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Accounting disclosure of transactions relating to Distributor-Retailer entities in South East Queensland
Purpose
This bulletin provides local governments in South East Queensland with guidance to assist in determining the most appropriate accounting treatment and financial statement disclosure for transactions relating to Distributor-Retailer entities (DRs).
It contains an overview of accounting treatments to:
- record the transfer of assets and liabilities to DRs
- classify DR participation rights
- record dividend income from DRs.
It also provides example disclosures for the 2010-11 financial year.
Background
The South East Queensland Water (Distribution and Retail Restructuring) Act 2009 established a number of new entities, known as Distributor-Retailers, to operate the water distribution and retail businesses previously conducted by local governments in South East Queensland.
On 1 July 2010, those businesses were transferred to the new DRs, with the affected local governments receiving participation rights and a loan receivable in exchange for the transfer of assets and liabilities. The participation rights effectively represent the local government’s relevant stake in the Distributor-Retailer, entitling them to:
- share in a proportion of the profits of the DR
- share in tax equivalent payments of the DR
- share in a proportion of the net assets of the DR on expiry.
- exercise rights akin to shareholders, including appointing board members and issuing direction to the DR under the terms of the participation agreement.
Overview
This Bulletin covers the following topics:
- initial accounting treatment
- classification of participation rights
- subsequent measurement/accounting treatment of participation rights
- accounting for dividends from DRs
- disclosures
- implications of announcement to cap pricing and allow individual local governments to exit the DR
- relevant accounting standards
- Attachment 1 - suggested journal entries (
30 KB) - Attachment 2 - example note disclosure. ( 40 KB)
Initial accounting treatment
On 1 July 2010 affected local governments were required to de-recognise the assets and liabilities transferred to the DRs, and recognise the participation rights and loan arrangements received in consideration for those assets and liabilities.
The value of the transferred asset and liabilities was based on a whole-of-business market valuation and has been used for the purpose of setting the Regulated Asset Base (RAB) of the Distributor-Retailers as at 1 July 2010.
The initial fair value of the participation rights is the RAB at 1 July 2010, less the debt owed by the DRs to the local governments. Therefore, the consideration received by each local government in exchange for the assets and liabilities of the business transferred to the DR is the value of the relevant percentage of the participation rights obtained plus the respective local government’s loan receivable from the DR.
Any gain or loss resulting from disposal of the relevant assets and liabilities will be included in profit or loss.
Certain other assets and liabilities not included in the RAB may also be transferred from the local governments to the DRs. The net impact of such transfers also will need to be recognised as a gain or loss in the Statement of Comprehensive Income.
Example journal entries are included in Attachment 1.
Any gain or loss on the initial transfer transaction, as well as the gain/loss on additional assets/liabilities transfers to the DRs, is to be separately disclosed in the notes to the financial statements (refer Attachment 2 - example note disclosure. ( 40 KB)).
Classification of participation rights
In order to accurately classify and represent the participation rights on the statement of financial position, local governments will need to:
- review the participation agreement they are a party to
- consider their level of influence and ownership interest in terms of the relevant accounting standards
- refer to these accounting standards to determine the most appropriate method of accounting for the council’s ownership interest.
The applicable accounting standards to be referenced are:
- AASB 7 Financial Instruments: Disclosures
- AASB 9 Financial Instruments
- AASB 127 Consolidated and Separate Financial Statements
- AASB 128 Investments in Associates
- AASB 131 Interests in Joint Ventures
- AASB 139 Financial Instruments: Recognition and Measurement.
The method of accounting for each local government’s individual ownership interest will be one of the following:
- AASB 127 Interest in a Subsidiary
- AASB 131 Interest in a Jointly Controlled Entity
- AASB 128 Interest in an Associate
- AASB 132 and 139 Investment in an Equity Instrument.
However, in the majority of cases, participation rights will fall under the interest in associate category. In accounting for interest in associates, councils will need to apply the equity accounting method, as detailed in AASB 128. Discussion of the equity accounting method is outside the scope of this Bulletin.
Local governments will need to demonstrate to their councillors why the interest in associate method is the most appropriate method of accounting for their ownership interest in the DR.
Where local governments determine that the interest in associate method is not the most appropriate method of accounting for their individual ownership interest in the DR, they should:
- ensure a consistent method of accounting for ownership interest is applied across each of the DR’s local government participants
- demonstrate to councillors why the chosen method of accounting for ownership interest is the most appropriate.
Subsequent measurement/accounting treatment of participation rights
Subsequent measurement of participation rights in the statement of financial position is dependent on the category within which the rights have been classified. The table below provides a summary of how participation rights will be measured subsequently.
| Category | Subsequent measurement/treatment | Relevant accounting standard(s) |
|---|---|---|
|
Interest in a subsidiary |
Consolidation of entity at cost (fair value of water assets transferred to the DR in exchange for participation rights). |
AASB 127 |
|
Interest in a jointly controlled entity |
Adjust the carrying amount of the interest in DR to recognise local government’s share of the profit or loss of the DR after the date of acquisition (in line with equity accounting method). |
AASB 131 |
|
Interest in an associate |
Adjust the carrying amount of the interest in DR to recognise local government’s share of the interest in the DR after the date of acquisition (in line with equity accounting method). This method also provides for disclosure of the share of profit or loss of the DR. |
AASB 128 |
|
Investment in an equity instrument |
Fair value with gains or losses on the investment being recognised in other comprehensive income. |
AASB 132 |
Accounting for dividends from distributor-retailers
Dividends from DRs are revenue.
Dividends (including estimated dividends) declared by DRs before the end of a financial year, but not paid until after year end, will need to be accrued by local governments in the year of declaration. Appropriate disclosures, including discussion around the basis of accrual and any interim dividends received also, is required.
Disclosures
Affected local governments will need to provide information about the establishment and transfer of assets and liabilities to the DRs in the accounting policy note to the financial statements.
Local governments will need to provide disclosures on the treatment of the ownership interest, in particular how this ownership interest has been measured and accounted for, both initially and subsequently. This disclosure should be either within the existing notes for principles of consolidation, Financial instruments or interests in associates - whichever is applicable.
Disclosure should be made that this ownership interest provides for a share in both the profits earned by the DRs and tax equivalent receipts. It will also be necessary to show the loan receivable as being part of the consideration received from the DRs, with the ownership interest in the form of Participation Rights being the balance.
Example note disclosure for principles of consolidation, Financial instruments or Interests in associates, whichever is applicable to each local government, is included in Attachment 2. The disclosures follow the Tropical’s sample financial statement examples.
Implications of announcement to cap pricing and allow individual local governments to exit the DRs
Legislation to introduce a cap on price increases for residential and small business customers of the DRs was enacted on 17 June 2011. Further legislation to allow individual local governments to exit the DRs may be developed once the local governments have made their decision on whether the assets and liabilities should revert back to the council(s).
In respect of the legislated cap on price increases, the recoverable amount of the assets held by the DRs may be affected. As this could impact on the value of the interest in the DRs recognised by the local government(s), care must be taken in the preparation of the 2010-11 financial reports.
Legislative amendments allowing the local government participants to exit the DRs is not expected to be introduced until late 2011 or 2012 and as such, does not affect the preparation of 2010-11 financial reports.
However, local governments will need to include information in their accounting policy or disclosure notes for the year ended 30 June 2011 related to this matter (based on the most recent information available up to the time of audit certification) and disclose the related impacts these decisions will/could have on the council’s operations.
Example disclosure is included in Attachment 2 . ( 40 KB)
Relevant accounting standards
The following accounting standards are relevant to this bulletin:
- AASB 127 Consolidated and Separate Financial Statements
- AASB 128 Investments in Associates
- AASB 131 Interests in Joint Ventures
- AASB 132 Financial Instruments: Presentation
- AASB 139 Financial Instruments: Recognition and Measurement
Updates to accounting standards are available from the Australian Accounting Standards Board website.
Further information
For more information, contact the department.
