Chapter 4.3: Expenses

4.3.1 Expenditure disclosure

Expenditure should be disclosed separately from income - not ‘netted off’ - to help the reader of the financial statements understand what has happened at the school during the year. This includes locally raised funds, such as trading activities, hostel operations and fees received from international students, although the detail is usually provided in the notes to the financial statements rather than the Income Statement.

School expenditure is usually reported against a range of expenditure-type categories, eg, learning resources, administration or property. That enables comparisons from year to year within the school and across the school sector. However, if a school has allocated its budget against strategic priorities within those categories, it may choose to report actual expenditure in the same way, especially within its Statement of Variance or notes to the accounts.

4.3.2 Depreciation

What is depreciation?

When an asset is bought, the cost is recognised in the Balance Sheet of the school as an asset and not expensed in the year of purchase. Instead, in each year of using the asset, part of the cost of the asset is expensed as depreciation. This is because of the accounting ‘matching principle’ – the cost of the asset should be matched to the years when the school uses the asset.

How is depreciation calculated?

The most common and simplest method used to calculate depreciation is to estimate the useful life of an asset and then divide the cost of the asset equally across that life. This is known as ‘straight line’ depreciation.

Example

A computer is estimated to have a useful life of four years and at the end of that time it will have no resale value. If the computer cost $2,000 then the depreciation cost each year will be:

Journal entry

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4.3.3 Leases

Leases can either be classified as finance or operating leases. The classification of a lease is determined in terms of NZ IAS 17: Leases.

Finance leases

A finance lease is a lease that transfers substantially all the risks and rewards of owning an asset to the lessee (the person leasing the asset).  The substance of the lease documentation (what it means) is looked at rather than the contractual form (the words used). Each lease should be considered on a case-by-case basis to decide whether it is a finance lease or an operating lease.

Factors that indicate a lease is a finance lease (as per sections 10 and 11 of NZ IAS 17) include:

• ownership of the leased asset is transferred to the lessee by the end of the lease term
• the lessee can buy the asset at no or low cost at the end of the lease
• the lease is for the major part of the economic life of the asset
• at the beginning of the lease the present value of the total minimum lease payments are at least substantially all of the fair value of the asset
• the asset is of a specialised nature so that only the lessee can use it without major modifications
• there are penalties for cancelling the lease
• the lessee gets any gains or losses in the value of the asset
• the lease can be extended when it finishes, at a lower than market rate.

In most cases, the ministry believes that it should be possible for the school and financial service provider to make the decision about whether the lease is a finance or operating lease, without consultation with their auditor. However, the ministry accepts that it can be difficult to make a decision on some leases and, therefore, where there is doubt, and the issue is material to the financial statements, the ministry recommends that the school consults its auditor for advice.

Accounting for finance leases

According to NZ IAS 17 ‘Accounting for Leases and Hire Purchase Contracts’:

“At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments”.

Fair values can usually be estimated based on the cost of buying the asset.  The present value of the minimum lease payments is usually around fair value.

The depreciation policy for leased assets should be consistent with that for depreciable assets, which are owned, except where there is no reasonable certainty that the board will obtain ownership of the asset by the end of the lease term, in which case depreciation should be over the lease term (refer to paragraph 27 of NZ IAS 17).  For example, if computer equipment is normally depreciated over five years, computer equipment obtained under a 4-year finance lease should be depreciated over four years rather than five years.

The finance charge is the total of the lease payments less the initial value of the capitalised asset.  This charge should be allocated as an expense to the financial periods of the lease term to give a constant periodic rate of interest on the remaining balance of the liability (as per section 25 of NZ IAS 17) or a reasonable approximation.

Operating leases

A lease will be an operating lease if it isn’t a finance lease. Operating leases are expensed as payments are made.

Notional lease – use of land and buildings

Schools must recognise the cost of a notional lease for land and buildings provided to them by the Crown (or their proprietor) as an expense, with the same number recognised as income (see Chapter 4.2.7 for further information, including how the value is calculated).

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4.3.4 Personnel expenses

(Refer also to the Funding, Staffing and Allowances Handbook)

Boards are required to show all personnel costs relating to their employees in their financial statements, even when these payments are made by the Ministry of Education on behalf of the board, eg, for the school’s full-time teaching equivalent (FTTE) teachers.

Salaries and wages for administration and property staff are also usually paid via the Ministry of Education payroll system but are expensed against the board’s operational grant. Schools can also elect to pay teachers additional to their FTTE with operational grants or locally raised funds. Some schools elect to administer their own payroll for non-teaching staff.  If these employees are on a payroll system administered by the school then their costs will be recognised as they are paid.

The costs for employees on the payroll administered by the Ministry of Education must be entered as a Journal entry. Boards should enter the payroll costs from their monthly Staffing Usage and Entitlement (SUE) report as a Journal entry each month rather than wait until the end of the year.  This ensures meaningful reporting against budget.

To assist schools with the annual Journal entry a summarised SUE report is generated at the end of each financial year and sent to schools in mid January.

Journal entry

ACC Premium

The Ministry of Education pays ACC premiums on behalf of schools. As with teacher salaries, ACC premiums must be recorded by schools in their financial statements as a grant from the Ministry of Education and as a cost to the school. Although this will have no effect on a school’s surplus for the year, it will reflect the actual cost of operating the school and the revenue earned.