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Building the financial model is essentially a financial exercise, that is, it does not primarily deal with accounting results. Its bottom line conclusion, the Equity Free Cash Flow, is a financial concept rather than an accounting concept. However, the financial model also needs to produce projected financial statements of the project company, consistent with applicable accounting policies, for the entire duration of the contract. These should include the yearly income statements and the balance sheet.

The first reason for this is that the model must project the amount of taxes to be paid by the project company. Taxes are not calculated on financial concepts such as the cash flow but rather on accounting concepts such as the net profit or the earnings before taxes[21].

Secondly, income statements and the balance sheet of the project company also provide the basis for estimating the project’s impact on public debt (where appropriate, given the government’s accounting policies and the nature of the project – see section 12) as well as offer the information used by banks to assess the bankability of the project (see 8.1.1).

A third reason is a need to assess the ability of the Project Company to effectively distribute dividends to its shareholders. In many countries, there are limits to cash distribution imposed by the loan agreements, the PPP contract itself, or regulatory requirements. In these cases, the limits are generally stated in accounting terms.

Accounting reports may have a further important regulatory function. Many countries run regulatory accounting schemes as a methodology to permanently assess the financial equilibrium of the contract and to evaluate, if necessary, the value of the compensation required in a specific event. Regulatory accounting consists of indicating appropriate accounting data to be intensively monitored during contract management, and its design needs to consider a sound estimate of accounting statements during the construction of the financial model.

 

[21] The main difference between the financial concept of cash flow and the accounting concept of net profit is the consideration, in the latter, of a theoretical reduction amount called depreciation of the physical asset or amortization of the financial asset. In practice, this is a reduction of the basis for calculating the project company’s income tax due to the value invested in the early years of the contract.

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