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Australian proposals on applying new consolidation concepts by not-for-profit entities

  • AASB (Australian Accounting Standards Board) (lt blue) Image

03 Apr 2013

The Australian Accounting Standards Board has published an exposure draft that proposes to add guidance to on the application of AASB 10 'Consolidated Financial Statements' (equivalent to IFRS 10) by not-for-profit entities in the private and public sectors.

The Exposure Draft, ED 238 Consolidated Financial Statements – Australian Implementation Guidance for Not-for-Profit Entities (link to AASB website), would add an additional appendix to AASB 10 providing guidance on applying the concepts in IFRS 10 to not-for-profit situations. It discusses topics such as:

  • how 'power' might be illustrated in a not-for-profit context, providing examples in relation to entities operating under government legislation or fulfilling government objectives and when they might, or might not be consolidated
  • new examples of rights which may give an investor power of an investee in a not-for-profit context, including rights to give policy directions, approve or veto operating and capital budgets, and rights to appoint, reassign or remove key management personnel
  • how economic dependency might be applied, pointing out that governments may not have the ability to direct the relevant activities of entities to which it provides funding, e.g. private schools, private hospitals, private aged-care providers and universities
  • the interaction of political considerations and regulatory powers with substantive and protective rights, and how a government's power to enact or change legislation impacts the assessment of control
  • the nature of 'variable returns' encompassing financial, non-financial, direct and indirect benefits (whether positive or negative), e.g. the further fulfillment of social policy objectives
  • the existence of 'congruent objectives' alone being insufficient for a not-for-profit investor to conclude that it controls an investee, e.g. many Australian Federal or State Government arrangements surrounding local governments and universities
  • the consideration of agent and principal when an entity either acts on behalf of, or under the delegation of powers from, a government minister, focusing on the extent of decision-making authority as a key determinant.

ED 238 also proposes to add an additional appendix to AASB 12 Disclosure of Interests in Other Entities (equivalent to IFRS 12) to provide additional guidance on 'structured entities' in the not-for-profit sector, particularly in the context of administrative arrangements or legislation established by governments. Consequential amendments are also proposed to the Australian domestic standard AASB 1049 Whole of Government and General Government Sector Financial Reporting.

In order to ensure the new guidance is not broadly applied, the proposed amendments would explicitly state that they do not apply to for-profit entities, nor affect their application of AASB 10 and AASB 12.

The new requirements are proposed to apply to annual reporting periods beginning on or after 1 January 2014, with early adoption permitted for beginning on or after 1 January 2013.  The limit on early adoption coincides with the mandatory application date of AASB 10 by not-for-profit entities, as when making AASB 10, the AASB prohibited early adoption by such entities until specific guidance could be developed.

In relation to the International Public Sector Accounting Standards Board (IPSASB) project on consolidation, the ED's basis for conclusions notes:

The Board also noted the current project of the International Public Sector Accounting Standards Board (IPSASB) to update its consolidation, joint ventures and associates Standards for the issuance of IFRS 10 Consolidated Financial Statements and its related IFRSs. The IPSASB is expected to finalise its Exposure Drafts mid - year [2013], but the AASB decided to continue with the publication of its ED, having considered the decisions of the IPSASB to date and its discussions on various issues that are still in progress.

Comments on the exposure draft close on 30 June 2013. Click for the full text of ED 238 (link to AASB website).

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