Flooding and cyclones in early 2022 and late 2021 have seen disasters declared across more than half of Queensland’s local government areas. This has a significant impact on local communities, businesses, and governments.
The disasters may affect the condition of your assets and your ability to collect revenue, increase expenditure, and result in expanded or new grant programs to help the community recover. This article provides an overview of what Queensland public sector entities, including local governments, should consider when assessing the impact of these events on their financial statements.
Impact on assets
Perhaps the most visible impact of these events is damage caused to physical infrastructure, equipment, and inventory. Entities should consider the:
- asset’s condition – do parts of the asset need repair or replacement, or should the whole asset be written off? Engineers and asset managers can provide condition assessments with recommended actions.
- asset’s useful life – will the asset last as long as previously forecast or do you need to revise the useful life? Engineers' reports and condition assessments will provide relevant information to help determine the asset’s remaining useful life.
- asset’s value – is the asset impaired or has its value declined? For assets carried at cost or valued using an income or market approach, AASB 136 Impairment of Assets states that physical damage is an indicator of impairment. For assets valued using current replacement cost (where AASB 136 does not apply), condition assessments are a key input to determining their value. Has damage also affected the amount you expect to receive when it is sold (the residual value)?
- accounting treatment for expenditure on repairing or replacing assets – should you capitalise it as a new asset (or component of an asset) or expense it as repairs and maintenance? If the damage is substantially to an entire asset component or the entire asset, then the expenditure should probably be capitalised. For assets that aren’t componentised, you will need to consider the value of the work compared to the asset and the extent of work required to restore the asset to working order. If it’s significant, then the expenditure should probably be capitalised.
When components are replaced or are not expected to provide future benefits to your entity, you should:
Write-off damaged assets (or components of assets) where no future benefits will flow to the entity.
Through the profit and loss statement, for example as a loss. Don’t write it off through other comprehensive income (asset revaluation surplus).
If damage is minor and needs repairs, the expenditure is treated as an expense, and the asset revalued as at 30 June.
At the time the damage occurred
Capitalise eligible expenditure against the asset
Through the balance sheet
Against ‘work-in-progress’ (WIP) as expenditure is made
Transfer WIP to completed assets
Through the balance sheet
Once a component, or the entire asset if not componentised, is ready for use
Revalue asset held at fair value
Through the asset revaluation surplus in other comprehensive income, or reverse a previous write-down through the profit and loss statement
As at 30 June (or 31 December), reflecting the condition at the reporting date
Queensland Treasury’s Non-Current Asset Policies for the Queensland Public Sector provide additional guidance that is relevant for all entities.
Management will need to apply judgement when answering these questions. Remember to document your decisions and assumptions along the way and retain sufficient evidence to support them. We have a fact sheet for Preparing position papers for accounting matters and valuation, which may help you to structure your thoughts and conclusions.
Your assessments will take time, particularly if many assets are affected, so it is best to start early.
Impact on revenue and expenditure
Grants and donations
Many entities may receive new grants and donations in response to the disasters. Our experience has shown that having a good system to track each grant and donation allows you to prepare your accounting records quickly and accurately. You will need to assess:
- how to account for these grants in line with the relevant revenue accounting standards – AASB 15 Revenue from Contracts with Customers or AASB 1058 Income of Not-for-Profit Entities. Remember, broadly you can’t recognise a grant you expect to receive. There are a couple of different recognition treatments depending on whether the grant is a capital grant or an operational grant. If the grant is to rebuild infrastructure, in general, you will recognise the revenue as you spend the money. We have an example of this on slide 32 of our 2021 presentation to local governments at the tropical workshop for local government finance officers
- whether the agreement contains performance obligations that are sufficiently specific or relates to the construction of an asset that your entity controls. This will determine whether you recognise revenue when you receive the funding or over time
- how to value physical donations or volunteer services (subject to materiality). You should only recognise volunteer services at fair value when the services would have been purchased if not donated and can be reliably measured
- how to separately account for the related expenditure. This will make it easier to acquit how you spent the funding back to the granting body and identify relevant disclosures for your financial statements.
Management may decide to defer, reduce, or refund fees and charges for affected businesses and the community. Your entity may also provide loans and other grants. You should consider and document how these impact the:
- timing and amount of revenue to recognise under the relevant accounting standards
- carrying amount of financial assets – for example, the disaster event may impact the amount of expected credit losses under AASB 9 Financial Instruments
- classification and disclosure of assistance provided in the financial statements.
Insurance claim recoveries can only be recognised as a receivable when it is virtually certain that the amount will be received. The recoveries are treated as separately identifiable income and are not offset against the cost of repairing or replacing those assets.
Value of investments
The disaster may impact your investment in other entities. Consider the investment’s value – for example, did that entity suffer damage to its assets or has its ability to generate revenue been affected?
Impact on operations and internal controls
These disasters will likely have immediate and ongoing impacts on your entity’s operations and internal controls. However, your recent experience in responding to changed operating environments because of COVID-19 should have you ready to respond to these disasters.
Staff may need to make quick decisions, implement temporary workarounds, or take leave; this may reduce the effectiveness of internal controls during this period. Likewise, you may need to spend time documenting (or re-documenting) lost records or making contemporary records of your transactions. Your entity’s priorities may have changed. Some actions you should take include:
- reconsidering your budget and operational plan
- assessing your asset management plan – will any assets be replaced earlier than expected or capital projects brought forward or delayed?
- maintaining appropriate controls to ensure your entity is achieving value for money when procuring goods and services during the recovery phase
- reviewing and updating your business continuity and disaster recovery plans. If your entity does not have a documented plan, take this opportunity to create one.
Impact on financial report preparation and disclosures
Our experience has shown that assessing and documenting the impact from natural disasters on the financial report can take longer than entities initially expect. Reassess your financial report preparation timetable, particularly the expected date for assessing asset condition and finalising valuations.
Think about what disclosures you should include in your financial report to provide meaningful information to readers. This could include:
- the extent of assets written off, impaired (non ‘current replacement cost’ assets), or revalued
- specific grants and other assistance recognised as revenue
- changes to usual revenue collection processes, such as discounts, refunds, or deferral of payment
- clean-up costs and repairs
- specific community grants and other assistance provided
- impact on staff such as additional leave, allowances, or overtime paid
- contingencies or commitments at the end of the financial year.
Present these disclosures early to your audit committee and executive management team for their review.
A useful resource that your entity can work through is Queensland Treasury’s recently updated self-assessment checklist for identifying the accounting and reporting impacts from natural disasters. You may also find the Department of State Development, Infrastructure, Local Government and Planning’s guide to accounting for natural disasters helpful, however it currently refers to the former accounting standards for revenue.
Impact on your audit
Communication with your auditors is key. We can help you to identify what might be significant financial impacts on your entity and work with you to assess the accounting implications.
We may revise our risk assessments and change the extent of work we do in response to the impact on your entity. This will be limited to addressing the changes in risk – for example, the valuation and existence of assets or the completeness and accuracy of grant programs. We may also need to audit your acquittal of funds back to various granting bodies.
To support your recovery, we may reassess our audit timetable, while still working towards the statutory deadlines.
We are here to help. Please reach out to your QAO engagement leader or signing officer. We will continue to publish advice as the year progresses.
- Queensland Treasury’s Checklist for Natural Disaster Reporting
- Queensland Treasury's Non-Current Asset Policies for the Queensland Public Sector
- Local Government Bulletin: Accounting for infrastructure damaged by natural disasters
- Results of audits: Local government financial statements for 2010-11 (Report 2: 2012)
- Results of audit: Internal control systems 2014–15 (Report 1: 2015–16), specifically Appendix F
- Fact sheet: Preparing position papers for accounting matters and valuation
- Blog: Maintaining controls amidst a global pandemic
- Better practice guide: Annual internal control assessment