Home and Community Care (HACC) Program in Western Australia

Funded Assets(Accrual Financial Reporting)

Policy

JUNE 2014Version 3.1

CONTENTS

1 Background

2 Purpose

3 Depreciation

3.1 How to Treat Depreciation

4 Asset Acquisition

4.1 HACC Funded Assets4.2 Disposal of HACC Funded Assets (other than as a trade-in)4.3 Non HACC Funded Assets4.4 Accounting Issues Relating to HACC Assets and Accrual Accounting4.5 Principles of Asset Acquisition – Replacement Assets4.6 Principles of Asset Acquisition – Additional Assets4.7 Principles of Asset Acquisition – Donated or Gifted Assets4.8 Principles of Asset Acquisition – Service Provider Assets

5 Management of Funds Set Aside for Asset Replacement

6 Asset Register

7 Motor Vehicles

7.1 Purchase of Vehicles7.2 Replacement Vehicles7.3 Additional Vehicles7.4 Leased Vehicles

Attachment 1 Compliance with AASB 120 and AASB 1004 and Incorporated Associations

Attachment 2 Definitions

Attachment 3 Examples Clarifying Building Usage Charged to the HACC Program

Document Version control

Version 3.1 – November 2014Version 3.0 - June 2014Version 2 - August 2011Version 1 - 2008

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1 Background

The WA HACC Program’s policy since 2010 has been that depreciation of assets used in HACC service delivery can be funded out of HACC recurrent funding (Annual Funding Level).

Many service providers are established under the Associations Incorporation Act 1987. Where these service providers prepare special purpose financial statements they are not subject to Australian Accounting Standards and may determine their own accounting policies, including how non-recurrent income is treated.

The asset replacement reserve funds are not dedicated to specific assets. They are a pool of funds available to replace all HACC funded assets.

Provided sufficient funds are available, replacement assets are deemed approved and can be purchased from the accumulation of these depreciation funds in the asset replacement reserve (cash) account.

If there are insufficient funds available to replace assets the service provider is required to provide a business case for additional funds through a Growth Funding Application (GFA) (non-recurrent).

2 Purpose The purpose of this document is to clarify the WA HACC Program’s policy regarding funding of depreciation, including:

Permitted use of HACC funds to replace assets Permitted use of HACC funds to acquire additional assets Accounting for:

o Funds set aside for asset replacement and the acquisition of additional assets

o Annual depreciationo Accumulated depreciation

Acceptable depreciation policy Accounting treatment required for HACC assets and asset funding Requirement to maintain a register of HACC assets Issues that may arise when HACC assets are disposed of Definitions of significant terms used in this policy

Service providers must comply with the HACC reporting requirements regarding ‘Notes to HACC Program Financial Statements’ as outlined in Schedule 5 of the Service Agreement. These notes contain specific requirements for reporting depreciation on assets and the content of HACC Asset Registers.

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3 Depreciation

Fixed assets are depreciated over the estimated useful life of the asset.

Service providers should use the rate that is most appropriate to them for the class of asset and its usage.

3.1 How to Treat Depreciation

BuildingsThe WA HACC Program will fund depreciation of service provider owned buildings up to a maximum of 2% of cost per annum.

Where buildings are revalued any cash held to fund depreciation of the building in the asset replacement reserve (cash) account should be reassessed. This cash is available for other purposes.

If the building is owned by a third party and provided either ‘free of charge’ or at a subsidised rent, then a notional commercial rental cost and equal notional income may be shown in the financials.

If there is an arm’s length rental arrangement with a third party then the rent should be shown as a cost.

Some service providers may wish to charge an occupancy fee when part of a building is used for the provision of HACC services. The WA HACC Program will accept an apportionment of accommodation costs based on a reasonable rationale for the space used by the HACC service provider.

Attachment 3 clarifies the principles to be applied when charging building usage to the HACC Program.

Other Fixed AssetsHACC funded assets – the depreciation cost is included in the Unit Price paid by the WA HACC Program.

Service provider assets not used in service delivery but part of the overhead structure –the depreciation is part of the funded overhead cost structure.

100% service provider funded assets occasionally used in HACC service delivery – the depreciation is assumed included in the usage charge. This would be the case where service provider vehicles are sometimes used in the HACC service delivery.

Donated AssetsDepreciation on these assets is funded provided the service provider demonstrates the donor will not fund replacement of the asset.

The same principle applies to service provider assets used in service delivery. These are effectively donated assets. If an asset is used in HACC service delivery the

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depreciation cost is reimbursable to the service provider. The depreciation cost should form part of any usage fee.

4 Asset Acquisition

Asset acquisition occurs when an additional asset is purchased or an existing asset is replaced.

The use of HACC funds to acquire additional assets requires submission of a HACC GFA (non-recurrent funding). This applies even when there are funds set aside in an asset replacement reserve account. Asset replacement funds can only be used to replace existing assets on a like-for-like basis.

Where an asset is replaced with a significant upgrade this is not strictly a replacement and should go through the GFA process. For example, motor vehicles improve as technology advances. However, if a Toyota HiAce is replaced with a Toyota Coaster this is more than a replacement as the carrying capacity has increased.

Transitional Issues:Some transitional issues exist for service providers that have not set aside sufficient annual funds equivalent to the depreciation expense. These service providers may remain dependent on the GFA process to replace assets.

4.1 HACC Funded Assets

Some service providers recognise the income from non-recurrent asset funding in the year it is received.

Other service providers show non-recurrent funds as income received when the asset is purchased or over the useful life of the asset (to match depreciation expense).

The WA HACC Program requires service providers to include depreciation in their reported costs and set an equivalent amount of cash aside each year from recurrent funding into an asset replacement reserve.

Replacement assets should be funded from the asset replacement reserve and not via GFAs.

4.2 Disposal of HACC Funded Assets (other than as a trade-in)

When assets with a Written Down Value (WDV) in excess of $1,000 are destroyed and replaced through insurance cover, the service provider’s HACC Project Officer should be informed.

If an asset ceases to be used and is surplus to requirements, the service provider must inform the Project Officer who will be able to advise the action to take. Under-utilised and surplus assets inflate a service provider’s unit costs.

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The WA HACC Program will determine what to do with the HACC funded assets if a Service Agreement is terminated or a change in sponsorship occurs.

4.3 Non HACC Funded Assets

Service providers can charge a reasonable usage fee (rent) for assets used in HACC service delivery. These assets may be the use of a building or occasional use of some other assets.

Where a service provider’s asset is used 100% in HACC service delivery all the operating costs of the asset can be charged into the WA HACC Program.

4.4 Accounting Issues Relating to Depreciation Funds

How HACC funded depreciation is treated:

The cash funds relating to the depreciation of HACC funded assets must be identified in an Asset Replacement Reserve account

Depreciation of service provider assets used in HACC service delivery is a WA HACC Program expense. This depreciation is shown as a cost in the HACC financial statements. The depreciation expense is reimbursed to the service provider along with any other service provider costs allocated to the WA HACC Program

An amount equal to the funded depreciation for HACC assets should be placed in an interest bearing deposit account. These funds must not be used to fund day to day service delivery and are to be used to replace identified assets.

The funds set aside each year will equal the movement in the Accumulated Depreciation account. Where maintaining a separate bank account is not practical, the funds should be identified and reported as part of the HACC cash position.

The cash amount equivalent to the cumulative depreciation on HACC assets can be increased by interest earned and by additional funds approved by the Project Officer. These additional funds may be available if there is surplus cash available from recurrent funding.

4.5 Principles of Asset Acquisition – Replacement Assets

Existing assets are replaced from funds that have been set-aside in the Asset Replacement Account.

There may be insufficient replacement funds to replace existing assets.

A shortfall less than $1,000 may be funded from HACC recurrent funds.

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A shortfall greater than $1,000, but less than $10,000, to replace an asset requires a special “business case”. This business case is presented to the service provider’s Project Officer. The shortfall may result from cost increases or assets being replaced sooner than anticipated. A Project Officer may approve recurrent funds to be used to meet the shortfall.

Any shortfall greater than $10,000 must be funded via the GFA process.

4.6 Principles of Asset Acquisition – Additional Assets

All funding for additional assets require a GFA. Replacement funds cannot be used to acquire additional assets.

Service providers that are unsuccessful in the GFA process for additional assets cannot use asset replacement funds to acquire the additional assets. The GFA is assessed against stringent criteria and asset replacement funds cannot be used as a means to bypass this process.

4.7 Principles of Asset Acquisition – Donated or Gifted Assets

Donated assets are capitalised and shown at their ‘fair value’. The fair value is non-recurrent income in the year that the donated asset is received. However, this accounting treatment may vary according to the policy of the service provider. The asset is depreciated over its estimated useful life.

The depreciation expense of donated assets is fundable by the WA HACC Program provided the asset is used in provision of HACC services and the service provider can demonstrate that funds will not be made available by the original donor to replace the asset.

These depreciation costs should be separately identified in HACC financial reporting. Refer to ‘Notes to HACC Program Financial Statements’ as outlined in Schedule 5 of the Service Agreement.

4.8 Principles of Asset Acquisition – Service Provider Assets

Where service provider assets are used in HACC service delivery a reasonable charge for depreciation may be made against the WA HACC Program.

As with donated assets these depreciation costs are separately identified in the HACC financial reporting.

These costs are reimbursable to the service provider by the WA HACC Program in the unit price as compensation for use of the asset. In these circumstances the service provider has been funded to replace the asset.

If a service provider donates an asset or contributes to the acquisition cost of an asset to be used 100% in HACC service delivery, the annual depreciation expense is reimbursable to the service provider.

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However, if the service provider wishes to treat the asset as an additional HACC asset they should seek the approval of the Project Officer.

If the Project Officer approves, the annual depreciation is treated similarly to that of HACC assets and the cash equivalent accumulated in the asset replacement reserve.

5 Management of Funds Set Aside for Asset Replacement

Funds equal to the movement in cumulative depreciation should be transferred to an interest bearing deposit account. They can be cumulated with other funds to obtain the best return on the funds.

The cash funds need to be identified separately when reporting to the WA HACC Program. Cash flow reporting will reflect the transfer of funds to this account, and from this account, when assets are replaced.

This assists to ensure the funds set aside for asset replacement are identified and not used for other purposes.

The cash held in the Asset Replacement Reserve account should reconcile to the cumulative depreciation shown on the HACC Asset Register. Interest earned on these funds can be used to increase the reserve.

6 Asset Register

The HACC Asset Register is one of the reports required each year by 30th September as part of Service Agreement financial reporting requirements.

All HACC funded assets with a value of $1,000 or greater are to be recorded in an asset register.

The acquisition of multiple similar assets costing less than $1,000 each can also meet the criteria for recording in the register, depending on the circumstances of the purchase. It may be appropriate to aggregate individual items and apply the criteria to the aggregated value of the composite asset.

When an asset is funded by multiple sources, including the WA HACC Program, the asset is recorded in the HACC asset register with the percentage funded by the WA HACC Program recorded against the asset.The asset register must contain, as a minimum:

Asset Class (refer to Attachment 2) Description of Asset Date of Acquisition Percentage funded by HACC (if less than 100%) Cost Depreciation for the year Accumulated Depreciation Written Down Value Depreciation Rate and Method

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The Project Officer can request the Asset Register from a service provider at any time.

Details of assets disposed of should be contained in the register at least for the year of disposal, and may be deleted from the register in subsequent years.

Fully depreciated assets still in use remain in the asset register.

Small value items costing less than $1000 may also be entered in the asset register for control purposes. However, there is no need to record the depreciation and WDV.

7 Motor Vehicles

7.1 Purchase of Vehicles

Service providers should select the most fuel efficient and economical vehicle (both short and long term) for the intended use. The basic model that meets the requirements should be selected.

Service providers need to consider whether the vehicle will be able to meet current and future client needs and service requirements.

The WA HACC Program does not support the purchase of vehicles that are not used in service provision and distinguishes between:

Replacement vehicles Additional vehicles, and Leased vehicles

A description of a purchased vehicle must be entered on the service provider’s Asset Register. Refer to item 6 - Asset Register for a complete list of Asset Register criteria.

7.2 Replacement Vehicles

The WA HACC Program does not specify replacement criteria such as age or kilometres travelled. Service providers are expected to manage and optimise the replacement decision, including the safety of clients and staff.

7.3 Additional Vehicles

The purchase of additional vehicles is funded via the GFA process.

The WA HACC Program provides non-recurrent funding for up to 100% of the purchase cost of vehicles, including modifications, by the submission of a Non-Recurrent Growth Funding Application in the WA HACC Program’s annual growth funding round.

Before considering the purchase of an additional vehicle (or an upgraded vehicle), service providers must demonstrate through the GFA process the need and justification for an additional vehicle.

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Service providers should comply with the competitive pricing process and demonstrate compliance by providing three (3) written quotes obtained from different suppliers to establish the best price. Quotes from suppliers should include the specifications of the vehicle such as manufacturer, type, model, class, number of seats, accessories, base price, and cost of modifications and applicable taxes.

The quotes from suppliers and the service provider’s recommendation should be included in the GFA to the WA HACC Program.

Once notified of a successful GFA application, service providers should proceed to order the vehicle and arrange the necessary modifications.

As part of the conditions of funding, providers are required to provide the WA HACC Program proof of purchase of the vehicle.

HACC service providers should also review the GFA requirements located on the website at: http://www.health.wa.gov.au and search HACC for details.

7.4 Leased Vehicles

Service providers can enter into operating and finance lease agreements for motor vehicles provided they can be funded as part of the unit price of their current HACC annual recurrent funding.

Leased vehicles should only be included in an asset register once ownership has transferred to the lessee. Operational leases are not to be included.

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Attachment 1

Compliance with AASB 120 and AASB 1004 and Incorporated Associations

AASB 120 ‘Accounting for Government Grants and Disclosure of Government Assistance’ and AASB 1004 ‘Contributions’ are the relevant accounting standards applicable to HACC funding.

AASB 1004 Contributions – requires contributions received or receivable to be recognised immediately as revenue when:

(a) the entity obtains control of the contribution or the right to receive the contribution

(b) it is probable that the economic benefits comprising the contribution will flow to the entity, and

(c) the amount of the contribution can be measured reliably

This can conflict with the requirements of AASB 120 when applied to Not-For-Profit organisations.

In many cases service providers will apply their own accounting policy to HACC non-recurrent income. They may, for example, show only income equivalent to the depreciation expense and hold the balance in a provision account more in line with AASB 120.

Service providers should disclose their treatment of non-recurrent funding in the notes to the HACC Income Statement.

This is part of the required reconciliation of HACC annual funding to the amounts shown in the HACC Income Statement. Refer to Schedule 5 of the Service Agreement.

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Attachment 2

DefinitionsAASBAustralian Accounting Standards Board refer www.aasb.com.au

AASB 116Publication of the Australian Accounting Standards Board dealing with “Property, Plant and Equipment”.

AASB 120Publication of the Australian Accounting Standards Board dealing with “Accounting for Government Grants and Disclosure of Government Assistance”

AASB 1004Publication of the Australian Accounting Standards Board dealing with “Contributions”.

Additional AssetAn incremental asset (or significantly different replaced asset) that increases the pool of assets as opposed to a replacement asset. Additional assets can only be acquired through the GFA process.

Asset ClassA term used in AASB 116 to group assets into like categories, for example:

Motor vehiclesFurniture and fixturesOffice equipmentMachineryLand and buildings

Asset Replacement Reserve (Provision)A provision account used to identify funds earmarked to replace assets.

Asset Replacement Reserve (Cash)The actual cash funds held in a bank account and identified separately as an asset account in the ledger.

Business CaseA structured proposal to justify requested expenditure which includes the reasons for the proposal, the expected benefits, the options considered, and the expected costs.

Deposit AccountAn interest bearing account. In the HACC context, this is where funds identified for future expenditure, and not required immediately, are kept. The best rate of interest with minimum risk should be sought, recognising the requirement to access the funds.

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Fair ValueThis is defined in AASB 116 - Property, Plant and Equipment. ‘Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.”

GFAThis stands for Growth Funding Application. These are additional funds made available each year to service providers to cater for growth in service provision.

ProgramA term used to describe the whole of the activities funded by Department of Health, Disability Services Commission, Department of Veterans Affairs, Department of Social Services

Replacement AssetAn asset that takes the place of an existing asset which has been disposed of.

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Attachment 3

Examples Clarifying Building Usage Charged to the HACC Program

Occupancy costs for buildings used for HACC service delivery are chargeable to the HACC Program. There are different scenarios regarding building ownership and building funding that impact on the cost that may be charged.

Potential scenarios are: - Buildings rented from 3rd parties for HACC service delivery Buildings funded by LotteryWest and HACC Buildings donated to the service provider (normally by clients or others) Buildings owned by the service provider that has not been funded by

LotteryWest, HACC or donated

Buildings rented from 3rd parties for HACC service delivery:Service providers that do not own buildings will rent premises from a third party. A third party commercial rent for appropriate premises is an acceptable cost to the HACC Program.

Where a “peppercorn” or subsidised rent is charged to the service provider, the WA HACC Program expects that only the cost incurred is charged against the HACC program.

Buildings funded by LotteryWest and HACC:The HACC Program will fund the operational cost of a building funded by LotteryWest and HACC when used for HACC service provision. Utilities, maintenance and depreciation of up to 2% pa can be included.

It is not acceptable for a service provider to charge a rent that recovers more than the operational costs of the building.

Buildings donated to the provider (normally by clients or others):The HACC Program will accept the operational cost of a donated building when used for HACC service provision. This includes all utilities, maintenance etc. Depreciation of up to 2% pa can also be charged.

It is not acceptable for a service provider to charge a rent that recovers more than the operational costs of the building.

Buildings owned by providers not funded by LotteryWest and HACC, or donated:This will usually apply to the buildings of large service providers and LGAs.

The reasonable costs associated with operating these buildings will be accepted by the HACC program as a HACC cost. The service provider will normally have a basis for cost allocation acceptable to the HACC Program. LGAs typically allocate occupancy costs based on headcounts or space occupied for offices.

Where a hall or facility is offered for rent by an LGA there will be a schedule of hire rates.

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A (market) rental charge for a building owned by a provider, whereby the provider makes a profit, is not an appropriate principle. This is contrary to the principle of cost reimbursement.Any intention to vary from these principles must be approved by the WA HACC Program.

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