office of local government aasb 10 consolidated financial statements aasb 11 joint arrangements aasb...

Office ofOffice ofLocal GovernmentLocal Government

AASB 10 Consolidated Financial Statements

AASB 11 Joint ArrangementsAASB 12 Disclosure of

Interests in Other Entities

OFFICE OFOFFICE OF LOCAL LOCAL

GOVERNMENTGOVERNMENT

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time can be entered here

Laura Love



Interaction of accounting standards

Yes

No

Yes – determine type of joint arrangement

Yes

No Control in own right?

Joint control?

Significant

influence?

Consolidate in accordance with

AASB 10

AASB 12 disclosures

No

Joint OperationAccount for share of

assets, liabilities, income and

expenses – AASB 11

Joint Venture / Associates

Equity accounting in accordance with

AASB 128

AASB 12 disclosures AASB 12 disclosuresTreat as investment in accordance with AASB 139 / AASB 9

AASB 7 and AASB 13 disclosures



AASB 10 – 12 for not-for-profit entites

• Not-for-profit effective date is 1 January 2014 • Guidance to assist NFP in implementing AASB 10

and 12 has been released in AASB 2013-8 Amendments to Australian Accounting Standards – Australian Implementation Guidance for Not-for-Profit Entities – Control and Structured Entities • This guidance will not change requirements• Provides help in interpreting terms which are ‘for-profit’

orientated.

• Appendix to AASB 10 to be read in conjunction with AASB 10, it is not a stand-alone document



AASB 10 Consolidated financial statements

• An entity that is a parent shall present consolidated financial statements• A parent is an entity that controls one or

more entities• A subsidiary is an entity that is controlled

by another entity (i.e. the parent)• A group is a parent and its subsidiaries.

• Single control-based consolidation model for all types of entities which aims to reflect the economic substance of the relationship between a reporting entity and an investee.



What is control?

An entity controls another if:“it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.”



Key concepts for NFP’s

• An investor and an investee are merely entities that have a relationship in which control of one entity (investee) by the other (investor) might arise.

• Investor need not have a financial interest.



What is power?

• Existing rights that give the current ability to direct the relevant activities of the investee.• Need to have current ability - i.e. able to make

decisions at the time the decisions need to be made – substantive rights.

• What are the rights of the investor?• Voting rights• Potential voting rights• Other contractual arrangements• A combination thereof

• What are the relevant activities?• Do the rights give the investor the ability

to direct the relevant activities?



Power

• Rights which indicate power often arise from contractual or statutory agreements in place (e.g. rights from administrative arrangement or statutory provisions).

• Other rights:• rights to give policy directions to the governing body of an

investee that give the holder the ability to direct the relevant activities of the investee; and

• rights to approve or veto operating and capital budgets relating to the relevant activities of an investee.



Rights – substantive v protective

• Substantive – practical ability to exercise right.• Protective rights apply only in exceptional circumstances or

where there are fundamental changes in the activities of an investeeE.g. •Right of a regulator to curtail or close operations of a non-compliant entity;•Right to remove members of the governing body of another entity in certain circumstances, e.g. councillors of a local government•Right to remove tax deductibility to a not-for-profit entity.

• Protective rights alone do not give power.



Rights

• Political, cultural, social or similar types of barriers might make it difficult for the investor to exercise rights in relation to investee – this would not prevent rights from being substantiveE.g. •power to appoint and remove members of railway authority without cause – reluctance to do this due to sensitivity in the electorate.



Variable returns

• Broad definition of returns:• Dividends• Remuneration from services• Fees and exposure to losses• Residual interests on

liquidation• Returns not available to other

investors

• Variable returns – potential to vary as a result of the investee’s performance

• Multiple parties can be exposed to variable returns.



Returns – NFP considerations

• Nature of returns includes financial, non-financial, direct and indirect benefits, whether positive or negative, including the achievement of furtherance of the investor’s objectives.

• For example:• The provision of goods and services by the investee to its

beneficiaries may affect the extent to which the investors social policy objectives are furthered.



Ability to affect returns of the investee

• Investor has the ability to use its power to affect investor’s returns from its involvement with the investee.

• Control – power that could be used to benefit the investor.



Example

Entity F41%

interestAppoints 5 directors

17 other investors59% voting

interestAppoint 7 directors

Entity E

Entity E manufactures widgets:•95% of output is sold to Entity F, •5% sold to external parties

Entity E was established to allow Entity F a source of widgets.

The 17 investors have interests as follows:(14%, 8%, 7%, 6%, 5%, 4% plus others have less than 3%).



Agent v principal

• Agency relationship - a principal contracts another party to perform specified services on behalf of the principal that involves delegating some authority to the agent

• Delegated power does not mean control -many agent contracts provide power not control - judgement

• Agent:• Acts in the best interest of the principal (fiduciary

responsibility)• Additional measures to ensure the agent does not act

against the interests of the principal



Agent v principal assessment:

• Consider:• Rights held by other parties (i.e. kick out rights

held by single party?)• Scope of the decision-making authority• Remuneration of the decision-maker

(magnitude and variability)• Other interests that the decision-maker holds

in the investee

• Different weightings to factors but … ‘kick-out’ rights is conclusive.

17



Transitional arrangements

• No adjustments for entities previously:• Consolidated which continue to be consolidated• Not consolidated which continue to be not consolidated.

• Retrospective application for:• Entities which require consolidating for the first time under AASB 10• Entities which require de-consolidating under AASB 10.



AASB 11:JOINT ARRANGEMENTS



What is a joint arrangement?

A joint arrangement has the following characteristics: a.The parties are bound by a contractual arrangement b.The contractual arrangement gives two or more of those parties joint control of the arrangement

AASB 11 principle – all parties should recognise their rights and obligations arising from the arrangement.

Joint arrangement – an arrangement of which two or more parties have joint

control.

Joint arrangement – an arrangement of which two or more parties have joint

control.



Classifying joint arrangements



Joint venture

Classification - summary

YesNo

Rights to assets and obligations for liabilities

Rights to net assets



AASB 11 points to consider

• Transitional provisions where classification or accounting for joint arrangements has changed is complex.• Proportionate consolidation to the equity method (joint

ventures)

• Equity method to accounting for assets and liabilities (joint operations)

• AASB 11 has supporting illustrative examples to consider the judgements required by the standard

• Don’t assume that a ‘joint venture’ will continue to be a ‘joint venture’



AASB 12: DISCLOSURES OF INTERESTS IN OTHER

ENTITIES



Scope of AASB 12

Applicable to an entity with an interest in any of the following:

•Disclosure only standard•Require an entity to disclose information to evaluate:

a. Nature of, and risks associated with, its interests in other entities

b. Effects of those interests on its financial position, financial performance and cash flows.

SubsidiariesJoint

arrangementsAssociates

Unconsolidated structured entities



Four broad categories of disclosure:

• Information about:• Significant judgements and assumptions a company has made

in deciding whether it has control, joint control or significant influence over another entity

• An entity’s interest in subsidiaries• An entity’s interest in joint arrangements and associates• The nature, extent and risks relating to an entity’s interests in

unconsolidated structured entities.



Accounting policies

The following accounting policies have been revised:•Principles of Consolidation

• Subsidiaries• Joint Arrangements

• Joint operations• Joint ventures

• Associates• Business Combinations

•Delete policy if Council doesn’t have a particular investment.



Significant judgements and assumptions

Significant judgements and assumptions an entity has made in determining:•That is has control of another entity•That is has joint control of an arrangement or significant influence over another entity•Basis for decision of joint arrangement classification (i.e. joint operations or joint venture) when arrangement has been structured through a separate vehicle

•Councils to include information about specific judgements, estimates and assumptions made.



Interests in subsidiaries

Disclosures to allow users to understand and evaluate:• Composition of the group • The interest that non-controlling interests have in the

group’s activities and cash flows;• The nature and extent of significant restrictions on its

ability to access or use assets, and settle liabilities, of the group;

• The nature of, and changes in, the risks associated with its interests in consolidated structured entities;

• The consequences of changes in its ownership interest in a subsidiary that do not result in loss of control;

• The consequences of losing control of a subsidiary during the reporting period.



Subsidiaries that have material non-controlling interests

• For all subsidiaries that have NCI that is material to the reporting entity:• Name of each subsidiary• Principal place of business• Proportion of ownership / voting rights held by NCI • Profit or loss allocated to NCI• Accumulated NCI at the end of the reporting period• Summarised financial information.



Interests in Subsidiaries(a) Composition of the Group

Principal place of business / Country of Incorporation

Percentage Owned (%)*

2015


2014

Subsidiaries: Sub 1 Australia Sub 2 AustraliaThe percentage ownership interest held is equivalent to the percentage voting rights for

all subsidiaries

Controlled entities with ownership interest of 50% or less

The Council holds 42% of the ordinary shares of Goreng Ltd. Under a management agreement between Council, Goreng and the other shareholder, Council is required to make all the financial and operating policy decisions of Goreng and to ensure that those policies are consistent with the policies of the Group and therefore has control.

(b) Significant restrictions relating to subsidiaries[Provide details of significant restrictions, for example statutory, contractual and regulatory restrictions, on the subsidiary’s ability to access or use the assets and settle the liabilities of the group, i.e.:•Those that restrict the ability of a parent or its subsidiaries to transfer cash or other assets to (or from) other entities within the Group.•Guarantees or other requirements that may restrict dividends and other capital distributions being paid, or loans and advance being made or repaid to (or from) other entities within the Group.]



Interests in subsidiaries continued

Name of subsidiary Sub 1 Sub 2Reporting period 2015 2014 2015 2014

% ownership held by NCI Profit / (loss) allocated to NCI Accumulated NCI of subsidiary Dividends paid to NCI Summarised statement of financial position

Current assets Non-current assets Current liabilities Non-current liabilities

Net assets Summarised statement of profit and loss and other comprehensive income

Revenue Profit / (loss) Total comprehensive income Summarised statement of cash flows

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase / (decrease) in cash and cash equivalents

(c) Subsidiaries with material non-controlling interestsThe amounts disclosed below are prior to any inter-company eliminations.



Interests in Subsidiaries continued

[year end date] $Consideration received Less: Increase in net assets attributable to NCI

Increase / (decrease) in Council interest

[year end date] $NCI interest acquired Less: Consideration paid Increase / (decrease) in Council interest

Consolidated structured entities[where Council has consolidated structured entities, provide details of circumstances where Council or an entity within the group may be required to be financial support to that consolidated structured entity and details where support has been provided during the financial reporting period.]

Consequences of changes in a Council’s ownership interest in a subsidiary that do not result in a loss of control

Disposal of ownership interestDuring the year, the Group disposed of xx% of its investment in [Name of subsidiary], control was maintained and therefore the Group structure did not change, although the non-controlling interest increased.This effect of this transaction on the equity attributable to the Council is shown below:Note: the increase / decrease to Council interest is recorded in the Transactions with Non-controlling Interest reserve.

Acquisition of ownership interestDuring the year, the Group acquired xx% additional interest in [Name of subsidiary], control was maintained and therefore the Group structure did not change, although the non-controlling interest decreased.This effect of this transaction on the Council interest is shown below:Note: the increase / decrease to Council interest is recorded in the Transactions with Non-controlling Interest reserve.



Interests in joint arrangements and associates

• Disclose information that enables users of its financial statements to evaluate:• Nature, extent and financial effects of its interests in joint

arrangements and associates, including details of its contractual relationships with other investors

• Nature of, and changes in, the risks associated with its interests in joint ventures and associates

• Summarised financial information for each individually material joint venture and in total for all other joint ventures.



Interests in Joint Arrangements (and Associates)

The percentage ownership interest held is equivalent to the percentage voting rights for all joint arrangements.

Joint arrangement 1 Provide details of the nature of the Council’s relationship with the joint arrangement, for example describing the nature of the activities of the joint arrangement and whether they are strategic to the entity’s activities.

Joint arrangement 2 Provide details of the nature of the Council’s relationship with the joint arrangement, for example describing the nature of the activities of the joint arrangement and whether they are strategic to the entity’s activities.

Type of joint arrangement

Principal place of business / Country of Incorporation


2015


2014

Joint arrangements:

Joint arrangement 1

Joint arrangement 2



Joint ventures (and associates) continued

Name of joint venture 2015 2

014

2015

2014

Measurement basis (equity method / fair value) Dividends received from the joint venture Summarised statement of financial position Cash and cash equivalents Current assets Non-current assets Current financial liabilities (excluding trade and other payables and provisions)

Current liabilities Current financial liabilities (excluding trade and other payables and provisions)

Non-current liabilities Net assets Summarised statement of profit and loss and other comprehensive income

Revenue Interest income Depreciation and amortisation Income expense Income tax expense (income) Profit / (loss) from continuing operations Post-tax profit or loss from discontinued operations Other comprehensive income Total comprehensive income Summarised statement of cash flows

Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase / (decrease) in cash and cash equivalents

Joint venturesAll joint ventures have the same year end as the Council.There are no significant restrictions on the ability of joint ventures to transfer funds to the Group in the form of cash dividends or to repay loans or advances made by the Council.Material joint venturesThe following information is provided for joint ventures that are material to the Group and is the amount per the JV financial statements, adjusted for fair value adjustments at acquisition date and differences in accounting policies, rather than the Group’s share.



Joint ventures (and associates) continued

[Name of joint venture] Current year end $ Prior year end $

Group’s share of xx% of net assets

[insert reconciling items]

Carrying amount

Fair value of investment (if there is a quoted price)

Reconciliation of carrying amount of interest in joint venture to summarised financial information for joint ventures accounted for using the equity method:



Aggregate information for joint ventures that are not individually material

Current year end $ Prior year end $

Carrying amount of investments in joint ventures that are not individually material

Share of those joint ventures:

Profit or loss from continuing operations

Post-tax profit or loss from discontinued operations

Other comprehensive income

Total comprehensive income

The Council has interests in a number of joint ventures none of which is considered individually material. The table below summarises, in aggregate, the financial information of all individually immaterial joint ventures.



Other joint venture disclosures

Commitments relating to joint ventures held

Contingent liabilities incurred jointly with other investments over joint ventures held

Unrecognised share of lossesThe unrecognised share of losses of joint ventures due to the Council’s interest being reduced to zero under the equity methods are $xx for the reporting period and $xx on a cumulative basis.Risks associated with the interests in joint ventures



Structured entities

• “An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.”

• Common for NFP entities to be established by administrative arrangements or legislation.• If administrative arrangements or legislation are the dominant

factors in determining control of such an entity then it is not a structured entity.



Example of structured entities

• Partnership between government and private sector entity – established and directed by contractual arrangements.

• Community service organisation whose relevant activities directed by contractual arrangements which were established or are sponsored by a not-for-profit entity – i.e. responsibility or requirement to provide financial support.



Unconsolidated structured entities• Ensure that users of financial statements are able to:

• Understand the nature and extent of an entity’s interests in unconsolidated structured entities; and

• Evaluate the risks associated with those interests.

• For example, disclose requirement or intention to provide support.



Unconsolidated Structured Entities

Structured entity type

Total income Assets transferred to structured entities

[income categories]

Carrying amount Fair value

COMMENTARY – Interests in Unconsolidated structured entitiesIf the Council has any unconsolidated structured entities such as involvement with a community organisation then the note below needs to be includedNature of interests[Provide details, including but not limited to the nature, purpose, size and activities of the structured entity and how it is financed.]Sponsored unconsolidated structured entities[provide details of how the Council has determined which structured entities it has sponsored].




Financial statement line item

Loans Investments

Commitments / guarantees

Derivative instruments

Total Assets Total Liabilities

Total

Structured entity type

Maximum exposure to loss Carrying amount of assets / liabilities that relates to unconsolidated structured entities

Loans Investments Commitments / guarantees

Total Assets Liabilities

Nature of risksCarrying amount of assets and liabilitiesThe following table shows the carrying amounts of the assets and liabilities recognised in the Council financial statements relating to its interests in unconsolidated structured entities.

Maximum exposure to lossThe maximum exposure to loss shown in the table below is contingent in nature and may arise as a result of the provision of liquidity facilities and other funding commitments provided by the [entity type] to unconsolidated structured entities in which it has an interest at [year end date].[Provide details of how the maximum exposure to loss was determined].




Financial support provided - Without a contractual obligation[Provide details of financial support which was provided by the Council without having a contractual obligation to do so – including the type and amount of support provided (including situations in which the Council assisted the structured entity in obtaining financial support) and the reasons for the support].

Current intentions to provide financial or other support[provide details of any current intentions to provide financial or other support to an unconsolidated structured entities, including intentions to assist the structured entity in obtaining financial support].



Thoughts on AASB 12…

• AASB 12 disclosures are minimum – consider level of aggregation.

• Council needs to assess whether the disclosures required by AASB 12 and other AASB’s, taken together, provide sufficient information to evaluate the nature, risks and effects of the Council’s interest in other entities.



Questions

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