Report 12: 2019-20

Audit Results Report – Annual 2018-19 Financial Audits of State Government Entities

Other financial reporting, accountability and audit matters

This part of the report details matters of current significance and legislative compliance:

  • entities’ first time adjustment for the new standard for reporting financial instruments, AASB 9
  • restructured government departments’ progress with amalgamating IT systems
  • future impact of changes to auditing and accounting standards
  • verifying eligibility for pensioner rebate schemes
  • entity reporting of building cladding remediation
  • emerging issue of entity’s reporting climate-related risks.

Entities’ first time adjustment for new standard AASB 9

Entities adopted accounting standard AASB 9 Financial Instruments for the first time in their 30 June 2019 financial reporting. AASB 9 replaced AASB 139 Financial Instruments: Recognition and Measurement.

The new standard changes the classification and measurement of financial assets and requires earlier recognition of provisions for bad and doubtful debts based on expected credit losses. Reclassifications were made at 1 July 2018. Accounting for impairment losses for financial assets from 1 July 2018 also changed.

Application of AASB 9, its impact and any adjustments made by each entity were included in their 2018-19 audited financial statements. In general any impact reported was not material and no adjustment was made.

The overall impact on the State’s whole-of-government accounts, presented in the Annual Report on State Finances[1], was also not considered material.

Restructured government departments’ progress with amalgamating IT systems

The 2017 Machinery of Government (MOG) changes gazetted the amalgamation of 27 departments and 17 statutory authorities into 11 new departments from the start of the 2017-18 financial year. Some departments were abolished and their staff resources, and those of several statutory authorities, were transferred to the 11 newly created departments.

The statutory authorities are required to continue preparing an annual financial report, including audited financial statements, until relevant legislative changes are made. However, the task of merging the financial, human resources/payroll and administrative systems of the constituent entities has progressed. At 30 June 2019:

  • 16 statutory authorities remain separate legal entities under their own enabling legislation. The financial management systems of 6 of these statutory authorities remain separate. The payroll systems of 3 have been amalgamated with their respective department, while the remaining 3 continue to operate their own payroll systems
  • 10 of the 11 new departments have completed the transition of their previous departments and now operate and report from one financial management system and one payroll system. The Department of Primary Industries and Regional Development (DPIRD) has commenced with the transition and has advised that tenders for a finance system and an HR system will be issued before the end of 2019, with transition expected to commence in early 2020.

Future impact of changes to accounting standards

The following new and revised standards issued by the Australian Accounting Standards Board (AASB) require close attention by Treasury, entity CFOs and our audit staff.

For public sector entities and other not-for-profit entities these standards apply from 1 January 2019, except for AASB 1059 which has been deferred by 1 year. This means they will apply for the 2019-20 reporting year, or at 31 December 2019 for universities and TAFEs and entities with calendar year reporting.

  • AASB 15 – Revenue from Contracts with Customers – This standard requires entities to recognise revenue at a point in time or over time, as applicable, as they fulfil the performance obligations of an enforceable contract.
  • An example for government entities is receiving grant moneys. Entities need to allocate the grant amount to each performance obligation in the contract and recognise the revenue only when the related performance obligations are satisfied. In the instance, however, where a grant is received for construction of an asset, the full value of the grant should have been recognised as revenue by the time the constructed asset is put into operation.
  • Not-for-profit public sector entities that receive revenue from the issue of licences received guidance through the Board’s amending standard AASB 2018-4, released in September 2018.
  • AASB 1058 – Income of Not-for-Profit Entities – This standard, in combination with AASB 15, establishes new principles for income recognition for not-for-profit entities. AASB 1058 applies to transactions where assets are acquired at significantly less than fair value.

It is anticipated that the implementation of these 2 standards may result in more delayed income recognition. However, the applicability across the Western Australian public sector will need to be further considered by Treasury and guidance issued to support implementation, as appropriate.

  • AASB 16 – Leases – For lessees, this standard removes the distinction between operating leases and finance leases, and requires all leases (except short-term leases and leases of low-value assets) to be recognised as lease assets and lease liabilities on the balance sheet. This will result in the grossing-up of the balance sheet and higher expense in the early years of the lease term.

Treasury has issued several circulars to provide accounting policy positions and guidance to assist entities implement this standard on leases when it applies for their 2019-20 reporting year.

  • AASB 1059 – Service Concession Arrangements: Grantors – This standard is applicable to public sector entities (grantors) that enter into service concession arrangements with sector operators. It requires grantors to recognise a service concession asset and, where applicable, a service concession liability on the balance sheet. The initial balance sheet accounting, as well as the ongoing income statement impacts, will have implications for grantors and for whole-of-government reporting.

During 2018, implementation of AASB 1059 was deferred, and it will now apply for years beginning on or after 1 January 2020 (2020-21 reporting year).

We acknowledge that there are varying degrees of readiness and preparation across entities for these new accounting standards. We are preparing and training financial audit staff in the new and revised requirements and updating relevant audit policies and procedures. We continue to encourage Treasury to carefully consider applicability to the Western Australian public sector and provide early advice and guidance to entities to streamline adoption appropriate for the Western Australian public sector accountability environment.

Recommendation

  1. Treasury should continue to provide guidance to assist entities with the adoption of new accounting standards in the Western Australian public sector. Entities should continue to make timely preparations for implementation of these new standards.

Verifying eligibility for pensioner rebate schemes

Legislation or regulations may authorise government entities to offer eligible pensioners and seniors a rebate of part of their fees and charges. This may be for an ongoing rebate each billing or annual cycle or for a one-off fee or charge. In all instances an application would need to be received from the pensioner and assessed by the entity against the established eligibility criteria prior to the rebate being given. Entities’ processes for determining initial and ongoing eligibility should follow their approved policies and procedures.

Water Corporation has a Pensioner Rebate Scheme (PRS), which validates land ownership, occupancy and eligibility, and gives eligible pensioners a rebate on their water accounts. The Water Corporation’s register of rebate eligible pensioners is validated on initial registration and on an ongoing triennial basis.

The Office of State Revenue in the Department of Finance has been relying on the Water Corporation’s PRS information when processing subsidy payments to local government entities to reimburse them for rates’ rebates given to pensioners. The Department will be updating its procedural manual to outline its reliance on the validation work performed by the Water Corporation.

Entity reporting of building cladding remediation

The Department of Mines, Industry Regulation and Safety (DMIRS) is undertaking Western Australia’s State-wide cladding audit for privately-owned buildings and is coordinating the audit of government-owned buildings. DMIRS is publishing updates as part of an Australia-wide initiative to check the fire risk presented by combustible cladding on buildings.

The scope of the DMIRS audit was to include all private and State government buildings with cladding attached or incorporated, that are 3 storeys or taller, constructed or refurbished after year 2000, and falling within the Building Codes of Australia classes 2,3,4 and 9. These are generally buildings where either people sleep, which accommodate vulnerable occupants or high occupancy events. Some local government buildings were included in the scope of private buildings as they were regarded as class 9. As an extra precaution, some State government entities applied an expanded audit scope to the minimum proposed by DMIRS.

At the time of our 2018-19 financial audits of State government entities, their respective combustible building cladding audits identified 12 buildings which may require remedial action. These entities were: Department of Education; Department of Fire and Emergency Services; East Metropolitan Health Service; Housing Authority; North Metropolitan Health Service; South Metropolitan Health Service; the Western Australian Museum and the Western Australian Sports Centre Trust (VenuesWest).

These entities included a contingent liability note in their 2018-19 financial statements which discloses:

  • the nature or extent of any potential remediation action and advises that the associated costs have not yet been reliably estimated
  • remediation work is in progress, or
  • obligations to address cladding safety concerns have been met.

State government entities are still undertaking their detailed building cladding risk assessments which they will report to DMIRS.

Climate-related risks, an emerging issue for entity reporting and auditing

The AASB and the Auditing and Assurance Standards Board’s (AUASB) recent joint publication Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2 (April 2019) considers how entities should disclose climate-related and other emerging risks.

Climate-related risks include those from potential acute or chronic natural disasters, change in climate patterns and the related technology, market, legal and changes in government policies risks.

Entities affected by climate-related risks include those in the financial sector such as banks, insurance groups, asset/investment owners and managers, and also in the non-financial sector such as in the energy, transportation, materials and buildings, and agriculture, forest and food product sectors. Climate-related discussion in an annual report is currently included outside the financial statements, if at all.

The AASB/AUASB publication goes further, reporting that investors and other stakeholders consider climate-related risks important to their decision-making. The publication suggests entities need to be mindful that climate-related risks are no longer just a matter of corporate social responsibility when applying the existing materiality definition in the Australian Accounting Standards, and the AASB/IASB Practice Statement 2 Making Materiality Judgements. Therefore, entities may also need to consider disclosing the risks in their financial statements. For example, an entity may need to disclose its judgements and assumptions regarding climate-related risks in relation to asset impairment, fair value estimates, asset useful life estimates, provisions and expected credit losses, if considered material.

At this stage, we encourage State government entities to read the practice statement and start thinking about how climate-related risks may impact on their business. As the accounting profession develops further guidance, entities will need keep up-to-date and assess the appropriate disclosure to include in either their annual report or financial statements.

[1] Note 34 of the 2018-19 Annual Report on State Finances details the initial application of AASB 9

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