1.6 Accounting Issues – Wellington Regional Stadium Trust

Local government: results of the 2002-03 audits.

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Wellington Regional Council (Greater Wellington) and Wellington City Council jointly established the Wellington Regional Stadium Trust (the Trust) as settlors under a Trust Deed.

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Greater Wellington and Wellington City Council have accounted differently for their respective interests in the Trust in their 2002-03 annual financial reports. Notwithstanding the difference, we issued both Councils with an audit report containing an unqualified opinion. We explain in the following paragraphs why we have accepted the different accounting treatments.

The Trust

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An empowering Act was passed by Parliament in 1996 called the Wellington Regional Council (Stadium Empowering) Act 1996 (the Act). This Act required Greater Wellington in conjunction with Wellington City Council to establish the Trust as joint settlors, and enabled Greater Wellington to lend money to the Trust.

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The Trust Deed was signed in 1997 and provides for certain decisions to be made jointly by both Greater Wellington and Wellington City Council in their capacity as settlors of the Trust. The decisions include appointment of the Trustees and amendments to the Trust Deed. Neither Council has
greater influence than the other in the particular decisions for which they share joint responsibility.

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Each Council provided the Trust with an interest-free loan (of different amounts), which was necessary for the financial viability of the stadium. Neither Council has a right to share in the net assets of the Trust, other than repayment of their respective loans, if the Trust is wound up.

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The two Councils and the Trust are currently in the process of seeking clarification from the High Court about the legal status of the Trust. The position of the Councils and Trust is that the Trust is not a council controlled trading organisation under the Local Government Act 2002. Instead, they claim that the Trust is an incorporated charitable trust, established in accordance with the provisions applicable to community trusts, and with its own governance code as required by Parliament in the Act and approved by the Minister of Local Government.

New Financial Reporting Standard

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A new financial reporting standard – FRS-38: Accounting for Investments in Associates8 – became applicable to the 2002-03 financial reports of both Greater Wellington and Wellington City Council. Under FRS-38, an associate is an entity in which an investor has an ownership interest (not being a subsidiary of the investor or a joint venture entered into by the investor) and over which the investor has the capacity to exercise significant influence.

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FRS-38 requires an entity’s associates to be equity accounted into the entity’s group financial statements. That is, an investor is required to account for the percentage of the equity of the associate attributable to the investor, whether the equity is attributable to the investor directly, or indirectly through its subsidiaries.

The Views of Both Councils

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Both Greater Wellington and Wellington City Council agree that they have the capacity to exercise significant influence over the Trust and, therefore, that the Trust is an associate of both Councils. Nevertheless, Greater Wellington and Wellington City Council disagree about their respective
levels of ownership interest. Greater Wellington is of the opinion that its ownership interest is nil, whereas Wellington City Council is of the opinion that it has a 50% ownership interest.

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The reason for Greater Wellington’s view of nil ownership interest comes from its consideration of the substance of the arrangement in place. Greater Wellington’s view is that not accounting for a 50% interest:

  • reflects the intention of Parliament through the Act, that the Trust be established and governed as an incorporated charitable trust, established in accordance with provisions applicable to community trusts with its own unique governance code;
  • reflects the fact that the Council’s governance responsibilities, including the joint appointment of trustees with Wellington City Council, arise solely from Greater Wellington’s interest-free loan to the Trust;
  • reflects the arms-length nature of the relationship including the financial relationship, and that Greater Wellington is legally prohibited from contributing any further funding to the Stadium Trust; and
  • is appropriate given the complementary activities test within FRS-37: Consolidating Investments in Subsidiaries, which is used to determine ownership interest under FRS-38, is not met in respect of Greater Wellington.

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Greater Wellington concludes that it does not have an equity interest in the Trust – rather, its only financial interest is an interest-free loan – and it would distort the economic reality of that interest to equity account 50% of the Trust.

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The reason for Wellington City Council’s view that it has a 50% ownership interest comes from its consideration of the substance of the arrangement in place. Wellington City Council’s view is that accounting for a 50% interest:

  • reflects Wellington City Council’s commitment to the Trust in a transparent manner for ratepayers;
  • provides a complete representation within the group financial statements;
  • is consistent with the principles behind Wellington City Council’s recognition of its interest in subsidiary trusts; and
  • is appropriate given the complementary activities of the Trust – that is, the operating objectives of the Trust support the wider objectives of Wellington City Council.

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Wellington City Council therefore concludes that there is an ownership interest shared between it and Greater Wellington.

The Auditor-General’s View

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In our view, FRS-38 does not provide sufficient clarity about how to determine the ownership interest. FRS-38 is a new standard created in New Zealand (as opposed to being taken from another jurisdiction) and, therefore, has not been tested and refined in an international context.

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However, there is an international public sector accounting standard for accounting for associates – International Public Sector Accounting Standard Number 7: Accounting for Investments in Associates. This standard applies to associates for which an entity has a form of shareholding or other formal equity structure. The standard notes that where the equity structure is poorly defined it may not be possible to obtain a reliable measure of the ownership interest.

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In the absence of clarity about determining ownership interest, we decided to accept both treatments. Our acceptance was based on both financial reports providing sufficient information to allow respective readers to work out the changes that would need to be made:

  • in the case of Greater Wellington, to equity account 50% of the Trust; and
  • in the case of Wellington City Council, to remove the amounts that had been equity accounted.

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The current process of creating New Zealand standards based on International Financial Reporting Standards will also lead to change in the relevant New Zealand standards towards the end of 2004. We will give careful consideration to how the respective Councils’ interests in the Trust should be accounted for under the emerging standards.

Footnote 8: FRS-38 applies to financial statements covering periods ending on or after 31 December 2002.

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