Focus on Finance - Summer 2017
Review of 2016 Annual Financial Statements and prospective changes to the 2017 Model Statements – a brief precis.
The following is a brief precis of the presentation given by David Maxwell to the FMG Workshop on 1 December 2016.
Overall there was continued improvement in the standard of preparation of 2016 Annual Financial Statements, although there are some areas that continue to cause problems, notably the unwinding of present value discounts.
Points to watch
- Try to achieve a consistent type size (particularly Note 7).
- Remove irrelevancies – a number of upcoming standards will not take effect until the 2018/19 year – is this too far ahead to have a material effect on the interpretation of the 2016/17 reports?
- No need to show nil notes or sections.
- Do need to show the actual date of authorisation for issue of the statements in Note 1.
Land – operational land (generally fair value level 2) and community land (generally fair value level 3) should probably be split in Note 7.
Highest and Best Use – whenever AASB 13 Fair Value Measurement refers to “highest and best use” of assets, it does so in an absolute sense. To claim, as some Councils did, that all assets are used for their “highest and best use” for AASB 13 purposes is a nonsense. The statement must be qualified to refer to the purpose of the Council, and a suggested wording is included in the Model Statements.
FAGs Grants – the example disclosure included in the 2016 Model Statements seems to have met with general approval, but I welcome suggestions for further improvement.
Employee Leave Liability – the Auditors have reported that there is confusion at a number of Councils concerning the calculation of this liability at balance date. I will prepare an article for inclusion in a later edition of this newsletter.
Amounts in Advance – The recording of amounts in advance as a liability is basically only permitted where the services are to be supplied DIRECTLY to the payer. In all other instances, AASB 1004 requires recognition as income upon receipt or entitlement. This applies to all grants and contributions.
AASB 9 – Financial Instruments & AASB 7 – Financial Instruments – Disclosures - do not apply until the 2018/19 financial year, and for Councils whose investments are solely with LGFA will not involve any changes to the amounts to be disclosed.
AASB 15 – Revenue from Contracts with Customers – now does not apply to not-for-profits until the 2019/20 financial year (from 1 January 2018 for all others) and is unlikely to have any effect on the amounts disclosed by most Councils.
AASB 1058 (formerly ED 180 / ED 260) – Income for Not-for-Profit Entities – affects accounting for special purpose grants, was approved 20 December 2016, and takes effect from 1 January 2019 – i.e. the 2019/20 financial year.
AASB 16 - Leases - The IASB expects that this change will impact an estimated USD 3.3 trillion leasing commitments of listed entities, so there must be potential for slippage in the commencement date. Currently the application date is set for 1 January 2019 (i.e. the 2019/20 financial year). Whether there will also be specific clauses for NFPs and peppercorn rentals is not known. The 2017 Model Statements will include some preliminary information on its requirements, but full details will be deferred until closer to the commencement date.
Changes in the 2017 Model Statements
New standard to be adopted early - AASB 2016-4 Recoverable Amount of Non Cash-Generating Specialised Assets of Not-for-Profit Entities was authorised in June 2016 and commences from 1 January 2017, although early adoption is permitted.
The standard means that AASB 136 does not apply to non cash-generating specialised assets of not-for-profit entities where those assets are carried at fair value. Most infrastructure assets meet those requirements.
The early adoption of this standard will mean that these asset classes will not need to be tested for impairment – probably not a major issue, but at least it is a task that will not need to appear on the list.
Related Party Disclosures
Although Councils have previously been exempt from the application of AASB 124 – Related Party Disclosures, AASB 2015-6 terminated that exemption from 1 July 2016, and the standard first applies to the 2016/17 financial statements. It has now been determined that comparative figures will NOT need to be shown.
The key terms are “related party”, “control, “joint control”, “significant influence”, key management personnel”, and “close members of a family or person”. Disclosures are required of relationships, transactions and outstanding balances, including commitments”. Comprehensive information on these terms was included in the 2016 Model Statements.
The 2017 Model Statements will include a “skeleton” format for the disclosure Note, and a number of example wordings for common types of situations involving key management personnel and related parties. Councils will be able to copy and paste these wordings from the Model Statements before amending them as necessary.
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