Accounting Alert - February 2016
NZASB issues exposure drafts and amendments for Public Benefit Entities
The New Zealand Accounting Standards Board (NZASB) and the International Public Sector Accounting Standards Board (IPSASB) have recently issued several important exposure drafts which will primarily impact Tier 1 and Tier 2 public benefit entities. The exposure drafts cover a wide range of topics, including public sector combinations, service performance reporting, and interests in other entities. The NZASB has also issued an amendment to the non-exchange revenue standard providing relief for certain entities from the requirement to record donated goods at fair value.
Topics included in this alert:
Public Sector Combinations (ED 60)
The International Public Sector Accounting Standards Board has issued an exposure draft with proposed guidance on accounting for public sector combinations, a subject on which the IPSASB has not previously issued any standards. The draft standard provides a welcome alternative for many public sector entities which have applied the acquisition method outlined in IFRS and found that it does not provide relevant accounting information for the users of public sector financial statements. The New Zealand Accounting Standards Board anticipates adopting the final standard, with New Zealand – specific amendments, as a replacement for PBE IFRS 3 Business Combinations.
The draft standard proposes to divide public sector combinations into two categories, amalgamations and acquisitions, with different accounting treatment for each category. Where one party gains control of one or more operations, the transaction is treated as an acquisition unless an examination of the economic substance of the arrangement supports amalgamation accounting. In considering the economic substance of the combination, the resulting entity would consider the decision-making process and the consideration paid, if any, in effecting the transaction. Where no party gains control, the transaction is treated as an amalgamation.
Acquisitions would be accounted for using the IFRS 3 model with some amendments and additional guidance for public sector entities. One of the key differences is the measurement of goodwill. Goodwill would be recognised only where consideration is transferred in the combination (or where equity is exchanged) and only to the extent that the acquisition will result in a positive impact on the cash flows of the acquirer. Any goodwill amount in excess of the expected improvement in cash flows is recognised as a loss at the date of the acquisition.
Amalgamations would be accounted for using a modified pooling method. The assets, liabilities, and any non-controlling interests of the combining operations would generally be recognised at their previous carrying amounts, adjusted for any accounting policy differences. Any residual amount is recognised in equity. The amalgamation would be treated as the creation of a new entity so comparative columns would not be presented in the primary statements in the initial period after the amalgamation. Previous components of net assets/equity such as accumulated surplus or deficit, or revaluation surplus would not be recognised. This may result in more revaluation decreases being recognised in surplus or deficit.
Comments may be submitted to the NZASB by 27 May 2016 or the IPSASB by 30 June 2016. The exposure draft is available here on the XRB website.
PBE Interests in Other Entities (ED NZASB 2016 – 1 to ED NZASB 2016 – 5)
The NZASB has issued 5 exposure drafts of standards that will provide guidance on accounting for interests in other entities, including subsidiaries, associates, and joint arrangements. These proposals, which will replace PBE IPSAS 6, 7 and 8 are based on new standards recently issued by the International Public Sector Accounting Standards Board (IPSASB) and will more closely align the New Zealand PBE standards with the corresponding for-profit standards.
The IPSASB recently issued IPSAS 34 Separate Financial Statements, IPSAS 35 Consolidated Financial Statements, IPSAS 36 Investments in Associates and Joint Ventures, IPSAS 37 Joint Arrangements, and IPSAS 38 Disclosure of Interests in Other Entities based on the ‘package of 5’ IFRS standards published by the IASB in May 2011 with amendments to make them more suitable for application in the public sector environment. The NZASB has made modifications to these IPSAS standards to integrate them into the New Zealand financial reporting framework, including the addition of RDR exemptions for Tier 2 entities. The proposed standards will become part of the Tier 1 and Tier 2 PBE suite and will also apply to any Tier 3 public benefit entities that have interests in other entities.
Comments may be submitted to the NZASB by 30 June 2016. The exposure draft is available here on the XRB website.
Service Performance Reporting (ED NZASB 2016-6)
The NZASB has issued an exposure draft with proposed guidance on service performance reporting for public benefit entities. The exposure draft provides high level principles for communicating an entity’s activities to its stakeholders and is designed to be used by a wide range of organisations. The proposed standard requires that an entity report on three dimensions of service performance:
- What did the entity do? (what goods and services (referred to as outputs) did the entity provide during the period?)
- Why did the entity do it? (what outcomes did the entity seek to influence?)
- What impact did the entity have? (what evidence does it have of its influence on the groups or environment that it is seeking to change?)
The proposed disclosures would require the public benefit entity to select and report on performance indicators which appropriately describe the outputs, outcomes and impacts that the entity has had on its beneficiaries during the period as a result of its operations.
The proposed standard would be mandatory for all Tier 1 and Tier 2 not-for-profit entities and the Tier 1 and Tier 2 public sector PBE’s which are required by legislation to provide a statement of service performance. Other public sector PBE’s would be encouraged to comply with the proposed standard.
Comments may be submitted to the NZASB by 29 July 2016. The exposure draft is available here on the XRB website.
Amendments to IPSAS 25 Employee Benefits (ED 59)
The IPSASB has issued an exposure draft proposing amendments to the accounting for defined benefit pension plans. The proposed amendments are intended to align the accounting treatment for these plans with the current treatment under IAS 19 Employee Benefits. The key changes would be to remove the ‘corridor approach’ for recognising actuarial gains and losses and to simplify the presentation of service costs, net interest, and remeasurements in the statement of comprehensive income.
Comments may be submitted to the NZASB by 24 March 2016 or the IPSASB by 30 April 2016. The exposure draft is available here on the XRB website.
Amendment to Non-exchange Revenue Standard
Donated Goods (Amendments to PBE IPSAS 23)
The NZASB has issued amendments to PBE IPSAS 23 Revenue from Non-Exchange Transactions which provide relief to entities, such as organisations operating charity shops, that receive large quantities of low-value donated goods from the requirement to record those donated goods at fair value when they are received.
Entities will not be required to recognise goods in-kind that meet the definition of inventories in PBE IPSAS 12 Inventories at the date of acquisition if it is not practicable to measure their fair value reliably (i.e. when the costs outweigh the benefits of doing so). If selling the items, the entity will recognise revenue when they are sold. If the entity is distributing the items free of charge, it will not recognise any revenue in relation to the donated goods. Disclosure of the nature of the goods and any distribution activities will be required.
The amendments are effective for periods beginning on or after 1 January 2016. Early application is permitted. The amendments are available here on the XRB website.