E.2 Central government and NHS bodies will report under International Financial Reporting Standards (IFRS) from the 1 April 2009, as amended for application in the public sector context.89 Until then, accounting under UK GAAP continues to be relevant. In broad terms the same principles apply under both sets of guidance, such that it is the level of control that determines the accounting treatment.
E.3 Under UK GAAP, Financial Reporting Standard (FRS) 2 - Accounting for Subsidiary Undertakings (supplemented by FRS 5 - Reporting the Substance of Transactions) and FRS 9 - Associates and Joint Ventures provide appropriate guidance. Under IFRS the key standards are IAS 27 - Consolidated and Separate Financial Statements and IAS 28 - Investments in Associates, and IAS 31 - Interests in Joint Ventures. IAS 27 is equivalent to FRS 2, while IAS 28 and 31 are equivalent in combination to FRS 9.
E.4 Details of accounting determination and treatment can be found in the relevant accounting standards as set out above. Table E.1 below briefly describes details of the accounting determination of the entity type under UK GAAP and IFRS.90
E.5 Having identified the accounting determination of the entity, the public sector partner needs to ensure that their financial statements are prepared correctly. If the sponsoring public sector body is outside the departmental consolidation boundary as defined in the Financial Reporting Manual (FReM) or International Financial Reporting Manual (iFReM) (e.g. trading funds, NDPBs, public corporations, NHS providers), then the accounting treatment of public sector partner will follow the relevant accounting standards, under either UK GAAP or IFRS.
E.6 Accordingly under UK GAAP, subsidiary undertakings should be reflected in the accounts of the body to give a true and fair view of the financial position and profit and loss account for the group as a single economic entity, i.e. the subsidiary should be consolidated with the parent.
E.7 FRS 9 establishes that associate undertakings should be incorporated into the sponsoring body's consolidated accounts using the 'equity' method,91 and JVs using the 'gross equity' method.92 In the sponsoring body's individual company accounts its interest in the entity will be accounted for as a fixed asset investment. Where the sponsor body has no subsidiaries and therefore does not prepare consolidated accounts, FRS 9 requires the disclosure of information on associate undertakings and JVs equivalent to that required in consolidated accounts.
Table E.1: Accounting determination for a JV
| Entity | Nature of relationship | Description of the defining relationship under uk gaap | Description of the defining relationship under ifrs |
| Subsidiary | Investor has the power to exercise, or actually exercises, dominant influence or control over its investee. Note the requirement for there to be a 'participating interest' (i.e. an interest in the form of shares or similar) to trigger this part of the definition has been removed under UK GAAP. | Control is the ability of an entity to direct the operating and financial policies of another entity with a view to gaining economic benefits from its activities. To have control, the investor must have both: (a) the ability to deploy the economic resources of the investee or to direct it; AND (b) the ability to ensure that any resulting benefits accrue to itself - with corresponding exposure to losses - and to restrict the access of others to those benefits. | Under IFRS a subsidiary is defined as an entity, including an unincorporated entity such as a partnership that is controlled by another entity. The most significant difference of principle compared to UK GAAP is that IAS37 focuses on the power to control, whereas the UKGAAP definition also encompasses situations in which control is actually exercised in practice notwithstanding the fact that the power to control is not overtly present. |
| Associate | Investor holds a Participating Interest and exercises Significant Influence. | The investor has a long-term interest and is actively involved, and influential, in the direction of its investee through its participation in policy decisions covering the aspects of policy relevant to the investor, including decisions on strategic issues such as: The expansion or contraction of the business, participation in other entities or changes in products, markets and activities of the investee; and determining the balance between dividend pay outs and re-investment. | An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence, and which is neither a subsidiary nor an interest in a JV. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. |
| Investor holds a long-term interest and shares control under a contractual agreement. | Acting together, the venturers control the venture and there are procedures for such joint action. Each venturer has (implicitly or explicitly) a veto over strategic policy decisions. | A JV is defined as a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. |
E.8 While the JV principles in IAS 31 and FRS 9 are very similar, the respective presentation requirements are different. FRS 9 only allows gross equity accounting, while IAS 31 allows equity accounting or a proportional consolidation method, while strongly recommending the latter due to its representing the economic substance of the arrangement more closely.
E.9 It should be noted that, while the alternative presentation methods allowed under IAS 31 compared to those required under FRS 9 give potentially very different outcomes on a line-by-line basis, these presentations' impact on overall retained surplus and net worth will not change from that of FRS 9.
E.10 Section 2.4 of the FReM provides guidance for those public sector sponsors inside the departmental consolidation boundary (e.g. government departments, on Vote agencies, NHS purchasers). In practice, this will mean that an interest in a subsidiary undertaking, associate undertaking or JV is treated as a fixed asset investment (on the assumption that the JV is itself outside the resource accounting boundary). The same guidance is applicable under the iFReM.
E.11 However, in these circumstances, the public sector body should still disclose equivalent information to that required by FRS9 for associate undertakings and JVs (as noted previously). The draft iFReM does not change these requirements. That is the JV should be treated as a non-current asset investment but with disclosures made in line with the requirements of IAS 31.
E.12 The table overleaf summarises the difference in presentation between FRS 9 and IAS 31.
Table E.2: FRS9 vs IAS 31 accounting presentation
| FRS 9 - Gross Equity Method | IAS 31 - Equity Method | IAS 31 - Proportionate Consolidation Either | |
| Income and expenditure account | Share of the JV's operating profit and each line item after operating profit, are presented separately in the income statement. Additionally, the investor's share of its JVs' turnover should be shown on the face of the primary statement, but separate from the group turnover. | The investor's share of profits or losses after tax is shown as a single item in the income statement. | Line-by-line combination of share in all items on consolidated financial statements; Or Separate line-by-line presentation of share in all items on consolidated financial statements. |
| Balance Sheet | Share of net assets with share of gross assets and liabilities shown as an amplification of this amount as additional disclosure. | Share of net assets |
E.13 Public sector subsidiaries, associates and 'JVs' will be consolidated into Central Government Accounts and/or Whole of Government Accounts in due course.
E.14 Separately, the JV will need to consider its own financial reporting arrangements to ensure that it complies with any relevant legislation as well as open and transparent best practice.
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89 Local government bodies will move to IFRS in April 2010.
90 Further guidance is available by contacting HM Treasury (Financial Reporting Policy Team).
91 Under the equity method the sponsor body should show its share of the entity's operating result immediately after the group operating result in the profit and loss account, and disclose its share of the net assets of the entity as a single figure in its consolidated balance sheet.
92 Under the gross equity method the sponsor body should show its share of the entity's turnover, operating result and line items below operating result as well showing its share of net assets on its consolidated balance sheet must disclose its share of the gross assets and gross liabilities as an additional disclosure of that amount.