opinion regarding assertions made in relation to marina · pdf file ·...

Opinion regarding assertions made in relation

to Marina finances – District Council of Robe

April 2015

Version Control

Prepared by: Galpins Accountants Auditors and Business Consultants

Draft Version 1 29/04/2015

Final 01/05/2015

Opinion regarding assertions made in relation to Marina finances – District Council of Robe

Liability limited by a scheme approved under Professional Standards Legislation

This report is to be read in conjunction with the attached disclaimer Page 1 of 11

Background

Council at its meeting held 12/8/2014 passed resolution 29/2015 as follows:

Cr Mathews moved that the District Council of Robe request its external Auditors, Galpins, provide an

opinion in relation to the concerns expressed by Council’s Independent Chair of the Council’s Audit

Committee Mr W Peden that:

“A loan of approximately $1M that was in the balance sheet of both the marina project and

council before June 2013 as a loan owed to Council by the marina project. This loan seems to have

disappeared at the June 2013 consolidation. Thus, the money that was owed by the marina project

to the ratepayers has effectively been ‘gifted’ to the marina project as at June 2013. In other

words the ratepayers have donated approximately $1M to the project despite the ratepayers

having always been told the marina project is, and will remain, ‘user pays’ and that it will never

use any ratepayer money. Did this loan get consolidated out of existence in June 2013?”

The scope of our opinion, as agreed with Council, is limited to the following:

determine whether a loan of approximately $1m existed and was recorded in the books of the

Marina and Council

determine what happened to those amounts in June 2013

review the accounting treatment and internal reporting of Marina financial matters before and

after June 2013

report on the extent of community consultation.




Discussion

Context – what is the nature of the “loan”?

In considering the existence or otherwise of a loan between the Marina and Council, it is important to

establish what we are defining as a “loan”.

As of January 2008, the Marina and Council are not separate legal entities. The Marina, regardless of

exactly how its boundaries are defined, is now essentially a business unit/department of Council. It may

also be seen as a grouping of infrastructure owned and operated by Council.

Therefore, any current ‘loan’ between the Marina and Council can only be internal in nature. In essence,

any loan existing between the Marina and Council represents the by-product of an internal allocation of

revenues, expenses and capital.

Relevance – why would Council need / want to measure an internal loan?

Being internal in nature, the relevance of the existence of such a loan hinges solely on the concept of a

user pays system for the Marina.

If Council has not elected for the Marina to be operated as a user pays system, then the Marina

infrastructure is simply another asset of Council, and would be expected to be operated and managed in

the same manner as any other piece of Council infrastructure. Recognising an internal loan under this

scenario would be of little or no use.

If Council has elected for the Marina to be a user pays system, tracking the revenues and expenses of the

Marina and the balance of any notional loan will assist Council in measuring the extent to which the

revenues collected from users are recovering the costs of operating the Marina, and the extent to which

any shortfall, if it exists, is being met from the general operating revenues of Council.

The leases underpinning the major revenue sources for the Marina provide Council with limited recourse

to increase revenue. Further, ongoing operating and capital expenses such as infrastructure maintenance

and replacement are unable to be avoided. As a result, measuring any notional short-fall in cost recovery

is unlikely to have a material impact on decision making in relation to the day-to-day operation of the

Marina. The concept of unpaid internal loans may be a relevant factor should Council be considering any

major future upgrades to Marina infrastructure over and above that required to meet existing lease

obligations.

Expectations – has communication to the community implied that a user pays system exists?

In the absence of a documented Council decision to establish a loan, or to formally recognise the concept

of a user pays system, it would still be reasonable for the community to have an expectation that the

Marina project would be funded by its users, including establishment costs.




There have been a number of statements made by Council officers in Media releases and in Robe Marina

Corporation newsletters which imply this concept, including the following:

Media release extracts

o 9/11/2005 - Peter Darr - Mayor

"no budget allocations have been provided for (in any year) expenditure and its

has been resolved (by all councils) that the costs will be recouped as part of

overall Marina development" (comment relates to Marina expenses incurred by

Council)

"projected funds from the sale and lease of berths in the project will recoup these

funds"(comment relates to Marina expenses incurred by Council)

"proposal has always been for these expenses to be incorporated in to the whole

cost of the Marina and be recouped from berth sales/lease fees". (comment

relates to EPA costs, breakwater, future dredging and wharf repairs)

Robe Marina Corporation newsletter extracts

o newsletter 18/8/2006

"the board has consistently considered the issue of rate-payer protection,

avoiding future costs for maintenance and development, and the model adopted

provides for a NPV of $1m and a cash flow positive position in 5 years. All of this

is paid for by the users of the Lake."

o newsletter 17/10/2006

"the project will be cash-flow positive by year 4 (2009), and by definition, would

have then paid back all borrowings from Council to establish the Corporation's

operation.”

Existence - has Council formally established a loan at any point?

We have found no Council resolution that specifically establishes a loan.

There are 4 resolutions which have been highlighted to us as being relevant resolutions to establish the

loan. These are:

resolution 435/2008, in which Council adopts the recommendations within the ‘Judith Jones

report’

resolution 436/2008 which adopts the ‘Scenario 2 financial model’ of this same report

resolution 278/2010 which endorses the results provided by the Financial Modelling Tool

developed by Dr Geoff Wells

resolution 279/2010, which required Council to use the Modelling Tool as developed by Dr Geoff

Wells for the Section 41 Robe Marina Committee and the outcomes to be reported on a quarterly

basis and Council to annually review the outputs from those reports.

Judith Jones Report

We have reviewed the report, and conclude that the Judith Jones report’s formal recommendations do

not include establishment of a loan. One of the recommendations in the report is to complete the




"actions required" as they appear in the body of the report. None of these (approximately 100) actions

relate to establishing a loan.

The scenario 2 financial model, detailed in Appendix 20 of the report, does not include any reference to a

loan between the Council and the Marina Corporation.

Whilst the body of the report makes reference to the concept that whole of life costs should have been

incorporated into financial plans of the Robe Marina Corporation, and references funds transferred by

Council to the Marina and the difficulties in ascertaining whether these transfers were loans or gifts, the

report stops short of recommending that a loan be formally established.

If Council’s intention in adopting this report was to also resolve to establish a loan between the Council

and the Marina, the minutes of Council have failed to reflect this intention.

Dr Geoff Wells Financial Modelling Tool

The adoption of the Financial Modelling Tool is the closest that Council has come to formally adopting the

concept of an internal loan.

The Model adopted by Council shows one line in the balance sheet representing a loan titled "LGFA

borrowings". The opening balance of this account in the Model is made up of two amounts being an LGFA

loan of $1.223m and amounts paid by Council of behalf of the Marina of $0.706m. The reports generated

by the financial modelling tool showed the loan (including both principal and interest payments) being

paid with revenue generated by Marina operations.

Dr Wells states in his report accompanying the tool that in his brief for the development of the tool, it was

intended that the tool would be used by the Section 41 Committee and the Council to test the financial

implications of the different strategic scenarios which might be available to take the Marina forward. In

other words, the tool is a strategic modelling tool and not a financial reporting model. Adopting the use

of the tool therefore does not impose obligations for how the Marina finances are accounted for in the

financial system.

The Council resolutions fell short of any formal instruction to establish a loan, or provide direction for how

to account for Marina transactions by Council within the financial system. Again, if Council’s intention in

adopting this model was to also resolve to establish a loan between the Council and the Marina, the

minutes of Council have failed to reflect this intention.

Existence - has Council recognised a loan at any point, and how is it treated now?

A balance of approximately $1m did exist in the books of both the Marina and the Council prior to June

2013. It was not described as a loan in the financial records, it was not supported by a loan document,

and it did not arise from a specific Council resolution.

It reflected an accounting practice commenced approximately six months after the Judith Jones report

was adopted by Council (i.e. September 2008). At this time, separate records were kept for the Council




and Marina operations in two separate finance systems – MYOB and Synergy. The accounting practice

had the effect of identifying the cumulative amount of Council contributions to the Marina.

Internal Marina reporting included the "loan" balance as part of the balance sheet prior to June 2013.

Following June 2013 an income and expenditure statement has been prepared. As a result of

incorporating the Marina operations into Council's normal systems, the Marina has ceased to have

separate accounts for control accounts in the balance sheet such as debtors, creditors, etc. The

significant assets and liabilities attributable to the Marina are readily identifiable in the accounting

records of Council. These include land, infrastructure and lease premiums received in advance. It would

be possible to also keep a track of the cumulative contribution from Council to Marina operations, if

Council and the community desire. It would be possible to prepare a balance sheet for the Marina that

considers the significant items.

Value – can the balance of the loan be reliably measured

If Council makes a decision to recognise the Marina as a user pays system, and also to recognise an

internal loan, the balance of this loan must be determined.

A notional loan was recognised in Council’s records from September 2008 recognising transactions from

this date onwards. This loan had a balance of $843,653 as at June 2014. This number has not been

audited.

There are at least three main complicating factors in determining an accurate balance of a notional loan

from inception of the Marina project:

1) “The Marina” is not defined

Council has not formally defined what it considers to be “the Marina” for the purposes of tracking the

implications of a user pays system (e.g. tracking expenditure or calculating any notional loan balance).

The Robe Marina Precinct includes some significant infrastructure, such as the breakwater, wash

down facility and boat ramp, which existed prior to the construction of infrastructure managed by the

Robe Marina Corporation. The precinct also includes facilities such as parking, toilets and footpaths

which are readily used by the general public. There are arguments for and against the inclusion of

these items within the definition of “the Marina”. Regardless, it is clear that agreement cannot be

reached on a loan balance until agreement is reached on the appropriate definition of what

constitutes the Marina for this purpose.

2) Unknown pre-September 2008 balance

At the time of dissolution of the Robe Marina Corporation in January 2008, there was no loan

recorded between the Robe Marina Corporation and Council. It wasn’t until September 2008 that an

internal loan was first recognised in the financial records of Council and the Marina. There is evidence

that prior to this date, Council paid expenses on behalf of the Robe Marina Corporation. In particular,

two loans were taken out and repaid by Council to fund Marina expenses:

$400,000 DC Robe LGFA Loan 80 (Marina master plan and associated costs) taken out 15/9/2005.

Council repaid in full in 2010-11.




$250,000 DC Robe Bendigo Loan 74 (Boat Ramp) taken out 1/4/2003 - last payment repaid by

Council in 2012-13.

There are likely to be other expenses outside of these loan amounts paid by Council on behalf of

the Robe Marina Corporation which have not been specifically tracked, but which could

presumably be obtained from archived records.

3) The terms of the “loan” are not defined

As no loan has been formally established, there have been no terms and conditions (such as applicable

interest rates, repayment terms, etc) established to guide calculation of the loan balance.

Clarification - use of the term “consolidation”

Given that the term “consolidation” has been used in the assertion made, we make the following

clarifications regarding use of the term in relation to the Marina finances. There appears to be three

different ways this term has been used in various understandings of the Marina finances as follows:

1. Prior to January 2008, the Robe Marina Corporation was a separate legal entity. In accordance

with accounting standards, it produced its own financial statements, which were audited. As the

Council was assessed as having control of the Robe Marina Corporation, accounting standards

required the Robe Marina Corporation accounts to be consolidated with Council. The Financial

Statements of Council therefore included the financial transactions and balances of the Robe

Marina Corporation i.e. they were "consolidated" in accordance with then-current accounting

standard AASB 127 Consolidated and Separate Financial Statements. At this time there were no

significant inter-entity balances requiring elimination.

2. After January 2008 when the Robe Marina Corporation dissolved, the Marina finances continued

to be recorded in a separate financial system. As the Marina was now part of the Council,

financial reports from the two separate systems had to be added together (with eliminations as

required) to produce an overall report for Council. This process might also be termed as a

"consolidation", although it no longer has the meaning in the accounting standard, as there are

not two separate entities involved.

3. From June 2013, the Marina balances and transactions were transferred to and subsequently

recorded on Council's financial system. This has been termed as a "consolidation", but it is more

properly described as a change in bookkeeping arrangements.




Our conclusions in relation to the agreed scope are:

determine whether a loan of approximately $1m existed and was recorded in the books of the

Marina and Council

A balance of approximately $1m did exist in the books of both the Marina and the Council

prior to June 2013. It was not described as a loan in the financial records, it was not

supported by a loan document, and it did not arise from a specific Council resolution.

It reflected an accounting practice commenced approximately six months after the Judith

Jones report was adopted by Council (i.e. September 2008). The Jones report did not

include a specific recommendation for Council to establish a loan. The report does have

an underlying theme that all income and costs should be considered when evaluating the

Marina's financial viability. The accounting practice had the effect of identifying the

cumulative amount of Council contributions to the Marina. In another report obtained by

Council in relation to the Marina operations, the “Wells report”, this balance was treated

as a liability from the perspective of the Marina operations and it was assumed that it

would be serviced by principal and interest payments i.e. it had the character of a loan.

Had this accounting practice been established prior to September 2008, the resulting

balance of the notional loan would likely be higher than $1m. It would be a fairly

significant exercise to determine the exact balance.

The methodology underpinning the calculation used to determine the $1m balance

contains significant assumptions, including what infrastructure is included within the

definition of Marina operations, which have not been formally agreed.

determine what happened to those amounts in June 2013

The amounts ceased to be recorded when the Marina finances were moved to Council's

main financial system. Council has performed calculations off-ledger to determine the

notional loan balance since June 2013.

review the accounting treatment and internal reporting of Marina financial matters before and

after June 2013

Accounting treatment

The balance referred to as a "loan" has never been recognised in the audited financial

statements as it is internal in nature. This treatment has been in accordance with

accounting standards at all times.

Internal reporting

Internal Marina reporting included the "loan" balance as part of the Marina balance sheet

prior to June 2013, and included notional interest calculations on this balance. Following

June 2013 only an income and expenditure statement has been prepared.




As a result of incorporating the Marina operations into Council's normal systems, the

Marina has ceased to have separate accounts for control accounts in the balance sheet

such as debtors, creditors, etc. The significant assets and liabilities attributable to the

Marina are readily identifiable in the accounting records of Council. These include land,

infrastructure and lease premiums received in advance. It would be possible to also keep

a track of the cumulative contribution from Council to Marina operations, if Council and

the community desire. It would be possible to prepare a balance sheet for the Marina

that considers the significant items.

report on the extent of community consultation.

There was no community consultation on the Marina finances at the time of the change

in internal reporting arrangements in June 2013.




Recommendation

It is recommended that Council reviews and forms or reaffirms positions on:

the extent to which the Marina is considered to be a user pays service

how that is reflected in the long term financial plans of the Marina

how that is reflected in the day to day bookkeeping and financial reporting of the Marina

what Council considers to be the definition of the Marina for internal reporting purposes

the extent of community consultation required in relation to Marina finances

the need to revisit any prior resolutions of Council and/or make new resolutions to reflect the

above positions.




Closing Comments

Ultimately, the question of the source of Council monies which pay for the Marina (i.e. whether or not the

Marina is a user pays system) can be debated. Regardless of the outcome of this question, the key issues

for the strategic management of the Marina have long been and remain to this day the questions of when

major refurbishment and other works (e.g. dredging) will be required, what it will cost, how it will be

funded and how any resultant shortfall will be funded.




Disclaimer

This report has been prepared at the request of the District Council of Robe for the sole purpose of

providing an opinion on the assertion from the former Independent Chair of Council’s Audit Committee as

referred to in the background section of this report, and for no other purpose.

Accordingly, our report has been prepared only for the benefit of the District Council of Robe and should

not be used for any other purpose. We accept no responsibility or liability to any other person in relation

to the contents of the report and no other person should rely upon any statement made in the report for

any purpose.

The scope of the work was limited to the matters detailed in the background section of this report as

agreed with the District Council of Robe. The adequacy of the scope is solely the responsibility of the

District Council of Robe. Consequently, we make no representation regarding the adequacy of the scope

either for the purpose for which the report has been requested or for any other purpose.

Statements and opinions contained in the report are given in good faith but, in the preparation of the

report, Galpins Accountants, Auditors and Business Consultants has relied upon information provided by

the District Council of Robe which Galpins Accountants, Auditors and Business Consultants believes, on

reasonable grounds, to be reliable, complete and not misleading.

The engagement is undertaken expressly on the condition that the District Council of Robe has drawn our

attention to all matters of which they are aware concerning the scope which may have an impact on our

report up to the date of issue and on the condition that the District Council of Robe acknowledges that

Galpins Accountants, Auditors and Business Consultants is entitled to rely on this information. It should

also be noted that Galpins Accountants, Auditors and Business Consultants does not imply, nor should it

be construed, that it has carried out any form of audit or verification of the information supplied to us.

Drafts of our report have been issued to District Council of Robe management for confirmation of factual

accuracy and to confirm that management is not aware of any material matters relevant to our terms of

reference which have been excluded. For this reason, Galpins Accountants, Auditors and Business

Consultants makes no representation or warranty, express or implied, as to the accuracy, reliability or

completeness of any information contained in the report. Moreover, we accept no responsibility to

update our report for events and circumstances occurring after the date of the report.

Recognising that Galpins Accountants, Auditors and Business Consultants has relied on information

provided by the District Council of Robe officers and associates, the District Council of Robe may make no

claim against Galpins Accountants, Auditors and Business Consultants to recover any loss or damage

which the District Council of Robe may suffer as a result of that reliance and agrees to indemnify Galpins

Accountants, Auditors and Business Consultants against any claim arising out of the assignment to give

the report, except where the claim has arisen as a result of any proven willful misconduct by Galpins

Accountants, Auditors and Business Consultants.

Our report does not purport to contain all of the information that may be required to evaluate the

accounting practices of the Marina Finances and does not amount to a recommendation, either expressly

or by implication, regarding the appropriate accounting practices to be adopted now or into the future.

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