Appendix E (AASB12_08-15_COMPmar20_07-21)

AASB 12 incorporates International Financial Reporting Standard IFRS 12 Disclosure of Interests in Other Entities, issued by the International Accounting Standards Board. Consequently, some of the text of this Standard particularly reflects the perspective of for-profit entities. The AASB has prepared this appendix to explain and illustrate the definition of ‘structured entity’ in the Standard for not-for-profit entities in the private and public sectors, to address circumstances where the for-profit perspective does not readily translate to a not-for-profit perspective.

AASB 12 includes specific disclosure requirements regarding both consolidated and unconsolidated structured entities. Entities preparing general purpose financial statements that apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities are not required to comply with AASB 12.

A structured entity is defined in Appendix A of AASB 12 as follows:

“An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.”

Relevant activities are defined in AASB 10 as the activities of an entity that significantly affect the entity’s returns.  The current ability to direct the relevant activities is necessary in order for one entity to control another.

Paragraph B22 of AASB 12 states that structured entities often have some or all of the following features or attributes: restricted activities, a narrow and well-defined objective, insufficient equity to finance its activities without subordinated financial support, and financing tranches in the form of multiple contractually linked instruments.  Paragraph B23 gives examples of structured entities: securitisation vehicles, asset-backed financings and some investment funds.

The definition of a structured entity depends on voting or similar rights not being the dominant factor in deciding who controls an entity.  Voting rights are a common feature in many for-profit entities, having a dominant role in determining who controls an entity.  Accordingly, the principle underlying the definition limits the scope of structured entities to entities that are controlled through less conventional means.  The features listed in paragraph B22 and the examples in paragraph B23 also suggest that structured entities constitute a limited class of entity.

It is common for not-for-profit entities to be established by administrative arrangements or legislation, especially in the public sector. Therefore, if the administrative arrangements or legislation are dominant factors in determining control of such an entity, the entity is not a structured entity.  The AASB 12 disclosures regarding structured entities, such as the provision of financial support without a contractual obligation, are not particularly relevant to such entities, given the expectation of ongoing government funding through appropriations to supplement any other revenue sources.

Applying the principle underlying the definition of a structured entity means that structured entities have been designed so that less conventional means – in the context of not-for-profit entities – are the dominant factor in determining who controls the entity. This approach limits, for not-for-profit entities, the scope of structured entities to entities that have been designed so that voting or similar rights, including administrative arrangements or statutory provisions, are not the dominant factor in determining control of the entity.

To illustrate the definition of a structured entity, an entity for which contractual arrangements are significant to determining control of the entity is a structured entity.  This would include entities for which most of the activities are predetermined, with the relevant activities limited in scope but directed through contractual arrangements. Examples of such entities are included in paragraph B23. Another example would be a partnership between a government and a private sector entity, being a partnership established and directed by contractual arrangements. On that basis, the partnership is a structured entity, regardless of the rights (if any) that the government and the entity have in relation to the partnership.  If the government guarantees a certain level of revenue for its private sector partner, for example, the AASB 12 disclosures concerning the provision of financial support would be particularly relevant, whether the partnership is a consolidated or an unconsolidated structured entity for the government.  However, the mere fact that a government provides funding to another entity does not make that entity a structured entity.

Not-for-profit private sector entities will also need to identify any structured entities with which they are associated. For example, a not-for-profit private sector entity may have established or sponsored a community service organisation whose relevant activities are directed by means of contractual arrangements. Those arrangements might require the not-for-profit private sector entity to provide financial support in specified circumstances to the community service organisation, or alternatively the entity might choose to provide financial or other support to the organisation without the contractual obligation to do so (eg due to the economic dependency of the organisation upon the entity). The AASB 12 disclosure requirements would be relevant in both circumstances as the community service organisation is a structured entity.  Paragraph 31, for example, would require the not-for-profit private sector entity to disclose any current intentions to provide support to an unconsolidated structured entity.