Liabilities of government departments assumed by other entities (AASB1004_12-07_COMPmar20_07-21)

Paragraphs 39 to 43A of this Standard apply only to government departments.

A liability of a government department that is assumed by the government or other entity shall be accounted for as follows:

(a)                   on initial incurrence of the liability by the government department, the government department shall recognise a liability and an expense;

(b)                   on assumption of the liability by the government or other entity, the government department shall extinguish the liability and:

(i)             when the assumption is not in the nature of a contribution by owners, the government department shall recognise income of an amount equivalent to the liability assumed; or

(ii)             when the assumption of the liability is in the nature of a contribution by owners, the government department shall make a direct adjustment to equity of an amount equivalent to the liability assumed.

The obligation to make payments to employees in respect of long-service leave and other employee benefits may rest with the government, a central agency or other entity. However, the costs of long-service leave and other employee benefits are part of the cost of the goods and services provided by the government department for which those employees work. Employment contracts or employment arrangements may be such that a government or other entity, rather than the government department, directly incurs the obligation to settle liabilities that arise in respect of benefits of the government department’s employees. Alternatively, it may be that the government department initially incurs the obligation to settle such liabilities, and the government or other entity then assumes that obligation.

A government or other entity may initially incur, and then settle, obligations in respect of the wages, salaries and other costs of the employees of a government department during the reporting period. Similarly, other expenses of operating the government department during the reporting period, such as building occupancy expenses, may be incurred and settled by the government or other entity. In such cases, the government department does not recognise a liability when the expenses are initially incurred. Rather, the government department recognises income equivalent to the fair value of the employee services or other assets it receives, and recognises expenses of the same amount to reflect that the economic benefits represented by those employee services or other benefits have been consumed by the government department. For employee services, this normally occurs when the services are provided, but in some instances the costs of these services forms part of the cost of acquiring an asset.

When an employee transfers from one government department to another government department, the liability in respect of employee benefits accrued up to the transfer date is usually transferred to the transferee government department.  In such cases, the transferor government department may make a payment to the transferee government department for the employee’s accrued benefits.  When an employee transfers from one government department to another government department:

(a)            the transferor government department extinguishes any liability for employee benefits recognised in respect of the employee, and recognises income equivalent to the liability extinguished.  When a payment is made or is to be made by the transferor government department in consideration for the assumption of the liability by the transferee government department, the transferor government department extinguishes the liability and recognises a decrease in assets (cash) or an increase in liabilities (cash payable).  When the payment is less than the total amount of the liability, the transferor government department recognises income equal to the amount of that shortfall; and

(b)            the transferee government department recognises an expense and a liability in respect of any present obligations to pay accrued employee benefits in the future that are assumed as a consequence of the transfer. When a payment is made or is to be made to the transferee government department in consideration for the assumption of the liability, the transferee government department recognises the liability assumed and an increase in assets (cash or cash receivable). When the payment is less than the total amount of the liability for employee entitlements assumed, the transferee government department recognises an expense equal to the amount of that shortfall.

As noted in paragraphs 39 to 41, a government may initially incur or subsequently assume all obligations to make payments to employees of a government department in respect of long-service leave and other employee benefits. In such cases, the transfer of employees between government departments will not give rise to the need for the transferee government department to recognise expenses and liabilities or for the transferor government department to extinguish liabilities and recognise income as outlined in paragraph 42.

A government department shall disclose liabilities that were assumed during the reporting period by the government or other entity.

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