SEMINAR ON PHILIPPINE PUBLIC SECTOR ACCOUNTING STANDARDS PPSAS 38 September 18, 2019 PPSAS 38 — Disclosure of Interests in Other Entities IPSAS 38 PPSAS 38 SESSION OVERVIEW Definition of Terms Objective and Scope of PPSAS 38 Required Disclosures Relevant Exercises LEARNING OBJECTIVE At the end of the session, the participants will be able to: identify the required disclosures that a GC must make on its financial statements relating to its interests in other entities. BACKGROUND PPSAS 6 Consolidated and Separate FS PPSAS 7 Investments in Associates Disclosures Disclosures Controlling interests acquired with the intention of disposal PPSAS 8 Investments in Joint Ventures Disclosures PPSAS 38 Structured entities that are not consolidated DEFINED TERMS is an additional information attached to an entity's financial statements, usually as explanation for activities which have significantly influenced the entity's financial results. DEFINED TERMS (par. 7 of PPSAS 38) Interest in another entity refers to involvement by way of binding arrangements or otherwise that exposes an entity to variability of benefits from the performance of the other entity DEFINED TERMS (par. 7 of PPSAS 38) Interest in another entity can be evidenced by: the holding of equity or debt instruments; provision of funding; liquidity support credit enhancement & guarantees Interest in another entity SIGNIFICANT INFLUENCE JOINT CONTROL OR OR OVER ANOTHER ENTITY DEFINED TERMS (par. 7 of PPSAS 38) Binding arrangement is an arrangement that confers enforceable rights and obligations on the parties to it as if it were in the form of a contract. It includes rights from contracts or other legal rights. DEFINED TERMS (par. 7 and AG 20 of PPSAS 38) Structured entity 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 the administrative tasks only and the relevant activities are directed by means of contractual arrangements. DEFINED TERMS (par. 7 of PPSAS 38) Revenue from a structured entity includes, but is not limited to: recurring and non-recurring fees; interest; dividends or similar distributions; gains or losses on the remeasurement or derecognition of interests in structured entities; and gains or losses from the transfer of assets and liabilities to the structured entity OBJECTIVE OF PPSAS 38 To require disclosure of information that enables users of financial statements to evaluate: 1 NATURE 2 RISKS ASSOCIATED 3 EFFECTS TO FS INTERESTS IN OTHER ENTITIES SCOPE PPSAS 38 shall be applied by an entity that has an interests in: Controlled entities Joint Arrangements (Joint Operations or Joint Venture) Associates Unconsolidated structured entities SCOPE (Cont’d) PPSAS 38 DOES NOT APPLY TO: a. post-employment benefit plans or other long-term employee benefit plans to which PPSAS 39, Employee Benefits, applies SCOPE (Cont’d) PPSAS 38 DOES NOT APPLY TO: b. an entity’s separate FS to which PPSAS 34, Separate Financial Statements, applies EXCEPTIONS: (PPSAS 38 will still apply) 1. Separate FS only! If a GC has interests in unconsolidated structured entities and prepares separate FS as its only FS, pars. 40-48 of the Standard will apply. GC has interests in Unconsolidated Structured Entities SCOPE (Cont’d) EXCEPTIONS: (cont’d) 2. An investment entity that prepares FS in which all of its controlled entities are measured at fair value through surplus or deficit SCOPE (Cont’d) PPSAS 38 DOES NOT APPLY TO: c. An interest held by a GC that participates in, but does not have joint control of, a joint arrangement unless that interest: (PPSAS 38 will still apply) results in significant influence over the arrangement an interest in a structured entity SCOPE (cont’d) PPSAS 38 DOES NOT APPLY TO: d. An interest in another entity accounted for in accordance with PPSAS 29, Financial Instruments: Recognition and Measurement. however, PPSAS 38 shall still apply when: it is an interest in an associate or a joint venture; and it is an interest in an unconsolidated structured entity. WHAT TO DISCLOSE? DISCLOSURES a. Significant judgments made in determining: and assumptions • the nature of its interest in another entity or arrangement; • the type of joint arrangement in which it has an interest; and • that it meets the definition of an investment entity, if applicable DISCLOSURES (Cont’d) b. Information about its interests in Controlled entities Joint arrangements and associates; Non - quantifiable ownership interests; and Structured entities that are not consolidated; Controlling interests acquired with the intention of disposal CONTROLLED ENTITIES Significant Accounting Policies Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its investees that are considered subsidiaries as at 31 December 2015. Subsidiaries are investees that the Group has control over. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has: Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee); Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect its returns (pg. 22, Good Insurance (International) Limited, http://ey.com, EYGM Limited) JOINT ARRANGEMENTS AND ASSOCIATES Summary of Significant Accounting Policies Interest in joint venture The Economic entity has an interest in a joint venture which is a jointly controlled entity, whereby the venturers have a binding arrangement that establishes joint control over the economic activities of the entity. The Economic entity recognizes its interest in the joint venture using the proportionate consolidation method. The Economic entity combines its proportionate share of each of the assets, liabilities, income and expenses of the joint venture with similar items, line by line, in its consolidated financial statements. The financial statements of the joint venture are prepared for the same reporting period as the Economic entity. Adjustments are made where necessary to bring the accounting policies in line with those of the Economic entity. (pg. 14, Model Public Sector Economic entity, http://ey.com, EYGM Limited) UNCONSOLIDATED STRUCTURED ENTITIES Structured Entities Sponsored Where No Interest Exists at the Reporting Date “XYZ Bank considers itself the sponsor of a structured entity where it is primarily involved in the design and establishment of the structured entity. XYZ Bank also transfers assets to the sponsored structured entity, it markets products associated with the structured entity in its own name, and/or provides guarantees regarding the structured entity’s performance. For some sponsored structured entities, XYZ Bank has no interest at the reporting date. However, it has sold assets to those entities with no continuing involvement during the reporting period and has earned fees for selling those assets and for other transactions carried out for the entities. The table below presents XYZ Bank’s income recognized during the reporting period and the fair value of any assets transferred to those structured entities during the reporting period.” (pg. 14, IFRS 12 – Example disclosures for interests in unconsolidated structured entities, http://ey.com, EYGM Limited) Exercise INSTRUCTION: Fill in the blanks to complete the full text of the required disclosures of PPSAS 38. Choose from the word bank. You are given 5 minutes to answer. Remember Where the disclosures required by PPSAS 38 and other PPSASs do not meet the objective, an entity is required to disclose whatever additional information is necessary to meet the objective. EFFECTIVITY PPSAS 38 shall be applied by all GCs for annual financial statements covering periods beginning on or after January 1, 2017. Earlier application is encouraged. Thank you!