ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
Audit Committee
ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
AUDIT COMMITTEE MEETING 21 AUGUST, 2018
ITEM SUBJECT PAGE
ITEM-1 CONFIRMATION OF MINUTES
ITEM-2 DRAFT STATUTORY FINANCIAL STATEMENTS FY 2017/18
8
ITEM-3 INTERNAL AUDITORS REPORT 116
ITEM-4 GENERAL MANAGER'S EXPENSES 158
ITEM-5 STATUS REPORTS - AUDIT COMMITTEE MEETING 15 AUGUST 2017
159
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
MINUTES of the duly convened Audit Committee Meeting of The Hills Shire Council held in the Council Chambers Baulkham Hills on 15 August 2017
This is Page 1 of the Minutes of the Audit Committee Meeting of The Hills Shire Council held on 15 August 2017
ITEM SUBJECT PAGE
ITEM-1 CONFIRMATION OF MINUTES 3
ITEM-2 DRAFT STATUTORY FINANCIAL STATEMENTS 3
ITEM-3 INTERNAL AUDITORS REPORT 4
ITEM-4 IT SECURITY STRATEGY 4
ITEM-5 ACTING/GENERAL MANAGER'S EXPENSES 4
QUESTIONS WITHOUT NOTICE 5
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
MINUTES of the duly convened Audit Committee Meeting of The Hills Shire Council held in the Council Chambers Baulkham Hills on 15 August 2017
This is Page 2 of the Minutes of the Audit Committee Meeting of The Hills Shire Council held on 15 August 2017
77 PRESENT
Clr Y D Keane (Mayor, in the Chair) Clr M G Thomas
Clr A J Hay OAM Mr Trevor Bland Mr Michael Blair OAM
78 IN ATTENDANCE
Mr Michael Edgar – General Manager Ms Kerrie Wilson – Internal Auditor
Marc Upcroft - External Auditor, PricewaterhouseCoopers
79 APOLOGIES Clr Dr J N Lowe
Adjunct Professor Jim Taggart OAM
80 TIME OF COMMENCEMENT 7.04pm
81 TIME OF COMPLETION 8.52pm
82 DECLARATIONS OF INTEREST Nil.
83 ARRIVALS AND DEPARTURES Nil.
84 DISSENT FROM COUNCIL'S DECISIONS Nil.
85 ADJOURNMENT & RESUMPTION Nil.
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
MINUTES of the duly convened Audit Committee Meeting of The Hills Shire Council held in the Council Chambers Baulkham Hills on 15 August 2017
This is Page 3 of the Minutes of the Audit Committee Meeting of The Hills Shire Council held on 15 August 2017
ITEM-1 CONFIRMATION OF MINUTES
A MOTION WAS MOVED BY MR MICHAEL BLAIR OAM AND SECONDED BY MR TREVOR BLAND THAT the Minutes of the Audit Committee Meeting held on 15 June 2017 be confirmed.
THE MOTION WAS PUT AND CARRIED.
86 RESOLUTION
The Minutes of the Audit Committee Meeting held on 15 June 2017 be confirmed.
APOLOGIES
A MOTION WAS MOVED BY COUNCILLOR HAY OAM AND SECONDED BY COUNCILLOR THOMAS THAT the apologies from Councillor Dr Lowe and Adjunct Professor Jim Taggart OAM be accepted and leave of absence granted.
THE MOTION WAS PUT AND CARRIED.
87 RESOLUTION
The apologies from Councillor Dr Lowe and Adjunct Professor Jim Taggart OAM be accepted and leave of absence granted.
ITEM-2 DRAFT STATUTORY FINANCIAL STATEMENTS A MOTION WAS MOVED BY COUNCILLOR THOMAS AND SECONDED BY COUNCILLOR HAY OAM THAT
1. The presentation from Council’s External Auditor be received.
2. The Audit Committee advise Council that it does not agree with the amended methodology of the Financial Statements and recommends that Council adopt and accept the Draft Financial Statements consistent with Council’s current practice as printed in the Business Paper.
3. Council liaise with the Office of Local Government on their interpretation on the issue of valuing assets.
THE MOTION WAS PUT AND CARRIED.
88 RESOLUTION
1. The presentation from Council’s External Auditor be received.
2. The Audit Committee advise Council that it does not agree with the amended methodology of the Financial Statements, and recommends that Council adopt and accept the Draft Financial Statements consistent with Council’s current practice as printed in the Business Paper.
3. Council liaise with the Office of Local Government on their interpretation on the issue of valuing assets.
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
MINUTES of the duly convened Audit Committee Meeting of The Hills Shire Council held in the Council Chambers Baulkham Hills on 15 August 2017
This is Page 4 of the Minutes of the Audit Committee Meeting of The Hills Shire Council held on 15 August 2017
Councillors HAY OAM and Keane rose for a Division. The result of the Division was as follows:
VOTING FOR THE MOTION Clr Y D Keane (Mayor) Clr A J Hay OAM Clr M G Thomas Mr Trevor Bland Mr Michael Blair OAM
VOTING AGAINST THE MOTION None
ITEM-3 INTERNAL AUDITORS REPORT
A MOTION WAS MOVED BY COUNCILLOR THOMAS AND SECONDED BY MR TREVOR BLAND THAT the Recommendation contained in the report be adopted.
89 RESOLUTION The report be received.
ITEM-4 IT SECURITY STRATEGY
A MOTION WAS MOVED BY COUNCILLOR KEANE AND SECONDED BY COUNCILLOR HAY OAM THAT
1. The presentation be received.
2. A Briefing on Council’s Security be brought to a Councillor Workshop.
THE MOTION WAS PUT AND CARRIED.
90 RESOLUTION
1. The presentation be received.
2. A Briefing on Council’s Security be brought to a Councillor Workshop.
ITEM-5 ACTING/GENERAL MANAGER'S EXPENSES
A MOTION WAS MOVED BY MR MICHAEL BLAIR OAM AND SECONDED BY MR TREVOR BLAND THAT the Recommendation contained in the report be adopted.
THE MOTION WAS PUT AND CARRIED.
91 RESOLUTION
1. The report be received.
2. The expenses be noted (ECM No. 16056523).
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
MINUTES of the duly convened Audit Committee Meeting of The Hills Shire Council held in the Council Chambers Baulkham Hills on 15 August 2017
This is Page 5 of the Minutes of the Audit Committee Meeting of The Hills Shire Council held on 15 August 2017
QUESTIONS WITHOUT NOTICE
92 DRAFT STATUTORY FINANCIAL STATEMENTS
Councillor Hay OAM requested, in respect of the determination of the decision made in regards to the Draft Statutory Financial Statements, that the General Manager prepare a Motion that could be forwarded to the Local Government Conference in December in regards to the Council’s view. Would the General Manager be able to prepare this?
The Mayor noted that today LGNSW called an extra Board Meeting on 1 September 2017 and asked if the General Manager could prepare some words and she will include it on the Agenda for LGNSW.
93 REDUCTION IN RATES
Mr Bland requested an explanation for why rates had dropped from $95m to $85m this year, a drop of 12%, and expenses had stayed the same.
The General Manager noted this reflects the adjustment of the loss below the M2.
Somewhere in the order of $8m of services above the M2 were funded by the residents below the M2. It is noted that expenditure does not necessarily align to the geographical area it’s collected. Under the TSA Council was still responsible for maintaining the assets and reserves for a while but this has now been handed over. Council did not qualify for the $10m merger costs from the State Government because we were classified as an altered Council.
Council’s CFO, Mrs Saba, advised in the previous financial year there was a $3m loss on sale of assets. If you adjust for that, depreciation has increased between the 2 years, staff costs have reduced and material contracts had increased as Council was still providing waste management services to residents south of the M2.
94 THANK YOU TO THE MAYOR AND COUNCILLORS
Mr Blair OAM wished the incumbent Councillors standing at the next election all the success and thanked the Mayor for her service to Council.
The Minutes of the above Meeting were confirmed at the Audit Committee Meeting held on 21 August 2018.
MAYOR GENERAL MANAGER
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ORDINARY MEETING OF COUNCIL 11 SEPTEMBER 2018
AUDIT COMMITTEE MEETING 21 AUGUST, 2018
PAGE 8 ITEM-2 DRAFT STATUTORY FINANCIAL STATEMENTS
FY 2017/18
THEME: Proactive Leadership
OUTCOME: 3 Sound governance that values and engages our customers and is based on transparency and accountability.
STRATEGY: 3.3 Ensure Council is accountable to the community and meets legislative requirements and support Council’s elected representatives for their role in the community.
MEETING DATE: 21 AUGUST 2018
INTERNAL AUDIT COMMITTEE
GROUP: FINANCE AND ORGANISATIONAL PERFORMANCE
AUTHOR:
MANAGER FINANCE, INTEGRATED PLANNING &
REPORTING ANEESH ZAHRA
RESPONSIBLE OFFICER:
ACTING GROUP MANAGER FINANCE &
ORGANISATIONAL PERFORMANCE CHANDI SABA
BACKGROUND
On 7 August 2017, one week prior to the Audit Committee meeting last year, it was brought to our attention by the Auditors that they cannot accept the Land under Roads (LUR) valuation as it is not compliant with the Australian Accounting Standard. As a result a
“Qualified Audit Opinion” was issued in FY 16/17.
Audit Office had also questioned the valuation methodology for Community Land and the application of consumption based depreciation. Two workshops were held on 28 June 2018 and 7 August 2018 along with the Auditors to discuss these items in detail with the Councillors.
This report is tabling two sets of Financial Statements. First set (Attachment 1 – under separate cover) Non Generally Accepted Accounting Principles “Non- GAAP” is not incorporating the adjustments for Land under Roads and Community Land as this Council does not agree with the valuation methodology applied in relation to these items. These items are discussed later in this report. The second set (Attachment 2) has incorporated all the changes that are complying with the Australian Accounting Standards.
The Audit Office & Price Waterhouse Coopers (PwC) will present the draft financial statements to the Audit Committee at this meeting.
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PAGE 9 REPORT
Financial statements have been prepared and were distributed to the Auditors on 10 July 2018. The audit commenced on 16 July 2018. At the time of preparing this report, the audit was not finalised. The Audit Office may also discuss other issues which may arise between the time of writing this report and the finalisation of the audit.
1.0 Land under Roads (LUR)
Australian Accounting Standard AASB 13 (11) states that all assets must be measured at fair value and must take into account restrictions on the sale or use of the asset. One of the methods recommended by Office of Local Government (OLG) is the ‘Englobo’ method which requires applying a discount of 90% on the average value (Code of Accounting Practice Code #26 Appendix E page D-11)
Land under Roads was first brought into the Hills Shire Council books in 2009 at a valuation of $1.8 billion (based on an average residential unit value of $107 per sq/metre). It was last revalued in 2014 and as at 30 June 2017 this valuation was $2.4 billion. Although PWC has accepted this valuation in the past as complying with the Standard, Audit Office is of the view that it is not complying with the standard as it has not taken a restriction on use of the land. As such, FY 16/17 Financial Statements were “Qualified”.
In order to resolve this matter, various methods were submitted to the Audit Office, and the Audit Office has accepted the following method as complying with the Standard.
The underline road zoning in each suburb has been used in order to find an appropriate valuation being 90% of the residential, farmland or business rates in each suburb. The table below details the rate which was used for each underline road zone:
Road Zone Description Applicable Rate
B1 – B7 Business Business Rate
IN2 Industrial Business Rate
E 1 – E4 Environmental Business Rate
R1 – R4 Residential Residential Rate
RE1 – RE2 Recreational Residential Rate
SP2 – SP3 Special Purpose Residential Rate
RU1 – RU6 Rural Farmland Rate
Based on this revised methodology, Land under Roads will have a total value of $929m.
This revised valuation will not change the operating surplus in the Income Statement and financial ratios however it will result in an adjustment to Opening Equity value with a reduction of $ 1.5 billion.
2.0 Community Land
In the past Community Land acquisitions were shown at cost in the year of purchase and a revaluation of the whole class of assets were undertaken every five years along with a desktop revaluation each year to ensure that the carrying amount did not differ materially.
However up until FY 16/17, this practice was not requested by the previous audits.
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PAGE 10 As per Australian Accounting Standard AASB 116, all infrastructure assets must be initially recorded at cost, and subsequent measurement (day after the purchase date) must be at revalued amounts. This practice was not applied, in the previous audits as well.
AASB 13 states the revaluations must be at fair value and it must take into account the restrictions on the use of the asset. In the absence of private professional valuations which are very costly to obtain, Valuer General’s (VG) valuations are used for Community Land valuations after the initial purchase to conform to the standard.
AASB 116 (40) further states that if there is a decrease in the fair value, then the decrease can be netted off against Equity - Asset Revaluation Reserve (ARR) to the extent of any credit balance existing provided it is within the same asset class. The remaining balance, if any, has to be recognised in the Income Statement as a loss (revaluation decrement).
Community Land was last revalued in FY 15/16 using an average rate per square metre of all community land based on 2014 VG valuations. No write down was required for the FY 16/17 purchases ( $ 74.8m ) as the increase in book valuation using 2016 VG valuations ( $ 70.4m ) was sufficient to offset the write down that was required for the purchases in FY 16/17.
However, in FY 17/18, Council purchased Community Land totalling $61.6m at market value.
The VG’s value for these purchases is only $12m.This will result in Council taking a revaluation loss of $49.6m, $ 30.7m of this loss will be written off against the Asset Revaluation Reserve and the balance $18.9m will need to be shown as a loss to the Income Statement.
The Accounting Standards Board recognises this issue needs to be addressed as it is common to both Local & State Government. This standard is currently being reviewed and until a determination is made, Council is required to follow the standard.
3.0 Other Classes of Assets
The desktop valuation on all the other classes did not show any material difference that required an adjustment.
Operational Land was last revalued in June 2013. A desktop valuation based on ABS Price Index for Sydney Established Houses revealed a 64% increase since 2013, resulting in an increase of $ 74.5m. This adjustment resulted in an increase in Fixed Assets and the Asset Revaluation Reserve. Total Operational Land Holdings after this revaluation is $ 191m.
Audit Office has requested a Comprehensive Independent Valuation for Operational Land and Buildings be undertaken prior to 30 June 2019, as these classes are now over the 5 year cycle.
4.0 Depreciation
Council has been depreciating infrastructure assets on a consumption basis since FY 15/16.
Further guidance has been issued in this year’s code of accounting practice stating that if councils are using a depreciation method other than straight line, then councils need to have detailed systems and controls to support that alternative model. The Office of Local Government (OLG) prefers the use of straight-line method.
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AUDIT COMMITTEE MEETING 21 AUGUST, 2018
PAGE 11 Audit Office had requested management to assess whether there is a material difference between consumption based depreciation and straight-line depreciation. An assessment was undertaken and although the method was not changed to straight line, changes were made to the application of consumption based depreciation.
The main change was to apply a normal curve pattern instead of the steep curve pattern that has been applied since FY 15/16. When a steep curve pattern is applied, it has minimal amounts of depreciation in the early years and it suddenly increases to very large amounts towards the end of its useful life.
At the Hills Shire Council, depreciation amounts are used as a guide to set funds aside for future renewal of assets, it is prudent to change this pattern now so that sufficient funds are available in the future when these assets require renewal.
The table below shows the amounts expensed as depreciation prior to implementing consumption based depreciation from FY 15/16.
Financial Year $’000
2012/2013 18,258
2013/2014 18,991
2014/2015 20,233
2015/2016 12,855
2016/2017 13,363
2017/2018 21,514
Furthermore an analysis was undertaken to compare the amounts shown as Depreciation (FY 16/17) in other Local Government areas and The Hills Shire Council amounts are the lowest, in this group of Councils.
Rank Council FY 16/17
$’000
1 Blacktown City Council 70,371
2 Wollongong City Council 61,271
3 Parramatta City Council 46,983
4 Liverpool City Council 34,034
5 Penrith City Council 26,198
6 Campbelltown City Council 20,582
7 Hawkesbury City Council 18,594
8 The Council of the Shire of Hornsby 16,885
9 Blue Mountains City Council 15,969
10 The Hills Shire Council 13,363
It is recommended that Council change the pattern from a steep curve to normal curve effective FY 17/18 and this change will result in an increase in depreciation expense for the year by $ 8.2m compared to previous year.
This will affect the operating surplus in the Income Statement and ratios such as the Operating Performance Ratio and Asset Renewals Ratio. However these are still above
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PAGE 12 benchmark and the change to normal curve reflects a better pattern of consumption for these assets.
5.0 Income Statement
Table below details the difference between the Non- GAAP and Draft Financial Statements.
As at 30 June 2018
Attachment 2
Before LUR &
Community Land adjustments
Com Land Changes discussed
in this report
After LUR &
Community Land adjustments
$’000 $’000 $’000
Rates & Annual Charges 92,202 - 92,202
User Charges & Fees 21,587 - 21,587
Investment Revenues 10,829 - 10,829
Other Revenues 8,235 - 8,235
Grants & Contributions (Operating) 18,293 - 18,293
Grants & Contributions (Capital) 139,340 - 139,340
Gain/Loss on Sales of Assets 915 - 915
Total Income 291,401 - 291,401
Employment Costs 51,248 - 51,248
Materials and Contracts 39,934 - 39,934
Depreciation and Amortisation 21,514 - 21,514
Other Expenses 32,394 - 32,394
Revaluation Decrement IPPE - 18,895 18,895
Total Expenses 145,090 18,895 163,985
Surplus/Operating result 146,311 (18,895) 127,416
These changes will not change the Budget Format result or any of the following Financial Ratios as these are all non-cash adjustments.
As at 30 June 2018 Attachment 2
Benchmark Before LUR &
Community Land adjustments
After LUR &
Community Land adjustments
Operating Performance Ratio > = 0.00% 11.99% 11.99%
Unrestricted Current Ratio 1.50x 17.05x 17.05x Asset Renewals Ratio > = 100% 102.81% 102.81%
6.0 Balance Sheet
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AUDIT COMMITTEE MEETING 21 AUGUST, 2018
PAGE 13 Table below details the difference between the Non- GAAP and Draft Financial Statements.
Attachment 2
Statutory Format before
LUR &
Community Land Adjustments
LUR Adjustment
Community Land Adjustment
Statutory Format after
LUR &
Community Land Adjustments
$’000 $’000 $’000
Current Assets 429,779 - - 429,779
Non-Current Assets 4,800,075 (1,466,855) (49,568) 3,283,652 Total Assets 5,229,854 (1,466,855) (49,568) 3,713,431
Current Liabilities 49,252 - - 49,252
Non-Current
Liabilities 761 - - 761
Total Liabilities 50,013 - - 50,013
Equity B/F 5,033,530 (1,466,855) (30,673) 3,536,002
Surplus FY 17/18 146,311 (18,895) 127,416
Total Equity 5,179,841 (1,466,855) (49,568) 3,663,417
The changes discussed above will result in a reduction of Equity from $5.18 billion to $3.66 billion in FY 17/18.
IMPACTS Financial
This matter will not have a direct impact upon Council’s budget format surplus reported for FY 17/18.
Strategic Plan - Hills Future
The review and audit of the Councils financial statements ensure that the Council is accountable to the community and meets its legislative requirements.
RECOMMENDATION
1. The presentation from Council’s External Auditor be received.
2. The Non-GAAP Financial Statements (Attachment 1) without the adjustments for Land under Roads and Community Land be received.
3. The Financial Statements (Attachments 2) as required by Section 413 of the Local Government Act 1993 be referred to Council on 28 August 2018 and the external auditor is requested to present his findings at that meeting.
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PAGE 14 ATTACHMENTS
1. NON-GAAP Financial Report for year ended 30 June 2018, Special Purpose Financial Reports for year ended 30 June 2018 and Special Schedules for year ended 30 June 2018 without the adjustments for Land under Roads & Community Land. (Distributed under Separate Cover) (96 pages) (ECM Doc No. 17166590).
2. General Purpose Financial Report for year ended 30 June 2018, Special Purpose Financial Reports for year ended 30 June 2018 and Special Schedules for year ended 30 June 2018 (99 pages) (ECM Doc No. 17166591).
3. Statement required by Section 413 of the Local Government Act, 1993 (1 page) (ECM Doc No. 17166592).
4. Statement required by the Local Government Code of Accounting Practice (1 page) (ECM Doc No. 17166589).
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