Discussion (INT1038_12-07_COMPmay19_01-20)

AASB 1004 defines contributions by owners as “future economic benefits that have been contributed to the entity by parties external to the entity, other than those which result in liabilities of the entity, that give rise to a financial interest in the net assets of the entity which:

(a) conveys entitlement both to distributions of future economic benefits by the entity during its life, such distributions being at the discretion of the ownership group or its representatives, and to distributions of any excess of assets over liabilities in the event of the entity being wound up; and/or

(b) can be sold, transferred or redeemed."

However, AASB 1004 requirements relating to contributions by and distributions to owners, other than in relation to restructures of administrative arrangements by government departments and other government controlled not-for-profit entities:

(a) do not provide specific guidance on how the definition of contributions by owners should be applied to transfers between public sector entities controlled by the same government;

(b) do not provide guidance on the policies to adopt to achieve consistent classification by transferors of transfers recognised by transferees as contributions by owners; and 

(c) do not apply to statutory authorities and government-owned corporations.

This Interpretation adopts the views that the determinant of whether a transfer to a public sector entity should be classified as a contribution by owners is whether the transfer meets the definition of contributions by owners in paragraph 18, and that such classification does not depend:

(a)            on whether the transfer increases the capacity of the transferee public sector entity to provide services;

(b)            on the composition and extent of the transfer, for example (other than for government departments and other government controlled not-for-profit entities involved in restructures of administrative arrangements) whether it involves a restructuring; or

(c)            solely on the nature of the parties to the transfer, for example whether they are for-profit or not-for-profit entities.

In addition, authorisation of a transfer by a legally binding authority (such as a statute or ministerial direction) does not of itself indicate that the transfer should be classified as a contribution by owners unless the instrument authorising the transfer designates that the transfer (or a class of similar transfers) has such a nature.

One form of evidence that a transfer is a contribution by owners is the issuance of equity instruments in relation to the transfer.  Equity instruments may be shares, equivalent ownership instruments (for example, units of contributed equity in a non-corporate entity such as a trust), or debt instruments (or components thereof) that fail the definition of “financial liabilities” and accordingly are classified as equity under AASB 132 Financial Instruments: Presentation.

This Interpretation adopts the view that the issuance of equity instruments in relation to a transfer is not essential for the transfer to qualify for recognition as a contribution by owners. 

Another form of evidence that a transfer is a contribution by owners as defined in paragraph 18 is an agreement in relation to the transfer setting out the respective ownership interests of equity contributors.  In substance, the existence of such an agreement is the same as the issuance of equity instruments, because it specifies the respective interests of the various owners of the transferee’s contributed equity.

Designation of a transfer as a contribution by owners by the original transferor, the government or another entity interposed between the original transferor and the ultimate transferee is sufficient for a wholly-owned public sector transferee to classify the transfer as a contribution by owners, if that transfer is not made as consideration for the provision by the transferee of assets or services at fair value to the transferor.  However, designation would be insufficient if the transferee is not wholly owned by the transferor or its controlling government.  In these circumstances, either the issuance of equity instruments, or the existence of an agreement setting out the respective ownership interests of equity contributors, in relation to the transfer would be necessary for the transfer to be a contribution by owners.  This is because where a minority interest exists, these actions are necessary to specify the respective interests of the various owners of the transferee’s contributed equity.

Part (a) of the definition of contributions by owners in paragraph 18 refers to transfers that “give rise to a financial interest in the net assets of the entity which … conveys entitlement … to distributions of future economic benefits by the entity during its life, such distributions being at the discretion of the ownership group or its representatives …”.

For a transfer to a public sector entity to satisfy part (a) of the definition of contributions by owners in paragraph 18, the distributions of future economic benefits to which the owner obtains an entitlement must include returns on investment, as distinct from returns of investment.  A consequence of this requirement is that if a transferee public sector entity is a not-for-profit entity, it will be unlikely that the financial interest arising from the transfer will convey an entitlement to discretionary distributions of future economic benefits.  Accordingly, it is likely that a transfer to such an entity can only qualify as a contribution by owners if it satisfies part (b) of the definition of contributions by owners – which requires that the financial interest in the net assets arising from the transfer can be sold, transferred or redeemed.

Part (b) of the definition of contributions by owners in paragraph 18 refers to transfers that “give rise to a financial interest in the net assets of the entity which … can be sold, transferred or redeemed”.  If the transferee is a wholly-owned subsidiary of the transferor or a parent of the transferor, the transferor or that parent will almost invariably possess rights of redemption.

The requirements of paragraph 10 reflect that a transfer to a public sector entity from another entity controlled directly or indirectly by the same government (other than a transfer made as consideration for the provision by the transferee of assets or services at fair value to the transferor) is, in substance, a transfer from that government.  Accordingly, in respect of these rights of redemption:

(a) it is irrelevant whether the particular government-controlled transferor is entitled to receive any distribution of future economic benefits comprising a redemption of a financial interest in the net assets of the transferee public sector entity; and

(b) the rights of the government, held directly by the government or indirectly through any of its controlled entities, determine the classification of transfers to the public sector entity.

Because any transfer by a parent to its wholly-owned subsidiary (other than a transfer made as consideration for the provision by the transferee of assets or services at fair value to the transferor) has the potential to satisfy the definition of contributions by owners in paragraph 18, this Interpretation adopts the view that it is necessary to refer to the form of the transfer to determine whether it should be classified as a contribution by owners.  Accordingly, if the transferee neither issues equity instruments nor is a party to an agreement setting out the respective ownership interests of equity contributors, in relation to the transfer, formal designation that the transfer is to be added to the transferee’s contributed equity is necessary to identify contributions by owners (except in relation to government departments and other government controlled not-for-profit entities involved in restructures of administrative arrangements).

Designation of transfers as contributions by owners may occur in a variety of ways which include, but are not limited to, a minute of a decision by the governing body of the contributor, correspondence to the transferee, legislation, administrative orders, and allocation statements, directions or bulletins issued by or on behalf of relevant ministers, each of which specifies that the transfer (or a class of such transfers) is to be added to the transferee’s contributed equity.  In each case, designation of the transfer or class of transfers is made by the transferor (or a parent of the transferor), because the distinction between an entity’s contributed equity and its other components of equity (such as retained earnings and certain reserves) is at the discretion of its owners.

This Interpretation adopts the view that for the designation of a transfer (either specifically in respect of that transfer or in respect of the same class of transfers) as a contribution by owners to be effective, it should occur at or before the time of the transfer, because:

(a) the character of a transfer does not change after it occurs and therefore the character of a transfer should be evident or determined at or before the time of the transfer; and

(b) a contribution by owners changes the formal contributed equity of the recipient of that contribution.

This requirement removes the potential for deferring the classification of a transfer until the entity has more information about the likely profit or loss for the reporting period and the effect of classifying the transfer as a contribution by owners.

This Interpretation does not permit a contribution by owners to be redesignated as income.  The definition of income under the Framework for the Preparation and Presentation of Financial Statements indicates that an inflow of economic benefits that results in an increase in equity (other than increases relating to contributions from equity participants) has occurred.  A transfer to an entity increases its equity only once, and the transferee’s equity does not increase at the time of any intended redesignation.

As a consequence of the requirement that, where a transfer is classified as a contribution by owners on the basis of its designation, the designation of the transfer or class of similar transfers must occur at or before the time of the transfer, a transfer designated as income cannot be redesignated as a contribution by owners.

The prohibitions of redesignations in paragraph 12 do not preclude the redesignation of liabilities as contributed equity when converted to equity because:

(a) recognition of the liabilities did not involve the recognition of contributions by owners or income; and

(b) consistent with AASB 15 and AASB 1004, such redesignations are not recognised as giving rise to income.

A pre-existing interest of the government in all of the net assets transferred to a public sector entity does not preclude a transfer to the public sector entity from being a contribution by owners.  The contribution to the transferee public sector entity can give rise to a financial interest in the net assets of that transferee, because that financial interest is in respect of the net assets of the transferee rather than the net assets transferred.  That financial interest in the net assets of the transferee public sector entity cannot exist until the transfer is made.  Until then, the transferor has a direct interest in the assets it contributes to the transferee.

This Interpretation adopts the view that a transfer recognised by a transferee public sector entity as a contribution by owners should be classified consistently by the transferor(s) in respect of that transfer.

As noted in paragraph 29, a transfer to a public sector entity from another entity controlled directly or indirectly by the same government is, in substance, a transfer from that government.  The rights of the government in respect of the transfer, held directly by the government or indirectly through any of its controlled entities, determine the classification of the transfer to the public sector entity.  Accordingly, for a transfer to a public sector entity to satisfy part (b) of the definition of contributions by owners in paragraph 18, a right to sell, transfer or redeem the financial interest in the net assets of the transferee must be held by either the government or a government-controlled transferor.

Many transfers are made between public sector entities that are controlled by the same parent.  Where the original transferor is another entity controlled directly or indirectly by the same government, the chain of entries that would be recorded by the original transferor, the ultimate transferee and the interposed parent (which will be the government or a subsidiary of the government that controls the transferor and the transferee, if there is only one interposed parent) for transfers classified as contributions by owners by transferee public sector entities are:

(a) the government-controlled transferor (the original transferor) would classify the transfer as a distribution to owners;

(b) the immediate recipient of the transfer (the interposed parent) would record the transfer received as income or a redemption of part or all of its ownership interest (investment) in the transferor (see paragraph 43);

(c) the interposed parent (the immediate transferor) would record the corresponding transfer made as the acquisition of an ownership interest in the ultimate transferee; and

(d) the ultimate transferee would classify the transfer as a contribution by owners.

However, the entries described in paragraphs 40(b) and 40(c) for the interposed parent (for example, the controlling government) would not be recognised in that entity’s whole of government or general government sector financial statements because they concern transfers within the group of entities.  They would be recognised in that entity’s own financial statements, if prepared.

Some transfers between public sector entities controlled by the same government have more than one interposed parent.  In these cases, the method of accounting for the transfers by each transferor would follow the general approach underlying the specific case explained in paragraph 40 (where there is only one interposed parent).  Under the general approach, which is set out in paragraph 11, if the transfer is classified by the ultimate transferee as a contribution by owners, each transferor must classify the transfer as:

(a)            a distribution to owners, if the transferor makes the transfer to all or part of its ownership group; or

(b)            the acquisition of an ownership interest in the transferee, if the transferor makes the transfer to an investee.

Another issue concerning the consistency of treatments by transferors and transferees arises where a transfer between public sector entities within the same group is a distribution to owners in circumstances where the transferee held an equity interest in the transferor.  The issue is whether and to what extent the transfer should be accounted for by the transferee (which may be the government) as a redemption of part or all of its ownership interest (investment) in the transferor.  The appropriate classification would be clear where, in respect of the transfer, equity instruments are cancelled or a formal ownership agreement is amended.  In other circumstances, classification of distributions to owners by the transferee is based on the designation by the government or a government-controlled parent of the transferee of the character of the distribution at or before the time of the transfer.  In making this designation, distributions to owners can be classified as redemptions by the transferee of its ownership interest in the transferor only to the extent of the ownership interest recorded by the transferor immediately before the distribution was made.

This Interpretation applies to public sector entities in relation to certain transfers to or from other entities within the same group.  It applies to transferees in relation to these transfers only where they are wholly owned, and to corresponding transferors whether wholly owned or partly owned by the government or a government-controlled parent.