This article was originally published 5 November 2019.
Aligned to Queensland Government’s sweeping Security of Payment reforms, financial reporting requirements have increased significantly and QBCC now has far greater insight into your business.
With QBCC’s 31 December 2019 deadline looming, all Category 1-7 licensees must lodge extensive financial information and for most Category 1-3 licensees, this heralds their first annual reporting since 2014’s removal of mandatory annual MFR Reports. In comparison for Category 4-7 licensees, any ASIC or ASX lodgers have always had to provide their annual audited financial statements while for Category 4-7 licensees who for various reasons fell outside of this requirement, 31 March 2019 was their first reporting date.
Additionally and for the first time, licensees with categories “Self Certifying 1 & 2” (SC1/2) must lodge detailed financial information.
For those holding personal SC1/2 licences held solely to act as Nominee for a licensed company, we recommend changing your personal licence to a Nominee Supervisor before 31 December, noting that timing is critical as QBCC gears up for increased reporting.
MFR Report and Annual Reporting
There has been some confusion as the new Annual Reporting measures are called ‘Minimum Financial Requirements’, creating a link in advisers and licensees minds to the existing ‘Minimum Financial Requirements Report’ (MFR Report).
The new reporting requirements are referred to here as ‘Annual Reporting’ as distinct from the separate long-standing MFR Report.
QBCC messaging
The QBCC has been providing specific messaging in relation to the Annual Reporting requirements. This messaging is available in their FAQs, guides and webinars, and includes the following:
- It is important that you lodge your financial information by 31 December 2019 even if you are concerned you do not have the target working capital for your business
- If you are experiencing hardship and need more time, contact the QBCC
- The QBCC will work with licensees to help understand the requirements
- Category 1-3 and self-certifying licensees will be given at least a year if needed to strengthen your business
- Licensees only need to provide an annual report where a contractor licence is held
- No accounting standards are required to be applied for Category 1-3 and self-certifying licensees.
BDO comments on the QBCC messaging
While BDO welcomes the position taken by the QBCC in providing a grace period and a softer approach to accounting standards for the lower category licensees, we remind licensees and advisers the only way to remain compliant with the regulations is to ensure all your requirements are met. Relying on regulator grace periods and non-enforcement of regulations opens the business to unwanted outcomes in any number of scenarios. BDO agrees the regulations do not require an accountant to oversee the financial data provided to the QBCC, however, we do recommend advice be sought from a professional with knowledge not only of your financial affairs but also the QBCC specific rules prior to preparing and lodging the required documents.
MFR Report – when to use
Importantly the MFR Report remains the QBCC’s go-to document for clarity around a licensee’s financial position against the mandated requirements. The MFR Report is a mandated document for specific events, including:
- Obtaining a licence
- Increasing or reducing a licensees maximum revenue
- Where instructed to by the QBCC
- When compared to the most recently lodged MFR Report, the Net Tangible Asset Position of a licensee reduces by more than:
- 30% for SC1, SC2 and Cat 1-3 licensees
- 20% for all other licensees (Cats 4-7)
- Change of ownership or executive officer
- Reducing reliance on, or when completely removing a Deed of Covenant and Assurance from the licensees NTA calculations (i.e. using only the company NTA).
An MFR Report is not a part of the standard Annual Reporting requirements (per below) and must be signed by an accountant.
Annual Reporting – new requirements
There are two components of the Annual Reporting requirements:
- Financial Statements
- Annual Reporting Form
Note: Neither the Financial Statements nor the Annual Reporting Form are required to be signed off by an accountant - this is a key difference to the MFR Report.
Financial Statements
By 31 December 2019, all licensees must now lodge mandated Financial Statements of their “most recent reporting year” (i.e. financial year) noting that calendar years or other 12-month periods are not permitted unless agreed by the QBCC.
The lodgement due date will change in 2020, predicted to be 31 October, so keeping the financial statements inside the four month ageing restriction at lodgement time. QBCC will separately advise each licensee of their lodgement date for 2020 and following years.
There are three broad licence groups:
- Self-Certifying 1 & 2 (turnover less than $800,000 – dealt with in a separate post)
- Licence Categories 1-3 (turnover between $800,001 and $30,000,000)
- Licence Categories 4-7 (turnover above $30,000,000)
Financial Statements summary by category:
| Report type | Cat 1-3 | Cat 4-7 |
|---|---|---|
| Sign off by qualified accountant | x | x |
| Prepared Under Prescribed Accounting Standards | ✔ | ✔ |
| Profit & Loss Statement | ✔ | ✔ |
| Balance Sheet | ✔ | ✔ |
| Statement of Cashflows | ✔* | ✔ |
| Aged debtors and creditors report including date each invoice is due to be paid or received | ✔ | ✔ |
| Notes to the Financial Statements | x | ✔ |
| Declaration by the Licensee or executive officer | x | ✔ |
| Descriptions of the measurement and accounting policies | x | ✔ |
| Trade Debtors report categorising each debtor into specific aging categories | x | ✔ |
*Cat 1-3 licensees have an exemption from providing a cashflow statement in the 2019 year reporting where they were not already required by law to prepare one and the information is not available. This is a one off exemption and the cashflow statement will be required in the 2020 reporting cycle.
Adding to the above table details, the two key takeaways are:
- The financials are not required to be signed off by an accountant
- All financials are to be prepared under Prescribed Accounting Standards.
To ensure reporting satisfies the mandated requirements, it’s recommended that licensees seek advice from an accountant who has current knowledge of how the accounting standards apply to building/contracting businesses.
Further, all relevant AASBs should be considered, particularly those relating to recognition and measurements aspects. One of QBCC’s key focus areas will be on creditor/debtor documents, specifically on payment timing.
For those Category 4-7 licensees who lodge Financial Statements with ASIC or ASX, these documents as always, are required to be lodged with the QBCC. The Financial Statements portion of the Annual Reporting requirements will be deemed met when these ASIC/ASX lodged documents are provided to the QBCC by the required date (31 December this year).
Note: While the above Trade Debtor and Creditor reports are not required to be provided by Category 4-7 licensees who provide the ASX/ASIC lodged financials, summary detail is still required on the Annual Reporting Form (see below).
Annual Reporting Form
Importantly, the above Financial Reports represent only 50% of the new requirements.
Licensees must also lodge the ‘Annual Reporting Form - Minimum Financial Requirements’ specific to their licence category (emphasising again this is different to an MFR Report).
Click here and here for a copy of Category 1-3 & Category 4-7 Annual Reporting Forms.
As the Annual Reporting Forms require detailed information and preparation, we strongly recommend these forms are reviewed and understood well before lodgement.
Considerations for the licensee
Financial reporting requirements
When preparing the Annual Reporting documents, consider these:
- Maximum revenue: Calculated per most recently lodged MFR Report, ensuring that Maximum Revenue has not been breached by more than 10% in the reporting year.
- Net tangible assets: Ensure the NTA position has not decreased by 20% - 30% per most recently lodged MFR report and that the licensee has a NTA position of at least $0 in its own right.
- Current ratio: Needs to be at least 1:1 at all times.
The QBCC will be monitoring these ratios. Failure to satisfy one or more of these requirements by 30 June should prompt a strategy developed with a financial adviser for future resolution.
NTA sidenote: While there is a hard test of 20% or 30% reduction in the company NTA (against most recently lodged MFR Report), there is also a requirement to maintain the NTA position unless there is a “reasonable excuse”. Therefore, a Category 6 licensee cannot sit with NTA 19.5% below the most recent MFR Report and not expect a ‘please explain’ from the QBCC.
Related party loans – tread carefully
Undoubtedly, the new regulations take a stricter approach to related party loans. These loans can only be included in the QBCC ratios as follows:
- Net tangible assets: The related party has an NTA (excluding any Deeds) of at least $0 and has a current ratio of at least 1
- Current ratio test: The loan meets the conditions to be included in the Net Tangible Assets (above) and on the day the current ratio is calculated, the related party has current assets sufficient to repay the loan in full.
These are bright line tests meaning that either the test is met and the loan can be included in the Net Tangible Assets or Current Ratio calculations; or the test is failed and the loan is excluded. No proportioning is considered.
Note: When completing a MFR Report, whether the above Related Party loan tests are met must be signed off where the loan is included in the Net Tangible Assets calculation. In addition, a balance sheet of any/all relevant related entities where a loan is included in the MFR Report calculations must be lodged with the QBCC. Where the loan is to an individual, a Statement of Financial Position (official QBCC document) of the individual is required. For the loan to be included in the Net Tangible Assets and/or Current Ratio calculations, the individual must meet the above tests.
BDO can assist with preparing your lodgements
In summary, these changes are significant and pose measurable challenges and risks for licensees. To help navigate these new risks, BDO can assist with extensive industry knowledge and hands-on capabilities to compile, review and lodge these documents on your behalf.
For assistance or more information on the recent QBCC reporting changes, please contact BDO’s QBCC specialist Shannon Rowe.