NSW Audit Office - Awareness - Issue 2003 08 - September 2003

The Audit Office Of New South Wales

Description

AWARENESSccounting and Auditing Developments Issue 8 SEPTEMBER 2003AUDIT OFFICE 1AUDIT OFFICE UPDATEUPDATESYDNEY WATER CORPORATION: ACCOUNTING 2NORTHSIDE STORAGE TUNNEL PROJECTUPDATEProviding public infrastructure is a fundamental role of government. Unfortunately, governments do not always handle this role as well as they should. All too often, URGENT ISSUES 5projects are completed late and/or over budget, do not deliver the benefits GROUP UPDATEexpected, or are subject to continuing litigation.INTERNATIONAL 6This audit examined a major sewerage infrastructure project - Sydney Water’s UPDATE$466 million Northside Storage Tunnel. It focuses on the form of the contractual relationship with the private sector. The Tunnel represents the first major MISCELLANEOUS 8construction project in NSW delivered through an ‘alliance’ between the public and PUBLICATIONSprivate sectors. LEGISLATIVE 10Major infrastructure projects delivered under the traditional approach can be CHANGES UPDATEplagued by costly and time-consuming disputes. In an alliance, the asset owner and its partners adopt a team approach. They share both the costs of underachievement TREASURY 10and the rewards of a job well done. They seek to resolve problems, rather than UPDATEallocate blame. An alliance, however, brings its own risks. One is not getting the incentives and sanctions right. Another is that the parties become too close. The PREMIER’S 11owner needs to ensure that the ...

Informations

• Publié par: Zaur
• Nombre de lectures: 18
• Langue: English

Extrait

Acco A unting and W Auditing De A velopmen R tsIssue 8 E SEPTEMBE N R 2003 ESS

AUDIT OFFICE UPDATE

SYDNEY WATER CORPORATION: NORTHSIDE STORAGE TUNNEL PROJECT

Providing public infrastructure is a fundamental role of government. Unfortunately, governments do not always handle this role as well as they should. All too often, projects are completed late and/or over budget, do not deliver the benefits expected, or are subject to continuing litigation.

This audit examined a major sewerage infrastructure project - Sydney Water’s $466 million Northside Storage Tunnel.It focuses on the form of the contractual relationship with the private sector. The Tunnel represents the first major construction project in NSW delivered through an ‘alliance’ between the public and private sectors.

Major infrastructure projects delivered under the traditional approach can be plagued by costly and time-consuming disputes. In an alliance, the asset owner and its partners adopt a team approach. They share both the costs of underachievement and the rewards of a job well done. They seek to resolve problems, rather than allocate blame. An alliance, however, brings its own risks. One is not getting the incentives and sanctions right. Another is that the parties become too close. The owner needs to ensure that the alliance delivers value for money and that the principles of accountability and transparency so integral to the public sector are not compromised.

Opinion

The outcome of the project suggests that an alliance approach, when applied to a suitable project and managed appropriately, can support positive outcomes. And in many respects the Northside Storage Tunnel Alliance worked well. For example, the flexibility with which the alliance responded to ensure that, while not complete, the tunnel could have taken some overflows during the Olympics demonstrates an advantage of alliancing. This result would have been difficult to achieve under a conventional contract. Disputation would have been more likely. There are, however, a number of issues that we believe need to be addressed for future alliances.

There is a need to ensure that a ‘value for money’ outcome is clearly demonstrated in any future alliances of this type. There is insufficient evidence available to judge whether the cost of the tunnel represents ‘value for money’.

The flexibility available in an alliance gives rise to risks that need to be managed.

Awarenessis published by The Audit Office of New South Wales, 234 Sussex Street, Sydney NSW 2000, GPO Box 12, Sydney NSW 2001Telephone[phone]Fax[phone] [e-mail]

AUDIT OFFICE UPDATE

ACCOUNTING UPDATE

URGENT ISSUES GROUP UPDATE

INTERNATIONAL UPDATE

MISCELLANEOUS PUBLICATIONS

LEGISLATIVE CHANGES UPDATE

TREASURY UPDATE

PREMIER’S DEPARTMENT UPDATE

AUDIT OFFICE BETTER PRACTICE GUIDES

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For instance, rearranging work so that the tunnel could have accepted overflows during the Olympics resulted in Sydney Water paying more and accepting more risk, a reward for its partners being made easier to obtain and negation of a substantial potential penalty for late completion.

Effective governance and oversight were important given the tight deadline, the size and sensitivity of the project, and the adoption of a new approach to managing a major project and its associated risks. Our view is that Sydney Water’s governance of the project was not as robust as it should have been.

As with most major projects undertaken for the first time there are lessons to be learned. Sydney Water has applied the knowledge gained from the tunnel to subsequent alliances.

Further Information

Mr Denis Streater Director Performance Audit on 02 9285 0075 or email: [e-mail].

The report was issued on 24 July 2003 and can be accessed at http://www.audit.nsw.gov.au.

ACCOUNTING UPDATE

As part of the process to converge Australian Accounting Standards with International Reporting Standards, the Australian Accounting Standards Board (AASB) has issued the following Exposure Drafts. The preface to each Exposure draft:

Compares the requirements in the International Standard to those in the current Australian equivalent

Identifies differences between the International Standard and the equivalent International Public Sector Standard (IPSAS)

Proposes Amendments to the current Australian equivalent, and

Seeks comments on specific issues.

ED 118 REQUEST FOR COMMENT ON IAS 11 CONSTRUCTION CONTRACTS

The Exposure Draft identifies the following incompatibilities between AASB 1009 and IAS 11:

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When the collectability of contract revenue becomes doubtful, IAS 11 requires that the uncollectable amount be recognised as an expense rather than an adjustment to contract income. AASB 1009 only requires the uncollectible amount to be recognised as an expense when it is due to the customer’s inability to pay.

IAS 11 explicitly requires an expected loss on a construction contract to be recognised immediately as an expense, even though the outcome of the contract cannot be estimated reliably. AASB 1009 does not have an equivalent statement but the requirement may be implied

Under AASB 1009 amounts due to and from customers for contract work can be set off when a right of set off exists under AASB 1014. IAS 11 requires gross amounts due to or from customers to be disclosed.

The Audit Office of New South Wales

The Exposure Draft discusses the following areas where the level of guidance differs between the Standards:

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Definition of a contractor

Definition of a construction contract

Contracts in progress.

The main difference between International Public Sector Accounting Standard (IPSAS) 11 and IAS 11 is that the former includes binding arrangements that are not legal documents within the scope of a “construction contract”. This would include a ministerial direction, a legislative direction, or a memorandum of understanding.

In addition IPSAS 11 states that the requirement to recognise an expense for the expected deficit on a contract immediately after it becomes probable that the total contract costs will exceed total contract revenues only applies to commercial or full cost recovery contracts.

The proposed Standard is to be operative for annual reporting periods beginning on or after 1 January 2005.

The comment period ends on 30 September 2003.

ED 119 REQUEST FOR COMMENT ON IAS 14 SEGMENT REPORTING

A possible difference between IAS 14 and AASB 1005 may arise from the different treatment of proceeds from the sale of non-current assets. However, this possible difference arises from differences between AASB 1004Revenueand IAS 18Revenue. Under AASB 1004 the proceeds of sale of non-current assets is treated as revenue. In contrast IAS 18 treats the difference between the proceeds from the sale and the carrying amount of a non-current asset as revenue. This difference may lead to different reportable segments being identified under IAS 14 and AASB 1005.

There are no disclosure differences between AASB 1005 and IAS 14. However IAS 36 Impairment of Assets sets out certain disclosure requirements for reporting impairment losses by segment.

The nature of segment reporting issues for not-for-profit entities are different than those facing for-profit entities. AASB 1005 does not apply to not-for-profit entities including reporting entities to which AAS 27 Financial Reporting by Local Governments, AAS 29Financial Reporting by Government Departments and AAS 31Financial Reporting by Governmentsapply. These Standards include requirements relating to the disclosure of disaggregated information. The AASB will consider the International Public Sector Accounting Standards IPSAS 18Segment Reportingas part of a separate project on segment reporting by not-for-profit entities and not as part of the current project to adopt IAS 14.

The proposed Standard is to be operative for annual reporting periods beginning on or after 1 January 2005.

The comment period ends on 30 September 2003.

The Audit Office of New South Wales

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ED 120 REQUEST FOR COMMENT ON IAS 16 AND IPSAS 17 PROPERTY, PLANT AND EQUIPMENT

The Exposure Draft identifies the following incompatibilities between AASB 1015 and IAS 16:

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AASB 1015 requires that, when determining an asset’s cost at its acquisition date, any deferred settlement cash consideration is discounted to its present value. AASB 1015 requires that the discount rate used to determine the discounted cash consideration is the entity’s pre-tax incremental borrowing rate. In contrast, IAS 16 does not specify a discount rate. IAS 16 comments that where payment for an item of property, plant and equipment is deferred beyond normal credit terms, its cost is the cash price equivalent. This implies that the deferred payment amount is effectively discounted at a rate specific to the asset. Where the entity’s incremental borrowing rate differs from the asset specific discount rate the acquisition cost will differ. If the asset is a depreciable asset, the amount of depreciation will also differ.

IAS 16 requires that a revaluation decrease be charged directly against any related revaluation surplus. This is to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset. In contrast AASB 1041 requires revaluation increments/ decrements to be offset against one another within a class of non-current assets.

AASB 1041 and IAS 16 allow changes between the cost basis and the fair value basis. However, unlike AASB 1041, IAS 16 limits the choice between measurement attributes to either:

fair value; or

historical cost, namely, the treatment in accordance with IAS 16, which is the “original” historical cost less any accumulated depreciation and accumulated impairment losses.

In contrast, AASB 1041 does not allow the use of original cost when discontinuing the revaluation of a class of non-current assets. Instead AASB 1041 requires that assets be measured at their carrying amounts at the date the revaluation of the class was discontinued, less any subsequent accumulated depreciation and subsequent accumulated recoverable amount writedowns or impairment losses. Accordingly, where an entity can justify changing from the fair value basis, the application of the requirements in IAS 16 and AASB 1041 will give rise to different carrying amounts.

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IAS 16 comments that exchanges of items of property, plant and equipment (regardless of whether the assets are similar) are measured at fair value. The exception is that when the fair value of neither of the assets exchanged can be determined reliably, the cost of the asset acquired is measured at the carrying amount of the asset given up. AASB 1015 assumes that fair value can always be measured in an exchange.

The Exposure Draft discusses the following areas where the level of guidance differs between the Standards: 1. Revaluation of depreciable assets 2. Measurement on initial recognition of assets acquired at no or nominal Consideration 3. Enhancements that do not directly increase future economic benefits 4. Restoration costs 5. Cost of an item of property plant and equipment 6. Revenue and related expenses incidental to construction or development 7. Current valuations 8. Cost equivalent of revalued carrying amount 9. Revalued assets.

The Audit Office of New South Wales

Set out below are differences between IAS 16 and IPSAS 17 for which not-for-profit specific paragraphs have been included in the ED.

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IPSAS 17 requires that, where an asset is acquired for no or nominal cost, the asset’s cost be measured at fair value on the date of acquisition. It is considered that such transactions are common in the not-for-profit sector and that specific guidance is appropriate.

It is anticipated that the individual asset approach to revaluations in IAS 16 would be onerous for not-for-profit entities. Therefore, for practical reasons, the AASB proposes to require the class approach to revaluations for not-for-profit entities, as required by IPSAS 17. The IAS 16 approach is proposed for the for-profit sector.

IAS 16 requires, where an asset is measured at fair value, that the carrying amount of the asset, had it been measured at cost, be disclosed. Neither AASB 1041 nor IPSAS 17 require this additional disclosure. The AASB’s preferred approach is that adopted in IPSAS 17. The disclosure requirement is proposed for the for-profit sector in accordance with the AASB’s convergence policy. However, it is not proposed to require not-for-profit entities to make such disclosures.

The proposed Standard is to be operative for annual reporting periods beginning on or after 1 January 2005.

Comments on the proposed adoption of IAS 16 and relevant parts of IPSAS 17 end on 30 September 2003.

URGENT ISSUES GROUP UPDATE Meeting 7 August 2003

UIG ABSTRACT 54 DEFINED BENEFIT SUPERANNUATION DISCLOSURES BY 1 EMPLOYERS

The Consensus requires that employers disclose:

for each superannuation plan and in aggregate, accrued benefits and the net market value of the plan assets

the difference between the two preceding items, and vested benefits as disclosed in the most recent financial report of the superannuation plan; and

where available, more recent information of the amount of any of the above items, its basis and date of preparation.

The Consensus applies for reporting periods ending on or after 7 August 2003.

EMPLOYER’S MINIMUM SUPERANNUATION RETURN GUARANTEE

The UIG considered a proposed draft International Financial Reporting Interpretations Committee (IFRIC) Interpretation “Money Purchase Plans with a Minimum Return Guarantee”. The Interpretation proposes to account for those components of these plans having the characteristics of defined benefit plans in accordance with IAS 19 “Employee Benefits”. The UIG was of the view that the issue addressed in the draft Interpretation is not a significant issue in Australia and agreed to monitor the IFRIC project.

1 Refer issue 5 June 2003 Awareness

The Audit Office of New South Wales

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CHANGES IN DECOMMISSIONING, RESTORATION AND SIMILAR LIABILITIES

UIG members considered a proposed draft IFRIC Interpretation “Changes in Decommissioning, Restoration and Similar Liabilities”.

UIG members were concerned that the retrospective approach to the treatment of a change in accounting estimate proposed by IFRIC was not consistent with the approach to the treatment of a change in accounting estimate in the proposed improved IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. Members agreed to highlight this apparent inconsistency in the UIG’s submission to IFRIC.

REVIEW OF UIG ABSTRACTS FOR 2005

Members continued their review of UIG Abstracts and International Interpretations to identify differences between them. The review will enable the members to identify changes in practice expected from 2005 under the adoption of the International Interpretations, in conjunction with the AASB’s program to adopt International Standards by 2005.

Members considered Abstracts 13 to 53 and formally withdrew the following Abstracts, subject to veto

by the AASB:

Abstract 2 “Accounting for Non-Vesting Sick Leave”

Abstract 6 “Accounting for Acquisitions – Deferred Settlement of Cash Consideration”

Abstract 8 “Accounting for Acquisitions – Recognition of Restructuring Costs as Liabilities”; and

Abstract 12 “Accounting for the Costs of Modifying Computer Software for the Year 2000”.

Members noted that some Abstracts reviewed have been superseded by subsequent Australian Standards already on issue, or are no longer relevant. Members agreed that the following Abstracts should be formally withdrawn at the next meeting, subject to confirmation by the AASB:

Abstract 15 “Early Termination of Foreign Currency Hedges”

Abstract 18 “Early Termination of Gold Hedges”

Abstract 26 “Accounting for Major Cyclical Maintenance”

Abstract 35 “Disclosure of Contingent Liabilities”; and

Abstract 48 “Status of Tax Consolidation Legislation”.

The next meeting will be held on the 18 September 2003 in Melbourne.

INTERNATIONAL UPDATE

CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS

The International Federation of Accountants (IFAC) is recommending that the Code be elevated from a “model code” on which to base national requirements to a “standard,” requiring IFAC member body compliance. This change is part of IFAC’s overall efforts to work with its member bodies to raise the quality of practice by accountants worldwide.

The Audit Office of New South Wales

The proposed Code expands guidance for all individual accountants addressing integrity, objectivity, professional competence, confidentiality, and professional behaviour. Clearer identification of threats and safeguards are set out for professional accountants in public practice in the areas of second opinions, fees and remuneration, and custody of client assets.

The proposed Code also provides new and in-depth guidance for professional accountants in business by addressing issues such as potential conflicts, preparing and reporting information, financial interests, inducements, and disclosing of information.

Comments are requested by November 30, 2003.

INTERNATIONAL ACCOUNTING STANDARDS BOARD MEETING (IASB)

ON 22-24 JULY 2003

Key matters from the meeting included:

Business combinations (phase 1)

The Board reaffirmed its previous conclusions that:

Goodwill on a business combination should be initially recognised as an asset

subsequent accounting for goodwill should be by way of impairment rather than amortisation

an entity should assess at each balance date whether there are potential impairments

reversals of impairment losses recognised for goodwill are prohibited.

The Board also agreed to amend the paragraphs dealing with:

allocating goodwill to cash-generating units

timing of impairment tests for intangible assets that have indefinite useful lives to be consistent with that for goodwill

value in an asset’s use.

Other matters discussed included:

Convergence issues

Disclosures of risks arising from and other disclosures relating to financial instruments

Financial instruments

Improvements to existing IFRSs

Measurement objectives

Reporting comprehensive income

Revenue recognition

Share-based payment

Small and medium sized entities.

The Audit Office of New South Wales

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REBUILDING PUBLIC CONFIDENCE IN FINANCIAL REPORTING: AN INTERNATIONAL PERSPECTIVE

The above report was commissioned by IFAC and developed by an independent task force. It includes recommendations for strengthening corporate governance and improving audit effectiveness.

The report’s recommendations are built on three basic assumptions:

the credibility of financial reporting is both an issue in each country and an international issue, with action required at both levels

to improve credibility in financial reporting, action will be necessary at all points in the supply chain that delivers financial information

integrity both individual and institutional-is essential for building confidence in financial reporting, and, therefore, needs to be fostered.

Specific recommendations include the following:

effective corporate ethics codes need to be in place and actively monitored; such codes should be supported by training

Codes of conduct need to be put in place for other participants in the financial reporting process - such as investment analysts and lawyers - and their compliance should be monitored

incentives to misstate financial information need to be reduced, and companies must refrain from forecasting profits with an unrealistic level of precision

audit effectiveness needs to be raised, primarily through greater attention to audit quality control processes.

The report is available at www.ifac.org/credibility.

MISCELLANEOUS PUBLICATIONS

THE A TO Z OF GOOD CONDUCT AND ADMINISTRATIVE PRACTICE: “BIAS, BAD FAITH AND BREACH OF DUTY” “CONFLICTS OF INTEREST”

The above fact sheets issued by the NSW Ombudsman summarises and addresses key issues affecting public sector agencies and their officials.

The fact sheets note that public officials are under an obligation to conduct their official duties in good faith, fairly and impartially. Failure to do so is likely to constitute misconduct involving bad faith, bias or breach of public duty.

The fact sheets may be obtained at: www.ombo.nsw.gov.au.

The Audit Office of New South Wales

PUBLIC AUDIT FORUM: AUDIT IMPLICATIONS OF ELECTRONIC SERVICE DELIVERY IN THE PUBLIC SECTOR

This paper explains the audit implications of the integrated electronic service delivery envisaged in the 1999 Modernising UK Government White Paper. In the public services, it is essential that electronic service delivery does not cause erosion of accountability. There is, therefore, a particular public sector audit need for some basic guidance on the audit implications of electronic service delivery, both for auditors and management.

The delivery of public sector services over electronic networks does not give rise to new audit objectives, but it does result in new risks that need to be addressed by management and assessed by auditors in their audit planning work.

Management needs to be able to convince interested parties, especially their auditors, that their electronic records are reliable. This entails demonstrating that the controls that protect the records are appropriate to the value of the records and that they are working consistently. From an audit point of view, this means evaluating the control environment that protects business information before using that information to form an audit opinion. In a paperless system, evidence of the continuous operation of controls is more important than individual transaction records. This is because the failure of a control, or lack of evidence of its operation, will cast doubt on all the records affected by that control.

The Public Audit Forum was established in the UK IN 1998. It brings together the national audit agencies on a purely advisory basis to provide a focus for development thinking about public audit.

The paper can be accessed at: http://www.public-audit-forum.gov.uk/2148RA_PAF.pdf.

AUSTRALIAN NATIONAL AUDIT OFFICE REPORTS:

Administration of Three Key Components of the Agriculture-Advancing Australia (AAA) Package

Audit Activity Report: January to June 2003

Public Sector Governance

These reports are available at www.anao.gov.au.

QUEENSLAND AUDIT OFFICE REPORTS:

QAO Audit Engagement Terms and Conditions

Better Practice Guidelines for Non-Current Assets-Amended July 2003

These reports are available at www.qao.qld.gov.au.

OFFICE OF THE AUDITOR-GENERAL FOR WESTERN AUSTRALIA REPORT:

Management of Marine Safety and Sea Search and Rescue

This report is available at www.audit.wa.gov.au.

The Audit Office of New South Wales

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INDEPENDENT COMMISSION AGAINST CORRUPTION (ICAC) PUBLICATION

Report on an Investigation into the Conduct of the Hon.Malcolm Jones MLC

This report is available at www.icac.nsw.gov.au.

LEGISLATIVE CHANGES UPDATE

ANNUAL REPORT (STATUTORY BODIES) AMENDMENT REGULATION 2003

The object of this Regulation is to amend theAnnual Reports (Statutory Bodies) Regulation 2000to remove the requirement set out in clause 8 (2) (c) of that Regulation and instead provide that the annual report of a statutory body must comprise:

a statement of the total external costs (such as fees for consultants and printing costs) incurred in the production of the report, and

a statement as to whether the report is available in non-printed formats (such as on the Internet or on CD ROM), and

if the report is available on the Internet, particulars of the Internet address at which the report may be accessed.

(Commencement of this Regulation is 1 August 2003, GG No 121 1 August 2003 p 7531).

ANNUAL REPORT (DEPARTMENT) AMENDMENT REGULATION 2003

The object of this Regulation is the same as for theAnnual Report (Statutory Bodies) Amendment Regulation 2003refer above.

(Commencement of this Regulation is 1 August 2003, GG No 121 1 August 2003 p 7534).

TREASURY UPDATE

TREASURY CIRCULAR TC 03/11 CHANGE TO ANNUAL REPORTING REGULATIONS

This Circular discusses the implications of the changes to the annual reporting regulations-refer preceding article.

The new requirements apply in respect of annual reports of agencies prepared for financial periods ending on or after 30 June 2003.

For further information regarding Agency specific issues contact your Treasury RAD Analyst on 9228 4567. For Policy Issues contact Financial Legislation and Accounting Policy on 9228 4095

The Audit Office of New South Wales

August 2003

June 1998

August 2003

Date issued October 2001 September 2001 June 2001 June 2001

PREMIER’S MEMORANDUM

Issued

PREMIERS DEPARTMENT UPDATE

no date given

PREMIER’S DEPARTMENT CIRCULAR’S

August 2003

2003-33

2003-34

Number

April 1998 January 1997 September 1996 December 1995

November 2000 June 1999 April 1999

September 1995

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March 1994 March 1998

Issued

August 2003

Number

no date given

Title of Guide Management of Intellectual Property e-ready, e-steady, e-government: e-government readiness assessment guide Monitoring and reporting on performance audit recommendations Internal Financial Reporting Reporting Performance: a guide to preparing performance information for annual reports Contracting Out Review Guide Public Sector Corporate Governance - ready reckoner Methodology for the Review of Residential Services for People with Disabilities On Board: Guide to better practice for public sector governing and advisory boards The Corporate Credit Card: guidelines for the internal control Ambulance Service of New South Wales: debtors administration Ethnic Affairs Commission: administration of grants Joint Operations in the Education Sector: a review of establishment, management and effectiveness issues Fraud Control: developing an effective strategy  Volume 1: conceptual framework  Volume 2: strategy  Volume 3: diagnostics  Volume 4: Fraud Control Self Audit Kit

The Audit Office of New South Wales

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AUDIT OFFICE BETTER PRACTICE GUIDES

2003-08

2003-09

Donations of Redundant Computers to the Reconnect. NSW Program

Training on Merit Selection Techniques

Variation to the Crown Employees (Public Sector Conditions of Employment) Award 2002

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The Audit Office produces guides to better practice to assist agencies. The following is a list of those guides and the dates that they were published. All these guides are available on the Audit Office website at www.audit.nsw.gov.au/guides-bp/bpgilest.htm.

Premier’s Department Restructure-Public Employment Office

Statute Law Revision Program

Increase in Parking Space Levy