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AASB 10 Consolidated Financial Statements AASB 11 Joint Arrangements AASB 12 Disclosure of Interests in Other Entities. Laura Love. What your screen looks like and how it all works… . Please enter questions at any time and we will attempt to answer them during the presentation.
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AASB 10 Consolidated Financial StatementsAASB 11 Joint ArrangementsAASB 12 Disclosure of Interests in Other Entities
Laura Love What your screen looks like and how it all works… • Please enter questions at any time and we will attempt to answer them during the presentation. • Some of the unanswered questions will be asked of Carmen at the end of the presentation. • If you wish to discuss any matters in person, please do not hesitate to contact the relevant OLG staff. • Any further questions can be emailed to Code@olg.nsw.gov.au • All questions and answers and a recording of the Webinar will be emailed to all Councils. Questions at any time can be entered here
Interaction of accounting standards Control in own right? Yes No Consolidate in accordance with AASB 10 Joint control? Yes – determine type of joint arrangement AASB 12 disclosures No Significant influence? Joint Venture / Associates Equity accounting in accordance with AASB 128 Joint Operation Account for share of assets, liabilities, income and expenses – AASB 11 Yes No Treat as investment in accordance with AASB 139 / AASB 9 AASB 12 disclosures AASB 12 disclosures 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 investee E.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 substantive E.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 F 41% interest Appoints 5 directors • 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%). Entity E 17 other investors 59% voting interest Appoint 7 directors
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.
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.
What is a joint arrangement? Joint arrangement – an arrangement of which two or more parties have joint control. A joint arrangement has the following characteristics: • The parties are bound by a contractual arrangement • 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.
Classification - summary Yes No Rights to net assets Rights to assets and obligations for liabilities Joint venture
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’
Scope of AASB 12 Subsidiaries Joint arrangements Associates Unconsolidated structured entities Applicable to an entity with an interest in any of the following: • Disclosure only standard • Require an entity to disclose information to evaluate: • Nature of, and risks associated with, its interests in other entities • Effects of those interests on its financial position, financial performance and cash flows.
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 • The 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 (c) Subsidiaries with material non-controlling interests The amounts disclosed below are prior to any inter-company eliminations.
Interests in Subsidiaries continued 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 interest During 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 interest During 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.
Joint ventures (and associates) continued Joint ventures All 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 ventures The 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 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 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 Unrecognised share of losses The 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 COMMENTARY – Interests in Unconsolidated structured entities If the Council has any unconsolidated structured entities such as involvement with a community organisation then the note below needs to be included Nature 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].
Unconsolidated Structured Entities Nature of risks Carrying amount of assets and liabilities The 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 loss The 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].
Unconsolidated Structured Entities 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.
