Appendix E -- Australian implementation guidance for not-for-profit entities

Control | Power | Rights that give an investor power over an investee | Substantive rights | Protective rights | Returns | Exposure, or rights, to variable returns from an investee | Link between power and returns | Delegated power | Implementation examples

This appendix is an integral part of AASB 10 and has the same authority as the other parts of the Standard.  The appendix applies only to not-for-profit entities.  The appendix does not apply to for-profit entities or affect their application of AASB 10.

IG1

AASB 10 incorporates International Financial Reporting Standard IFRS 10 Consolidated Financial Statements, issued by the International Accounting Standards Board.  Consequently, much of the text of the body of this Standard and Appendices A–C is expressed from the perspective of for-profit entities.  The AASB has prepared this appendix to explain and illustrate the principles in the Standard for not-for-profit entities in the private and public sectors, particularly to address circumstances where a for-profit perspective does not readily translate to a not-for-profit perspective.

IG2

This appendix addresses a range of matters affecting not-for-profit entities broadly in the order in which the related paragraphs appear in the body of the Standard and in Appendix B.  The appendix paragraphs are arranged under the same headings as in the body of the Standard or Appendix B.  Cross-references to the paragraphs in the body of the Standard and to the other appendices are included to assist in relating the paragraphs in this appendix to the requirements of the Standard.

IG3

Illustrative examples are provided in the implementation guidance both within implementation guidance paragraphs and as discrete examples.  The examples apply by analogy to types of not-for-profit entities other than those identified in the examples and similar circumstances.  It is the facts and circumstances in any case, not simply the type of not-for-profit entity, that need to be assessed in determining whether one entity controls another entity.

Control

IG4

Paragraph 5 of AASB 10 sets out the fundamental requirement that an investor shall determine whether it controls an investee.  As indicated by the reference in paragraph 11 to assessing power arising from contractual arrangements, the investor need not have a financial investment in the investee.  In general terms, an investor and an investee are merely entities that have a relationship in which control of one entity (the investee) by the other (the investor) might arise.

Power

IG5

One of the criteria set out in paragraph 7 for control of an investee is that the investor has power over the investee.  Paragraph 10 states that an investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, that is, the activities that significantly affect the investee’s returns.  As an example, a not-for-profit investor would have power over an investee when the investor can require the investee to deploy its assets or incur liabilities in a way that affects the investee’s returns (for example, in providing goods or services to the investor or other parties that assist in achieving or furthering the investee’s objectives).

IG6

Paragraph 11 states that power arises from rights, and refers to voting rights granted by equity instruments and rights arising from contractual arrangements.  While these rights will often be the source of power for for-profit entities, power will frequently arise through different sources for not-for-profit entities.  For many not-for-profit entities, rights arising from administrative arrangements or statutory provisions will often be the source of power.  Assessing the purpose and design of an investee will assist an investor to identify who has power over the investee, ie the current ability to direct the relevant activities (paragraph B5).

IG7

As an example of contractual or statutory arrangements, a not-for-profit investor often will have power over an investee that it has established when the constituting document or enabling legislation for the investee specifies the investor’s rights to direct the operating and financing activities that may be carried out by the investee.  However, the impact of the constituting document or legislation is evaluated in the context of the prevailing circumstances, as all facts and circumstances need to be considered in assessing whether an investor has power over an investee.  For example, the purpose and design of an investee may point to the relevant activities of the investee and how decisions about the relevant activities are made.  To illustrate, a government may not have power over a research and development corporation that operates under a mandate created, and limited, by that government’s legislation if that or other legislation means that the power to direct the relevant activities is held by other entities that are not controlled by the government, such as participants in the research and development activities.

IG8

The research and development corporation example in the previous paragraph illustrates that an investor might not have power over an investee due to the rights of other parties in relation to the investee, as indicated in paragraph B10.  As another example, subject to consideration of all the facts and circumstances, a State or Territory government normally would not have power to direct the relevant activities (ie the activities that significantly affect the returns) of a local government that determines through the council elected periodically by the local community how to deploy the local government’s resources in the interests of the local community (even though those interests might coincide with or overlap the interests of the State or Territory government).

Rights that give an investor power over an investee

IG9

Paragraph B15 provides examples of rights that, either individually or in combination, can give an investor power in respect of an investee.  In relation to not-for-profit investors, additional examples of such rights include:

(a) rights to give policy directions to the governing body of the investee that give the holder the ability to direct the relevant activities of the investee; and

(b) rights to approve or veto operating and capital budgets relating to the relevant activities of the investee.

IG10

A not-for-profit investor can have power over an investee even if it does not have responsibility for the day-to-day operation of the investee or the specific manner in which prescribed functions are performed by the investee.  For example, legislation governing the establishment and operation of an independent statutory office (such as an auditor-general or the judiciary) sets out the broad parameters within which the office holder is required to operate, and results in the office holder operating in a manner consistent with the objectives set by the legislation.  Whilst the holders of an independent statutory office are to act independently in discharging their responsibilities, the government typically provides the organisations that assist the statutory office holders in fulfilling their responsibilities.  In such cases, the resources of those organisations remain government resources albeit that they are placed at the disposal of the office holders, subject to the office holders acting in accordance with their enabling legislation.  Furthermore, the relevant activities of the organisations, including providing technical services to the statutory office holders, are generally subject to the same financial management, employment and administrative frameworks and policies as would apply to government-controlled entities such as government departments.  Therefore, subject to other facts and circumstances, assuming the other control criteria are also satisfied, the organisations assisting the independent statutory office holders would be controlled by the government and would be consolidated into the whole of government general purpose financial statements.

IG11

Paragraph B19 lists a range of indicators that suggest that an investor has more than a passive interest in an investee, but notes that the existence of such indicators does not necessarily mean that the power criterion is met.  The indicators listed include the investee’s operations being dependent on the investor, such as dependence on the investor to fund a significant portion of its operations, guarantee a significant portion of its obligations or provide critical goods or services.  Paragraph B40 also states that, in the absence of other rights, the economic dependence of an investee on the investor does not lead to the investor having power over the investee.

IG12

An example of the circumstances contemplated in paragraphs B19 and B40 is that a government may not have the current ability to direct the relevant activities of entities (such as private schools, private hospitals, private aged-care providers and universities) that are financially dependent on government funding, where the governing bodies of those entities have discretion with respect to whether they will accept resources from the government, or the manner in which their resources are to be deployed.  This may be so even if government grants provided to such entities require them to comply with specified conditions.  Although these entities might receive government grants for capital construction and operating costs subject to specified service standards or restrictions on user fees, their independent governing body may have ultimate discretion about how assets are deployed.

Substantive rights

IG13

Barriers that prevent a holder of rights from exercising them are considered in determining whether the rights are substantive, that is, whether the holder has the practical ability to exercise the rights (paragraph B22).  Paragraph B23 provides examples of such barriers.  For some not-for-profit investors, political, cultural, social or similar types of barriers might make it difficult for the investor to exercise rights held in relation to an investee.  However, the investor’s rights would be substantive, despite such barriers, if the investor can still choose to exercise those rights.  For example, a government may have the power to appoint and remove the majority of members of the governing body of a railway authority without cause but may be reluctant to remove members because of sensitivity in the electorate regarding the previous government’s involvement in the operation of the rail network.  In this case, the government has substantive rights, irrespective of whether it chooses to exercise them.

IG14

Paragraph B24 states that to be substantive, rights need to be exercisable when decisions about the direction of the relevant activities need to be made.  Usually this means that the rights need to be currently exercisable.  However, paragraph B24 also notes that sometimes rights can be substantive even though they are not currently exercisable.  For many not-for-profit investors, power over an investee may be obtained from existing statutory arrangements.  Rights specified in substantively enacted legislation would be substantive rights that need to be considered by the investor in assessing control of an investee if it is assessed that the rights will be exercisable when decisions about the direction of the relevant activities need to be made.  However, the power to enact or change legislation does not give the investor the current ability to direct relevant activities of the investee.  Depending on circumstances, statutory arrangements may be in the nature of protective rights rather than substantive rights – see paragraphs IG15–IG17.

Protective rights

IG15

Protective rights are defined in Appendix A as rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.  Applying this principle to not-for-profit entities, protective rights include rights held by a government or other entity in order to protect, as distinct from enhance, the interests of the government, the beneficiaries of an entity or the public at large.  In accordance with paragraph B27, such rights do not result in the investor (the government or other entity) having power over an investee or restricting another entity from having power over the investee.

IG16

Not-for-profit entities might hold regulatory powers that restrict the way in which regulated entities operate.  The regulatory powers may be exercisable through an established framework within which entities are required to operate, including the ability to impose conditions or sanctions on their operations.  Regulatory powers may represent protective rights, which do not give power (as defined in the Standard) over an investee, or substantive rights that need to be considered in determining control.  For example, regulatory powers may represent substantive rights when they would have the effect of giving the regulator the ability to direct the relevant activities of an investee in particular circumstances.  Not-for-profit investors are required by paragraph B26 to assess whether their rights (and rights held by others) are protective or substantive rights.

IG17

In addition to the examples in paragraph B28, examples of protective rights in relation to not-for-profit entities include:

(a) the right of a regulator to curtail or close the operations of entities that are not complying with regulations or other requirements. For example, a pollution control authority may be able to close down an entity’s activities that breach environmental regulations.

(b) the right to remove members of the governing body of another entity under certain restricted circumstances. For example, for reasons relating to a lack of probity, a State government may be able to remove or suspend the councillors of a local government and appoint an administrator who is not directed by the State government in carrying out the functions of the local government.

(c) the right to appoint additional members to the governing body of another entity under certain restricted circumstances. For example, when the entity has failed to comply with performance standards, a regulator may be able to appoint appropriately qualified members who are in the same position as other members – they do not report to and are not directed by the regulator.

(d) the right of the government to remove tax deductibility for contributions to a not-for-profit entity if the entity significantly changes its objectives or activities.

(e) a philanthropic trust providing resources to a charity on condition that the net assets of the charity would be distributed to a similar organisation undertaking similar activities if the charity is liquidated.

Returns

Exposure, or rights, to variable returns from an investee

IG18

One of the criteria set out in paragraph 7 for control of an investee is that the investor has exposure, or rights, to variable returns from its involvement with the investee.  The examples of returns in paragraph B57, particularly those in paragraph B57(c), indicate that the scope of the nature of returns is broad.  In application to not-for-profit entities, the broad scope of the nature of returns encompasses financial, non-financial, direct and indirect benefits, whether positive or negative, including the achievement or furtherance of the investor’s objectives.

IG19

An investor’s exposure, or rights, to variable returns from its involvement with an investee may give rise to indirect, non-financial returns, such as when achieving or furthering the objectives of the investee contributes to the objectives of the investor.  For example, the provision of goods and services by the investee to its beneficiaries may affect the extent to which the investor’s social policy objectives are furthered.  These returns to the investor would reflect factors such as the efficiency and effectiveness of delivery of the goods and services and changes in the outcomes for the beneficiaries.

Link between power and returns

IG20

The third criterion set out in paragraph 7 for control of an investee is that the investor has the ability to use its power over the investee to affect the amount of the investor’s returns.  As an example, the investor would have the ability to use its power over the investee when it can direct the investee to work with the investor to further the investor’s objectives.  However, the existence of congruent objectives alone is insufficient for a not-for-profit investor to conclude that it controls an investee.

Delegated power

IG21

An investor with decision-making rights (a decision maker) is required by paragraph B58 to determine whether it is a principal or an agent.  Paragraphs B60 and B61 summarise factors to be taken into account in making that determination, such as the scope of the decision-making authority and the rights of other parties.  The following examples illustrate these paragraphs in relation to not-for-profit entities.

IG22

A charity establishes a trust to fund and construct village dams, bores and other water infrastructure in several provinces of a developing country. The trustee is appointed by the charity to oversee the work of the trust. The trustee receives remuneration from the trust commensurate with the services provided and the skills applied, plus a performance bonus upon the successful completion of individual projects. The charity can replace the trustee at its discretion. The trustee therefore is an agent of the charity and cannot control the trust in its own right. In this case, the charity then needs to assess whether it controls the trust through the trustee. For example:

(a) the trustee may have power over the trust in having the current ability to direct its relevant activities, whether through a broad decision-making authority or as determined by the charity in respect of major aspects, such as project selection. Even if the trustee does not have exposure or rights to variable returns from the trust, the charity does so in terms of the extent to which its overseas aid objectives are achieved or furthered through the activities of the trust. Since the trustee (as an agent of the charity) can use its powers to affect the trust’s non-financial returns, the three control criteria are satisfied in respect of the charity and the charity would control the trust; or

(b) the trustee may be permitted by development regulations of the provincial governments to provide only oversight of the trust’s activities, which are carried out in general by management committees appointed by the relevant provincial government. In this case, the trustee does not have the power to direct the relevant activities of the trust, and accordingly the charity would not control the trust.

IG23

A government department acts in relation to an investee only as an agent of the responsible Minister when the department or an official of the department is merely authorised by the Minister to act on the Minister’s behalf (in which case the department’s activities in relation to the investee would be reflected in its reporting under AASB 1050 Administered Items).

IG24

Alternatively, a department acts as a principal under a delegation of powers from the Minister as the department or an official of the department exercises their own discretion, not subject to specific direction by the Minister.  In this case, the department would report its activities in relation to the investee as its own transactions.  The department would need to assess whether the delegated powers give it the current ability to direct the relevant activities of the investee and whether the other control criteria are satisfied in deciding whether the department controls the investee and should consolidate it.

Implementation examples

IG25

Examples IG1–IG5 illustrate the application of the three criteria for control (power over an investee, variable returns from involvement with the investee, and link between power and the investor’s returns) in a range of circumstances.  Example IG5 also illustrates the effect of delegated powers in the public sector.

IG26

Each example provides detailed information about the purpose and design of the investee, as a basis for assessing control of the investee.  The sub-examples address the initial circumstances, and then vary the design of the investee, with the control assessment then reconsidered in each case.  Examples IG3 and IG4 particularly distinguish substantive and protective rights held by an investor in relation to the investee.  In any specific case, distinguishing substantive and protective rights requires analysis of the circumstances, including considering the reasons for different investors holding various rights in relation to the investee.

Implementation examples

Example IG1

A religious organisation ABC established a community housing program that provides low-cost housing.  The program is operated by an incorporated association.  The association’s constitution states that its objective is to manage the community housing facility to meet the need for low-cost housing.  The association has not issued any equity instruments.

The relevant activities of the association comprise:

·       reviewing and selecting applicants for housing;

·       the day-to-day operation of the housing program;

·       maintaining the houses and common facilities; and

·       improving and extending the housing facilities.

The board of governors of the association has 16 members, with eight appointed by (and subject to removal by) the religious organisation.  The chair is appointed by the board from amongst the appointees of the religious organisation, and has a casting vote that is rarely exercised.  The board meets regularly and reviews reports received from the association’s management.  Based on these reports, the board may confirm or override management decisions.  In addition, the board makes decisions on major issues such as significant maintenance and investing further capital to build additional housing, after reviewing vacancy levels and the demand for housing.

The religious organisation owns the land on which the housing facilities stand and has contributed capital and operating funds to the association since it was established.  The association owns the housing facilities.

The association retains any surplus resulting from the operation of the facilities and under its constitution is unable to provide a direct financial return to the religious organisation.

Example IG1A

Based on the facts and circumstances outlined above, the religious organisation controls the association.

The religious organisation appoints eight members of the board of governors, one of whom will become the chair, who has a casting vote.  As a result, the religious organisation has power over the association through substantive rights that give it the current ability to direct the relevant activities of the association, regardless of whether the religious organisation chooses to exercise those substantive rights.

The religious organisation also has exposure or rights to variable returns from its involvement with the association.  The religious organisation obtains non-financial returns through the association furthering its social objective of meeting the need for low-cost community housing.  Although not able to receive direct financial returns, the religious organisation obtains indirect returns through its ability to direct how the financial returns are to be employed in the community housing program.

The religious organisation also satisfies the final control criterion.  Through its appointees on the board, the religious organisation has the ability to use its power to affect the nature and amount of its returns from the association.

The religious organisation satisfies all three criteria for control and therefore the religious organisation controls the association.

Example IG1B

In this example, the facts of Example IG1A apply, except that:

·       the association’s board of governors is elected through a public nomination and voting process that does not give rights to the religious organisation to appoint board members; and

·       decisions made by the association’s board are reviewed by the religious organisation, which may offer advice to the association.

Based on the revised facts and circumstances outlined above, the religious organisation does not have substantive rights relating to the association and therefore does not have power over the association.

The religious organisation’s social objectives in relation to low-cost community housing are still being achieved and therefore it will still obtain indirect non-financial returns.  However, congruence of objectives alone is insufficient to conclude that one entity controls another (see paragraph IG20).

The religious organisation does not have power and consequently does not have the ability to use power to affect the amount of the organisation’s returns.  The religious organisation is unable to satisfy two of the three control criteria and therefore the religious organisation does not control the association.

Example IG1C

In this example, the facts of Example IG1B apply, except that the association’s constitution allows the religious organisation to change the manner in which the board of governors is determined, as it sees fit.

For example, the religious organisation has the unilateral ability to amend the constitution of the association to enable the religious organisation to appoint a majority of the board of governors, thus giving the religious organisation substantive rights that give it the current ability to direct the relevant activities of the association.  Therefore, the religious organisation has power over the association through those substantive rights, regardless of whether the religious organisation chooses to exercise those rights.

Since the religious organisation has the ability to determine the composition of the board of governors and thus direct the relevant activities of the association, the religious organisation has exposure or rights to the same variable returns from its involvement with the association as set out for Example IG1A.

The religious organisation also satisfies the final control criterion.  Through its ability to determine the composition of the board of governors, the religious organisation can use its power to affect the amount of its returns from the activities of the association.

The religious organisation satisfies all three of the control criteria and therefore the religious organisation controls the association.  In this example, the design of the association as set out in its constitution indicates that the religious organisation has the ability to direct the relevant activities of the association even though a publicly elected board of governors has been established.  This design reflects the special relationship between the religious organisation and the association.

 

Implementation examples

Example IG2

FGH Charity is a private sector not-for-profit organisation.  Its objectives are to protect and serve the community by providing emergency first aid and increasing the first aid skills of the community.  The charity provides first aid at sporting events and when natural disasters occur.  The charity is funded via donations and the sale of first aid supplies (bandages, first aid kits, etc.).  The board of the charity has 10 members.

The charity established TUV First Aid Training Ltd (TUV or the company) some years ago.  The purpose of TUV is to provide first aid training courses to the general public for a fee.  TUV has an eight-member board, with all members appointed by the board of FGH Charity.

The charity has the right to receive distributions of profits made by TUV.

The management of TUV is responsible for the day-to-day operations of the company.  TUV’s management is also responsible for developing the company’s policies, including:

·       the scope of the training courses, such as the type of courses and the maximum number of participants for each course;

·       marketing plans for the courses, including the fee structure;

·       the frequency and location of courses; and

·       the use of in-house or off-the-shelf training materials.

These policies address the relevant activities of TUV, ie the activities that significantly affect the company’s returns.

The board of TUV meets regularly to review reports from TUV management in order to assess the performance of the company.  The board makes decisions about the company’s activities and policies so as to optimise its outcomes.  For example, the board might modify the scope or frequency of courses or revise the fee structure.

The TUV board also considers whether any profits should be distributed to the charity (FGH) as a financial return or used to improve or expand the company’s activities.

Example IG2A

Based on the facts and circumstances outlined above, the charity controls TUV.  The charity has power over TUV because its board appoints the board members of TUV, thus giving the charity the current ability to direct the relevant activities of the company.  The charity is exposed to variable returns from its involvement with TUV, both financial returns (the right to receive distributions of profits from TUV) and non-financial returns (the furtherance of its objective of improving community first aid skills).  Finally, the charity can use its power over TUV (via the board) to affect the nature and amount of returns it obtains through TUV.

Example IG2B

In this example, the facts of Example IG2A apply, except that:

·       the charity does not have the right to receive distributions of profits from TUV since the constitution of the company prohibits distributions to its members; and

·       all profits of TUV are to be reinvested into first aid training programs.

Based on the revised facts and circumstances, the charity controls TUV.  The charity has power over TUV because it appoints the board of the company.  Although it does not receive any financial returns, the charity obtains non-financial returns because TUV is fulfilling one of its objectives by increasing the first aid skills of the community.  The charity is able to use its power over TUV to affect the nature and amount of its returns.  Therefore, the three control criteria are satisfied.

Example IG2C

This example has the same facts as Example IG2B, except that:

·       the charity cannot appoint the board members of TUV, except for the Chair, who must be a board member of the charity; and

·       the charity has the right to veto appointments to the board of TUV, but only in exceptional circumstances – that is, when a potential board member is deemed unsuitable.  This right has only been enforced once, when a proposed board member was found to have a history of fraudulent activities.

Based on these facts and circumstances, the charity does not control TUV.  This is because the charity does not have the requisite power to direct the relevant activities of TUV – it appoints only one of the eight members of the board of TUV.  Even though the charity has the right of veto over TUV board appointments, this is only a protective right because it is a safeguard against having board members who could potentially interfere with the operations of the company and adversely affect its outcomes.

The charity had the opportunity and incentive when establishing TUV to obtain rights that would give it the ability to direct the relevant activities of TUV, but it did not do so.  Being involved in the design of an investee is not sufficient to give an investor control (see paragraph B51 of the Standard).

Example IG2D

In this example, the facts of Example IG2C apply, except that:

·       TUV’s constitution permits its board to make financial distributions to other parties as decided by the board; and

·       although the charity does not have any right to distributions of profits from TUV, to date TUV has always distributed its profits to the charity.

Based on these facts and circumstances, the charity does not control TUV because, as in Example IG2C, the charity does not have power over TUV to direct the relevant activities.

Even though TUV was established by the charity in order to further its objective regarding community first aid skills, and despite the charity historically receiving financial returns from TUV, the design of TUV does not give the charity power over TUV.  The board of TUV is independent of the charity, there is no requirement for TUV to make distributions to the charity (or to any other party), and the charity has no right to demand financial returns.

 

Implementation example

Example IG3

The LMN local government (the Council) is created under a State’s Local Government Act to operate for the peace, order and good government of its municipal district.  The Council is administered by the councillors, who are elected directly by the local community in periodic elections.  General requirements for the elections are set out in the Act.

Objectives of the Council

The Act specifies that the Council’s primary objective is to achieve the best outcomes for the local community over the long term.  In working to achieve this objective, the Council must have regard to:

·       promoting the social, economic and environmental viability and sustainability of the municipal district;

·       ensuring that resources are used efficiently and effectively and that services provided are accessible and equitable;

·       the equitable imposition of rates and charges; and

·       transparency and accountability in Council decision making.

 

Powers and Functions of the Council

The Council is empowered by the Act to do all things necessary and convenient for the achievement of its objectives and the performance of its functions, subject to any limitations under the Act or any other legislation (see the sections on the State Government’s protective and substantive rights later in this example).

The Council’s functions include:

·       raising revenue to fund its functions and activities;

·       planning for and providing services and facilities (including infrastructure) for the local community;

·       strategic and land-use planning;

·       making and enforcing local laws; and

·       advocating proposals that are in the best interests of the district.

Activities of the Council

In carrying out its functions, the Council undertakes a wide range of activities, including the employment of staff, the imposition of rates and charges upon constituents, the establishment and implementation of policies and procedures, the purchase or sale of goods or services from or to constituents or other parties, the provision without charge of services such as parks and roads, transactions under financial contracts and prosecuting legal actions.

State Government Involvement with the Council

The State Government’s objectives for the government of the municipal district are consistent with the objectives of the Council, since the State Government set out the Council’s objectives in the State’s Local Government Act.

Consequently, the Council is subject to a wide range of State Government regulatory powers, even though its day-to-day operations are carried out by the Council’s staff under the direction of its elected councillors.  The State Government’s rights in respect of the Council are held primarily by the Minister for Local Government, but other Ministers also hold some additional powers, such as land-use planning powers held by the Minister for Planning.

The interest of the State Government in the activities of the Council is to ensure that the general objectives set out in the Act are being achieved or furthered.  To that end, the State Government has an extensive range of rights (through its Ministers) to advise or guide the Council in its activities or, under particular circumstances, to intervene in the activities of the Council.  The principal rights of the State Government are described in the following sections.

Protective rights of the State Government

Some of the State Government’s rights are protective rights, as described in paragraph B26: rights that relate to fundamental changes to the activities of the Council (the investee) or that apply in exceptional circumstances.  For example, the Minister has the following rights that are regarded as protective rights for the purpose of this example:

·       restructure the municipal district through boundary changes;

·       abolish the existing Council and constitute a new Council or Councils, with the Minister able to direct the transfer of property, income, assets, rights, liabilities, expenses and staff among Councils as part of the process;

·       suspend all the councillors of the Council if the Minister is satisfied that there has been a serious failure to provide good government or serious unlawful acts by the Council – in which case an administrator is appointed to act as the Council and to perform its functions, powers and duties;

·       appoint inspectors of municipal administration to examine any particular Council matter and make recommendations to the Council, and enforce those recommendations if the Council does not adopt them;

·       revoke local laws passed by the Council where, in the Minister’s opinion, the laws substantially restrict competition without appropriate justification;

·       approve (or veto) Council entering into an entrepreneurial endeavour that exceeds 5% of the Council’s revenue from rates and charges;

·       approve (or veto) investment by the Council in types of financial instruments not already approved under the Act; and

·       make guidelines concerning the Council’s procurement policy or the provision of services by the Council so as to best meet the needs of the local community.

Substantive rights of the State Government

The State Government also has a range of rights that do not fall into the category of protective rights.  For example, Ministers have the following rights that, for the purpose of this example, are classified as substantive rights:

·       give directions concerning rates and charges to limit the rate of change in the Council’s general income for a financial year;

·       review the allowance category annually for the Council, including the limits and ranges of councillor allowances; and

·       prepare a planning scheme for the district or authorise an amendment subject to any conditions that the Minister wishes to impose.

Control of the Council

Based on the facts and circumstances outlined above, does the State Government control the Council in accordance with the definition of control in the Standard?  If not, who controls the Council?

Relevant activities

The State Government has numerous rights in relation to the Council.  Whereas the State Government’s protective rights cannot give power over the Council, the substantive rights do give the State Government the current ability to direct some activities of the Council.

However, paragraph 10 of the Standard states that an investor has power over an investee when the investor has the current ability to direct the relevant activities, ie the activities that significantly affect the investee’s returns.  Therefore, it is necessary to identify the relevant activities of the Council, and then assess the State Government’s substantive rights in respect of those activities relative to the rights of other parties.

Judgement is required in identifying the relevant activities, as this requires identifying both the Council’s returns and the activities of the Council that significantly affect those returns.  As a not-for-profit entity, the Council’s non-financial returns for the community are considered to be of primary importance, even though its objectives also include financial aspects, such as the efficient use of resources and equitable rates and charges.  The objectives do not include the raising of revenue per se.

All of the Council’s activities and functions contribute (whether positively or negatively) to the Council achieving or furthering its objectives.  Thus they are activities that affect the financial and non-financial returns of the Council.  But which activities significantly affect the Council’s returns?  Given the significance of non-financial returns for the Council, it is considered that the provision of services and facilities for the community and regulating other parties’ activities in the community (eg property development, health services and shopping centres) are the activities that most significantly affect the Council’s returns.  Consequently, these are likely to be the relevant activities of the Council.

Power

Paragraph B10 states that whether an investor has power over an investee depends on, for example, the rights the investor and other parties have in relation to the investee.  When two or more parties each have existing rights that give them the unilateral ability to direct different relevant activities, the party that has the current ability to direct the activities that most significantly affect the investee’s returns has power over the investee (paragraph 13 of the Standard).  Does the State Government have the power, the current ability, to direct the relevant activities of the Council?

The substantive rights of the State Government do give it the current ability to direct some of the activities of the Council, such as amending or replacing planning schemes.  However, the State Government is unable to direct the major part of the activities that significantly affect the Council’s returns.  Therefore, the State Government does not hold power over the Council as described in the Standard.

The power to direct the relevant activities is held by the councillors of the Council, who direct, within the framework established by the State Government, the vast majority of the Council’s activities that affect the returns from its operations.

The State Government’s right to give directions to limit the rate of change in the Council’s general income (rates and charges) is in the nature of price regulation rather than directing relevant activities.  The raising of revenue itself is not a relevant activity, as identified above, because revenue by itself is not one of the Council’s returns or objectives.

Returns

The State Government is exposed, or has rights, to variable returns from its involvement with the Council since the activities of the Council contribute to the achievement or furtherance of the State Government’s objectives for the good government and appropriate development of the municipal district.

Ability to use power to affect returns

Since it was concluded above that in the circumstances presented the State Government does not have power (as described in the Standard) over the Council, then the third control criterion linking power and returns is also not satisfied.  The State Government is able to affect the Council’s returns, and thus its own indirect returns, through exercising its substantive rights.  However, the State Government is unable to direct the activities that most significantly affect the Council’s returns.

Control conclusion

The conclusion from the above assessment is that the State Government does not have power over the Council and therefore does not control the Council.

In this case, the Council would not be consolidated by any other entity.  The councillors of the Council as a group are not investors as contemplated by the Standard.  They are akin to the board of directors of a company, that is, the councillors are a part of the Council itself.

Alternative Outcome

The distinction between protective and substantive rights and the significance of the substantive rights to the Council’s returns are matters for judgement in view of all the facts and circumstances in any particular situation.  A different list or classification of relevant activities, protective rights and substantive rights from that presented in this example might change the conclusion on control of the Council.

 

Implementation examples

Example IG4

XYZ University was established under an Act of the State Government.  The University receives approximately 40% of its total revenue in the form of grants for various purposes, comprising 30% from the Australian Government and 10% from the State Government.  The University is required by the Act to submit an annual report to the State Minister for Education.

Objectives of the University

The Act specifies that the University’s objects include:

·       to provide higher education at an international standard;

·       to undertake scholarship and research for the advancement of knowledge and the benefit of the well-being of the State, Australian and international communities;

·       to equip graduates to excel in their careers and contribute to the life of the community; and

·       to serve the State, Australian and international communities and the public interest by enriching cultural and community life and promoting critical and free inquiry and public debate.

 

Management of the University

The governing body of the University is the University Council.  The Council consists of 17 members, five of whom were appointed directly or indirectly by the State Minister.  Four members were elected by the staff and students of the University.  The remaining eight members were appointed by the Council itself, comprising the three official members (the Chancellor, the Vice-Chancellor and the President of the Academic Board) and five other (non-official) members.

The Act specifies that the number of Minister-appointed members (five members in this case) must be equal to or greater than the number of non-official Council-appointed members (also five).

The Act specifies that the University Council’s responsibilities, powers and functions include:

·       approving the mission, strategic direction and annual budget and business plan of the University;

·       establishing policies (‘university statutes and regulations’) relating to the governance and operation of the University, including trusts and endowments, and research, development, consultancy, commercial activities and other services undertaken for commercial organisations or public bodies;

·       developing guidelines (if any) concerning the carrying out of commercial activities, finance and property matters, or any other related matter;

·       overseeing the management of the property, finances and business affairs of the University, such as risk management across the University, including its commercial activities;

·       any other powers and functions conferred on it by or under legislation or any university statute or regulation; and

·       the power to do anything else necessary or convenient to be done for or in connection with its powers and functions.

 

Activities of the University

In carrying out its functions, the University undertakes a wide range of activities, including employing academic, teaching and administrative staff, determining fees and charges for courses provided to students and for commercial activities, entering into contracts, and forming or becoming a member of other entities.

State Government Involvement with the University

The State Government’s objectives for the University are consistent with, but not limited to, those specified in the Act for the University.  For example, the State Government anticipates State economic development as a result of the University’s activities, such as the provision of housing and tourism services to international students.

The State Minister has the following powers and functions, which are classified in this example as substantive rights under the Standard:

·       fix the remuneration and fees to be paid to Council members who are not full-time staff of the University or holders of statutory office;

·       approve (or veto) University statutes and guidelines made by the Council;

·       declare an activity to be a university commercial activity;

·       make interim guidelines concerning university commercial activities and finance and property matters – these apply unless replaced by University-submitted guidelines approved by the Minister;

·       certain rights specified in State Government grants provided to the University – some of the grants detail the education or research activities to be carried out under the grant;

·       in conjunction with the State Treasurer, approve the limits and conditions (eg security) for University borrowings; and

·       approve (or veto) the disposal of land that was previously Crown land granted to the University.

The Minister also has the following powers, which are classified as protective rights for the purpose of this example:

·       request commercial and financial reports from the University;

·       refer a university commercial activity or any aspect thereof to the auditor-general for investigation and report to the Minister; and

·       certain rights specified in State Government grants provided to the University – some of the grants are required to be repaid if not applied as specified.

 

Australian Government Involvement with the University

The Australian Government’s objectives for the University are consistent with, but not limited to, those specified in the State Act for the University.  For example, the Australian Government anticipates national economic development as a result of the University’s activities and may seek to advance foreign policy objectives through universities attracting international students.

The Australian Minister for Education also has the rights specified in Australian Government grants provided to the University.  Some of these grants specify how they are to be applied to education or research activities (which are substantive rights for the purpose of this example) and some require their repayment if not applied as specified (protective rights for the purpose of this example). 

The Minister can also request reports from the University.

University Council-directed Activities

As indicated above, the University’s commercial activities and finance and property matters are subject to various State Government Ministerial powers, and government grants may be conditional.  However, the University Council also has a range of powers and functions that it can exercise directly, such as the following:

·       appoint the Vice-Chancellor, who is the chief executive officer of the University and responsible for the conduct of the University’s affairs in all matters;

·       determine the composition of borrowings within the parameters set by the State Government;

·       approve the University’s budget for a financial year, incorporating total revenue and the planned revenue sources, including planning the mix between teaching, research and commercial activities, the fees and charges to apply to those activities, and the type and value of government grants desired;

·       determine the course mix and target student mix, such as vocational, undergraduate, graduate and executive courses, on-campus or distance learning, and local and international students;

·       appoint staff and determine their terms and conditions;

·       decide whether to operate through multiple campuses and how to utilise the University’s infrastructure; and

·       make university regulations with respect to any matter relating to the University.

Example IG4A

Control of the University

Based on the facts and circumstances outlined above, does the State Government or the Australian Government control the University in accordance with the definition of control in the Standard?  If not, who controls the University?

Economic dependence

The State and Australian Governments each has a range of rights in relation to the University.  The University may be economically dependent on the grants from those Governments in order to carry out its activities at their present scope and scale, but paragraphs B19 and B40 of the Standard make clear that economic dependence alone does not lead to the investor having power (as that term is used in AASB 10) over the investee.  The State Government and Australian Government rights under some of their grants to the University to recover misapplied funds amount to protective rights.  The repayment of such grants, potentially coupled with a reduction of Government grants in the future given the lack of compliance with grant conditions, may require the University to curtail its activities due to the reduction in funding.  However, such a curtailment does not involve either Government in directing activities of the University, since it is the University that would determine which activities would be curtailed.

Relevant activities

Judgement is required to identify the University’s relevant activities, that is, the activities that significantly affect the University’s returns.  All of the University’s activities and functions contribute in some way (positive or negative) to the University achieving or furthering its objectives.  Thus they are activities that affect the financial and non-financial returns of the University.  However, as the University has fairly limited commercial activities in this example, the activities that most significantly affect the University’s returns are the education and research activities.

Power

Protective rights held by the State and Australian Governments cannot give them power over the University.  Instead, their substantive rights concerning the University’s education and research activities (the relevant activities) need to be weighed against the rights of the University Council itself, in order to assess which party has the current ability to direct the activities that most significantly affect the University’s returns (or outcomes).

It is the University Council that generally directs the education and research activities.  For example, the Council decides the mix between education, research and commercial activities, the courses to be offered, the target student mix, the fee structure and how to use the University’s infrastructure for the activities.  Some grants from the State and Australian Governments direct how they are to be applied, but these affect only a relatively small proportion of the education and research activities overall.  On balance, the University Council itself appears to have the current ability to direct the relevant activities of the University.

Since the State Minister is able to appoint members of the University Council, it is necessary to consider whether the State Minister has power over the University through substantive rights to appoint a majority of the members of the University Council.  In this example, the State Minister can appoint only five of the 17 members of the University Council.  Therefore, the State Government is unable to direct the relevant activities of the University through appointments to the University Council.

The State Government’s substantive rights in relation to the University’s commercial activities or business operations are not considered in this assessment of control, since they do not relate to the relevant activities.

Neither the State Government nor the Australian Government would have power (as described in the Standard) over the University.

Returns

The State and Australian Governments are exposed, or have rights, to variable returns from their involvement with the University since the activities of the University contribute to the achievement or furtherance of the State Government’s and the Australian Government’s objectives for higher education.  The Governments have additional objectives regarding the activities of the University, but there is no need for a direct alignment between the Governments’ objectives and the University’s objectives.

Ability to use power to affect returns

Since it was concluded above that in the circumstances presented neither the State Government nor the Australian Government has power (as described in the Standard) over the University, then the third control criterion linking power and returns is also not satisfied.  The Governments are able to affect the returns of the University, and thus their own indirect returns, through exercising their substantive rights.  However, the Governments are unable to direct the activities that most significantly affect the University’s returns.

Control conclusion

The conclusion from the above assessment is that neither the State Government nor the Australian Government has power over the University and therefore neither Government controls the University.

In this case, the University would not be consolidated by any other entity.  The University Council as a group is not an investor as contemplated by the Standard.  It is akin to the board of directors of a company, that is, the Council is a part of the University itself.

Example IG4B

In this example, the facts are the same as in Example IG4A except that:

·       XYZ University is a research university with extensive commercial activities, and teaching activities that are limited to a small range of graduate and executive courses;

·       the University receives approximately 30% of its total revenue in the form of grants for various purposes, comprising 10% from the Australian Government and 20% from the State Government;

·       50% of the total revenue is derived from commercial activities, and the balance of 20% from industry funding and course fees; and

·       the State Government requires all significant commercial activities and finance and property decisions of the University to be approved by the Minister.

Based on these revised facts and circumstances, the State Government’s substantive rights in respect of the University’s commercial activities and its finance and property matters have a much more significant role in the operations of the University than in Example IG4A.  The substantive rights may now be of such effect that the State Government has the current ability to direct the activities that significantly affect the University’s returns.  In that case, the State Government would have power over the University as described in the Standard, satisfying the first control criterion.

As explained in Example IG4A, the State Government is exposed or has rights to variable returns from its involvement with the University, thus satisfying the second control criterion.

Finally, the State Government is able to use its power over the University’s commercial activities to affect its returns from the University, thus meeting the third control criterion.

Control Conclusion

The conclusion from the above assessment is that in this case the State Government controls the University, assuming that the State Government’s substantive rights give it the ability to direct the relevant activities of the University.

 

Implementation examples

Example IG5

A statutory authority SHS is established under State health services legislation to deliver services to the community.  The statutory authority has a governing council that oversees the authority’s operations and is responsible for its day-to-day operations.  The State Health Minister, as part of their role in the State Government, appoints the authority’s governing council and, subject to the Minister’s approval, the authority’s governing council appoints the chief executive of the authority.

The State Health Department acts as the ‘system manager’ for the State public health system.  This role includes:

·       strategic leadership, such as the development of State-wide health service plans;

·       directions for the delivery of health services, such as entering into service agreements, capital works approval and management of State-wide industrial relations, including employment terms and conditions for the authority’s employees; and

·       monitoring of performance (eg quality of health services and financial data) of the authority and taking remedial action when performance does not meet specified performance measures.

The Minister’s approval, given on behalf of the State Government, is specifically required for the following major decisions:

·       entering into service agreements with the authority;

·       issuing binding health service directives;

·       finalisation of State-wide health service plans and capital works planning; and

·       employment and remuneration of the authority’s executive staff.

Example IG5A

Based on the facts and circumstances outlined above, the Department generally acts as an agent of the State Government in relation to the statutory authority.  This is evident from the restricted decision-making authority held by the Department.  The Department does not control the statutory authority.

As the State Government appoints the statutory authority’s governing council and approves the major decisions affecting the authority’s activities, the State Government has the power to direct the relevant activities of the authority.  Assuming that the other control criteria (variable returns and link between power and returns) are satisfied, as would be expected, then the State Government would control the statutory authority.  As a result, the statutory authority would not be consolidated by the Department, but would be consolidated directly into the whole of government general purpose financial statements.

Example IG5B

The facts are the same as in Example IG5A except that:

·       the State Government has delegated the power to appoint members of the statutory authority’s governing council to the Department head;

·       the appointment of the authority’s chief executive by the governing council does not require Ministerial approval;

·       the State Government has delegated the power to approve the major decisions to the Department head; and

·       assessments of the Department’s performance encompass the performance of the statutory authority.

In this example, the scope of the decision-making authority held by the Department has increased significantly as a result of the delegations by the State Government to the Department head.  As the Department acts as a principal under the delegations, the Department has the current ability to direct the relevant activities of the authority so as to achieve the health service objectives of the Department.  As the Department also has the ability to use its power over the authority to affect the nature and amount of the Department’s returns, the Department controls the statutory authority.

The Department would consolidate the statutory authority into its consolidated financial statements.  The Department’s consolidated financial statements would then be consolidated into the whole of government financial statements.