPP project. If actual
usage falls below the guaranteed level, the government may be obligated to
compensate the private partner.
• Performance-Based Payments: Governments may structure PPP contracts with
performance-based payments, linking payments to specific performance targets. If the
private partner fails to meet these targets, the government may have to make
additional payments.
• Demand and Revenue Risks: If the actual demand for the service or usage of the
infrastructure falls short of project levels, the private partner’s revenue may be
adversely affected. In such cases the government may have to provide financial
support to ensure the private partner’s financial viability and prevent service
disruption
• Legal and Regulatory Risks: If there are changes in laws and regulations and if these
impose additional costs or restrict revenue generation the private partner may seek
compensation from the government thus resulting in contingent liabilities for the
government.
Management of Contingent Liabilities in PPPs
Management problems also arise once a government has incurred a contingent liability.
Governments can employ various strategies to manage contingent liabilities in PPPs:
• Contractual Risk Allocation: Carefully drafting PPP contracts to clearly define the
allocation of risks between the public and private parties can minimize contingent
liabilities.
• Risk Transfer Mechanisms: Projects need to be monitored to reduce risks if possible.
Governments can utilize risk transfer mechanisms, such as insurance or guarantees, to
shift certain risks to third parties, reducing their exposure to contingent liabilities.
• Financial Stability Provisions: Contingent liabilities have a cost but judging what the
cost is and whether it is worth incurring is difficult. Except in the case of contingent
liabilities created by simple guarantees of debt governments usually can incur
contingent liabilities to other obligations. Hence, incorporating financial stability
provisions into PPP contracts can help governments maintain fiscal discipline and
avoid excessive contingent liabilities. The International Monetary Fund (IMF), the
World Bank often warn of the risks.
Accounting for Contingent Liabilities in PPPs
Recognition: A provision for a contigent liability is recognized if there is a present obligation as
a result of past events and it is obvious that an outflow of resources embodying economic
benefits. If it is not probable that an outflow of resources will be require, the contigent liability is
not recognized as a provision that may require disclosure in the financial statements.
Measurement: Two approached can be used to measure contingent liabilities, namely the
expected value approach which requires the company to estimate the total cost of the liabilities
and record it as a portion in the financial statement and the probability weighted approach which
requires the company to estimate the likelihood of the liability occurring and record the
estimated liability as a provision
Review and update: Contingent liabilities should be reviewed at each reporting date. If there is
a change in the estimate of the outflow or the likelihood of the obligation, the provision is
adjusted accordingly
Disclosure: If a provision for a contingent liability is recognized. It is disclosed in the financial
statements along with relevant information about the nature of the liability, uncertainties
involved and the potential financial impact. If a provision for a contingent liability is not
recognized because the out flow is not probable, the contingent liability is disclosed unless the
possibility of an outflow is remote.
PART 2: IN YOUR OPINION DO YOU THINK ARE ECONOMIC DEVELOPMENT?
PPPs can serve as effective tools for economic development by:
• Mobilizing Private Sector Capital: PPPs leverage private sector capital to finance
infrastructure projects that governments may struggle to fund solely through
public resources.
• Enhancing Efficiency and Innovation: PPPs introduce private sector expertise and
efficiency into public service delivery, potentially improving project execution
and innovation.
• Risk Sharing: PPPs allow governments to share risks with the private sector,
reducing their exposure to potential cost overruns or project failures.
• Service Delivery and Quality: the involvement of the private sector introduces
competition and performance-based contracts leading to improved service
delivery standards which can have a positive impact on the overall economy
enhancing productivity, attracting businesses and improving the quality of life for
citizens
PART 3: PPPs for Zimbabwe's Development Agenda
• PPPs could play a crucial role in Zimbabwe's efforts to achieve its Vision 2030 and
Sustainable Development Goals (SDGs) by 2030. PPPs can help Zimbabwe:
• Address Infrastructure Deficiencies: Zimbabwe faces significant infrastructure gaps
in transportation, energy, and water sectors. PPPs can provide the necessary financing
and expertise to upgrade and expand these critical infrastructure networks.
• Improve Public Service Delivery: PPPs can enhance the quality and efficiency of
public services, such as healthcare and education, by introducing private sector
innovation and management practices.
• Promote Economic Growth: PPPs can stimulate economic growth by generating
employment opportunities, attracting foreign investment, and fostering a business-
friendly environment.
PPPs, when carefully structured and managed, can be valuable tools for economic development.
Zimbabwe can leverage PPPs to address its infrastructure deficiencies, improve public service
delivery, and stimulate economic growth, contributing to the achievement of its Vision 2030 and
SDGs. However, it is crucial to carefully assess the risks and benefits of each PPP project and
ensure that they are aligned with the country's development goals and fiscal capacity.
PART 4: USING IFRS 11 JOINT VENTURES, EXPLAIN WHICH FRAMEWORK
SHOULD BE USED TO ACCOUNT FOR PPPs
A PPP typically involves a contractual arrangement between a public sector entity (such as a
government or governmental agency) and a private sector entity, where both parties have joint
control over the arrangement and share in the risks and rewards associated with the project. The
accounting treatment for contingent liabilities in PPPs depends on the specific jurisdiction and
applicable accounting standards. IFRS 11, "Joint Arrangements," is an arrangement of which two
or more parties have joint control and the following characteristics are present; the parties are
bound by a contractual arrangement and the contractual arrangement gives two or more of the
parties joint control of the arrangement. It provides guidelines for accounting for joint
arrangements, which may include certain PPP structures. IFRS 11 requires entities to assess
whether they have joint control over an arrangement and, if so, to account for their share of the
arrangement's assets, liabilities, revenues, and expenses.
IFRS 11 recognizes two types of joint arrangements:
1. Joint Operations: In a joint operation, the parties that have joint control have rights to the
assets, and obligations for the liabilities, relating to the arrangement. Each party recognizes its
share of the assets, liabilities, revenues, and expenses in its financial statements.
2. Joint Ventures: In a joint venture, the parties that have joint control have rights to the net
assets of the arrangement. Each party recognizes its share of the investment in the joint venture
as an investment on the balance sheet and its share of the joint venture's profits or losses in the
income statement using the equity method of accounting.
The determination of whether an arrangement is a joint operation or a joint venture depends on
the contractual arrangements, rights, and obligations of the parties involved. It requires an
assessment of the specific terms and conditions of the arrangement, including the decision-
making rights and the right to the assets and obligations for the liabilities.
ASSIGNMENT 2 SOLUTION
IFRS S1 and IFRS S2: Promoting Sustainability Reporting
The International Sustainability Standards Board (ISSB) has released two groundbreaking
standards: IFRS S1 General Requirements for Disclosure of Sustainability-related Financial
Information and IFRS S2 Climate-related Disclosures. These standards represent a significant
step towards harmonizing sustainability reporting globally and addressing the growing demand
for transparent and comparable sustainability information from investors, regulators, and other
stakeholders.
The Concept of Double Materiality
IFRS S1 and IFRS S2 are underpinned by the concept of double materiality. Double materiality
recognizes that sustainability-related information is financially material if it affects the
company's ability to generate value in the short, medium, or long term. It also acknowledges that
sustainability-related information can be material even if it does not directly impact financial
performance because it can influence stakeholder perceptions, risk profiles, and access to capital.
Contribution to the Green Economy
IFRS S1 and IFRS S2 are expected to make several significant contributions to the green
economy:
•Enhanced Transparency: By requiring companies to disclose material sustainability-related
information, IFRS S1 and IFRS S2 will increase transparency and accountability in the business
community. This transparency will enable investors to make informed decisions about which
companies are aligned with their sustainability values and reduce the risk of greenwashing.
•Risk Assessment and Mitigation: IFRS S1 and IFRS S2 will help companies identify, assess,
and manage sustainability-related risks and opportunities. This will lead to more informed
decision-making and better risk management practices, ultimately contributing to a more
sustainable and resilient economy.
•Promoting Sustainable Practices: By providing a framework for reporting on sustainability-
related performance, IFRS S1 and IFRS S2 will encourage companies to adopt more sustainable
practices. This will drive innovation and technological advancements in the pursuit of
sustainability goals.
Addressing ESG Requirements
IFRS S1 and IFRS S2 are aligned with the Environmental, Social, and Governance (ESG)
requirements framework in several ways:
•Environmental Focus: IFRS S2 specifically focuses on climate-related disclosures, addressing
the environmental pillar of ESG. It requires companies to disclose information about their
greenhouse gas emissions, climate-related risks and opportunities, and their strategies for
mitigating climate change.
•Social Considerations: IFRS S1 requires companies to disclose information about their social
impacts, including labor practices, human rights, and community engagement. This addresses the
social pillar of ESG.
•Governance Practices: IFRS S1 also requires companies to disclose information about their
governance practices, including board composition, risk management processes, and
sustainability governance structures. This addresses the governance pillar of ESG.
Enhancing Capital Markets
IFRS S1 and IFRS S2 are expected to play a critical role in enhancing capital markets by:
•Improving Risk-Adjusted Returns: By providing investors with more comprehensive
information about companies' sustainability performance, IFRS S1 and IFRS S2 will enable them
to make more informed investment decisions. This will lead to better risk-adjusted returns and a
more efficient allocation of capital.
•Promoting Long-Term Value Creation: IFRS S1 and IFRS S2 will encourage companies to
focus on long-term value creation by embracing sustainable practices. This will contribute to a
more sustainable and resilient economy, which is essential for long-term economic growth and
stability.
Conclusion
IFRS S1 and IFRS S2 represent a significant milestone in the harmonization of sustainability
reporting globally. By promoting transparency, risk assessment, and sustainable practices, these
standards are expected to make a substantial contribution to the green economy and enhance
capital markets. They also address the ESG requirements framework by providing a
comprehensive framework for disclosing environmental, social, and governance information. As
businesses increasingly recognize the importance of sustainability, IFRS S1 and IFRS S2 will
play a pivotal role in shaping a more sustainable future.
