Appendix A: Financial Reporting Standards and Budget Concepts
The Charter of Budget Honesty Act 1998 (the Charter) requires the budget to be based on external reporting standards. Budgets in previous years contained three sets of financial statements prepared according to both the Australian Bureau of Statistics' (ABS) accrual Government Finance Statistics (GFS) and Australian Accounting Standards (AAS). The Australian Accounting Standards Board released Whole of Government and General Government Sector Financial Reporting (AASB 1049) aiming to harmonise ABS GFS and AAS in a single set of financial statements. The 2008‑09 Budget is therefore the first budget prepared according to both AAS and ABS GFS, subject to disclosed departures, in a single set of statements.
AASB 1049 and the UPF also provides a basis for reporting of public non‑financial corporations, public financial corporations and total non‑financial public sectors.
General Government Sector Financial Reporting (AASB 1049)
The budget papers primarily focus on the financial performance and position of the general government sector (GGS). The ABS defines the GGS as providing public services which are mainly non‑market in nature, mainly for the collective consumption of the community, involving the transfer or redistribution of income and financed mainly through taxes and other compulsory levies. Pursuant to AAS, the GGS has recently been recognised as a reporting entity.
AASB 1049 history and conceptual framework
The Australian Accounting Standards Board (AASB) released AASB 1049 Whole of Government and General Government Sector Financial Reporting (AASB 1049) for application in the 2008‑09 Budget. AASB 1049 seeks to 'harmonise' ABS GFS and AAS.
The reporting framework for AASB 1049 requires the preparation of accrual based general purpose financial reports, showing assets, liabilities, income, expenses and cash flows. GGS reporting under AASB 1049 aims to provide users with information about the stewardship of each government and accountability for the resources entrusted to it; information about the financial position, performance and cash flows and information that facilitates assessments of the macro‑economic impact of the government. While AASB 1049 provides a basis for whole‑of‑government and GGS outcome reporting (including the public non‑financial corporations and public financial corporations sectors), budget reporting focuses on the GGS.
The Government's budget reporting framework
There are three main general purpose statements that must be prepared in accordance with ABS GFS and AASB 1049. These are:
- an operating statement, including other economic flows, which shows net operating balance and net lending/borrowing (fiscal balance);
- to allow the presentation of a single set of financial statements, in accordance with AASB 1049 the ABS GFS statement of other economic flows has been incorporated into the operating statement;
- a balance sheet, which shows net worth, net financial worth, net debt and net financial liabilities; and
- a cash flow statement, which shows the derivation of the underlying cash balance.
In addition to these general purpose statements, notes to the financial statements are prepared. These notes include a summary of accounting policies, disaggregated information and other disclosures required by AAS. A full set of notes and other outcome disclosures required by AAS are included in the annual consolidated financial statements.
All financial data presented in the budget financial statements is recorded as either stocks (assets and liabilities) or flows (classified as either transactions or other economic flows). Transactions result from a mutually agreed interaction between economic entities. 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.1
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, exchange rates and changes in volumes from discoveries, depletion and destruction. All other economic flows are reported as operating transactions.
Consistent with the ABS GFS framework and, in general AAS, the budget financial statements records flows in the period in which they occur. As a result, prior period outcomes may be revised for classification changes relating to information that could reasonably have been expected to be known in the past, is material in at least one of the affected periods, and can be reliably assigned to the relevant period(s).
Operating statement
The operating statement presents details of transactions in revenues, expenses, the net acquisition of non‑financial assets (net capital investment) and other economic flows for an accounting period.
Revenues arise from transactions that increase net worth and expenses arise from transactions that decrease net worth. Revenues less expenses gives the net operating balance. The net operating balance is similar 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.
Other economic flows are presented in the operating statement and outline changes in net worth that are driven by economic flows other than revenues and expenses. Revenues, 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 GGS arise from price movements in assets and liabilities.
Fiscal balance
The fiscal balance (or net lending/borrowing) is the net operating balance less net capital investment. Thus, the fiscal balance includes the impact of net expenditure (effectively purchases less sales) on non‑financial assets rather than consumption (depreciation) of non‑financial assets.2
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 GGS to the balance on the current account in the balance of payments.
Balance sheet
The balance sheet shows stocks of assets, liabilities and net worth. In accordance with the UPF, net debt, net financial worth and net financial liabilities is also reported in the balance sheet.
Net worth
The net worth of the GGS, PNFC and PFC sectors is defined as assets less liabilities. This differs from the ABS GFS definition for the PNFC and PFC sectors where net worth is defined as 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.
Net financial worth
Net financial worth measures a government's net holdings of financial assets. It is calculated from the balance sheet as financial assets less liabilities. This differs from the ABS GFS definition of net financial worth for the PNFC and PFC sectors defined as financial assets less liabilities less shares and other contributed capital. Net financial worth is a broader measure than net debt, in that it incorporates provisions made (such as superannuation) as well as holdings of equity. Net financial worth includes all classes of financial assets and all liabilities, only some of which are included in net debt. As non‑financial assets are excluded from net financial worth, this is a narrower measure than net worth. However, it avoids the concerns inherent with the net worth measure relating to the valuation of non‑financial assets and their availability to offset liabilities.
Net financial liabilities
Net financial liabilities comprises total liabilities less financial assets but excludes equity investments in the other sectors of the jurisdiction. Net financial liabilities is a more accurate indicator than net debt of a jurisdiction's fiscal position as it includes substantial non‑debt liabilities such as accrued superannuation and long service leave entitlements. Excluding the net worth of other sectors of government results in a purer measure of financial worth than net financial worth as, in general, the net worth of other sectors of government, in particular the PNFC sector, is backed up by physical assets.
Net debt
Net debt is the sum of selected financial liabilities (deposits held, advances received, government securities, loans, and other borrowing) less the sum of selected financial assets3 (cash and deposits, advances paid, and investments, loans and placements). Net debt does not include 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.
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 specifically identified because cash management is considered an integral function of accrual budgeting.
Underlying cash balance
The underlying cash balance plus Future Fund earnings (ABS GFS cash surplus/deficit) is the cash counterpart of the fiscal balance, reflecting the Australian Government's cash investment‑saving balance. This measure is conceptually equivalent under the current accrual framework and the previous cash framework. For the GGS, 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
ABS GFS cash surplus/deficit
less
Future Fund earnings
equals
Underlying cash balance
The Government is reporting the underlying cash balance net of Future Fund earnings from 2005‑06 onwards because the earnings will be reinvested to meet future superannuation payments and are therefore not available for current spending. However, Future Fund earnings are included in the fiscal balance because superannuation expenses relating to future cash payments are recorded in the fiscal balance estimates.
Expected Future Fund earnings are separately identified in the Australian Government GGS cash flow statement in Table 3 of this statement and the historic tables in Statement 10.
Headline cash balance
The headline cash balance is calculated by adding cash flows from investments in financial assets for policy purposes and Future Fund earnings 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 Loan Program (HELP), and contributions to international organisations that increase the Australian Government's financial assets.
Sectoral classifications
To assist in analysing the public sector, data are presented by institutional sector as shown in Figure 1. ABS GFS defines the GGS and the PNFC and PFC sectors. In accordance with ABS GFS, AASB 1049 has also adopted this sectoral reporting.
Figure 1: Institutional structure of the public sector
Table A1: Entities within the sectoral classifications
General government sector entities |
|---|
Agriculture, Fisheries and Forestry Portfolio Australian Fisheries Management Authority, Australian Pesticides and Veterinary Medicines Authority, Australian Wine and Brandy Corporation, Biosecurity Australia, Cotton Research and Development Corporation, Dairy Adjustment Authority, Department of Agriculture, Fisheries and Forestry, Export Wheat Commission, Forest and Wood Products Australia Ltd, Fisheries Research and Development Corporation, Grains Research and Development Corporation, Grape and Wine Research and Development Corporation, Land and Water Resources Research and Development Corporation, Rural Industries Research and Development Corporation, Sugar Research and Development Corporation |
Attorney‑General's Portfolio Administrative Appeals Tribunal, Attorney‑General's Department, Australian Commission for Law Enforcement Integrity, Australian Crime Commission, Australian Customs Service, Australian Federal Police, Australian Institute of Criminology, Australian Law Reform Commission, Australian Security Intelligence Organisation, Australian Transaction Reports and Analysis Centre (AUSTRAC), Criminology Research Council, Crimtrac, Family Court of Australia, Federal Court of Australia, Federal Magistrates Court, High Court of Australia, Human Rights and Equal Opportunity Commission, Insolvency and Trustee Service Australia, National Capital Authority, National Native Title Tribunal, Office of Parliamentary Counsel, Office of the Director of Public Prosecutions |
Broadband, Communications and the Digital Economy Portfolio Australian Broadcasting Corporation, Australian Communications and Media Authority, Department of Broadband, Communications and Digital Economy, Special Broadcasting Service Corporation |
Defence Portfolio Army and Air Force Canteen Service, Australian Military Forces Relief Trust Fund, Australian Strategic Policy Institute Ltd, Australian War Memorial, Defence Housing Australia, Defence Materiel Organisation, Department of Defence, Department of Veterans Affairs, Royal Australian Air Force Veterans' Residences Trust Fund, Royal Australian Air Force Welfare Trust Fund, Royal Australian Navy Central Canteens Board, Royal Australian Navy Relief Trust Fund |
Education, Employment and Workplace Relations Portfolio Australian Fair Pay Commission Secretariat, Australian Industrial Registry, Comcare, Department of Education, Employment and Workplace Relations, Office of the Australian Building and Construction Commissioner, Office of the Workplace Ombudsman, Seafarers Safety, Rehabilitation and Compensation Authority (Seacare Authority), Teaching Australia — Australian Institute for Teaching and School Leadership Ltd, The Carrick Institute for Learning and Teaching In Higher Education Ltd, Workplace Authority |
Environment, Water, Heritage and the Arts Portfolio Australia Business Arts Foundation Ltd, Australia Council, Australian Film Commission, Australian Film, Television and Radio School, Australian National Maritime Museum, Bundanon Trust, Bureau of Meteorology, Department of Environment, Water, Heritage and the Arts, Film Australia Ltd, Great Barrier Reef Marine Park Authority, National Gallery of Australia, National Library of Australia, National Museum of Australia, National Water Commission, NEPC Service Corporation, Sydney Harbour Federation Trust, The Director of National Parks |
Family, Housing, Community Services and Indigenous Affairs Portfolio Aboriginal Hostels Ltd, Anindilyakwa Land Council, Central Land Council, Department of Family, Housing, Community Services and Indigenous Affairs, Equal Opportunity for Women in the Workplace Agency, Indigenous Business Australia, Indigenous Land Corporations, Northern Land Council, Tiwi Land Council, Torres Strait Regional Authority, Wreck Bay Aboriginal Community Council |
Finance and Deregulation Portfolio Australian Electoral Commission, Australian Reward Investment Alliance, Comsuper, Department of Finance and Deregulation, Future Fund Management Agency, Telstra Sale Company Ltd |
Foreign Affairs and Trade Portfolio AusAid, Australian Centre for International Agricultural Research, Australian Secret Intelligence Service, Australian Trade Commission, Department of Foreign Affairs and Trade, Export Finance and Insurance Corporation National Interest Account |
Health and Ageing Portfolio Aged Care Standards and Accreditation Agency Ltd, Australian Institute of Health and Welfare, Australian Radiation Protection and Nuclear Safety Agency, Australian Sports Anti‑Doping Authority, Australian Sports Commission, Cancer Australia, Department of Health and Ageing, Food Standards Australia New Zealand, General Practice Education and Training Ltd, National Blood Authority, National Health and Medical Research Council, Private Health Insurance Administration Council, Private Health Insurance Ombudsman, Professional Services Review Scheme |
Human Services Portfolio Centrelink (Commonwealth Service Delivery Agency), Department of Human Services, Medicare Australia |
Immigration and Citizenship Portfolio Department of Immigration and Citizenship Affairs, Migration Review Tribunal and Refugee Review Tribunal |
Infrastructure, Transport, Regional Development and Local Government Portfolio Australian Maritime Safety Authority, Civil Aviation Safety Authority, Department of Infrastructure, Transport, Regional Development and Local Government, Maritime Industry Finance Company |
Innovation, Industry, Science and Research Portfolio Australia Institute of Aboriginal and Torres Strait Islander Studies, Australian Institute of Marine Science, Australia Nuclear Science and Technology Organisation, Australia Research Council, Commonwealth Scientific and Industrial Research Organisation, Department of Innovation, Industry, Science and Research, IP Australia, IIF Bioventures Pty Ltd, IIF (CM) Investments Pty Ltd, IIF Foundation Pty Ltd, IIF Investments Pty Ltd, IIF Neo Pty Ltd |
Prime Minister and Cabinet Portfolio Australian Institute of Family Studies, Australian National Audit Office, Australian Public Service Commission, Department of the Prime Minister and Cabinet, National Archives of Australia, National Australia Day Council (Company Ltd By Guarantee), Office of the Commonwealth Ombudsman, Office of National Assessments, Office of the Inspector‑General of Intelligence and Security, Office of the Official Secretary to the Governor General, Office of the Privacy Commissioner, Department of Climate Change, Office of Renewable Energy Regulator |
Resources, Energy and Tourism Portfolio Department of Resources, Energy and Tourism, Geoscience Australia, National Offshore Petroleum Safety Authority, Tourism Australia |
Treasury Portfolio Auditing and Assurance Standards Board, Australian Accounting Standards Board, Australian Bureau of Statistics, Australian Competition and Consumer Commission, Australian Office of Financial Management, Australian Prudential Regulation Authority, Australian Securities and Investments Commission, Australian Taxation Office, Commonwealth Grants Commission, Corporations and Markets Advisory Committee, Department of the Treasury, Inspector General of Taxation, National Competition Council, Productivity Commission, Royal Australian Mint |
Parliamentary Departments Department of Parliamentary Services, Department of the House of Representatives, Department of the Senate |
Public financial corporations |
Environment, Water, Heritage and the Arts Portfolio Film Finance Corporation Australia Ltd Education, Employment and Workplace Relations Portfolio Coal Mining Industry (Long Service Leave Funding) Corporation Finance and Deregulation Portfolio Australian Industry Development Corporation, Medibank Private Ltd Foreign Affairs and Trade Portfolio Export Finance and Insurance Corporation Treasury Portfolio Australia Re‑insurance Pool Corporation, Reserve Bank of Australia |
Public non‑financial corporations |
Attorney‑General's Portfolio Australian Government Solicitor Broadband, Communications and the Digital Economy Portfolio Australian Postal Corporation Finance and Deregulation Portfolio Australian River Co. Ltd, Australian Submarine Corporation Pty Ltd, Australian Technology Group Ltd Human Services Portfolio Australian Hearing Services, Health Services Australia Ltd Infrastructure, Transport, Regional Development and Local Government Portfolio Airservices Australia, Australian Rail Track Corporation Ltd |
Differences between ABS GFS and AAS framework (AASB 1049)
AASB 1049 has adopted the AAS conceptual framework and principles for the recognition of assets, liabilities, revenues, expenses and their presentation, measurement and disclosure. In addition, AASB 1049 has broadly adopted the ABS GFS conceptual framework for presenting government financial statements. In particular, AASB 1049 requires the GGS to prepare a separate set of financial statements, over‑riding AASB 127 Consolidated and Separate Financial Statements. AASB 1049 also follows ABS GFS by requiring changes in net worth to be split into either transaction or 'other economic flows' and for this to be presented in a single operating statement. AASB 1049 is therefore broadly consistent with international statistical standards (SNA93) and the International Monetary Fund's (IMF) Government Finance Statistics Manual 2001).6
Some of the major differences between AASB 1049 and the ABS GFS treatments of transactions are outlined in Table A2. Further information on the differences between the two systems is provided in the ABS publication Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (cat. no. 5514.0).
Table A2: Major differences between AAS and ABS GFS
| Issue | AAS treatment | ABS GFS treatment | Treatment adopted |
|---|---|---|---|
| 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 at the time of acquisition. Defence weapons platforms do not appear as an asset on the balance sheet and no depreciation is recorded in the operating statement. ABS is updating its treatment from 2009 and will align with AAS. | AAS |
| Circulating coins — seigniorage | The profit between the cost and sale of circulating coin (seigniorage) is treated as revenue. | Circulating coin is treated as a liability, and the cost of producing the coins is treated as an expense. | AAS |
| Special Drawing Rights (SDRs) | SDRs currency issued by the International Monetary Fund (IMF) is treated as a liability. | SDR currency issued by the International Monetary Fund is treated as a contingent liability. ABS is updating its treatment and will align with AAS. | ABS GFS, early adoption |
| Provisions for bad and doubtful debts | Treated as part of operating expenses and included in the balance sheet as an offset to assets. | Creating provisions is not considered an economic event and therefore not considered an expense or in the balance sheet. | AAS |
| Concessional loans | Discounts concessional loans by a market rate of a similar instrument. | Does not discount concessional loans as no secondary market is considered to exist. | ABS GFS, being reviewed. |
| Fiscal aggregates differences | |||
| Finance leases | Does not deduct finance leases in the derivation of the cash surplus/deficit. | Deducts finance leases in the derivation of the cash surplus/deficit. | Both are disclosed |
| Net worth of PNFC and PFC sectors | Calculated as assets less liabilities. | Calculated as assets less liabilities less shares and other contributed capital. | AAS |
| Classification difference | |||
| Prepayments | Treated as a non‑financial asset. | Treated as a financial asset. | AAS |
1 Not all transactions impact net worth. For example, transactions in financial assets and liabilities do not impact net worth as they represent the swapping of assets and liabilities on the balance sheet.
2 The net operating balance includes consumption of non-financial assets because depreciation is an 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.
3 Financial assets are defined as cash, an equity instrument of another entity, a contractual right to receive cash or a financial asset, or a contract that will or may be settled in the entity's own equity instruments.
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 by 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 Additional information on the Australian accrual GFS framework is available in the ABS publication Australian System of Government Finance Statistics: Concepts, Sources and Methods, 2005 (cat. no. 5514.0).
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