I saw an interesting article in the Eurobodalla shire free local paper (The Beagle, 26 July 2022). The headline was ‘State Government tries to pull a swifty on RFS assets’. The gist of the story was:

… Council’s concern that the NSW Auditor General … recommends that NSW Council’s should include rural firefighting equipment, that has been vested to them, in their financial statements and depreciate them. The issue is that the State Government says it does not control these assts, so therefore, “by default” they must be controlled by the councils that they are vested in.

Council determined to:

… write to the Auditor General for New South Wales to advocate that the NSW Government acknowledges rural firefighting equipment is controlled by and is the property of the State government and advise that Council’s financial statements have been prepared in accordance with the Australian Accounting Standards, as required by the Local Government Act and such assets will not be recorded in Council’s financial statements.

A question asked by one Councillor:

… revealed that if Council takes on responsibility of the asset they would also be taking on over $1 million in depreciation to cover the last two years where they have refused to allow the RFS assets to come on to their books (other than RFS buildings on Council land).

North Sydney Council reported (NSW Government withdraws support for RFS equipment, 8 August 2022):

Councils across New South Wales including North Sydney are voicing their concerns about the State Government’s latest Audit Office Local Government Report, which has determined that Rural Fire Service (RFS) assets will be the property of Councils for accounting purposes.

This means that RFS equipment will be recorded in all Council financial statements, forcing local governments to absorb depreciation costs and stocktake the items, even though they are owned and controlled by local brigades, not Councils.

(And see also ‘Gil council objects to ownership of RFS assets‘ The Gilgandra Weekly (26 August 2022)).

The Audit Office Local Government Report 2021 (published 22 June 2022) can be found online.  It says:

Sixty-one per cent of the total value of uncorrected errors was due to unrecorded rural firefighting equipment

In 2017, we recommended that OLG should address the different practices across the local government sector in accounting for rural firefighting equipment.

In 2020–21, 68 (2019–20: 68) councils did not record rural firefighting equipment in their financial statements estimated to be $145 million (2019–20: $119 million). Forty-one councils recognise this equipment in their financial statements with a total value of $162.8 million, highlighting the inconsistent recognition practices across the local government sector.

The financial statements of the NSW Total State Sector and the NSW Rural Fire Service do not include these assets, as the State is of the view that rural firefighting equipment that has been vested to councils under section 119(2) of the Rural Fires Act 1997 is not controlled by the State. In reaching this conclusion, the State argued that on balance it would appear the councils control the rural firefighting equipment that has been vested to them. It is important to note that there are only two parties to the agreements that govern the use of vested rural firefighting equipment, leaving only two parties who would be considered to control this equipment – the NSW Rural Fire Service in the State sector, or councils in the local government sector.

The Department of Planning and Environment (inclusive of the Office of Local Government) (the Department) confirmed in the ‘Report on Local Government 2020’ (tabled in Parliament on 27 May 2021) their view that rural firefighting equipment is not controlled by the NSW Rural Fire Service.

The Local Government Code of Accounting Practice and Financial Reporting confirms the State’s view that it does not control these assets but provides that ‘Councils need to assess whether they control any rural firefighting equipment in accordance with Australian Accounting Standards’. It would seem however, given the State’s view that it does not control these assets, that these assets can only be controlled and therefore recognised by councils in the local government sector.

Despite this, many councils do not report these critical assets in their financial statements.

The continued non-recording of rural firefighting equipment in financial management systems of some councils increases the risk that these assets are not properly maintained and managed. Councils who have rural firefighting equipment vested from the NSW Rural Fire Service should recognise these assets in their financial management systems and consider their condition and useful life.

Recommendation to councils

Councils should perform a full asset stocktake of rural firefighting equipment, including a condition assessment for 30 June 2022 financial reporting purposes.

Consistent with the requirements of the Australian Accounting Standards, councils should recognise this equipment as assets in their 30 June 2022 financial statements.

The Rural Fires Act

The Rural Fires Act 1997 (NSW) relevantly defines the term ‘local authority’ to mean ‘in relation to land that is situated within an area within the meaning of the Local Government Act 1993 –the council of the area’ (Dictionary, definition of ‘local authority’).  A function conferred on a local authority is to be exercised by the relevant council (s 7).

Section 15(1) says ‘A local authority may form one or more rural fire brigades for any rural fire district constituted for its area or part of its area’ but it is well known that in fact local authorities are not forming brigades. Section 12A says that the Commissioner can enter into service agreements with local authorities which ‘may specify functions imposed on the local authority by or under this Act that are to be exercised by the Commissioner during a period (if any) specified in the agreement’ (s 12A(2)(a)). By virtue of those agreements, decisions to create or disband rural fire brigades are made by the Commissioner, not the local authority (see NSW Rural Fire Service, Service Standard 1.3.1 Operational Delegations and Authorisations (7 June 2022)and Service Standard 1.3.4 Rural Fire District Service Agreements (16 August 2010)).

Part 5 of the Rural Fires Act deals with the New South Wales Rural Fire Fighting Fund.  This fund collects money allocated to the RFS by treasury and money required to be paid by councils to fund the Rural Fire Service (s 102).  Section 119 relevantly, says:

(2)        All fire fighting equipment purchased or constructed wholly or partly from money to the credit of the Fund is to be vested in the council of the area for or on behalf of which the fire fighting equipment has been purchased or constructed.

(3)        A council must not sell or otherwise dispose of any fire fighting equipment purchased or constructed wholly or partly from money to the credit of the Fund without the written consent of the Commissioner…

(5)        A council must take care of and maintain in the condition required by the Service Standards any fire fighting equipment vested in it under this section.

(6)        The Commissioner may, with the concurrence of the council in which fire fighting equipment is vested under this section, use any of the equipment not reasonably required by the council to deal with incidents in the area of the council to deal with incidents outside the area.

Australian Accounting Standards

The Statement of Accounting Concepts: Definition and Recognition of the Elements of Financial Statements (1995) published by the Australian Accounting Standards Board says says (at [14])

“control of an asset” means the capacity of the entity to benefit from the asset in the pursuit of the entity’s objectives and to deny or regulate the access of others to that benefit.

With respect to ‘control’ it goes onto say:

[24]     …  The entity controlling an asset is the one that can, depending on the nature of the asset, exchange it, use it to provide goods or services, exact a price for others’ use of it, use it to settle liabilities, hold it, or perhaps distribute it to owners.  An asset is specific to an entity in that it cannot at the same time be an asset of another entity…

[25]     The capacity of an entity to control the future economic benefits would normally stem from legal rights and may be evidenced by title deeds, possession, or other sanctions and devices that protect the entity’s interests.  However, legal enforceability of a right is not a prerequisite to the establishment of control over the future economic benefits, since an entity may be able to control the future economic benefits expected to flow from a particular item or activity in some other way.  Legal enforceability is discussed further in paragraph 37.

[26]     Possession or ownership of an object or right would normally be synonymous with control over the future economic benefits embodied in the object or right.  However, these are not essential asset characteristics.  An entity may possess an object or right but not expect to enjoy the benefits embodied in it.  For example, an agent may hold goods for sale on behalf of a principal.  Conversely, an entity may not possess an object or right but expect to enjoy its benefits.  Also, an entity may control an object or right but not own it.  … Conversely, an entity may own an object or right but not control it…

[28]     … a control test rather than a legal enforceability test means that the definition is less rigid and more reliable in assessing the capacity of an entity to secure the future economic benefits.

Discussion

The obvious problem is that the ‘Department of Planning and Environment (inclusive of the Office of Local Government) (the Department) confirmed … their view that rural firefighting equipment is not controlled by the NSW Rural Fire Service’ whilst the various Local government authorities clearly have a different view. The Audit Office has not attempted to resolve the conflict between those views but has accepted the State view.

The Statement of Accounting Concepts: Definition and Recognition of the Elements of Financial Statements (1995) says that the control test is separate from the ‘legal enforceability’ test or ownership.  Even if it is the case that the vehicles are owned by the local council (Rural Fires Act 1997 (NSW) s 119(2)) it does not follow that the council controls the asset.

The idea that the council controls the asset seems implausible. The Council does not establish or manage the brigade (discussed above). The council does not set the training standards or define the standard operating procedures for driving (see OMP 8.06.01.07 Safe Driving SOPs). Service Standard 5.3.5 Fleet Insurance for NSW RFS Appliances (21 April 2021) says (at [1.1])

As part of sound corporate governance practice and to ensure compliance with NSW Treasury Managed Fund (TMF) requirements, the NSW Rural Fire Service (NSW RFS) operates a centrally managed comprehensive motor vehicle insurance arrangement for appliances identified on the NSW RFS Fleet Program.

Vehicles ‘identified on the NSW RFS Fleet Program’ include ‘all NSW RFS, Brigade and Council owned’ vehicles ([1.3]).  The RFS determines what are ‘Bonafide/authorised activities’ for which appliances may be used ([2.1](b)]. 

A fire control officer is appointed for each local government authority and is employed under Government Sector Employment Act 2013 (NSW) as part of the RFS. He or she is not employed by the council (Rural Fires Act 1987 (NSW) s 10).  A fire control officer (s 38(2)):

(a) has the supervision and direction of … all rural fire brigades and groups of rural fire brigades in the rural fire district for which the fire control officer has been appointed …

(b) has the right to use any fire fighting apparatus in the rural fire district …

(c) must inspect, or cause to be inspected, at least once each year all fire fighting apparatus in the rural fire district …

Section 119(6) says:

(6)        The Commissioner may, with the concurrence of the council in which fire fighting equipment is vested under this section, use any of the equipment not reasonably required by the council to deal with incidents in the area of the council to deal with incidents outside the area.

As evidence from s 38(2) cited above, council does not manage the fire response. The idea that a local government, that has no direct responsibility for firefighting can tell the Commissioner that the RFS cannot relocate a tanker or other appliance because in council’s opinion the vehicle is ‘reasonably required by the council to deal with incidents in the area’ is to put it mildly, laughable.  It is the RFS, not council that is responsible for dealing with relevant incidents, in particular fires (Rural Fires Act 1997 (NSW) s 9; State Emergency Management Plan). The roles of Local Government (NSW State Emergency management Plan ([442)) are:

  • convening Local Emergency Management Committees and Recovery Committees
  • working with State agencies to identify and prioritise risk mitigation options
  • undertaking an all-hazards approach to emergency risk management
  • working with insurers to minimise disaster risk exposure. Recognising that Local Councils have many other tasks to perform,

Local Councils are not responsible for dealing ‘with incidents [and in particular fires] in the area of the council’. Councils do not use fire appliances to provide services to the community, the RFS does.

A council cannot dispose of an appliance without the Commissioners approval (s 119(3)) and I would suggest cannot use an appliance to settle liabilities nor can they charge the RFS or anyone else for its use.

Conclusion

I am not an accountant so don’t claim to be familiar with the Australian Accounting Standards but, with respect to the Audit Office, it seems to me that they have simply adopted the ‘state’ view without any regard to the actual operations of the RFS.  Councils may own the assets (s 119(2)) but that does not mean they control them (Statement of Accounting Concepts: Definition and Recognition of the Elements of Financial Statements (1995)).

In my view, having regard to the Rural Fires Act 1997 (NSW) and the State Emergency Plan the RFS (and therefore the state) controls the appliances, regardless of who owns them. I agree with the councils that the RFS assets are not subject to control by the council. I agree with the Mayor of Eurobodalla Shire (Agenda: Ordinary Meeting of Council 26 July 2022, p. 5)

Council has no right of use to the RFS equipment and hence does not economically benefit from them. A right not only includes the right of the entity to benefit from the asset but also the ability to deny other entities having any access to the use of rights.  Council is unable to deny the RFS from using the equipment. State Government legislation including Rural Fires Act 1997 which is applicable to the RFS would stipulate they deliver their services using these assets for their whole life…

This blog is made possible with generous financial support from the Australasian College of Paramedicine, the Australian Paramedics Association (NSW), Natural Hazards Research Australia, NSW Rural Fire Service Association and the NSW SES Volunteers Association. I am responsible for the content in this post including any errors or omissions. Any opinions expressed are mine, and do not necessarily reflect the opinion or understanding of the donors.