Appendix (INT1038_12-07_COMPmay19_01-20)

This appendix discusses five scenarios in a whole of government context to illustrate the classification of certain transfers within a group of entities in which the parent is either a government or a subsidiary of a government, in accordance with the Interpretation.  It illustrates the position of interposed parents in a series of such transfers, and the application of paragraphs 10, 11 and 13 of the Interpretation to the classification of such transfers within the group.  None of the transfers illustrated in this appendix is made as consideration for the provision by the transferee of assets or services at fair value to the transferor.  In addition, none of the transfers involves the issuance or cancellation of equity instruments; and none of the transfers are in relation to a government department or other government controlled not-for-profit entity in respect of a “restructure of administrative arrangements” as defined in AASB 1004 Contributions.

In this scenario a transfer of assets from Entity A to Entity B (both wholly-owned public sector entities) is denoted by the broken arrow.  Under paragraph 10 of the Interpretation, since the transfer is to a wholly-owned public sector entity from another entity controlled by the same government, the transfer is accounted for as two transfers via that government (T1 and T2, denoted by the unbroken arrows).  Entity A is the original transferor.  The Government is the interposed parent.  It is the “immediate transferee” in respect of Transfer 1 (T1) and the “immediate transferor” in respect of Transfer 2 (T2).  Entity B is the ultimate transferee.

Where the transfer to Entity B (T2) is classified as a contribution by owners by the Government to Entity B, as the ultimate transferee, the journal entries that would be recorded by the original transferor (Entity A) and the interposed parent (the Government) are:

(a) the original transferor would classify Transfer T1 to the Government as a distribution to owners, as required by paragraph 11(a) of the Interpretation, regardless of whether the distribution is a distribution of accumulated surpluses or a return of the transferor’s contributed equity to the Government;

(b) the immediate recipient of Transfer T1 (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 (consistent with paragraph 13); and

(c) the interposed parent (the immediate transferor) would record the corresponding transfer made (T2) as the acquisition of an ownership interest in the ultimate transferee, as required by paragraph 11(b).

In Scenario 1, the original transferor and the ultimate transferee are commonly controlled, but neither entity controls the other.  Under Scenario 2, the original transferor and the ultimate transferee are commonly controlled, and both of the transfers are from a parent to its subsidiary.

In this scenario the Government transfers assets to Entity C (a wholly-owned subsidiary) and designates the transfer as a contribution by owners (Transfer 1, indicated as T1).  Entity C transfers the assets to Entity D, its wholly-owned subsidiary, and designates the transfer as a contribution by owners (Transfer 2, indicated as T2).  Because Entity C controls Entity D, it has the authority to designate the nature of Transfer 2, unless the Government has designated the nature of the transfer in its capacity as the ultimate parent.

For Transfer 1, the Government is the immediate transferor and Entity C is the immediate transferee.  For Transfer 2, Entity C is the immediate transferor and Entity D is the immediate transferee.  Because Entity C controls Entity D, it is unnecessary to deem Transfer 2 as passing through the Government in order to establish the transferor’s financial interest in the transferee’s net assets that is essential for a transfer to qualify as a contribution by owners.  For both transfers, the transferor accounts for the transfer as the acquisition of an ownership interest in the transferee (as required by paragraph 11(b)), and the transferee accounts for the transfer as a contribution by owners.

In this scenario the Government controls Entity E, which is the sole owner of Entities F and G.  The situation is the same as Scenario 1, except that Entity E (rather than the Government) is the interposed parent.  Consistent with paragraph 8(c) of the Interpretation, Entity E has the authority to designate the nature of each transfer, unless the Government has designated the nature of the transfer in its capacity as the ultimate parent.  The transfers should be classified by each transferor and transferee in accordance with the classifications outlined in Scenario 1.

In this scenario, Entity H, which is wholly owned by the Government, makes a distribution to owners to the Government.  Entity H is the immediate transferor and the Government is the immediate transferee.  The Government would, according to its designation of the transfer, classify the transfer received as income or a redemption of part or all of its ownership interest (investment) in the transferor (see paragraph 43 of this Interpretation).

Under Scenario 5, transfers occur between public sector entities that are controlled by the same government and have more than one interposed parent.  Paragraph 11 of this Interpretation specifies that (regardless of the number of interposed parents involved in the transfer) 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.

The application of those policies is illustrated in respect of the following entities and transfers.  Control relationships are denoted by unbroken lines without arrows.  Entities I and J are wholly owned directly by the Government, and Entities K, L, M and N are wholly owned by Entities I or J.

In this scenario there is a transfer of assets from Entity K to Entity N, denoted by the broken arrow.  However, under paragraph 10 of this Interpretation, since the transfer is to a wholly-owned public sector entity from another entity controlled by the same government, the transfer instead is accounted for as a series of transfers via that government and its directly-controlled entities, denoted by the unbroken arrows (T1, T2, T3 and T4).  Entity K is the original transferor.  Entity I, the Government and Entity J are interposed parents.  Entity N is the ultimate transferee.

Entity I is the “immediate transferee” in respect of Transfer 1 (T1) and the “immediate transferor” in respect of Transfer 2 (T2).  The Government is the “immediate transferee” in respect of Transfer 2 (T2) and the “immediate transferor” in respect of Transfer 3 (T3).  Entity J is the “immediate transferee” in respect of Transfer 3 (T3) and the “immediate transferor” in respect of Transfer 4 (T4).

Where Entity N classifies the transfer to it as a contribution by owners, because of the requirements of the Interpretation, the journal entries that would be recorded by the original transferor and the interposed parents are as follows:

(a) under paragraph 11(a) of the Interpretation, Entities K and I would classify the transfers they make as distributions to owners;

(b) according to paragraph 13 of the Interpretation, Entity I and the Government would classify the transfers they receive as income or a redemption of part or all of their ownership interest (investment) in the transferor;

(c) under paragraph 11(b) of the Interpretation, the Government and Entity J would classify the transfers they make as the acquisition of an ownership interest in the transferee; and

(d) like Entity N, Entity J would classify the transfer made to it as a contribution by owners.

The journal entries described in these scenarios for interposed parents (for example, the controlling government) and for the Government in Scenario 4 would not be recognised in the consolidated financial statements of those entities where they concern transfers within the group.  They would be recognised in each entity’s own financial statements, if prepared.  Similarly, the foregoing references to classification of transfers by the Government concern the Government in its role as the parent, where the Government or a notional entity (such as “the Crown”) prepares separate financial statements in that capacity.  In such instances, the Government as ultimate transferee would fall outside the scope of the Interpretation, because it is not a wholly-owned public sector entity, although the Interpretation would represent analogous guidance.