Model financial statements: Te Motu District Council – Commentary

PDF, 277KB, 6 pages

The most currently available model financial statements for Te Motu District Council (the Council) are for the year ended 30 June 2021.

Other than a limited number of disclosure matters discussed below, the 30 June 2021 model financial statements remain relevant for local authority financial statements for the year ended 30 June 2022.

In this commentary, we discuss the following matters:

• revaluations of property, plant, and equipment;
• three waters reform;
• accounting for software as a service (SaaS); and
• commentary and updates to model financial statement disclosures.

Revaluation of property, plant, and equipment

Economic factors – for example, inflation, escalation of costs, and increases in interest rates – could significantly affect fair value assessments and valuations of property, plant, and equipment this year.

Recent data has indicated some significant increases to the values of land and commercial buildings, and to replacement costs that are used in depreciated replacement cost valuations.

Local authorities and their valuers will need to consider these economic factors and the impact of market/cost price movements on the fair value of property, plant, and equipment.

PBE IPSAS 17 Property, Plant and Equipment states that “Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date”.

In some instances, this may mean local authorities are required to complete an out-of-cycle full valuation. Where an out-of-cycle valuation is required, in some cases it is possible to book a valuation movement based on indicative movements from indices supported by expert advice. Local authorities needing out-of-cycle valuations of one or more asset classes should discuss this with their Audit Director.

Three waters reform programme

Local authorities affected by the three water reform programme will need to disclose information in their financial statements about the proposed reforms. An example disclosure is provided below:

“Note xx – Three waters reform programme

In June 2022, the Government introduced legislation to establish four publicly owned water services entities to take over responsibilities for service delivery and infrastructure from local authorities with effect from 1 July 2024. The impact of these proposed reforms, once legislated, will mean that the Council will no longer deliver three waters services or own the assets required to deliver these services. The Bill is currently before Parliament and as such, the impacts of the proposed reforms are currently unclear. Additional legislation is expected later in 2022 that will provide detail on the transfer of assets and liabilities to the water service entities.”

The three waters reform programme disclosure will need to be updated to reflect any changes or developments prior to the finalisation of the annual report. This may include changes to the Government’s proposal, or the progress of the Bill through the House.

Accounting for software as a service (SaaS)

Entities can sometimes incur significant costs when implementing cloud computing arrangements. Until recently, there has been no specific guidance on this subject in New Zealand accounting standards.

An agenda decision issued by the IFRS Interpretations Committee (IFRIC) has provided some clarity on the accounting for certain costs in implementing such arrangements under the International Financial Reporting Standards (IFRS).

The IFRIC decision must be applied by for-profit entities. There is no formal interpretation by the International Public Sector Accounting Standards Board. However, we note that PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors says that entities may consider the IFRIC decision when developing their accounting policies for matters not covered by the PBE IPSAS standards. For public benefit entities, the agenda decision can be referred to in determining the accounting treatment because the underlying intangible asset standards are consistent between IFRS and PBE IPSAS.

The key issues are whether such costs should be:

• capitalised as an intangible asset and amortised;
• expensed when incurred; or
• expensed over the term of the SaaS arrangement (including capitalising as a prepaid service if paid upfront).

If a local authority has material SaaS arrangements, it should carefully consider the accounting treatment for these costs when preparing the 30 June 2022 financial statements.

The Treasury has issued guidance on the accounting for SaaS arrangements: Guidance on Accounting for Software as a Service (SaaS) (treasury.govt.nz).

Commentary and updates to model financial statement disclosures

The table below notes the updates to those disclosures in the 2021 model financial statements that should be considered by local authorities in preparing their 30 June 2022 financial statements.

The yellow highlight indicates the disclosure concessions available under the reduced disclosure regime (Tier 2) .

The following is an illustrative example of a note providing a reconciliation of movements in liabilities arising from financing activities. Where a local authority has a group, both parent and group amounts will need to be presented if different. This disclosure is not required by entities that apply the reduced disclosure regime.

Comparative information is not required when applying the amendment for the first time.