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.

Bhavin Shah looks at what councils can learn from FY23 and how they can better prepare for the year ahead.

Increasing auditor focus on indexation

Councils need to be prepared and assume that auditors are going to ask for an indexation for the coming financial year. This may require a desktop revaluation—in other words, revaluing an asset class by applying revised unit rates to known quantities of assets.

While Queensland councils are indexed each year, NSW councils were hit hard in FY23, 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.

Scrutiny around remaining useful life of assets

Councils 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. Many councils 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.

Make sure you scrutinise your data before you send it to a contractor for condition inspections. Update the inventory so you are 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

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.

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 per cent, expect that there’s a comprehensive value to follow. That may be two years before you are scheduled to do a valuation.

A 20 per cent cumulative indexation is the threshold currently—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.

Managing capital works programs

Take the pain out of trying to get everything done in those last two months before EOFY and 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.

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.

Asset damage

The accounting standard for impairment has changed over the last couple of years. While it’s still a grey 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 repair the affected area, however, the landslip may have only impacted 10 square metres of the asset, i.e. a road. The damage to the asset is only $50,000, not what it’s going to cost to repair the entire landslip.

*Bhavin Shah is a trained civil and irrigation and water management engineer and Associate director of client services at Brightly.

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