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Accounting for developer contributions for the 2010-11 financial year
Purpose
This bulletin provides local governments with an overview of the changes to the accounting and reporting requirements for developer contributions, such as infrastructure charges. The changes have occurred due to the release of AASB Interpretation 18 Transfers of Assets from Customers.
Scope
This bulletin applies to all local governments and controlled entities for the 2010-11 financial year.
Only the changes to revenue recognition in relation to developer contributions under Interpretation 18 Transfers of Assets from Customers will be discussed. This Interpretation is applicable to both property, plant and equipment/infrastructure assets transferred and cash contributions from developers for the construction of infrastructure assets.
It does not cover revenue recognition in relation to the future ongoing supply of services using such assets.
From 1 July 2011 new legislative requirements apply to infrastructure charges.
The effect of those changes is not discussed in this bulletin.
Overview of Interpretation 18
Many local governments receive contributions from property developers (termed developer contributions) to construct assets such as roads, footpaths and water/sewerage networks for new property developments in the local government area.
Regardless of whether the developers construct these assets or whether the developers contribute cash (also known as infrastructure charges) to the council in order to construct the assets, once constructed, these assets are usually owned by the local government.
Previously, local governments accounted for such contributions as ‘non-reciprocal transfers’, recognising the amounts as revenue upon receipt - in accordance with AASB 1004 Contributions.
With the introduction of Interpretation 18 Transfers of Assets from Customers, local governments are now required to recognise the amounts as revenue under AASB 118 Revenue, as the related performance obligations are fulfilled, rather than on receipt.
Topics covered by this bulletin
The topics covered in this bulletin include:
- types of developer contributions
- performance obligations
- treatment where ongoing supply of services using transferred assets exists
- accounting for developer contributions
- disclosure information
- illustrative examples.
Types of developer contributions
There are two main types of developer contributions that local governments may encounter:
- transfer of property, plant and equipment/infrastructure assets from developers
- cash contributions from developers to build infrastructure assets, for example, infrastructure charges.
The table provides examples of each type.
| Type | Transfer of PPE/infrastructure assets | Cash contributions from developers |
|---|---|---|
| Example | Roads constructed by developers as part of their development on a parcel of land | Cash provided to council to build water pipes to connect properties on a new development site to the water grid |
Performance obligations
Performance obligations refer to the obligations that local governments are required to fulfil in exchange for receiving contributions of assets or cash from developers.
|
Example 1 The performance obligation is created when the cash is received. The revenue is recognised only by reference to the stage of completion of the new water pipes, rather than upon receipt of the cash. |
The identification of performance obligations forms a pivotal part of the changes introduced by Interpretation 18, as it dictates when revenue from developer contributions can be recognised.
The table below summarises how performance obligations impact revenue recognition.
| Performance obligation | Exists | Does not exist |
|---|---|---|
| Revenue recognition | Revenue recognised by reference to stage of completion of performance obligation | Revenue recognised immediately |
Additionally, Local Governments must carefully consider whether performance obligations exist, not only in cash contributions, but also where assets such as partially or fully developed roads and water pipes are contributed to council.
|
Example 2 As further work is deemed to be required in this instance, the council would have a performance obligation. Accordingly, council would record the fair value of the water pipes received as an asset, with a corresponding liability for deferred income. Tropical Shire Council would then recognise revenue by reference to the stage of completion of the remaining work to be done. If the council had no performance obligation, it would recognise revenue upon receipt of the assets. |
Determining whether a performance obligation exists
The following documents should be considered in assessing whether performance obligations exist in relation to a developer contribution:
- infrastructure agreements
- council’s planning scheme and policies
- conditions attached to development approvals
- council’s priority infrastructure plan
- any other agreement concerning the assets.
Common categories of developer contributions
Developer contributions/infrastructure charges are often categorised into areas such as:
- water supply and sewerage internal and external works and headworks
- external roads and drainage
- parks and recreation space.
Accounting treatments for different types of infrastructure charges
The following table summarises suggested accounting treatments in relation to the common categories of infrastructure charges/performance obligations. Councils will have to review the documentation before deciding upon the appropriate accounting treatment. The following table may assist in making that decision.
| Category | Sub-category | Explanation | Recommended revenue treatment of contributions |
|---|---|---|---|
| Water supply and sewerage | Water supply headworks | Contribution towards existing and proposed works to the water supply network. There is no obligation to construct any particular infrastructure in connection with the charge. | Recognise immediately |
| Sewerage headworks | Contribution towards existing and proposed works to the sewerage network. There is no obligation to construct any particular infrastructure in connection with the charge. | Recognise immediately | |
| External works | Connection from development site to existing water supply/sewerage headworks systems | Recognise by reference to stage of completion of connection works | |
| External roads and drainage | Frontage road works | Upgrades to frontage roads/associated works necessitated by the development project | Recognise by reference to stage of completion of works |
| Site access | Provision of vehicular access to the development site | Recognise by reference to stage of completion of works | |
| External roads to site | Upgrades to external roads that provide access from the development site to the road system | Recognise by reference to stage of completion of works | |
| Storm water drainage | Works for the adequate drainage of stormwater from the development site | Recognise by reference to stage of completion of works | |
| Parks and recreation space | Condition of development approval to fund works in relation to creation of a new or improvement to an existing park/recreational space | Recognise by reference to stage of completion of works | |
|
Example 3 Developer X advances $1.5 million to cover the infrastructure charges. Tropical Shire Council would not recognise this amount immediately on receipt of cash, but rather, would refer to its planning scheme and separate the $1.5 million into the individual categories and sub-categories of infrastructure charges, and then recognise revenue as follows: |
| Category | Sub-category | Recommended revenue treatment of contributions |
|---|---|---|
| Water supply and sewerage | Water supply headworks | Recognise immediately |
| Sewerage headworks | Recognise immediately | |
| External works | Recognise by reference to stage of completion of connection works | |
| External roads and works | Frontage road works | Recognise by reference to stage of completion of works |
| Site access | Recognise by reference to stage of completion of works | |
| External roads to site | Recognise by reference to stage of completion of works | |
| Storm water drainage | Recognise by reference to stage of completion of works | |
| Parks and recreation space | Recognise by reference to stage of completion of works | |
In some cases there may be no clear obligation on council to spend the contribution in a particular way. In this case, the contribution is immediately recognised as revenue upon transfer of control of the asset (that is, receipt of cash). This is more likely to be the case where no specific infrastructure agreements are in place and council does not have a priority infrastructure plan in place for the 2010-11 financial year.
Treatment where ongoing supply of services using transferred assets exists
Although this topic is outside the scope of this bulletin, it is important to note that Interpretation 18 limits the term ‘service activity’ to the development of infrastructure assets. It does not include the future ongoing supply of services using those assets.
The effect of this is that revenue from ongoing supply of services from transferred assets will be recognised separately, at a later date.
Accounting for developer contributions
This section is presented in two parts:
- Account for contributions of assets
- Account for contributions of cash.
Part A - Account for contributions of assets
There are three major steps in accounting for developer contributions of assets:
- Determine whether definition of an asset is met.
- Recognise the property, plant or equipment.
- Recognise the revenue associated with the receipt of property, plant or equipment.
Determine whether definition of an asset is met
Local governments can easily determine whether the property, plant or equipment received from the developer meets the definition of an asset, by referring to Paragraph 49(a) of the Framework:
‘An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.’
Whilst, the right of ownership is not essential, it is imperative that control of the asset exists, before the definition of an asset is met. Therefore, if the developer continues to control the transferred item, the asset definition would not be met, despite a transfer of ownership.
Recognise the property, plant or equipment
Once the local government concludes the definition of an asset is met, it must then:
- recognise the transferred asset as an item of property, plant and equipment in accordance with paragraph 7 of AASB 116
- measure its cost on initial recognition at its fair value in accordance with paragraph 24 of AASB 116.
| Journal entry where performance obligation(s) exist: | ||
|---|---|---|
| DR | Property, plant and equipment | x |
| CR | Deferred income - performance obligation liability | x |
| Journal entry where performance obligation(s) do not exist: | ||
| DR | Property, plant and equipment/infrastructure assets | x |
| CR | Developer contributions revenue | x |
Recognise the revenue associated with the receipt of property, plant or equipment
Once the asset has been recognised and any associated performance obligations accounted for, the revenue can be recognised by reference to the stage of completion. Note that where no performance obligations exist, this step is unnecessary as the revenue would have been recognised immediately in the previous step.
| Journal entry where performance obligation(s) exist: | ||
|---|---|---|
| DR | Deferred income – performance obligation liability | x |
| CR | Developer contributions revenue | x |
Part B - Accounting for contributions of cash
There are two major steps in accounting for developer contributions of cash:
- Record receipt of cash and deferred income associated with the developer contribution
- Record the construction of the asset(s) and recognise revenue by reference to the stage of completion.
Record the receipt of cash and deferred income
The journal below can be used to record the receipt of the cash contribution from the developer, as well as the associated deferred income that exists due to the performance obligation attached to the cash contribution:
| DR | Cash at bank | x |
| CR | Deferred income – performance obligation liability | x |
Record the construction of the asset(s) and recognise revenue by reference to the stage of completion
| Journal entry to record the construction of the asset(s): | ||
|---|---|---|
| DR | Property, plant and equipment | x |
| CR | Cash at bank | x |
| Journal entry to recognise revenue as the asset is being completed: | ||
| DR | Deferred income – performance obligation liability | x |
| CR | Developer contributions revenue | x |
Disclosure information
Disclosure of date from which Interpretation was applied.
Paragraph Aus 21.4 of Interpretation 18 states that entities will be required to disclose the date from which the Interpretation was applied.
This is an important disclosure given that the application of this Interpretation is prospective, but may also be applied retrospectively from 1 January 2005 (in certain circumstances).
Disclosure of accounting policy related to developer contributions
All entities that receive Developer contributions will need to establish and disclose a detailed accounting policy for this unique source of revenue.
The policy will need to address the following:
- timing of revenue recognition
- how the stage of completion of related service activities will be measured.
Service activities refer to activities such as:
- construction of roads
- footpaths
- water or sewerage infrastructure.
A sample accounting policy for treatment of revenues from developer contributions has been included in the Tropical Council Illustrative Financial Statements for the 2011 Reporting Period.
Further information
Accounting standards, including Interpretation 18, are available from the Australian Accounting Standards Board.
