YEAR END 2011 ACCOUNTING PROCEDURES - …sydney.edu.au/finance/docs/YE-presentation-2011.pdfYEAR END 2011 ACCOUNTING PROCEDURES 1 NOVEMBER 2011 FINANCIAL CONTROL AND TREASURY TONY

YEAR END 2011 ACCOUNTING PROCEDURES 1 NOVEMBER 2011

FINANCIAL CONTROL AND TREASURY

TONY HOUISON | SENIOR ACCOUNTANT REPORTING

YEAR END ACCOUNTING PROCEDURES OVERVIEW

›  This presentation has been developed to provide guidance in relation to the fundamental elements of the year end accounting process and requirements. It includes and explains: -  Underlying accounting theory & requirements

i.e. why we do, what we do -  Practical examples on how to apply the requirements

›  The presentation deals with the following topics: -  Creditors, accruals and commitments

-  Balance Sheet Reconciliations -  Prepayments / prepaid income -  Revenue recognition -  Dealing with the auditors

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MAIN COMPONENTS

YEAR END ACCOUNTING PROCEDURES

› The timetable can be downloaded from: sydney.edu.au/finance/accountants/year_end.shtml

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TIMETABLE FOR THE YEAR END 2011

OVERVIEW – RECORDING CREDITORS

› Broadly, for year end purposes, where the university has a contractual obligation to pay a third party, the obligation to pay can be recorded: -  In the books as a CREDITOR or ACCRUAL or

-  As an off-balance sheet COMMITMENT

› The items recorded as creditors or accruals affect the operating result and balance sheet. They end up by being recorded as trade and other payables in the balance sheet.

› The items recorded as commitments are notional items which are presented in the commitments note to the accounts with no affect on the operating result or balance sheet.

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THE BIG PICTURE

OVERVIEW OF RECORDING CREDITORS & ACCRUALS

› Firstly, as invoices received relating to the current year’s activities that meet “creditors ledger cut-off” and are recorded in the creditors ledger & class 1003 creditors control.

› Secondly, as invoices relating to the current year that are received after the creditors cut-off and are recorded as accruals in class 1000 accrued expenditure.

› Thirdly, purchase order / other documentary support recorded based upon known obligations that can be reliably measured or estimated without reference to invoice(s) are recorded as accruals in class 1000 accrued expenditure.

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CREDITORS CAN BE RECORDED IN THREE WAYS AT YEAR END

CREDITORS – GST TREATMENT

› Where creditors or accrual entries are based upon tax invoices that have been received by the University. -  The University is entitled to record the liability with relevant GST paid

› Where however, the accrual is based upon an estimate and no tax invoice(s) are available, the accrual should be recorded as excluding GST.

The overall rule is that GST claims should only be made when you have a tax invoice.

›  If we create accruals that include GST and we don’t have a tax invoice we are “breaking the law” because we are getting a refund via the BAS for amounts that are not properly supported.

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GST RULES

CREDITORS INVOICE CUT-OFF PROCEDURES

› Forward invoices received up to 7 December to Procure to Pay (P2P). -  These invoices will be input to the creditors system in December

›  Invoices received after 7 December are to be processed as follows: -  Stamp with an accrual stamp -  Photocopy original invoice -  Send original stamped invoice to P2P -  P2P will input these invoices as January invoices to the creditors system -  Prepare accrual template and send copy of invoice to FCT -  NEVER send the original invoice to FCT -  The accrual template and copy invoices will support the December accrual

for these invoices -  FCT will input the accrual entry to the general ledger

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WHAT TO DO WITH INVOICES RECEIVED IN DECEMBER 2011


› To enable the timely and accurate preparation of accruals and prepayments the following limits have been imposed: -  Only accrue invoices that are equal to or greater $1000

-  Only prepay items that are equal to greater than $50,000

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CREDITORS AND PREPAYMENT – LIMITS


› The accrual template covers: -  Invoices received after cut-off date

-  Accruals based on previous months invoices e.g. electricity bill or rate notice -  In these cases specify on the previous month’s invoice how you calculated the December

accrual. This is required for audit. It may be best to refer to the previous years bill -  Accrual based on purchase order (PO) where goods received or services performed -  In these cases attach the PO, together with other supporting documentation such as

email confirmation, goods received note (GRN) that proves the goods have been received and or the service performed

-  Cross referencing the accrual template to the supporting documentation -  Each piece of supporting documentation is to be numbered 1 to 999 and that number

must be recorded on the accrual template. This is done for audit purposes and to make review as easy as possible.

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HOUSE-KEEPING RULES FOR THE ACCRUAL TEMPLATE


› Two versions of the accrual template should be forwarded to FCT via email to [email protected] -  First version is an excel spreadsheet [without any supporting docs]

-  Second version is a PDF copy that has been signed by the originator and their supervisor and includes the supporting documents

› The accrual template and supporting documentation must be forwarded to FCT by cob 16/12/11.

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HOUSE-KEEPING RULES FOR THE ACCRUAL TEMPLATE


› The following items are practical examples of how to prepare the accrual template and supporting documentation.

› Example 1: Freehills invoice -  Invoice is in respect of the renewal of a patent. Its cross ref number is (1)

-  Invoice is dated 16/12/11 it is received and dated after cut-off

-  The invoice has two components: -  Charge by Freehills for their services. This charge is subject to GST

-  Charge which is a reimbursement of costs incurred by overseas associates which is GST free

-  All charges should be coded to 6714 licence fees, however, due to the differing GST treatment the components should be separated.

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THE ACCRUAL TEMPLATE – SOME PRACTICAL EXAMPLES

TEMPLATE EXAMPLE (1) FREEHILLS INVOICE

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› Example 2: Accruals based on previous period charges -  In this case the base data is an electricity bill covering the period

15/5 to 11/8/2011 i.e. 89 days

-  The accrual required is for the period 12/8/11 to 31/12/11 i.e. 143 days

› Calculation of charges to be accrued: Base charge x # of days to 31/12/11 = 2336.25 x 143 = 3573.49

# of days base invoice 89 The GST free accrual is coded to class 5402 electricity.

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TEMPLATE EXAMPLE (2) INTEGRAL ENERGY INVOICE

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› Example 3: Accrual based on purchase order -  In cases where you don’t have an invoice and you know the goods have

been received

› The GST free accrual is recorded in account 6714 licences.

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TEMPLATE EXAMPLE (3) CISCO SYSTEMS PURCHASE ORDER

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COMMITMENTS

› Definition: -  An undertaking to commit / pay substantial expenditure at a future

date(s) -  A legal obligation to undertake an activity at a future date -  These pledges are deemed liabilities, that must be recorded in the

University’s statutory accounts as notes to the accounts

› What’s the difference to booked creditors and accruals? -  The actual legal obligation arises at a future date -  The supplier hasn’t provided the goods or service at the reporting date -  Commitments are “notional” entries that do not effect the University’s

results -  Commitments are included in the accounts as a note

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THE BASIC REQUIREMENTS

COMMITMENTS

› Why do we have to record commitments? -  AASB 101 presentation of financial statements AUS 138.6

“the entity shall disclose the nature & extent of each capital and other commitment at the reporting date”

-  The disclosure shall be: -  Next 12 months -  12 months to 5 years -  Over 5 years

-  AASB 117 leases -  AASB 116 property plant and equipment for capital commitments -  AASB 101 & AASB 124 related parties for remuneration

› What value is the notional liability recorded? -  The GST inclusive value

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THE BASIC REQUIREMENTS

COMMITMENTS

› Review purchase orders to determine eligibility for recording as a commitment.

›  It may be necessary to liaise with finance and/or academic personnel to ascertain whether the commitment is required

› Run SUPOC255 outstanding orders by department from PeopleSoft or run SUGLQ130 outstanding order details from Hyperion

› Having ascertained what POs are not required, or if there are amendments / variations required, contact Alex Papangelis via email [email protected]

›  The work performed by the faculties – sets up the commitment listing that is prepared by FCT and P2P

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HOW TO REVIEW THE COMMITMENTS WITHIN YOUR FACULTY

CREDITORS QUIZ 1

› Receive an invoice on 5 December from ABC Lawyers for work done in relation to my research project. The work was done in November 2011

›  The invoice is approved and sent to P2P on 6 December

›  The creditors cut-off date is 7 December

› Q: What would happen if the invoice wasn’t approved on 6 December?

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HOW DO I TREAT THIS ITEM?

CREDITORS QUIZ 2

› Receive an invoice on 16 December from ABC Lawyers for work done in relation to my research project. The work was done in November 2011

›  The creditors cut-off date is the 7 December

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CREDITORS QUIZ 3

›  I have been working with ABC Lawyers in relation to the IP rights for my research project

›  The work commenced in November and was in progress on 16 December, the last working day of the University for 2011

›  Jim Grimes of ABC Lawyers is notorious for being slow in billing for his services. Grimes has not provided an invoice for his services by the last working day. I contact Grimes and he advises by telephone & email that according to his records, the University owes ABC $110,000 GST inclusive as at 31 December 2011.

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CREDITORS QUIZ 4

› Receive a series of invoices from Allianz on 1 December 2011 for various insurance covering the period 1 November 2011 to 31 October 2012

›  The invoice is paid on the 10 December 2011

› How do I treat these invoices?

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PRE-PAYMENTS

›  A pre-payment is a payment in advance of the period to which it relates

›  Pre-payments typically occur where an invoice is for a: -  Service -  Facility -  Licence

›  That is for an extended period of time

›  The following example explains a typical pre-payment

›  The University receives an Insurance bill for $1.32M covering the period 1 November 2011 to 31 October 2012

›  The invoice is paid on 30 November 2011

› How do we record this transaction?

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THE BASIC DEFINITION

PRE-PAYMENTS

›  2/12ths relate to 2011 and impacts the results for 2011 i.e. $200,000

›  10/12ths relate to 2012 and is prepaid in 2011

›  In summary the 30 November 2011 payment should be coded: -  Dr insurance expense $200,000

-  Dr pre-payment $1,000,000

-  Dr GST paid $120,000

-  Cr cash/creditors $1,320,000

›  In the 10 months to 31/10/12, $100,000 per month is released from the prepayment as follows: -  Dr insurance expense $100,000

-  Cr prepayment $100,000

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THE BASIC ACCOUNTING PROCEDURE PREPAYMENTS CLASS 0102

HOW DO I TREAT THE FOLLOWING ITEM?

›  I receive an invoice from XYZ Ltd on the 25 December 2011 ›  It is based on a purchase order prepared by Risk Management › The invoice is in relation to software licences covering the whole of

next year i.e. 1 January 2012 to 31 December 2012 › The GST inclusive value of the invoice is $1,100,000

› The invoice is paid on 25 January 2012

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QUIZ QUESTION 1

HOW DO I TREAT THE FOLLOWING ITEM?

› The license fee relates to the following year 2012, therefore, it has no impact on the results for 2011

› The University has a legal liability to pay this invoice

› However, this liability arises in a Future Period Accordingly › Record as a Current Non-Payroll Expenditure Commitment in the

Commitment Note for the 2011 accounts. It is recorded notionally in the Commitment note.

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THE ACCOUNTING TREATMENT OF THE LICENSE FEE

PRE-PAYMENTS

› Receive a licence fee in May 2011 covering the period 1 June 2011 to 31 May 2012

› The invoice is for $1,2M including GST

› The invoice is paid 30 June 2011

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REVENUE RECOGNITION NOT FOR PROFIT ENTITIES

›  The income earned by the University comes under three accounting standards as follows: -  AASB 1004 Contributions

-  Government Operating Grants and Donations: which are non-reciprocal transfers

-  ARC, NHMRC and other Research & Capital Grants: which may be reciprocal transfers

-  AASB 139 Financial Instruments Recognition and Measurement

-  Relates to investment income

-  AASB 118 Revenue - Other Externally Sourced Income -  Externally sourced income includes consulting, royalties, trademarks, licences, gains and

losses on disposal of PPE, sale of books, merchandise etc

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ACCOUNTING STANDARDS IN RESPECT OF THE UNIVERSITY’S REVENUE

REVENUE RECOGNITION: NOT FOR PROFIT ENTITIES

›  The accounting requirements are specified by AASB 1004 Contributions

›  This accounting standard applies to not for profit entities ONLY

›  Income arising from a contribution is to be measured at the fair value of the contribution received, or receivable and recorded as income when: -  The entity obtains control of the contribution or the right to receive the contribution

-  It is probable the economic benefits comprising the contribution will flow to the entity

-  The contribution can be measured reliably

›  Para 20 contributions to be recognised as income when the transferee obtains control over the funds, irrespective of whether restrictions are imposed on the use of the contributions. The transferee does not have a present obligation to sacrifice future economic benefits to the transferor even though it has a fiduciary duty to use the funds efficiently and effectively. Accordingly the receipt of funds does not give rise to a liability.

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BASIC ACCOUNTING RULES: NOT FOR PROFIT REVENUE RECOGNITION


› Contributions are defined in AASB 1004 as reciprocal or non-reciprocal transfers

› Reciprocal transfers occur when the transferee and transferor receive and sacrifice approximately equal value. You have to do something for the provider

› Non-reciprocal transfers occur when the entity receives assets, funds, services or has liabilities extinguished without having to give the same value in exchange for the goods or services received. You get something for nothing

› Non-reciprocal transfers include grants, donations and gifts and other goods and services provided free of charge or for nominal consideration

›  In some cases it may be difficult to determine whether the entity has control of a contribution or the right to receive a contribution

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› Outlined below are three examples of where this may be the case: -  Single year grant agreement: Contributions are controlled when all the conditions

in the agreement have been met. If the conditions have not been met at the end of the financial year, the contribution will not be recognised as revenue

-  Multi-year grant agreement: The entity does not obtain control of the contribution until it has met all the conditions under the agreement. Therefore, income from the grant will generally be recognised in stages, as the conditions of the grant are met

-  A donor pledges a donation to an entity. If the pledge is not enforceable against the donor, the entity does not control the donation until the monies have been received

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›  There are direct consequences for not complying with this standard. Melbourne University had their 2009 and 2010 accounts qualified

›  Melbourne University’s qualification: -  Government and research grants totalling $217M (2009: $191M) were recorded as

current liabilities. As the University effectively controlled these grants, the University should have recognised these funds as income in accordance with AASB 1004.The University also brought to account $61M (2009: $84M) of grant monies as income that should have been recorded as income in the previous year.

-  The auditor qualified the report further because Melbourne failed to comply with AASB 108 accounting policies changes in accounting estimates and error in respect of $57M (2009: $84M). They failed to correct the error from the previous year

-  What Melbourne has done is say we have received grant monies that we haven’t spent. We will record the unspent grant monies as liabilities until we spend them, as we have an obligation to repay the grantor if we do not spend the monies

-  This is a clear breach of AASB 1004


›  Example 1: Commonwealth grant -  The University of Sydney receives grant monies of $10M on 1 January 2011 which

covers up to 31 December 2013. At the end of the project, any unspent monies are supposed to be returned to the grantor

-  As at 31 December 2011, $2M has been spent and $8M remains unspent

-  The only entries recorded as at 31 December 2011 are the $10M income and spent monies

-  Under no circumstances should the $8M be recorded as prepaid income

›  Example 2: Donation -  The University of Sydney receives a $5M donation from ABC Co on 31 December

2011 -  The Deed of Gift states the funds will be transferred to DEF Co on 30 June 2012 if

certain conditions are met. At 31 December 2011 the conditions have not been met

-  The only entry raised is the funds received as income

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EXAMPLES OF HOW TO TREAT MONIES RECEIVED UNDER THE STANDARD


›  Example 3: NHMRC grant -  It’s 31 December 2011 and the University has received to date $4.8 mill

-  Spent $5.3 mill

-  The University is in deficit by ($0.7 mill)

›  The NHMRC normally pays at the end of each quarter. It appears they missed paying the 31 December 2011 instalment

›  The receipt of monies in respect of the quarter ended 31 December 2011 is dependent on the University passing its ethics clearance

›  Is the University entitled to accrue the shortfall?

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EXAMPLES OF HOW TO TREAT MONIES RECEIVED UNDER THE STANDARD

BALANCE SHEET RECONCILIATIONS

›  The integrity of the annual accounts relies in part on the accurate and timely reconciliation of the balance sheet accounts

›  All accounts should be reconciled to their dependent systems such as debtors, creditors or other systems

›  Items recorded in suspense accounts should be reviewed and dealt with in a timely and appropriate basis

›  The use of suspense accounts should be kept to a minimum and the contents explained in detail

› Reconciliations should be prepared in a standard format

› Reconciling items should be supported by documentary evidence

›  The due date for completion of December reconciliation is 28 January 2012

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KEY REQUIREMENTS

THE AUDIT PROCESS

› Audit objectives -  Primary objective is to determine whether the entity’s accounts are ‘true and fair’

which means they are not materially misstated -  Secondary objectives are to review the efficiency and effectiveness of the

operation and the probity of funds usage. The underlying aim is to ascertain whether there is waste of government funds.

-  Under the secondary objective, auditors are interested in KPI’s such as the ageing workforce, overdue annual leave and overdue R&M.

› How does the auditor achieve his/her objectives? -  Substantive approach: transaction testing based upon samples -  Controls approach: review of internal control, how the system operates to

determine strengths and weaknesses. Where weaknesses are found, tests are conducted to test exposure

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AUDIT OBJECTIVES AND PROCESS FOR MEETING THOSE OBJECTIVES

AUDIT REPORTS

›  Independent Audit Report › Statutory Audit Report › Auditor General’s Report to Parliament

› Management Letter

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AUDIT REPORTS / OUTPUTS RELEVANT TO THE UNIVERSITY

DEALING WITH THE AUDITORS

› Answer what you are being asked ›  If in doubt, consult with Financial Control and Treasury (FCT) › Know the policies and primary controls relevant to your job function

› Know the secondary controls relevant to your job function › Don’t assume you know another persons job function

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RESPONDING TO AUDIT QUERIES

Documents

YEAR END 2011 ACCOUNTING PROCEDURES - …sydney.edu.au/finance/docs/YE-presentation-2011.pdfYEAR END 2011 ACCOUNTING PROCEDURES 1 NOVEMBER 2011 FINANCIAL CONTROL AND TREASURY TONY