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This bulletin provides local governments with a summary of the frequently asked questions, together with responses, that took place during and after the recent Tropical Illustrative Financial Statements Workshops for 2010-11.
Local governments are required to prepare audited annual financial statements that comply with local government legislation and the Australian Accounting Standards. To assist with this, the department prepares a set of example annual financial statements each year.
The statements, commonly referred to as ‘Tropical’, are updated each year to reflect new and amended Australian Accounting Standards and other legislative requirements. Each release of Tropical is accompanied by a series of workshops are conducted throughout the State. The questions in this bulletin were raised in those workshops.
Question 1: Council has a road that is under construction, which has been inundated with flooding. Assuming the waters have subsided and an assessment can be made on the reduction in value of the road by June 30, how should the decrease in value be accounted for?
Answer: As discussed in the workshop by representatives from the Queensland Audit Office, the first decision point would be to determine whether the asset (or a component of the asset) should be written off.
In this case, once the floodwaters have receded it may be determined that due to the significance of the damage, it would probably be appropriate to write off the asset or a material component of the damaged asset.
As the asset is not carried at Fair Value, there is no requirement for the value of the asset to be assessed at balance date to ensure it is materially reflective of its fair value. Consequently, it would also not be appropriate to undertake a revaluation of the asset.
It would also be inappropriate to book any impairment losses on the asset, because under the impairment process, the recoverable amount of the asset would be in its value in use. Given the asset in question is only a Work-In-Progress it would not currently have a value in use.
Furthermore, it would not be appropriate to simply capitalise the additional costs to complete the asset, without first recording any decrease in value of the asset incurred as an expense. Paragraph 22 of AASB 116 Property, Plant and Equipment states that the cost of abnormal amounts of wasted material, labour or other resources incurred in self-constructing an asset is not included in the cost of the asset.
In summary, the process that will be followed in this scenario involves determining whether the asset is so severely damaged that it needs to be written off and de-recognised from the statement of financial position Reducing from the value of the asset and recognising as an expense, abnormal amounts of wasted material, labour or other resources incurred in self-constructing the asset due to the damage caused by the inundation (if the asset is not so severely damaged that it will need to be written off).
Question 2: Where can the Regional Indices for Asset Revaluations be located?
Answer: Councils need to undertake a thorough assessment of the indices that are applied in interim asset valuations, in order to ensure that they are appropriate.
To ensure selection of an appropriate index, Councils should consider all factors including the following:
The following indices may be of assistance:
Statistics related to the consumer price index (CPI), retail prices, house prices and petrol prices are available from the Office of Economic and Statistical Research.
Appendix 5.1 of Treasury’s Non-Current Asset Policies may assist Councils in assessing the appropriateness of the index selected.
This matter is currently being considered, The department will provide a further update to councils in this regard.
Question 1: Should financial assistance grants received in June for use in the following financial year be shown in the general purpose financial statements as restricted/constrained revenue?
Answer: Under AASB 1004 Contributions, financial assistance grants need to be accounted for as revenue when received. Whilst this and related standards, do not use the terms ‘restricted’ or ’constrained’, AASB 1004 paragraph 60 does require the amounts and nature of the following contributions to be disclosed in the notes to the financial statements:
The Tropical Council illustrative financial statements provide example disclosures in this regard (refer to Note 1.I and Note 4).
The QAO has noted that some local governments use reserves to account for unspent non-reciprocal grants. As identified in Tropical, this is not mandatory and care needs to be taken where reserves are used.
If the financial statements identify that unspent grants are included in reserves on the basis that the monies can only be spent for specific purposes, councils need to be able to demonstrate that the money is still within their bank account.
If the amount disclosed in the reserves is higher than the amount disclosed as cash at bank in the financial this could result in a qualified opinion being issued on the general purpose financial statements.
AASB 1004 does not contain any requirement to account for unspent grants in reserves.
Question 2: To what extent could restoration estimates used for Natural Disaster Reconstruction and Recovery Arrangements be used as an acceptable valuation adjustment for affected assets?
Answer: Under AASB 116 Property, Plant and Equipment paragraphs 65 and 66, it is not possible to simply adjust the values of damaged assets for amounts expected to be received from grants, without first considering all relevant elements of AASB 116 and AASB 136.
As a starting point, councils should first consider whether the damage caused to assets requires all or part of the asset to be written-off or replaced. In this regard, Councils may be able to apply AASB 116 paragraph 70 (de-recognition of the carrying amount of a replaced part of the asset).
The ability to derecognise assets under AASB 116 is also likely to make it easier to determine whether amounts spent on repairs/restoration are to be either expensed or capitalised.
In terms of NDRRA requirements, it is also important to consider the specific purpose for which the funding is being provided. Under the NDRRA requirements assistance is available for:
The nature of emergent works means that they are unlikely to cause dramas at balance date, given they are likely to be undertaken prior to reassessing the value of assets for reporting purposes.
Where the funding falls within the category of being for the reconstruction/replacement of an asset to its pre-disaster standard/level service, the amount could potentially be used as an estimate of the decline in the value of the asset, given that this category of funding is only provided to reconstruct/replace the asset to its ‘pre-disaster standard/level of service’.
Costs incurred in restoring / replacing an asset to a higher level of service are generally ineligible for funding under the NDRRA.
Care needs to be taken, however, in considering what is meant by ‘pre-disaster standard/level of service’ as the NDRRA requirements do not provide a specific definition for this term.
In summary, councils must consider the following:
The above two issues would need to be considered for each asset that may eligible for funding under NDRRA and would also require councils to take into account the specific basis on which fair value for the affected assets are determined.
Detailed information can be obtained from the Queensland Audit Office’s 2010-11 Financial Audit Update Questions and Answers website.
AASB Interpretation 1017 Developer and Customer Contributions for Connection to a Price-Regulated Network has been superseded by AASB Interpretation 18 Transfers of Assets from Customers. Under Interpretation 18, developer contributions now need to be accounted for under AASB 118 Revenue, rather than AASB 1004 Contributions. As such, there is no longer a need to draw the distinction between ‘reciprocal’ and ’non-reciprocal’ contributions.
Most councils historically accounted for these contributions using the principles of AASB 1004 Contributions, recognising revenue upon receipt in the belief that these were non-reciprocal transfers. However, AASB Interpretation 18 Transfers of Assets from Customers (which applies prospectively from 1 July 2009) asserts that these contributions fall under AASB 118 Revenue as they actually represent an exchange transaction (a fee for service). Consequently, Interpretation 18 concludes that these types of contributions should be recognised as revenue as the related service obligations are fulfilled, not as revenue on receipt.
Like any transaction, consideration would need to be given to the specific terms and conditions relating to the contributions received in determining whether they fall within the requirements of Interpretation 18. Many local governments receive contributions from property developers (termed ‘developer contributions’) to construct assets such as roads and footpaths, and water and sewerage networks for new property developments in their local government area. Regardless of whether the developers construct these assets themselves or whether the developers contribute cash to the council in order for the council to construct the assets, once constructed, these assets are usually owned by the local government.
Given the possible disparity between the approach historically adopted by councils and the requirements of the Australian Accounting Standards, there is potential for many councils to be preparing general purpose financial statements that are materially inconsistent with the accounting standard requirements.
The main discrepancies will arise in situations where there is a significant time difference between when the local governments receive cash contributions from the developers and when the local governments construct the infrastructure assets. It is not anticipated that this Interpretation will result in significant changes in revenue recognition where the developer constructs the assets and only transfers these assets to the council on completion.
Interpretation 18 limits the term ‘service activity’ to the development of the infrastructure assets. It does not include future ongoing supply of services using those assets.
For example, in the case of a water supply system, the performance obligation created when the council receives a cash contribution may be to connect the new properties to the water grid by constructing infrastructure such as new water pipes in the area. The council's obligation does not include providing water to the properties, as it will be charging separately for water usage and the water prices charged are the same regardless of whether the property developer made any contribution towards the water infrastructure. Hence revenue is recognised by reference to the stage of completion of the new water pipes.
Where the council receives assets such as partially or fully developed roads, water pipes, etc instead of cash, the council must consider whether it has any performance obligations. For example, if the property developer laid water pipes as it constructed the properties and contributed those pipes to the council, the council may (or may not) have an obligation to do further work necessary to connect all the properties to the water grid. If further work is required, the council would record the fair value of the water pipes received as an asset with a corresponding liability for deferred income which the council would recognise as revenue by reference to the stage of completion of the remaining work to be done.
Detailed information can be obtained from the Queensland Audit Office’s 2010-11 Financial Audit Update Questions and Answers website.
Question 1: Where there is no specific deliverable for developer contributions received for trunk infrastructure, is it acceptable that unspent amounts are recognised as revenue?
Answer: If the council has no performance obligation (i.e. no further work required), it should recognise revenue upon receipt of the assets
Question 2: Where there is a specific purpose for developer contributions received for infrastructure and that purpose is not met at 30 June, should the unspent portion be recognised as a liability and not a revenue?
Answer: Upon receipt of the developer contribution, Council would record the developer contribution as an asset, with a corresponding liability for deferred income. This deferred income would only be recognised as revenue, by reference to the stage of completion of the remaining work to be done to satisfy the performance obligation. Accordingly, the unperformed portion of the developer contribution would in fact be recognised as a liability and not a revenue, where there is a specific purpose that has not been met at 30 June.
It is important that the revenue is recognised as the performance obligation is completed. If 100 per cent of the developer contribution has been spent but only 50 per cent of the work to fulfil the obligation has been completed (perhaps the remainder of the work is funded from another source), 50 per cent of the contribution would still be a liability as that portion of the performance obligation has not been fulfilled.
Question 1: What is the annual leave accrual discount rate for 2011?
Answer: The annual leave accrual discount rate for 2011 is discussed in Local Government Bulletin 13/11 Discounting of employee benefits under AASB 119.
Question 2: Is an Interim GST Certificate for 2010-11 required to be supplied by local governments?
Answer: An Interim GST Certificate is not required for 2010-11. Local Government Bulletin 06/11 Annual GST certificates for 2010-11 states a final GST certificate is, however, required for the full financial year by Thursday 15 September 2011.
Question 3. Where can the Financial Management (Sustainability) Guidelines for 2011 be located?
Answer: Download a copy of the Financial Management (Sustainability) Guidelines for 2011 from the department.
Question 4: What were the three missing AASB references that need to go into the notes?
These references were omitted from note 1.G of Tropical because the standards were released after Tropical for 2010-11 had been prepared. Local governments will need to make sure that any further standards that are released before 30 June are included in this note together with a brief description of any impact the standards would have on the general purpose financial statements.
Question 5: Where can information relating to the Auditor-General’s perspective on the impacts of the recent natural disasters in Queensland and on the general purpose financial statements of local governments be located?
The Auditor-General commented on the potential impacts of the recent natural disasters in Queensland and on the general purpose financial statements of local governments in Section 2 of the Auditor-General Report to Parliament No. 2 for 2011.
The Auditor-General Report to Parliament No. 2 for 2011 covers the following issues:
In terms of accounting for non-current physical assets, the report covers:
In terms of Accounting for grants and assistance, the report covers:
For further information, contact the department