Appendix A: Financial Reporting Standards and Budget Concepts
External Reporting Standards
The Charter of Budget Honesty Act 1998 requires that the Final Budget Outcome be based on external reporting standards. Accordingly, the major external standards used in the Final Budget Outcome are the Australian Bureau of Statistics (ABS) accrual Government Finance Statistics (GFS) framework and Australian Accounting Standards (AAS), including Australian Accounting Standard No. 31 Financial Reporting by Governments (AAS31). The major fiscal aggregates (including the fiscal and underlying cash balances) are based on the accrual GFS framework.
The Charter also requires that departures from applicable external reporting standards be identified. These are disclosed in Attachment A to Part 1 and Note 1 in Part 3.
The next section provides a brief overview of the GFS and AAS reporting framework. Further information can be found in Budget Strategy and Outlook 2003-04, Statement 8: Financial Reporting Standards and Budget Concepts.
Accrual GFS Framework
The GFS reporting framework is a specialised accounting system designed to support economic analysis of the public sector. It allows comprehensive assessments to be made of the economic impact of government and is consistent with international statistical standards (the System of National Accounts 1993 (SNA93) and the International Monetary Fund’s (IMF) Government Finance Statistics Manual 2001).1
The GFS conceptual framework is divided into a number of separate statements, each of which draws out analytical aggregates or balances of particular economic significance. Together, these aggregates provide for a thorough understanding of the financial position of the public sector. The GFS statements reported in the Final Budget Outcome are the operating statement, balance sheet, cash flow statement and statement of other economic flows.
All GFS data are recorded as either stocks (assets and liabilities) or flows (classified as either transactions or other economic flows).
A transaction is an interaction between two economic entities by mutual agreement. Despite their compulsory nature, taxes are transactions deemed to occur by mutual agreement between the government and the taxpayer. Transactions that increase or decrease net worth (assets minus liabilities) are reported as revenues and expenses respectively in the operating statement.2
A change to the value or volume of an asset or liability that does not result from a transaction is an other economic flow. This can include changes in values from market prices, most actuarial valuations and exchange rates and volume changes for discoveries, depletion and destruction. Other economic flows are reported in the statement of other economic flows.
Under the accrual GFS framework, flows are recorded in the period in which they occurred. As a result, prior period outcomes may be revised where information arises that could reasonably be expected to have been known in the past, is material in at least one of the effected periods and can be reliably assigned to the relevant period(s).
Operating statement
The operating statement presents details of transactions in GFS revenues, GFS expenses and the net acquisition of non-financial assets (net capital investment) for an accounting period.
GFS revenues arise from transactions that increase net worth and GFS expenses arise from transactions that decrease net worth. GFS revenues less GFS expenses gives the GFS net operating balance. The net operating balance is comparable to the National Accounts concept of government saving plus capital transfers.
The net acquisition of non-financial assets (net capital investment) measures the change in the Australian Government’s stock of non-financial assets due to transactions. As such, it measures the net effect of purchases, sales and consumption (for example, depreciation of fixed assets and use of inventory) of non-financial assets during an accounting period.
Net acquisition of non-financial assets equals gross fixed capital formation, less depreciation, plus changes (investment) in inventories, plus other transactions in non-financial assets.
Fiscal balance
The fiscal balance (or GFS net lending/borrowing) is the net operating balance less net capital investment. Thus fiscal balance includes the impact of net expenditure (effectively purchases less sales) on non-financial assets rather than consumption (depreciation) of non-financial assets.3
The fiscal balance measures the Australian Government’s investment-saving balance. It measures in accrual terms the gap between government savings plus net capital transfers, and investment in non-financial assets. As such, it approximates the contribution of the Australian Government general government sector to the balance on the current account in the balance of payments.
Balance sheet
The balance sheet shows stocks of assets, liabilities and GFS net worth. Net debt is also reported in the balance sheet.
Net debt
Net debt is defined as the sum of selected financial liabilities (deposits held; advances received; government securities; loans; and other borrowing) minus the sum of selected financial assets (cash and deposits; advances paid; and investments, loans and placements). Net debt does not include superannuation or superannuation related liabilities. Net debt is a common measure of the strength of a government’s financial position. High levels of net debt impose a call on future revenue flows to service that debt.
Net worth
The net worth of the general government sector is defined as assets less liabilities. For the public financial corporations and public non-financial corporations sectors, the formula becomes assets less liabilities less shares and other contributed capital. Net worth is an economic measure of wealth, reflecting the Australian Government’s contribution to the wealth of Australia.
Cash flow statement
The cash flow statement identifies how cash is generated and applied in a single accounting period. The cash flow statement reflects a cash basis of recording (rather than an accrual basis) where information is derived indirectly from underlying accrual transactions and movements in balances. This, in effect, means that transactions are captured when cash is received or when cash payments are made. Cash transactions are identified specifically because cash management is considered an integral function of accrual budgeting.
Underlying cash balance
The underlying cash balance (GFS surplus/deficit) is the cash counterpart of the fiscal balance, reflecting the Australian Government’s cash investment-saving balance. The underlying cash balance measure is conceptually equivalent under the current accrual framework and the previous cash framework. For the general government sector, the underlying cash balance is calculated as shown below.
Net cash flows from operating activities
plus
Net cash flows from investments in non-financial assets
less
Net acquisitions of assets acquired under finance leases and similar arrangements4
equals
Underlying cash balance
Headline cash balance
The headline cash balance is calculated by adding ‘cash flows from investments in financial assets for policy purposes’ to the underlying cash balance.
Cash flows from investments in financial assets for policy purposes include equity transactions and net advances.5 Equity transactions include equity injections into controlled businesses and privatisations of government businesses. Net advances include net loans to the States, net loans to students under the Higher Education Contribution Scheme (HECS), and contributions to international organisations that increase the Australian Government’s financial assets.
Statement of other economic flows (reconciliation of net worth)
The statement of other economic flows outlines changes in net worth driven by economic flows other than GFS revenues and GFS expenses. GFS revenues, GFS expenses and other economic flows sum to the total change in net worth during a period. The majority of other economic flows for the Australian Government general government sector arise from price movements in its assets and liabilities.
Sectoral classifications
To assist in analysing the public sector, GFS data are presented by institutional sector. GFS distinguishes between the general government sector, the public non-financial corporations sector and the public financial corporations sector, as shown in Figure A1.
Figure A1: Institutional structure of the Public Sector
Budget reporting focuses on the general government sector. The general government sector provides public services that are mainly non-market in nature, and for the collective consumption of the community, or involve the transfer or redistribution of income. These services are largely financed through taxes and other compulsory levies, although user charging and external funding have increased in recent years. This sector comprises all government departments, offices and some other bodies.
In preparing financial statements for the sectors all material transactions and balances between entities within the sectors are eliminated.
Australian Accounting Standard No. 31 Reporting Framework
Australian Accounting Standard No. 31 Financial Reporting by Governments (AAS31) requires governments to prepare accrual-based general purpose financial reports, including in relation to the assets they control and any liabilities incurred, their revenues and expenses, and cash flows. Reporting under this framework is intended to provide a consolidated overview of the financial performance and position of government, including in the area of financing and investing activities.
There are three main general purpose statements that must be prepared in accordance with the AAS31 framework. These are:
• a statement of financial performance, which includes an operating result;
• a statements of financial position, which shows net assets; and
• a statement of cash flows, which includes net increase/decrease in cash held.
In addition to these general purpose statements, the standard requires notes to the financial statements to be prepared which report disaggregated information in relation to the financial performance and financial position of the government. The notes should also include other information seen as relevant to users.
While AAS31 provides a general framework for accrual budgeting and financial reporting by governments, compliance with all other applicable accounting standards is required. Exceptions to this rule are explicitly stated in AAS31.
A full set of AAS31 financial statements and accompanying notes prepared for the general government sector can be found in Part 3. These statements are derived from audited financial statements with the exception of the Department of Defence, for which an audit opinion is pending, and for the liability relating to asbestos related claims for which a reliable actuarial measure is not yet available.
Reconciliation of GFS and AAS31 Aggregates
There is a general consistency of treatment of the elements of financial statements between GFS and accounting standards. Both frameworks are based on the concept of economic events that give rise to stocks and flows. As a result, the definitions of stocks are broadly similar under the two frameworks and relate to the control of economic benefits, while flows are defined with reference to changes in stocks.
The GFS and AAS31 definitions of the scope of the public sector agree in almost all cases, with AAS31 recommending the same segmentation of the public sector into general government, public non-financial corporations and public financial corporations sectors.
Transactions are generally treated in a similar manner by GFS and accounting standards; however, where GFS is a framework designed to facilitate macro-economic analysis, AAS31 is designed as a standard for general purpose financial reporting. The different objectives of the two systems lead to some variation in the treatment of certain items. This differing treatment relates predominantly to the definitions of revenues and expenses under the two frameworks.
In particular, revaluations of assets and liabilities are classified differently under the AAS31 and GFS standards. Major revaluations include: writedowns of bad and doubtful debts (excluding those that are mutually agreed); changes in the valuation of superannuation liabilities; and gains and losses due to changes in foreign exchange rates and interest rates.
Under AAS31 reporting, valuation changes generally affect revenues or expenses and therefore the operating result. However, under GFS reporting, revaluations are not considered to be transactions (that is, they are considered to be other economic flows) and accordingly do not form part of revenues or expenses. Therefore, most revaluations are not taken into account in the calculation of the GFS net operating balance or fiscal balance. However, revaluations still impact on GFS assets and liabilities, as can be seen in the statement of other economic flows.
Some of the major differences between the GFS and AAS31 treatments of transactions are outlined in Table A1. Further information on the differences between the two systems is provided in the ABS publication Information Paper: Accruals-based Government Finance Statistics, 2000 (Cat. No. 5517.0).
Table A1: Selected differences between AAS31 and GFS reporting standards
Issue |
AAS31 Treatment |
GFS Treatment |
Asset writedowns |
Treated as part of operating expenses. |
Treated as revaluations (other economic flows), except for mutually agreed writedowns, and therefore removed from expenses. |
Gains and losses on assets |
Treated as part of operating revenues/expenses. |
Treated as revaluations (other economic flows) and therefore removed from revenues/expenses. |
Provisions for bad and doubtful debts |
Treated as part of operating expenses and included in the balance sheet as an offset to assets. |
Act of creating
provisions is not considered an economic event and is therefore
not considered an expense or included in the balance sheet. |
Interest flows related to swaps and other financial derivatives |
Treated as operating revenues and expenses. |
Treated as other economic flows and so not included in revenues and expenses. |
Acquisition of defence weapons platforms |
Treated as capital expenditure. Defence weapons platforms appear as an asset on the balance sheet. Depreciation expense on assets is recorded in the operating statement. |
Treated as an expense. Defence weapons platforms do not appear as an asset on the balance sheet and no depreciation is recorded in the operating statement. |
Valuation of assets and liabilities |
Classes of assets and liabilities are measured using a range of methods. The predominant methods for valuing different asset classes include historic cost and market value. |
Individual assets and liabilities are measured at current market value based on current market prices or a suitable proxy where market prices are not available. |
Finance leases |
Treats finance leases as if an asset were purchased from borrowings. That is, the lease payment is split into an interest component (which is shown as an operating expense) and a principal component. The asset and the liability are recorded on the balance sheet. This convention does not apply to the cash flow statement, which does not record the acquisition of the asset or the liability. |
As per the accounting standard, except that the GFS cash flow statement includes the acquisition of the asset as a supplementary item for the calculation of the surplus/deficit (underlying cash balance). |
Following the broad strategic direction of the Financial Reporting Council, the Australian Accounting Standards Board is currently pursuing harmonisation of GFS and Australian Accounting Standards. A converged financial reporting framework will reduce confusion associated with the publication of two sets of financial statements and improve the readability of government budget and outcome reports.
Table A2 reconciles GFS revenue and expenses with their AAS31 counterparts.
Table A2: Reconciliation of GFS and AAS31 revenue and expenses
Table A3 reconciles the accounting operating result to the GFS net operating balance and the fiscal balance (GFS net lending).
AAS31 revenues less expenses equal the AAS31 net operating result. Similarly, GFS revenues less expenses calculate the GFS net operating balance. Consequently, the reconciliation between the AAS31 operating result before extraordinary items and the GFS net operating balance relates directly to differences in the definitions of revenues and expenses which are shown in Table A2.
The second part of the Table A3 reconciliation shows the adjustment for net capital investment required to derive the fiscal balance from the GFS net operating balance.
As discussed previously, fiscal balance is calculated as the net operating balance less net capital investment. This is a useful economic indicator as it represents the gap between government saving (less capital transfers) and investment, and so is included at the end of the GFS operating statement. In AAS31 there is no equivalent measure to the fiscal balance. That is, the AAS31 statement of financial performance stops at the operating result and includes no information on net capital investment. Under the accounting standards framework, the equivalent indicator to the fiscal balance would measure the extent to which profits (that is, the net operating result) are sufficient to fund net capital investment.
Table A3: Reconciliation of AAS31 net operating result and fiscal balance
(a) The fiscal balance in Part 2 is higher than the fiscal balance presented in Part 1, as explained in the following section.
Accounting for GST and budget assistance to States
Under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations (the IGA), all goods and services tax (GST) receipts are appropriated to the States and Territories and thus are not available for expenditure by the Australian Government. As such, the GST is a State tax, with the Australian Taxation Office acting as the States’ agent in the collection of the tax. Consequently, collections of GST from taxpayers and payments of the GST revenue to the States are not recorded as revenues and expenses of the Australian Government in Part 1.
Under the IGA, the Australian Government has guaranteed that the budgetary position of each individual State and Territory will be no worse off than it would have been had the GST reforms not been implemented (referred to as the Guaranteed Minimum Amount (GMA)). Grants to the States to meet this no worse off funding benchmark are given the notional accounting title of ‘general budget assistance to the States’ (GBA) and are recorded as expenses of the Australian Government.6 GBA comprises Budget Balancing Assistance (BBA) grants paid in accordance with the provisions of the IGA (based on mid-June estimates) and adjustments to account for any divergence between this amount and the amount required to meet the GMA (given actual GST cash collections).7
GBA to the States in 2002-03 was broadly consistent with the Budget estimate.
In Part 2 the accounts are presented including GST as Australian Government revenue.
The different accounting approaches (applied in Part 1 and Part 2 respectively) result in different net impacts on the fiscal balance in 2002-03. In Part 1, the total net impact on the fiscal balance equals GBA to the States. In Part 2, the fiscal balance impact is the difference between GST revenue and the grant payments to the States comprising BBA grants and GST grants made under the Commissioner of Taxation’s mid-June determination of cash GST receipts. This results in the fiscal balance outcome shown in the Government Finance Statistics (GFS) general government sector operating statement in Part 2 being $526 million greater than the fiscal balance reported in Part 1 and elsewhere in the Final Budget Outcome. A reconciliation of GFS revenue and GFS expenses in Part 1 and Part 2 is presented in Table A2.
The different accounting approaches also flow through to differences in GFS net worth, resulting in GFS net worth in Part 2 being $919 million greater than GFS net worth reported in Part 1 and elsewhere. This difference results from the inclusion of GST receivables and payables in the GFS balance sheet in Part 2.
The different accounting approaches have the same net impact on cash flows. Therefore the underlying cash balance is the same whether it is calculated on the basis that the GST is a State tax or an Australian Government tax.
Further information on accounting for GST and budget assistance to the States can be found on page 10 of the Final Budget Outcome 2000-01.
1 Additional information on the Australian accrual GFS framework is available in the ABS publication Information Paper: Accruals-based Government Finance Statistics, 2000 (Cat. No. 5517.0)
2 Not all transactions impact on net worth. For example, transactions in financial assets and liabilities do not impact on net worth as they represent the swapping of assets and liabilities on the balance sheet.
3 The net operating balance includes consumption of non-financial assets, as depreciation is a GFS expense. Depreciation also forms part of net capital investment, which (in the calculation of fiscal balance) offsets the inclusion of depreciation in the net operating balance.
4 The underlying cash balance treats the acquisition and disposal of non-financial assets in the same manner regardless of whether they occur by purchase/sale or finance lease —acquisitions reduce the underlying cash balance and disposals increase the underlying cash balance. However, finance leases do not generate cash flows at the time of acquisition or disposal equivalent to the value of the asset. As such, net acquisitions of assets under finance leases are not shown in the body of the cash flow statement but are reported as a supplementary item for the calculation of the underlying cash balance.
5 Cash flows from investments in financial assets for policy purposes were called net advances under the cash budgeting framework.
6 The term ‘general budget assistance to the States’ explains aggregate changes in Australian Government expenses under a States’ agent accounting arrangement and does not appear in the IGA, which governs the actual payments from the Australian Government to the States. For States receiving BBA grants, GBA is calculated as the GMA less actual GST cash collections. For States no longer receiving BBA grants, GBA relates to the difference between actual GST cash receipts and the Commissioner of Taxation’s mid-June determination of cash GST receipts.
7 The Australian Government finalises payment of the annual GST revenue and BBA grants to the States in mid-June. As a result, if the final outcome for GST collections for the year differs from the Commissioner of Taxation’s mid-June determination then GBA will not equal BBA grants paid.
