Note 13: Accounting Treatment of TEIs
Section 27 (2) of the Public Finance Act 1989 (the Act) requires the Crown to prepare financial statements in accordance with generally accepted accounting practice. Section 27 (3) of the Act also requires the Crown to record its interest in entities such as Offices of Parliament and Crown entities within its financial statements.
The applicable financial reporting standards (FRSs) that determine the basis of combination of entities that make up the Government reporting entity are FRS 37: Consolidating Investments in Subsidiaries and FRS 38: Accounting for Investments in Associates.
FRS 37 provides the basis for establishing whether the Crown’s interest in an entity should be line-by-line combined. The control test in FRS 37 requires consideration of both the Crown’s level of power and the benefit in relation to entities.
FRS 37 is not clear about how the definition of control in FRS 37 should be applied in some circumstances in the public sector, particularly where legislation provides certain public sector entities with some statutory autonomy and independence. Treasury’s view is that line-by-line combination of such entities would provide a more conceptually complete and consistent picture of the Government’s financial activities and position. However, given the lack of clarity in applying FRS 37, the 2006 Financial Statements of the Government equity account the TEIs as the Crown cannot unilaterally determine their operating and financing policies, but does have a number of powers in relation to these entities.
The following table shows the financial effect if the revenue, expenses, assets and liabilities of TEIs were line-by-line combined and contrasts this with the treatment in the financial statements of equity accounting TEIs’ net surpluses and net assets. If TEIs were line-by-line combined there would be an increase in total revenues and expenses, total Crown debt and total assets and liabilities. The operating balance and net worth are the same under both accounting treatments.
Note that the following table indicates the total revenues and expenses of TEIs in the second column. However, the impact on the total Crown results from combining TEIs line by line would be to increase revenues and expenses, but only to the extent the TEI totals were not funded by the Crown (ie, by the amount in the third column). The Statement of Financial Position would alter as indicated in the following table.
| TEIs as at 30 June 2006 $ millions | Equity accounting (current treatment) 2006 | Impact on total Crown[2] | Equity accounting (current treatment) 2005 | Impact on total Crown |
|---|---|---|---|---|
| Operating Results | ( ) = reduce item | |||
| Revenues | - | 1,843 | - | 1,423 |
| Expenses | - | 1,789 | - | 1,290 |
| Net surplus of TEIs | 54 | - | 133 | - |
| Operating Balance (no change) | 54 | 54 | 133 | 133 |
| Assets and Liabilities | ||||
| Assets | ||||
| Financial assets | - | 867 | - | 914 |
| Property, plant and equipment | - | 5,684 | - | 5,125 |
| Other assets | 248 | 226 | ||
| Net investment in TEIs | 5,475 | (5,475) | 5,010 | (5,010) |
| Total assets | 5,475 | 1,325 | 5,010 | 1,255 |
| Liabilities | ||||
| Gross debt | 226 | 331 | ||
| Other liabilities | 1,099 | 924 | ||
| Total Liabilities | 1,325 | 1,255 | ||
| Net Worth (no change) | 5,475 | - | 5,010 | - |
Notes
- [2]This is the impact on the total Crown results if a full line by line combination approach was adopted.
