Reporting changes adopted in 2019
Universities applied the new and revised accounting standards of the Australian Accounting Standards Board (AASB) from the application date of 1 January 2019 for public sector entities and other not-for-profit entities.
The universities elected to apply the modified retrospective option in the standards for their transition. The benefit of using this approach was comparative figures for prior years did not need to be restated, therefore reducing the amount of work required. A detailed note to the financial statements discloses the impact of these changes in accounting treatment from 1January 2019.
Reporting of leases – AASB 16
The key change of AASB 16 is that the majority of operating leases, which were previously recorded off-balance sheet, are now required to be capitalised on the balance sheet (Statement of Financial Position). Accordingly property, motor vehicle and equipment leases are now accounted for as right-of-use assets and their associated lease liability.
Using this approach, from initial application of AASB 16 on 1 January 2019, universities recognised right of use assets and the lease liability.
Reporting of revenue and income under AASB 15 and AASB 1058
From 1 January 2019, revenue from contracts (AASB 15), such as grant money received with performance obligations, is reported by allocating the grant money to each performance obligation and recognising the revenue as or when the obligations are satisfied. Similarly, grant money received with an obligation to acquire or construct an asset that will be retained by the entity (i.e. a capital grant under AASB 1058) is recognised as or when the obligation to acquire or construct the asset is satisfied. This means a grant received for the construction of an asset is recognised as revenue in stages during the construction. The full value of the grant is recognised by the time the constructed asset is put into operation. Prior to introduction of the new standards, this practice of deferring revenue recognition was common in the private sector but not for not-for-profit public sector entities.
Under AASB 1058, transactions relating to assets acquired at significantly less than fair value also have new recognition principles.
The implementation of these standards by the universities resulted in adjustments of opening equity and recognition of deferred revenue.
Selected significant financial transactions
Details of significant 2019 financial transactions that we noted during our audits are listed below. Most of this information is reported in each university’s annual report, and we have included them here for the convenience of Parliament. By reporting these items, we are not implying that we have any residual concern with these transactions.
Assets
- Curtin commenced construction of the $300 million Greater Curtin project, named ‘Exchange’, during 2019 – a new precinct with student accommodation, hotel, retail, commercial and car parking space. As part of this arrangement, Curtin early-adopted AASB 1059: Service Concession Arrangements. The current year treatment resulted in the recognition of $39 million of service concession assets and a corresponding liability. This reflects Curtin granting the operator of Exchange, the right to operate existing and to construct and operate new accommodation.
- UWA’s property plant and equipment increased by $30 million for the year due to additional capital investment for EZone, a new student hub for Engineering and Mathematical Sciences. Ezone started in 2018 and is expected to be completed in early 2020, as it was estimated to be 90% completed at 31 December 2019.
- ECU’s property, plant and equipment increased from $806 million in 2018 to $847million in 2019 largely due to $39 million capital spending on the Joondalup biosciences research and teaching laboratories.
- Each universities’ investment in Education Australia Limited increased from $22.9million in 2018 to $39.7 million in 2019 following the most recent independent fair value assessment conducted in 2019.
Liabilities
- On 11 April 2019, ECU issued $120 million of AUD fixed rate medium term notes with a 3% per annum coupon rate and a settlement date of 11 April 2029. This notes issue is recorded by ECU as part of their long term financial plan to fund strategic goals.
Revenue
- Murdoch’s fees and charges income increased by $27.6 million (28.8%) to $123.4million. Murdoch attributes this to the increase in overseas fee paying onshore students from their ongoing international welcome scholarship and increased marketing efforts.
Expenditure
- UWA’s employee related expenses increased by $14 million to $541 million partly due to an increase in FTE, a 2% wage increase, and the additional long service leave expense resulting from reassessment after clarification of leave requirements under the Fair Work Act 2009.
KPIs
- UWA reported 13 KPIs for 2019, of which 7 were new and 5 were prepared using revised methodologies. Preparing and auditing the new datasets and amended methodologies of these KPIs was a significant task for UWA staff and our auditors.
Key financial ratios of universities
The Australian Government Department of Education, Skills and Employment (DESE) uses a number of benchmark indicators to assess the financial performance of universities. These measures include liquidity, diversity of revenue, dependence on international student fees, operating result and borrowings to equity ratio.
We have used each university’s audited financial statements[1] to show performance against these indicators for the 5 years ending 31 December 2019. Table 4 summarises the risk ratings inferred by these indicators.
| 2019 – Summary of universities’ ratios | |
| Liquidity / current ratio | 2 universities rated as low risk, 1 as medium and 1 as high risk |
| Diversity of revenue | 2 universities rated as low risk and 2 as medium risk |
| Operating results | All 4 universities reported a surplus |
| Borrowings to equity ratio | 3 universities rated as low risk and 1 as high risk |
| Dependence on international students | 3 universities rated as medium risk and 1 as low risk |
Table 4: University financial risk inferred by selected 2019 financial performance ratios Source: OAG calculated from audited annual financial statements using DESE benchmarks
Note: These ratings are based on criteria set by the Australian Government DESE
Liquidity / current ratio
The liquidity or current ratio assesses an entity’s ability to meet their debts as and when they fall due. The traditional accounting formula is current assets divided by current liabilities.
DESE considers a ratio of more than 1 low risk and below 0.75 high risk. Based on this rating, ECU and Murdoch were low risk, Curtin was medium risk and UWA high risk, when assessed on this indicator for 2019.
As the liquidity ratio recognises current assets only, we have also shown in Table 6, details of the universities’ total current and non-current cash and other financial assets for each year. Each university’s liquidity ratio would improve if their non-current liquid assets were included in the calculation.
Diversity of revenue – dependence on Australian Government funding
Universities can reduce their financial risk by diversifying their revenue sources. Each university has a different capacity to generate revenue, depending on factors such as location, size, courses offered, extent of research activity, perceived standing and student profiles.
For its 2019 benchmarking DESE considered universities with 55% or less of revenue received from Australian Government funding low risk and between 55% and 65% medium risk. Australian Government financial assistance includes Commonwealth Grant Scheme and other grants, HECS-HELP and FEE-HELP payments. For 2019, Murdoch and UWA rated as low risk while Curtin and ECU were a medium risk for this indicator.
Operating result
Universities are not-for-profit organisations but their operating result is a useful measure of financial performance. Large deficits or a trend of consecutive deficits indicates a need for review and analysis.
All universities reported a surplus for 2019.
Borrowings to equity ratio
Legislation permits universities to finance their activities by borrowing. DESE considers universities with 7% or less of their equity represented by borrowings to be low risk. Greater than 10% rates as high risk.
Curtin, Murdoch and UWA remain low risk, while ECU is high risk on this indicator.
Dependence on overseas student fees
Universities can diversify their revenue sources by encouraging overseas students to study their courses. However, the general view is that universities should not be overly dependent on this source of income.
For its 2019 benchmarking DESE considered universities with 15% or less of operating revenue from fee-paying overseas students low risk and between 15% and 25% medium risk. Based on these criteria, 3 universities rate as medium risk and UWA as low risk for this indicator.
Equivalent Full Time Student Load for universities
Universities measure their student enrolments as Equivalent Full Time Student Load (EFTSL). As this information is released by the DESE in September of the following year, the 2019 student enrolment information is not yet available.
The following table shows the EFTSL for the universities from 2015 to 2018, and the percentage of these enrolments relating to international students. ECU’s EFTSL has increased each year, as has their proportion of international students. Curtin and UWA had an overall decreasing trend in their EFTSL with Curtin’s proportion of international students also decreasing while UWA’s proportion of international students increased.
[1] Financial ratios are calculated using the university figures, not their consolidated results.
