Chapter 4.5: Liabilities

4.5.1 Banking staffing overuse

Schools are provided with a banking staffing report fortnightly. Under or over-usage of banking staffing as at 27 January (PP22) each year can be corrected up to and including PP26 (end of March) of that year. Any remaining overuse at PP26 is deducted from the operations grant funding payment on 1 July. Schools should recognise any net liability they have for banking staffing overuse as a current liability in their annual financial statements. (PP = Pay Period; eg, PP22 is pay period 22).

Example : Kiwi Park School receives a banking staffing report for PP22 showing overuse at a value of -6.52 FTTE or $13,792.31. That figure is reduced by moving one teacher to operational funding for the period PP23 to PP26.

That reduces the overuse to -2.52 FTTE or $5,330.77 (a reduction of $8,461.54). This balance should be included as a current liability in the Balance Sheet because it will be recovered from the operations grant payment on 1 July the following year.

Journal entry

Example: Kiwi Park School receives a banking staffing report for PP22 showing overuse at a value of -6.52 FTTE or $13,792.31. No underuse is expected to 31 March. This overuse balance should be included as a current liability in the Balance Sheet because it will be recovered from the operations grant payment on 1 July the following year.

Journal entry

Note: all calculations in the above examples are based on the 2007 recovery rate of $55,000. To calculate the exact amounts, take $55,000, divide by 26 FTTEs for the year and multiply by the relevant actual FTTE figure.

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4.5.2 Creditors/expense accruals

Accrual accounting, adopted by the government and all Crown entities in 1989, recognises expenses that have been incurred for the financial year, regardless of whether any cash has changed hands.

Expenses incurred but not paid for are usually recorded as creditors and most schools will have a system to record and track creditors, manually or within their accounting software.

Usually year-end Journal entries are also required to recognise expenses that need to be accrued but are not recorded in the creditor system. All accrual Journal entries must be reversed at the start of the next financial year. The reversal entries will be dated January, and the entries themselves will be the same as above, but debits will be changed to credits and vice versa. Most accounting software packages will ask if a Journal entry is to be reversed and this facility can save considerable effort in the new year.

Example: Kiwi Park School orders $500 of stationery that arrives in December but won’t pay the supplier until January.

Journal entry

Accrual of personnel costs

It is likely that the most significant items to be accrued at year end relate to personnel costs (salaries, wages, ACC premiums etc) to recognise the expense incurred between the last pay day for the year and 31 December. For example, if the last pay period for the year ends on 24 December, an accrual will have to be made for the period 25 to 31 December.

To calculate the accrual, refer to the summary SUE report provided to the school in mid January.

Journal entry

Any holiday pay due but not paid will need to be accrued.

Journal entry

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Accural for sick leave

NZ IFRS requires an accrual for employee sick leave, but the Office of the Auditor-General (OAG) has agreed that no provision is required to be recognised for sick leave for any teachers, irrespective of whether a school is above its teaching entitlement, as in practice most teachers’ sick leave is grant funded by the Ministry.

For non-teaching staff, both sick and annual leave can accumulate. The OAG and Ministry are assessing whether this issue is sufficiently material to warrant recognition of a provision for the 2009 financial statements. Schools do not therefore have to accrue for leave accumulated by non-teaching staff at 31 December 2008.

A disclosure note is required, as included in the Kiwi Park School models. See the Resources section of this handbook.

Salary accruals

Salary accruals mainly reflect annual leave owing to teachers and ancillary staff and are recognised in respect of employees' services to balance date and are measured at the amounts expected to be paid when the liabilities are settled. There is a corresponding teachers’ salaries grant receivable from the Ministry to fund the liability.

Accrual for long service and retirement leave

If a school has non-teaching staff who have been employed with the school for some time, they may be entitled to long service or retirement leave. It is important to check their personnel records, calculate any liability that exists, set funds aside and record the liability in the school’s Balance Sheet. It can be difficult for a school to find unexpected, significant amounts to pay exiting staff.

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4.5.3 Funds held on trust

Refer also to 4.5.7 - Shared Funds.

Funds donated for specified purposes

From time to time schools receive special donations, bequests and other sums of money. Where the donor states that the interest on the money is to be used for a specified purpose then the money received, or capital sum, must be held separately – ‘in trust’. (See also Donations, Bequests and Gifts.)

The purpose of these donations or bequests may be:

• an annual prize
• a scholarship
• equipment purchase
• any other purpose specified.

Depending on the terms or conditions attached to the donation or bequest the school may be required to:

• hold the capital sum intact as a cash deposit or investment
• only distribute interest earned on deposits.

If the conditions attached to the donation are complex, a written opinion should be obtained from a lawyer or chartered accountant. These opinions should set out precise details as to how the fund is to be administered and accounted for. These opinions must be made available to the school’s auditor.

When a donation, bequest or gift is to be held in trust, it is regarded as a liability until the conditions attached to the donation are met. At that time the donation is transferred from a liability and recognised as income.

If the donation is to be held for a long time before it is paid out, or if the conditions require that only interest is paid, schools should consider setting up a separate bank account.

Example: Kiwi Park School receives $10,000 from the estate of M. Cooper, a former student. The bequest states that half of the interest earned each year is to be given as an award to the student who has made the most outstanding contribution to the school. In the first year $700 is earned in interest so that $350 can be paid as an award.

Journal entries

International students - personal funds held on behalf of students

In certain circumstances, schools may look after international students’ personal funds, perhaps to ‘drip-feed’ this money to the student over the year. However, there are other options available, such as bank accounts with restrictions on access. Whatever the legal arrangement, any school looking after funds for international students needs to regard itself as being in a fiduciary relationship with the student. Therefore the school must behave in an exemplary manner regarding the use of the funds.

Schools should deposit the private funds held on behalf of students into a bank account separate to the school’s main bank account – schools are holding funds on trust and have a very high duty of care. Interest earned on the funds must be returned to the students rather than being treated as a windfall by the school. Schools should have written agreements with the students and/or their parents/guardians to outline the circumstances in which the funds can be used or accessed and by whom.

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4.5.4 Grants received in advance

Refer to Chapter 4.2.5 Grants received in advance.

4.5.5 Loans with low or no interest

Refer to Impairment of Loans in Chapter 4.4.6 - Impairment of Assets.

4.5.6 Provision for cyclical maintenance

Schools operation grant funding includes a component for maintenance of school property. Although schools are not required to report directly how they have spent that money, they are required to keep their property well maintained, as part of their Property Occupancy Document.

One of the most significant maintenance costs for schools is painting, especially external painting. External painting is usually done on a cyclical basis, say every seven years. If a school does not set aside money each year from its operations grant then it can be a struggle to pay for the cost of external painting.

To support better planning for cyclical maintenance costs, like external painting, and to comply with GAAP, schools are required to have a Provision for Cyclical Maintenance as a liability in their Balance Sheets. Schools should set aside sufficient funds to match that liability.

How is the cyclical maintenance provision calculated?
Use your school’s 10-Year Property Plan to determine each major item of cyclical maintenance that should be provided for. The most common items are internal and external painting of the school, but may include other items like resurfacing sports areas, painting the swimming pool, replacement of curtains and resealing car parks.

The amount of the provision is split between current (to be carried out in the following year) and non-current (to be carried out in future years) annually.

A model spreadsheet to help calculate the cyclical maintenance provision for a school is available in the Resources section of this handbook. The spreadsheet can be edited to include all of the major maintenance projects to be carried out in future years, the year each task is expected to be done and the estimated cost.

The assumptions used in the spreadsheet will need to be verified every five years by reference to the professionally reviewed 10-Year Property Plan (10YP), a long term painting contract or other reliable sources of evidence.

These assumptions will need to be reviewed more frequently if:

• a 5-Year Plan (5YP) has been agreed in a current year and some of the maintenance requirements are taken care of as part of the 5YP programme
• if the expenditure in the current year is not in accordance with the current provision in the previous year
• if there are any grounds to doubt the reasonableness of the provision.

It is important that the provision is correct and not influenced by any funding flows.

Please note the 10 YPP will still include a maintenance component and needs to be professionally reviewed ever three years. This spreadsheet simply calculates the provision for cyclical maintenance for inclusion in a school’s annual accounts.

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Accounting for cyclical maintenance expenditure

When cyclical maintenance work is carried out, the cost of that work will be charged against the provision for cyclical maintenance in the Statement of Financial Position.

It is possible that the maintenance cost incurred will not equal the provision for cyclical maintenance. This could be the result of:

• Changes in the nature of the school’s property – for example:
  - completion of 5-Year Plan capital projects
  - major roll change, resulting in the arrival or departure of re-locatable classrooms.
• Changes in estimates – for example:
  - signing of a 5-Year Plan with the Ministry, resulting in changes to the school’s 10-Year Plan
  - amendments to the nature and timing of maintenance tasks in the 10-Year Plan.
• Differences between estimated cost and actual costs

Example – actual cost equal to provision

Kiwi Park School has one classroom block that last had an exterior paint late eight years ago. The school anticipates that it needs repainting every ten years and the 10-Year Plan shows a repaint due next year that is expected to cost $50,000. At 31 December year end the school had a Provision for Cyclical Maintenance liability of $40,000 ($50,000/10 x 8 years). The provision was increased each year by $5,000 ($50,000/10 years).

Journal entry

Two years later the repaint was done at the forecast cost of $50,000.

Journal entry

Example – actual cost is more than provision

Kiwi Park School has a classroom block that last had an exterior paint eight years ago. The school anticipates that it needs repainting every ten years and the 10-Year Plan shows a repaint due next year that is expected to cost $50,000. At 31 December year end the school had a Provision for Cyclical Maintenance liability of $40,000 ($50,000/10 x 8 years).

The following year the school noticed a rapid deterioration in exterior paint on their classroom block. Although the repaint was not due for another two years, the board decided to have the block painted that year.

The repaint was completed for a cost of $50,000. The school must now record the cost of the exterior repaint. With the balance of the Provision for Cyclical Maintenance standing at $40,000, the cost of the repaint exceeds the amount provided. The additional cost must therefore be recorded as an expense.

Journal entry

At the end of that year the school updates its 10-Year Plan and recalculates its Provision for Cyclical Maintenance. The only item of cyclical maintenance was the repaint of the classroom block, and since this has only just been completed, the school is in a ‘good order of repair’ and the next repaint is not due for another ten years. Therefore, the current value of the school’s obligation to maintain Crown property is zero and no provision is required at year end.

Example – actual cost is less than provision

Kiwi Park School has a classroom block that last had an exterior paint nine years ago. The school anticipates it needs repainting every ten years and the 10-Year Plan shows a repaint due next year that is expected to cost $50,000. At 31 December year end the school had a Provision for Cyclical Maintenance liability of $45,000 ($50,000/10 x 9 years).

During the year, Kiwi Park School signed up to a new 5-Year Agreement with the Ministry. As part of this agreement the sash windows in the classroom block were replaced with aluminium windows and the areas around the windows were painted once the job was completed.

The following year the school carries out the exterior repaint of the classroom block in accordance with the 10-Year Plan. Because of the window painting work completed the previous year, the actual cost of the repaint was $40,000, $10,000 less than the amount estimated.

At year end the school updates its 10-Year Plan and recalculates its Provision for Cyclical Maintenance. The only item of cyclical maintenance was the repaint of the classroom block and since this has only just been completed, the school is in a ‘good order of repair’ and the next repaint is not due for another ten years. Therefore the current value of the school’s obligation to maintain Crown property is zero and no provision is required at year end. This means the balance of the provision at 31 December must be transferred to revenue.

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4.5.7 Accounting for shared funds

Schools that are members of clusters, which share resources and funding to achieve a common purpose, are required to account for any balance of these funds at each year end. The lead school will account for any balance unspent and should identify each cluster member school’s share. The member schools should show their share of the balance as a current asset.

You can find more information about detailed accounting entries to account for cluster or shared funding by searching this site – keywords ‘Shared Funds’.