New NSW Local Government Code of Accounting Practice and Financial Reporting 2021/22 is available on:
Usually, we prepare a detailed analysis of all updates and changes. However, this year there were no many changes, which is good news for preparers. However, we identified four interesting updates which we tagged as:
(1) “Not significant but funny 😊”;
(2) “Many changes but not critical”;
(3) Significant and important; and
(4) “Significant but not yet due”.
Each of the updates above relate to specific Notes in GPFS. Details follow below.
(1) Not significant but funny: “RFS” (Note C1-8)
The only change occurred with Rural Fire Service assets is addition of a small paragraph in the IPPE Commentary section (p. 54) which reads as follows: “The NSW Government has confirmed its view that these assets are not controlled by the NSW Rural Fire Services or the State.”
Well... what can we say about this… I think there is one participant missing. Indeed, the paragraph should be like: “The NSW Government has confirmed its view that these assets are not controlled by the NSW RFS, the State and Santa Claus”.. Or maybe somebody or something else...Anyway, the meaning of the whole paragraph for NSW local councils will not change.
Now, seriously. What is it so important about this paragraph in relation to the financial reporting of NSW local government councils? The answer is… nothing. It does not tell us whether councils have or don’t have to recognise RFS assets. Nothing has changed compared to previous Code. Indeed, the OLG still states that “Councils need to assess whether they control any rural firefighting equipment in accordance with Australian Accounting Standards”.
In other words, there is no authoritative “YES” or “NO” to recognition of RFS assets by councils. Councils just need to make a proper assessment of the subject matter and then follow it as an “accounting policy”… Well, this is what it says, isn’t it ..? Ho-ho-ho😉
(2) Many changes but not critical: “Restricted cash” (Note C1-3)
The Code returned “externally restricted” cash line. What else… a previously called “internally restricted” cash is now called “internally allocated”. Still the same principle. However, importantly to note that the “unrestricted cash” balance is a net of total cash less externally restricted cash only. The reason being that internally “allocated” cash is a cash which is used “at council’s own discretion” and not restricted by external party or a contract with external party.
Some new comments appeared in “commentary” section on page 42 which aim to provide more clarity about what “external restrictions” and “internal allocations” are. However, I don’t think it became clearer. Instead, it is still confusing.
The Code starts with the paragraph saying the “Council shall disclose….significant cash and cash equivalent balances held, but not available for use by Council.” That was an attempt to fix an issue with previous paragraph in Code 2021 which referred to some “entity”.
Anyway, the new version is still confusing. Indeed, how is it possible for a Council to have cash which this Council can’t use??? As if someone would give you money but tells you that you can’t use it… Something like a depositary… The Code refers to AASB 107.48 which says: “An entity shall disclose, together with a commentary by management, the amount of significant cash and cash equivalent balances held by the entity that are not available for use by the group.” See the difference? – AASB refers to the cash held by the entity which can’t be used by the group which that entity is consolidated to…
Internal allocations are far more confusing now. In the example on page 42 it has a heading “At 30 June, Council has internally allocated funds…”. Same requirement to define internal allocations as restrictions made by resolution or policy of a council… So, this is usually done by adoption of a Quarterly Budget Review (QBR). But councils are exempt from preparing June QBR. Only a handful of councils do this… So, how on earth, councils can “internally allocate” funds “at 30 June”? That is a big question…
To conclude, it seems that the whole section of restrictions of cash has nothing to do with AASB. It is purely an OLG specific requirement… Which is fine, but definitely needs a lot more details and clarifications… Especially with external restrictions with references to particular clauses of LG Act 1993. Otherwise, we are left with “common sense” approach which very often can be interpreted differently b/w councils and auditors.
(3) Significant and important: “Intangible assets relating to cloud-based software” (Note C1-10)
The new paragraph in the Commentary notes to Note C1-10 on page 56 states:
“If councils have material intangible assets relating to configuration or customisation of cloud-based software, they should review the agenda decision published by the International Interpretations Committee to consider the appropriateness of the accounting.”
That is indeed an interesting and important paragraph given increasing popularity of cloud-based services which include, but not limited to, access to various enterprise resource systems, financial reporting, etc. In other words, entity do not have the software installed on their machines – they have access to a software which is on cloud.
Obviously, before you start using a cloud-based software, it should be configured and customised to meet your entity’s needs. For example, for the successful usage of a financial reporting cloud-based software, you need to have your TB mapped; or a number of SPFS created depending on the amount of reporting businesses you have and so on and so forth. It is all about dollar value of time and resources which councils have to utilise in order to have the cloud-based systems up and running. These are, in most cases, those costs which are incurred at the start and most likely will not be repeated (or could be… but not often).
So, the question is, how to treat those costs? The answer is not so straight forward. Obviously, to recognise an intangible asset (IA) the costs need to meet IA definition and recognition criteria from paragraphs 8-17 of AASB 138 and 21-23 of AASB 138 Intangible Assets. Otherwise it would be expensed.
But to cut the long story short, the main issue is with control aspect as part of the IA definition criteria. Control is defined as having “…power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits.” (AASB 138.13). This could be an easy but also a highly judgemental matter.
Keep in mind that only “material” costs should be analysed. Otherwise, feel free to contact Vanguard for help if needed.
(4) Significant but not yet due: “Developer contributions “ (Note G5-1)
Appendix N – Legislative and regulatory amendments not yet effective.
In the next 2023 financial year developer contributions note G5-1 will be extended by adding one more column for contribution of land. In other words, all contributions will have to be split b/w “cash”, “land” and other “non-cash”. This was caused by changes in EPA legislation which come into effect 1 July 2022. However, what is important is that by 1 July 2022 councils should already have some work done and information published on councils’ websites as explained in details in this Circular:
In simple terms, starting 1 July 2022 developer contributions (S7.11 and S7.12) will become a subject of high scrutiny and interest from external stakeholders. One of the aspects of this is developer contributions register which should be timely and accurate.
Furthermore, probably one of the most critical aspects for LG finance professionals would be to ensure enough controls are implemented in the expenditure side of developer contributions pool. At least, having a separate GL account for expenditure for each plan or groups of plans with jobs linked to this account would be a good start.
The rest of the information, including links, are on page 60 of the Appendices to the Code.