1.5 Accounting Issues

Subsidiaries and Associates

1.501
Financial Reporting Standard No. 37: Consolidating Investments in Subsidiaries (FRS-37) has introduced a new definition of control, and provides extensive guidance on the nature and identification of control. Control is the basis that determines if a local authority must consolidate another entity into its group financial statements. As a result of FRS-37, there have been changes to the entities included in the group financial statements of some local authorities.

1.502
Financial Reporting Standard No. 38: Accounting for Investments in Associates (FRS-38) has also introduced some changes into the determination of entities over which Councils have significant influence and are therefore “associates”. Associates are accounted for using the equity method of accounting. There have been some issues in applying this standard in its first year of application. A specific example of the difficulty is set out in this report (see pages 23-26) in relation to the interests of Wellington City Council and Wellington Regional Council in the Wellington Regional Stadium Trust.

Heritage Assets

1.503
Last year we reported on issues that had arisen in relation to accounting for heritage assets in accordance with Financial Reporting Standard No. 3: Accounting for Property, Plant and Equipment (FRS-3).⁵ The valuation of such assets is problematic because there is no ready market generally available to assess their value, and there may be no generally accepted methods of valuation for certain heritage assets.

1.504
There has been no further progress in relation to the heritage asset issues, although local authorities and other entities with significant collections of assets continue to raise their concerns.

1.505
In 2002-03 no local authority audit opinions were qualified for non-inclusion of heritage assets, although the opinions on the financial statements of some entities associated with local authorities were qualified (see pages 105-107).

1.506
We expressed the view last year that the inconsistent approach among local authorities to valuation of heritage assets was unsatisfactory. We note that the National Asset Management Steering Group (NAMS) has recently completed work to provide guidance on the valuation of heritage assets. We will watch with interest to see whether this guidance enhances consistency in the valuation of heritage assets.

1.507
We are also mindful that the adoption of a new standard dealing with property, plant and equipment – to be based on International Accounting Standard 16: Property, Plant and Equipment – will have an effect on this matter. We will watch with interest the development of the new standard.

Valuation of Infrastructural Assets and Land Under Roads

1.508
Last year we reported on issues in relation to the valuation of infrastructural assets under FRS-3.⁶

1.509
Local authorities were given a transitional period, ending on 30 June 2004, within which to revalue all assets under FRS-3. During the 2002-03 year, many local authorities did revalue more assets. The comments that we made last year remain relevant, although we were pleased to observe some improvement in the process to obtain valuations.

1.510
Last year we also explained our approach to the valuation of land under roads.⁷ No progress has been made during the past year in reaching a consensus on the most appropriate valuation basis.

1.511
We will continue to encourage efforts to reach a consensus on the appropriate valuation basis. Pending such a consensus being reached, we will continue to expect these assets to be included in financial statements on some reasonable valuation basis. We will furthermore expect full disclosure of the basis of valuation.

Footnote 5: Local Government: Results of the 2001-02 Audits, parliamentary paper B.29[03b], 2003, pages 19-20.

Footnote 6: ibid, pages 20-21.

Footnote 7: ibid, page 22.