Report 16: 2019-20

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

Upcoming changes to accounting standards and the local government regulations

A number of significant changes to Australian Accounting Standards will be applicable over the next few years, some commencing for local government entities in 2019-20. These, and a change to the LG Financial Management Regulations, are expected to require close attention by entities’ finance officers and our audit teams.

Future impact of changes to accounting standards

The following new and revised standards issued by the AASB are expected to impact local government entities to varying extent:

  • AASB 15 – Revenue from Contracts with Customers – This standard requires revenue to be recognised by entities on the fulfilment of the performance obligations of an enforceable contract at a point in time or over time, as applicable. An example 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. This will be consistent with current practice for the private sector.
  • 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 from 1 January 2019 reporting and will therefore apply to entities for the 2019-20 reporting year. AASB 1058 applies to transactions where assets are acquired at significantly less than fair value, including rates and grant moneys. It is anticipated that the implementation of these 2 standards will result in more delayed income recognition.
  • 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. This standard applies from 1 January 2019 and will therefore apply to local government entities for the 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 operators (generally from the private sector). 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. AASB 1059 will apply for years beginning on or after 1 January 2020 and will apply to local government entities for the 2020-21 reporting year.

We acknowledge that there are varying degrees of readiness and preparation 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.

Recommendation

To facilitate timely preparation of annual financial reports, and to minimise the additional audit costs associated with Australian Accounting Standards on revenue, income and leases, AASB 15, AASB 1058 and AASB 16, entities should complete preparations for those new standards by 30 June 2020.

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