With the re-introduction of “Annual Reporting” to the QBCC Minimum Financial Requirements (MFR) there are numerous reporting challenges facing the industry.
The Annual Reporting requirement is mandatory and has been in place since 1 January 2019 for all licensees, regardless of size.
As part of this undertaking, the prior “Minimum Financial Requirements Policy of 9 October 2015” was replaced by a regulation called “Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018” (QMFR).
Lesson 1.1 Purpose
While the underpinnings of the old policy, such as Net Asset and Current Ratio requirements remain in place, there are fundamental changes that have been made to the policy that licensees and their advisors need to get across.
Since the re-introduction, licensees in category 4 to 7 ($30m plus) have submitted financial data due by 2 April 2019 and again on 31 December 2019. For all other licensee categories, financial data was required to be submitted by 31 December 2019 for the first time – refer to s 20 QMFR. As at the date of the drafting of this training, there are 20,000 licensees reported who have not yet complied with this deadline.
A break-down of the most significant reporting challenges on the re-introduction of Annual Reporting are:
Lesson 1.2 Annual Reporting
In our view, the clear number one is the requirement for all licence categories to submit financial information to the QBCC on an annual basis – refer to s 9A QMFR. It should be noted at the outset that annual reporting is a distinctly different requirement to an accountant or auditor preparing a MFR Report signed off to the QBCC.
While an accountant may be involved in the annual reporting process, it is accepted that the accountant is not certifying that the licensee is meeting the MFR.
Annual Reporting is designed by the QBCC to collect financial information. This includes information such as accounts receivable and payables reports in addition to the general profit and loss statement and balance sheet.
The financial data supplied in annual reporting will differ depending on the category of the licensee (see s 9 QMFR). See the following list on a category by category basis as to what must be provided as part of annual reporting:
For all licensees, this will now mean that you will need to commit to having your financial data up to date and in good order to meet these annual reporting deadlines.
Lesson 1.3 QBCC transition of all licensees
For the QBCC it will be the process of transitioning over 70,000 licences back into a system of Annual Reporting. There is then the additional requirement for manpower at the QBCC to engage with licensees in both assisting and enforcing the new mandatory requirements.
Despite all warning provided by regulatory and professional bodies, according to the QBCC as at 7 June 2020, only 50,659 licensees had lodged their 31 December 2019 information. That equates to over 75% of the total required licensees lodging their information.
Lesson 1.4 Online reporting portal
There is no requirement under “Annual Reporting” for a licensee to do all adjustments required by the QBCC to assess compliance with the financial requirements. This is the job of the new QBCC portal, myQBCC portal. The portal has been designed for licensees and their advisors to input their financial data in a way that the QBCC can more readily test their compliance with the financial requirements. In addition to this, each licensee will need to upload their financial statements and other data to their online account.
Using the new online portal, the QBCC is running their own financial health checks on each licensee as they lodge financial data. You can expect a letter where you are not meeting the MFR or likely to have suspicions of financial difficulties.
This will make it necessary for licensees to ensure that they are receiving appropriate professional advice on their compliance with the MFR both at the end of the reporting period and by the time of lodgement. It should be noted that under s 11E QMFR, a licensee must prepare quarterly management accounts. On this basis, most licensees would hopefully know whether they are compliant with the MFR at any one point in time.
Lesson 1.5 Policy to regulation
Another significant change, that may at first appear superficial, is the transfer of the financial requirements from a policy guideline to a regulation. The policy was written in more straightforward language, while the regulation reads as you would expect a piece of legislation to read.
For advisors used to looking at the detail of legislation and getting into the nitty gritty, you will find that this is not a problem. Based on industry feedback to date, including that of the regulator, this is not easy reading.
While the new regulations are based on the old policy, there are important and subtle differences to be aware of. Some of these were not apparent at the re-introduction of the new regulation.
For example, related entity loans have significant hurdles to get through before a licensee may include them as assets. That is, for any loan made to a “related entity” to be included as an asset, the related entity must have net tangible asset of at least $0 and have a current ratio of at least 1 based on the same financial tests that a licensee would – refer to s 15(1)(l) QMFR and Module 5 for more information. Many licensees have already fallen foul of this issue requiring a restructure of their asset position.
Lesson 1.6 Coming up to speed on new regulations
Like any new piece of regulation that comes along, it takes time to read over and apply this to many different licensee situations before licensees and advisors become comfortable in its application. Considering a failure to meet the MFR may lead to a licence suspension and/or an insolvency event, any errors or disagreements on interpretation of the new QMFR can be fatal. Don’t say we didn’t warn you.
Lesson 1.7 Relaxed 12-month transition
It was only formally announced in December 2019 that the QBCC would take a more accommodative approach with SC1 ($200,000) to category 3 ($30m) licensees in the 2020 calendar year. To date, this will mean that for up to 12 months the QBCC will give more leeway and work with licensees who are not meeting the MFR. As to how far this extends and to what extent, we expect this will be determined on a licensee by licensee basis and depend on the type and manner of any MFR problems.
Download the Guide to Annual Financial Reporting published by QBCC dated December 2019 here.
Until this announcement, licensees had seen extremely strict enforcement by the QBCC of MFR throughout 2019. We expect that this will not change for category 4 to 7 licensees.
Lesson 1.8 What to do if you are not meeting the MFR?
Once again, this is something that licensees will need to contemplate with the QBCC collecting your financial information each year. You can expect the QBCC to touch base directly with you if you are not compliant.
A short list of issues that a licensee will need to contemplate in this case are:
- A proper understanding of why a licensee is not meeting the requirements. This will take professional advice and support. In many cases, it is the undetected problems that the QBCC pick up. This can be as simple as a misunderstanding of how the MFR works.
- If you are not meeting the MFR, then you need to consider a strategy to become compliant again. What are your options and how quickly can you execute any of these? This could be an injection of capital or restructuring of related party loans.
- If you need to lodge a submission to the QBCC, are you clear on the issues and have you provided evidence to support your position?
Lesson 1.9 QBCC review or audit
In some cases, it will be the QBCC that first detects the non-compliance with the MFR. This will mean that the licensee is now subject to the QBCC’s timeline to fix the problem within defined legal time limits – refer to Part 9B QBCC Act. Failure to do so may result in suspension or cancellation of the licence. This will require any strategy that needs to be put in place to be executed quickly. In our experience, significant time is often lost in this process where licensees have not correctly assessed what the issues are, let alone contemplated a clear strategy.
Lesson 1.10 Level of sophistication of licensees and their advisors
With the same regulations applying to all licence classes, this will provide a challenge to both the licensee and their advisors. Some licensees will have internal management support to deal with compliance as well as external advisors with industry experience. This will not be the case for all.
With 70,000 licensees being re-introduced to Annual Reporting, this will undoubtedly take time for all parties to get on top of.
Lesson 1.11 Technical accounting challenges
There are some significant differences coming from more technical accounting requirements. Two clear examples are:
- More extensive use of Accounting Standards are now required – see s 8(2) QMFR and schedule 3 dictionary definition of “prescribed accounting standards”. For example, AASB 15 Revenue (applying to Work in Progress reporting) and AASB 16 Leases (now capitalised) would need to be applied on any MFR report lodged with the QBCC.
For most category 1 to 4 licensees, their annual accounts will normally be prepared primarily for tax purposes as special purpose financial statements. They will rarely incorporate the detailed use of accounting standards of an ASX entity or a large company for Corporations Act purposes (an ASIC large company would generally have at least $50m turnover). You can access the information to assist in determining “are you a large or small proprietary company” here.
For the purposes of a MFR report, the use of these standards is mandatory. This is not the case for Annual Reporting. However, a prudent licensee would want to understand if they are meeting the MFR under the Accounting Standards were they subjected to a QBCC review or audit.
This will be a significant new impost for many licensees and not something that all advisors will have experience in preparing. This is likely to require further external support for licensees.
- A “Statement of Cashflows” must be prepared for categories 1 to 7 in accordance with the Accounting Standards – refer to s9 QMFR and schedule 3 dictionary definitions of “internal management accounts” and “signed financial statements”. Most advisors will be aware that this is only normally prepared for clients that are subject to “Audit” under the Corporations Act. This is not a 12-month cash forecast that you prepare internally or that the banks might request. This will be an additional cost and not something that all advisors will ordinarily prepare or have experience in (refer to Module 5 for more information)
Lesson 1.12 Structuring
The new regulations have already brought to light the inherent problems in some existing licensee business structures meeting the MFR. In some cases, the structure was arguably never appropriate, in others the structure never met the old requirements, and in more recent cases, structures that met the old policy will no longer meet the new QMFR.
Some examples of outdated structures are as follows:
- Trading trusts – While often a good tax structure, there have always been difficulties and complexities in applying the MFR. That is:
- Trust assets cannot be used in meeting net asset requirements – refer to s 17(1)(j).
- As the trustee is the QBCC licence holder, it is the entity that must hold net tangible assets (with additional deed of assurance if required).
- But, you cannot ignore the trust as:
- The current ratio is based on the combined financial position of the licensee and the trading trust – refer to s 17I QMFR;
- The revenue is based on the combined revenue of the trust and licensee – refer to s 11P QMFR; and
- The trust must still be assessed under the MFR for the purpose of the current ratio and in understanding if the trustee might have a deficit of assets over liabilities. If this is the case, then the deficit must be taken up by the trustee – refer to s 16 QMFR.
- Related Entity loans – It is not unusual for a licensed entity to have made various loans to related entities such as directors and shareholders. These will normally sit on the balance sheet as assets of the licensee. Under the new QMFR, it has become far more difficult to include these as assets. For a loan made to a “related entity” to be treated as an asset:
- The related party must have net tangible asset of at least $0; and
- Have a current ratio of at least 1 based on the same financial tests that a licensee would – see s 15(1)(l) QMFR. (Refer to Module 5 for more information).