Article 8: Accounting for leaky homes liabilities

Local government: Results of the 2009/10 audits.

Accounting for the effect of leaky homes has been a significant issue for the local government sector for more than five years. We have reported on this issue for the last three years. We have particularly focused our reporting on how the six local authorities15 most significantly affected have accounted for the liabilities they face – liabilities related to claims that have been lodged and claims that are expected in the future.

There has been significant concern throughout the local government sector about the current and future effect of leaky home claims on the finances of local authorities – and consequently on ratepayers. This has been balanced with an acknowledgement that all New Zealanders need to have a means to resolve leaky home issues and therefore to be able to live in healthy and safe homes.

In the 2010 Budget, the Government announced its intention to set up a new financial assistance package to help homeowners repair their leaky homes faster. The package will see the Government meet 25% of homeowners’ agreed repair costs, local authorities contribute 25%, and homeowners fund the remaining 50%.

The Government is working on the specific claim process related to the package. It expects this to be operational from early to mid-2011.

Whether a local authority has formally agreed to participate in the new package or not, accounting for the liability faced for leaky homes remains very important. The new package does not change the accounting requirements for leaky home liabilities.

Each local authority must assess its exposure to liabilities for leaky homes. There are three categories of claims. These are claims that have been investigated and reviewed and the total cost to the local authority confirmed, claims lodged where the cost and the local authority’s share of the liability is still to be confirmed, and claims that might be made against a local authority between now and the end of the statutory limitation period. Generally, an actuary will need to calculate the liabilities in the last two categories. The applicable accounting standard16 assumes that the liabilities in the first and second categories will be accounted for as an actual liability. Those within the third category should also be accounted for as an actual liability if the actuarial assessment is reliable enough. Otherwise, it should be disclosed as a contingent liability.

As we have noted in our previous reporting on this issue, identifying and assessing liabilities for both the second and third categories has proved complex in practice, even with the professional expertise of an actuary. As a result, a significant proportion of leaky home liabilities have been accounted for as contingent liabilities with varying degrees of specificity regarding the amounts. We do not anticipate that the new package will significantly simplify this situation. However, we encourage you to work with your actuaries to use the increasing volume of claims history and to disclose in the financial statements and the contingent liability note disclosures in your annual report more accurate information about the leaky home liabilities you face.

In calculating the leaky home liability, each local authority must also consider how the provision for this liability has been allowed for in the 2009-19 LTCCP and whether the calculation, in light of the new package, indicates a significant change. If it does, it could trigger a long-term plan amendment. This will depend on the approach each local authority has taken in the past and therefore must be considered by each local authority with reference to its individual circumstances.

In addition, we encourage you, as you begin developing the 2012-22 long-term plan, to work towards building into those financial forecasts appropriate assessments of the liabilities that are ahead. The long-term plan must include appropriate assumptions and uncertainties/risks regarding how the forecast liability has been estimated. Importantly, it must also include appropriate funding mechanisms to meet the forecast liability.

15: In 2007, when we first reported on this matter, the six most significantly affected local authorities were Auckland City Council, Christchurch City Council, North Shore City Council, Rodney District Council, Waitakere City Council, and Wellington City Council. Based on our review of 30 June 2009 annual reports, Manukau City Council and Tauranga City Council had claims higher than Rodney District Council.

16: New Zealand equivalent to International Accounting Standard 37: Provisions, Contingent Liabilities and Contingent Assets.

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