The benefits of early end of financial year planning for asset managers
Preparing for end of financial year (EOFY) auditing is often a busy and stressful time for asset accountants within councils across Australia, especially if things have been left to the last minute. Fortunately, there’s a way to take the headache out of EOFY and keep asset registers current—and it comes down to early planning.
Let’s look at the top auditing lessons from 2022 and how councils can better prepare for the year ahead.
Increasing auditor focus on indexation
Last year, we noticed that auditors across Australia are increasingly focused on indexation.
While Queensland councils are indexed each year, New South Wales (NSW) councils were hit hard in 2022, with movement seen in both dollars and percentages. The percentage movement may have been small, but the dollars were significant enough for auditors to request they be indexed. We suspect Victoria will take a similar approach this year.
The lesson for councils is that they need to be prepared and assume that auditors are going to ask for an indexation this year. This may require a desktop revaluation—in other words, revaluing an asset class by applying revised unit rates to known quantities of assets. If you need assistance, Brightly offers a robust system to determine indexation by looking at individual asset classes.
Scrutiny around remaining useful life of assets
The other trend we’re noticing is that as councils become more mature in asset management, they are starting to publish their capital works programs and asset management plans.
Auditors may look at these and ask questions, particularly if the program says you’re going to replace an asset next year but your accounting register says the asset has 20 years left of remaining useful life. If you do have capital works programs locked in such as for asset renewals, completing a desktop revaluation can help you uncover any inconsistencies and reduce the remaining useful life through that process.
Checking asset inventory data before condition inspections
A common issue that affects EOFY planning is councils not keeping their asset inventories up to date.
Quite often, we see clients pay tens of thousands of dollars to have assets inspected by contractors, only to find out that half of the assets can’t be inspected because there’s not enough inventory.
Other times, the contractors can’t find the assets in the first place.
Many clients don’t even realise this is a problem until they receive the first draft and it’s dotted with contractor notes stating, “This asset hasn’t been valued because there isn’t enough detail.” From an audit perspective, the contractors aren’t the ones to blame—the auditor will instead be wondering who is managing the data at the council.
The lesson here is to make sure you scrutinize your data before you send it to a contractor for condition inspections. Update the inventory so you’re not missing any opportunity—even if you must send someone out to check half a dozen assets to verify the location. We know that many assets aren’t physically inspected frequently, sometimes not for three to five years. The best way to get value from your dollar is to get someone to check and update your data first.
Putting contractor tender briefs in writing
Another missed opportunity we often see is when councils go out to tender.
Councils sometimes assume that a verbal conversation with a contractor is enough to outline what’s required. However, smaller details such as whether GPS or photographic data should be included can fall through the cracks. Sometimes councils are surprised that they have been charged extra for GPS or photos, or that GPS and photos weren’t collected because it wasn’t in the brief. If you are only doing these inspections every few years, you must take the opportunity to get the brief right, and in writing.
It's also important to allow reasonable and flexible timelines for data collection. Expecting data collection and a draft report in three months, particularly for some bigger classes, puts pressure on everyone. Be aware that when contractors are out on the field, they will find other issues which may impact timelines, as can changes in weather conditions.
Comprehensive valuation cycles may change
Typically, revaluation cycles are every three to five years, however, the focus by auditors on indexation may alter those cycles.
If your cumulative indexation is starting to reach 20%, expect that there’s a comprehensive value to follow. That may be two years before you are scheduled to do a valuation.
A 20% cumulative indexation is the threshold at the moment—NSW has put a policy in place for this and other states are leaning towards doing the same. Rising inflation over the past couple of years may likely trigger a comprehensive revaluation next year.
Auditors are also looking for a consistent approach across all classes. Therefore, it may be worth looking at completing multi-year deals to reduce the headache of tendering each year. It allows you to build a relationship with the valuer who can get access to your data earlier so any issues are caught sooner and can be promptly addressed.
Lastly, make sure you have people who can assist with the questions that valuers may have. Usually, there is a lot of backwards and forwards with the valuer, and assumptions can be difficult if they can’t access insights from the right people.
Managing capital works programs
As soon as a capital works program is adopted, start identifying the assets that are going to be impacted so you can get an understanding of what’s going to be renewed or removed.
Identify those assets from June-July through to the time it capitalises the following year. Once you’ve got all the information, the last thing you need to do is allocate the dollar amount, which is the easy part. Take the pain out of trying to get everything done in those last two months before EOFY.
Many auditors are recommending that councils do more frequent capitalisation. On June 30, there will always be a number of projects that aren’t completed and are finished in the first few months of the next financial year. Quite often, they will then sit there until June of the following year, ready to be capitalised. There’s no reason why you can’t clear this before Christmas to take the pressure off the next EOFY.
Another option is to close off your WIP early such as in March, April or May. That allows you to get invoices in for completed projects so you’re not waiting for the last payment run in mid-July. Auditors widely accept this approach.
You may have a one-off year where you have a lot of money sitting in WIP. There’s nothing wrong with that if you have an established process in place to smooth it out over time and can take auditors on the journey.
The accounting standard for impairment has changed over the last couple of years. While it’s still a gray area around how impairment is being audited, it’s likely to end in a desktop revaluation.
Councils need to focus on getting the right information on the materiality of the damage. Remember, it’s about reducing the carrying value, not the replacement cost. It’s unlikely the asset was brand new at the time of the damage.
Be mindful of how much you are reducing the carrying value by and use estimated repair costs as a guide. Take landslips for example—it may cost $1 million to replace it, however, the landslip may have only taken out 10 square metres of payment. The damage to the asset is only $50,000, not what it’s going to cost to repair the entire landslip.
Introducing Project Zen
At EOFY, there’s a lot of pressure on councils to reconcile engineering and financial data, which can be especially challenging given engineers and accountants approach things in different ways. And as 2022 shows, audits are only getting more rigorous.
That’s why we’ve launched Project Zen, a 12–18-month initiative to enhance Brightly’s strategic asset management (SAM) accounting offering to give councils the best tools and experience to perform legislative EOFY asset management processes, pass financial sustainability audits, and contribute to long-term asset management planning.
Through Project Zen, we aim to:
- Boost software performance with faster and simpler data exchange imports, multiple batch processing, and faster reporting and data exports.
- Improve reporting and BI capabilities with out-of-the-box, regionally compliant reports, current state-of-asset dashboards, and easy integration with existing finance systems.
- Create user-friendly workflows that are fast and intuitive to help make data handling and navigation easier.
It’s an exciting project that’s like driving a car and changing the front wheel at the same time. We’ve already made great progress, including investing in SQL server replication to enable performance gains, simplifying DX imports, investing in third-party BI tools, and expanding our product development team, including hiring UX designers to enable a rich and seamless user experience.
Our long-term aim is for these new capabilities to be available to both Assetic and Confirm users, and we look forward to keeping you posted on the project. In the meantime, if you have any questions about your EOFY preparation or need some support, please reach out to us anytime.