Process guide

If the above criteria are not present:

• the transfer cannot be considered a ‘contributions by or distributions to owners’ (equity)
• go to Step 4 and account for the transfer through the statement of comprehensive income in accordance with applicable AAS.

For the purposes of restructures of administrative arrangements in AASB 1004, section 26(2)(a) of the FRR defines ‘government department’ as any government controlled entity. For further detail on accounting for restructures of administrative arrangements, refer to paragraphs 54 to 59 of AASB 1004 and RMG 118.

Restructure of administrative arrangements by criteria (by level)

Both criteria ‘1. Business Transfer’ and ‘2. Government decision to restructure’ need to be met for an asset and liability transfer to be accounted for as a restructure of administrative arrangements.

Appendix A of AASB 1004 limits the scope of restructuring of administrative arrangements to the ‘transfer of a ‘business’, as defined in AASB 3 Business Combinations (AASB 3). The transfer of an individual asset/liability or a group of standalone assets/liabilities cannot be considered a business transfer.

For a transfer of assets and liabilities to be considered a ‘transfer of a business’ it must:

• have a clearly defined set of integrated activities
• have a clearly defined policy purpose or return element
• include the normal elements that would be expected of any business (such as staff, systems, clients/customers, fixed assets and liabilities)

In determining whether the transferred assets and liabilities have a return component, entities need to consider that in the public sector the return component has a broader context. For Commonwealth entities, it may be necessary to consider things like consolidation and alignment of program outcomes, additional functionality and/or reduced costs.

Entities also need to consider the transfer decision. For a transfer to be regarded as a business transfer, the transfer must represent a decision by government to reorganise its activities, supported by legislation or other appropriate authority. Authority does not, of itself, remove the obligation of the entities to demonstrate compliance with the requirements of AASB 1004 and the FRR.
 

If the transfer meets all of the above criteria, the transfer shall be deemed equity in nature and does not require formal designation – go to Step 4 - Statement of financial position treatment.

If the transfer does not meet all of the above criteria* and the transferee:

• is a wholly-owned government entity , proceed to Step 3 to apply the designated equity criteria
• is not wholly-owned, Interpretation 1038 prohibits designation – go to Step 4 and account for the transfer through the statement of comprehensive income in accordance with applicable AAS.

* assuming equity instruments or a formal equity agreement have not been issued or established as per paragraph 8 of Interpretation 1038.

Step 3 relates to paragraphs 48 to 53 of AASB 1004 and applies only where the transferee is a wholly owned government entity.

Issues to consider:

• Has the transfer already occurred?
• Has the transfer previously been designated by the transferor as income or an expense to the transferee?

If the answer to either question is YES, formal designation as equity is prohibited under Interpretation 1038 – go to Step 4 - Statement of comprehensive income treatment.

Procedure

Was the formal agreement (designation) obtained prior to or at the time of transfer?

• If yes – equity is designated – go to Step 4 - Statement of financial position treatment
• If no – equity treatment is prohibited under Interpretation 1038 – go to Step 4 - Statement of comprehensive income treatment.

Statement of financial position treatment

Contributions by/distributions to owners (equity) whether due to a restructure of administrative arrangements (Step 2) or designated as an equity transfer (Step 3), should be accounted for in accordance with paragraphs 48-49 of AASB 1004. For example, for NFA transfer:

Receiving entity (Transferee):

Transferring entity (Transferor):

Statement of comprehensive income treatment

Net asset transfers which are not contributions or distributions of equity are accounted for through the statement of comprehensive income. An example (refer paragraph 42 of AASB 1004) is as follows:

Transferring entity (Transferor):

*1270003 'Assets transferred from related entities’ would apply for assets received.

Receiving entity (Transferee):

*2280004 'Assets transferred to related entities’ would apply for assets transferred.
 

Please note:

• these journal entries are simplified for the purpose of illustrating the accounting treatment
• the net impact on the general government sector (GGS) of a transfer between wholly-owned government entities is nil because the transfer is within the GGS.