Page title

Elected members and senior staff are well aware of the need for sound financial management of their local government’s resources. It is essential that local governments have meaningful and accurate financial information on which to base decisions. A key element of sound financial management is the preparation of the annual budget and this guideline addresses an integral element of the budget process – net current assets (opening funds) carried forward from the previous financial year and closing funds.

The calculations of opening funds brought forward at 1 July from the previous financial year, and closing funds carried forward at 30 June into the next financial year in the rate setting statement of the budget, have a direct impact in the determination of the amount of rates to be raised, and whether it is a balanced, surplus or deficit budget. Some local governments have found themselves in difficulties over miscalculation of these funds. Errors have led to situations where the funds available during the year have been less than that required to deliver the services and facilities provided for in the budget. In other cases councils have imposed higher rate increases than were necessary.

This guideline uses a typical rate-setting statement and through a series of examples, demonstrates how the opening and closing funds should be calculated.

Adherence to the methodology contained in this guideline will ensure that the method of calculation will become more consistent and accurate across the local government sector.

In compiling this guideline the department is aware that it is a technical issue and many elected members will be prepared to leave the calculations to local government staff. The target audience is local government staff who need to know about the calculation and interpretation of such figures and those elected members such as chairs of finance committees who also need to understand the technique and implications of the calculations.

It is intended that the guideline will alert elected members who have little or no training in financial matters of the importance of such calculations. As a consequence of this guideline all elected members should seek assurances from the staff that the methodology outlined and due diligence have been applied in producing a set of opening and closing balances.

If, after studying this guideline, elected members need further explanation of this aspect of financial management, it is recommended that they speak to the relevant officers in their local government.

Legislation

Various sections of the Local Government Act 1995 (the Act), and Local Government (Financial Management) Regulations 1996 (FMR) relevant to this topic are addressed below.

Preparation of the Annual Budget

Section 6.2(2) of the Act requires that in preparation of the annual budget local governments are to prepare detailed estimates for the budget year of:

• The expenditure by the local government.
• The revenue and income, independent of general rates, of the local government.
• The amount required to make up the deficiency, if any, shown by comparing the estimated expenditure with the estimated revenue and income.

Rates and service charges

Section 6.32(1) of the Act provides: “When adopting the annual budget, a local government:

• In order to make up the budget deficiency, is to impose a general rate on rateable land within its district …

Limit on the amount to be raised from rates

Section 6.34 of the Act provides that: 'Unless the Minister otherwise approves, the amount shown in the annual budget as being the amount it is estimated will be yielded by the general rate is not to:

• Be more than 110% of the amount of the budget deficiency; or
• Be less than 90% of the amount of the budget deficiency'.

This is explained in further detail under part 6 of the guideline.

Position at the start of the financial year

FMR r. 31 requires the net current assets at the start of the financial year to be shown in the annual budget. FMR r. 32 prescribes the amounts that may be excluded in calculation of the budget deficiency in accordance with section 6.2(3).

Guidance on the interpretation of these regulations is detailed in the table below:

Procedures for Determining the Opening and Closing Funds

Summarise net current assets

An initial step is to prepare a summary of all current assets and current liabilities brought forward from the previous financial year. If actual amounts are unavailable, then estimates may be used. The use of estimates has to be clearly disclosed and reasonable efforts should be made to ensure they are as accurate as possible. Estimates may occur for items such as accruals, creditors, stock on hand and prepayments.

In the following table the actual closing balances of current assets and current liabilities are used to determine the net current assets (opening balance) for the following period budget.

Calculation of surplus/(deficit) in the annual budget

The net current assets figure calculated above needs to be adjusted for relevant r. 31 and r. 32 items, already included in the annual budget to avoid double counting and any other adjustments in the table under 2.4 above. This involves:

• Deducting all cash reserves as these are restricted by section 6.11 of the Act.
• Deducting restricted grants and contributions that will not be used in the following year.
• Deducting land held for resale inventory amount if it is not expected to be sold in the budget year.
• Deducting loans that are proposed to remain unspent at the end of the financial year.
• Deducting loan repayments from clubs/ institutions from accruals.
• Adding back interest-bearing liabilities disclosed as a current liability. This is required to ensure that current loan borrowings are not included twice as it is usually already included in the rate setting statement.
• Adding back cash backed leave reserve or the value of leave already budgeted to avoid the amount being used twice in the calculations. This may only be added back if the leave provisions have been included in the calculation.

Note: Deciding what portion of leave provisions to ‘add back’ should be carefully considered in terms of what is already funded in the budget or can be funded from a cash reserve. Consideration would need to be given to:

• Whether annual leave is funded through 52 weeks of budget for salaries and wages for each employee and the extent to which periods of extended leave are funded.
• Whether relief staff are engaged and how that cost is funded.
• The likelihood of large leave accruals being paid out on termination.

Long service leave provision is calculated in accordance with AASB 119; a calculation based on the present value of probable future cash flows relevant to each employee. The provision includes a calculation for employees with less than 7 years continuous service and who would have no legal claim to leave until after that period of service is achieved. The accumulated value of this portion of the provision would not require funding. It is stressed that if this is not assessed correctly, a funding shortfall may occur or the calculated budget deficiency may be incorrect.

The above adjustments result in either a surplus as a source of funds, or a deficit to be funded from rates as part of net opening and closing funds.

Determination of the carried forward figure for the annual budget is calculated from the estimated annual financial statements. This then becomes the brought forward surplus or deficit (opening funds) in the annual budget rate setting statement.

To accurately determine the June 30 carried forward surplus or deficit (closing funds), local governments are encouraged to create a budget statement of financial position and a budget statement of equity. The creation of these statements (while not prescribed) helps to ensure that a realistic estimate of the surplus or deficit is being carried forward to 30 June of the budget financial year.

Calculation of Surplus/(Deficit) in annual financial report

Regulation 31(3)(a) requires the annual budget to include or be accompanied by notes containing a summary explaining the composition of the net current assets. Regulation 31(3)(b) requires the annual budget to include an explanation if the net current assets differs from the amount used in the rate setting statement.

Accordingly, local governments are encouraged to create a note that discloses how these amounts are determined which also provides information on any variance that has occurred between the prior year carried forward and the current year brought forward.

The following is a suggested template (also provided in the WA Local Government Accounting Manual) to aid in these calculations.

Note: If there is a difference between the prior year 30 June carried forward and the 1 July brought forward figure, then an explanation of this difference must be given.

Rate setting statement

The rate setting statement is pivotal to determining the amount required to be made up from rates and whether a balanced, surplus or deficit budget is adopted. It has the features of an income statement, the cash flow statement and a capital works program. The financial resources required and applied are summarised in this one statement.

This statement contains values of net current assets carried forward from the previous financial year shown as the opening funds at 1 July and net current assets shown as closing funds at 30 June.

The opening funds form part of the calculation of the amount of the deficiency to be raised from rates as referred to in section 6.2(2)(c) of the Act. Given the statutory limits on general rates that can be imposed to make up the budget deficiency, it is important that it be calculated as accurately as possible to ensure that a valid budget is adopted.

The following example demonstrates the use of opening and closing funds in the rate setting statement. The calculation of opening funds is explained in detail in part 3 of this guideline.

* Calculation of these figures is given in parts 3 and 5 of this guideline.

Limits on Deficit or Surplus Budgets Section 6.34 of the Act places restrictions on the amount shown in the annual budget as being the amount it is estimated will be yielded by the general rate, unless the Minister otherwise approves. The amount to be yielded by the general rate is not to:

• Be more than 110% of the amount of the budget deficiency, or
• Be less than 90% of the amount of the budget deficiency. In other words, a local government cannot (without the Minister’s approval) adopt an annual budget with a surplus or deficit of more than 10% of the budget deficiency.

Using the information from the Rate Setting Statement given earlier, the percentage to be derived from rates compared with the total budget deficiency is calculated. It will be noted from that statement that the amount to be made up from rates is $8,899,387.

If the local government does not propose to adopt a balance budget with $8,899,387 in general rates, it has the discretion to impose rates within the range of $8,009,449 to $9,789,325 without obtaining Ministerial approval. This is detailed in the following table:

Assuming that the local government proposed a 10% surplus budget, then the last three lines of the Rate Setting Statement would disclose:

If the amount required to be raised from rates is outside of the 90%–110% statutory limits, Ministerial approval must be obtained before adopting the annual budget. If this is adopted without that approval, the budget would be considered to be invalid and rates challenged in the State Administrative Tribunal under section 6.82 of the Act.

Opening and closing funds — budget review

Local Government (Financial Management) Regulations r. 33A require a local government to conduct a budget review to consider their financial performance in the period beginning on 1 July and ending no earlier than 31 December in that financial year.

This is the only statutory budget review that has to be undertaken. However, it is extremely important for a local government to review the budget immediately following the annual financial statements being completed and audited. Very often the estimated carried forward figure in the budget will differ from the audited annual financial statements carried forward figure and this should be adjusted by a budget variation adopted by council as early as possible in the current financial year.