Local Government: 2015–16 Audit Snapshot

Conclusion

At 30 June 2016, local governments collectively generated a net surplus for the year of $1.6 billion. We assess the sector generally as having relatively low financial sustainability risks. However, this is not uniform. Financial sustainability issues are emerging for the cohort of 19 small shire councils. Declining revenues are forecasted for this cohort over the next three years, while expenditure is expected to remain consistent.

Asset valuation processes across the sector require more attention. Some councils do not:

• provide complete and accurate asset registers to their valuation experts for review
• have sufficient understanding to review and challenge their valuers' assessments
• have appropriate governance measures to identify and mitigate risks associated with the valuation process.

Footnote

[1] Interface councils are the nine municipalities that form a ring around metropolitan Melbourne. See Appendix B.

1.1 The local government sector

Victoria's constitution recognises local government as the third tier of government. It comprises 79 councils, 11 regional library corporations and 14 associated entities. In this report, the local government sector refers to the 79 councils.

We have classified councils into five cohorts based broadly on size, demographics and funding. These cohorts are consistent with the classification that Local Government Victoria (LGV) uses. Figure 1A provides details of the cohorts used.

Figure 1A

Council cohorts

Source: VAGO.

Appendix B lists the councils included in each cohort.

1.2 What we cover in this report

In this report, we detail the outcomes of the 2015–16 financial audits of Victoria's local government sector. We identify and discuss the key matters arising from our audits, and provide an analysis of information included in councils' financial reports.

Figure 1B outlines the structure of this report.

Figure 1B

Report structure

The financial audits of the 104 entities included in this report were undertaken in accordance with section 15 of the Audit Act 1994 and Australian Auditing and Assurance Standards. The total cost of preparing this report was $210 000, which is funded by Parliament.

2.1 Financial audit outcomes for 2015–16

2.1.1 Financial report opinions

Independent audit opinions add credibility to financial reports by providing reasonable assurance that the information reported is reliable and accurate. A clear audit opinion confirms that the financial report presents fairly the transactions and balances for the reporting period, in accordance with the requirements of the applicable accounting standards and relevant legislation.

All 79 councils were issued with clear audit opinions for their financial statements for the financial years ended 30 June 2015 and 30 June 2016.

At the date of reporting, 10 regional library corporations and 14 associated entities had been issued with clear audit opinions for their financial statements for the financial year ended 30 June 2016. The audit of one regional library corporation is still to be finalised.

2.1.2 Performance statement opinions

Councils' performance statements contain 90 performance indicators, of which we audit 30. Our audit opinion notes that the performance statement presents fairly, in all material respects, the outcome of the audited performance indicators.

We issued all 79 councils with clear audit opinions for their performance statements for the financial years ended 30 June 2015 and 30 June 2016.

2.2 Council financial results

Figure 2A summarises the key financial balances of the local government sector—comprising the 79 councils—for the financial year ended 30 June 2016. The sector generated a net surplus of $1.6 billion ($1.5 billion in 2014–15).

We measure financial performance using net result—the difference between revenues and expenses. We measure financial position as the difference between total assets and total liabilities.

Figure 2A

Key balances for local government sector for the financial year ended 30 June 2016

Source: VAGO.

Figure 2B shows the net result of the cohorts for the financial years 2011–12 to 2018–19. The information for this figure, and all analysis in this Part, has been drawn from:

• councils' audited financial statements for the 2011–12 to 2015–16 financial years
• councils' 2016–17 budget, which contains forward estimates for the 2016–17, 2017–18 and 2018–19 financial years—this information has not been audited.

Figure 2B

Net result per council cohort for years ended 30 June 2012 to 2019

Note: Dashed line represents budgeted forward estimates.

Source: VAGO.

The net result for the sector at 30 June 2016 was a $100 million increase on the prior year. Two key revenue changes affected this result:

• timing of grant funding provided to councils—which reduced revenue, due to half of the funding being received in the prior year
• growth in developer contributions—which increased revenue.

Financial assistance grants

The combined net result of the 79 councils is influenced by the timing of payments of the financial assistance grant from the Commonwealth Government—received through the state government. This grant is provided to councils each year, to be used towards the provision of council services. Under Australian Accounting Standard AASB 1004 Contributions, councils are required to recognise this income in the financial year it is received, even if it relates to the provision of services in the following financial year.

In recent financial years, councils have sometimes received a portion of the grant early. The first payment for 2015–16 was received in June 2015. This resulted in additional revenue of $269.8 million, which councils would ordinarily have recorded in 2015–16, being recorded in 2014–15.

During 2015–16, councils received the balance of their financial assistance grants for that financial year, but the first payment of their 2016–17 grant was paid in 2016–17. This meant that councils recognised only $269.6 million grant income in 2015–16, compared to $811.5 million in 2014–15.

In 2014, the Commonwealth Government announced that it would stop indexation of the financial assistance grant until 2017–18. This means that the total value of the grant provided to Victoria will be similar each year until 2017–18, and may not reflect the cost increases councils incur as they provide services to their communities. As a result, councils will need to ensure they have other funds available to meet any shortfall in grant funding.

Developer contributions

Developer contributions are received either as cash or physical assets (in-kind contributions) when a new community has been built. The council then maintains the assets on an ongoing basis. Items include infrastructure—footpaths, roads, drainage—or community buildings, such as a school or library. Alternatively, the developer will provide cash to enable the council to build these items as required. Both types of contribution are recognised as revenue when they are handed over to the council.

While total in-kind developer contributions are recognised as revenue up front, councils have an ongoing obligation to maintain the assets they receive and also to spend developers' cash contributions on community assets.

Interface councils generated the largest surplus in most of the last five financial years. This reflects their 'growth council' status—which means that they undertake more community development than other councils. This results in these councils receiving more developer contributions than other councils each financial year. The peak in 2015–16 was driven by $692.4 million in contributions, a 54.7 per cent increase on the $447.7 million they received in 2014–15.

2.3 Financial reporting controls

When carrying out our financial audits of the sector, we found that councils' internal controls generally were adequate for financial reporting. However, we found instances where important internal controls needed to be strengthened.

We report the weaknesses we find in a council's internal controls to the mayor, chief executive officer and audit committee in a management letter.

2.3.1 Issues identified in 2015–16

In 2015–16, we reported 211 issues that we classified as extreme, high and medium risk in our management letters across the 79 councils. Figure 2C summarises the issues by area and risk. Appendix C provides additional information on our risk ratings, and our expected time lines for resolving issues.

Figure 2C

Reported issues by area and risk rating for 2015–16

Note: Issues rated as low risk are excluded from this analysis.

Source: VAGO.

We found the key areas of weakness across the councils relate to the areas of information systems (IS) controls and fixed assets.

Information systems

IS are an integral part of day-to-day council processes. In particular, each council has several key systems that feed into the financial reporting processes. It is important that data held within these systems is secure, and the risk of an unauthorised person accessing the data and systems in minimised.

Across the 79 councils, we raised 46 issues relating to:

• poor patch installation—the latest security updates may not be in place across a particular system or on networked computers
• the use of software that is no longer supported by the provider—these applications will not be subject to updates that enable them to remain secure
• poor password policies—increasing the risk that an unauthorised user may be able to gain access to the IS
• back-up restoration procedures were not documented and/or had not been recently tested—increasing the risk that they may not work when required, resulting in lost data.

All of these issues increase the vulnerability of council IS systems to a potential loss of data or the failure of a particular system, which would reduce the integrity of the data available to the council, and potentially affect their financial information.

Property, infrastructure, plant and equipment

We raised 90 issues regarding the fixed assets and the valuation framework in place across the 79 councils, including failure to:

• regularly update the fixed asset register to ensure that it is accurate and complete
• put an asset valuation policy in place for non-current physical assets
• identify and mitigate asset valuation risks through the risk management process
• conduct a thorough review of valuers'reports before adopting the results of the valuation.

These issues are discussed further in Part 4 of this report, where we assess the non-current physical assets valuation frameworks in place across the 79 councils.

2.3.2 Status of issues raised in previous audits

Through our management letters, we provide an update on the status of internal controls that have been identified and reported during previous audits. We monitor these issues to ensure that they are resolved. Figure 2D shows the status of these issues, as reported in our management letters to the 79 councils.

Figure 2D

Prior-period internal control deficiency issues—resolution status by risk

Note: Issues rated as low risk are excluded from this analysis.

Source: VAGO.

While councils are taking corrective action—with 55 per cent of prior-year issues resolved in 2015–16—issues are still being left unresolved for too long. We recommend that high risk issues are resolved within two months of our management letter being issued. Medium risk issues should be resolved within six months.

3.1 Conclusion

At 30 June 2016, the local government sector had a relatively low financial sustainability risk assessment.

However, the small shire council cohort is facing an increased financial sustainability risk, with budget projections for the next three financial years showing a fall in expected revenue. This will reduce the funds these councils have available to invest in new and replacement assets which may adversely affect the services they can provide to their communities.

3.2 Financial sustainability risks

To be financially sustainable, councils should aim to generate enough revenue from their own operations to meet their financial obligations, and to fund asset replacement and asset acquisitions.

We use six financial sustainability risk indicators over a five-year period to assess the potential financial sustainability risks in the local government sector. The financial sustainability indicators, risk assessment criteria and benchmarks we use in this report are described in Appendix D.

Figure 3A summarises the financial sustainability risk ratings for the sector at 30 June 2016 based on the council cohorts. The financial sustainability risk indicators are calculated using the financial transactions and balances of each council's audited financial report.

Figure 3A

Financial sustainability risk indicators for the local government sector at 30 June 2016

Note: Yellow result = medium risk assessment; green result = low risk assessment.

Source: VAGO.

3.2.1 Overall analysis

Figure 3B shows that, over the past five years, the local government sector is in a financially sustainable position.

Figure 3B

Financial sustainability risk indicators for the local government sector at 30 June, 2012 to 2016

Note: Yellow result = medium risk assessment; green result = low risk assessment.

Source: VAGO.

The slight drop in the net result indicator between 2015–16 and 2014–15 reflects the disparity in the payment schedules for the financial assistance grant. However, the result is still positive. This—when combined with a strong liquidity result for all cohorts—indicates that councils are in a good financial position, and able to meet their commitments when they fall due over the next 12 months.

Our review of councils' financial statements has highlighted that the strong financial position is driven by a high level of cash and investment assets and a low level of borrowings at 30 June 2016. As shown in Figure 3C, this trend has been in place over the last five financial years, and is projected to continue over the budget period.

Figure 3C

Cash and investments and borrowings for the local government sector from 2011–12 to 2018–19

Note: Dashed line represents budget information.

Source: VAGO.

Figure 3C highlights:

• a peak in cash holding across the 79 councils at 30 June 2016—reflecting councils' building cash reserves
• an increase in borrowings from the 2012–13 financial year—this is linked to the Municipal Authority Victoria setting up a sponsored funding vehicle that enabled councils to borrow at lower rates.

As councils seek to increase their debt profile, they need to ensure that they are able to meet the repayments when they fall due.

The indebtedness indicator measures councils' ability to meet their non-current liabilities through own-source income—meaning, can they meet their longer-term debts through rates and other income raised by the council, rather than relying on grants for this purpose. Although this covers more than just the repayment of borrowings, it is a good indicator of whether the council is at risk of defaulting on a debt.

At 30 June 2016, the local government sector is rated strongly for this indicator, and is in a position to meet commitments as required. This is consistent with prior years.

The capital renewal indicator provides a snapshot of councils' spending on renewing and replacing their non-current physical assets. This is assessed against the level of depreciation expense for the financial year as this represents use of the assets within the same period. The internal financing ratio assesses whether this capital expenditure can be met from council funds, or additional funding is required.

3.2.2 Small shire councils

When compared with the local government sector as a whole, the small shire council cohort is facing a relatively higher level of financial sustainability risks—particularly in the forecast years. Figure 3D summarises the financial sustainability risk ratings for this cohort from 30 June 2012 to 30 June 2019.

Figure 3D

Financial sustainability risk indicators for the small shire cohort, 2012–19

Note: Yellow result = medium risk assessment; green result = low risk assessment.

Source: VAGO.

Overall, small shire councils are facing additional pressures due to smaller year-on-year revenue increases, and steady increases in expenditure. This has a direct impact on the level of funds these councils have available for capital expenditure. This could potentially have an adverse impact on the services and infrastructure that councils are able to offer to their communities.

Net result

The small shire council cohort reported a net deficit of $0.1 million for the financial year. This reflects:

• a reduction of $69.8 million in revenue compared to the prior year, reflecting the receipt of the first payment of the 2015–16 financial assistance grant in 2014–15
• a combined deficit of $0.3 million from the councils' joint ventures, compared to a $0.2 million surplus in 2014–15.

The small shire councils are not budgeting to rebuild a strong surplus over the upcoming three financial years.

Figure 3E shows the revenue and expenditure for the small shire council cohort over the financial years ended 30 June 2012 to 2019.

Figure 3E

Revenue versus expenditure for the small shire council cohort at 30 June, 2012 to 2019

Note: Dashed line represents budget information.

Source: VAGO.

Figure 3E shows that the revenue for these councils is expected to fall slightly over the budget period, decreasing from $494.3 million in 2016–17 to $476.9 million in 2018−19, a fall of 3.5 per cent. This fall in revenue is linked to an expected 42.5 per cent reduction in capital grants. For these financial years, councils are expecting to generate only small increases in rates revenue—due to rate capping—and expect limited increases in their financial assistance grant.

Over the same period, the cohort's expenditure is expected to increase by 3.6 per cent, from $453.0 million in 2016–17 to $469.3 million in 2018–19. This will result in a small surplus, reducing each financial year. By 2018–19, the cohort projects to generate a collective surplus of $7.6 million.

Capital renewal and renewal gap analysis

Figure 3F shows the capital renewal indicator for the small shire council cohort from 2011–12 to 2018–19. This chart indicates that the cohort is facing an increasing risk that they will not be able to replace or build new assets as required.

Figure 3F

Small shire council cohort—capital renewal financial sustainability indicator results, 2011–12 to 2018–19

Note: 2016–17 to 2018–19 analysis based on unaudited budget information.

Source: VAGO.

Figure 3G shows our assessment of the renewal gap indicator for the small shire council cohort. It shows our analysis of the level of capital renewal expenditure that was—or is forecast to be—spent on renewing their existing assets, and illustrates that spending on capital renewal is reducing, therefore spending will not be focused on replacing existing assets.

Figure 3G

Small shire council cohort—renewal gap financial sustainability indicator results, 2011–12 to 2018–19

Note: 2016–17 to 2018–19 analysis based on unaudited budget information.

Source: VAGO.

Although building new assets and infrastructure is important for the local community, councils need to ensure that existing assets can continue to be used as required. Councils need to find the right balance between new and replacement asset expenditure to offer the best outcomes for their community.

4.1 Conclusion

Asset valuation frameworks in place across the 79 councils are not in line with better practice. Improvements to asset recognition processes are required to reduce the frequency of 'found' and duplicated assets recorded by councils.

4.2 Valuations

4.2.1 Australian Accounting Standards requirements

In their annual financial statements, councils are required to report on the value of their fixed assets in accordance with Australian Accounting Standards AASB 116 Property, Plant and Equipment and AASB 13 Fair Value Measurement. These accounting standards detail the valuation and reporting requirements councils need to comply with for financial reporting purposes.

The valuation process is complex due to the scale and variety of assets that councils control. Asset valuation requires sound management judgement, the engagement of a valuation expert, and the identification and use of a number of key assumptions to underpin the methodology applied when determining fair value. Incomplete or inaccurate asset information may lead to noncompliance with these standards, or result in a material error in the council's financial statements.

4.2.2 Cyclical asset valuations

Councils are required to review the value of their fixed assets annually, and engage valuers to undertake formal valuations as required. This is a complex process that relies on strong data and good judgement. If there is reason to believe the value of an asset is materially inaccurate, then a council should complete a revaluation.

Councils often have programs detailing when they will conduct a formal valuation process on each type of asset, rather than valuing all assets at the same time. For example, drains might be revalued every three years, but roads every second year. There are no set cycles for this process, and this approach is acceptable under AASB 116 and AASB 13.

Figure 4B summarises the revaluation cycles of the four main asset classes for the 79 councils.

Figure 4B

Revaluation cycles for major asset classes in the 79 councils

Note: 'Variable' indicates that revaluations take place within a range of years—for example, 2–5 years, 3–5 years or 'ad hoc'.

Source: VAGO.

4.2.3 Financial impact of asset valuations

The revaluation of an asset class needs to be accounted for in the council's financial statements. Figure 4C shows the impact of asset valuations for the different asset categories across the local government sector for the last two financial years.

Figure 4C

Asset revaluation increments per asset category, for financial years ended 30 June 2015 and 30 June 2016

Source: VAGO.

4.2.4 Issues arising from 2015–16 valuation process

Due to its complexity, we identify asset revaluations as a key risk that we need to address through our financial audit. This means that we assess each element of the judgements made by management and the valuation experts to ensure that the figures reported in the financial statements are materially accurate.

During 2015–16, our review found the following issues with valuations:

• the use of incorrect unit costs when revaluing assets
• asset condition assessments not being completed for all revalued assets
• proposals to depreciate assets on a deterioration curve basis when a straight line basis is required.

Councils could improve their approach to valuations by implementing an appropriate quality assurance process, and improving communication between the council's accounting and finance area and their engineering area.

All of the issues we identified were resolved by the councils concerned before signing their financial statements.

Found, ghost and duplicate assets

A common issue across councils is the identification of 'found' assets—an asset that the council was unaware of, but for which they have control. As a result, the asset has not been valued nor included in the asset valuation process until the point it is found.

In 2015–16, councils have accounted for found assets either by:

• recording them as income in the financial year they were identified
• making a correction to the prior-year asset information.

During this process, 'ghost' or 'duplicate' assets may also be identified. A ghost asset is one that the council has been recording as an asset but is identified as no longer existing, and a duplicate is an asset that has been identified as a duplicate of an existing asset.

Across the local government sector, 31 councils identified $149.3 million of found assets in the 2015–16 financial year, and $36.8 million of duplicate and ghost assets.

4.2.5 Key systems

All councils have an asset register in place to collate information about their physical assets. The data in this register must be accurate and complete, both for financial reporting purposes and to assist in the valuation process. Figure 4D shows how these elements are linked.

Figure 4D

Asset valuation process

Source: VAGO.

Asset management system

The asset management system should store all of the data relating to the council's assets. Ideally, it should be available to both the finance and engineering functions of the council to enable asset information to be kept up to date, and to inform all aspects of asset management.

Asset register

Councils collate and store all financial information regarding their physical assets in an asset register. This is the key source of information for councils' financial statements. The asset register must be updated every time the council acquires, disposes of, or revalues an asset. Often the accounting and finance department of a council maintains the asset register.

Asset registers—which can be specialist systems or spreadsheets—are usually updated manually. Many have been in place for a number of years. This increases the risk that they contain errors. Council management must carry out regular quality assurance reviews of the data to confirm that it is complete and accurate.

Our review identified 57 councils (72 per cent) that carried out formal quality assurance reviews of data held in the asset register before providing the data to the valuers. If this review is not done, the valuation may not cover all assets, or may value the wrong assets. It is not the valuer's role to confirm the accuracy of the asset register—only to value the items listed.

Geographical Information System

All councils also operate a Geographical Information System (GIS). The GIS can hold a more detailed registry of all assets similar to the asset register, but with more information about individual assets— such as a description, accurately measured physical dimensions, the geographic location, and photos.

Often a council's engineering department maintains its GIS. Like the asset register, the system needs to be manually updated when a council acquires, disposes of, or reassesses the condition of an asset.

Integrity of the datasets

One of the ways to maintain accurate asset information is to reconcile these separate systems. By performing a reconciliation, councils will be able to identify and investigate any discrepancies, such as:

• assets missing from one system but included in another
• assets included in different asset classifications on the two systems.

By undertaking this reconciliation, council management will also build up a familiarity with their assets base, improving their ability to review and question the valuers' assessments as required.

4.2.6 Valuation frameworks across councils

Councils should have an effective asset valuation framework in place to provide guidance, oversight and management of the asset valuation process. The key elements of an asset valuation framework are shown in Appendix E.

Our review identified 49 councils (62 per cent) had an approved or draft policy covering asset valuations. From those, 25 policies had been reviewed in the last two years, which means that these policies reflect the introduction of AASB 13 Fair Value Measurement for the financial year ended 30 June 2014. Older policies may not include these requirements.

Councils without policies mainly relied on accounting standards for guidance on asset valuations. Although this provides details on the financial statements reporting requirements, it does not cover key aspects of a valuation framework for individual councils, including:

• roles and responsibilities
• frequency of revaluation
• valuation approach and methods
• sources of valuation information
• quality assurance requirements.

Without a policy, councils lack formal direction about how to complete, manage and assess the valuation of their assets. This could lead to potential misstatements in the financial statements. In turn, incorrect valuations will affect the council's depreciation expenses and, potentially, their asset management processes.

Key elements of policies

We analysed the 49 asset valuation policies in place in the sector using the key elements listed in Appendix E. This analysis highlighted common weaknesses across the policies. This is illustrated in Figure 4E.

Figure 4E

Assessment of council asset valuation policies against key elements of better practice

Source: VAGO.

Councils need to improve their policies to include all elements of better practice. For example, by not identifying agreed sources of key information, there is a risk that councils are changing the information they use for each valuation from one cycle to the next. This may mean the valuations are not comparable and could result in wide fluctuations in the outcome. The eventual impact of this will be on the depreciation expense and asset revaluation reserve, and on the council's retained surplus.

Similarly, if councils do not specify whether assets should be valued at a component level or not, they are not providing a consistent methodology for capturing data within the asset register. By not capturing the components of an asset, councils are at risk of noncompliance with the requirement under AASB 116 Property, Plant and Equipment that major components of assets are identifiable and depreciated individually, rather than as a single asset—for example, a leisure centre is not recorded as a single item—but itemised as a building, a swimming pool, gym equipment, fixtures and fittings, etc. It may then be possible to further specify items such as components of the building.

By including all the better practice elements in their valuation frameworks, councils will be able to get the most accurate valuation for their assets possible at the appropriate time. As well as complying with the financial standards, this information can be used in their asset planning processes across the council, to ensure that both the finance and engineering functions have a complete and accurate list of all assets, their useful lives and values.

Management practices

Council management is responsible for maintaining complete and accurate records to prepare financial statements in line with reporting requirements. This includes maintaining control of the asset valuation process, making key decisions at each stage and ensuring that appropriate quality assurance procedures are in place.

Our review identified that 58 councils (73 per cent) review and agree to the terms of reference before starting the asset valuation process.

Similarly, we noted that management formally reviews the proposed methodology to be adopted by the valuers at 60 councils (76 per cent). This is important for management to be able oversee and understand the asset values.

All councils should use these elements of better practice, regardless of whether the valuers engaged are external contractors or internal council staff. In both cases, the valuers need to have reliable data from the asset systems to enable them to provide an accurate valuation.

Governance and oversight

A good governance and oversight process is required to ensure that the results of the asset revaluation stand up to scrutiny. Management must review and query valuers' reports to ensure that they understand any substantial movements in asset valuations within a financial year. Errors arising from the valuation process could lead to material misstatements in a council's financial statements.

Encouragingly, 75 of the 79 councils performed the quality assurance processes over asset valuation reports. These checks included reviewing the unit rates used, assessing the condition and remaining useful lives of assets, and determining asset component levels. Management generally sought answers to any queries from the valuers after reviewing the reports.

Asset valuation risks

Due to the complexity of asset valuations, councils need to identify and mitigate the risks arising from the revaluation process using their risk management framework. This will add an extra level of oversight to the valuation process.

Our review identified that 28 councils (35 per cent) have identified asset valuation risks as part of their risk registers. Councils who are not identifying, mitigating and resolving issues related to the asset valuation process have an increased risk of material errors arising during the process.

Working with audit committees

Councils require their audit committee to independently review the draft financial statements and to recommend whether they should be adopted. Therefore, the audit committee is an ideal high-level reviewer of asset valuation movements. The committee should complete its review before the financial statements are completed.

However, we found that 69 councils (87 per cent) did not separately brief the audit committees about the results of the valuation process to outline key movements in the asset balances.

Review by an audit committee of a revaluation's terms of reference, the key assumptions made in a revaluation and the reasons for the underlying movements in asset values will provide greater assurance over the revaluation process.

Although the audit committee review does not replace robust oversight by management, it should be included in the oversight process. Our recent report Audit Committee Governance, tabled in August 2016, notes that audit committees should be an independent and objective source of advice on matters including financial expertise. Reviewing and understanding asset revaluation movements is a key area where this should occur.

4.2.7 Case studies

Our review identified two councils that provide good examples of the challenges faced by councils as they undertake the valuation process.

Case study: Reconciling asset systems

Mornington Peninsula Shire Council has undertaken a comprehensive review of their asset register, including a reconciliation with the GIS system. As a result of this process, the council found assets they were previously unaware of, and removed duplications in the systems. The case study in Figure 4F provides an example of the issues that councils face.

Figure 4F

Case study: Mornington Peninsula Shire Council

Background Mornington Peninsula Shire Council (the shire) looks after an area of 723 square kilometres, and is responsible for $2.0 billion of non-current physical assets. Found assets The shire has a history of reporting found assets in their financial statements. Over the five financial years 2011–12 to 2015–16, $95.9 million of found assets were identified and recognised. These are outlined in this chart. Fair value of found assets ($ million) for financial years ended 30 June 2012 to 2016   Source: VAGO. The high volume of found assets illustrates the risk of not having a complete register of assets, in particular, infrastructure and drainage assets. Identifying these assets To resolve the situation, the shire has used its infrastructure maintenance contracts to gradually identify assets that were not previously recorded, and update missing asset data. Using tools such as geospatial software linked to the fixed asset register, the asset management team has been able to map out infrastructure assets. In early 2016 the shire found $42.8 million of infrastructure assets in the asset register that did not exist. It derecognised these assets through the financial statements. Improving internal processes To get accurate and reliable data about the type and condition of the assets, regular communication between the asset management team (engineers and valuers) and the finance team is important. In the past, the asset management team at the shire entered new data and updated existing data without understanding the financial reporting implications. The finance team relied on this information and used it for reporting purposes. Starting in 2015–16, regular meetings between the finance and asset management teams have resulted in the fixed asset register having a greater degree of accuracy.

Source: VAGO.

Case study: Found assets

If councils do not have a formal valuation policy, or good governance and oversight in place, errors may arise in the valuation process. These councils may also have a higher than expected number of found assets. Figure 4G provides a case study of Maroondah City Council, which illustrates the impact on a council in this situation.

Figure 4G

Maroondah City Council case study: Asset valuations and data issues

Source: VAGO.