New Accounting Requirements for Local Government

A New Model of Revenue Recognition


It all starts with AASB 15 Revenue from Contracts with Customers, which is a new Standard aimed at aligning the timing of recognition of contract revenue with the transfer of goods and services.

Each contract with a customer needs to be assessed to identify the performance obligations it creates.  If there is a mismatch between the timing of performance obligations under a contract and receiving an asset (say cash) or undertaking works and services in advance, then a contract liability or contract asset is created until the performance obligations under the contract are satisfied. Once the performance obligations are satisfied, the associated level of revenue can be recognised.    

There are some exceptions under the AASB 15, but it is likely local government contracts for the provision of goods and services including maintenance contracts, membership fees, private works, service charges, WANDRA funding and licences will need to be assessed.

For some specific transactions such as the consideration to acquire an asset at less than fair value or the revenue is from a Tax or is volunteer services then the transaction falls under the scope of AASB 1058 Income of Not-for Profit Entities, rather than AASB 15 because it is not a contract with a customer.  

Grants and Contributions


Currently, when a local government receives a cash grant/contribution or a donated asset, it is recognised as an asset in the accounts at fair value with the credit being revenue. It is the timing of recognising these related credit amounts that has the potential to change under AASB 1058. 

After 1st July 2019, if a local government receives a specific purpose grant or contribution in advance, including to construct a building or develop infrastructure, it must recognise the asset (cash) with the corresponding credit being a financial liability for the associated grant agreement obligation. Revenue is not recognised until the performance obligations under the agreement are satisfied. Depending on the terms of the agreement, this may be some significant time in the future for say, developer contributions.  

Rates in Advance


Currently property rates are recorded as revenue when the cash is received, regardless of the rating period to which the revenue relates. From 1st July 2019, AASB 1058 requires the credit side of cash received for rates in advance to be recorded as a liability, which is converted to revenue after the taxable event (most likely when the rates relating to the prepayment are struck). 

Volunteer Services


Provided the services would have been purchased had they not been donated and if they can be reliably measured, local governments will be required to recognise the value contributed by volunteers as an asset or operating expense with the credit being revenue.

Each volunteer activity needs to be assessed individually against the recognition criteria. If individual assessment of activities presents a problem, there is an option to elect to recognise all volunteer services in this way irrespective of whether they would have been purchased if not donated.

Local governments often benefit from volunteer services and now will have to determine if they would have purchased the services for such activities as volunteer bush fire brigades or home care if they had not been donated.         

Leases


In a substantial change to accounting for leases, most will now need to be capitalised under AASB 16 Leases. A right-of-use asset will need to be recognised which will be depreciated over time. The lease liability is calculated at the present value of future lease payments.

There are two exemptions from the requirements of AASB 16 being, for short-term leases (12 months or less) or where the underlying asset is of low value. Low underlying asset value is not the same a low lease payment.
In the case of a peppercorn lease if the fair value of the right-of-use of the asset is material then these leases will be captured by the new requirements. When there are concessionary leases terms, any difference between the lease liability and the fair value of the right-of-use asset will immediately be recognised as income in accordance with AASB 1058.

The recent release of AASB 2018-8 gives not-for-profits the option to apply either cost or fair value to right-of-use assets in relation to concessionary leases however, this relief is temporary and comes with additional disclosure requirements regarding the impact of this election.

There is also Financial Management Regulation 17A(2) to consider which requires all assets of the local government to be shown at fair value in the financial statements.

New Disclosures


Some of the new disclosure requirements in AASB 1058 around grants are already required under current W.A. legislation, however additional disclosures include the extent and value of volunteer services, the level of any prepaid rates, explanations regarding unsatisfied grant obligations and determinations surrounding the amounts and timing of income recognition. AASB 15 requires a significant level of additional disclosure such as a disaggregation of contract revenue and information concerning the changes in a balance of contract assets and contract liabilities.   

Transition    


Two transition choices are available under AASB 1058 and AASB 15, either full restatement of prior period comparative information or making a one-off adjustment to retained surplus on 1st July 2019, for the net impact of the changes.

In practical terms, the choice of action on transition may be influenced by each local government’s circumstances. For example, an adjustment of the net impact to accumulated revenue at 1st July 2019, would see the value of any incomplete performance obligations (e.g. unspent grants and contributions) recognised as a current liability and potentially recognised again as revenue in the 2019-20 budget year. If a contract asset is recognised for say works completed in advance, then a one-off adjustment to retained surplus would mean that the revenue will not appear in the Statement of Comprehensive Income.     

‘Moore’ Information


These substantial changes that take effective from 1st July 2019 and make it more important than ever to attend our series of local government specific workshops scheduled for the first half of 2019.

For more information on our Local Government services, or to attend our Local Government Training Events, please click HERE.