Accounting for Collaboration- Transition Issues

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1 LAAP BULLETIN 102 Accunting fr Cllabratin- Transitin Issues February 2015 The Lcal Authrity Accunting Panel issues LAAP Bulletins t assist practitiners with the applicatin f the requirements f the Cde f Practice n Lcal Authrity Accunting, SeRCOP and Prudential Cde, and t prvide advice n emerging r urgent accunting issues. Bulletins prvide influential guidance that is intended t be best practice, but are nt prescriptive and d nt have the frmal status f the Cde, SeRCOP r Prudential Cde. Please address any queries t CIPFA Technical Enquiry Service fr CIPFA members and students [email protected] The Chartered Institute f Public Finance and Accuntancy Registered with the Charity Cmmissiners f England and Wales Number CIPFA, the Chartered Institute f Public Finance and Accuntancy, is the prfessinal bdy fr peple in public finance. Our 14,000 members wrk thrughut the public services, in natinal audit agencies, in majr accuntancy firms, and in ther bdies where public mney needs t be effectively and efficiently managed. As the nly UK prfessinal accuntancy bdy t specialise in public services, CIPFA s qualificatins are the fundatin f a career in public finance. They include the benchmark prfessinal qualificatin fr public sectr accuntants as well as a pstgraduate diplma fr peple already wrking in leadership psitins. Our in-huse CIPFA Educatin and Training Centre delivers the range f ur prgrammes at lcatins acrss the UK, and wrks with ther places f learning t prvide ur curses lcally. We als champin high perfrmance in public services, translating ur experience and insight int clear advice and practical services. They include infrmatin and guidance, curses and cnferences, prperty and asset management slutins, cnsultancy and interim peple fr a range f public sectr clients. Glbally, CIPFA shws the way in public finance by standing up fr sund public financial management and gd gvernance. We wrk with gvernments, accunting bdies and the public sectr arund the wrld t advance public finance and supprt its prfessinals.

2 Intrductin 1. Chapter 9 Grup Accunts f the Cde f Practice n Lcal Authrity Accunting in the UK 2014/15 (the Cde) cntains revised prvisins fllwing the issue f new IFRS standards and the amendment f related existing standards. The new prvisins have effect in three main areas: a new definitin f subsidiaries based n a remdelled cntrl test (IFRS 10 Cnslidated Financial Statements) new classificatins fr jint peratins and jint ventures (IFRS 11 Jint Arrangements) extended and revised disclsure requirements fr grup accunts (IFRS 12 Disclsure f Interests in Other Entities) 2. Guidance n these changes is generally available in the CIPFA publicatin Accunting fr Cllabratin. This Bulletin deals with issues specifically relating t making the transitin frm the ld t the new arrangements. 3. The changes have the ptential t shift cllabrative arrangements acrss an authrity s grup bundary, bringing new arrangements within the scpe f grup accunts r remving nes previusly included. As the result f a change in accunting plicy, such shifts wuld nrmally be accunted fr as prir perid adjustments, with full retrspective restatement f transactins and balances as if the new plicy had always applied. 4. The Cde recgnises that this may be prblematic. Fr instance, if the remdelled cntrl test were t newly classify as a subsidiary an entity which the authrity effectively tk cntrl f in 1994, restatement wuld require a business cmbinatin t be accunted fr as it happened 20 years ag. The Cde therefre cntains a number f cncessins that recgnise practicable limits t making prir perid adjustments. Accunting fr Cllabratin Transitin Issues Impracticability 5. The cncessins are based n requiring things t be dne except t the extent that they are impracticable. Impracticability is defined in paragraph f the Cde as the inability t apply a requirement after making every reasnable effrt t d s. Changes in accunting plicy r crrectins f errrs are nt applied fr a particular year where: the effects f the retrspective applicatin r retrspective restatement are nt determinable the retrspective applicatin r retrspective restatement requires assumptins abut what management s intent wuld have been in that perid, r the retrspective applicatin r retrspective restatement requires significant estimates f amunts and it is impssible t distinguish bjectively, frm ther infrmatin, infrmatin abut thse estimates that: Page 1

3 prvides evidence f circumstances that existed n the date(s) at which thse amunts are t be recgnised, measured r disclsed, and wuld have been available when the financial statements fr that prir perid were authrised fr issue. Basic Requirements 6. Unless the Cde (r IFRS) prvides an exemptin, any changes in accunting plicy relating t grup accunts will need t be accunted fr in accrdance with sectin 3.3 f the Cde, ie, by retrspective applicatin. Fr changes dating back befre 2013/14, this entails adjusting the balance f each affected cmpnent f net wrth at 1 April 2013 and the ther cmparative amunts disclsed fr 2013/14 as if the new accunting plicy had always been applied (paragraph ). 7. Appendix C f the 2014/15 Cde sets ut the fllwing specific requirements fr disclsures in relatin t the new r amended grup accunts standards: a restated Balance Sheet at 1 April 2013 (Third Balance Sheet) where changes are material a narrative descriptin that the change in accunting plicy is as a result f the Cde s adptin f the amendments t the grup accunts standards the nature f the change f the accunting plicy fr 2014/15 and 2013/14, the amunt f the adjustment t each line item in the financial statements affected, t the extent practicable the amunt f the adjustments relating t the prir perid befre 1 April 2013, t the extent practicable 8. These basic requirements are then mdified by prvisins in paragraphs t f the Cde. The mdificatins cver eight main areas: when t apply the new IFRS 10 cntrl test fr subsidiaries what t d if an entity is a subsidiary under bth the ld (IAS 27 Cnslidated and Separate Financial Statements/SIC-12 Cnslidatin Special Purpse Entities) and the new cntrl tests setting a deemed date fr the acquisitin f cntrl f newly defined subsidiaries which standards t apply when accunting fr the business cmbinatin f a new subsidiary n lnger cnslidating a subsidiary switching frm cnslidatin t equity accunting fr jint ventures switching frm equity accunting t asset/liability accunting fr jint peratins disclsure ntes Applying the new IFRS 10 cntrl test fr subsidiaries 9. Paragraph C2B f IFRS 10 Cnslidated Financial Statements cnfirms that the new cntrl test is t be applied frm the beginning f the reprting perid fr which IFRS 10 is applied fr the first time. This means 1 April 2014 fr the purpses f the Cde. Cnsequently, entities that wuld have been subsidiaries under the IFRS 10 test but where cntrl was lst befre 1 April 2014 are utside the scpe f the new arrangements. Page 2

4 10. N accunt therefre needs t be taken f entities that wuld nly have been subsidiaries under the new test but ceased t be cntrlled by an authrity in 2013/14 (eg, because the authrity dispsed f r reduced its interest). N change in subsidiary status 11. Paragraph f the Cde cnfirms that adjustments are nt required t amend the previus grup accunts treatments (inclusin r exclusin) fr entities where the cnslidatin cnclusin is the same under the ld and the new definitins f subsidiaries. 12. This might have been significant if the IAS 27/SIC-12 tests had defined a different date fr when cntrl f a subsidiary was secured, but paragraph remves all pssible cmplicatins. Deemed date fr the acquisitin f cntrl f subsidiaries 13. Paragraph f the Cde sets ut the steps t be taken fr an entity that is t be cnslidated that was nt previusly treated as a subsidiary. 14. The relevant treatment depends n whether the entity is a business (per IFRS 3 Business Cmbinatins) r just a cllectin f assets. The IFRS 3 definitin f a business is an integrated set f activities and assets that is capable f being cnducted and managed fr the purpse f prviding a return in the frm f dividends, lwer csts r ther ecnmic benefits directly t investrs r ther wners, members r participants. 15. If the entity is a business, the steps are: measure the assets, liabilities and minrity interests1 in the entity n 1 April 2014 as if the subsidiary had been cnslidated (and thus had applied acquisitin accunting in accrdance with IFRS 3) frm the date when the authrity btained cntrl per the Cde s requirements fr IFRS 10 adjust retrspectively 2013/14 cmparative figures if the date that cntrl was btained is earlier than 1 April 2013, recgnise, as an adjustment t reserves at 1 April 2013, any difference between: the amunt f assets, liabilities and minrity interests recgnised, and the previus carrying amunt f the authrity s invlvement with the subsidiary. 16. If the entity is nt a business, the steps are: measure the assets, liabilities and minrity interests in the entity as if the subsidiary had been cnslidated (applying the acquisitin methd as described in IFRS 3 but withut recgnising any gdwill fr the investee) frm the date when the authrity btained cntrl per the Cde s requirements fr IFRS 10 adjust retrspectively 2013/14 cmparative figures if the date that cntrl was btained is earlier than 1 April 2013, recgnise, as an adjustment t reserves at 1 April 2013, any difference between: the amunt f assets, liabilities and minrity interests recgnised, and 1 IFRS 10 uses the term Nn-cntrlling Interest but this has been changed fr the purpses f the Cde t Minrity Interest Page 3

5 the previus carrying amunt f the authrity s invlvement with the subsidiary. 17. Hwever, the extent t which these steps in paragraphs 15 and 16 abve are fllwed depends n practicability (as discussed in paragraph 5). Paragraph f the Cde says that if measuring a. subsidiary s assets, liabilities and minrity interests is impracticable, an authrity shall: apply the requirements f IFRS 3 as f a deemed acquisitin date (the beginning f the earliest perid fr which applicatin f IFRS 3 is practicable, which may be 2014/15) adjust retrspectively the 2013/14 cmparatives, unless the earliest date fr which applicatin is practicable is 1 April 2014 where the deemed acquisitin date is earlier than 1 April 2013, recgnise, as an adjustment t reserves at 1 April 2013, any difference between: the amunt f assets, liabilities and minrity interests recgnised, and the previus carrying amunts f the authrity s invlvement with the subsidiary. (If the earliest perid fr which applicatin is practicable is 2014/15, the adjustment t reserves shall be recgnised at 1 April 2014.) 18. One f the crucial tasks in accunting fr a newly defined subsidiary will be t determine the deemed acquisitin date. Applying paragraph 5, analysis wuld nly need t g back as far as all f the fllwing hld: infrmatin is available t allw the effects f retrspective applicatin t be determined and measured reliably, withut having t make unreasnable effrts t btain that infrmatin there is n requirement in preparing figures t make assumptins abut what management s intent was at the time it is pssible when making significant estimates t separate ut (withut intrducing subjective judgements) the infrmatin that prvides evidence f circumstances that existed n the date that amunts are t be recgnised/measured/disclsed and wuld have been available when the financial statements fr that year were authrised fr issue 19. The Cde des suggest that the deemed date culd be 1 April 2014, but des nt set this as a default psitin. In determining hw far back it wuld be reasnable t make restatements, bth practicability and materiality shuld be cnsidered. It will be mre significant t set a deemed date in an earlier year where material amunts f gdwill might have arisen upn the acquisitin f cntrl r it is cnsidered imprtant t have an accurate breakdwn f the subsidiary s reserves in the Grup Balance Sheet. 20. The views f the authrity s experts will be relevant in assessing practicability. Fr instance, valuers will have views abut hw far back they are able t g in giving retrspective valuatins fr prperty that meet their prfessinal standards and the practicability requirements f paragraph f the Cde. Standards t apply when accunting fr the business cmbinatin f a new subsidiary 21. When IFRS 10 was issued, there was sme debate as t whether retrspective adjustments were t be made applying the current versins f relevant standards r the prvisins that were applicable at the time items wuld have been recgnised Page 4

6 and measured. The Cde makes it a requirement that the 2008 versins f IAS 27 Cnslidated and Separate Financial Statements and IFRS 3 Business Cmbinatins are used in establishing adjustments fr all newly defined subsidiaries (paragraph ). N lnger cnslidating a subsidiary 22. Paragraph f the Cde sets ut the steps t be taken fr an entity that was cnslidated in the Grup Accunts prir t 2014/15 but des nt meet the new definitin f a subsidiary: measure the authrity s interest in the entity at 1 April 2014 at the amunt at which it wuld have been measured if the requirements f IFRS 10 (as adpted by the Cde) had applied when the authrity became invlved with the entity (r lst cntrl f it) (eg, the entity might have been an assciate if it had nt previusly been accunted fr as a subsidiary) adjust retrspectively 2013/14 cmparative figures if the date that the authrity was first invlved in the entity withut having cntrl (because it did nt btain cntrl per IFRS 10 r it lst it) is earlier than 1 April 2013, recgnise, as an adjustment t reserves at 1 April 2013, any difference between: the previus carrying amunt f the assets, liabilities and nncntrlling interests, and the recgnised amunt f the authrity s investment in the entity. 23. Hwever, the extent t which these steps are fllwed depends n practicability (as discussed in paragraph 5). Paragraph f the Cde says that if measuring the interest in the entity is impracticable, an authrity shall: apply the requirements f IFRS 10 at the beginning f the earliest perid fr which applicatin f paragraph is practicable, which may be 1 April 2014 adjust retrspectively the 2013/14 cmparatives, unless the beginning f the earliest perid fr which applicatin f this paragraph is practicable is 1 April 2014 where the date that the authrity became invlved with r lst cntrl f the entity is earlier than 1 April 2013, the authrity shall recgnise, as an adjustment t reserves at 1 April 2013, any difference between: the previus carrying amunt f the assets, liabilities and nncntrlling interests, and the recgnised amunt f the authrity s interest in the entity. Switching frm cnslidatin t equity accunting fr jint ventures 24. Under the previus arrangements authrities were able t use either prprtinate cnslidatin r the equity methd fr jintly cntrlled entities. Paragraph f the Cde nw requires use f the equity methd. 25. Where a switch needs t be made frm prprtinate cnslidatin t equity accunting, paragraphs C2 t C4 f IFRS 11 Jint Arrangements set ut the steps t be taken: the authrity s investment in the jint venture shuld be recgnised at 1 April 2013 the investment at 1 April 2013 is measured as the aggregate f the carrying amunts f assets and liabilities (including any gdwill) previusly prprtinately cnslidated Page 5

7 this balance is t be regarded as the deemed cst f the investment at initial recgnitin but shall be assessed fr impairment under IAS 28 Investments in Assciates and Jint Ventures any impairment lss is recgnised as an adjustment t grup prfit and lss reserves 2 at 1 April 2013 if the deemed cst is negative, a liability shall nly be recgnised if the authrity has legal r cnstructive bligatins in relatin t the negative net assets therwise an adjustment t grup prfit and lss reserves shuld be made at 1 April Paragraph C5 f IFRS 11 requires disclsure f a breakdwn f the assets and liabilities that have been aggregated int the single line investment balance at 1 April Where negative net assets are nt recgnised, disclsure is required by paragraph C4 f the fact this is the case, alng with the cumulative unrecgnised share f lsses as at 1 April 2013 and up t 1 April Switching frm equity accunting t asset/liability accunting fr jint peratins 27. The new definitin f jint ventures (requiring rights t the net assets f the arrangement, rather than rights t assets and bligatins fr liabilities) might result in sme jintly cntrlled entities that were previusly included in the Grup Accunts being redefined as jint peratins. Jint peratins are accunted fr in the single entity accunts, recgnising the authrity s share f assets and f liabilities. Where a jintly cntrlled entity becmes a jint peratin, the Grup Accunts will need t be adjusted s that the arrangement is n lnger accunted fr using the equity methd. 28. Paragraph f the Cde (supprted by paragraphs C7 t C11 f IFRS 11) specifies the fllwing steps fr the adjustment: at 1 April 2013, derecgnise the investment that was previusly accunted fr using the equity methd recgnise the share f each f the assets and liabilities in respect f the authrity s interest (including any gdwill that previusly frmed part f the carrying amunt f the investment) disclse a recnciliatin between the investment derecgnised and the assets and liabilities recgnised 29. In preparing the 1 April 2013 carrying amunts f assets and liabilities, paragraphs C8 and C9 f IFRS 11 require in the Grup Accunts: disaggregatin f the assets and liabilities frm the carrying amunt f the investment n the basis f the infrmatin used in applying the equity methd applicatin f the specified prprtins in the cntractual arrangements t the assets and liabilities If any difference arises between the previusly recrded investment and the net amunt f assets and liabilities, this shuld be ffset against gdwill (r grup prfit and lss reserves nce gdwill is exhausted) if a debit r added t grup prfit and lss reserves if a credit. 30. Where a jint peratin has previusly been accunted fr as a jintly cntrlled entity, an authrity will prbably have accunted fr the interest as a financial asset at fair value r at cst in its single entity statements (paragraph f the 2 IFRS 11 uses the term retained earnings Page 6

8 Cde). This asset shuld be derecgnised at 1 April 2013 and replaced by the relevant shares f assets and liabilities, with any difference being psted t the General Fund Balance as an adjustment in the Mvement in Reserves Statement. 31. Adjustments made per paragraph 30 have the ptential t affect the General Fund Balance. Fr instance, suppse an authrity had used the cncessin t carry an investment in a jint venture in its single entity Balance Sheet at histrical cst f 1m but the authrity s share f the assets and liabilities held by the jint arrangement is nw 3m. The accunting transitin wuld result in a gain f 2m t be recgnised in the single entity statements. 32. Where gains result frm the recgnitin f capital balances there shuld be n mvement in the Capital Financing Requirement, as the gains arise frm a change in accunting plicy rather than any new respnsibility t finance capital expenditure. The accunting prcess shuld then include adjustments t neutralise capital related effects n the General Fund Balance, almst usually by applying dnated assets principles t transfer gains recgnised t the Capital Adjustment Accunt. 33. Any remaining effects n the General Fund Balance will relate t revenue transactins, perhaps relating t timing differences between mvements in the authrity s interest in the jint peratin s assets and liabilities and the distributins it receives r the cntributins it makes t its running csts. Care shuld be taken t ensure that it is apprpriate t leave any gains/lsses against the General Fund Balance ie, that there is n statutry basis that wuld require the impact t be reversed ut. Disclsure ntes 34. The nly specific cncessin in relatin t the Cde s adptin f the requirements f IFRS 12 Disclsure f Interests in Other Entities is made in paragraph This allws the new disclsures in relatin t uncnslidated structured entities t be restricted t 2014/15 (ie, n cmparatives required fr 2013/14). Page 7