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MORSEIGROUP ^e 6<;r^ACCOUNTANTS & ADVISORS

»f-v !HMC,J-

LfppER LACHLAN"SHIRE7:5U^!Th1.

MZS;4D6423 -i;-!^iLN<i^^OOKW^LL7fARlTGltl kp,Ac no:n By: CMOOW/DEP/DFAT^^TTMW^MNV//HRO/SP/RO/

^October 2011 A» ^

- 6 OCT 2011General Manager

3Upper Lachtan Shire Council L. ^I-E * RETLT7R!^RT''A~ACK'^fQTRT?NrPO Box 42 Action Taken.

GUNNING NSW 2581 ri-'ilt: No. . Dat L Filed ....... "r. 3

Dear John,

We advise having completed our audit of the Upper Lachtan Shire Council's financial reports for the periodended 30 June 2011 and enclose the foLLowing:

> independent auditor's report on the general purpose financial report of Council;

> independent auditor's report on the special purpose financial report of Council; and

> independent auditor's report on the conduct of the audit of Council

Copies of the audit reports have been forwarded to the Division of Local Government as required by the Act,

If we can be of further assistance to you in relation to any of the above matters, please do not hesitate tocontact us.

Yours faithfuLLyMORSE GROUP

Per:

ZS^ST--^^ ^ <-i v^~\ i^JLLEANNE SMITHPARTNER

H 266 Howick Street, Bsthurst NSW 2795PO Box 690, Bathurst NSW 2795 DX: 31U

Liability limited by a scheme approved unde r t 02 6339 9200 E 02 6331 9068COVER OF

Cbartwsd Accountant* EXCELLENCE, Professional Standards Legislation bathurstfamorsegroup.com.au www.morsegroup.com.au'**

MORSEIGROUPACCOUNTANTS & ADVISORS

INDEPENDENT AUDITOR'S REPORT TO THE COUNCILON THE GENERAL PURPOSE FINANCIAL STATEMENTS OF

UPPER LACHLAN SHIRE COUNCIL

Report on the Financial Statements

We have audited the accompanying general purpose financial statements of Upper Lachlan Shire Council forthe financial year ended 30 June 2011. The financial statements comprise the Statement by Councittors andManagement, Income Statennent, Statement of Comprehensive Income, Balance Sheet, Statement of Changesin Equity, Statement of Cash Flows and accompanying Notes to the Financial Statements.

Council's Responsibility for the Financial Statements

The Council are responsible for the preparation and fair presentation of the financial statements in accordancewith the LocaL Government Act 1993. This responsibility includes establishing and maintaining intematcontrols relevant to the preparation and fair presentation of the financial statements that are free frommaterial misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies;and making accounting estimates that are reasonable in the circumstances.

Auditors Responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. Our auditresponsibility does not extend to the original budget figures included in the Income Statement and Statementof Cash Flows, the original budget disclosures in Notes 2(3) and 16, northe projected revenue and expenditureof developer contributions reported in Note 17 and accordingty, we express no opinion on them. We conductedour audit in accordance with Australian Auditing Standards. These Auditing Standards require that we complywith relevant ethical requirements relating to audit engagements and plan and perform the audit to obtainreasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements The procedures selected depend on the auditor's judgement, incLuding the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the entity's preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by Council, as well as evaluating the overaLL presentation of thefinancial, statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

Independence

n conducting our audit, we foLLowed applicable independence requirements of Australian professional ethicalpronouncements.

B^

COVER OFEXCELIENCE Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 [NSW]Chartsrad Actdunitarrt*

Matters Relating to the Electronic Presentation of the Audited Financial Statements

This auditor's report relates to the general purpose financial statements of Upper Lachtan Shire CounciL{CounciU for the year ended 30 June 2011 included on Council's web site. Council is responsible for theintegrity of Council's web site. We have not been engaged to report on the integrity of the web site. Theauditor's report refers only to the statements named above. It does not provide an opinion on any otherinformation which may have been hyperlinked to/from these statements. If users of this report areconcerned with the inherent risks arising from electronic data communications they are advised to refer tothe hard copy of the audited financial statements to confirm the information included in the auditedfinancial statements presented on this web site.

Audit Opinion

n ouropimon:

the Council's accounting records have been kept in accordance with the requirements of the Locala

Government Act 1993, Chapter 13, Part 3, Division 2;

(b) the Council's financial statements:

i] has been prepared in accordance with the requirements of this Division;is consistent with the CounciL's accounting records;II

in] presents fairly the Council's financial position, the results of its operations and cashflows; and(iv) is in accordance with applicable Australian Accounting Standards [including the AustralianAccounting Interpretations].

c] ati information relevant to the conduct of the audit has been obtained; and

(d) there are no material deficiencies in the accounting records or financial statements that have cometo Light in the course of the audit.

/n<2<^- G c£^> A'^c^ r^rv^ y\A^

MORSE GROUP LR SMITHPARTNER

266 Howick StreetBathurstDated: 4 October 2011

MORSEIGROUPACCOUNTANTS & ADVISORS^

NDEPENDENT AUDITOR'S REPORTON THE SPECIAL PURPOSE FINANCIAL STATEMENTS OF

UPPER LACHLAN SHIRE COUNCIL

Report on the Financial Statements

We have audited the special purpose financial statements of Upper LachLan Shire Council for the year ended 30June 2011 comprising the Statement by Council Income Statement by Business Activities, Balance Sheet byBusiness Activities, and accompanying Notes to the Financial Statements. Our audit responsibility does notextend to the best practice management discLosures in Notes 2 and 3 and accordingly we express no opinion onthem.

Council's Responsibility for the Financial Statements

The Council are responsible for the preparation and fair presentation of the financial statements and havedetermined that the accounting policies described in Note 1 to the financial statements which form part of thefinancial statements are appropriate to meet the financial reporting requirements of the Council and theD.'visl?^ of lr?caiGove^nment for t,h,T..pur,pose °f fulfilLin9 the requirements of National Competition Poticyreporting. The Council's responsibility also includes establishing and maintaining intemaL controls relevant tothe preparation and fair presentation of the financial statements that are free from material misstatementwhether due to fraud or error; selecting and applying appropriate accounting policies; and making accountingestimates that are reasonable in the circumstances.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. No opinion isexpressed as to whether the accounting policies used, as described in Note 1, are appropriate to meet theneeds of the Council. We conducted our audit in accordance with Australian Auditing Standards. TheseAuditing Standards require that we comply with relevant ethical requirements relating to audit enqaqementsand plan and perform the audit to obtain reasonable assurance whether the financial statements are free fro mmaterial misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in th e

financial statements. The procedures selected depend on the auditor's judgement, including the assessmentof the risks of material misstatement of the financial statements, whether due to fraud or error. In makingthose risk assessments, the auditor considers internal control relevant to the entity's preparation and fairpresentation of the financial statements in order to design audit procedures that are appropriate in thecircumstances but not for the purpose of expressing an opinion on the effectiveness of the entity's internalcontrol. An audit also includes evaluating the appropriateness of accounting policies used and thereasonabteness of accounting estimates made by the Council as well as evaluating the overall presentation ofthe financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion

Independence

n conducting our audit, we fottowed applicable independence requirements of Australian professional ethicalpronouncements.

HCOVER OF

Chartemd Accourrtairts EXCEllENCE, Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 [NSW]

Matters Relating to the Electronic Presentation of the Audited Financial Statements

This auditors report relates to the special purpose financial statements of Upper LachLan Shire Council[CounciL] for the year ended 30 June 2011 included on Council's web site. CounciL is responsible for theintegrity of Council's web site. We have not been engaged to report on the integrity of the web site. Theauditor's report refers only to the statements named above. It does not provide an opinion on any otherinformation which may have_been hyperlinked to/from these statements. If users'of this report areconcerned with the inherent risks arising from electronic data communications they are advised to refer tothe hard copy of the audited financial statements to confirm the information included in the auditedfinancial statements presented on this web site.

Audit Opinion

n_our opinion, the special purpose financial statements of Upper Lachlan Shire Council are presentedfairly in accordance with the requirements of those applicable accounting policies detailed in Note 1, theaccounting requirements of the Local Government Act 1993 and the Local Government Code of AccountingPractice and Financial Reporting.

Basis of Accounting

Without modifying our opinion, we draw attention to Note 1 to the financial statements, which describes thebasis of accounting. The special purpose financial statements have been prepared for distribution to theCouncil and the Division of Local Government for the purpose of fuLfiLLing the requirements of NationalCompetition Policy reporting. As a result, the financial statements may not be suitable for anotherpurpose. We disclaim any assumption of responsibility for any reliance on this report or on the financialstatements to which it relates to any person other than the Council or the Division of Local Government orfor any purpose other than for which the statements were prepared.

/TlCHA^. a ff^Q /^^\^~t^t^^^y^ r~^r^_

MORSE GROUP LR SMITHPARTNER

266 Howick StreetBathurstDated: ^October 2011

1

MORSEIGROUPACCOUNTANTS & ADVISORS

4 October 2011

The MayorUpper Lachlan Shire CouncilPO Box ^2GUNNING NSW 2581

Dear Mr Mayor

INDEPENDENT AUDITOR'S REPORT ON THE CONDUCT OF THE AUDIT - Section 417 (3)UPPER LACHLAN SHIRE COUNCIL

We advise having completed our audit of the financial statements of Upper LachLan Shire Council for thefinancial year ended 30 June 2011. Our audit resulted in the issuing of an unmodified audit report on boththe general purpose and special purpose financial statements of Council

n accordance with Section 417 of the Local Government Act 1993 we submit our report on the conduct ofthe audit of Upper Lachlan Shire Council for the year ended 30 June 2011. Our audit reports on the generalpurpose financial statements of Council and the special purpose financial statements on CounciL'sbusiness units outline the Legislative framework of our audit and should be referred to in order to establishthe context in which our comments are made.

Council's ResponsibiLity for the Financial Report

The Council is responsible for the preparation and fair presentation of the financial report in accordancewith the Locat Government Act 1993. This responsibility includes establishing and maintaining internalcontrols relevant to the preparation and fair presentation of financial statements that are free frommaterial misstatement. whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in the circumstances.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial statements based on our audit. We conductedour audit in accordance with Australian Auditing Standards. These Auditing Standards require that wecomptywith relevant ethical requirements relating to audit engagements and plan and perform the audit toobtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor's judgement, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers intemat control relevant to the entity'spreparation and fair presentation of the financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness ofthe entity's internal control. An audit also includes evatuating the appropriateness of accounting policiesused and the reasonableness of accounting estimates made by Council, as well as evaluating the overaLLpresentation of the financial statements.

The following comments are provided in accordance with Section 415 [3] of the Local Government Act 1993and Regulation 227 of the Local Government [General] Regulation 2005 to assist in the understanding of thefinancial statements and our reports-

H^

COVER OFChartarad Accountants EXCELIENCE Liability limited by the Accountants Scheme, approved under the Professional Standards Act 1994 [NSW]N

Review of Financial Results

a) Operating Result

As disclosed in Council's Income Statement the year's operations resulted in a surplus from ordinaryactivities after capital amounts of $3,79^,000 [2010 - $7,285,000]. Some items of note in the operatingstatement include:

Revenue

The operating surplus from ordinary activities Ae/bre capital amounts was $^37,000 [2010 -.

$1,562.0001.

Rates and annual charges increased by$3U,000 [4.^5%] to $8,067,000 [2010 - $7,723,000) which is.

consistent with the 2.6% increase in rate pegging, togetherwith increases in annual charges forDomestic and Rural. Waste Management Services.

User charges and fees fell from $^,834,000 in 2010 to $3,843.000 in 2011 (decrease of $991,0001..

This was primarily due to a reduction in the level of works undertaken on behalf of the RTA, withrevenue from this source falling by $909,000 compared to the prior year.

nterestand investment revenue for 2011 totalled $872,000. which is $87,000 lower than the 2010.

result of $959.000.

Both years included the write back of prior year devaluations in relation to components of Council'sinvestment portfolio. The 2010 year saw write backs of $517,000 whereas 2011 included $253,000 inrevenue of this nature.

Actual interest earnt on Council's investment portfolio increased by $175,000 compared to the prioryear.

Operating grants and contributions rose from $6,615,000 in 2010 to $8,196,000 in 2011 [increase of.

$1,581,000).

The key contributor to this was the recognition in 201 1 of natural disaster funding due to Council forundertaking remediation works necessary after Shire wide flooding in December 2010. Thiscomprised $1,331,000 in relation to Council's road network and $360,000 for Council's water andsewer operations.

Capital grants and contributions decreased by $2,366,000 to $3,357,000 [2010- $5.723,000}..

The 2010 financial year included the receipt of $3,781,000 in funding for the Taralga SewerageScheme, whereas only $1,782,000 was received for this project in the 2011 financial year.

n addition, btackspot funding of $500,000 was received in 2010 for work on Gundaroo Road. Nofunding was received under this program during 2011.

Expenditure

Employment costs were wett contained, increasing by just $118,000 E1.32%] in total to $9,091,000.

[2010-$8,973,000].

Materials and contracts increased from $3,775,000 in 2010 to $4,793,000 in 2011 (increase of.

$1,018,000].

A large proportion of this increase was due to the unscheduled works required to repair flooddamage throughout the Shire. This saw the need for a number of external contractors to assistCouncil staff with this work due to both the urgency of repairs and specialised nature of some work.

Council's depreciation expense for 2011 was $811,000 higher than the 2010 financial year, Of this.

increase, $695,000 related to additional depreciation on CounciL's roads, bridges and footpaths dueto the revaluation of these assets at 30 June 201 0.

Ibl Financial Position

The Balance Sheet discloses that for the year ended 30 June 2011 Council's net assets stood at$401.515.000 (2010 - $395,193,000) which represents an increase of $6,322.000.

This increase is the combined effect of the surplus for the year after capital amounts of $3,794,000, therevaluation of Council's community Land, Land improvements, other structures and other assets of$2,462,000 and other equity adjustments totalling $66,000.

To assess the health of Councils net current asset position it is necessary to review the Level of restrictionsplaced against the use of Council's assets. The notes to the financial statements indicate clearly whererestrictions exist, and the effect of the restrictions is summarised as follows.

2011 2010$.000 $'000

Net current assets 8,556 8,178

Less: Amounts extemaLly restricted forspecial purposes refer Notes 6; 7; & 8of financial statements (6,7891 [5,415]

Less: Council intemalty imposed restrictions(refer Note 6 of financial statements [4,438] [4.087]

Add: Applicable current liabilities refer Note 10- Water 695 198- Sewerage 925 236- Domestic Waste Management 57 63

Add: Employee Leave entittements classifiedas current but not expected to besettled within 12 months 1,995 1,914

Unrestricted net current asset surpLusAdeficit) 1,001 1,087

Unrestricted net current assets comprise:-

AssetsCash 243 318Receivables 1,733 ,812nventories 959 908

Other assets 297 317

3,232 3.355Less:

Liabilities

PayabLes (1,629] (1.528)nterest bearing Liabilities [70] [281

Provisions 12,527] t2,373]

(4,226) 14.182)Add: Employee Leave entitlements classified

as current but not expected to besettled within 12 months 1,995 1,914

Unrestricted net current asset surptus/jdeficit] 1,001 1,087

I

The positive unrestricted net current asset position of Upper Lachlan Shire Council has deterioratedslightly since the prior year. It will need continued management to ensure it remains positive insubsequent financial years.

Whilst Council's unrestricted cash position has fallen since the prior year, it is pertinent to note thatCouncil has incurred $488,000 of operating expenditure for the year ended 30 June 2011 in relation to roadrestoration works undertaken by Council as a result of flooding in December 2010.

A claim totalling $3,1^3,000 has been made under the Natural Disaster Assistance Program by Council tocover the cost of these works and other remediation works required throughout the Council area as aresult of the flooding.

Whilst the analysis of the net current asset position is a complete summary of Council's short-termposition the strength of that position is determined by the Liquidity of those assets, hence Council's abilityto operate effectively is largely governed by the amount of available cash.

Note 6 to the accounts discloses total cash and investments (current and non-cun-ent) of $1 2,150,000 [2010-^$10,659.000]. Of this amount $6.845,000 [2010-$5,591,ODD) is subject to external restrictions requiringCouncil to commit those funds to the purposes for which they were provided and $5,062,000 (2010-$4,750,000) is subject to internal restrictions agreed upon by Council for designated purposes. Theseinternal restrictions may be altered at the discretion of Council, consistent with their management plan.

The unrestricted balance of $243,000 [2010 - $318,000] represents funds available to cover non-budgeteddiscretionary expenditure and short-term cash flow requirements.

d Performance Indicators

Note 13 to the Financial Statements provides a measure of Council's performance using a number ofselected ratios as follows;

Unrestricted Current Ratio

The Unrestricted Current Ratio is a measure of Council's liquidity that demonstrates Council's ability tosatisfy obligations out of short-term asset balances.

Council's ratio of 3.44% [2010-3.28%) demonstrates an acceptable LeveL of funds available to meet itsshort term obLigations. We stress the importance of considering this ratio in conjunction with otherperformance indicators and not in isolation. The fact that this ratio is based upon consolidated fundsshould also be kept in mind as the ratios for indfviduat funds [i.e. General, Water, Sewer, etc.) may varysignificantly.

Debt Service Ratio

The cost of repaying debt is reflected in the debt service ratio, which expresses that cost as a percentage ofrecurrent revenue.

Council's ratio for 2011 was 3.6% (2010-3.3%). Any future borrowings should be entered into only ifCouncil believes it can continue to meet its debt service requirements out of recurrent revenue.

Rates & Annual Charges Coverage Ratio

The ability of'Council, to meet community expectations for the delivery of services and provision of facilitiesis directly influenced by the discretion it can exercise in the aLLocation of resources.

In relation to rates a high Level of dependency on rates income provides Council with a degree of flexibilityin the nature and timing of how funds are spent.

Upper LachLan Shire Council's ratio of 32.50% (2010-29.4%] is higher than the prior year, and reflects thedecreased revenue from grants and contributions and user charges and fees.

Rates & Annual Charges Outstanding Ratio

The rates and annual charges outstanding percentage is a measure of management efficiency. Whilstprevailing economic conditions may influence Council's ability to coLLect revenue, the efficiency andapplication of collection procedures are stilt the largest determinant of this ratio.

Upper Lachlan Shire Council's rates and annual charges outstanding percentage of 2,86% [2010 - 2.65%reflects effective cottection of debts and is the result of continued efforts by Councils staff to activelymanage outstanding rates.

Building and Infrastructure Renewals Ratio

The purpose of this ratio is to assess the rate at which infrastructure assets are being renewed against therate at which they are depreciating.

Because the distinction between replacements, renewals and repairs is not well defined, it is difficult tomake meaningful analysis from this ratio. CounciL's ratio at 30 June 2011 was 1 .00 compared to 1.07 In2010 and 1.84 in 2009.

(d) Statement of Cash Flows

The Statement of Cash Flows reports a net increase in cash assets held of $345,000 [2010 - net decrease of$1,636,000) as follows:

2011 2010$'000 $'000

Cash flow provided by / (used in]

Operating activities 8,498 9,698

nvesting activities (7,871 112,485]

Financing activities (282) 1,151

Net increase / (decrease] in cash held 345 (1,636)

Cash flows from operating activities

Cash flows from operating activities were Lower than the prior year. with a key contributor being anincrease in cash outflows for materials and contracts of $1,000,000.

Cash flows from investing activities

The net cash flows used in investing activities totalled $7,871,000 [2010 - $12,485,000). The major outflowsincluded $2,799,000 of capital work on roads throughout the Shire, including $560,000 related to workrequired on roads as a result of the flooding in December 2010. A further $580,000 was spent on bridges,including $432,000 on WooLshed Creek Bridge under the Timber Bridge Replacement program. Councilalso spent $1,7^2,000 on additions to its sewerage network during the year, primarily related to the TaralgaSewerage Scheme.

Cash flows from financing activities

The net cash flows used in financing activities were $282.000 [2010 - $1.151.000 provided by).

No borrowings were drawn in the current financial year. Repayments were in Line with the requirements ofthe Loans.

e] Comparison of Actual and Budgeted Performance

Council's surplus from ordinary activities after capital amounts of $3,794.000 was $2,422,000 lower thanCouncil's original estimate of $6,216,000.

The nature of this report does not Lend itself to detailed analysis of individual budget variation. Council hasprovided a commentary on these variations in Note 16.

Other Matters

a) National Competition PoLicy

n accordance with the requirements of National Competition Policy guidelines, Upper LachLan ShireCouncil has prepared a special purpose financial report on its business units for the year ended 30 June2011. Council has determined that it has three business units within its operations being Water, Sewerageand Domestic Waste Management.

The Division of Local Government's July 1997 guidelines 'Pricing and Costing for Council Businesses: AGuide to Competitive Neutrality' outlines the process for identifying and allocating costs of activities andprovide a standard of disclosure requirements. These disclosures are reflected in Council's pricing and/orfinancial reporting systems and include taxation equivalents, Councit subsidies, rate of return oninvestments in business units and dividends paid.

An unmodified audit report on the special purpose reports for the year ended 30 June 2011 has beenissued.

(bl Management Letters

An interim management Letter was issued on 26 May 201 1 whilst a finaL report will be prepared uponcompLetion of ouryear end review. Matters raised via management letters have been satisfactorilyaddressed.

[c Legislative compliance

As a result of our audit we advise that there are no material, deficiencies in the accounting records orfinancial reports that have come to our attention during the conduct of the audit and that Upper LachlanShire Council's accounting records have been kept in accordance with the requirements of the LocalGovernment Act, 1993 and regulations.

Matters Relating to the Electronic Presentation of the Audited Financial Report

This auditor's report relates to the financial report of Upper Lachtan Shire Council ICouncit) for the yearended 30 June 2011 included on Councifs web site. Council is responsible for the integrity of Councils website. We have not been engaged to report on the integrity of the web site. The auditor's report refers onlyto the statements named above. It does not provide an opinion on any other information which may havebeen hyperlinked to/from these statements. If users of this report are concerned with the inherent risksarising from electronic data communications they are advised to refer to the hard copy of the auditedfinancial report to confirm the information included in the audited financial report presented on Council'sweb site.

Conclusion

3 The Council's accounting records have been kept in a manner and form that facilitated thepreparation of the generat purpose financial report and allowed proper and effective audit of thisreport;

(b) The Council's accounting records have been kept in a manner and form that facilitated thepreparation of the special purpose financial reports and allowed proper and effective audit of thisreport; and

[c] all information relevant to the conduct of the audit has been obtained.

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MORSE GROUP LR SMITHPARTNER

266 Howick StreetBathurstDated: 4 October 2011