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Accounting for Project Finance

Introduction Topics to be emphasised on course:

• Overview of the International Financial Reporting Standards∙
• Project Finance Overview∙
• Designing the Deal∙
• IFRS 10 – Identifying when to consolidate∙
• Investor Decisions∙
• Define Type of Joint Arrangement in Accordance with IFRS 11∙
• The Possible Structures∙
• The Risks∙
• Risk Mitigation∙
• Sources of Finance∙
• Accounting for Project Financing∙
• Regulatory Environment

The success of any project finance venture requires a good understanding of the structures and which ones are most appropriate for the sponsoring company, the partners and the risk profile. However the reporting requirements of certain infrastructures may have a huge impact on whether sponsors utilise the Project Finance route and of course investors will take into account their ability to recognise profits as well as the impact that accounting losses are likely to have. Obviously, practitioners need to be familiar with the various structure options from Joint Ventures to Special Purpose Vehicles as well as being able to foresee the risks and deal with them at the planning stage.

The International Financial Reporting Standards (IFRS) as well equivalent American rules have altered considerably the way that sponsors treat Project Finance deals in their published accounts. Areas that demand attention include:

• Control and Risks & Rewards of Ownership IFRS 10
• Joint Ventures v Joint Arrangements
• Proportionate and Equity methods of Accounting, when they should be used
• Reporting requirements under IFRS 12
• Off Balance Sheet v On Balance Sheet debate

There is concern in the industry that financial professionals often develop structures without fully understanding or appreciating the risks involved. This course will give financial professionals a thorough understanding of Project Financing, when it should be used, its strengths, its limitations and the most appropriate structured vehicle. We examine the risks and rewards of ownership, allocating the risks amongst the various parties, legal structures and their accounting implications as well as the disclosure requirements that accountants must make to investors.

Apart from identifying the most appropriate structure for the project the course will examine the key risk factors that will influence the project’s success or failure. Today, the structural options open to experts are vast but the key to success is developing a structure that involves relevant parties and allocating risk accordingly. Modelling and financing are also covered on the course as well as the accounting and evaluation implications. This course will give you practical guidance on how project financing is different from corporate finance and looks at how various projects are financed as well as trends in corporate and project financing. The deal is examined in stages as well as risk identification and sources of funding etc. Credit enhancement factors are also considered as is the role of Debt and Mezzanine financing. The role of the Sponsors are also examined.

Numerous case studies and excel spreadsheet examples are used throughout the course. Emphasis is also placed on the accounting and regulatory issues.

At the end of the two day course delegates will be able to:Have a thorough understanding of the new International Financial Reporting Standards including IFRS 10.11 and 12

• Appreciate the difference between project and corporate finance
• Evaluate the various structures
• See how risk is measured and mitigated in practice
• Appreciate the regulatory and accounting environment

COURSE CONTENT

Overview of the International Financial Reporting Standards

• Recent changes
• The Off Balance Sheet problem
• Recent changes in relation to loan financing
• IAS 39 and expected changes.
• Debt v Equity Classification
• Convertible Bonds
• IFRS 9 Project Finance Overview
• Definition of Project Finance
• Corporate v Project Finance
• Projects Suitable for Project Finance
• Trends in Project Finance Case Study – Government Project Financing for a School and Prison

Designing the Deal

• Setting out the Feasibility Study
• Planning – The involvement of the sponsoring companies and strategic partners
• Setting up the most appropriate structure
• Financing Arrangements
• Risk assessment and risk mitigation

IFRS 10 Identifying when to consolidate

• Applying the single control model
• Assessment of control made on a continuous basis
• Control v Collective control
• Range of Operating and Financing ActivitesInvestor Decisions
• Investees controlled by means of voting rights
• More complex cases
• when voting rights are not relevant
• Ranging of operating and finance activities. Define type of joint arrangement in accordance with IFRS 11
• Structure of the arrangement under IAS 31
• Joint venture v Joint operations • Jointly controlled operations v Jointly controlled assets
• Proportionate v Equity method of consolidation.The Structure
• Partnerships
• Special Purpose Vehicle
• Joint Venture
• Limited Partnership Case Study – Oil and Gas Project Financing

The Risks

• Business Risk – Sale of output
• Market Risk – Foreign Exchange and Interest rate risk
• Completion Risk
• Maintenance Risk
• Government Risks Case Study Eurotunnel and Disney Risk Mitigation
• Use of Treasury Derivatives
• Take or Pay Contracts
• Legal Binding Agreements
• Credit Enhancement
• Legal Structure

Sources of Finance

• Equity Debt
• Rule 144a financing
• Convertible Bonds
• Bank Loans
• Bonds
• Syndicated Lending Case Study Asia Disney – Syndicated Lending Accounting for Project Financing
• On v Off Balance Sheet
• Beneficial Interest
• IAS Accounting Framework
• FASB Accounting Framework

Regulatory Environment

• Risk assessment on Lending
• Basel 2 for Syndicated Lending
• Project Financing weightings
• Tier 1 and 2 Capital Case Study Corporate Finance v Project Finance The Project Cash Flow • Recourse Limitation
• Allocation of Risk
• Quantification of the Risk
• Structure and Finance Solutions

Free Cash Flow

• What is Free Cash Flow
• Internal Rate of Return and Other Issues
• Allowing for Cash Sensitivities Pre- Completion Issues
• Project Overruns and Delays
• Turnkey Contracts
• Liquidation Damages
• Completion Guarantees
• Standby Financing