Late Items Agenda of Ordinary Meeting - Thursday, 26 November 2020

BYRON SHIRE COUNCIL

Late Reports 17.1

Late Reports

Report No. 17.1 Draft 2019/2020 Financial Statements

Directorate: Corporate and Community Services

Report Author: James Brickley, Manager Finance

File No: I2020/1799

Summary:

At its 22 October 2020 Ordinary Meeting Council adopted the Draft 2019/2020 Financial Statements (Resolution: 20-549) and referred the statements to external audit. The audit of the financial statements had not been completed by the time of agenda delivery for the 26 November 2020 Ordinary Meeting due to the significant asset revaluations undertaken by Council and their outcome, requiring this late report given there is a deadline of 30 November 2020 to lodge the Financial Statements with the Office of Local Government.

Given the change (primarily around prior period error reporting) in the financial statements from those presented at the 22 October 2020 Ordinary Meeting, this report recommends to Council the readoption of the Draft 2019/2020 Financial Statements as prepared, and the completion of the statutory steps outlined in Section 418 to 420 of the Local Government Act 1993.

A representative from the NSW Auditor General contracted audit firm, Thomas Noble and Russell, will be attending the 17 December 2020 Ordinary Meeting to make a presentation to Council on the financial outcomes for 2019/2020.

RECOMMENDATION:

1. That Council adopts the Draft 2019/2020 Financial Statements incorporating the General Purpose Financial Statements (#E2020/94746) and Special Purpose Financial Statements (#E2020/94699).

2. That Council reapproves the signing of the “Statement by Councillors and Management” in accordance with Section 413(2)(c) of the Local Government Act 1993 and Clause 215 of the Local Government (General) Regulation 2005 in relation to the 2019/2020 Draft Financial Statements.

3. That the Audited Financial Statements and Auditors Report be presented to the public at the Ordinary Meeting of Council scheduled for 17 December 2020 in accordance with Section 418(1) of the Local Government Act 1993.

Attachments:

1 Draft 2019-2020 General Purpose Financial Statements, E2020/94746 , page 14⇩

2 Draft 2019-2020 Special Purpose Financial Statements, E2020/94699 , page 108⇩

3 Draft 2019-2020 Special Schedules, E2020/94700 , page 121⇩

REPORT

The Draft 2019/2020 Financial Statements were to be considered by the Audit, Risk and Improvement Committee on 14 November 2020. A verbal update was provided to that Meeting and it is expected a copy of this report and attachments will be provided to the Committee prior to this Ordinary Meeting of Council.

The Draft 2019/2020 Financial Statements will be considered again by Council at its Ordinary Meeting on 17 December 2020 where they will be presented to the public. At that Ordinary Meeting, a representative from the NSW Auditor General contracted audit firm, Thomas Noble and Russell, will be present to discuss the financial outcomes for 2019/2020 and answer any questions Councillors may have.

Council received a report on this matter at its 22 October 2020 Ordinary Meeting and whilst the financial results overall have not changed, there have been disclosure adjustments made following audit, particularly surrounding the recording of a prior period error regarding the revaluation of assets conducted in the 2019/2020 financial year as discussed further in this report.

The attachments provided with this report have had an initial review by the NSW Audit Office following review and audit by their contracted Audit firm, Thomas Noble and Russell. It is expected they will be the finalised results and should not change to an extent that will not enable Council to sign off the Draft 2019/2020 Financial Statements.

The Draft 2019/2020 Financial Statements provided in the attachments are broken down into:

- General Purpose Financial Statements – Attachment 1

- Special Purpose Financial Statements – Attachment 2

- Special Schedules – Attachment 3

As in previous years, Council produces Special Schedules that are not audited (except Permissible Income for General Rates). However from the 2018/2019 financial year, whilst the Special Schedules are still produced and submitted to the Office of Local Government, they are no longer required to be published as part of Council’s Financial Statements, except for the Special Schedules relating to Permissible Income for General Rates and Report on Infrastructure Assets.

Brief explanations for each item follow:

General Purpose Financial Statements

These Statements provide an overview of the operating result, financial position, changes in equity and cash flow movement of Council as at 30 June 2020 on a consolidated basis with internal transactions between Council’s General, Water and Sewerage Funds eliminated. The notes included with these reports provide details of major items of income and expenditure with comparisons to the previous financial year. The notes also highlight the cash position of Council and indicate which funds are externally restricted (i.e. may be used for a specific purpose only), and those that may be used at Council’s discretion.

Special Purpose Financial Statements

These Statements are a result of the implementation of the National Competition Policy and relate to those aspects of Council’s operations that are business oriented and compete with other businesses with similar operations.

Mandatory disclosures in the Special Purpose Financial Reports are Water and Sewerage.

Additional disclosure relate to Council business units that Council deems ‘commercial’. In this regard Council has traditionally reported its Caravan Park Operations, being Suffolk Beachfront Holiday Park and First Sun Holiday Park, on a combined basis. These financial reports must also classify business units in the following categories:

· Category 1 – operating turnover is greater than $2million

· Category 2 – operating turnover is less than $2million

AllCouncil’s business units are classed as Category 1 with all having operating turnover greater than $2 million.

Another feature of the Special Purpose Financial Reports is to build taxes and charges, where not physically incurred, into the financial results in order that the results can be measured on a level playing field with other organisations operating similar businesses, who are required to pay these additional taxes and charges. These taxes and charges include:

· Land tax – Council is normally exempt from this tax, so notional land tax is applied.

· Income tax – Council is exempt from income tax and in regard to these reports, company tax. Any surplus generated has a notional company tax applied to it.

· Debt guarantee fees – Generally due to the low credit risk associated with Councils, Councils can often borrow loan funds at lower interest rates then the private sector. A debt guarantee fee inflates the borrowing costs by incorporating a notional cost between interest payable on loans at the interest rate borrowed by Council and one that would apply commercially.

The Special Purpose Financial Reports are prepared on a non-consolidated basis - in other words they are grossed up to include any internal transactions with the General Fund.

Specific Items relating to 2019/2020 Draft Financial Statements

The Draft 2019/2020 Financial Statement results have been impacted by the following items that require explanation:

· Operating Result from Continuing Operations

The 2019/2020 financial year has seen a positive overall financial result. Council recorded a $23.778million surplus compared to the $13.022million surplus in 2018/2019. This result incorporates the recognition of capital revenues such as capital grants and contributions for specific purposes and asset dedications amounting to $32.021 million, compared to $21.109million in 2018/2019. Capital grants and contributions in 2019/2020 were significantly influenced by additional grant funding i.e. from the Election Commitment Grant, and recognising asset values for the former Byron Hospital over and above the $1 purchase price.

A more important indicator is the operating result before capital grants and contributions. This result was a deficit of $8.243 million in 2019/2020 compared to a deficit of $8.087million in 2018/2019, representing an increase of $0.156million between financial years. This indicates Council’s operating expenditures exceeded its operating revenues. Whilst operating revenues, excluding capital grants and contributions, grew by $0.467million, overall operating expenses grew by $0.623million. Considering the impacts of the COVID-19 pandemic during the later half of the 2019-2020 financial year, it could be considered that this is a reasonable outcome.

With reference to the Income Statement to the General Purpose Financial Reports included at Attachment 1, the following table indicates the major changes between 2019/2020 and 2018/2019 by line item:

Item	Change between 2019/2020 and 2018/2019 $’000	Change Outcome	Comment
Income
Rates & Annual Charges	+$3,251	Increase	Reflects imposition of the third year of the 7.50% Special Rate Variation and changes in annual charges from Council’s adopted 2019/2020 Revenue Policy
User Charges and Fees and Rental Income	-$2,057	Decrease	Incorporating the new line item of rental income to provide comparison to previous year, there has been a reduction of $2.057million. It is in this area that Council has realised most revenue losses from COVID-19. Revenue reductions include holiday parks $1.180million and pay parking fees $0.667million Further information is available in Note 3(b) to Attachment 1.
Other Revenues	-$367	Decrease	The major reduction in this item relates to fine revenues.
Grants & Contributions – Operating	+$302	Increase	Overall operating grants increased by $257k including $205k increase in the Financial Assistance Grant but contributions reduced by $325k. Further information is available in Note 3€ and Note 3(f) to Attachment 1.
Grants & Contributions – Capital	+$10,912	Increase	Revenue increases in this item are associated with grant funding for the Byron Bay Bypass and Election Commitment Grant. Additionally Council recognised former Byron Hospital assets at fair value compared to the purchase price of $1.
Interest and Investment Revenue	-$715	Decrease	Interest rates during 2019-2020 have fallen to historic lows plus liquidity measures by Reserve Bank during COVID-19 have reduced investment rates significantly, lowering the return on Council’s investments.
Net share of interests in associates	+53	Increase	Recognition of Byron Shire Council’s share of a surplus for Richmond Tweed Regional Library for 2019/2020
Total Income Change	+$11,379	Increase

Expenditure
Employee Benefits and Oncosts	+$2,908	Increase	Increased leave entitlement expenses of $143k reflecting emphasis on controlling leave balances and impact of declining interest rates on present value of liability calculations. There was a decrease of $88k of employee costs capitalised on capital works in 2019/2020 compared to 2018/2019 and gross salary and wages increased $2,884k. More information is provided at Note 5(a) to Attachment 1.
Borrowing Costs	-$1,053	Decrease	Reduction due to significant refinancing of sewerage loan in 2019/2020, ongoing repayment of existing loans and borrowing of new loans at lower interest rates given current market conditions.
Materials & Contracts	-$1,912	Decrease	Raw materials and contracts decreased overall as a result of increasing capital works spending along with reduction in the cost of the former Mullumbimby Hospital remediation of $0.942million compared to previous year. Other changes can be found at Note 5(c) to Attachment 1.
Depreciation	+$673	Increase	Respective changes between asset classes are outlined at Note 5(d) to Attachment 1. Essentially small incremental increases in each asset class.
Other Expenses	-$60	Decrease	Overall small but there were variations in line items as disclosed at Note 5(e) to Attachment 1.
Net Losses from Disposal of Assets	+$71	Increase	Reflection of the written down value of assets disposed of at the end of financial year and is contingent upon the extent of assets disposed and their written down value at the time of disposal which can vary. For 2019/2020, Council has more disposals than gains, including the disposal of infrastructure $2,516k, against plant and equipment $127k gain. Further details can be found at Note 6 to Attachment 1
Net share of interests in associates	-$4	Decrease	Recognition of Council’s share of the operating result of Richmond Tweed Regional Library for 2019/2020 was a surplus, not a deficit as it was in the previous year.
Total Expenditure Change	+$623	Increase

Change in Result	+$10,756	Increase	Increase in overall surplus between financial years.

Following from the operating results, are the performance ratios at Note 27(a) to the General Purpose Financial Statements. These have been derived following the financial assessments undertaken by NSW Treasury Corporation on all NSW Councils in 2012, and are now incorporated into the latest update to the Code of Accounting Practice and Financial Reporting that determines the content of Council’s Financial Statements. These ratios present either a stable or improving result for Council except for the following:

1. Operating Performance Ratio is a reflection of Council’s operating result. The benchmark is to be greater than 0% but in 2018/2019 Council’s ratio was -7.11% and in 2019/2020 it was -7.09%, a very slight improvement. This ratio was impacted by some one-off items i.e. demolition costs of the former Mullumbimby Hospital and revenue losses due to COVID-19, however Council will look to improve this result back towards the benchmark.

2. Outstanding, Rates and Annual Charges – Whilst still within the industry benchmark, Council’s ratio has increased to 7.32% in 2019/2020 from 4.63% in 2018/2019. The increase can be attributable not only to the third year of the special rate variation increases to annual charges but also the impact of the COVID-19 Pandemic. Through its assistance program Council has offered ratepayers extended payment arrangements and suspended debt recovery.

· Asset Revaluations

During 2019/2020, a revaluation of assets relating to Roads, Bridges, Stormwater Drainage and Community Land was undertaken. These revaluations have increased Council’s asset values by the following amounts:

· Roads – $6.148million

· Bridges – $9.010million

· Bulk Earthworks - $3.403million

· Footpaths - $0.698million

· Stormwater Drainage - $57.992million

· Community Land - $25.594million

· Crown Land - $10.693million

For the upcoming 2020/2021 financial year, Council will need to consider the revaluation of Operational Land and Building along with Open Space and Recreation assets given these assets have not been revalued since 2016.

· Prior Period Error Adjustment

The asset revaluation carried out during the 2019/2020 financial year also resulted in the recognition of prior period errors relating to roads, bridges, footpaths and stormwater drainage assets previously omitted being recognised, totalling $36.130million. The revaluation of Community Land also revealed overstatement of operational land related to a parcel of land with a dual classification of operational and community land valued at $9.143million. The net effect of this is recognition of a further $26.987million in asset values not previously recognised. Details of the prior period error are contained at Note 16(b) to the Draft 2019/22020 Financial Statements.

This error has occurred due to the following reasons:

1. The last comprehensive revaluations were carried out in 2015 for transport and drainage assets along with 2016 for community land.

2. Over this four to five year period Council has undertaken extensive asset inspections and data review, condition assessment of the entire road network, improved segmentation of the road network and reassessed stormwater drainage data.

3. Implementation of new capital value register system, removing asset financial data from being retained in spreadsheets to be now identified by distinct asset records in the Authority financial systems linked to the Authority Asset Management module.

4. Greater componentisation of assets able to be undertaken due to improved data collection following on from audit outcomes.

5. The previous revaluation undertaken in 2015 appears to have listed a significant number of existing assets with no value but without adequate explanation.

The ongoing effort Council is putting into asset management has shown the gains made in terms of understanding the quantum of Council’s assets, massively improving the quality of the asset data. Whilst the prior period error has required restatement of Council’s financial position back to 1 July 2018, it should be seen as a result of ongoing improvement in Council’s asset information. It is acknowledged that although the revaluation and recognition of assets previously omitted has increased the value of Council’s asset by in excess of $135million, which may seem difficult to grasp, substantial work has been undertaken to verify the asset data and to ensure assets are not duplicated.

· Asset Recognition

As indicated at Note 11 to Council’s financial statements, Council recognised $22.538million on asset renewals and $22.955million on new assets aside from any asset revaluations. The extent of asset renewals is significant and demonstrates ongoing commitment in that area. The depreciation expense of Council’s assets for 2019/2020 was $15.685million so it is pleasing to see that asset renewal was significantly more then the financial depreciation of Council’s assets. The draft 2019/2020 Financial Statements at Note 11(a) indicates $8.4million in new assets for Operational Land. This represents the value of land associated with the former Byron Bay Hospital. No value related to the buildings for the former Byron Bay Hospital has been included, as these assets would automatically then need to be impaired, as they are not able to be used for their intended purpose without redevelopment.

· Cash and Investments

As at 30 June 2020 (detailed at Note 7 to the financial statements), Council has maintained $0.724million in unrestricted cash and investments being a reduction of $0.276million compared to 2018/2019. This is a satisfactory result given the impacts of COVID-19 and the assistance Council has endeavoured to provide the community during these uncertain times.

Whilst still dealing with COVID-19 Council aims to restore one of its short term financial goals of reaching an unrestricted cash balance of $1million by the end of 2020/2021. All other cash and investments totalling $75.838million at 30 June 2020 are restricted for specific purposes. Overall the cash and investment position of Council decreased by $1.808million during the year.

· Receivables

As at 30 June 2020 (detailed at Note 8 to the financial statements), Council was due $9.674million in receivables. Of this amount $1.276million was due for Government Grants, $0.963million from the Commonwealth Government for Goods and Services Tax. Overall receivables increased by $1.287million compared to the 2018/2019 financial year if including Contract Assets disclosed at Note 12 of $2.8million that would have been classified as a receivable in 2018/2019.

· Payables and Provisions

At 30 June 2020 (detailed at Note 14 for payables and Note 15 for provisions), total payables by Council were $13.067million including $4.130million held in security bonds, deposits and retentions, $0.442million in accrued expenses and $8.007million payable to suppliers. In addition at 30 June 2020, Council has accrued employee leave entitlements valued at $6.776million. Specific employee leave entitlements include $2.348million for annual leave, $4.272million for long service leave and $0.156million for gratuities. In comparison to 2018/2019, total payables have increased by $1.149million whereas total provisions for employee leave entitlements increased by $0.924million.

· Loan Borrowings

During 2019/2020 Council borrowed new loans of $1.884million and continued to make normal loan repayments. Council has now borrowed the full $6million in loan funds it committed to as part of the 2017/2018 Special Rate Variation application to provide additional funding to infrastructure renewal.

Council’s outstanding loans as at 30 June 2020 are $62.835million. Total loan expenditure for 2019/2020 included interest of $3.305million and principal payments of $2.372million. Total expenditure in 2019/2020 related to loan repayments was $5.677million or 6.60% of Council’s revenue, excluding all grants and contributions.

The outstanding loans by Fund totalling $62.835million are as follows:

· General Fund $22.263million

· Water Fund $0 – Water Fund is debt free

· Sewerage Fund $40.572million

· New Accounting Standards

The 2019-2020 financial year has required Council to implement the following new accounting standards:

· AASB 15/AASB 1058 – Revenue from Contracts with Customers and Income of Not for Profit Entities

· AASB 16 – Leases

AASB15 and AASB 1058 have had the most impact on Council’s reported results. Council now has to disclose rates received in advance as a liability. Previously these were reported in receivables, effectively reducing receivables outstanding. At 30 June 2020 Council has $488k in prepaid rates which are now shown as a liability.

Council now also has to show advance bookings for its holiday parks as a contract liability instead of a payment in advance. Whilst ultimately still a liability, the change reflects the requirements of AASB15. Council historically has recognised grant revenues as revenue when received. The implications of AASB 15/AASB1058 now require revenue recognition when the obligations of the grant have been performed. At 30 June 2020, Council has $925k in unexpended capital grants now recognised as a contract liability. Previously this would have been recognised as revenue.

Council is also now identifying and disclosing contract assets at Note 12 of $2.8million relating to recognition of grant revenues based off expenditure but not shown as a receivable at Note 8 as Council has not yet reached the relevant milestone in the grant agreement in terms of timing or performance that prevents these amounts being shown as receivable. Once the milestone is reached the contract asset becomes a receivable.

Council is of the view that the implications of AAASB 16 concerning leases have an immaterial impact and therefore Council does not have any disclosure requirements.

The implementation of these new accounting standards does not require restating the previous year comparative and therefore this is not provided.

Liquidity

Council’s Statement of Financial Position (balance sheet) indicates net current assets of $58.161million. It is on this basis, in the opinion of the Responsible Accounting Officer, that the short term financial position of Council remains in a satisfactory position and that Council can be confident it can meet its payment obligations as and when they fall due. That is, there is no uncertainty as to Council being considered a ‘going concern’. In addition, Council’s cash expense cover ratio is at 8.76 months whereas the minimum benchmark is 3 months. Council exceeds this benchmark by nearly three times.

Council’s Unrestricted Current Ratio has declined from 3.65 to 3.08, demonstrating Council has $3.08 in unrestricted current assets compared to every $1.00 of unrestricted current liabilities. Whilst a slight decline on the previous year, Council is exceeding this benchmark by 2.05 times.

On a longer term basis Council will need to consider its financial position carefully. Nevertheless in isolation, the financial results for 2019/2020 continue to present a ‘stable’ financial position especially given the impacts of COVID-19. Every effort will be made to manage the trend towards operational deficits before capital grants and contributions. Furthermore, it will be a goal to endeavour to restore the unrestricted cash balance back to $1million during the course of the 2020-2021 financial year.

STRATEGIC CONSIDERATIONS

Community Strategic Plan and Operational Plan

CSP Objective

CSP Strategy

DP Action

OP Activity

Community Objective 5: We have community led decision making which is open and inclusive

5.5

Manage Council’s finances sustainably

5.5.2

Ensure the financial integrity and sustainability of Council through effective planning and reporting systems (SP)

5.5.2.2

Complete annual statutory financial reports

Legal/Statutory/Policy Considerations

Section 413(2)(c) of the Local Government Act 1993 and Regulation 215 of the Local Government (General) Regulation 2005 requires Council to specifically form an opinion on the financial statements. Specifically Council needs to sign off an opinion on the Financial Statements regarding their preparation and content as follows:

In this regard the Financial Statements have been prepared in accordance with:

· The Local Government Act 1993 (as amended) and the Regulations made thereunder.

· The Australian Accounting Standards and professional pronouncements.

· The Local Government Code of Accounting Practice and Financial Reporting.

And the content to the best of knowledge and belief:

· Presents fairly the Council’s operating result and financial position for the year.

· Accords with Council’s accounting and other records.

· Management is not aware of any matter that would render the Financial Statements false or misleading in any way.

Section 416(1) of the Local Government Act 1993, requires a Council’s annual Financial Statements to be prepared and audited within four (4) months of the end of that financial year i.e. on or before 31 October 2020. Due to the COVID-19 Pandemic, all Councils in NSW have been granted an extra month ie on or before 30 November 2020 for the 2019/2020 financial year.

Section 417(4) of the Local Government Act 1993 requires, as soon as practicable after completing the audit, the Auditor must send a copy of the Auditor’s Reports to the Departmental Chief Executive and to the Council.

Section 417(5) of the Local Government Act 1993 requires Council, as soon as practicable after receiving the Auditor’s Reports, to send a copy of the Auditor’s Reports on the Council’s Financial Statements, together with a copy of the Council’s audited Financial Statements, to the Departmental Chief Executive before 7 November 2020. Due to the COVID-19 Pandemic, all Councils in NSW have been granted an extra month ie on or before 7 December 2020 for the 2019/2020 financial year.

Section 418(1) of the Local Government Act 1993 requires Council to fix a date for the Meeting at which it proposes to present its audited Financial Statements, together with the Auditor’s Reports, to the public, and must give public notice of the date so fixed. This requirement must be completed within five weeks after Council has received the Auditors Reports.

Financial Considerations

There are no direct financial implications associated with this report as the report does not involve any future expenditure of Council funds but is a report advising on Council’s draft financial outcomes during the 2019/2020 financial year, which are identified in this report and attachments. It is expected the financial outcomes in this report will not change and the progress of the external audit that has been undertaken. Council is expecting the financial statements to be signed off by the NSW Audit Office on 27 November 2020.

Consultation and Engagement

Section 420 of the Local Government Act 1993 requires Council to provide the opportunity for the public to submit submissions on the Financial Statements. Submissions are to be submitted within seven days of the Financial Statements being presented to the public. In the case of the 2019/2020 Financial Statements, the closing date for submissions is expected to be 24 December 2020.