MFR information for accountants

The new Accounting Standard (AASB 16) relevant to leases requires companies that lease equipment to account for virtually all leases on their balance sheet. Property and equipment leases previously recognised as operating leases (effectively off balance sheet) will be accounted for as a right-of-use (ROU) asset on balance sheet, with the corresponding lease liability recorded as current (12 month portion) and non-current liabilities.

It is a requirement within the accounting standard that the financial statements reflect the right-of- use asset component separately, which will then appear accordingly in the balance sheet or notes to account.

Exemptions still exist for short term leases (less than 12 months) and low value (< $ 5,000) leases. 

AASB 16 may significantly impact a licensee’s financial metrics including current ratio and net tangible assets (NTA). 

While the new accounting standard does not explicitly state whether the right-of- use asset is of a tangible or intangible nature, it is the QBCC’s position that a right-of-use asset can be recorded as tangible if the underlying asset is tangible (i.e. property, plant and equipment).

Work in Progress (WIP) requires estimating the assets or liabilities accumulated from construction contracts based on what is entitled to be invoiced for works performed under the contracts, less what has been invoiced at a particular point in time. 

For construction contracts, WIP should be calculated in accordance with the provisions of AASB 15 Revenue from Contracts with Customers (which replaced the previous accounting standard of AASB 111).

It is not the QBCC’s role to advise a licensee how to calculate their work in progress, as each business is different – bigger companies may use the percentage complete method, smaller businesses may use costs incurred but not yet invoiced. Both methods are acceptable under the accounting standards.

The calculation of work in progress is the outcome of a construction contract that can be estimated reliably, with contract revenue and contract costs to be recognised by applying the stage of completion method. That includes billable work performed up to and including the balance sheet date that has not been invoiced plus an element of the expected profit on the project.

Contractors can include profit in the calculation of WIP but it should be relevant to the portion of work they have undertaken and therefore only be a percentage of the total profit they expect to make. A contractor cannot bring all of their profit to account prior to the completion of a job. For example, if a contact is on target at 40% stage of completion, then 40% of the anticipated profit can be brought to account.

Where a job appears as if a loss will result, then all costs must be written off in the books of account.  

Where the outcome of a construction contract cannot be estimated reliably, costs incurred are to be recognised as expenses and revenue is to be recognised only to the extent that it is probable that the costs incurred will be recoverable.

Work in progress is NOT:

• Bringing to account the value of work remaining to be undertaken on a contract where the work has not been done;
• Doing 25% of the work on a contract but bringing to account more than 25% of the estimated profit;
• Projected or actual loss on a contract brought to account over time (losses must be brought to account immediately).

Work in progress amounts are actively reviewed to ensure accuracy of calculations and appropriateness of estimates and assumptions made.

Key areas of review may include:

• How entities determine their estimated profit margin applied to construction WIP - i.e. the QBCC may ask you to identify the estimated profit margin you have applied to individual contracts and provide support for these figures.  We may review historical trends or interrogate aggressive assumptions.
• When and how entities take into account anticipated losses on individual construction contracts
• How the value of total contract consideration was determined, measured and applied
• How any/all approved variations have been incorporated into the calculation of WIP

If a licensee has a line of credit facility, such as a credit card or overdraft facility, the terms and conditions of the facility should be reviewed to determine the correct classification as a current or long term (non-current) liability.

While the facility may not have an immediate repayment requirement, this is very different to confirming that there is an unconditional right to defer settlement of the liability. 

If the liability can be called upon on demand, it must be presented as a current liability under AASB 101 Presentation of Financial Statements.

Definition of a large proprietary company

Under the Corporations Act, ‘large proprietary companies’ and publicly listed companies must prepare and lodge a financial report and a director’s report for each reporting period. The accounts must be audited unless ASIC provides relief or an exemption.  

A proprietary company is defined as “large” for a financial year if it satisfies at least two of the criteria listed:

• The consolidated revenue for the financial year of the company and any entities it controls is $50M or greater;
• The value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25M or greater;
• The company and any entities it controls has 100 or more employees at the end of the financial year.

If the company does not meet at least two of the criteria, it is considered to be a “small” proprietary company.

ASIC Corporations

(Wholly-owned Companies) Instrument 2016/785 (previously ASIC Class Order 98/1418)

The ASIC instrument refers to a Deed of Cross Guarantee (DOCG) executed by some or all of the companies within the group. The DOCG is an undertaking by all parties to it that they will guarantee the debts of each company within the group in the event of liquidation.  

This allows the ‘group’ of companies to be audited on a consolidated basis. Each party to the group is not required to be audited on an individual basis. The parent or ultimate holding company is usually the trustee of the DOCG, and is the financial reporting entity for licensing purposes.  

The licensee may be the parent company, or may be a subsidiary of the parent, but must be a party to the DOCG to enable it to rely on consolidated or closed group accounts.

Licensees wishing to rely on the consolidated accounts of their parent entity must provide evidence they are party to a DOCG.  This can be through the provision of either a copy of the DOCG or by a disclosure in the Notes to the Accounts (usually listed under “Controlled Entity” or similar heading in the accounts of the company).  

Definitions

“Consolidated” - information based on the PARENT and ALL its subsidiaries as a whole, as the DOCG incorporates them all. The licensee relying on the information must be within this structure, regardless of who the licensees are within the group. It is the group taken as a whole.

“Closed Group” - information based on the PARENT and SOME subsidiaries (within a larger group of companies) which are party to the DOCG. Other subsidiaries within the Group may not be party to the DOCG, and therefore are not part of the closed group.

“Standalone company” – the licensee can elect to report financially on just its own financial position, and not that of the closed group or consolidated group.

Regardless of which option is reported on (ie consolidated, closed group or standalone entity), the financial information provided needs to comply with the Minimum Financial Requirements (MFR).

This means that if a licensee is a party to a DOCG and elects to comply with the MFR by relying on consolidated group financial information, the consolidated group needs to have sufficient NTA to cover the actual revenue being generated by the consolidated group, and the financial statements would be run through the same framework as a standalone entity (i.e. intangibles deducted, disallowed assets not included etc).

The licensee must provide the balance sheet (at a minimum) of the related entity to determine if the related entity meets the requirements set out in the MFR Regulation. 

The Qualified Accountant is to view the balance sheet (at a minimum) of the related entity, and for the loan to be included in QBCC’s calculations, the related entity, at the same balance sheet date, must hold a net tangible asset position of at least $0 and have a current ratio of at least 1:1

In calculating the related entity's net tangible asset position and current ratio, any disallowed or intangible assets must be excluded from the related entity's financial position. Disallowed assets are identified in Section 17 of MFR Regulation.

If directors owe money to a licensee as an asset, those loans would need to be assessed under the same framework. A balance sheet (or statement of financial position) would need to be sighted for the director which demonstrates a net tangible asset position of at least $0 and a current ratio of at least 1:1 for the loan to be included in the QBCC’s calculations.

Repayment of the loan after the balance sheet date, or through the intended future payment of dividends, cannot be considered acceptable under the MFR Regulation. The only test that can be applied is for the related entity, as at the same balance sheet date, to hold a net tangible asset position of at least $0 and have a current ratio of at least 1:1, for the loan to be included in calculations.

Related entity loan liabilities cannot be deducted from the calculations of net tangible asset or current ratio under any circumstances.

All related entities providing financial information i.e. related entities owing loans to a licensee, the Trust through which the trustee company trades, or the Covenantor providing financial information to assure a Deed of Covenant and Assurance, are assessed on the same basis - this means financial information provided for related entities, Trusts and Covenantors are not to include intangible, disallowed or related entity loan or investment assets which do not meet the identified test, and cannot remove any liabilities from calculations under any circumstances.

Offsetting of related entity loans

AASB 101 states “an entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Australian Accounting Standard”.

Therefore, related entity liability loans cannot be “offset” against related entity asset loans unless permitted to do so by accounting standards (ie AASB 124).

Usually, a company’s internal management accounts will list an asset such as motor vehicle or plant and equipment at the value that it could be reasonably sold for. This is the value that could be received if the company was to sell the asset at any given moment.

The depreciated or written down value of these assets will look completely different. This usually happens once the relevant accounting standards have been applied to the financial statements (ie AASB 116).

This can cause issues with a company’s financial statements when reporting to the QBCC, as the financial statements will be shown with lesser values attributed to the assets.

For the QBCC’s annual financial reporting obligations, we do accept internal management accounts being provided for SC1 / SC2 licensees, and Categories 1-3. This means, we would accept the financials at book value (for annual reporting).

When providing financial information for MFR Requirements (ie to apply for a licence, or upgrade your Maximum Revenue), the financial statements need to have all relevant accounting standards, which means the assets would likely be written down for tax depreciation reasons.

If applying accounting standards, to revalue an item of property, plant or equipment, the correct accounting standard must apply (ie AASB 116 / AASB 136), and if an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs needs to be revalued.  The revalued amounts need to included in the company’s financial statements, which should also reflect the increase in income as well as accumulated in equity under the heading of revaluation reserve.

Trading under a trust

The net tangible assets, for QBCC purposes, is based on the net tangible assets of the trustee company or trustee individual (not the trust), combined with the amount being assured by a covenantor (ie director of the company, or beneficiary of the trust. (Note: a deed is only available for licensees in categories 1 to 7. Contractors in SC1 or SC2 categories are unable to rely upon a deed). That total net tangible asset amount determines the maximum revenue amount set for the licence.

For example, Licensee Pty Ltd trades through a trust structure, namely the Licensee Family Trust.  The Licensee Family Trust has net tangible assets of $8,731 (noting that any intangible or disallowed assets need to be deducted from the net asset position).  Licensee Pty Ltd has net tangible assets of $10, and relies upon a deed of covenant and assurance in the amount of $56,000 from director, John Bloggs.  The total net tangible asset amount of $56,010 (ie $10 from the trustee company and $56,000 being assured by the director) will provide Licensee Pty Ltd with a maximum revenue amount of $1,000,200.

We provide a calculator to help with these calculations.

The actual revenue for a licensee that is a trustee of a trust needs to include all revenue received by both the trustee (if any) as well as the trust.

Whilst QBCC does not licence trusts (only the trustee entity), the financial information for the trust will usually always be required.

The Pty Ltd “trustee” company (licensee) will usually have $2 or $10 assets (paid up capital). We require financial statements for both the trustee and the trust for the same reporting date. While all trading is usually completed under the Trust, the trustee company is still required to provide signed financial statements to confirm its net asset position.

The current ratio is the combination of trust and trustee’s current assets over current liabilities, but NTA is calculated solely on trustee (Pty Ltd) net assets. If the Trust has a negative net tangible asset position assessed under the MFR Regulation framework, the trustee (licensee) has to include the deficiency as a liability in its NTA calculation.

Usually, the only way the trustee company can meet the NTA test is to rely upon a Deed from a director, beneficiary or associated company.

Pursuant to Section 16 of the MFR Regulation, the MFR framework must be applied to the financial information of the Trust. In calculating the Trust’s net asset position, disallowed assets of the Minimum Financial Requirements are excluded from the calculation. This means:

• any related entity asset loans need to be assessed under the MFR Regulation (ie the related entity needs to have a QBCC current ratio of at least 1:1 and a NTA position of at least $0)
• any borrowing costs / intangible assets need to be deducted from net assets
• trade debtors need to be assessed under the MFR Regulation framework (i.e. 50% of debtors between 180-365 days are disallowed, and 100% of debtors over 365 days old are disallowed)
• disallowed assets as listed in the Minimum Financial Requirements need to be deducted.

If deducting disallowed or intangible asset amounts from the Trust’s net asset position results in a negative Net Tangible Asset position for the Trust, this negative NTA position would then flow back to the trustee (licensee) entity. The licensed entity would then need sufficient NTA of its own to absorb any deficiency in the Trust.

All related entities providing financial information i.e. related entities owing loans to a licensee, the Trust through which the trustee company trades, or the Covenantor providing financial information to assure a Deed of Covenant and Assurance, are assessed on the same basis—this means financial information provided for related entities, Trusts and Covenantors are not to include intangible or disallowed assets in calculations, and cannot remove any liabilities from calculations under any circumstances.

As trustee for a trust, assets held by a trustee under trust arrangements are excluded when calculating the NTA position. However, any liabilities incurred by the Licensee as a trustee for a trust must be included in the liabilities. If, however, the trustee has a recognised right of indemnity to the assets of the trust relevant to the trust liabilities incurred, then the value of the indemnity may be set off against the trust liabilities. Assets which are considered as disallowed or intangible are also to be excluded from the assets of the trust when calculating the value of the indemnity.

The QBCC requires financial statements for both the trustee and the trust for the same reporting year. While all trading is usually completed under the Trust, the trustee company is still required to provide signed financial statements to confirm its net asset position. As trustee for a trust, assets held by a trustee under trust arrangements are excluded when calculating the NTA position. However, any liabilities incurred by the Licensee as a trustee for a trust must be included in the liabilities. If, however, the trustee has a recognised right of indemnity to the assets of the trust relevant to the trust liabilities incurred, then the value of the indemnity may be set off against the trust liabilities.  

As the licensed entity is the trustee company, a set of their signed financial statements for the trustee company must be provided even if they show nil activity. The QBCC cannot waive the legislative requirement for the supply of these documents.

Trustee company assets

When calculating the NTA of a licensed company that is trustee for a trust, you include the trustee company assets.

NTA for a company that is a trustee for a trust can include:

• assets and liabilities of the trustee company, exclusive of the trust; or
• in combination with assets assured by way of Deed from one or more of the following:
  • beneficiary of the trust
  • director of the licensee, or
  • associated company of the licensee.

Assets and liabilities held in the trust cannot be taken into consideration in determining NTA and cannot be assured to the applicant through a deed. Assets held on trust for another person or corporation do not fall within the definition of ‘assets’ under the MFR Policy. 

An unpaid present entitlement is usually a current liability in the trust, unless the parties have entered into a legally binding agreement for its repayment (eg div 7A loan). This is because the trust does not have an unconditional right to defer settlement outside 12 months.

In the case of a UPE being recorded as a current asset, the QBCC would need information to confirm previous years’ trust distributions, including a copy of the resolution relating to the current years’ distributions or a copy of the beneficiary account (breakdown) from the ledger.

For UPE’s that are recorded as assets, these are treated by the QBCC in the same way as related entity asset loans, and evidence that these amounts meet the MFR Regulation test by way of balance sheet is required.

There is no provision within the MFR Regulation to reduce liability amounts from calculations. If a set of financial statements provided to QBCC includes both deferred tax assets and deferred tax liabilities, QBCC would deduct the deferred tax assets from calculations but would not deduct the deferred tax liabilities.

Restated financials could be accepted which show the amounts as already offset in the balance sheet.

Recapping, if the Qualified Accountant offsets the amounts whilst preparing the financials, QBCC would accept that. However, if the financials provided to QBCC show both figures (asset and liability), QBCC would apply the Regulation on face value and deduct the asset but not the liability.