New Code (Update 28) Draft
Hello everyone and happy New Year!
Early in December 2019, OLG released a Draft Code (Update 28). Most of the changes relate to new requirements of new accounting standards: AASB 15, AASB 1058 and AASB 16. As expected, more extensive disclosures will have to be prepared in 2020 financial year financial statements. One of the main one is presenting the 2020 balance sheet and income statements figures under the old income standards for comparison purposes. However, the comparatives in the main statements will not be restated because OLG mandated “modified” approach on transition to new standards.
Users of our Income Standards Application Pack (ISAP) might remember from our ISAP Hints & Tips newsletters that because of “modified” transitioning approach, councils which had unspent grant money for enforceable specific contracts as at 30 June 2019, will have to account those money as income again in 2020 financial statements if project is completed in 2020. We called it “double counting” of income.
We are grateful to say, that in its Draft Code 28, OLG confirmed our conclusion. This can be seen in the Appendix J to the Code “Guidance on AASB 15 Revenue from Contracts with Customers and AASB 1058 Income of NFP Entities” (See Scenario B on page E-44 in Appendix J).
Council successfully applies for a $20m grant to contribute to the development of an art museum.
The funding agreement states that the funds must be spent on the museum project and they must be returned if they are not or if there is excess funds.
Council receives the funding on 28 June 2019.
The museum project commences and all funding is expended in 2019 – 20 and the museum opens in August 2020.
There is no contract with a customer under AASB 15 since there is no transfer of goods / services external to Council as the funds are to be used for Council capital projects. The funds are for an identified non-financial asset, there is no transfer back to the fund provider and the contract is enforceable and therefore the revenue is within the scope of the exception in AASB 1058.
The funds are recorded as a contract liability on receipt and recognised as revenue as and when the construction is performed.
Under AASB 1004, the funds would have been recorded as revenue on receipt and therefore an adjustment should be made to retained earnings.
At 1 July 2019:
Dr: Retained earnings 20m
Cr: Contract liability 20m
Note this means that the revenue in relation to the grant will be recorded in both the 2018-19 AND the 2019-20 financial years as there is no restatement of comparatives.
Some changes to the general ledger structure will also be required. In particular, creation of new accounts for: contract assets; contract liabilities; right-of-use assets. As well as setting up processes and controls to ensure compliance with new accounting requirements.
Though the Code is in the Draft mode yet, conceptually, the final version should not change significantly.
Therefore, it is really important that councils start preparation for new disclosures as soon as possible.
You can always contact us for advice when in need.
Our full feedback on the Draft Code can be found here (you need to be signed in).
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DISCLAIMER This article was prepared by Vanguard Consulting Group.
The information in this article provided for general guidance only and on the understanding that it does not represent, and is not intended to be, advice.