Protect your QBCC Licence – Satisfying the Net Tangible Assets Test
Posted by Tom Nunan, Manager, Carter Connell
“The correct treatment of retentions, contracts, WIP and assets on a licensee’s books is now more important than ever.”
The construction industry is a challenging one to survive in. Everyone has seen the shells of half-built developments sitting empty for months on end as the construction company disappears into legal battles with subcontractors and other creditors. As part of the steps taken to combat this, the Queensland Building and Construction Commission (QBCC) requires construction companies to hold enough working capital to cover their revenue. This is known as the Net Tangible Assets (NTA) test. Correct accounting treatment of contracts, work in progress, retentions and assets are critical to ensure a correct NTA calculation. Too often these are incorrectly treated (or not recognised at all) by accountants, causing businesses to fail the NTA test and risk losing their QBCC licences.
Even though all licensees have always been required to maintain a minimum NTA, in practice this wasn’t always done because financial reporting to QBCC wasn’t mandated for all licensees. As of 2019, all licensees were required to start this reporting. Up until recently, the QBCC has taken an educational approach and has been willing to work with licensees to ensure their compliance. However, this grace period is now coming to an end, and the QBCC is likely to start taking regulatory action against non-compliant licensees.
Below we’ve highlighted the most common accounting errors that can negatively impact the NTA.
1. Retentions
Retention clauses are common in construction contracts. Typically, a head contractor will withhold 5% of the contact value owing to subcontractor to ensure completion of the project and cover any liabilities that might arise. Subcontractors will often fail to recognise retention money on the books until they receive it. The result? An understated NTA.
2. Contracts
Construction is unique from other industries; the contracts have complex payment terms and should be individually tracked against performance as the true NTA may not be reflected in your standard Profit & Loss or Balance Sheet. For example, you may need to consider:
Are you invoicing ahead of completion? For example, have you invoiced for 70% of the contract when only 50% has been completed?
Does the cost align with the stage of completion? For example, the cost is 40% of expected but you are at 70% completion.
If so, adjustments should be made to take these into account. Failure to do so will give you an inaccurate NTA.
3. Work in progress (WIP)
WIP is work that hasn’t been billed. Whether the WIP is expensed, treated as an asset or recognised at all will depend on the circumstances of each individual job.
For example, let’s say you have a job that you expect to be profitable. You have recorded 70% WIP but only 50% of the job is completed – perhaps because your materials have arrived but haven’t yet been assembled. In this scenario, the extra 20% WIP should be reflected on the balance sheet, increasing your NTA.
Alternatively, if a job is expected to make a loss (because you have under-quoted), the WIP should be expensed as incurred, decreasing your NTA.
These are simplified examples but illustrate how a variety of factors can influence how WIP should be treated and the flow-on impact to your NTA.
4. Assets
Are all your fixed assets on the balance sheet recognised at their true, written-down value or at their tax value? Both ways could be acceptable from an accounting perspective, however, one of these will negatively impact your NTA significantly more.
Now the 2021 Federal Budget has eliminated any thresholds for instant asset write-offs, incorrect treatment of write-offs will become more of a common issue as businesses can write off more assets than ever. The increased opportunity for write-offs is a great stimulus measure for businesses; however, assets should be written off in way that minimises the negative impact on the company’s NTA.
The correct treatment of retentions, contracts, WIP and assets on a licensee’s books is now more important than ever. If these are not correctly dealt with, the true NTA of the business may not be reflected in the accounts, causing your business to fail the test. Adopting best practice accounting principles will not only assist licensees to protect their licence but will also assist in better management of contracts internally.
Get in touch with Carter Connell today to discuss your construction business needs with one of our experienced advisors.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Carter Connell accepts no responsibility for any loss suffered as a result of any party using or relying on this article.