Part 3: Australian Accounting Standards Financial Statements Notes to the financial statements

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Notes to the financial statements

Note 1: External reporting standards and accounting policies

The Charter of Budget Honesty Act 1998 requires that the final budget outcome be based on external reporting standards and that departures from applicable external reporting standards be identified.

The financial statements included in this section of the Final Budget Outcome have been prepared on an accrual basis in accordance with applicable Australian Accounting Standards (AAS), being the Australian Equivalents to International Financial Reporting Standards (AEIFRS) and AAS 31 Financial Reporting by Governments (AAS 31).

AAS requires governments to prepare accrual-based general purpose financial reports. This means that assets, liabilities, income and expenses are recorded in financial statements when transactions have an economic impact on the government, rather than when the cash flow associated with these transactions occurs. Consistent with AAS, an income statement, a balance sheet, a statement of changes in equity and a cash flow statement have been prepared for the year ended 30 June 2006.

The accounting policies in this part are generally consistent with the requirements of AAS. While the scope for financial reporting recommended in AAS 31 is the whole of government (that is, the Australian Government public sector), in accordance with the Charter of Budget Honesty Act 1998, the presentation of financial outcomes in Part 3 covers the general government sector only.

AAS would suggest the gross amount of goods and services tax (GST) be included in the Australian Government’s financial statements. However, under the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations, GST is collected by the Australian Taxation Office as an agent for the States and Territories (the States), and appropriated to the States. Therefore, accrued GST revenues and associated payments to the States are not recorded in the financial statements.

Where measurement is reliable, the budget and related documents from 2005-06 onwards recognise tax revenue when the economic event giving rise to the taxpayer's liability occurs, known as the Economic Transactions Method (ETM). ETM is the preferred method for measuring revenue since it recognises the event when economic benefit accrues to the Australian Government. However, certain categories of revenue cannot yet be reliably measured according to ETM, including revenue from individuals, company and superannuation. For these items, revenue is recognised the earlier of when an assessment of a tax liability is made or cash payment is received by the Australian Taxation Office or the Australian Customs Service, known as the Tax Liability Method (TLM). This means that for these items there is a short lag between the time at which the underlying economic activity giving rise to the tax liability occurs and when the revenue is recognised. Longer lags occur for some elements of company and superannuation funds taxation. TLM is permitted under AAS where taxation revenues can not be reliably measured at the time the underlying transaction or event occurs. The financial effect of this change is recognised in the Statement of Changes in Equity.

The new AEIFRS standard relating to superannuation is AASB 119 Employee Benefits. The standard requires the government bond rate to be referenced when valuing the superannuation liability, with the relevant bond yield to match the term of the liability. However, the longest maturing government bond available is only 10 years, significantly shorter than the term of the superannuation liability. Rather than the 10 year government bond rate at 30 June 2006 (of 5.9 per cent), a longer term rate (of 6 per cent) as determined by actuaries has been adopted to discount the liability. Guidance from the Australian Accounting Standards Board is being sought to clarify differing interpretations in applying AASB 119.

Consistent with the market basis of valuation of assets adopted elsewhere in this document, the basis of valuation of the Government's investment in Telstra Corporation Limited and other Commonwealth entities under AAS, has changed from cost to fair value. The financial effect of this change is recognised in the Statement of Changes in Equity.

On 25 August 2006 the Australian Government announced the further sale of Telstra shares. The timing of the sale is expected to be in the 2006-07 financial year. As at 30 June 2006, there is no financial effect of this announcement on the Government’s investment in Telstra and any subsequent financial effect can not, at this time, be reliably measured.

Note 2: Reconciliation of cash

Note 2: Reconciliation of cash

Note 2(a): Consolidated Revenue Fund

The cash balance reflected in the statement of financial position for the Australian Government general government sector (Table 28) includes the reported cash balances controlled and administered by Australian Government agencies subject to the Financial Management and Accountability Act 1997 and the reported cash balances controlled and administered by entities subject to the Commonwealth Authorities and Companies Act 1997 (CAC Act), that implement public policy through the provision of primarily non-market services.

Revenues or monies raised by the Executive Government automatically form part of the Consolidated Revenue Fund by force of section 81 of the Australian Constitution. For practical purposes, total Australian Government general government sector cash, less cash controlled and administered by CAC Act entities, plus special public monies, represents the Consolidated Revenue Fund referred to in section 81 of the Australian Constitution. On this basis, the balance of the Consolidated Revenue Fund is shown below.