PURPOSE This paper is to update the Audit and Risk Committee on a number of accounting issues that will impact the finalisation of the Annual Report

Transcription

1 6.3 ANNUAL REPORT 2018 Author: Authoriser: Lorraine Walmsley, Manager Finance Systems Kaiwhakahaere Pūnaha Pūtea Roy Baker, General Manager Corporate Services and Chief Financial Officer Kaiārahi Pūtea Matua PURPOSE This paper is to update the Audit and Risk Committee on a number of accounting issues that will impact the finalisation of the Annual Report RECOMMENDATION That the Audit and Risk Committee: 1. Receive the report Reports contain recommendations only. Refer to the meeting minutes for the final decision. DISCUSSION AND OPTIONS 1. Revaluations of 3 Water Assets Revaluation of the 3 Water Assets has been undertaken as at 31 December 2017 by Opus. The Revaluation has increased the total value of the 3 Water Assets by $36.4m or 11.4% to $357.3m. Depreciation has increased by $0.7m from $7.1m to $7.8m or 10.2% as a result of the revaluation exercise. Note depreciation for next year is expect to be around a further $0.1m higher than this once this year s WIP and vested assets are capitalised at year end. Revaluation increases are higher than BERL estimates / forecasts as BERL uses capital price index s whereas the revaluations also take into account of the costs of putting the pipes in the ground. Within the Revaluation Report, Opus details the components of change in values from 2015 to One item of change they have called Capex leakage of $2.5m. Opus advise us that they know there was capex spent for an asset group in but since it is not captured in the data provided to them by Wellington Water it is a capex leakage. We are further investigating this with Opus and Wellington Water but for the interim Audit this will be an Open Item. Item 6.3 Page 21

2 Comparison of 2015 and 2017 valuations AUDIT AND RISK COMMITTEE AGENDA Asset Depreciated Replacement Cost $000 Annual Depreciation $ Water 65,335 62,250 1,925 1,816 Wastewater (including WWTP) 178, ,452 4,082 3,737 Stormwater 113,681 97,139 1,776 1,507 Total 357, ,841 7,783 7,060 Note the table above includes WWTP assets at 100% - PCC share is 72.4% and that there is no allowance yet for WIP capitalisation or vested assets Serlby Place Potential Sale 7 Serlby Place is currently in a sale process. 7 Serlby Place is recorded in Council s accounts as an Investment Property and is revalued annually. The revaluation by Aon last year for 7 Serlby Place was on a commercial development site basis valued at $250,000.The actual sale may result in either a gain or loss on sale. Income Recognition (James Cook) Income recognition for payment from NZTA for costs arising from relocation of James Cook Interchange Council has received payment of $547k as a contribution to the PCC Link Roads. This is to offset the additional cost to construct the PCC Link Roads arising from the TG PPP contractual decision to alter the location of the James Cook interchange. Under Public Benefit Entity (PBE) IPSAS 9, the income should be recognised on a percentage of completion. This is likely to be difficult to measure as the Link Roads are being progressively built, and the cause of the additional costs being the change in location of the interchange, is not being built by Council but by NZTA. It is therefore proposed that the revenue be recognised from the beginning of this financial year until April 2020 on a proportionate basis of the remaining capital spend over this period on the link roads. Note as the revenue is a capital subsidy, it is therefore is excluded from Council Balanced Budget calculations and has no impact upon the rates calculation in balancing the budget by 2021/22 other than the cash funding itself. Item 6.3 Page 22

3 3. Period 13 adjustments Tech one adjustment We are in discussion with Tech One regarding going to the cloud and the treatment of the $1.5m payment and application (i.e. prepayment, capital or opex cost) Wellington Water Washup Operating overspend for current year: It is likely that council will need to make an additional payment to Wellington Water of around $600k relating to their over budget spend for the three waters. This issue has been identified to the city Directions committee through the Finance Report Settlement for transfer refer to separate paper Non-cash items Swaps: Interest rate swaps are revalued to fair value as at 30 June to comply with accounting standards. The impact of the value of the swaps will not be known until 30 th June. We will advise Audit & Risk Committee in its September meeting of the impact of the Swap revaluations on the financial results for the year. Based upon today s market conditions this is expected to be approximately $4m Vested Assets: The value of assets vested to Council for this financial year is not yet known. We are in the process of gathering this information for year end and will advise Audit & Risk Committee in its September meeting. The timing of the completion of subdivision work and the vesting of assets is outside the control of Council. Revenue from vested assets is non-cash revenue and Council assumes the ongoing maintenance obligations for these vested assets. Depreciation and amortisation: Depreciation and amortisation is currently forecast to be on track with the budget. The Landfill After Care accounting treatment change (refer below) will reduce deprecation by about $200k from that currently forecast. 4. Landfill After Care Provision Last year we amended the useful life of the Landfill from 2022 to 2030 which is when the current resource consent for the landfill ends. However, the new LTP is a 20 year LTP, and so the LTP extends pasts the 2030 resource consent end date. The Landfill Asset Management Plan and LTP assume the Landfill continues operations in a similar manner as today, and it is to be developed / extended and filled in until It would now be in 2052 when the aftercare provision would be required. The LTP and Landfill Asset Management Plan assumes the resource consent to be renewed, and includes costs for enabling this to happen. The recent change to the LTP for additional tonnage and therefore revenue will mean that the Landfill capital expenditure will need to be brought forward to enable the Landfill to take the additional fill. The useful life of the Landfill is assumed to remain at The Landfill Item 6.3 Page 23

4 manager is currently investigating and trialling at Southern in conjunction with WCC alternative cover materials which will enable the useful life of the Landfill to remain at There is risk that the additional tonnage stops, which would require a reassessment of the Council s budget at the appropriate Annual Plan. Therefore the Landfill useful life assumption for the Annual Report and LTP needs to be changed from 2030 to 2052, and adjustments to this year s accounts will reflect the change in useful life and the LTP will take the new opening position. 5. Financial reporting Updates for Local Government This section briefly highlights key accounting standard changes and how they will impact PCC financial reporting. Note: there are no significant accounting standard changes for Annual Report Accounting standards soon to be effective PBE Standard effective for 30 June 2018 Year End Standard Impact Effective date PBE Conceptual Framework 2016 Omnibus Amendments to PBE Standards Sets out the concepts that underpin general purpose financial reporting Narrow scope editorial amendments 2017 Various dates. Earliest 1 January 2017 Impact on PCC Low - minimum change Low - minimum change PBE Standard Issued but not yet effective Standard Impact Effective date Approved Budget (Amendments to PBE IPSAS 1) PBE IPSAS 34, 35, 36, 38 and 39 Accounting for Interests in Other Entities Removed the term approved budget and specifies where entities may present comparisons between prospective and historical financial statements These supersede PBE IPSASs Impact on PCC Low no changes required, wording clean up None - Principle is the same, more guidance provided on defining Control. Do you have power to control and do you influence all their directions. 3Waters does not falls into this as PCC s Item 6.3 Page 24

5 control & influence is low PBE IPSAS 39 Employee Benefits Defined Schemes Benefit 2019 More research to be done Impairment of Revalued Assets (Amendments to PBE IPSASs 21 and 26) Impairment loss on revalued assets does not require the entire class of assets to be revalued 2019 More research to be done PBE IFRS 9 Financial Instruments Gives PBEs the opportunity to early adopt a PBE standard that is based in NZ IFRS More research to be done Amendments to XRB A1 Application of the Accounting Standards Framework Clarifies Tier 4 Size criteria 2018 No impact as PCC is Tier 1 PBE FRS 48 Service Performance Reporting New requirement for Tier 1 and Tier 2 PBEs on how to select and present service performance information 2021 High: see section PBE FRS 48 Service Performance Reporting below PBE FRS 48 Service Performance Reporting Issued November 2017 Information about the delivery of services for community or social benefit High level and principles based requirements As entity must provide users with: Information to understand why the entity exists What it intends to achieve in broad terms over the medium to long term Information about what the entity has done during the reporting period in working towards its broader aims and objectives Mix of performance measures made in the selection, measurement, aggregation and presentation of the service performance information Disclose judgements made in the selection, measurement, aggregation and presentation of the service performance information Item 6.3 Page 25

6 Presenting Service Performance Information AUDIT AND RISK COMMITTEE AGENDA The Standard does not prescribe the format of service performance information Entities may develop a format that best suits the information needs of their users. Impact on PCC Comes into effect for next LTP so we have 3 years to plan. KPIs and projects will need another review to ensure clear linkage is made to strategic community outcome and strategic priorities Performance Planning Local Government Solution (PPLGS) module within Technology One will be able to provide assistance. This will require further development to enable the capture of more data such as strategic priorities and designing dashboard style reporting Current Accountant Standards in Development ED 64 Leases This will replace IPSAS 13 Leases and departure of IFRS 16 Objective is to propose new lease accounting requirements covering both lessors and lessees Introduces a single right-of-use model for both lessees and lessors removing the finance/operating lease distinction. New public sector specific requirement for concessionary leases What is the right- to- use model? (shaded = new changes) Lessor Lessee Continues to recognise the underlying Recognises a right-of-use asset leased asset representing the value of the lease Recognises a lease receivable for its right to receive lease payments over the leases term Recognise liability (unearned revenue) Who is affected? Entities that lease assets as a lessee or lessor What s the impact on Lessees? contract Recognises a lease payment for its total lease payments over the lease term Leases will no longer be classified as operating or financing leases Right-to-use assets and liabilities will be recognised on balance sheet at present value (PV) of unavoidable future leases payments. Short-term and low value asset leases do not need to be recognised on balance sheet. Item 6.3 Page 26

7 Depreciation on right-to-use assets and interest on leases liabilities will be recognised in the income statement over leases term. In the cash flow, the total amount of cash paid will be separated into principal and interest. Leases expense will be typically front-loaded (see interest expense example below) PCC currently has 6 leases out of 17 that would be affected by this change. An example of how a lease would be accounted for under the new standard is below: BNZ lease - 3 years at borrowing rate 4.3% Cash flow and P&L 2016/ / / /2020 Lease payments (cash) 133, , ,150 Depreciation expense (P&L) 122, , ,469 Interest expense (P&L) 15,799 10,752 5,489 Total expense 138, , ,959 Balance Sheet Right-of-use asset 367, , ,469 - Lease Liability 367, , ,661 0 What s the impact on lessors? Recognises the leases receivable over the term of the leases Right-to-use assets and liabilities will be recognised on balance sheet at present value (PV) of unavoidable future leases payments. Short-term asset leases do not need to be recognised on balance sheet. This recognition is different to lessees whereby covers both short term and low value leases The majority of PCC leases will be affects by these changes. Currently PCC has 37 leases. An example of how a lease would be accounted for under the new standard is below: Lessor accounting: Lease to Carter Holt Harvey - 3 years Cash flow and P&L 2016/ / / /2020 Lease receipts (cash & P&L income ) 225, , ,918 Balance Sheet Lease Receivable (asset) 623, , ,112 - Unearned Revenue (liability) 623, , ,112 - (lease receivable recorded at present value of future lease payments) Concessionary leases Concessionary leases are leases below market terms and measured at fair value Accounted for in similar way to concessionary loans Item 6.3 Page 27

8 Avoid understatement of the right-to-use assets on balance sheet Ensures the subsidy received is recognised in P&L PCC currently does not have any concessionary leases. However, further investigation will need to be done. Are they any other changes? A new definition of a lease will result in some arrangement previously classified as leases to be so, and vice versa New guidance on sale and leaseback accounting New and different disclosures When are the changes effective? Annual periods beginning on or after 2019 Various transition relief Early application is permitted however PCC has opted not to adopt early ATTACHMENTS Nil Item 6.3 Page 28