MFR Explained - definitions, concepts and requirements

Accounting for Leases

The new Accounting Standard (AASB 16) relevant to leases requires companies that lease equipment to account for virtually all leases on their balance sheet. Property and equipment leases previously recognised as operating leases (effectively off balance sheet) will be accounted for as a right-of-use (ROU) asset on balance sheet, with the corresponding lease liability recorded as current (12 month portion) and non-current liabilities.

It is a requirement within the accounting standard that the financial statements reflect the right-of- use asset component separately, which will then appear accordingly in the balance sheet or notes to account.

Exemptions still exist for short term leases (less than 12 months) and low value (< $ 5,000) leases. 

AASB 16 may significantly impact a licensee’s financial metrics including current ratio and net tangible assets (NTA). 

While the new accounting standard does not explicitly state whether the right-of- use asset is of a tangible or intangible nature, it is the QBCC’s position that a right-of-use asset can be recorded as tangible if the underlying asset is tangible (i.e. property, plant and equipment).

Accounting for construction work in progress (WIP)

Work in Progress (WIP) requires estimating the assets or liabilities accumulated from construction contracts based on what is entitled to be invoiced for works performed under the contracts, less what has been invoiced at a particular point in time. 

For construction contracts, WIP should be calculated in accordance with the provisions of AASB 15 Revenue from Contracts with Customers (which replaced the previous accounting standard of AASB 111).

It is not the QBCC’s role to advise a licensee how to calculate their work in progress, as each business is different – bigger companies may use the percentage complete method, smaller businesses may use costs incurred but not yet invoiced. Both methods are acceptable under the accounting standards.

The calculation of work in progress is the outcome of a construction contract that can be estimated reliably, with contract revenue and contract costs to be recognised by applying the stage of completion method. That includes billable work performed up to and including the balance sheet date that has not been invoiced plus an element of the expected profit on the project.

Contractors can include profit in the calculation of WIP but it should be relevant to the portion of work they have undertaken and therefore only be a percentage of the total profit they expect to make. A contractor cannot bring all of their profit to account prior to the completion of a job. For example, if a contact is on target at 40% stage of completion, then 40% of the anticipated profit can be brought to account.

Where a job appears as if a loss will result, then all costs must be written off in the books of account.  

Where the outcome of a construction contract cannot be estimated reliably, costs incurred are to be recognised as expenses and revenue is to be recognised only to the extent that it is probable that the costs incurred will be recoverable.

Work in progress is NOT:

  • Bringing to account the value of work remaining to be undertaken on a contract where the work has not been done;
  • Doing 25% of the work on a contract but bringing to account more than 25% of the estimated profit;
  • Projected or actual loss on a contract brought to account over time (losses must be brought to account immediately).

Work in progress amounts are actively reviewed to ensure accuracy of calculations and appropriateness of estimates and assumptions made.

Key areas of review may include:

  • How entities determine their estimated profit margin applied to construction WIP - i.e. the QBCC may ask you to identify the estimated profit margin you have applied to individual contracts and provide support for these figures.  We may review historical trends or interrogate aggressive assumptions.
  • When and how entities take into account anticipated losses on individual construction contracts
  • How the value of total contract consideration was determined, measured and applied
  • How any/all approved variations have been incorporated into the calculation of WIP
Accounting for line of credit facilities (ie credit cards, overdrafts)

If a licensee has a line of credit facility, such as a credit card or overdraft facility, the terms and conditions of the facility should be reviewed to determine the correct classification as a current or long term (non-current) liability.

While the facility may not have an immediate repayment requirement, this is very different to confirming that there is an unconditional right to defer settlement of the liability. 

If the liability can be called upon on demand, it must be presented as a current liability under AASB 101 Presentation of Financial Statements.

Changes to financial information

We rely upon financial information provided for licensees, as being true and correct and therefore reliable. We will not usually accept a second set of financial information for the same reporting date but showing different figures, unless it is accompanied by:

  • Full disclosure of new information that has come to the accountant's attention since completing the initial statements (and not due to deficiencies in the financial information being raised by the QBCC); and
  • A written request from the accountant withdrawing the initial set of statements provided.

Any changes to the financial statements need to be in accordance with the relevant accounting standards (ie AASB 108 and/or AASB 110).

Can the Qualified Accountant re-type or alter the wording in the MFR Report?

The MFR Report may be re-typed onto the letterhead of the qualified accountant as long as the wording in the body of the document is not altered or omitted in any way.

Consolidated Group Entities

Definition of a large proprietary company

Under the Corporations Act, ‘large proprietary companies’ and publicly listed companies must prepare and lodge a financial report and a director’s report for each reporting period. The accounts must be audited unless ASIC provides relief or an exemption.  

A proprietary company is defined as “large” for a financial year if it satisfies at least two of the criteria listed:

  • The consolidated revenue for the financial year of the company and any entities it controls is $50M or greater;
  • The value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25M or greater;
  • The company and any entities it controls has 100 or more employees at the end of the financial year.

If the company does not meet at least two of the criteria, it is considered to be a “small” proprietary company.

ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (previously ASIC Class Order 98/1418)

The ASIC instrument refers to a Deed of Cross Guarantee (DOCG) executed by some or all of the companies within the group. The DOCG is an undertaking by all parties to it that they will guarantee the debts of each company within the group in the event of liquidation.  

This allows the ‘group’ of companies to be audited on a consolidated basis. Each party to the group is not required to be audited on an individual basis. The parent or ultimate holding company is usually the trustee of the DOCG, and is the financial reporting entity for licensing purposes.  

The licensee may be the parent company, or may be a subsidiary of the parent, but must be a party to the DOCG to enable it to rely on consolidated or closed group accounts.

Licensees wishing to rely on the consolidated accounts of their parent entity must provide evidence they are party to a DOCG.  This can be through the provision of either a copy of the DOCG or by a disclosure in the Notes to the Accounts (usually listed under “Controlled Entity” or similar heading in the accounts of the company).  

Definitions

“Consolidated” - information based on the PARENT and ALL its subsidiaries as a whole, as the DOCG incorporates them all. The licensee relying on the information must be within this structure, regardless of who the licensees are within the group. It is the group taken as a whole.

“Closed Group” - information based on the PARENT and SOME subsidiaries (within a larger group of companies) which are party to the DOCG. Other subsidiaries within the Group may not be party to the DOCG, and therefore are not part of the closed group.

“Standalone company” – the licensee can elect to report financially on just its own financial position, and not that of the closed group or consolidated group.

Regardless of which option is reported on (ie consolidated, closed group or standalone entity), the financial information provided needs to comply with the Minimim Financial Requirements (MFR).

This means that if a licensee is a party to a DOCG and elects to comply with the MFR by relying on consolidated group financial information, the consolidated group needs to have sufficient NTA to cover the actual revenue being generated by the consolidated group, and the financial statements would be run through the same framework as a standalone entity (i.e. intangibles deducted, disallowed assets not included etc).

Current Ratio

Current Ratio is worked out by comparing a licensee’s current assets to current liabilities. This helps to determine the business’s financial viability.

Current ratio = current assets / current liabilities.

Applicant or licensees must meet the minimum requirement of 1:1 at the time of licence application, and at all times while the licence is held.

For every 1 dollar of current liabilities, you must have at least 1 dollar in current assets.

Example: Current ratio = Current assets / Current liabilities = $52,000 / $30,000 = 1.73:1

If you have no liabilities, your current ratio would be the total of your current assets to 1 or 0. For example, if your current assets totalled $5,000 but you have no current liabilities, your current ratio would be 5000:1 or 5000:0

The ratio must still be provided even if there are no current liabilities. It must be expressed as a numerical ratio e.g. 1.73:1 OR 1.73:0.

There may be instances where assets are removed from the calculation of the current ratio due to those assets being intangible or disallowed assets under the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018. However, all current liabilities must be considered when calculating the current ratio.

Related Entity Loans or Investment Assets which have been excluded in determining the Net Tangible Asset calculation must also be excluded from the Current Ratio calculation, where they are recorded as a current asset.

The current ratio calculation depends on your business structure:

Structure of Client Current Assets & Liabilities of:
Individual (sole trader)  Individual only
Company (stand-alone)  Company only
Individual or Company as trustee for a trust  Individual or Company, as well as Trust
Individual or Company trading in partnership  Individual or Company, as well as partnership

If the licensee is a trustee of a trust, are the trust amounts included in the current ratio calculations?

Yes, the current assets and current liabilities of the trust are included in the calculation to determine the current ratio. Any intangible, uncollectible or disallowed current assets in the Trust need to be removed in calculating the Current Ratio.

Example: The licensee has $2 current assets and no current liabilities. The trust or partnership has $10,000 current assets and $8,000 current liabilities. The calculation is determined by the total of all current assets, divided by the total of all current liabilities: $10,002 / $8,000 = 1.25:1

If the licensee is a trustee of a trust, how is the ratio for the trust calculated? Do amounts owing by the trust to beneficiaries have to be included as current liabilities?

The amounts owing by the trust to beneficiaries are certainly liabilities of the trust. Whether those liabilities are current liabilities or non-current liabilities should be determined by an accountant. In making this determination the accountant must abide by the provisions in the Trust Deed, and also apply applicable accounting principles, practices and policies.

If the liabilities are properly classified as current rather than non-current liabilities then those liabilities would be taken into account in calculating the licensee’s current ratio.

What is a Current Asset?

A current asset is an amount owing to you by someone else that you expect to receive within the next 12 months.

A current asset is not:

  • Goodwill
  • Formation expenses
  • Uncollectible debts
  • Real estate not currently for sale

What is a Current Liability?

A current liability is an amount owing by you to someone else that you expect to pay within the next 12 months.

Deeds of Covenant and Assurance

The Deed of Covenant and Assurance (the Deed) allows licensees who do not have sufficient Net Tangible Assets (NTA) in their own right to rely on assets of certain related parties to meet the NTA requirements. In order for a licensee to rely upon a Deed of Covenant and Assurance, the licensee’s net tangible asset position without the deed must be at least $0 (ie the licensee cannot rely upon a deed if the NTA position is negative).

The Deed must be executed on the approved form and the original executed document provided to the QBCC. This document can not be altered in any way from the prescribed format.

The Deed of Covenant and Assurance creates a legal obligation on both parties, hence the requirement for the licensee and the assurer to receive legal advice (highly recommended for licensee, compulsory for the assurer/covenantor). The Deed may become enforceable upon an insolvency event of the licensee.

The trustee in bankruptcy or liquidator may make a demand on the assurer to pay the amount stated in the last MFR Report. The Deed contains a charging clause that assurers (covenantors) should have explained to them prior to the execution of the Deed. 

The amount being assured is stated in the MFR report - not the Deed. This allows the QBCC to accept a Deed once only, and be able to continue to rely upon it until it is no longer needed by the licensee. This eliminates the need to update the Deed when a new MFR report is provided. The Deed document does include a maximum value that may be included on an MFR report.

The licensee must, if reasonably practicable, ensure the covenantor’s statement of financial position is prepared by the accountant who prepares any MFR Report for the licensee that includes the deed of covenant asset for working out the licensee’s net tangible assets.

The covenantor’s statement of financial position must be accompanied by a copy of each document relied on by the licensee in assessing the covenantor’s eligibility to enter the deed including evidence of the net tangible assets of the covenantor.

A licensee cannot rely on a deed of covenant asset when they do not hold at least $0 Net Tangible Assets in their own right, i.e. a deed can not be used to overcome a negative net tangible asset position

Who can provide a Deed?

Section 17C of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 sets out who can provide a Deed of Covenant and Assurance.

It is the responsibility of the qualified accountant completing the MFR Report to determine that the covenantor is an appropriate covenantor as stated in the Regulation.

A shareholder of the trustee company is outside the stated relationships in Section 17C of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018.

Can the amount assured under the Deed of Covenant and Assurance be used in the calculation of the licensee’s current ratio?

No, the Deed of Covenant and Assurance can only be used to support the Net Tangible Asset requirements of the licensee. However, the licensee's NTA must be at least $0 before the assured amount is included.

Where there is a company licensee and the director is also licensed, can the assets used for the director’s licence be assured to the company?

No, the assets may only be counted once, not twice or more. If they are being used to support the director’s personal licence, they must be deducted before determining the amount available which can be assured to the licensee.

A beneficiary of a trust is going to provide a Deed of Covenant and Assurance in favour of the trustee. The beneficiary’s only asset is its interest in the trust. Is this acceptable?

If the beneficiaries’ interest in the trust was in the form of an unpaid present entitlement related to a distribution from the trust (i.e. the beneficiary has a vested interest), the unpaid distribution would be assessed under section 15(1)(l) of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018. To be considered an asset, the trust must have a current ratio of at least 1:1, and a net tangible asset position of at least $0 assessed under the MFR Regulation framework.

If the beneficiaries’ interest in the trust is in the form of units in an unlisted unit trust, then the units would be considered as a disallowed asset under the MFR Regulation framework.

What does the term related body corporate mean where that term is used in relation to the giving of a Deed of Covenant?

A related body corporate of the licensee is a company that is related to the licensee within the meaning of section 50 of the Corporations Act 2001. 

If more than one person is giving a Deed of Covenant and Assurance in support of a licensee, are separate deeds required or can they all sign the one Deed of Covenant?

The QBCC will accept both alternatives. All of the Covenantors can sign a single Deed, or they can each sign separate Deeds. 

Can SC1 or SC2 licensees rely upon a Deed of Covenant and Assurance to meet the financial requirements?

Only licensees in categories 1 – 7 can rely upon a Deed.  For SC1 or SC2 licensees to rely upon a Deed, they would need to step up to a category 1 licence and would need to provide an MFR Report, signed financial statements, and have a minimum net tangible asset position of at least $46,001. 

Examples of not meeting MFR

In many cases, the application of the MFR Regulation 2018 is non-discretionary, meaning that the QBCC does not have the discretion on whether an asset is acceptable or not. If the asset meets the definition as being acceptable as outlined in the Regulation, it can be included in calculations, but if it does not meet this definition or is defined as a disallowed asset, it cannot be included in calculations.

Examples of not meeting MFR

MFR Reports must be no more than 4 months old as at the day the report is signed by a qualified accountant

  • An MFR Report for the reporting year ended 30 June 2020 and signed off by the accountant on 3 November 2020 cannot be accepted.

Licensees must hold net tangible assets of at least $0

  • The net tangible asset position cannot be negative
  • A licensee cannot rely upon a deed of covenant and assurance if the NTA position is negative.

Licensee is trustee company trading through a trust

  • The trustee and theTrust must provide financial statements
  • The Trust is assessed in the same way as the licensee – any intangible assets (such as borrowing costs, or goodwill) must be deducted
  • If, by deducting intangible assets, the Trust then has a negative net tangible asset position, the amount of the deficiency in trust assets is considered to be a liability of the trustee company and is deducted from the trustee company’s net asset position.
  • If the Trust has unpaid present entitlements, they need to be recorded as current liabilities of the Trust, unless there is an unconditional right to defer settlement of this liability (the parties have entered into a binding agreement for its repayment).

A licensee’s actual revenue includes all revenue from all sources

  • If an entity carries out work nationally, the actual revenue needs to include all income derived, not just the Queensland portion. If an entity has income from other sources other than building or construction, such as farming, or lawn mowing, the actual revenue needs to include all income derived.

Licensee relying upon a related entity asset loan for current ratio and NTA

  • The related entity (at same balance sheet date as the licensee) needs to hold NTA of at least $0 (cannot be negative) and a current ratio of not less than 1:1. That means that the related entity is also assessed in the same way as the licensee – any intangible assets must be deducted, and any related entity asset loans that the related entity relies upon, also need to be tested.  
  • If the licensee relies upon the related entity asset loan as a current asset, the related entity must have the amount recorded as a corresponding current liability.
  • If the related entity does not have a current ratio of 1:1 or has NTA less than $0, then the related entity asset loan cannot be included in calculations for the licensee.
  • Related entity liability loans can never be deducted from the licensee’s total liabilities.
  • If a licensee has a related entity asset loan owing to it, and a related entity liability loan owing by it, these cannot be offset unless the related entities are the same legal entity. For example, a company has money owing to it from John Smith, and owes money to another of John’s companies named JS Pty Ltd. The asset and the liability loans cannot be offset against each other, as John Smith is a separate legal entity to JS Pty Ltd.
Maximum Revenue

Maximum revenue (MR) for your reporting year includes the total income you receive from the building industry and any other source including outside Queensland and overseas, but excludes wages and salary. Your maximum revenue is determined by your net tangible assets. 

For example; if your net tangible asset value is $95,000 your maximum revenue can be up to $1,779,990.00. This is the maximum amount you can turn over, not the amount you must meet.   

Alternatively, you may nominate a lower amount of maximum revenue.

You can exceed your maximum revenue by up to 10% without obtaining prior approval from us. If you want to increase your turnover by more than 10%, you must first provide us with a new financial Declaration or MFR Report that supports the increase.

The calculation of Revenue includes the total income received by the licensee for the stated period, derived from all sources (including in all other States, and not just limited to building or construction). In the case of a partnership, the revenue is to be the revenue of the licensee and the partnership in combination.  In the case of a trustee, the revenue is to be the revenue of the trustee and the trust in combination.

Example: Do I only include turnover (or income) I earn from building?

No, it is ALL turnover (or income) that you earn from all sources (except for salary or wages that you receive if you are an employee rather than a contractor).

Example: Do I only include turnover that my company makes in Queensland?

No, all turnover is included for the company.

If you are unsure of your maximum revenue or net tangible assets, you can use the handy MR/NTA calculator.

If you are unsure of the financial category previously approved with the QBCC you can search your licence on the QBCC website. The category is displayed on the landing page of the licence search.

Your maximum revenue will place your licence within a financial bracket of either a self certifying 1 or 2 category or Category 1-7.

  • Maximum revenue of not more than $200,000 - Self-certifying Category 1 (SC1)
  • Maximum revenue of more than $200,000 but not more than $800,000 - Self-certifying Category 2 (SC2)
  • Maximum revenue of more than $800,000 but not more than $30,000,000 – Categories 1, 2 and 3
  • Maximum revenue of more than $30,000,000 – Categories 4 – 7.
MFR Requirements v Annual Reporting v Licence Renewal

There are three aspects to your licence:

  • Licence renewal – the payment of a roll or renewal fee to keep your licence current. This can be paid for one year or three years.
  • Annual Reporting - is a once a year submission based on the information that is required for each licensee’s maximum revenue. These will be assessed to confirm licensees are meeting the financial requirements of the regulation. For most licence categories, annual reporting information does not need to have any accounting standards applied, does not need to be prepared by an accountant, and can be based on your most recent reporting/financial year information.
  • MFR Requirements apply when you apply for a new licence, if you decrease your NTA by 20% or 30% (depending on your licence category), if you breach your turnover level by more than 10%, if your business structure changes, or if we request it.
MFR Reports

An MFR Report is required to be given to the QBCC by licensees in the following circumstances:

  • when you apply for a new licence (licence Category 1 upwards, maximum revenue over $800,001)
  • if your Net Tangible Asset position decreases by more than 20% for Category 4-7 licensees and 30% for all other licensees
  • if you no longer meet the minimum Current Ratio of at least 1:1
  • if your Maximum Revenue (MR) needs adjusting (you must not exceed your MR by more than 10% in each financial year)
  • if we request it.

Note:

  • The age of the accounts being relied upon for an MFR Report can be no older than 4 months old
    • from the end of the financial reporting period being relied on, and
    • at the date the accepted independent accountant signed the Report.
  • Cannot contain negative dollar value in assets.
  • For an application or change of your maximum revenue, we cannot accept an MFR Report if it is signed more than 30 days before we receive it.

An MFR Report is required if you need to update any information previously provided by your accountant. Information provided with an MFR Report must be signed off by an accountant, must be accompanied by signed financial statements, must have relevant accounting standards applied, and must be no older than 4 months in age.

When the requirements state the accounts are to be no older than 4 months in age – does this mean the report is to be dated no more than 4 months old or the end of the actual reporting period is to be no more than 4 months ago?

The reference to 4 months age of accounts means no more than that length of time has lapsed between the period end date stated on the report, and the date the report is signed by the accountant and licensee.

When is an MFR Report required?

 

 

SC1

 

SC2

 

Categories 1-3

 

Categories 4-7

New licence

 

An MFR report is not required, unless requested by QBCC (eg. trading through a trust)

 

An MFR report is not required, unless requested by QBCC (eg. trading through a trust)

 MFR Report required

 MFR Report required

Maximum revenue adjustment

   

SC2 licensee increase maximum revenue to Cat 1

 

 

MFR Report required

 

 

Change of licence grade: nominee supervisor to contractor

 

 

 

 

Change of ownership of office holders

 

 

 

 

Restructure of partnership 

 

 

 

 

Change or withdrawal of covenantors

 

 

 

 

Revoking a deed

 

 

 

 

Annual reporting obligations

An MFR report is not required.

When changing (downgrading) from Cat 1-7 to a Self Certifying licensee (SC1 or SC2), what paperwork is required?

No MFR Report is required  - only the change of MR application form, either an SC1 or SC2 declaration ( declaration of maximum revenue), and a balance sheet to confirm NTA of minimum $46,000 and a profit and loss statement to confirm turnover is less than $800,000.

Net Tangible Assets

Net Tangible Assets (NTA), means the net assets (which is the total assets less the total liabilities) of a business:

  • less any intangible assets such as goodwill, borrowing costs, patents, and trademarks
  • less any disallowed assets, such as jet skis, boats, racehorses, personal furniture, collector’s items.

Applicants/licensees must have sufficient NTA to meet the minimum requirements. Combined with the defined amount of a Deed of Covenant and Assurance, the NTA must be sufficient to cover the actual revenue being carried out.

Applicants/licensees cannot have a negative NTA position. Entities with a negative NTA position cannot rely upon a Deed (a Deed can only be relied upon if the applicant/licensee has NTA of at least $0). We have an online calculator to work out how much NTA you need to cover your turnover, or vice versa.

If the Net Tangible Asset amount reported to QBCC decreases by more than 30% (if Cat 1 -3) or 20% (if Cat 4 - 7) from the last advised position, a new financial report must be provided within 30 days.

The Net Tangible Asset calculation depends on your business structure:

Structure of Client Net Tangible Assets of:
Individual (sole trader)
  • Personal assets and liabilities only
Company (stand-alone)
  • Company assets and liabilities only; or
  • In combination with assets assured by one or more director/s or a related body corporate of the applicant/licensee by way of a Deed of Covenant and Assurance

(Note: A deed is only available for licence categories 1 to 7, not SC1 or SC2)

Individual trading in partnership
  • Individual’s assets and liabilities only; or
  • In combination with assets assured by the partner by way of a Deed of Covenant and Assurance

(Note: A deed is only available for licence categories 1 to 7, not SC1 or SC2)

Company trading in partnership
  • Company’s assets and liabilities only; or
  • in combination with assets assured by way of a Deed from one or more of the following:
    • partner of the partnership
    • director of the licensee or;
    • related body corporate of the licensee.

(Note: A deed is only available for licence categories 1 to 7, not SC1 or SC2)

Individual as trustee for a Trust
  • Personal assets and liabilities; or
  • In combination with assets assured by one or more of the Beneficiaries of the Trust by way of a Deed.

(Note: A deed is only available for licence categories 1 to 7, not SC1 or SC2)

Company as trustee for a Trust
  • Company (trustee) assets and liabilities, exclusive of the Trust (eg $10 net tangible assets if representing the paid up capital of the company); or
  • in combination with assets assured by way of a Deed from one or more of the following:
    • beneficiary of the trust
    • director of the licensee or;
    • related body corporate of the licensee.

(Note: A deed is only available for licence categories 1 to 7, not SC1 or SC2)

Trading in a partnership (individual or company)

Evidence of a formal business Partnership Agreement must be provided where a Deed is provided by the partner of the applicant. You cannot include the assets of the partnership but may include the licensee’s share of equity (or loss) in the partnership as an asset (or liability) in calculating the licensee’s NTA position.

Example - If the partnership equity is $10,000 and you have a 40 per cent share within the partnership, equity of $4,000 may be included as a personal asset in your NTA.

Trustee for a Trust (individual or company)

Assets and liabilities held in the Trust cannot be taken into consideration in determining NTA and cannot be assured to the applicant through the use of a Deed.

However, pursuant to Section 16 of the Regulation, the MFR framework must be applied to the financial information of the trust and any QBCC Net Tangible Asset deficiency is a liability in calculating the Net Tangible Asset position of the trustee.

Subsidiary company within a consolidated group subject to ASIC Class Order (98/1418)

A Company subject to an ASIC Class Order (98/1418) - Deed of Cross Guarantee, may meet the NTA requirement from either:

  • the assets and liabilities of the Consolidated Group;
  • the assets and liabilities of the Closed Group of companies subject to the Class Order; or
  • the assets and liabilities of the applicant in its own right;
  • in combination with assets assured by a Deed by an approved assurer.

The applicant or licensee party to the Deed of Cross Guarantee will be required to provide evidence that the Deed is in place when submitting the MFR Report and signed financial statements.

A parent company within a consolidated group

A parent company of a consolidated group subject to ASIC’s audited requirements, may meet the NTA requirement from either:

  • the assets and liabilities of the Consolidated Group;
  • the assets and liabilities of the Closed Group of companies subject to the Class Order (if applicable); or
  • the assets and liabilities of the applicant in its own right;
  • in combination with assets assured by a Deed by an approved assurer

The applicant or Licensee party to the Deed of Cross Guarantee will be required to provide evidence that the Deed of Cross Guarantee is in place when submitting the MFR Report and signed financial statements.

What is an asset?

Acceptable assets are things you own in your own name, both legally and beneficially, so this does not include assets held on trust for another person or corporation.

  • Cash
  • Work in progress
  • Money held in a project bank account that you are entitled to
  • Retention money you are entitled to
  • Registered motor vehicles
  • Real estate
  • Tools of trade
  • Plant & Equipment
  • Stock on hand
  • Some loans you have given out to related entities (related entity asset loans)
  • Some money owing to you from clients / homeowners (trade debtors or work in progress)
  • Shares in publicly listed (ASX) companies

Example:

Can I use my family home as an asset?

Yes, a home can be used as an asset but only your share can be used in the calculation. If you and your husband/wife own your house together, you can only include your 50% share of the home.

What is not an asset? The following items are either disallowed or intangible assets

  • Racehorses
  • Paintings, stamps or coins
  • Personal furniture
  • Off road motorbikes
  • Quad bikes
  • Golf buggies
  • Jet skis
  • Boats
  • Money owing to you if it is disputed or subject to legal or court proceedings
  • Money owing to you from a homeowner if it is older than 1 year old
  • Goodwill
  • Franchise fees
  • Deferred Tax Assets
  • Barter dollars
  • Assets held by someone else (held on trust for a beneficiary other than yourself)
  • Superannuation if you cannot access it immediately
  • Life insurance policy benefits
  • Bitcoin / cryptocurrency.

What is a contingent asset?

If a debt owing to a licensee is disputed or is subject to legal proceedings, the amount cannot be included in the calculation of Net Tangible Assets or the Current Ratio, unless recovery is deemed to be virtually certain (as set out in AASB 137 Provisions, Contingent Liabilities and Contingent Assets).

AASB 137 (covering Contingent Assets) uses the words “virtually certain” so unless there is clear evidence that the outcome is virtually certain, rather than probable, then it would be a contingent asset and just a disclosure, rather than accounted for as an asset in the balance sheet.

What is a liability?

Liabilities are debts you owe to others.

This includes any debts or obligations you must pay or settle within a certain period of time or pay on demand (e.g. amounts of related entity loans, shares in companies not publicly listed). All liabilities must be taken into account.

  • Mortgage owing on property
  • Credit card debts
  • Car finance debts.

Example:

If you don’t declare your house as an asset, do you still need to declare the mortgage as a liability? 

Yes, all liabilities have to be taken into account.

Related entity loans

The licensee must provide the balance sheet (at a minimum) of the related entity to determine if the related entity meets the requirements set out in the MFR Regulation. 

The Qualified Accountant is to view the balance sheet (at a minimum) of the related entity, and for the loan to be included in QBCC’s calculations, the related entity, at the same balance sheet date, must hold a net tangible asset position of at least $0 and have a current ratio of at least 1:1

In calculating the related entity's net tangible asset position and current ratio, any disallowed or intangible assets must be excluded from the related entity's financial position. Disallowed assets are identified in Section 17 of MFR Regulation.

If directors owe money to a licensee as an asset, those loans would need to be assessed under the same framework. A balance sheet (or statement of financial position) would need to be sighted for the director which demonstrates a net tangible asset position of at least $0 and a current ratio of at least 1:1 for the loan to be included in the QBCC’s calculations.

Repayment of the loan after the balance sheet date, or through the intended future payment of dividends, cannot be considered acceptable under the MFR Regulation. The only test that can be applied is for the related entity, as at the same balance sheet date, to hold a net tangible asset position of at least $0 and have a current ratio of at least 1:1, for the loan to be included in calculations.

Related entity loan liabilities cannot be deducted from the calculations of net tangible asset or current ratio under any circumstances.

All related entities providing financial information i.e. related entities owing loans to a licensee, the Trust through which the trustee company trades, or the Covenantor providing financial information to assure a Deed of Covenant and Assurance, are assessed on the same basis - this means financial information provided for related entities, Trusts and Covenantors are not to include intangible, disallowed or related entity loan or investment assets which do not meet the identified test, and cannot remove any liabilities from calculations under any circumstances.

Offsetting of related entity loans

AASB 101 states “an entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Australian Accounting Standard”.

Therefore, related entity liability loans cannot be “offset” against related entity asset loans unless permitted to do so by accounting standards (ie AASB 124).

Treatment of depreciated (written down) assets versus book value

Usually, a company’s internal management accounts will list an asset such as motor vehicle or plant and equipment at the value that it could be reasonably sold for. This is the value that could be received if the company was to sell the asset at any given moment.

The depreciated or written down value of these assets will look completely different. This usually happens once the relevant accounting standards have been applied to the financial statements (ie AASB 116), and the finalised financial statements will then show what an asset is worth for tax purposes.  

This can cause issues with a company’s financial statements when reporting to the QBCC, as the financial statements will be shown with lesser values attributed to the assets.

For the QBCC’s annual financial reporting obligations, we do accept internal management accounts being provided for SC1 / SC2 licensees, and Categories 1-3. This means, we would accept the financials at book value (for annual reporting).

When providing financial information for MFR Requirements (ie to apply for a licence, or upgrade your Maximum Revenue), the financial statements need to have all relevant accounting standards, which means the assets would likely be written down for tax depreciation reasons.

If applying accounting standards, to revalue an item of property, plant or equipment, the correct accounting standard must apply (ie AASB 116 / AASB 136 / AASB 1041), and if an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs needs to be revalued.  The revalued amounts need to included in the company’s financial statements, which should also reflect the increase in income as well as accumulated in equity under the heading of revaluation reserve.

Trust structures

The Pty Ltd “trustee” company (licensee) will usually have $2 or $10 assets (paid up capital). We require financial statements for both the trustee and the trust for the same reporting date. While all trading is usually completed under the Trust, the trustee company is still required to provide signed financial statements to confirm its net asset position.

The current ratio is the combination of trust and trustee’s current assets over current liabilities, but NTA is calculated solely on trustee (Pty Ltd) net assets. If the Trust has a negative net tangible asset position assessed under the MFR Regulation framework, the trustee (licensee) has to include the deficiency as a liability in its NTA calculation.

Usually, the only way the trustee company can meet the NTA test is to rely upon a Deed from a director, beneficiary or associated company.

Pursuant to Section 16 of the MFR Regulation, the MFR framework must be applied to the financial information of the Trust. In calculating the Trust’s net asset position, disallowed assets of the Minimum Financial Requirements are excluded from the calculation. This means:

  • Any related entity asset loans need to be assessed under the MFR Regulation (ie the related entity needs to have a QBCC current ratio of at least 1:1 and a NTA position of at least $0);
  • Any borrowing costs / intangible assets need to be deducted from net assets;
  • Trade debtors need to be assessed under the MFR Regulation framework (i.e. 50% of debtors between 180-365 days are disallowed, and 100% of debtors over 365 days old are disallowed);
  • Disallowed assets as listed in the Minimum Financial Requirements need to be deducted.

If deducting disallowed or intangible asset amounts from the Trust’s net asset position results in a negative Net Tangible Asset position for the Trust, this negative NTA position would then flow back to the trustee (licensee) entity. The licensed entity would then need sufficient NTA of its own to absorb any deficiency in the Trust.

All related entities providing financial information i.e. related entities owing loans to a licensee, the Trust through which the trustee company trades, or the Covenantor providing financial information to assure a Deed of Covenant and Assurance, are assessed on the same basis - this means financial information provided for related entities, Trusts and Covenantors are not to include intangible or disallowed assets in calculations, and cannot remove any liabilities from calculations under any circumstances.

As trustee for a trust, assets held by a trustee under trust arrangements are excluded when calculating the NTA position. However, any liabilities incurred by the Licensee as a trustee for a trust must be included in the liabilities. If, however, the trustee has a recognised right of indemnity to the assets of the trust relevant to the trust liabilities incurred, then the value of the indemnity may be set off against the trust liabilities. Assets which are considered as disallowed or intangible are also to be excluded from the assets of the trust when calculating the value of the indemnity.

The QBCC requires financial statements for both the trustee and the trust for the same reporting year. While all trading is usually completed under the Trust, the trustee company is still required to provide signed financial statements to confirm its net asset position. As trustee for a trust, assets held by a trustee under trust arrangements are excluded when calculating the NTA position. However, any liabilities incurred by the Licensee as a trustee for a trust must be included in the liabilities. If, however, the trustee has a recognised right of indemnity to the assets of the trust relevant to the trust liabilities incurred, then the value of the indemnity may be set off against the trust liabilities.  

As the licensed entity is the trustee company, a set of their signed financial statements for the trustee company must be provided even if they show nil activity. The QBCC cannot waive the legislative requirement for the supply of these documents.

When calculating the NTA of a licensed company that is trustee for a trust, do you include the trustee company assets?

Yes. NTA for a company that is a trustee for a trust can include:

  • Assets and liabilities of the trustee company, exclusive of the trust; or
  • In combination with assets assured by way of Deed from one or more of the following:
    • Beneficiary of the trust
    • Director of the licensee; or
    • Associated company of the licensee.

Assets and liabilities held in the trust cannot be taken into consideration in determining NTA and cannot be assured to the applicant through a Deed. Assets held on trust for another person or corporation do not fall within the definition of ‘assets’ under the MFR Policy. 

Unpaid Present Entitlements (UPE)

An unpaid present entitlement is usually a current liability in the trust, unless the parties have entered into a legally binding agreement for its repayment (eg div 7A loan). This is because the trust does not have an unconditional right to defer settlement outside 12 months.

In the case of a UPE being recorded as a current asset, the QBCC would need information to confirm previous years’ trust distributions, including a copy of the resolution relating to the current years’ distributions or a copy of the beneficiary account (breakdown) from the ledger.

For UPE’s that are recorded as assets, these are treated by the QBCC in the same way as related entity asset loans, and evidence that these amounts meet the MFR Regulation test by way of balance sheet is required.

Which licensees are affected by the financial requirements?

Licensees who hold a contractor/ builder grade of licence are required to meet the Minimum Financial Requirements to obtain and maintain a QBCC licence.

If you hold a contractor licence, you are required to comply with annual financial reporting requirements each year, as well as meeting the Minimum Financial Requirements at all times. 

If you are retired, not currently trading in the building industry, an employee, or working for wages, you may wish to amend your licence type to nominee supervisor by completing the change licence type form and paying the appropriate fee. A nominee supervisor licence still allows you to be the employee for a licensed company, but you are unable to contract to perform building work in your own right.

Licensees that only hold a site supervisor, nominee supervisor or fire occupational licence are not required to adhere to the financial requirements.

Licensees and applicants with the following classes do not have to meet the minimum financial requirements in certain circumstances:

  • Builder Project Management Services
  • Building Design – Low Rise
  • Building Design – Medium Rise
  • Building Design – Open
  • Hydraulic Services Design licences
  • Site Classifier licences

These licence classes are required to hold current professional indemnity insurance instead of meeting the financial requirements. If the professional indemnity insurance held has expired, then these licensees are required to meet the financial requirements.    

Building Certifiers and Pool Safety inspectors are also exempt from meeting the Minimum Financial Requirements as these two licences are issued under the Building Act 1975.