A number of significant changes to Australian Accounting Standards will be applicable over the next few years, some commencing in 2018-19. These, and a change to the LG Financial Management Regulations are expected to require close attention by entities’ finance officers and our audit teams.
Expensing assets with a value at acquisition under $5,000
Regulation 17A(5) of the LG Financial Management Regulations requires, with effect from 2018-19, assets with a value below $5,000 at the time of acquisition, to be excluded from the assets reported in the financial report. These assets will instead be reported as an expense in the statement of comprehensive income in the year of acquisition.
Australian Accounting Standard AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, requires this amendment to the asset values to be treated as a change in accounting policy. The standard requires balances to be adjusted retrospectively, unless it is impracticable to determine the period-specific or cumulative effects of the change.
Future impact of changes to accounting standards
The following new and revised standards issued by the AASB are expected to impact LGs to varying extent:
- AASB 9 – Financial Instruments – This standard changed the classification and measurement of financial assets from 1 January 2018 and therefore applies to LGs for the 2018-19 reporting year. Another change is earlier recognition of provisions for bad/doubtful debts based on expected credit losses.
- 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 for LGs is receiving grant moneys. LGs 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.
Also, authoritative implementation guidance has been issued for not-for-profit public sector licensors reporting transactions involving the issue of licences. This standard applied from 1 January 2018 reporting for for-profit entities, and from 1 January 2019 reporting for not-for-profit entities.
- 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 LGs 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 two 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. Peppercorn lease assets can be elected to be measured either at cost or at fair value. This standard applies from 1 January 2019 and will therefore apply to local governments 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 private 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. AASB 1059 will apply for years beginning on or after 1 January 2020 and will apply to local governments 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.
Local governments should continue to make timely preparations for implementation of the upcoming accounting standards changes, and the new regulation requiring assets with a value at acquisition below $5,000 to be expensed.