ACT Accounting Policy Manual - · PDF fileACT Accounting Policy Manual 03/07/01 1.3-2 If any...

ACT Accounting Policy Manual

03/07/01 i

Table of ContentsPage

1. Purpose and Introduction .............................................. 1.1-1

1.1 Purpose of This Manual.......................................................... 1.1-1

1.2 Entities Bound by This Manual.............................................. 1.2-2

1.3 Relationship to Budget Estimates .......................................... 1.3-2


03/07/01 1.1-1

1. Purpose and Introduction

1.1 Purpose of This Manual

The Department of Treasury (Treasury) has prepared this Accounting Manual to assist officers and

other interested people to understand the framework governing the ACT's accounting and reporting

policies. This Manual establishes the accounting principles necessary under the Government’s

financial management reform model, which includes outputs based accrual budgeting and reporting,

and is consistent with Australian Accounting Standard 29 (AAS 29) Financial Reporting by

Government Departments. Any issues arising out of this Manual should be referred to Treasury. A

major objective of the Manual is to assist people to understand the financial management

obligations and the meaning and usefulness of financial management information. It represents good

financial management practice that is designed to enable compliance with the ACT’s financial

management framework and ensure consistency and comparability of departments’ financial

statements.

Departments should comply with this Manual unless it conflicts with the Financial Management

Act 1996 (the FMA). Sub-section 27(2) of the FMA requires that the financial statements must

comply with generally accepted accounting practice (GAAP). Hence, it is important to note that if

in any instance the Manual is in conflict with the GAAP, the latter would have primary authority.

GAAP is defined in sub-section 3(1) of the FMA, and primarily includes Australian Accounting

Standards (AAS) and Urgent Issues Group (UIG) pronouncements.

Mandatory sections of the Manual are indicated by bold lettering, and generally reflect

technical accounting treatments (that is, compliance is compulsory). Chapter 11 is

mandatory in its entirety. However, if a Department is of the view that in some respect following

Chapter 11 will result in noncompliance by the Department with the GAAP or the FMA this should

be brought to the attention of Treasury immediately. In such circumstances the relevant requirement

of Chapter 11 is not mandatory.

Non-mandatory paragraphs are stated in ordinary type face and are designed to explain the context

and intention of the mandatory paragraphs in non-technical language. These are to provide

guidance for commonsense interpretation and application of the policies and suggestions for good

management practices.


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If any officer believes that any policy contained within this Manual inhibits management efficiency

or effectiveness for no relevant reason, the officer should discuss the matter within his or her own

organisation and then, if necessary, contact Treasury. Other sources of accounting advice (eg. the

ACT Auditor General or private sector firms) may not necessarily provide advice within the context

of the whole-of-government framework. As inefficiencies arise from individual agencies seeking

relatively costly external advice, initial notification and discussion with Treasury is considered

essential.

1.2 Entities Bound by This Manual

The accounting policies set out in this Manual apply to all departments,Territory Authorities

and Territory Owned Corporations should comply with the reporting requirements specified

in the appropriate legislation. In each case, however, the Manual should be referred to as a

guide to the Government’s preferred accounting policy treatment.

Departments are the focus of this Manual because they have, until recently, reported on a

cash basis and this Manual represents a shift within government policy to an accrual basis of

accounting and reporting.

Commencement Date

This Manual supersedes the June 1999 edition and is effective for accounting periods ending

on or after 30 June 2001.

1.3 Relationship to Budget Estimates

Sub-section 27 (2) of the FMA requires departments to prepare their annual financial statements in

a form that facilitates comparison between the financial operations of the department during the

year and the estimates of those operations contained in the budget. This makes it necessary for

departments to ensure that the accounting treatments required by this Manual be taken into account

when framing their budget estimates.


3/07/2001Section-Page

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Table of Contents2. Accounting Pronouncements/Framework........................ 2-1

2.1 Statements of Accounting Concepts.......................................... 2-1

2.2 Australian Accounting Standards............................................. 2-3

2.2.1 International Harmonisation ..............................................................2-4

2.2.2 AAS 29 Financial Reporting by Government Departments .............2-4

2.2.3 Other Australian Accounting Standards............................................2-5

2.2.3.1 AAS 1 Statement of Financial Performance (Revised standard applies toreporting periods beginning on or after 1 July 2000) ..................................................2-8

2.2.3.2 AAS 2 Inventories .............................................................................................2-8

2.2.3.3 AAS 4 Depreciation..........................................................................................2-9

2.2.3.4 AAS 5 Materiality in Financial Statements.....................................................2-9

2.2.3.5 AAS 6 Accounting Policies............................................................................. 2-10

2.2.3.6 AAS 8 Events Occurring After Reporting Date ............................................ 2-11

2.2.3.7 AAS 9 Expenditure Carried Forward to Subsequent Accounting Periods .. 2-12

2.2.3.8 AAS 10 Accounting for the Revaluation of Non-Current Assets.................. 2-12

2.2.3.9 AAS 11 Accounting for Construction Contracts........................................... 2-13

2.2.3.10 AAS 15 Revenue .......................................................................................... 2-14

2.2.3.11 AAS 17 Accounting for Leases................................................................... 2-15

2.2.3.12 AAS 21 Accounting for the Acquisition of Assets (including BusinessEntities) 2-17

2.2.3.13 AAS 24 Consolidated Financial Reports ................................................... 2-18

2.2.3.14 AAS 28 Statement of Cash Flows............................................................... 2-19

2.2.3.15 AAS 30 Accounting for Employee Entitlements........................................ 2-20

2.2.3.16 AAS 31 Financial Reporting by Governments ........................................... 2-20

2.2.3.17 AAS 32 Specific Disclosures by Financial Institutions............................... 2-22

2.2.3.18 AAS 33 Presentation and Disclosure of Financial Instruments ................. 2-23



ii

2.2.3.19 AAS 34 Borrowing Costs............................................................................. 2-24

2.2.3.20 AAS 36 Statement of Financial Position (effective for reporting periodsbeginning on or after 1 July 2000............................................................................... 2-24

2.2.3.21 AAS 37 Financial Report Presentation and Disclosure (effective forreporting periods beginning on or after 1 July 2000 ................................................. 2-25

2.2.3.22 AAS 12 Accounting for Research and Development Costs........................ 2-26

2.2.3.23 AAS 14 Accounting for Investments in Associates.................................... 2-27

2.2.3.24 AAS 18 Accounting for Goodwill................................................................ 2-28

2.2.3.25 AAS 19 Accounting for Interests in Joint Ventures................................... 2-28

2.2.3.26 AAS 20A Accounting for Foreign Currency Translation .......................... 2-29

2.2.3.27 AAS 25 Set-off and Extinguishment of Debt .............................................. 2-30

2.2.3.28 AAS 35 Self-Generating and Regenerating Assets..................................... 2-31

2.2.3.29 AAS 3 Accounting for Income Tax (Tax-effect Accounting) ..................... 2-31

2.2.3.30 AAS 7 Accounting for the Extractive Industries........................................ 2-31

2.2.3.31 AAS 25 Financial Reporting by Superannuation Plans............................. 2-32

2.2.3.32 AAS 26 Financial Reporting of General Insurance Activities ................... 2-32



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2. Accounting Pronouncements/FrameworkThe financial framework for the Government presented in this Manual has been developed

such that it is consistent with the Statements of Accounting Concepts (SACs) and the

Australian Accounting Standards (AASs)

The SACs and AASs have been prepared by the Australian Accounting Standards Board (AASB)

and they are issued by AASB on behalf of the Australian Society of Certified Practising

Accountants (ASCPA) and the Institute of Chartered Accountants in Australia (ICAA).

An outline of the general requirements of the SACs and AASs are summarised below.

2.1 Statements of Accounting Concepts

The conceptual framework for financial accounting is summarised in the SACs. There are currently

four such statements:

SAC 1 Definition of the Reporting Entity(The contents of this Statement as relevant to the Government are addressedmore extensively in Chapter 4)

SAC 2 Objective of General Purpose Financial Reporting

SAC 3 Qualitative Characteristics of Financial Information

SAC 4 Definition and Recognition - Elements of Financial Statements

The purpose of the SACs is to provide a framework for the development of the Accounting

Standards and to provide general guidance on how to treat issues where those matters are not

covered by specific Accounting Standards.

The ICAA and the ASCPA have removed the mandatory status of the SACs. The accounting

framework and reporting guidelines as outlined in this Manual have been largely based on the

principles of the SACs.



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Policy

Financial Statements should be prepared in accordance with the Guidelines contained in this

Manual. The requirements of the Manual are consistent with applicable AASs and SACs.

An outline of the SACs that have been issued is set out below. For more detailed information users

should refer directly to the SACs.

SAC 1 “Definition of Reporting Entity”

A reporting entity is defined by SAC 1 as an entity for “which it is reasonable to expect the

existence of users dependent on general purpose financial reports for the information which will

be useful to them for making and evaluating decisions about the allocation of scarce resources”.

SAC 1 states that, if an entity qualifies as a reporting entity, it should prepare general

purpose financial reports in accordance with SACs and AAS.

The reporting entity concept and how it relates to the Government is considered in depth in Chapter

4 of this Manual.

SAC 2 “Objective of General Purpose Financial Reporting”

SAC 2 states that the purpose of financial reporting is to provide information to users that will help

them make decisions about the allocation of resources (eg funds). General purpose financial

reports also assist in discharging the accountability responsibility of the management of an

organisation.

SAC 2 also outlines the type of information useful for such decision making and for discharging the

responsibilities of management. It states that such reports should include information to enable

assessment of the organisation's performance, financial position and financing and investing,

including information about compliance with external legislative requirements.



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SAC 3 “Qualitative Characteristics of Financial Information”

The purpose of SAC 3 is to identify those qualitative attributes that financial information should

possess if it is to serve the specified objective of General Purpose Financial Reporting as set out in

SAC 2.

General purpose financial reports should include all financial information which satisfies the

concepts of:

• relevance and reliability for decision making by users; and

• comparability and understandability for presentation of reports.

A reporting entity’s financial statements should include all material information as defined by

Statement of Accounting Standards AAS 5 “Materiality in Financial Statements”, discussed in more

detail later in this chapter.

Financial information should be relevant and reliable, but need not be given if it is not material. The

information should be timely and facilitate comparison with financial reports of other organisations.

It should also be easy to understand.

SAC 4 “Definition and Recognition of the Elements of Financial Statements”

SAC 4 seeks to establish definitions of the elements of Financial Statements and to specify criteria

for their recognition in Financial Statements. These elements and the respective definitions are

addressed in more detail in Chapter 5 of this Manual.

2.2 Australian Accounting Standards

Australian Accounting Standards are minimum requirements with which ACT agencies must

comply. Other elements of the regulatory framework, which may require specific accounting

treatments for particular ACT agencies, include the Financial Management Act 1996 (the FMA)

and Regulations, and Guidelines issued under that Act, and this Manual.



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2.2.1 International Harmonisation

There are considerable differences among financial accounting and reporting practices throughout

the world. In recognition of the benefits of developing a set of international accounting standards,

Australia was one of the founders of the International Accounting Standards Committee (IASC).

The standards developed by the IASC are assuming increasing importance internationally.

Accordingly, the AASB and AARF have identified1 a number of significant benefits of harmonising

Australian Accounting Standards with IASC Standards, including:

• supplying international capital markets with comparable and better quality information;

• encouraging international investment;

• reducing financial reporting costs of multinational companies; and

• promoting more meaningful comparisons of the performance and financial position of domestic

and foreign reporting entities.

Although the AASB’s long-term objective is to pursue the development of an internationally

accepted set of accounting standards which can be adopted in Australia2, it is currently following an

interim objective of ensuring that compliance with Australian Accounting Standards also ensures

compliance with International Accounting Standards. An example of the harmonisation process is

the substantial revision of AAS 10 Revaluation of Non-Current Assets to more clearly align with

IAS 16 Property, Plant and Equipment.

2.2.2 AAS 29 Financial Reporting by Government Departments

The Public Sector Accounting Standards Board originally released Australian Accounting Standard

29 (AAS 29) in December 1993. It was reissued in June 1998.

While this Standard provides a broad reporting framework for departments, the requirements of the

Standard will be applied to reflect local administrative arrangements and conditions. The Standard

encourages Governments across Australia to adopt a consistent reporting model and to enhance the

1 see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3)2 Ibid para 2.2

3 see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3)4 Ibid para 2.2



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information base on which management and resource allocation decisions are made. This will

enable “Whole of Government” Financial Statements to be prepared on a similar basis. The

“Financial Statement Guidelines for Departmental Reporting Entities” are presented in Chapter 11

of this Manual.

The Standard is mandatory for Government departments only. Statutory authorities are not subject

to AAS 29. However, statutory authorities who choose to adopt Chapter 11 of the Manual should

fully comply with the Chapter 11 requirements, except where there is a conflict with AAS standards

other than AAS 29. Territory Owned Corporations (TOCs) are subject to AASB standards as

appropriate.

In accordance with AAS 29, each department that is a reporting entity (further discussed in Chapter

4) is required to prepare financial statements as set out in Chapter 11.

AAS 29 also requires the general purpose financial reports of departments to comply with all other

Australian Accounting Standards (AASs) except for AAS 16 “Financial Reporting by Segments”

and AAS 22 “Related Party Disclosures”. AAS 29 also contains a number of specific requirements

which override the requirements of some of the other accounting standards. For further details,

refer to AAS 29.

2.2.3 Other Australian Accounting Standards

There are presently 38 Australian Accounting Standards that have been issued, two of which have

been withdrawn. When Standards are issued or revised and reissued, the AASB sets an application

date from which the Standard will become operative. This is in order to allow entities time to

prepare for implementing the requirements of the Standard. Refer to individual Standards to check

their application date.

Further, to ensure consistency in government accounting practices across different jurisdictions in

Australia, the PSASB issued AAS 31 Financial Statements by Australian Governments. AAS 31

mandates government accounting at the consolidated or whole of government level, to allow users

to view and compare financial performance and financial position across the Australian public

sector.



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Those Australian Accounting Standards which are likely to be relevant to most Government

entities are:

• AAS 1 Statement of Financial Performance

• AAS 2 Inventories

• AAS 4 Depreciation

• AAS 5 Materiality

• AAS 6 Accounting Policies

• AAS 8 Events Occurring After Reporting Date

• AAS 10 Recoverable Amounts of Non-Current Assets

• AAS 11 Construction Contracts

• AAS 15 Revenue

• AAS 17 Accounting for Leases

• AAS 21 Accounting for the Acquisition of Assets (including Business Entities)

• AAS 24 Consolidated Financial Reports

• AAS 28 Statement of Cash Flows

• AAS 29 Financial Reporting by Government Departments

• AAS 30 Accounting for Employee Entitlements

• AAS 31 Financial Reporting by Governments

• AAS 32 Specific Disclosures by Financial Institutions

• AAS 33 Presentation and Disclosure of Financial Instruments

• AAS 34 Borrowing Costs

• AAS 36 Statement of Financial Position

• AAS 37 Financial Report Presentation and Disclosures

• AAS 38 Revaluation of Non-Current Assets

Some of the other Standards will be relevant to a smaller number of Government entities depending

on the nature of their activities. These are:

• AAS 13 Accounting for Research and Development Costs

5 see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3)

6 Ibid para 2.2



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• AAS 14 Accounting for Investments in Associates

• AAS 18 Accounting for Goodwill

• AAS 19 Accounting for Interests in Joint Ventures

• AAS 20A Foreign Currency Translation

• AAS 23 Set-off and Extinguishment of Debt

• AAS 35 Self-Generating and Regenerating Assets (issued in August 1998 and applies

to reporting periods on or after 30 June 2001 due to amendment by AAS

35A, but may be applied earlier).

The following Standards may be of little relevance to departments and Territory Authorities, as they

regulate business activity more appropriate to public trading enterprises which are usually subject to

the AASB series of Standards and the Corporations Law:

• AAS 3 Accounting for Income Tax (Tax-effect Accounting)

• AAS 7 Accounting for Extractive Industries

• AAS 25 Financial Reporting by Superannuation Plans

• AAS 26 Financial Reporting of General Insurance Activities

The AASs 12, 16, 22 and 27 are not included in the above schedules as they are not applicable or

have been withdrawn.

Detailed below is a summary of the main purposes of each of those Standards included in the first

grouping, ie the Standards likely to be referred to most often. For full details and commentaries,

reference should be made to the relevant Standard.



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2.2.3.1 AAS 1 Statement of Financial Performance

AAS 1 requires the inclusion of all items of revenue and expense, including adjustments relating to

prior reporting periods in the determination of the result for the reporting period. It also requires

specific disclosures in the Statement of Financial Performance, particularly of certain items known

as “extraordinary” items.

“Extraordinary items” are items of revenue and expense attributable to transactions or other events

outside the ordinary operations of the entity and which are not of a recurring nature. Examples

include condemnation or destruction of major property assets, sale or abandonment of business or

assets, etc.

Departments should confer with the Department of Treasury (Treasury) prior to classifying items as

extraordinary. AAS 1 also requires disclosure of:

• any revenues or expenses from ordinary activities that are of such a size, nature or incidence

that its disclosure is relevant in explaining the financial performance of the entity for the

reporting period;

• any adjustments made to equity as required or permitted by another standard or Urgent

Issues Group Consensus View; and

• the disclosure of any material prior year adjustments that are discovered during a subsequent

financial year, to be called fundamental errors.

2.2.3.2 AAS 2 Inventories

Inventories are defined as goods, other property and services:

(a) held for sale in the ordinary course of business; or

(b) in the process of production, preparation or conversion for such sale; or

(c) in the form of materials or supplies to be consumed in the production of goods and

services available for sale, but does not include depreciable assets (such as plant and

office equipment).



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The fundamental principle in the Standard is that inventory is valued at the lower of cost and net

realisable value on an item-by-item basis. Cost of inventories and net realisable value are both

defined in the Standard.

AAS 2 does not apply to:

• forests, livestock or similar regenerative natural resources;

• work in progress under long term contracts; and

• marketable securities.

These items are covered under specialised accounting practices or other Standards.

2.2.3.3 AAS 4 Depreciation

AAS 4 requires physical assets with useful lives which extend over more than one reporting period

to be depreciated over their estimated useful lives in recognition of the consumption or loss of

future economic benefits embodied in those assets, with the resulting depreciation charges

recognised in the Statement of Financial Performance.

AAS 4 does not apply to:

• forests, livestock or similar regenerative natural resources; or

• investment properties (as defined in the Standard).

Detailed coverage of AAS 4 is contained in Chapter 6 of this Manual at Section 6.10

2.2.3.4 AAS 5 Materiality in Financial Statements

AAS 5 defines the concept of materiality and specifies how it should be applied in the preparation

of financial information. The concept of materiality is an overriding concept which governs not only

the presentation of financial statements, but also the applicability of accounting standards and

practices. Unless explicitly specified otherwise, an Australian Accounting Standard (or any of its

individual provisions) needs only to be applied where it will have a material consequence.



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Information is considered material if its omission, non-disclosure or misstatement would

mislead users of that information when making evaluations or decisions, or result in

management or the governing body of the entity failing to discharge their accountability

requirements. The concept of materiality can apply to an individual transaction or a group

of transactions.

It should be noted that specific disclosures in annual Financial Statements required by legislation

must be complied with regardless of the amounts involved.

AAS 5 contains guidance on selecting appropriate base amounts.

2.2.3.5 AAS 6 Accounting Policies

Accounting policy is the technical term for a description of the accounting method or treatment

applied to a type of transaction in a particular set of Financial Statements (for example, an

explanation of how inventories have been valued.)

An understanding of an organisation's accounting policies is fundamental to an understanding of its

Financial Statements. AAS 6 “Accounting Policies” requires:

• all material accounting policies to be disclosed in the initial section of the notes in the

financial report; and

• a note to be included in the statement of accounting policies detailing whether Australian

Accounting Standards, Urgent Issues Group Consensus Views, and any other relevant

pronouncements have been complied with.

The impact of a change in accounting policy can have a material effect on reported results. For this

reason, changes in accounting policy are permitted by AAS 6:

• when necessary to comply with another Australian Accounting Standard, or

• to improve the overall relevance or reliability of financial information.

Where there is a change in accounting policy that has a material effect, the summary of accounting

policies or notes to the accounts must disclose:



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• the nature of the change;

• the reason for the change;

• the amount of any adjustment recognised as a revenue or expense in the current reporting

period. For policy changes that are not due to the implementation of another standard or

UIG Consensus View this amount will be calculated, where practical, as if the revised policy

had always been applied;

• the amount of any adjustment to the opening balance of accumulated funds; and

• the amount of the adjustment relating to prior accounting periods. Where practical

comparative information contained in the financial report is to be restated to show the

information that would have been presented had the new accounting standard always been

applied.

Details of changes in accounting policies implemented in prior years that did not have a material

impact at that time, but do have a material impact in the current reporting period must also be

disclosed.

2.2.3.6 AAS 8 Events Occurring After Reporting Date

Events occurring after reporting date can often have a significant impact on an entity's accounts.

For this reason, certain events occurring after reporting date must be disclosed and some may even

cause the Financial Statements to be adjusted.

Post-reporting date events fall into three categories:

• events which provide additional evidence of a condition existing at the reporting date (such

as the settling of a liability for a definite sum) which could only be estimated at reporting

date;

• events which reveal, for the first time, a condition which was in existence at reporting date

(eg the receipt of a claim for faulty inventory which was found to be defective before

reporting date); and

• events which happened after reporting date, the effect of which was material to the accounts

such as the destruction of major property assets.



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Generally the first two categories require an adjustment to the accounts while the third requires

disclosure as a note to the accounts.

Where events occur after reporting date which do not relate to any conditions existing at reporting

date, but those events are material in relation to the Financial Statements, a note to the Financial

Statements shall disclose the events and, if possible, their financial effect.

2.2.3.7 AAS 9 Expenditure Carried Forward to Subsequent Accounting Periods

This standard has been withdrawn and replaced by the principles outlined in Statement of

Accounting Concepts SAC 4. However, the following explanation of the matching concept is still

relevant.

One of the traditional, underlying principles of accounting practice is matching. Costs should be

matched with the revenues they generate. Costs in one period are often associated with revenue in

the next and the technique of accrual accounting is designed to deal with this.

Occasionally, however, costs may relate to benefits which will be derived over a number of future

accounting periods, for example the set up costs of a loan. Such costs may be capitalised and

amortised over the period of the benefit, for example, the period of the loan.

Expenditure should be carried forward at balance date to one or more future accounting periods

only when it satisfies the following tests:

• it is material in amount;

• it does not relate solely to revenue which has already been brought to account;

• it can be clearly identified as contributing to revenue earning capability in the future; and

• it is reasonably expected that future revenue will absorb the expense carried forward; or

• the expenditure has given rise to an asset which may be reasonably expected to realise at

least its book value.

2.2.3.8 AAS 10 Recoverable Amount of Non-Current Assets

This standard will have limited application within the ACT government, as it does not apply to:



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• non-current assets of not-for-profit entities where the future economic benefits comprising

those assets are not primarily dependent on the asset’s ability to generate net cash flows: or

• non-current assets measured at fair value or net fair value as required or permitted by another

Australian Accounting Standard, such as AAS 38 “Revaluation of Non-Current Assets”

AAS 10 requires that a non-current asset be written down to its recoverable amount when its

carrying amount is greater that its recoverable amount. The decrement in that carrying amount

must be recognised as an expense in net profit or result for the reporting period in which the

recoverable amount write off occurs.

Detailed policy and procedures relating to the revaluation of non-Current assets are contained in

Chapter 6 of this Manual.

2.2.3.9 AAS 11 Accounting for Construction Contracts

AAS 11 sets standards of accounting by a contractor for all construction contracts. Construction

contracts covered by the Standard include, but are not limited to, contracts for general building,

heavy earthmoving, dredging, demolition, dams, pipelines, tunnels, ships and transport vehicles.

A loss on a construction contract, whether the work is completed or yet to be completed shall be

recognised as soon as it is foreseeable.

The Standard requires detailed separate disclosures of, among other things, the method used to

determine contract revenues, the method used to determine stage of completion and amounts due

to, and receivable from, customers as an asset and liability respectively.



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Recent revisions to AAS 11 (operative after 31 December 1998) include the following

requirements:

• the substance and not the legal form of the transaction or other event must be considered when

determining the composition of a construction contract. This means that in appropriate

circumstances, a number of contracts should be combined to form a construction contract or a

contract that covers the construction of a number of items should be disaggregated;

• the effect of a change in the estimate of contract revenue and contract costs or the effect of a

change in the estimate of the outcome of a construction contract is to be recognised in the period

of the change and future periods if the change affects both. The effect of the change cannot be

recognised retrospectively via an adjustment through the statement of financial performance or

accumulated results;

• additional disclosures are required, including the method used to determine the stage of

completion of contracts in progress and the method used to determine the amount of revenue

recognised in the reporting period; and

• where the outcome of a construction contract cannot be estimated reliably, contract costs must

be recognised as expenses when incurred and revenues are recognised to the extent that it is

probable that expenses incurred are recoverable. The completed contract method under which

contract revenues and contract costs are recognised as revenue and expenses only on completion

of the contract is not permitted.

It also should be noted that in certain circumstances borrowing costs associated with construction

contracts are to be capitalised (see paragraph 4.2 of AAS 34 Borrowing Costs).

2.2.3.10 AAS 15 Revenue

AAS 15 prescribes the accounting treatment of revenues arising from various transactions.

Revenues must be recognised at fair values. Revenue from the sale of goods or the disposal of

assets must only be recognised when:

(a) the entity has passed control of the goods or other assets to the buyer;



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(b) it is probable that the economic benefits comprising the consideration will flow to

the entity; and

(c) the amount of the revenue can be reliably measured.

For the rendering of services, revenue arising from a contract must be recognised when:

(a) the entity controls a right to be compensated for services rendered;

(b) it is probable that the economic benefits will flow to the entity;

(c) the amount of revenue can be reliably measured; and

(d) the stage of completion of the transaction can be reliably measured.

Where the outcome of a contract to provide services cannot be reliably measured costs must be

recognised as an expense in the period they occur and revenue recognised to the amount of costs

only to the extent that it is probable that the costs will be recovered. AAS 15 also requires

disclosures of specific categories of revenues.

Further guidance on revenue recognition is provided in AAS 29 with specific exceptions to

AAS 15 applicable to government departments, such as under restructuring of administrative

responsibilities.

2.2.3.11 AAS 17 Accounting for Leases

For accounting purposes, leases are divided into two types:

• operating leases; and

• finance leases.

The type of lease is determined by examining the terms of the lease agreement.

An operating lease is defined as “a lease under which the lessor effectively retains substantially all

the risks and benefits” of ownership of the leased asset. That is, the lessor behaves as the owner of

the asset. These arrangements include conventional hiring arrangements such as short-term car hire

and renting furnished property.

A finance lease is essentially one which cannot be cancelled and where the lessee either pays for the

whole of the asset or has the use of the asset for most of its useful life. Under such arrangements,

the lessee is more like the owner of the asset and the lease is a means of financing what is

effectively the purchase of the asset, rather than a contract of hire. Under a finance lease, the risks



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and benefits normally associated with ownership of an asset fall to the lessee, while legal ownership

remains with the lessor. These risks and benefits of ownership include gains and losses in the value

of the asset, exposure to obsolescence, idle capacity and uninsured damage.

The type of lease determines the appropriate accounting treatment.

Finance Lease

Finance leases are capitalised as assets of the entity. This technique involves recognising the asset

as though it had been purchased using borrowed funds. An asset and corresponding liability are,

therefore, shown on the lessee's balance sheet. Each year the debt is reduced by a notional

repayment figure and the asset is amortised (similar to depreciation).

Amortisation of the asset and notional finance charges on the debt are taken to the Statement of

Financial Performance. During the life of the lease, the cash repayments being made to the finance

company very often differ from the amounts in the Financial Statements but by the end of the lease

they will have equalised.

The following are indications that a lease transfers the risks and benefits of ownership:

• the lease is not cancellable; and

• ownership is transferred at the end of the lease term; or

• the lease contains a nominal purchase option; or

• the lease term is for 75 % or more of the useful life of the leased property; or

• the present value of minimum lease payments is equal to or greater than 90% of the fair

value of the leased property.

Where a lessee acquires a non-current asset by means of a finance lease, the minimum lease

payments are discounted at the interest rate implicit in the lease. Where the implicit interest rate is

not known, an estimate is used. The discounted amount is established as a non-current asset at the

beginning of the lease term and amortised over its expected economic life. A corresponding liability

is also established and each lease payment is allocated between the principal component and the

interest expense. It should be noted that under the FMA, the Treasurer must sign approvals for a

finance lease (sections 40 (c) and 42 (a)).



2-17

Operating Lease

Under an operating lease no asset is shown in the lessee’s Financial Statements as the asset is

treated as being owned by the lessor, that is, the risks and benefits of ownership remain with the

legal owner. No asset, therefore, is capitalised but the minimum payments due under the lease are

charged to the Statement of financial performance and reflect the use of the leased property.

Generally this means that operating lease expenses are recognised as paid.

Disclosure

The amount of commitments under both types of leases must be disclosed and analysed

according to when the amounts fall due. Commitments should be split into:

• those payable not later than one year;

• later than one but not later than two years;

• later than two but not later than five years; and

• after five years.

2.2.3.12 AAS 21 Accounting for the Acquisition of Assets (including Business Entities)

This Standard sets out the accounting treatment that applies to the acquisition of all types of assets.

Under the Standard all acquisitions of assets are to be initially accounted for at the cost of

acquisition which is the sum of the purchase price plus any costs incidental to the acquisition. The

purchase price may take the form of cash, other monetary assets, non-monetary assets, securities

issued or liabilities undertaken; or a combination of any of these.

Where the price is in the form of cash, other monetary assets or liabilities undertaken, its value is

readily determinable. Where the consideration comprises non-monetary assets, including shares or

other securities, the value will be determined by reference to the fair value of the assets given at

the time of the transaction. Fair value is the amount for which an asset could be exchanged

between a knowledgeable willing buyer and a knowledgeable willing seller, in an arm's length

transaction.

The Standard does not deal with the accounting treatment for the receipt of assets involving no cost

of acquisition, for instance, donations and assets acquired as a result of a restructuring of



2-18

administrative arrangements. These matters are dealt with in AAS 29 and Chapter 6 of this

Manual.

Departments should note that AAS 29 states that assets acquired at no cost or for nominal

consideration, as a consequence of a restructuring of administrative arrangements, need not be

recognised at their fair values and may be recognised at the amounts at which the assets were

recognised by the transferor department immediately prior to the restructuring of administrative

arrangements.

2.2.3.13 AAS 24 Consolidated Financial Reports

AAS 29 specifically requires that the general purpose financial report of a Government Department

shall be prepared in accordance with the requirements of AAS 24.

AAS 24 requires the parent entity in an economic entity which is a reporting entity to prepare

consolidated financial reports. An economic entity is a group of entities comprising the parent

entity and each of the entities it controls. The notion of control rather than ownership is the

criterion for identifying the existence of a parent entity/controlled entity relationship and the

requirement to prepare consolidated financial reports.

Control is defined as the capacity of an entity to dominate decision-making, directly or indirectly, in

relation to the financial and operating policies of another entity so as to enable that other entity to

operate with it in pursuing the objectives of the controlling entity. The requirement to prepare one

set of consolidated financial reports applies even if:

• control is temporary;

• dissimilar activities are conducted by member entities; or

• the parent entity holds only a minority ownership interest in the controlled entity.

AAS 24 contains standards to be applied in the preparation of consolidated financial reports and

prescribes the financial and other information to be included and disclosed in those reports.



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2.2.3.14 AAS 28 Statement of Cash Flows

A Statement of Cash Flows provides information on the cash inflows, cash outflows and the net

change in an entity's cash position. Cash items are cash and/or its equivalents. A cash equivalent7

must be convertible to cash at the investor’s option and subject to insignificant risk of changes in

value when converted (examples of cash equivalents are detailed in AAS 28 para 14.1.1). AAS 28

assists understanding of:

• how much cash has been generated in operating activities;

• how much cash has been invested (or divested) from investing activities; and

• the net cash flows from financing activities. Department cash flow statements, in aggregate,

are also useful for understanding the effects of activities on the overall cash financing

requirements of the budget sector; and

• the ability to meet financial commitments as they fall due.

Cash inflows from operating activities include output appropriations. Other examples of cash

outflows from operating activities also include cash payments relating to employee salaries, rental

of premises and other expenses, such as stationery and transport expenses.

Investing activities involve the investment and divestment of cash in infrastructure and other non-

current assets.

AAS 28 requires that department financial reports disclose by way of note a reconciliation of cash

flows from operating activities to the operating result in the Statement of Financial Performance.

The reconciliation of the cash flows from operating activities should be to the net result plus capital

injections for operations.

7 Cash Equivalents means highly liquid investments with short periods to maturity which are readily convertible to

cash on hand at the investor’s option and are subject to an insignificant risk of changes in value, and borrowings

which are integral to the cash management function and which are not subject to a term facility (AAS 28 para 14.1).



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2.2.3.15 AAS 30 Accounting for Employee Entitlements

Employee entitlements include wages and salaries, annual leave, long service leave and (in certain

cases) sick leave. AAS 30 specifically excludes application to superannuation liabilities, although it

acknowledges that these are a type of employee entitlement.

AAS 30 requires:

• that employees’ entitlements to wages and salaries, annual leave, long service leave, sick

leave, non-monetary benefits, medical benefits, retirement, termination, retrenchment and

redundancy payments be recognised as liabilities in an employer’s financial statements where

the employer has a present obligation based on services rendered by employees up to the

reporting date;

• wages and salaries, annual leave and sick leave (irrespective of whether they are expected to

be settled within twelve months of the reporting date) and other employee entitlement

liabilities expected to be settled within twelve months of the reporting date to be measured

at their nominal amounts (based on current remuneration rates and undiscounted cash

flows); and

• other (long term) employee entitlement liabilities to be measured at their present value.

Calculation of the present value of the employer's liability relating to employee entitlements requires

the expected future payments to be discounted at an appropriate discount rate. AAS 30 requires

the discount rate to be the Commonwealth Government Guaranteed Securities rate with matching

terms to maturity.

2.2.3.16 AAS 31 Financial Reporting by Governments

The Standard mandates that each of the Commonwealth, State and Territory Governments is a

reporting entity and is therefore required to prepare general purpose financial reports. This

Standard applies therefore to those general purpose financial reports that need to be prepared by

consolidating the financial statements of controlled entities in accordance with Australian

Accounting Standard AAS 24 “Consolidated Financial Reports”. This requirement is based on the

view that the general purpose financial reports of governments should provide a comprehensive

overview of their financial performance, financial position, and financing and investing activities. It



2-21

is on this basis that the Standard requires each government to prepare, at least annually, a general

purpose report which includes:

• a Statement of Financial Position, displaying information about its assets and liabilities as at the

reporting date;

• a Statement of Financial Performance, which reports on its revenues and its expenses for the

reporting period;

• a Statement of Cash Flows, and other information necessary to allow informed assessments of

its financial position, financial performance, and financing and investing activities; and

• appropriate disclosures by way of notes which report disaggregated information relating to the

financial performance and financial position showing the government’s activities.

AAS 31 also requires governments to:

• adopt the full accrual basis of accounting;

• recognise as appropriate the assets it controls, including “infrastructure”, “restricted”,

“heritage”, and “community” assets that can be measured reliably, to be recognised as

appropriate; and

• to comply with other Australian Accounting Standards, except:

− AAS 16 Financial Reporting by Segments and AAS 22 Related Part Disclosures; or

− where they have been expressly excluded from applying some Australian Accounting

Standards that are issued in the future.

AAS 31 applies to reporting periods ending on or after 30 June 1999.



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2.2.3.17 AAS 32 Specific Disclosures by Financial Institutions

The purpose of AAS 32 is to require specific disclosures in the financial report of a financial

institution.8 In particular, the Standard:

• prescribes limited disclosures for parent-entity financial institutions in some circumstances;

• allows the net presentation of certain revenues and expenses in the Statement of Financial

Performance;

• clarifies impaired loans as non-accrual loans or restructured loans;

• prescribes specific disclosures additional to those required by other Accounting Standards,

including:

− particular revenues and expenses

− analysis of interest revenue and interest expense, including average interest rates;

− presentation of assets and liabilities in the Statement of Financial Position in order of relative

liquidity;

− particular assets and liabilities;

− maturity analysis of specified assets and liabilities;

− concentrations of deposits and borrowings;

− commitments and contingent liabilities;

− impaired loans, assets acquired through the enforcement of security and past-due loans;

− general and specific provisions for impairment; and

− fiduciary activities

8 a financial institution is defined as an entity (including an economic entity) whose principal activity is to take

deposits or borrow, or both take deposits and borrow, with the objective of lending or investing in financial assets

other than equity instruments, but excluding those entities which take deposits or borrow principally from other

entities in the economic entity, or general insurers, life insurers and superannuation plans, or entities subject to the

Banking Act 1959 (as amended).



2-23

2.2.3.18 AAS 33 Presentation and Disclosure of Financial Instruments

The main features of AAS 33 include the following:

• the term financial instrument and associated asset, liability and equity terms are defined (see

Glossary). They cover a wide range of items from cash and trade receivables to derivative

instruments like interest rate swaps;

• the issuer of a financial instrument must:

− classify an instrument as a liability or equity according to its substance on initial recognition

(an instrument may have a component of each);

− account separately for liability and equity components, subject to certain transitional

provisions; and

− not reclassify components unless certain conditions are met;

• the Standard prescribes disclosure requirements in relation to the following:

− the terms and conditions of financial instruments and the associated accounting policies

adopted;

− interest rate risk, by class of recognised and unrecognised financial asset and financial liability;

− credit rate risk, by class of recognised and unrecognised financial asset;

− net fair value by class of recognised and unrecognised financial asset and financial liability;

and

− financial assets recognised at amounts exceeding net fair value;

• with regard to derivatives, the objectives of having them, the context in which the objectives

were set out and the strategy for meeting the objectives;

• hedges of anticipated future transactions; and

• the standard also encourages other disclosures (eg. policies for controlling the risks associated

with financial instruments).

It should be noted that parent entities are permitted not to comply with disclosure requirements in

circumstances where the parent’s financial report is presented with the report of the economic

entity. It should also be noted that, although the Standard is relatively complex, in most instances,

there will be little impact on agencies beyond preparing a note to financial statements using the

elements contained in the suggested model provided (refer Chapter 11 Appendix 11-D).



2-24

2.2.3.19 AAS 34 Borrowing Costs

The operative date for this Standard is for reporting periods ending on or after 31 December 1998.

The principal features are:

• borrowing costs must be expensed in the reporting period incurred except to the extent that they

are directly attributable to the acquisition, construction or production of a qualifying asset9;

• borrowing costs capitalised during a reporting period must not exceed borrowing costs incurred

during the period by the entity;

• the standard also prescribes:

− the methods for allocating costs between assets;

− when capitalisation must cease or be suspended; and

− specific disclosures;

• the Standard notes that there may be situations where the treatment of borrowing costs differs

between entities within an economic entity. An example is where a parent entity may borrow

funds which are then granted to a subsidiary to construct a qualifying asset. Only in the

economic entity’s financial report would the borrowing costs be capitalised; and

• if not already in place, the accounting policies required by the Standard must be applied from the

beginning of the reporting period to which the standard is first applied.

2.2.3.20 AAS 36 Statement of Financial Position

This standard prescribes the format and classification criteria to be applied in the preparation of

statements of financial position. The standard applies to reporting periods ending on or after 30

June 2001.

The principle features of this standard are:

• classes of items to be disclosed separately on the face of the statement of financial position are

prescribed;

• current assets and current liabilities are to be presented separately from non-current assets and

non-current liabilities unless presenting items on the basis of liquidity provides more relevant

information. The latter approach is recommended for financial institutions;

9 a qualifying asset under AAS 34 is an asset that necessarily takes a substantial period of time to get ready for its

intended use or sale (generally more than 12 months).



2-25

• for note disclosures, assets are to be classified according to their nature or function, while

liabilities and equity items are to be classified according to their nature; and

• if an entity has a single clearly identifiable operating cycle exceeding twelve months, that period

must be used as the basis for identifying current and non-current assets and liabilities.

2.2.3.21 AAS 37 Financial Report Presentation and Disclosure

This standard prescribes presentation and disclosure requirements to be applied in the preparation

of financial reports for accounting periods ending on or after 30 June 2001. Required by the

standard are:

• disclosures regarding the entity’s operations, audit arrangements, economic dependence, and

dividends; and

• period to period consistency in the presentation and classification of items in financial reports

unless there is a significant change in the nature of the entity’s operations, a change in

presentation required by an applicable accounting standard or Urgent Issues Group Consensus

View, or more relevant presentation of classification of items will be achieved.

2.2.3.22 AAS 38 Revaluation of Non-Current Assets

The purpose of AAS 38 “Revaluation of Non-Current Assets” is to prescribe the manner in which

non-current assets are valued subsequent to their initial recognition. While the standard is operative

for reporting periods ending on or after 30 June 2000, it will not be immediately applied to ACT

agencies due to transitional provisions.

AAS 38 requires that subsequent to the initial recognition of assets, each class of non-current assets

must be measured on either the cost or “fair value” basis. “Fair value” is defined as the amount for

which the asset could be exchanged between knowledgeable willing parties in an arm’s length

transaction. Where a class of non-current assets is measured on the fair value basis, revaluations

must be made with sufficient regularity to ensure that the carrying amount of each asset in the class

does not differ materially from fair value

Revaluation increments and decrements must be offset against one another within a class of

non-current assets, but must not be offset in respect of different classes of non-current assets. When

classes of assets are revalued:



2-26

• revaluations increments must be credited directly to an asset revaluation reserve, except to the

extent that the increment reverses a revaluation decrement previously recognised as an expense

in respect of the same class of non-current assets. In such cases increments must be recognised

as revenue;

• revaluation decrements must be recognised immediately as an expense in the net result, except

to the extent that a credit balance exits in the asset revaluation reserve relating to that class of

asset. In these cases the decrement, grossed up for any related recognised current tax and

deferred tax, must be debited directly to the asset revaluation reserve.

Where the fair value basis is used:

• the method used in determining assets values; and

whether the revalued carrying amount has been determined in accordance with an independent

valuation must be disclosed.

Generally, accumulated depreciation is to be credited to asset accounts and those accounts then

increased or decreased by the relevant revaluation decrement or increment. An exception arises

when an entity revalues assets by reference to current prices for assets that are newer than those

being revalued, and adjusts those amounts to reflect the present condition of the assets.

Lengthy transitional provisions apply under this standard for public sector entities. As a

result current valuation methodologies (including deprival valuation) will continue to be

used for reporting periods ending on or before 30 June 2002. This is to allow the standard

setting bodies to investigate the compatibility of certain legislatively required valuation

methodologies, including deprival valuation, with the requirements of the standard.

The following are summaries of accounting standards considered to have less general application to

mainstream government activities, but may apply to particular businesses as appropriate. It is

recommended therefore that those Departments who do not regularly apply these particular

standards in the usual course of their business, consult with Treasury if they intend to include any

aspects of these standards in the preparation of their financial reports.

2.2.3.23 AAS 13 Accounting for Research and Development Costs



2-27

Research is defined as investigation procedures aimed at gaining new knowledge which will be

useful in the development of a new product or process or significant improvement in an existing

product or process. Examples are:

• new knowledge search;

• search for new research findings;

• search for new or improved products and processes; and

• testing of alternatives.

Development is defined as the translation of research into a plan. Examples are:

• evaluation of alternatives;

• testing of models, prototypes, pilots, etc;

• design of tools, etc using new technology; and

• market research.

Generally, research and development (R & D) costs must be recognised as an expenses unless they

possess future economic benefits, in which case the R & D costs are to be recognised as assets.

Government grants are to be credited against the relevant carrying amount of the deferred R & D

costs. Where the grant is for R & D that has already been written off, recognise the grant as

revenue. There are extensive disclosure rules for R & D costs depending on their nature as

incurred or deferred, and those amortised. The Standard requires disclosure only of the carrying

amount of R & D costs at the reporting date and the basis of amortising those costs as appropriate.

2.2.3.24 AAS 14 Accounting for Investments in Associates

AAS 14 defines an associate as meaning an investee, not being:

• a subsidiary10 of the investor; or

• a partnership of the investor; or

• an investment acquired and held exclusively with a view to its disposal in the near future,

over which the investor has significant influence11.

10 Subsidiary means an entity which is controlled by a parent entity (AAS 14 para 9.1).

11 Significant influence means the capacity of an entity to affect substantially (but not control) either, or both, of the

financial and operating policies of another entity (AAS 14 para 9.1).



2-28

AAS 14 prescribes:

• the circumstances in which investors must use the equity method of accounting for investments

in associates;

• the rules for implementation of the equity method of accounting; and

• the disclosure requirements in respect of investments in associates, including those for which the

equity method of accounting is not required.

(Equity Accounting is detailed in Chapter 14 of this Manual)

2.2.3.25 AAS 18 Accounting for Goodwill

AAS 18 describes goodwill as the future benefits derived from unidentifiable assets12. This

Standard specifies the manner of accounting for goodwill and discount on acquisition following the

acquisition of an entity. AAS 18 requires the disclosure of information relating to goodwill so that

users of general purpose financial reports are provided with information about the financial position

and performance of the reporting entity. Goodwill that is internally generated by the entity must

not be reported as goodwill (AAS 18 para 4.1).

2.2.3.26 AAS 19 Accounting for Interests in Joint Ventures

A joint venture is defined by AAS 19 as a contractual arrangement whereby two or more parties

undertake an economic activity which is subject to joint control13.

The concept of control has important implications for all facets of financial accounting, not least

because it has in many instances supplanted the concept of ownership within the Standards.

Control is described in detail in both AAS 24 Consolidated Financial Statements and AAS 31

Financial Reporting by Governments.

12 Unidentifiable assets are those assets which are not capable of being both individually identified and specifically

recognised (AAS 18 para 14.1). To recognise an asset means to report it on a financial statement.13Joint control means the contractually agreed sharing of control over an economic entity. Joint control exists when

two or more parties must consent to all major decisions.



2-29

AAS 19 requires a venturer to:

• recognise the assets, liabilities and expenses arising from its interest in a joint venture operation

and revenues from sale or use of its share of the output of a joint venture operation;

• measure its interest in a joint venture entity that is a partnership by applying the equity method of

accounting in its own financial report and, where applicable, its consolidated financial report; and

• make specific disclosures about its interests in joint ventures.

In addition to the above, those venturers that prepare consolidated financial reports are also

required to measure the interests in a joint entity that is not a partnership by applying the equity

method14 of accounting in its consolidated financial report and by applying the cost method in its

own financial report. Those venturers who do not prepare consolidated reports are required to

measure their interest in a joint venture entity that is not a partnership by applying the equity

method of accounting in their own financial reports.

2.2.3.27 AAS 20A Accounting for Foreign Currency Translation

AAS 20 prescribes the method of accounting for foreign exchange transactions and the translation

of foreign currency financial statements as well as the disclosure requirements for information

relating to foreign currency transactions.

Generally, each asset, liability, revenue and expense arising from a foreign currency transaction is

initially recognised and measured using appropriate domestic exchange rates. Monetary assets and

liabilities are measured at the spot15 rate current at that time. AAS 20 contains separate rules where16hedging is involved.

Disclosures under AAS 20A include the following:

• the method used for translating foreign currency transactions and foreign currency financial

statements;

14 The Equity Method of accounting is detailed in Chapter 14 of this Manual.15 Spot rate means the exchange rate for immediate delivery of currencies to be exchanged.16 Hedging means action taken, whether by entering into a foreign currency contract or otherwise, with the object of

avoiding or minimising possible untoward financial effects of movements in exchange rates.



2-30

• the resultant net exchange gains or losses, with separate disclosures of gains and losses resulting

from speculative dealings;

• details of the nature and amount of movements in the foreign currency translation reserve; and

• a reconciliation of opening and closing balances.

2.2.3.28 AAS 25 Set-off and Extinguishment of Debt

Set-off in this Standard means the reduction of an asset by a liability or of a liability by an asset in

the presentation of the statement of financial position so that only the net amount is recognised.

AAS 23 requires debt to be accounted for as extinguished when settled through repayment or

replacement by another liability. AAS 23 also prescribes:

• the conditions to be met before a debt can be accounted for as extinguished in situations of: legal

defeasance; in-substance defeasance via a trust; and in-substance defeasance via assumption by a

risk free entity;

• the accounting required when conditions for extinguishment cease to be met;

• the accounting requirements for partial extinguishments;

• the accounting for the costs of defeasance and gains and losses on defeasance;

• the specific disclosure requirements; and

• the set-off of assets and liabilities when there is a legal right to set-off, and settlement is intended

to be on a net basis or simultaneously.



2-31

2.2.3.29 AAS 35 Self-Generating and Regenerating Assets

A self-generating and regenerating asset (SGARA) means a non-human living asset17. AAS 35

applies to all SGARAs other than those held for non-commercial purposes18 and deems the cost of

non-living SGARAs to be the net market value of the produce immediately after it becomes non-

living (ie. for the purpose of applying AAS 2 Inventories). AAS 35 requires SGARAs:

• to be measured at net market value19;

• to be presented separately in the statement of financial position;

• other specific disclosures in relation to SGARAs; and

• increments/decrements in net market values to be recognised as revenues/expenses in the

reporting period in which the increments/decrements occur, and the net market value of non-

living produce determined immediately after it becomes non-living to be recognised as revenues

in the reporting period in which extraction occurs.

AAS 35 applies to reporting periods ending on or after 30 June 2001, and may be applied earlier.

The following are summaries of the Standards that are considered to be of little practical relevance

to Departments and Territory authorities:

2.2.3.30 Income Taxes

AAS 3 specifies the method for determining income tax expense, provision for income tax,

provision for deferred income tax, and future income tax benefit. The Standard also requires

disclosures of information in relation to the items above.

2.2.3.31 AAS 7 Accounting for Extractive Industries

17 Living asset applies to all non-human living assets, regardless of the length of the production cycle, or how they

were created. A living asset becomes non-living when biological change can no longer take place.18 AAS 35 does not apply to SGARAs that are held for the primary purpose of aesthetics, heritage, ecology, the

environment, or recreation.



2-32

AAS 7 specifies the accounting treatments for particular transactions and events relating to

extractive industry operations and disclosures of associated transactions in financial reports of those

entities. Although of little practical relevance to Territory entities, this relatively old (1989)

Standard contains some early references to environmental accounting, in terms of it’s recognising

restoration costs20

2.2.3.32 AAS 25 Financial Reporting by Superannuation Plans

AAS 25 specifies and requires the following:

• the manner in which superannuation plans should account for particular transactions and events;

• the format of superannuation plan financial statements; and

• disclosure of certain information in the financial report of superannuation plans.

2.2.3.33 AAS 26 Financial Reporting of General Insurance Activities

AAS 26 specifies and requires:

• the manner of accounting for the general insurance activities of a reporting entity and for the

investment activities of the entity integral to those general insurance activities; and

• disclosure of information relating to general insurance activities so that users of general purpose

financial reports are provided with information about the financial position and performance of

the operating entity.

19 Net market value means the amount which could be expected to be received from the disposal of an asset in an

active and liquid market after deducting costs expected to be incurred in realising the proceeds of such disposal.20 AAS 7 recognises that restoration costs may be incurred as part of entity policy even if there is no legal obligation

to do so (para 38).


3/07/2001 i


3. Underlying Financial Management of the ACTGovernment .......................................................................... 3.1-1

3.1 Legal Arrangements................................................................ 3.1-1

3.2 Funding Arrangements ........................................................... 3.2-2

3.3 Reporting by Departments ..................................................... 3.3-2

3.4 Territory Authorities .............................................................. 3.4-3

3.5 Territory Owned Corporations.............................................. 3.5-4

3.6 Joint Ventures.......................................................................... 3.6-4

3.7 Comparative Pricing ............................................................... 3.7-4



3.1-1

3. Underlying Financial Management of the ACTGovernment

3.1 Legal Arrangements

The power to perform the actions and operations of the Executive Government of the ACT (also

referred to as the Territory) is derived from Part V of the Commonwealth Australian Capital

Territory (Self-Government) Act 1988 (the Self-Government Act).

The regulatory framework for the Territory’s financial management has its basis in the

Self-Government Act and derives its substance from the Financial Management Act 1996 (the

FMA) and the Auditor General Act 1996 (the AGA). Other specific purpose legislation, such as

Appropriation Acts and enabling legislation for Territory authorities, may adapt, augment or

override the general powers and limitations of the FMA and AGA.

The FMA and AGA contain the fundamental rules of financial management to administer

requirements of the Self-Government Act. These Acts deal with a number of diverse matters,

including:

• Auditor-General. The AGA establishes the Office of Auditor-General and makes provision

for the administration and functions of the Auditor-General’s office.

• Territory Budget and Appropriation. The FMA provides for the expenditure of the

Territory and requires accrual based budget papers for departments and for the Territory.

• Financial Reporting. The FMA specifies financial reporting requirements for departments,

Territory authorities and the Territory; and requires that the financial statements facilitate

comparison with the budget estimates. The FMA also requires that the financial statements

of departments and Territory authorities be prepared in accordance with generally accepted

accounting practice.

• Accountability/Responsibility. The FMA makes Chief Executives responsible for the

efficient and effective financial management of their respective department or statutory

authority, and makes Chief Executives of departments accountable to their respective

Minister.



3.3-2

• Banking, Investment and Borrowing. The FMA deals with the power to bank, invest and

borrow funds. It also provides for a bank account for the purposes of the Territory (the

Territory Bank Account), and for each department to have its own bank accounts.

• Trust Money. The FMA provides for the administration, banking, and investment of trust

money.

• Miscellaneous Powers of the Treasurer. The FMA also empowers the Treasurer to make

certain payments, to waive the Territory’s right to debts, and to issue Financial Management

Guidelines such as this Manual.

3.2 Funding Arrangements

Sub-section 58(1) of the Self-Government Act stipulates that no public money of the Territory shall

be issued or spent except as authorised by enactment. This is achieved in large part by way of

Appropriation Acts, which are based on agency estimates.

Appropriation Acts provide for the Government’s purchase of outputs from departments, for

capital injections to departments, and for payments by departments on behalf of the Territory. The

Assembly normally pass an Appropriation Act as part of the annual budget. On 30 June each year,

any unused appropriation lapses.

The FMA also provides for expenditure in excess of the amount specifically appropriated, or which

is not provided for by any appropriation. The Treasurer may authorise such expenditure, by means

of the Treasurer’s Advance, provided that:

• the need for the expenditure could not reasonably have been foreseen at the time of the

passing of any of the Appropriation Acts relating to the financial year in which the

expenditure is to occur; and

• the total expenditure authorised in a financial year does not exceed the amount approved for

the purpose of the Treasurer’s Advance.

3.3 Reporting by Departments

The Financial Statement Guidelines for Departmental Reporting Entities, which form Chapter 11 of

this Manual, address the consistency and quality of financial information considered necessary for



3.4-3

departments to meet the information needs of the Legislative Assembly and other users. In

addition, section 27 of the FMA also specifies the form and contents of the financial statements.

The following table indicates the reporting arrangements for 2000-01, including the expected

reporting requirements for special operations of departments (These requirements apply to special

operations unless the Treasurer determines otherwise).

ENTITY AUTHORITY REPORTING REQUIREMENTSFOR THE YEAR ENDING30 JUNE 2001

Departments Financial Management Act 1996,section 27

Chapter 11 of this Manual

Special Operations ofDepartments

Financial Management Act 1996,section 27

Chapter 11 of this Manual

Territory Authorities Financial Management Act 1996,section 59

Financial Statement Guidelines forACT Entities

Territory OwnedCorporations

Corporations Law Corporations Law

3.4 Territory Authorities

Territory Authorities are established under an Act of the ACT Legislative Assembly or by

regulation. They perform specific tasks or have specific responsibilities which are considered to be

best performed within a structure separate from departmental operations. Examples are Canberra

Institute of Technology and the Gunghalin Development Authority.

The accounting and reporting requirements for Territory Authorities may be set out in their

enabling legislation. From 1 July 1996, the FMA has superseded the Audit Act 1989, and Part VIII

of the FMA supersedes any contrary provisions in previously enacted enabling legislation.



3.7-4

3.5 Territory Owned Corporations

The principal objective of Territory Owned Corporations is to carry on business successfully and, to

this end, operate at least as efficiently as any comparable business and maximise the sustainable

return to the Territory on its investment in the Corporation in accordance with performance targets.

They are registered companies with shareholders and are subject to the Corporations Legislation.

3.6 Joint Ventures

A joint venture is an association of persons (participants) for the purpose of some trading, mining,

financial or other commercial undertaking. Joint Ventures are often established to enable the

participants to share resources (including people and skills) and risks.

As the expression “Joint Venture” is a general one, it can apply to a range of associations of

participants and can take many forms, including companies, unit trusts, partnerships and

unincorporated joint ventures (also called contractual joint ventures and participation consortia).

Joint Ventures may involve commercial activities or activities which are mainly directed to research

or the development of ideas. The type of activity or venture is not a determining factor. The main

ingredient is that there is an association between the Territory and others to achieve a common

goal. Where a department is involved, there are reporting requirements as set out section 11.3.8.3.

3.7 Comparative Pricing

The Government has adopted a Comparative Pricing (CP)/output costing funding framework to

empower both Government and agencies to be price setters through a negotiation process guided

by benchmarking.

The framework allows for a full cost attribution model in conjunction with the adoption of CP for

output delivery. This will increase accountability and transparency under the financial framework

and encourage greater efficiency and effectiveness in departments.

The Government purchases the level of output delivery that it wants at what it regards as an

optimum price. The optimum price will not include inefficiencies. The optimum price, however,



3.7-5

may include acceptable premiums related to quality or other factors such as the inability to achieve

comparable economies of scale because of the size of the ACT.

Departments will recognise an allocation of centrally managed expenses, such as interest on

Government debt, and agencies will include annual superannuation expenses in their pricing

structure. Further, departments will record revenues for the agreed benchmarked output price and

any shortfalls caused by expenses above benchmark will be financed (where agreed) through an

injection for operations. Injections for operations are not to be included in the determination of

output costs and prices. (Chapter xx of the Manual)

The disclosure of full output prices will enable the Assembly and other users of financial statements

to determine more clearly the likely extent to which each department’s financial results reflect

efficient operations, management, changed demand or insufficient revenues.

Determining output price and funding

It is recognised that no benchmark data is perfect; accuracy depends on the quality of the data

provided by ACT and other jurisdictions to national collectors, including the Commonwealth

Grants Commission. Departments and agencies should work in consultation with the ACT

Government to refine benchmarks and improve the quality of data provided to national collectors

where necessary. From 1999-2000 onwards, departments and agencies will be responsible for

taking a more active role in providing output pricing information to the Department of Treasury

(Treasury) for consultation and agreement.

Where expenses exceed the Government Payment for Outputs (GPO), the Government will have a

choice to either fund the shortfall as an injection for operations or require the agency to put

strategies in place to meet the shortfall. The injection for operations will represent a capital

injection in that the owner is maintaining the ongoing operations of the entity.

Departments are to record revenues for the full amount of the agreed output price, but may also

receive an injection for operations to at best maintain their cash levels at the amount budgeted. In

the past pricing may have been set at average benchmarks to assist the transition, but there is an

expectation that departments will continue to work toward the achievement of best practice. In



3.7-6

future years, funding will be at the amount of agreed output prices and any amount of injection for

departmental operations to cover deficits will be monitored to ensure that, while departmental

operations are not impeded, there will be a focus on benchmarks being achieved wherever possible.

Injections for operations will be reflected in the Statement of Financial Performance immediately

following extraordinary items or tax equivalent expenses. In the Cash Flow Statement, the

injections for operations will appear as an inflow from operations. (Refer to Chapter 11.2.3 for

presentation).

Capital charge

As part of output pricing, departments will include a capital charge based on an allocation of

interest costs incurred by the general Central Financing Unit (CFU) (of Treasury) borrowings

related to the General Government Sector. Agencies are to attribute the capital charge to outputs

relating to commercial activities or activities with their own source revenue (ie non or less budget

dependent) where possible, and then as necessary, across other outputs. This will be allocated to

agencies on the basis of the written down value of the property, plant and equipment of agencies.

The capital charge is considered as an operating expense and should to be included with interest

expense. The capital charge in the ACT will involve the provision of funding through Government

Payments for Outputs to match the expense being allocated.

Depreciation and Capital Works

Depreciation will also be included in the agency’s pricing structure. If the agreed output price is

higher than the net cash requirement, the balance of the agreed price would be recorded as a

‘receivable’ from Government in an agency’s accounts and an ‘accounts payable’ in the CFU’s

Territorial account. This treatment makes the extent of Government’s non-funding of the full

amount of benchmarked prices transparent. Capital injections for capital works (ie for Statement of

financial position activity) will be effected in the usual way of funding capital works.



3.7-7

Administrative Restructure

In the event of an administrative restructure, funding will move according to the movement of

output delivery. The departments involved must agree on the values being transferred and must

notify the relevant area within the Treasury.


i


4. Reporting Entities........................................................... 4.1-1

4.1 Scope......................................................................................... 4.1-1

4.2 Reporting Entities ................................................................... 4.2-1

4.3 Guidance for the Administrative Framework....................... 4.3-2



4.2-1

4. Reporting Entities

4.1 Scope

Definition

A reporting entity means an entity (including an economic entity) in respect of which it is

reasonable to expect the existence of users dependent on general purpose financial reports for

information which will be useful to them for making and evaluating decisions about the allocation of

scarce resources (AAS 29, paragraph 17.1).

4.2 Reporting Entities

Policy

All reporting entities subject to this Manual shall prepare general purpose financial reports

in accordance with this Manual.

The general purpose financial report of a reporting entity shall encompass all entities

controlled by that reporting entity.

Commentary

For an explanation of “general purpose financial reports” refer section 2.1.

Section 1.2 outlines the reporting entities that are subject to this Manual.

Government reporting entities must report as economic entities1 where the reporting entity controls

other entities so that they collectively operate to achieve objectives consistent with those of the

reporting entity. This recognises that by controlling another entity the resources of that entity may

be deployed by the reporting entity for its own advantage. In order to reflect fully the total

activities of the reporting entity, it is necessary to combine those activities under the control of the

reporting entity. AAS 29, in paragraph 5.2.1, provides that this form of reporting will assist users

1Economic entities are defined as a group of entities comprising the parent entity and each of its subsidiaries (orcontrolled entities). Further guidance on public sector economic entities can be found in AAS 24 “ConsolidatedFinancial Reports”, paragraphs 21-38



4.3-2

in making economic decisions and will satisfy accountability requirements and disclose information

relevant to the assessment of performance particularly in relation to the management of resources.

Whether there is control over another entity will depend on a number of factors including but not

limited to the following:

• capacity to appoint or remove management;

• capacity to remove or appoint all or a majority of the directors or governing members of

another entity (AAS 24, para 22 (b));

• the existence of a statute, agreement, or trust deed, or any other scheme, arrangement or

device, which, in substance, gives an entity the capacity to enjoy the majority of the

benefits and to be exposed to the majority of the risks of that entity, notwithstanding that

control may appear to be vested in another party (AAS 24, para 22 (e));

• power to direct operations;

• the extent and implications of financial dependence; and

• capacity to utilise resources to achieve common objectives.

The application of the control concept is elaborated in subsequent chapters.

4.3 Guidance for the Administrative Framework

The framework established under section 3 of the Financial Management Act 1996 provides that

each agency (and statutory authority) is an economic entity in its own right.

It should be noted that AAS 29 does not apply to Government entities required to comply with

Accounting Standards operative under the Corporations Law. This will mean that Territory Owned

Corporations are not required to comply with the requirements of AAS 29.

AAS 29 also does not apply to Territory authorities. However, statutory authorities who choose to

adopt Chapter 11 of the APM should fully comply with the Chapter 11 requirements, except where

there is a conflict with applicable Australian Accounting Standards other than AAS29.



4.3-3

As stated in section 4.2 of this Manual, the question of whether or not reporting entities must

produce a consolidated report is determined by the criterion of control. Some areas which will

require review will be:

Trust Accounts:

Departments with trust accounts that contain third party money would not report this as

departmental money, although disclosure of funds held in trust is required in the Notes to the

Financial Statements (refer to section 11.3.8); and

Grants:

Where grants are paid by a department to a third party there arises a question as to whether control

exists over the grantee organisation because of the level of economic dependency or the special

conditions that may apply to the granting of the funds. Generally grants to third parties will be

considered as Territory (administered) expenses and will not result in consolidation of the third

party entity. However, each of these cases should be determined individually, in line with the

control criteria outlined in section 4.2.

In regard to trust accounts, agencies should note that simply because monies are held in something

called a ‘trust’ does not mean that those monies are trust monies. The substance of the trust needs

to be considered over the form. Where a department, for instance, is able to use trust monies to

satisfy either departmental or Territorial obligations, the department should correspondingly

recognise those monies as being departmental or Territorial (and therefore not trust monies under

the FMA). In the notes to the financial statements, departments should disclose genuine third party

monies only, as trust monies (in line with section 3 of the FMA).


5.1-1


5. Elements of Financial Reporting ................................... 5.1-2

5.1 Types of Elements.................................................................... 5.1-2

5.1.1 Assets ................................................................................................ 5.1-2

5.1.2 Liabilities .......................................................................................... 5.1-3

5.1.3 Equity................................................................................................ 5.1-4

5.1.4 Revenues ........................................................................................... 5.1-4

5.1.5 Expenses ........................................................................................... 5.1-5

5.2 Relationship Between the Elements and Financial Statements5.2-5

5.2.1 Statement of Financial Position ....................................................... 5.2-5

5.2.2 The Statement Of Financial Performance ...................................... 5.2-6

5.3 Principle of “Recognition” ..................................................... 5.3-7

5.4 “Departmental” and “Territory (Administered)” Items...... 5.4-9

5.4.1 Departmental and Territory (Administered) Revenues ............... 5.4-11

5.4.2 Departmental and Territory (Administered) Expenses................ 5.4-12

5.4.3 Departmental and Territory (Administered) Assets..................... 5.4-13

5.4.4 Departmental and Territory (Administered) Liabilities .............. 5.4-14


5.1-2

5. Elements of Financial ReportingPolicy

Each reporting entity must prepare general purpose financial reports in accordance with the

framework in this Manual. These financial reports will incorporate the accounting elements

of assets, liabilities, equity, revenue and expenses.

5.1 Types of Elements

The elements of annual accrual based financial reports are:

• assets;

• liabilities;

• capital;

• revenues; and

• expenses.

Periodic reports or special reports may include a combination of these elements.

The above elements are to be identified as either departmental or Territory (administered) items for

reporting purposes (Refer Section 5.4).

5.1.1 Assets

To qualify as an asset of an entity, an item must:

• provide future economic benefits to the entity;

• be controlled by the entity; and

• result from past transactions or other past events.

For accounting purposes, assets are categorised into either “current assets” or “non-current assets”.

They are then further classified according to their nature or type.


5.1-3

Current Assets

Current assets are items where it is intended that in the ordinary course of operations the asset

would be consumed or converted into cash within twelve months after the end of the reporting

period. Examples include cash, debtors and inventories.

Non-Current Assets

Non-current assets are all assets other than current assets. Examples include land, plant and

equipment, motor vehicles, buildings, non-current debtors and non-current inventories.

There will also be assets that must be recognised by a department because of the community service

obligation the Government considers it must satisfy. Examples of these include heritage assets,

monuments, museums and community specific assets. The service potential or future economic

benefits of these items can be difficult to determine.

Chapter 6 provides a more detailed explanation of assets.

5.1.2 Liabilities

Liabilities are existing debts or obligations that a reporting entity owes to other persons or entities.

To qualify as a liability, an item must:

• require sacrifices of future economic benefits or payment of funds;

• involve a present obligation to make those future payments;

• be owed to another entity; and

• result from past transactions.

As with assets, liabilities are categorised for reporting purposes into current liabilities and non-

current liabilities. Liabilities are then further classified according to their type, eg creditors,

borrowings or provisions.


5.1-4

Current Liabilities

Current liabilities are those liabilities of the reporting entity that would in the ordinary course of

operations of the entity be due and payable within twelve months after the end of the reporting

period. Examples include creditors and some employee entitlements, such as annual leave.

Non-current Liabilities

Non-current liabilities include all liabilities other than current liabilities, for example, finance lease

liabilities due for payment beyond twelve months after the end of the reporting period and some

employee entitlements, such as long service leave that are not due for payment within twelve

months.

Chapter 7 provides a more detailed explanation of liabilities.

5.1.3 Equity

Equity is the Government’s interest in the assets of the reporting entity, after deduction of its

liabilities. Equity equals net assets or net worth and will comprise accumulated funds and reserves.

The definition of equity is discussed in more detail in Chapter 8.

5.1.4 Revenues

Revenues include all inflows to an entity that increase the capital or net assets of the entity, such as:

• Government payment for outputs;

• amounts equivalent to the entity's liabilities assumed by other entities (eg Superannuation);

• contributions such as grants or gifts to the entity, including resources received free of

charge;

• user charges;

• interest;

• other revenue, eg from sales of inventory or other assets.

Revenues that a department might collect on behalf of the Territory also include rates, taxes, fees,

fines and Commonwealth Government grants.


5.2-5

All of the above revenue types are operating revenues. Operating revenue is revenue that results

from the ordinary operations (ie activities) of the entity. Entities may also have extraordinary

revenues, which result from extraordinary operations of the entity (Refer section 9.3.7).

Chapter 9 further explains the definition of revenue, including details of each class of revenue.

5.1.5 Expenses

Expenses are costs incurred in the entity's operations and service delivery.

Expenses do not necessarily relate solely to the payment of cash. Any consumption or diminution

of service potential or future economic benefits that occurs during the reporting period is an

expense and a cost to the reporting entity in providing its service. Examples of this include

consumption of assets (eg depreciation), the consumption of office supplies, employee expenses

relating to a financial period, administration costs and rent.

For Financial Statements purposes and to enable analysis of financial information and results,

expenses are to be classified according to their nature or type, eg employee entitlements,

depreciation or supplies.

Chapter 10 further explains the definition of an expense.

5.2 Relationship Between the Elements and Financial Statements

5.2.1 Statement of Financial Position

The Statement of Financial Position shall disclose the assets, liabilities and equity of the

Government Department as at the reporting date. (AAS 29, paragraph 6.1)

The relationship between these elements of the Statement of Financial Position can be expressed in

the following equation:


5.2-6

ASSETS - LIABILITIES = EQUITY

The accumulated operating result over a period is shown in the Statement of Financial Performance

of the department and represents the final results of activities after allowing for all expenses and

revenues. The accumulated operating result is incorporated in the Statement of Financial Position

through the Equity section. In this way it ensures that any change in the Statement of Financial

Performance is also reflected in the Statement of Financial Position. This relationship is illustrated

in the diagram below.

STATEMENT OF FINANCIALPERFOMANCE

(EXTRACT)

STATEMENT OF FINANCIALPOSITION (EXTRACT)

OPERATING RESULTAT END OF FINANCIAL YEAR results in a

CHANGE INEQUITY

5.2.2 The Statement Of Financial Performance

The Statement of Financial Performance represents the results from operations over a

financial period. It reports the revenues and expenses of a department for the reporting

period.

The Statement of Financial Perfomance will disclose revenue from government for the payment for

outputs, user charges, interest earned and other revenues less, expenses of the department. This

will disclose the operating result for the department.


5.3-7

REVENUE

-EXPENSES

=OPERATING RESULT BEFORE

EXTRAORDINARY ITEMS

-EXTRAORDINARY ITEMS

=OPERATING RESULT AFTER

EXTRAORDINARY ITEMS

+INJECTIONS FOR OPERATIONS

=INCREASE (OR) DECREASE IN

ACCUMULATED FUNDS

The Statement of Financial Performance will enable users to identify:

• the sources of revenues;

• the cost of goods and services provided during the period;

• capital injections required to sustain operations; and

• the net result.

5.3 Principle of “Recognition”

The principle of “recognition” refers to the identification and recording of an element in the

financial records of the entity. It is the initial acceptance by the entity that the element relates to the

activities of the entity. “Disclosure” refers to the presentation of items in the Financial Statements

of the entity.

Where an element is “recognised” it will be reported in the Financial Statements of that reporting

entity. Where an item is disclosed and not recognised it only appears in the Notes to the Financial

Statements.


5.3-8

Recognition Criteria

An asset shall be recognised when and only when:

(a) it is probable that future economic benefits embodied in the asset will eventuate; and

(b) the asset possesses a cost or other value that can be measured reliably.

A liability shall be recognised when and only when:

(a) it is probable that the future sacrifice of service potential or future economic benefits

will be required; and

(b) the amount of the liability can be measured reliably.

Assets and liabilities are disclosed in the Statement of Financial Position with further details of these

account balances, where appropriate, being disclosed in the notes forming part of the Financial

Statements.

A revenue shall be recognised in the Statement of Financial Performance, in the

determination of the result for the reporting period, when and only when:

(a) it is probable that the inflow or other enhancement, or saving in outflows, of future

economic benefits, has occurred; and

(b) the inflow or other enhancement, or saving in outflows of service potential or future

economic benefits can be measured reliably.

An expense shall be recognised in the Statement of Financial Performance, in the

determination of the result for the reporting period, when and only when:

(a) it is probable that the consumption or loss of future economic benefits resulting in a

reduction in assets and/or an increase in liabilities has occurred; and

(b) the consumption or loss of future economic benefits can be measured reliably.

Revenues and expenses are disclosed in the Statement of Financial Performance with further detail,

where appropriate, in the notes forming part of the Financial Statements.

Territory (administered) assets, liabilities, revenues and expenses of a department are disclosed

separately as “Territory (administered) items” (Refer Section 5.4).


5.4-9

In relation to the recognition criteria outlined above “probable” is taken to mean more likely than

not. Assessments as to the degree of certainty attaching to the future economic benefits (either

those that are available or those to be consumed) are made on the basis of available evidence.

Reliable measurement is also a prerequisite in the recognition criteria above. In the case of

liabilities, revenues and expenses it is usual for supporting evidence to exist for the amounts to be

paid or received. In the case of assets the appropriate measurement basis for an asset will depend

upon the model of accounting being applied (refer Chapter 6), eg, historical cost or independent

valuation.

There may be other items that do not meet the recognition criteria outlined above that should be

disclosed in the Notes to the Financial Statements if they are considered to be relevant to users of

those statements in their analysis of a department’s performance. This is discussed further in

Chapter 11.

5.4 “Departmental” and “Territory (Administered)” Items

Policy

Items of Departments will consist of two types:

Departmental; and

Territory (Administered).

These items are to be accounted for and reported separately (refer Chapter 11).

Commentary

The Manual requires the financial statements to be split between Departmental and Territory

(Administered) items. This split is an attempt to make more efficient use of financial statements by

providing mechanisms to enable a more detailed assessment of management’s performance.

Previously the financial statements have been limited to an assessment of the performance of the

organisation as a whole.

The split between Departmental and Administered items enables the full costs of outputs or other

service delivery to be isolated, thereby avoiding the distortion caused by including costs which do


5.4-10

not directly relate to the outputs. For example, grant payments where the conditions of grant are

specified by Government, the Commonwealth or other agency or legislation.

Achieving an appropriate split between Departmental and Administered items requires a

professional approach. However, a simplistic interpretation of AAS 29 requirements has previously

resulted in large balances being held in Territorial balance sheets. For example, before 1 July 1998,

virtually all infrastructure assets were classified as Territorial even though a strict application of the

AAS 29 guidelines indicates that such assets are generally controlled by Departments who manage

them. This policy was changed from 1 July 1998.

AAS 29 “Financial Reporting by Government Departments” adopts a classification concept for

revenues, expenses, assets and liabilities on the basis of control. “Control” of an asset is defined as

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 (AAS 29 para 18.1). Broadly, the

responsibilities of a government department may encompass the levying and/or collection of taxes,

fines, fees, the provision of goods and services at a charge to recipients, and the transfer of funds to

eligible beneficiaries. These activities may give rise to revenues and expenses which are not

attributable to the department (para 18.1). In other words, these are administered activities.

The separate disclosure of Departmental and Administered items allows users to identify separately

items that an entity can directly control and items for which it is accountable but does not control.

If administered assets or revenues of a department were included in the Statement of Financial

Performance and Statement of Financial Position, it could be incorrectly assumed that those

amounts were available for use by the particular department in the delivery of its outputs. The

framework requires that information about such items be disclosed elsewhere in the general purpose

financial report of the department that administers the item because that information may be

relevant for performance assessments, including assessment of accountability. This information

may be useful because, even though a particular department does not control such items, the

effective and efficient administration of those items is a part of the overall responsibility of that

department.

The responsibilities of departments usually encompass a wide variety of functions often making it

difficult to determine with suitable precision an appropriate split between Departmental and


5.4-11

Administered accounts. Therefore, while some items will be more obviously under (or not under)

the direct control of a department, other items will be more difficult to categorise. This Manual

provides some additional detailed guidance aimed at achieving an appropriate split between

Departmental and Administered accounts.

Departmental Items: Departmental items are those items over which the department has

discretion, responsibility and authority. For example, if the department has:

• the capacity to benefit from the use of assets or funds in the pursuit of its objectives and to

deny or regulate the access of others to those assets or funds;

• discretion and responsibility for how funds are spent; or

• expended funds, incurred a liability or received free services related to the operations under

its control;

it would be considered that the department controls the item.

Territory (Administered) Items: Territory (Administered) items are revenue, expenses, assets and

liabilities that a department administers but does not control. These items relate to activities

performed on behalf of the Territory. For example, an item would generally be regarded as a

Territory (administered) item if the department:

• has restricted or no discretion in relation to the item;

• has restricted or no discretion to increase or reduce the item;

• has responsibility for the item, but restricted or no authority over its use; or

• is responsible only for the collection and/or transfer of the item.

Items are generally likely to be Territory (Administered) where decisions relating to their use are

primarily made by government. Examples of Territory (Administered) items include rates and

taxes.

5.4.1 Departmental and Territory (Administered) Revenues

Departmental revenues are those that the department is able to retain for discretionary use, eg

operating revenues and where the department is entitled to retain revenue on sale of assets. These

revenues include those from fee-for-service type activities.


5.4-12

Territory (Administered) revenues are those revenues which a department collects as an agent of

government. Examples of Territory (Administered) revenues include those generated from:

• property rates;

• motor vehicle registration;

• parking fines;

• parking fees (being regulatory in nature);

• drivers’ licences;

• land tax; and

• other Territory taxes.

Appropriations determined by reference to legislation or authority which are specified for transfer

to eligible beneficiaries are Territory (Administered) because their amount and distribution are

essentially specified by government. Examples of items that are usually administered revenues

include:

• grants;

• community assistance; and

• welfare assistance.

5.4.2 Departmental and Territory (Administered) Expenses

Departmental expenses arise where the department has some discretion in the way funds are used,

for example, administrative costs and salaries or where the department retains responsibility for the

relevant costs. Grant moneys paid out may also be controlled where the agency is able to determine

both the amount of the grant and the recipient of the grant. This may occur where eligible persons

or organisations apply and the department has the capacity to determine which applicants receive

funds and the amounts to be paid, without reference to an externally determined schedule of

payments. Where the department does not have the discretion outlined previously over the grants

and other expenditures, they should be treated as Territory (Administered) items.

There will be many cases where departmental expenses directly relate to the collection of Territory

(Administered) revenue. This is not an inconsistency in the framework. This is in line with the

spirit of AAS 29 Financial Reporting by Government Departments, and the framework set out in


5.4-13

this Manual, as it will result in the disclosure of the full cost of collection as the costs of an output,

eg revenue collection services output within the Department of Treasury (Treasury).

Territory (Administered) expenses are those expenses which the agency handles, on behalf of

Government, under a rigidly structured set of criteria and schedule of entitlement, eg transfer

payments. Where an eligible beneficiary has an entitlement under a law or authority and the

department carries out the payment and recording process, such expenses are Territory

(Administered) as the department has no control over the amounts to be expended.

5.4.3 Departmental and Territory (Administered) Assets

Departmental assets are controlled by the department which controls the flow of future economic

benefits or service potential from the asset. This has been interpreted as the department which

fulfils a variety of possible criteria, such as the ability to:

• use the asset to contribute to the department’s outputs;

• obtain a benefit from the sale of the asset;

• charge for use of the asset; and/or

• deny or regulate use of the asset.

The assets that are to be reflected in the Departmental financial records are those resources over

which management exercises significant influence or control (ie Departmental assets) and those

assets that are specifically allocated to contribute to producing department’s outputs.

Where the above tests are satisfied, the asset should be accounted for as a departmental item.

Where control is minimal, the asset should be accounted for as a Territory (Administered) item.

These Territory (Administered) items are only controlled at the Whole of Government level.

Examples of departmental assets may include assets used in the operations of a department:

• office equipment and furniture;

• computer equipment;

• infrastructure assets; and

• certain cash balances subject to revenue retention arrangements.

Examples of Territory (Administered) assets would usually include:


5.4-14

• heritage assets

Infrastructure assets

The fact infrastructure assets provide a service to the general community does not necessarily mean

that they are administered by the responsible agency. Indeed, as these assets tend to be used to

deliver services which the responsible agency has agreed to provide with the Government, it can be

seen that a benefit is derived by the agency. Additionally, as agencies tend to have exclusive use of

infrastructure assets and can regulate access to them, the “controlled” criteria specified under AAS

29 is clearly met.

Section 15A of the Financial Management Act 1996 (FMA) allows the Treasurer to require

agencies to apply a correct classification of departmental and Territorial assets. Agencies must

ensure they have transferred all infrastructure assets, liabilities and associated revenues and

expenses from Territorial to Departmental statements and, if not yet done, are to be transferred as

soon as possible. Such transfers were to have been effected from 1 July 1998. From 1 July 1998,

infrastructure assets may only be classified as Territorial if specific approval is obtained from

Treasury.

5.4.4 Departmental and Territory (Administered) Liabilities

“Departmental” liabilities would include amounts owed but unpaid (eg trade creditors) at the end of

an accounting period.

“Territory (Administered)” liabilities are those over which the department has no, or minimal,

management discretion. This includes amounts that may have been prepaid (eg rates and taxes) to

the department, at the end of an accounting period.

Policy

Agencies are to apply a strict interpretation of the “controlled” versus “administered”

classifications as specified above.

Infrastructure assets, for instance, are for all practical purposes “controlled” and must be

reported in the departmental financial statements. Therefore, all agencies must transfer all

infrastructure assets, liabilities, and associated revenues and expenses (ie. those not being


5.4-15

regulatory in nature) from Territorial to Departmental statements as early as possible. After

1 July 1998, any infrastructure assets may only be classified as Territorial if specific approval

is obtained from Treasury.

Agencies should also note that in some instances, revenues currently classified as User

Charges may require reclassification to Taxes, Fines and Fees (where fees include regulatory

charges).

Disclosure

The Financial Statements of a department will include, in the Statement of Financial

Performance and Statement of Financial Position, items which the department controls.

Assets, liabilities, revenues and expenses that are administered on behalf of the Territory will

be disclosed separately from departmental items in the Statement of Revenues and Expenses

on behalf of the Territory and the Statement of Assets and Liabilities held on behalf of the

Territory. Details of how departments are to disclose Territory (Administered) items are

contained in Chapter 11.


3/07/2001 i


6. Assets ............................................................................... 6.1-1

6.1 Introduction .............................................................................6.1-1

6.2 Measurement of Assets............................................................6.2-2

6.3 Classification of Assets............................................................6.3-3

6.4 Current Assets .........................................................................6.4-4

6.4.1 Cash ..................................................................................................6.4-4

6.4.2 Receivables .......................................................................................6.4-6

6.4.3 Provision for Doubtful Debts ...........................................................6.4-9

6.4.4 Investments.....................................................................................6.4-10

6.4.5 Inventories ......................................................................................6.4-12

6.4.6 Work-In-Progress ..........................................................................6.4-14

6.4.7 Other Current Assets .....................................................................6.4-14

6.4.7.1 Prepayments .................................................................................................6.4-14

6.4.7.2 Consumable Stores and Supplies.................................................................6.4-15


Section-Page3/07/2001 6.1-1

6. Assets

6.1 Introduction

Assets are a significant part of the Territory's public sector resources. The Committee of Inquiryinto “Assets and Public Debt of the ACT” (Else-Mitchell Report) estimated the value of theTerritory resources in excess of $6.7 billion at May 1990. Over a six-year period since 1989 theTerritory has added assets in excess of $1 billion through capital appropriations alone.

A prerequisite for good asset management is relevant, reliable and timely information that will assistin:

• identification and recording of assets;

• facilitating the management of risk associated with the control of assets;

• determining the full cost of the goods or services produced (including the contribution of

assets to those services) so as to assist in program management;

• assessing whether the stock of assets controlled by an organisation is being appropriately

maintained;

• assessing whether the assets are being utilised in the most cost effective manner to

efficiently meet the objectives of the organisation and Government; and

• planning for future replacement of assets.

This Chapter provides guidance to all financial managers across the ACT Government Service inaccounting for Territory assets.

Detailed instructions on asset accounting and management are the responsibility of each entity andwhen developed must be consistent with the requirements of this Manual.

Definition

Assets are defined as future economic benefits that an entity controls as a result of past transactionsor other past events. The future benefits are not limited to situations involving future cash inflows.The future benefits refer to a capacity to provide goods and services in accordance with the entity’sobjectives including the provision of goods or services to a beneficiary.

For departments, assets are grouped into two broad categories in terms of the degree of controlexerted over them by the reporting entity: departmental and Territory (administered). In terms of



the definition, Territory (administered) assets are controlled at the Territory level rather than atdepartmental level. This categorisation is discussed in section 5.4.

The definition includes three essential characteristics:

• future benefits;

• there must be control by an entity over the benefits; and

• a transaction or other event giving rise to the entity's control over the future benefits must

have occurred.

6.2 Measurement of Assets

As discussed in section 5.3, one of the criteria for recognition of an asset is that it “possesses a costor other value that can be measured reliably”.

What Does “a Cost” Mean?

Entities should account for all acquisitions of assets (where there is a cost) at cost of acquisition inaccordance with AAS 21 Accounting for the Acquisition of Assets (including Business Entities).This amounts to the sum of the purchase consideration and the costs incidental to the acquisitionsuch as freight, installation, labour costs (eg costs of consultants), etc. (See also section 6.6 -Acquisition of Non-Current Assets).

Where an asset is produced rather than acquired, the cost of the asset is the cost of producing it.Refer Sections 6.7 - Capital Works in Progress, and 6.13.2 - Capitalisation of Expenditure.

What Does “Other Value” Mean?

It may be necessary to determine a value other than cost for assets:

(i) where the details of cost are not known or are not considered reliable; or(ii) where it is necessary to reassess the values of non-current assets at a particular point in

time, ie revalue the assets.

Where assets are received free of charge or for nominal consideration they should be recorded attheir fair value. The asset’s fair value is measured having regard to its highest and best use, whichmay differ from the entity’s existing or intended use for the asset. Fair values should be determinedwith reference to the deprival valuation framework. For the full range of circumstances affectingthe valuation of assets and the deprival valuation framework, refer to section 6.11, Revaluation ofNon-current Assets.



Assets acquired through a restructuring of administrative arrangements (or other capital transfers)may be recognised at the amounts contained in the transferor's records prior to transfer. (Refersection 6.6.1.1 - Asset Transfers Resulting from Restructurings and Other Resource Transfers.)

In some cases an asset may have a cost or other value that can not be reliably measured. The Notesto the Financial Statements should provide details of this situation, so that readers of the FinancialStatements are fully informed of all relevant information. Such disclosure would contain anexplanation of the type and nature of the assets, the fact that cost or values cannot be reliablymeasured and an indication of why this situation exists (eg no comparable assets, no comparablemarket, inadequate historical records, or the unique function of certain assets). This provision doesnot cover the situation where an agency has simply not yet determined a basis for measurement.(Refer section 11.3.7)

6.3 Classification of Assets

To facilitate financial analysis, assets are classified in accordance with their relative liquidity; ie anentity should classify its assets as either current or non-current depending upon when the entityexpects to either consume the asset or convert it into cash.

Current Assets

Current assets are short-term in nature and are in the form of cash, or expected to be eitherconverted into cash or consumed within 12 months of the reporting balance date. Examplesinclude cash and cash equivalents, accounts receivable, and inventory.

Non-Current Assets

Non-current assets are all assets other than current assets, ie assets that are not expected to beconverted into cash or consumed within 12 months after the end of the reporting period.Non-current assets are expected to possess service potential, or provide a benefit, beyond the endof the next reporting period.

Classes of Assets

All assets should be disclosed by class. A “class of assets” means a grouping of assets within acategory, having a similar nature or function in the operations of the entity. For the purpose offinancial reporting, classes of assets are shown as single items without supplementary dissection.For example, cash on hand is one class of asset, cash at bank is another class.



“Departmental” or “Territory (administered)” Assets of Departments

These concepts are discussed in detail in section 5.4. Departments reporting in accordance withChapter 11 are required to report departmental assets in the Statement of Financial Position, andTerritory (administered) assets in the Statement of Assets and Liabilities held on behalf of theTerritory.

6.4 Current Assets

Current assets are classified into the following categories:-

• Cash (Section 6.4.1)

• Receivables (Section 6.4.2)

• Provision for doubtful Debts (Section 6.4.3)

• Investments (Section 6.4.4)

• Inventories (Section 6.4.5)

• Work-in-progress (Section 6.4.6)

• Other (Section 6.4.7)

6.4.1 Cash

Definition

Cash constitutes the following classes:

(a) cash on hand (including cash in transit) - cash, cheques and cash advances;

(b) cash at bank (where applicable) - bank balances adjusted for unpresented cheques andoutstanding deposits; and

(c) cash equivalents - that is highly liquid investments with short periods to maturity which arereadily convertible to cash at the investor’s option and are subject to an insignificant risk ofchanges in value(Refer Australian Accounting Standard AAS 36 - Statement of FinancialPosition).

Furthermore for the purpose of preparation of statements of cash flows, AAS 28 Statement of CashFlows, also includes as cash equivalents borrowings which are integral to the cash managementfunction and which are not subject to a term facility.



Cash includes cash awaiting banking, cash paid into a Territory bank account, and cash sent fromdivisions or regional units but not yet received by Head Office (ie cash in transit). In addition, cashat bank in relation to advances, revenue and suspense accounts, etc, as per cash book balances, fallswithin this category. Holdings of trust money are excluded from the definition of cash as they arenot Territory assets and should be separately accounted for and included in the Notes to theFinancial Statements (refer Section 11.3.7).

Policy

• Entities shall determine cash balances and bank account balances and reconcile these to

supporting documentation and General Ledger balances at period end.

• Cash at bank and deposits at call are to be classified as “cash” in the Statement of

Financial Position.

• Cash at bank, deposits at call and borrowings that are integral to the cash management

function and which are not subject to a term facility are to be classified as “cash” in the

Statement of Cash Flows.

• Departments shall separately identify “departmental” and “Territory (administered)”

cash.

Cash on Hand

Cash on hand is represented by those cash amounts (excluding trust money) collected and not yetpaid into a bank account. It also includes balances on hand of imprest accounts for petty cash andadvances. Vouchers on hand are recorded as accrued expenses and accruals.

Cash at Bank

Cash at Bank is all bank accounts for which the entity is responsible, other than bank accountsholding trust money.

Entities are to report the reconciled cash at bank balance, rather than the bank account balance,when reporting cash at bank. Bank reconciliations begin with the Bank Account Statementbalance, which is then adjusted for outstanding deposits, unpresented cheques, and any otherappropriate adjustments necessary to reconcile with the balance recorded in the entity’s Ledger.



Cash Equivalents

Entities shall determine and document cash equivalents in a similar manner to cash on hand.Examples of cash equivalents are franking machine credits held as at balance date and deposits atcall.

Cash invested by or on behalf of an entity

Where another Government entity is holding any monies of the reporting entity, for the purpose ofinvesting those funds, the reporting entity’s Financial Statements should disclose those funds asinvestments (refer Sections 6.4.4 and 6.5.2).

Disclosure

The Statement of Financial Position shall include cash balances at the end of the reportingperiod as a current asset under the title “cash”.

A Statement of Cash Flows consistent with the requirements of AAS 28 Statement of CashFlows is to be prepared for inclusion in the financial reports of entities.

Notes to the Financial Statements are to:

(i) disclose the composition of the cash balance reported in the Statement of

Financial Position;

(ii) separately disclose details of any trust money that the entity held during the

reporting period;

(iii) detail the policy for determining which items are classified as cash in the

Statement of Cash Flows; and

(iv) reconcile the amount of cash at the end of the reporting period as disclosedin the Statement of Cash Flows to the related items in the Statement ofFinancial Position.

A note to the Financial Statements shall disclose the composition of the cash balance, asreported in the Statement of Financial Position.

6.4.2 Receivables

Definition

Receivables (also commonly known as debtors) are amounts owing to an entity at the end of anaccounting period, for goods the entity sold or services the entity rendered prior to the end of thataccounting period.



This represents the total value of amounts that the entity is due to receive, as at the end of theaccounting period, and that remain uncollected at that date.

The recognition of a receivable is usually evidenced by the raising of an invoice (as distinct from ataxation ‘assessment’). However, an invoiced amount does not become a receivable until theinvoicing entity has provided the relevant goods or services.

There may be instances where receivables can arise without an invoice being raised, for exampleunder a contractual arrangement. If an entity has any contractual arrangements that do not involveformal billing; the entity should examine these as at balance date to ensure that revenue earnedunder contracts is included in the financial statements of the period that the entity earned therevenue.

The amount reported as receivables shall exclude amounts which have been collected but notbanked, as these amounts should be reported as “cash on hand”.

Receivables might also include other amounts outstanding at the end of the reporting period, egoutstanding loans and advances.

For Departments, receivables also include Taxation Receivables. These include paymentsoutstanding as at the end of the accounting period, for returns assessed and assessments issued ordetermined prior to the end of that accounting period. Taxation Receivables also include the valueof returns and assessments, that a Department receives or determines in the month following theperiod being reported, and that relate to activity in either the period being reported or earlierperiods.

Policy

• Accounts receivable should be updated at the time an invoice is raised, or a loan or

advance given (or as soon as practicable after that date) and the balance due at the

end of the accounting period brought to account in the financial statements. The

raising of an invoice must be consistent with the amount of goods supplied or the

period of service provided up to the balance date.

• Accounts receivable should also be updated at the time a return is assessed or an

assessment is issued or determined (or as soon as practicable after that date) and the

balance due at the end of the accounting period brought to account in the financial

statements.



• The accounts receivable system and General Ledger should record accounts

receivable that exist up to and including the last day of the reporting period.

• Entities should regularly generate accounts receivable reports, to determine

outstanding debtor balances and to facilitate action to collect overdue balances.

• At the end of the accounting period, the accounts receivable report should be

reviewed for balances that are unlikely to be collectable. These should be provided

for as doubtful debts whilst those which will not be collected should be written off (ie

deleted from the ledger) as bad debts at that time (refer Sections 6.4.3 and 10.3.6).

• The list of receivables at period end shall not include any receivables that have been

written off as bad debts during the financial year (refer section 10.3.6).

• Entities must reconcile accounts receivable records to the General Ledger at period

end. The reconciliations are to be documented, with all reconciling items identified

and adjusted promptly.

• Where an entity’s accounts receivable are supported by subsidiary ledgers, the entity

should regularly (eg monthly) reconcile these subsidiary ledgers to their respective

control accounts in the General Ledger.

• Without limiting the classes that the Notes to the Financial Statements may include,

classes for both current and non-current receivables shall include:

- trade debtors;

- other debtors;

- loans; and

- accrued revenue.

• Departments must ensure that “departmental” and “Territory (administered)”

receivables are separately identifiable.

Disclosure

The Statement of Financial Position, under the title “Receivables”, shall include receivables(net of the provision for doubtful debts) outstanding at the end of the reporting period. TheNotes to the Financial Statements shall record the gross receivables less the provision fordoubtful debts. Where the entity does not expect settlement of the debt within twelvemonths, the entity should include the debt as a non-current “receivable” asset.

A Note to the Financial Statements shall show the classes of receivables constituting thebalance disclosed in the Statement of Financial Position or Statement of Assets and



Liabilities held on behalf of the Territory, separately disclosing the portion of each class ofreceivable that relates to:

• entities outside Government, and

• other ACT Government entities.

Without limiting the classes that the Notes may include, the following classes shall appear(where appropriate) as current assets and as non-current assets:

• trade debtors;

• other debtors;

• loans; and

• accrued revenue.

Entities shall report receivables and accrued revenues as one category of assets, titled“Receivables”, in both the Statement of Financial Position and the Statement of Assets andLiabilities held on behalf of the Territory. The Notes to the Financial Statements mustseparately identify these amounts and any related provisions for doubtful debts or losses(refer section 6.4.3).

The Notes to the Financial Statements are to disclose an age analysis of the gross value (iebefore deducting the provision for doubtful debts) of current receivables, as at the end of thereporting period. This analysis is to show amounts that are current and not overdue, andamounts that are overdue for less than 30 days, 30 to 60 days, and more than 60 days.

6.4.3 Provision for Doubtful Debts

Definition

The provision for doubtful debts is an estimate of the amount of receivables outstanding at the endof the reporting period that the reporting entity does not expect to recover but has not yet writtenoff as bad debts.

Bad debts are receivables that the entity considers uncollectable. The debtor may not be able tomake payment, may be uncontactable, or the entity may find that it is impracticable to enforcepayment.

Policy

• Entities shall make adequate provision for doubtful debts at the end of each reporting

period.


Section-Page3/07/2001 6.4-10

• Entities shall write off all known bad debts as they become recognised as “bad” (refer

section 10.3.6).

• For Departments, “departmental” and “Territory (administered)” provisions for

doubtful debts should be separately identifiable.

Disclosure

Entities should show the provision for doubtful debts as a deduction from the gross value ofreceivables in the Notes to the Financial Statements. Receivables are shown as a net figurein the Statement of Financial Position (ie after deducting the provision for doubtful debts).

6.4.4 Investments

Definition

Investments constitute expenditure of cash or its equivalent to obtain a subsequent cash orequivalent inflow and includes investments in subsidiary entities. Classes of investments includeterm deposits, short term securities, government fixed interest bonds, shares and equities, propertyinvestments, and interests in business undertakings.

Policy

• All investments are to be recorded and reconciled to supporting documentation at the

close of the reporting period.

• Monetary investments are to be measured at the present value of the cash flows

associated with their service potential and eventual payment. Such present values

should be determined by discounting the cash flows at the rate of interest implicit in

the original contract or other arrangement. Most monetary assets and liabilities are

recognised at their face values because the implicit rate of interest is zero. Entities

should make reference to the professional literature for further guidance.

• For the treatment of specialised financial instruments such as hedging and swaps,

entities should make reference to AAS 33 Financial Instruments .

• Departments are required to disclose investments as “departmental” and “Territory

(administered)”.

• Entities that are active in the finance industry are to measure each monetary

investment at the market value applicable to that investment at balance date. This is

to be consistent with the treatment applied in the finance sector. “Non-finance

industry” entities are to measure investments at present value as detailed above.


Section-Page3/07/2001 6.4-11

Disclosure

The Notes to the Financial statements should disclose the accounting policy regardinginvestments, and the book and market values (where known). Where market value is notknown, the Notes should include narrative disclosure.

Departments are to disclose Territory (administered) investments in the Statement of Assetsand Liabilities held on behalf of the Territory.

The Notes to the Financial Statements are to dissect investments into the following classes:

• at call deposits & term deposits;

• short term securities;

• government fixed interest bonds;

• shares & equities;

• property investments;

• interests in business undertakings; and

• other investments.


Section-Page3/07/2001 6.4-12

6.4.5 Inventories

Definition

Inventory is defined in AAS 2 Measurement and Presentation of Inventories in the Context of theHistorical Cost System as goods, other property and services:

• held for sale in the ordinary course of operations;

• in the process of production for such sale; or

• to be used up in the production of goods, other property or services for sale, including

consumable stores and supplies.

Inventory excludes consumable stores and supplies (eg stationery) that do not relate to theproduction of goods and services for sale. If these items are material, the Financial Statementsshould report them as “Other Assets” (refer section 6.4.7.2).

Inventory also excludes depreciable non-current assets (refer section 6.5.4).

AAS 2 Measurement and Presentation of Inventories in the Context of the Historical Cost Systemcovers in detail the accounting treatment of inventory. The requirements of this Manual areconsistent with that Standard.

Policy

• The Financial Statements shall report inventory, where material. If the Inventory is

not material, the amount should be expensed in the period of purchase.

• Inventory items of the same or similar nature shall be aggregated and included if

considered material.

• Where inventory is material, a stocktake of all inventory items shall be performed at

appropriate intervals and at period end.

• Inventories are to be valued at the lower of cost or net realisable value.

• If inventories have been received free of charge, the value of these resources should be

disclosed as resources received free of charge (refer section 10.3.7). Where there is no

cost, net realisable value is to be used.

• Cost should be assigned to inventory by one of the following four methods:

- specific identification;

- first in first out (FIFO);

- standard cost; or


Section-Page3/07/2001 6.4-13

- average (weighted) cost.

• The principles as outlined in this section apply to raw materials held for resale, land

held for resale and work-in-progress (refer section 6.4.6). However, they do not apply

to inventories that are:

(i) forests, livestock or similar regenerative natural resources (this category ofinventory should be valued at costs incurred, until there is a marketableproduct, then at market value.);

(ii) Capital Works in Progress under long term engineering, real estatedevelopment or construction projects (refer section 6.7); or

(iii) marketable securities (refer section 6.4.4).

• Any inventories held for resale that are unlikely to realise their value as shown in the

records of the entity in the ordinary course of business, shall:

(i) be written down to their expected net realisable value; or(ii) have adequate provision made for the difference between their value as shown

in the records and their expected net realisable value.

• For Departments, “departmental” and “Territory (administered)” inventories shouldbe separately identifiable.

Disclosure

Material inventories must be reported as assets in the Statement of Financial Position orStatement of Assets and Liabilities held on behalf of the Territory.

The accounting policy regarding the basis of inventory measurement and the methods usedto assign costs to inventory quantities shall be disclosed in the Notes to the FinancialStatements.

Without limiting the classes that may be disclosed in the notes, the following classes ofcurrent and non-current inventories may be included:

• raw materials and stores;

• work-in-progress (refer to section 6.4.6);

• finished goods; and

• land held for resale.


Section-Page3/07/2001 6.4-14

6.4.6 Work-In-Progress

Definition

Work-in-progress refers to goods and services which are incomplete, and not yet ready for sale orbilling. Work-in-progress will equate to the accumulated costs of the partially completed productor service. Note that Work-in-progress does not refer to “Capital Works in Progress”, which arecovered in section 6.7.

Policy

Where applicable, Government entities should establish and maintain appropriate systemsand procedures for the identification and collection of work-in-progress costs.

Disclosure

Work-in-progress forms part of ‘inventory’ in the Statement of Financial Position.

The composition of inventory (inclusive of work-in-progress) shall be disclosed in the Notesto the Financial Statements.

6.4.7 Other Current Assets

6.4.7.1 Prepayments

Definition

Prepayments are payments made in one reporting period, in respect of goods or services that theentity expects to receive or consume in future periods.

Policy

• Prepayments shall be brought to account as assets at the end of the reporting period,

and expenses for that period correspondingly reduced.

• Expenses for subsequent periods shall be increased when the goods or services are

consumed.

• For Departments, “departmental” and “Territory (administered)” prepayments

should be separately identifiable.

Disclosure

Prepayments are to be recognised as assets in the Statement of Financial Position orStatement of Assets and Liabilities held on behalf of the Territory.


Section-Page3/07/2001 6.4-15

Prepayments shall be included in the class of “other” current and non-current assets.

The composition of “other assets” shall be given in the Notes to the Financial Statements.

6.4.7.2 Consumable Stores and Supplies

Definition

Consumable stores and supplies are those items that an entity purchases on a regular basis and arenecessary in the day-to-day operations of an entity. Such items would include maintenancematerial, office supplies, cleaning aids and stationery.

Policy

• Unless material in value (refer section 2.2.2.4), individual purchases of consumable

stores and supplies shall be recognised as an expense in the Statement of Financial

Performance at the time they are incurred.

• Stocks of consumable stores and supplies may be carried forward as an asset at

period end to the extent that they satisfy the following:

- the aggregate value is material;

- they do not relate solely to the reporting period;

- they can be clearly identified as contributing to the revenue earning or service

capability of the entity in the future; and

- the expenditure has given rise to an asset which may be reasonably expected to

realise its book value if sold.

• Consumable items that satisfy the definition of inventory (ie items held for sale or for

use in the process of the production of goods for sale or in the provision of services for

sale) shall be accounted for in accordance with section 6.4.5.

Disclosure

Consumable stores and supplies that are not material (refer Section 2.2.2.4) shall be includedin the Statement of Financial Performance as an expense of the reporting period.


Section-Page3/07/2001 6.4-16

Significant consumable stores and supplies that have been identified as assets should beincluded in the category of “other” current and non-current assets in the Statement ofFinancial Position.

The composition of “other” assets shall be given in the Notes to the Financial Statements.


3/07/2001 i


6.5 Non-Current Assets .................................................................6.5-2

6.5.1 Receivables .......................................................................................6.5-2

6.5.2 Investments.......................................................................................6.5-2

6.5.3 Inventories ........................................................................................6.5-2

6.5.4 Property, Plant and Equipment.......................................................6.5-2

6.5.4.1 Land................................................................................................................6.5-3

6.5.4.2 Buildings.........................................................................................................6.5-4

6.5.4.3 Leasehold Improvements ...............................................................................6.5-5

6.5.4.4 Plant and Equipment .....................................................................................6.5-6

6.5.4.5 Heritage and Community Assets ...................................................................6.5-7

6.5.4.6 Restricted assets .............................................................................................6.5-9

6.5.4.7 Infrastructure Assets ....................................................................................6.5-10

6.5.5 Intangibles ......................................................................................6.5-11

6.5.6 “Other” Non-Current Assets .........................................................6.5-12


3/07/2001 ii

6.5 Non-Current Assets

Non-current assets are classified into the following categories:

• receivables (Section 6.5.1);

• investments (Section 6.5.2);

• inventories (Section 6.5.3);

• property plant and equipment (Section 6.5.4);

• intangibles (Section 6.5.5);

• capital works in progress (Section 6.7); and

• other (Section 6.5.6).

6.5.1 Receivables

Receivables are described, and associated accounting and reporting policies addressed, in section

6.4.2 in relation to current assets. The same principles apply to non-current receivables.

6.5.2 Investments

Investments are described, and associated accounting and reporting policies addressed, in section

6.4.4 in relation to current assets. The same principles apply to non-current investments.

Investments in the form of interests in partnerships, trusts and other business entities are addressed

in section 6.13.6.

6.5.3 Inventories

Inventories are described with associated accounting and reporting policies addressed in section

6.4.5 in relation to current assets. The same principles apply to non-current inventories, although it

will be uncommon for inventories, which generally turn over regularly, to be non-current in nature.

6.5.4 Property, Plant and Equipment

Classes of Property, Plant and Equipment

Within the classification “Property, Plant and Equipment” there are a number of major classes of

assets as follows:

• land (section 6.5.4.1);

• buildings (section 6.5.4.2);



• leasehold improvements (section 6.5.4.3);

• plant and equipment (including computer software and databases as applicable) (section

6.5.4.4);

• heritage and community assets (section 6.5.4.5); and

• infrastructure assets (section 6.5.4.6).

Policy

ACTPS policy specifies a default recording threshold of $2,000. Assets below this level may

be expensed (written off in lieu of being capitalised as an asset) in the period of purchase.

Where an entity controls groups of similar assets which individually may be below the

recording threshold, but for which the aggregate value is material, they may be accounted

for in the Assets Register and included in the Financial Statements (refer section 6.9).

Entities are to ensure that for asset recording and reporting purposes a uniform policy is

fully implemented within the entity.

A threshold up to $5,000 may be applied following approval by the Department of Treasury.

An entity that requires a variation from the $2,000 threshold should apply to the

Department of the Treasury.

6.5.4.1 Land

Definition

Land will include all freehold and leasehold land which is controlled by the entity but shall exclude

land held for resale (refer section 6.4.5 Inventories) and land under infrastructure (refer section

6.5.4.5 Heritage and Community Assets).

Policy

• Land shall be recognised at its historical cost or most recent valuation (refer section

6.2 Measurement of Assets and section 6.11 Revaluation of Non-Current Assets).

• Land that meets the recognition criteria shall be recognised in the Assets Register and

in the Financial Statements of the entity.



• Where land does not meet the recognition criteria, it must be recorded in the Assets

Register and disclosed in the Notes to the Financial Statements.

• Land is not depreciated for accounting purposes.


land.

Land Disclosure

Land is part of the asset category titled “Property, Plant and Equipment”. Departmental

land is reported in the Statement of Financial Position, and Territory (administered) land is

reported in the Statement of Assets and Liabilities Held on Behalf of the Territory.

Where an entity has revalued land to an amount other than the cost of purchase, the entity

shall apply the disclosure requirement set out in section 6.11.

When it is not possible to reliably measure the value of land; the Notes to the Financial

Statements should disclose details of land holdings, such as size, use, location and the like.

6.5.4.2 Buildings

Definition

Buildings are structures which are separately identifiable from the land they are constructed on,

such as, offices, houses, factories, schools.

Policy

• Buildings shall be recognised at historical cost or most recent valuation (refer Sections

6.2 and 6.11).

• Buildings shall be revalued where appropriate (refer section 6.11).

• Buildings that meet the recognition criteria (refer section 5.3) shall be recognised in

the Assets Register and in the Financial Statements of the entity.

• Where buildings do not meet the recognition criteria (refer section 5.3), they must be

recorded in the Assets Register and in the Notes to the Financial Statements.



• All buildings shall be depreciated, other than those buildings which are 'Investment

Properties' as defined in AAS 4, (refer section 6.4.4). Depreciation is calculated on

the basis of the estimated useful life of the buildings (refer section 6.10).

• When buildings are revalued, depreciation is calculated on the revalued amount

(refer Sections 6.10 and 6.11).


buildings.

Disclosure

Buildings may be recorded at historical cost or at valuation (refer section 6.11 on valuation

policy).

Buildings are included in the asset category “Property, Plant and Equipment” in the

Statement of Financial Position but are disclosed as a separate class in the Notes to the

Financial Statements for information purposes.

For Departments, buildings that are Territory (administered) assets are disclosed in the

Statement of Assets and Liabilities held on behalf of the Territory and in the Notes to the

Financial Statements.

Each material class of asset within the category of Property, Plant and Equipment, including

the accumulated depreciation applicable to each, shall be included in the Notes to the


6.5.4.3 Leasehold Improvements

Definition

Leasehold improvements are capital expenditure items incurred in relation to leased assets eg

fit-out of leased premises. This applies to operating and finance leases.

Policy

• Leasehold improvements shall be recognised at their historical cost or at valuation

and shall be depreciated (refer section 6.10):

- over the unexpired period of the lease; or



- the useful lives of the improvements,

whichever is the shorter.• Improvements and fitouts made by the entity to leasehold buildings (whether

notionally leased from Estate Management Branch or a private landlord) are

regarded as leasehold improvements.

• Where the lessee has undertaken fitout, the asset amount relating to the leasehold

improvements that meet the recognition criteria (refer section 5.3) must be recorded

in the Assets Register and in the Financial Statements of the lessee.

• Where leasehold improvements do not meet the recognition criteria, they must be

recorded in the Assets Register and in the Notes to the Financial Statements (in

accordance with the principles set out in section 5.3).

Disclosure

Leasehold improvements are included under “Property, Plant and Equipment” in the

Statement of Financial Position and the Statement of Assets and Liabilities held on behalf of

the Territory.

The composition of “Property, Plant and Equipment”, including the accumulated

depreciation applicable to each material class of asset, shall be included in the Notes to the


6.5.4.4 Plant and Equipment

Definition

This category comprises:

• motor vehicles;

• mobile plant;

• air conditioning and heating plant which is not integral to a building;

• office equipment including computers and communications equipment;

• furniture and fittings; and

• other mechanical or electronic equipment.

This category would also include computer software and databases where appropriate. The policy

in relation to these items is addressed in section 6.13.7.



Policy

• Where plant and equipment is purchased and the cost exceeds the asset recording

threshold of $2,000, it is to be recorded in the Assets Register and reported in the

Financial Statements (refer section 6.9). Portable and attractive items that fall below

the $2000 threshold should also be included in either the Assets Register or a register

of portable and attractive items (refer to section 6.9).

• Plant and equipment shall be recorded at their cost of acquisition or at valuation and

depreciated over their estimated useful lives.


plant and equipment. Most assets in this category will be departmental in nature.

Disclosure

Plant and Equipment is included under “Property, Plant and Equipment” in the Statement

of Financial Position and Statement of Assets and Liabilities held on behalf of the Territory.




6.5.4.5 Heritage and Community Assets

(a) Heritage Assets

Definition

The term “heritage assets” refers to assets that the Government intends to preserve indefinitely

because of the assets' historical, cultural or environmental attributes. They are not usually available

for sale or for redeployment (for alternative use). The agency responsible under statute or

Administrative Arrangement Orders for the provision of a particular service would normally control

the heritage assets linked to that service.

Heritage assets may include:

• art, museum and library collections;

• historical buildings;



• other cultural assets;

• monuments; and

• certain land which will be preserved in its existing state to maintain the intrinsic value of the

Territory.

The service potential of the heritage asset lies in its aesthetic utility, that is, it is of historical

significance or fulfils a social need that is either cultural or environmental. There need not be a

functional purpose outside that utility (although some heritage assets may also provide a functional

service that can be associated with financial returns).

(b) Community Assets

Definition

Community assets are those assets which are provided essentially for general community use or

services.

Such assets would include:

• public parks and gardens including public playgrounds, lakes and botanical gardens;

• public sporting reserves; and

• land under infrastructure.

Policy

• Heritage and Community Assets that meet the recognition criteria (refer section 5.3)

shall be recorded in the Financial Statements of an entity.

• Heritage and Community Assets that do not possess a cost or other value that can be

reliably measured, should be listed in the Notes to the Financial Statements and

allocated a nominal value of $1,000 each.

Disclosure

Department’s Heritage and Community Assets are collectively included under “Property,

Plant and Equipment” in the Statement of Financial Position at $1,000 per asset.



Heritage and Community Assets that are Territory (administered) assets (refer section 5.4)

are disclosed in the Statement of Assets and Liabilities held on behalf of the Territory and in

the Notes to the Financial Statements. Those that are departmental are reported in the

Statement of Financial Position and in the Notes to the Financial Statements.

6.5.4.6 Restricted assets

Definition

Restricted assets are assets whose use is limited by or subject to externally imposed requirements or

regulations. Examples of such restrictions are where assets are permitted to be spent, or invested,

only in certain specified manners; or may be required to be held in a particular form for a specified

minimum period. Assets are not to be classified as restricted if their use is limited only by or due to

the inherent nature of the asset itself.

Policy

• Restricted Assets that meet the recognition criteria (refer section 5.3) shall be recorded in

the Financial Statements of an entity and be valued in accordance with the relevant

section of this chapter of the Accounting Policy Manual;

• Restricted assets that do no possess a cost or other value that can be reliably measured

should be listed in the Notes to the Financial Statements and allocated a nominal value of

$1,000 each.


Section-Page3/07/2001 6.5-10

Disclosure

The following must be disclosed in respect of assets whose use is wholly or partially

restricted:

• the identity and carrying amount of those assets; and

• the nature of those restrictions.

6.5.4.7 Infrastructure Assets

Definition

Infrastructure assets are assets that comprise public utilities and which provide essential services

and enhance the productive capacity of the economy. In the normal course of operations,

infrastructure assets are expected to be replaced.

Infrastructure assets include:

• bridges;

• main drains and water retarding basins;

• sealed roads and streets;

• unsealed roads;

• water supply reticulation systems;

• sewerage reticulation systems; and

• electricity systems.

Infrastructure assets exclude land under infrastructure, which is treated separately in section

6.5.4.5.

Policy

• Infrastructure assets shall be recognised at historical cost or most recent valuation

(refer sections 6.2 and 6.11).

• Infrastructure assets shall be revalued where appropriate (refer section 6.11).

• Infrastructure assets that meet the recognition criteria (refer section 5.3) shall be

recognised in the Assets Register and in the Financial Statements of the entity.


Section-Page3/07/2001 6.5-11

• Where infrastructure assets do not meet the recognition criteria (refer section 5.3),

they must be recorded in the Assets Register and in the Notes to the Financial

Statements.

• All infrastructure assets shall be depreciated. Depreciation is calculated on the basis

of the estimated useful life of each asset (refer section 6.10).

• When infrastructure assets are revalued, depreciation is calculated on the revalued

amount (refer section 6.10 and 6.11).


infrastructure assets.

Disclosure

Infrastructure assets are included under “Property, Plant and Equipment” in the Statement

of Financial Position and Statement of Assets and Liabilities held on behalf of the Territory

as appropriate and are disclosed as a separate class in the Notes to the Financial Statements.




6.5.5 Intangibles

Definition

Intangibles are defined as assets with no easily identifiable physical form such as copyrights,

patents, intellectual property, and goodwill.

Policy

• Where intangibles are able to be valued reliably and thus meet the asset recognition

criteria (refer section 5.3), they shall be recognised accordingly in the Assets Register

and reported in the Financial Statement of the entity.

• Where intangibles meet the definition of an asset but not the recognition criteria, they

must be recorded in the Assets Register and disclosed in a Note to the Financial

Statements (in accordance with the principles set out in section 5.3).


Section-Page3/07/2001 6.5-12

• Intangible assets shall be expensed to the Statement of Financial Performance over

the period of time during which the benefits from the asset are expected to arise (ie

amortised, refer section 6.10).

• Intangible assets shall be revalued where appropriate (refer section 6.11).


intangible assets for Departments.

Disclosure

An intangible asset should be recognised in the Statement of Financial Position of an entity

when:

(a) it is probable that the service potential or future benefits embodied in the asset will

eventuate; and

(b) the asset possesses a cost or other value that can be reliably measured.

For Departments, the net value after amortisation, for departmental intangible assets that

meet the recognition criteria, shall be reported in the Statement of Financial Position of an

entity. Territory (administered) intangible assets shall be reported in the Statement of

Assets and Liabilities held on behalf of the Territory.

The Notes to the Financial Statements shall detail the composition of “intangible” non-

current assets to provide information for users of Financial Statements.

The notes should disclose the gross value, ie the unamortised value, of material individual

intangible assets and the accumulated amortisation applicable to each such asset.

Where intangible assets do not meet the recognition criteria but information on those assetswould be relevant to users (refer commentary above), such information shall be disclosed inthe Notes to the Financial Statements.

6.5.6 “Other” Non-Current Assets

Other assets are described, and associated accounting and reporting policies addressed, in section

6.4.7 in relation to other current assets. The same principles apply to “other” non-current assets.


3/07/2001 i

TABLE OF CONTENTS

PAGE

6.6 Acquisition of Non-Current Assets 6.6-1

6.6.1 Assets Acquired At No Cost 6.6-1

6.6.1.1 Asset Transfers Resulting from Restructurings and Other

Resource Transfers 6.6-1

6.6.1.2 Assets Received by Gift or Donation 6.6-4

6.7 Capital Works in Progress 6.7-6

6.8 Capital Versus Maintenance Expenditure 6.8-6

6.9 Asset Register 6.9-8



6.6 Acquisition of Non-Current Assets

Policy

• Assets acquired must be measured at the acquisition date at the cost of acquisition in

accordance with AAS 21 Accounting for the Acquisition of Assets, paragraph 6.1. This cost

will be equal to the sum of the purchase consideration plus all costs incidental to the

acquisition necessary to render the asset operational.

Disclosure

The amount to be disclosed in the Financial Statements at the end of each financial period

for non-current assets which involve a cost of acquisition is that cost (or revalued amount)

less accumulated depreciation from the date of acquisition (or date of revaluation) to the

reporting date.

Categories required to be disclosed in the Statement of Financial Position are outlined in

Chapter 11. Further dissection of class is required in the Notes to the Financial Statements.

Cash outflows from the acquisition of assets are disclosed in the Cash Flow Statement under

“cash flows from investing activities.”

6.6.1 Assets Acquired At No Cost

6.6.1.1 Asset Transfers Resulting from Restructures and Other Resource Transfers

Definition

This section deals with the transfer of assets, between Government agencies, at no (or nominal)

cost. For example, in the public sector, assets and liabilities are often transferred from one entity to

another as a result of changes in the administrative arrangements of Government, or for other

administrative reasons not directly associated with the ordinary course of business.



Policy

Transfers Between Departments

Chief Executives may jointly agree to transfers assets between Government agencies at no

cost or for a nominal consideration or may be accompanied by a transfer of appropriation.

Treasury Memorandum 1998/1 provides formats for the transfer of appropriations. If a

nominal consideration is received the amount will offset the adjustment to equity but does

not impact on the transfer value of the asset.

Assets should be transferred at the lower of fair value or written down book value. Assets

will therefore require revaluation by the transferor prior to transfer, if fair value is less than

book value (see also section 6.11). This policy should maximise the use of asset revaluation

reserves for the write down of asset values prior to asset transfers. In most instances, an

independent revaluation is recommended and the costs of valuation will be met by the

transferor.

The values of assets being transferred should initially be recognised by the transferee and the

transferor at the same value. To ensure the recognition of identical values, Chief Executives

should sign off on the transfer value.

Fair value for transfers is to be determined using the deprival valuation framework,

considering whether or not the asset is surplus/not surplus from a whole of Government

perspective.

If an asset is considered surplus from a whole of Government perspective, and is to be

transferred prior to onselling to an external party, fair value is the market selling price.

Hence, if the receiving department chooses to sell the asset at a value less than the market

selling price, the loss is appropriately recognised in their books and not the transferor’s

books.

If the asset is not considered surplus from a whole of Government perspective, the fair value

is either current market buying price; or the lower of current replacement cost and

reproduction cost as determined by the transferor as at the date of transfer. The current



market buying price, replacement cost and reproduction cost as determined by the

transferor may differ from the values determined by the transferee, as the transferee may,

for example, be subject to differing legal constraints. If the values differ, the transfer value is

still the value as determined by the transferor, and subsequent to initial recognition, the

transferee will have to revalue the asset.

Where assets are transferred at no cost, from a transferor (or donor) Government

department to a transferee (or recipient) Government department, the following policies

apply:

• The transferor shall recognise the loss of the asset and a corresponding adjustment to

equity equal to the lower of fair value or written down book value (cost or value less

accumulated depreciation) of the asset or the written down value less the nominal

consideration received (see also section 8.2.2).

• The transferee shall recognise:

(a) an increase to its equity corresponding to assets over which it gains control for

which there has been no or nominal consideration (Section 8.2.2); and

(b) assets received at no cost or for nominal value, at the transfer value as

determined by the transferor prior to transfer.

• The payment of a nominal consideration (which does not reflect the underlying value

of the asset) is uncommon for transfers of assets that are due to changes in

administrative arrangements. Any nominal payments will reduce the amount of

equity adjustment outlined in paragraph (a) of the second dot point above.

Asset Transfers Involving Territory Authorities or Territory Owned Corporations

Where assets transfer at no cost, to or from a Territory authority or Territory Owned

Corporation (TOC):

• if the transfer is part of the initial establishment of the authority or TOC, both the

transferor and the transferee should account for the transfer as an equity

transfer, the same as outlined above for transfers between departments;

• if the transfer is part of the ongoing operations of the authority or TOC (or is not

part of the initial establishment of the authority or TOC), both the transferor and the



transferee should account for the transfer through the statement of financial position

as either a revenue or expense (as applicable).

Disclosure

Transfers Between Departments

Transferor

The asset transferred will be removed from the Statement of Financial Position and Asset

Register.

The capital distribution arising from the transfer shall be recognised in the capital

reconciliation table below the Statement of Financial Performance.

Transferee

The asset transferred shall be recognised in the Statement of Financial Position.

The capital adjustment arising from the transfer shall be recognised in the capital

reconciliation table below the Statement of Financial Performance.

6.6.1.2 Assets Received by Gift or Donation

Definition

Assets received by gift or donation are those assets received by an entity from non-Government

entities free of charge, eg medical equipment donated from the Woden Valley Hospital Women’s

Auxiliary.

Assets received by gift or donation in this section do not include assets internally transferred

between ACT Government entities (refer Section 6.6.1.1).



Policy

• Assets received by donation or gift shall be recognised:

- as revenues when the contributed assets qualify for recognition, that is, when

the entity obtains control over them; and

- at a fair value (refer section 6.2), provided:

. a fair value of the assets can be reliably determined; and

. the assets would have been purchased if not donated.

• Where it is unlikely that the entity would purchase the asset for use in service delivery

if not received by donation, the asset should be separately recorded in an Asset

Register at market value and disclosed separately for financial statement and

management purposes by way of a note (refer also AAS 29 paragraph 11.13(b)).

• Where an entity upon receiving a gift is required to make a reciprocal transfer of

economic benefits and, at the end of the accounting period this has not occurred, the

entity will have a liability to the extent of the non-performance of the reciprocal

transfer of economic benefits.

Disclosure

The amount to be disclosed in the Financial Statements of an entity at the end of each

financial period is:

• the fair value at date of acquisition less depreciation from date of acquisition to the

reporting date; and

• for assets acquired for which reciprocal benefits are to be provided, the outstanding

liability at the reporting date.

Disclosure of the written down book value is made in the Statement of Financial Position or

Statement of Assets and Liabilities held on behalf of the Territory with details of cost (or

value) and accumulated depreciation disclosed in the notes.

Non-current assets received by gift or donation should not be reported in the Cash Flow

Statement as there is no cash flow.



6.7 Capital Works in Progress

Definition

Capital Works in Progress are assets being constructed over extended periods of time or are assets

which require extensive installation work or integration with other assets. Examples include

buildings, infrastructure assets, depots etc. These assets contrast with simpler assets which are

ready for use when acquired, such as motor vehicles and equipment. Capital projects may have

elements that are associated with replacement, enhancement and/or new capital works (refer to

section 6.8 on Capital versus Maintenance Expenditure).

Policy

• Costs incurred on Capital Works in Progress shall be recognised as assets (ie

capitalised) in a Capital Works Register as the project proceeds. In this context costs

means the cost of work done, including incidental costs.

• Once the capital work is completed and ready for use, the asset is recognised in the

fixed Assets Register and General Ledger. Depreciation of the asset commences at the

point of time that the asset can be used.

• The Government entity that controls the work during the construction phase will be

required to report the asset. In a devolved budget environment, the controlling entity

is likely to be the entity with the budget.

Disclosure

The amount to be disclosed in the Financial Statements, at the end of each reporting period,

is the value of Capital Works in Progress completed as at the reporting date.

6.8 Capital Versus Maintenance Expenditure

Definition

Capital expenditure is expenditure which improves, enlarges or adds to the service potential of an

existing asset. (Where there is no previously existing asset, refer to section 6.13.2 Capitalisation of

Expenditure.)



Maintenance expenditure neither increases nor decreases the value of an asset. Rather, it is

incurred to maintain the existing service potential of an asset.

These definitions are in accordance with the general recommendations of AAS 9 “Expenditure

Carried Forward to Subsequent Accounting Periods”.

Policy

Expenditure on an existing asset should be capitalised and recognised in the Financial

Statements as a non-current asset where the following criteria apply:

• it is material in amount;

• it does not relate solely to revenue which has already been brought to account;

• it can be clearly identified as contributing to the planned service potential of the

existing asset; and

• there has been a measurable increase in the existing service potential of the asset as

indicated by either an extension to its useful life or its revenue-earning capacity, or

both.

Expenditure on an existing asset that does not meet the above criteria should be treated as

an expense of the current period. Maintenance expenditure does not affect the service

potential of an asset beyond the current accounting period, and is treated as an expense in

full in the period in which it is incurred.

Capital expenditure is either added to the book value of an asset, or is included in the new

base value of an asset on revaluation, and is depreciated (or expensed) over the remaining

(or extended) useful life of the asset created or enhanced.

Where expenditure is capitalised because there will be a material increase in the useful life of

an asset, it is necessary to reassess the “useful life” of the asset for depreciation purposes in

accordance with AAS 4 “Depreciation of Non-Current Assets” (refer section 6.10).



Disclosure

Capital expenditure is classified in the Financial Statements as a non-current asset with the

associated depreciation for the current period being an expense. Maintenance expenditure is

an expense of the current period.

The treatment of capital expenditure in the Statement of Cash Flows is as an investing

activity outflow whilst maintenance expenditure is an operating activity outflow.

6.9 Asset Register

Definition

An Assets Register is a management tool used to record the location, ownership details, condition

and certain financial information relating to assets.

Policy

An entity should record in its Asset Register assets which:

• have a useful life greater than one year; and/or

• are valued over the $2,000 default threshold or other approved threshold; and/or

• are portable and attractive or which are on personal issue (Note: these items are not

recognised as assets or included in the asset totals for financial reporting); and/or

• as individual units, may cost less than $2,000 but may combine to form an operating

unit or network or have the same or similar nature. Where the total unit of the

combined assets is material in amount, these assets should be recorded in the Assets

Register.

For Departments, the Asset Register should distinguish assets which it “controls” from those

which are “Territory (administered)” (refer section 5.4).

The Asset Register should distinguish those assets which have restricted use due to externally

imposed requirements (refer AAS 29, paragraph 13.3).

The ACTPS policy on reporting thresholds is discussed in section 6.5.4.



Disclosure

Where an entity controls groups of similar assets which individually may be below the

recording threshold, but for which the value of the total is above the threshold, a decision

will need to be made to determine whether the aggregate value is material. Where the

aggregate of a number of low valued items is considered to be material (refer Chapter 2 and

AAS 5 “Materiality in Financial Statements”), the group of assets may be recorded in the

Assets Register as a whole.

Entities are to ensure that, for asset recording and reporting purposes, a uniform policy is

consistently implemented within all areas of the entity.


03/07/01 i


6.10 Depreciation 6.10-16.10.1 General 6.10-1

6.10.2 Depreciation - Other Issues 6.10-3

6.11 Revaluation of Non-Current Assets 6.11-56.11.1 Asset Revaluation Reserves: Accounting for Revaluation Increments

and Decrements 6.11-8

6.11.2 Treatment of Accumulated Depreciation 6.11-9

6.11.3 Disclosures 6.11-10

6.11.4 Disposal of Revalued Assets 6.11-12

6.11.5 Ownership Agreements and Monthly Reporting 6.11-13


Section-Page3/07/2001 6.10-1

6.10 Depreciation

6.10.1 General

AAS 4 Depreciation deals with recognition of assets with physical substance and the depreciation

of all non-current assets which have limited useful lives and the policies detailed below are

consistent with that Standard.

Definition

Depreciation is the expense associated with the consumption or loss of service potential or loss of

future economic benefit embodied in a non-current asset. It is generally brought about by the use

of the asset.

The term depreciation is often used interchangeably with the term amortisation. While the terms

have similar meanings, depreciation is used in relation to non-current assets that have physical

substance and amortisation is generally used in relation to intangible non-current assets and lease

agreements (refer section 6.5.5 and 6.13.3).

There are three aspects to depreciation:

(a) the depreciation expense - ie the periodic amount representing the loss of service potential;

(b) the accumulated depreciation - ie the total loss of service potential up to the end of the

accounting period; and

(c) the written-down value of the asset - ie the cost of the asset (or revalued amount) less the

accumulated depreciation to date.

Policy

• An asset with physical substance which is expected to be used during more than one

reporting period must be recognised when:

a) it is probable that the future economic benefits embodied in the asset will

eventuate; and

b) the asset possesses a cost or other value that can be measured reliably.


Section-Page3/07/2001 6.10-2

• All non-current assets having a limited useful life shall be systematically depreciated

in a manner that reflects the consumption of service potential embodied in those

assets.

• The depreciable amount of an asset shall be progressively charged to the Statement of

Financial Performance by means of depreciation expenses.

• The depreciation method chosen should best reflect the pattern of usage of the asset

or loss of service potential.

• The depreciation method assigned to an asset should be applied consistently from

accounting period to accounting period.

• A charge for depreciation shall be made from the time non-current assets are

acquired and ready for use. Where an asset is a complex structure which requires

installation in successive stages, it shall be considered that an asset cannot be held

ready for use until installation has been completed to a stage where it is capable of

being put into service.

• In respect of additions or extensions to an existing depreciable non-current asset:

(i) any addition or extension to an existing depreciable asset which becomes an

integral part of that asset shall be depreciated over the remaining life of that

asset; and

(ii) any addition to an existing depreciable asset which retains a separate identity

and will be capable of being used after that asset is disposed of shall be

depreciated independently of that existing asset on the basis of its own useful

life; and

(iii) any addition to an existing depreciated asset which retains a separate identity

and has a useful life less than the existing asset shall be depreciated

independently of that existing asset on the basis of its own useful life.

• Depreciation rates shall be reviewed annually and, if necessary, adjusted so that they

reflect the most recent assessments of the useful lives of the assets. These assessments

shall take into account such factors as:

- expected physical wear and tear;

- obsolescence;

- legal and or other limits on the use of the asset; and


Section-Page3/07/2001 6.10-3

- net amounts expected to be recovered on the assets’ disposal.

• Effects of changes to depreciation rates or methods must be accounted for as a change inthe estimated useful life of the asset. The effects must be recognised only in the currentand/or future periods. No retrospective adjustments are allowed.

6.10.2 Depreciation - Other Issues

Reassessments of Useful Lives

Situations will occur in relation to assets where it is discovered that the initial assessment of

their useful life was inappropriate.

Depreciation rates must be reviewed annually to determine whether this is the case. In cases

where there has been a change in the expected pattern of consumption of future economic

benefits, the depreciation method must be changed to reflect the changed pattern. In such

cases the remaining written down value of the asset must be depreciated over the revised

remaining useful life of the asset.

Reassessment of Residual Value

It may also become apparent that the estimated residual value of an asset is no longer

realistic. Increases to the estimated residual value of an asset, that are due changes in price,

must only be made when the asset is revalued.

Where the non-current asset is not revalued, the residual value must not subsequently be

increased for changes in price. Where a non-current asset is revalued, a new estimate of the

residual value must be made at the date of the revaluation.

Residual values may still be changed for reasons other than changes in price. For example if

the estimated useful life of an asset is decreased if the entity decides that it will dispose of the

asset earlier than planned, the residual value may require reassessment to reflect the amount

applicable at this revised disposal date.


Section-Page3/07/2001 6.10-4

Reinstatement of Assets

Situations may arise where it is necessary to reinstate assets which have been fully

depreciated (ie written down to zero or their residual values) are still in use by the entity.

Those situations may include:

• the adoption of accrual accounting by ACT Government entities. They may revalue

the entire class of assets in accordance with section 6.11 of this Manual. This will

reinstate a value in the Asset Register and the Financial Statements. The

corresponding adjustment will be made directly against the opening Accumulated

Funds, refer section 8.3; or

• an incorrect assessment of an asset's useful life. This situation may be avoided by

suitably frequent reassessment of the useful lives of assets. In such circumstances, the

asset should be revalued and useful life must amended to reflect its extended service

potential.

Disclosure

Depreciation is to be recognised as a periodic operating expense in the Statement of

Financial Performance of an entity.

The accounting policy adopted for the depreciation of non-current assets must be clearly

disclosed in the Notes to the Financial Statements.

Accumulated depreciation represents the total utilised service potential up to the reporting

date, and is shown as a deduction from non-current assets in the Notes to the Financial

Statements.

The following information should be disclosed in the Notes to the Financial Statements for

each major class of depreciable asset:

• total depreciation charge allocated for the accounting period; and

• the gross amount of the depreciable assets and the related amount of accumulated

depreciation.

Where the depreciation expenses for any reporting period have changed because of:


Section-Page3/07/2001 6.11-5

(a) re-assessment of the useful lives of certain assets; or

(b) changes in depreciable amounts as a consequence of a revaluation (upward or

downward) of certain assets and any associated reassessment of the assets expected

residual value;

the financial effect of the change (ie the increase or reduction in the depreciation charges),

where material, should be disclosed in the Notes to the Financial Statements.

6.11 Revaluation of Non-Current Assets

Definition

Revaluation means the act of re-establishing the value of non-current assets at a particular date.

Revaluation of assets is required to ensure that the value at which the assets are recorded and

reported reflects the current service potential and future benefits embodied in those assets. This

will be particularly relevant to management decision-making and performance monitoring on the

resources employed by an entity in satisfying its objectives.

AAS 10 Accounting for the Revaluation of Non-Current Assets has been split into two standards.

AAS 10 has been renamed Recoverable Amount of Non-Current Assets, and essentially details the

application of the recoverable amounts test. And the revaluation of non-current assets is now dealt

with via a new standard, AAS 38 Revaluation of Non-Current Assets. Both these standards apply

to reporting periods beginning on or after 1 July 2000. However a lengthy transitional period has

been included in AAS 38 to allow public sector entities to delay applying this standard until

reporting period ending on or after 1 July 2003. This transitional period has been included due to

concerns raised by the public sector in regard to the definition of fair value in the standard and how

it applies to the public sector. The definition of fair value is also perceived to be at odds with the

widely used deprival value method and therefore could require public sector entities to amend their

revaluation methods again once the application of fair value by the public sector is sorted out.

Agencies should therefore continue using existing valuation practices during the transitional period.

Revised AAS 10 Recoverable Amount of Non-Current Assets applies to reporting periods beginning

on or after 1 July 2000. This standard requires that a non-current asset must be written down to its

recoverable amount when its carrying amount is greater than its recoverable amount. This

standard, however, will have limited application to ACT government entities, as it will not apply to


Section-Page3/07/2001 6.11-6

non-current assets of entities whose financial objectives do not include the generation of profits,

where the future economic benefits comprising those assets are not primarily dependent on the

assets’ ability to generate net cash flows:

• that are inventories; or

• that are measured at fair value, net market value or net fair value as required or permitted by

another Australian Accounting Standard.

Policy

Revaluation Frequency

• Assets with an estimated value greater than one million dollars may be revalued every

year, using one of the following techniques:

• comprehensive independent valuation undertaken by an external valuer; or

• comprehensive internal valuation; or

• indexation of an asset’s most recent valuation using relevant Australian

Bureau of Statistics price indices or other reliable measures. Indices should

take into account not only the effects of specific or general price levels, but also

technological change and other changes that have a material impact on the

value of the asset. Indices may also be extrapolated from samples of revalued

assets and applied to the class of assets.

• The method of revaluation for assets over one million dollars, however, must not

result in an asset’s value being materially different from it’s deprival value at any

given reporting date. Assets less than one million dollars are not required to be

revalued on an annual basis, although they may be. Asset less than one million

dollars in a class of property, plant and equipment may be revalued on a five year

rolling basis for financial statements on or before 30 June 2004. This is consistent

with the transitional provision of paragraph 16.5 of AAS 29. Where a progressive

basis is adopted, it is necessary for the class of property, plant and equipment

revaluations to be carried out in a systematic and consistent manner. That is,

agencies are to determine a methodology to select the assets, within a class, to be

revalued each year. For example, the selection of assets may be based on asset values

prior to revaluation, or by reference to the nature, location or use of the assets.


Section-Page3/07/2001 6.11-7

• For financial statements ending after 30 June 1998, a progressive basis of revaluation

may be applied to assets less than one million dollars, provided the carrying amount

of each asset within the class does not differ materially from it’s deprival value.

• Classes/collections of like assets may be revalued in aggregate. Accordingly, if items

are valued in aggregate and the total value is above one million dollars, the collection

must be revalued every year.

Measurement Basis

Subsequent to the initial recognition as assets, non-current assets must be measured on a

deprival value basis.

Deprival Valuation Framework

General Assets

Where the service potential or future economic benefits embodied in the asset would

be replaced if the entity was deprived of the asset, the primary bases for valuation

are:

(i) current market (buying) price of a similar asset - where a similar asset can be

purchased;

(ii) current replacement cost of the same service potential or future economic

benefits of the existing asset - where a different asset having a similar purpose

can be purchased; or

(iii) current reproduction cost of the same service potential or future economic

benefits of the existing asset where the above techniques are not applicable.

Where the service potential or future economic benefits embodied in the assets would

not be replaced if the entity was deprived of the asset, the basis for valuation of assets

is the greater of current net market selling price and net present value of the cash

flows expected from continued use and subsequent disposal of the asset.

Surplus assets (that is, assets held for sale without replacement) are to be measured at

their current net market selling value.


Section-Page3/07/2001 6.11-8

Land Assets

Land held for continued use is to be valued at the greater of:

• current market buying price, taking into account the nature of the parcel, the legal

restrictions on use, the opportunities for and impediments to developments that

are inherent to the specific parcel of land, other constraints that exist in respect of

that land and any special attributes that the land may possess (value in use); and

• current market value (selling price) based on its feasible alternative use taking

account of the costs of achieving that alternative use.

Land, which would not be replaced, should be valued at the net present value of the

cash flows expected from continued use and subsequent disposal of the land.

6.11.1 Asset Revaluation Reserves: Accounting for Revaluation Increments andDecrements

Asset revaluation reserves are to be accounted for strictly within the guidelines specified by AAS 38

Revaluation of Non-Current Assets and AAS 1 Statement of Financial Performance. See also

6.11.4 ‘Disposal of Revalued Assets’.

Policy

• Where a class of non-current assets is revalued, the revaluation increment or

decrement shall be accounted for as follows:

• an increment shall be credited directly to an asset revaluation reserve, except

to the extent that the increment reverses a revaluation decrement, in respect of

that same class of assets, previously recognised as an expense in the Statement

of Financial Performance. Such exceptions must be recognised as revenue in

the Statement of Financial Performance for the period

• a decrement must be recognised as an expense in the Statement of Financial

Performance, except to the extent that such a decrement reverses a revaluation

increment previously credited to an asset revaluation reserve in respect of that

class, it should be debited directly to that revaluation reserve;


Section-Page3/07/2001 6.11-9

• revaluation increments and decrements shall be offset against one another

within a class of non-current assets, but shall not be offset in respect of

different classes of non-current assets.

A class of assets refers to a category of assets having similar nature or function in the business of

the entity which, for the purpose of disclosure in the Financial Statements of the entity, is shown as

a single sum without supplementary dissection (refer section 6.3), eg ‘buildings’ is a class of asset,

‘plant and equipment’ is another class.

As such, the Standard requires that reversals of previous revaluations are to be accounted for by

reversing entries generated when previous revaluations were recognised. Where a revaluation

decrement in respect of a class of non-current assets or an asset within a class of non-current assets

reverses a previous revaluation increment or cumulative increment in respect of that same class, it

would, to the extent that a credit balance currently exists in the revaluation reserve in respect of

that class of non-current assets, be debited to the asset revaluation reserve. Any excess over the

previous revaluation increment or cumulative increment would then be recognised as an expense in

the Statement of Financial Performance.

Where a class of non-current assets is subject to a progressive revaluation, any increments or

decrements arising during the revaluation period are to be recognised in the reporting period in

which they arise.

6.11.2 Treatment of Accumulated Depreciation

Where there is a decision to revalue a non-current asset upwards or downwards, AAS 10 requires

that any accumulated depreciation existing in respect of that asset be credited against the asset

account to which it relates prior to restating asset’s balance. This leaves a nil balance in the

accumulated depreciation account for that asset. The asset would then be increased or decreased

to the amount of the revaluation and future depreciation charges based on the revalued carrying

amount of the asset.


Section-Page3/07/2001 6.11-10

An exception to the above arises when an entity revalues depreciable assets by reference to current

prices for a newer asset (the current price is adjusted to reflect the present condition of the existing

asset via accumulated depreciation). Where current prices are used, agencies may restate

separately the gross amounts and related accumulated depreciation.

6.11.3 Disclosures

Where a class of non-current assets has been revalued or a non-current asset has been

revalued to its recoverable amount, the Financial Statements must, in respect of each such

class of non-current assets or non-current asset, disclose:

(a) the accounting period in which the revaluation was made or, where a progressive

basis has been adopted, the dates of the revaluation period;

(b) the method(s) used in determining deprival values (including the nature of any

indices used) and, where a progressive basis has been adopted, the approach to

determining which non-current assets within the class are revalued in each reporting

period within the five year period;

(c) whether the revalued carrying amounts have been determined in accordance with an

independent valuation, officer’s valuation or director’s valuation. Where an asset has

been previously revalued to fair value based on a valuation conducted by an

independent valuer, and is subsequently recognised at the same amount because the

directors decide that the fair value of the asset is not materially different from the

amount previously determined by the independent valuer, then such a valuation is

deemed a director’s valuation;

(d) where the revalued carrying amounts have been determined in accordance with an

independent valuation and the revaluation was made during the reporting period, the

name(s) of the person(s) who made that valuation and relevant particulars of the

valuer's or valuers' qualifications; and

(e) whether the revaluation was made in accordance with a policy of regular revaluation

of that class of non-current assets and, if so, particulars of that policy and the period

between revaluations.


Section-Page3/07/2001 6.11-11

Where a class of non-current assets comprises assets which are carried at revalued amounts

and assets which are carried at their cost of acquisition less any accumulated depreciation or

amortisation, the financial report shall disclose:

(a) the aggregate carrying amount of each of the following:

(i) assets within that class of assets which are carried at revalued amounts

determined prior to the current progressive revaluation period, less any

accumulated depreciation or amortisation;

(ii) assets within that class of assets which are carried at revalued amounts

determined as part of the current progressive revaluation period, less where

applicable any accumulated depreciation or amortisation; and

(iii) assets within that class of assets which are carried at their cost of acquisition

less any accumulated depreciation or amortisation; and

(b) for each aggregate carrying amount referred to in paragraphs i) and ii) above:

i) the dates of the revaluation;

ii) the basis used to determine deprival value; and

iii) whether the carrying amounts have been determined in accordance with an

independent valuation.

In respect of each class of property, plant and equipment :

• the balance of the asset revaluation reserve, indicating the movement for the

financial year;

• any restrictions or pledges against asset titles;

• the accounting policy for restoration costs for non-current assets;

• the carrying amount of capital works;

• the reconciliation of amounts for each class of asset, showing:

• additions;

• disposals;

• acquisitions through business acquisitions;

• the net amount of revaluation increments or decrements;

• write downs due to the recoverable amounts test/ impairment of assets;

• depreciation expense;


Section-Page3/07/2001 6.11-12

• other movements; and

comparative information for the preceding financial year, except in the year

these disclosure requirements are adopted.

6.11.4 Disposal of Revalued Assets

AAS 38 specifies that a gain or loss on disposal of a revalued non-current asset is to be recognised

in the Statement of Financial Performance for the reporting period in which disposal of the asset

occurs. The Standard requires that a gain or loss on disposal be measured as the difference

between the carrying amount of the revalued non-current asset as at the time of disposal and the net

proceeds, if any, from disposal. Additionally, gains and losses will have to be classified as an

extraordinary item where the criteria specified by AAS 1 are satisfied.

It should be noted that AAS 1 “Statement of Financial Performance does not permit the inclusion

of transfers from reserves, such as asset revaluation reserves, in the result/profit or loss for the

reporting period. In this regard, the aggregate amount of transfers to reserves and the aggregate

amount of transfers from reserves are, to the extent that they affect retained profits (surplus) or

accumulated losses (deficiency), to be shown after the result/profit or loss. The nature and amount

of each transfer is to be disclosed separately, by way of note or otherwise. Consistent with the

above, amounts appearing in asset revaluation reserves relating to an asset that is disposed of

should be transferred from the asset revaluation reserve to accumulated funds and disclosed in the

notes of the financial statements.

Transfers of revalued assets are to be treated as if disposed, however it is crucial that transfers be

effected at the same value between the agencies concerned.


Section-Page3/07/2001 6.11-13

6.11.6 Ownership Agreements and Monthly Reporting

Agencies should include details of their revaluation policy in their ownership agreements. The

details shall include:

• date of last full revaluation for each class of assets; and

• a statement as to whether or not a rolling basis for revaluation is used.

Agencies are also requested to provide details of the class of assets for which the stated

losses/gains on revaluation and asset revaluation reserves pertain on a monthly basis. See also

Finance Memorandum 1998/37.

.


3/07/2001i


7. Liabilities............................................................................ 7-1

7.1 Introduction ................................................................................ 7-1

7.2 Recognition Criteria................................................................... 7-1

7.3 Disclosure of Liabilities.............................................................. 7-3

7.4 Classification of Liabilities ........................................................ 7-3

7.5 Categories of Liabilities ............................................................. 7-4

7.5.1 Creditors..............................................................................................7-4

7.5.2 Borrowings ..........................................................................................7-6

7.5.3 Leases...................................................................................................7-7

7.5.4 Employee Entitlements .......................................................................7-9

7.5.4.1 Employee Entitlements - Salaries and Wages ................................................ 7-11

7.5.4.2 Employee Entitlements - Annual Leave ......................................................... 7-12

7.5.4.3 Employee Entitlements - Sick Leave............................................................... 7-13

7.5.4.4 Employee Entitlements - Superannuation...................................................... 7-14

7.5.4.5 Employee Entitlements - Long Service Leave ................................................ 7-15

7.5.4.6 Other Employee Entitlements......................................................................... 7-17

7.5.4.7 Employee Benefits and On-costs..................................................................... 7-18

7.5.4.8 Staff Transferring Between ACT Government Entities ................................ 7-20

7.5.5 Other Provisions................................................................................ 7-22

7.5.6 Other.................................................................................................. 7-23

7.5.6.1 Revenue Received in Advance ........................................................................ 7-23

7.5.7 Assumed Liabilities ........................................................................... 7-24

7.5.8 Liability Transfers Resulting from Restructuring of AdministrativeArrangements.............................................................................................. 7-25


3/07/2001ii

7.6 Liabilities vs. Future Commitments........................................ 7-26

7.7 Agreements Equally Proportionately Unperformed ............. 7-28

7.8 Guarantees and Undertakings................................................. 7-28

7.9 Contingent Liabilities............................................................... 7-29


3/07/2001Section Page

7-1

7. Liabilities

7.1 Introduction

Liabilities are the financial obligations of an entity to other parties. They represent in monetary

terms the amounts the entity “owes” and expects to pay at some time in the future.

It is important that management be fully aware of its obligations and the resources that will be

required to settle those obligations at some time in the future. It is also essential that management

know when these liabilities are likely to be payable in order that funds can be managed

appropriately.

Current obligations which will require future funding should be reflected in the cash budgets of all

Government entities.

Information regarding the present obligations of an entity is summarised in the accounting and

financial reports of an entity to enable the level of future funding to be quantified.

Definition

Liabilities are the sacrifices of future economic benefits that the entity is presently obliged to make

to other entities as a result of past transactions or other past events (AAS 29, paragraph 18.1).

7.2 Recognition Criteria

For an explanation of the term “Recognition” refer to section 5.3.

The recognition of liabilities, whether it be for the purposes of management accounts or external

Financial Statements, is necessary if the reports are to represent the obligations incurred by an

entity and the resources that will be required to be transferred or paid to other entities at some time

in the future to settle those obligations. It should also be noted that, where the incurrence of a

liability involves a corresponding expense, the omission of the liability from the financial reports

would also cause the omission of relevant information about the costs of operations and therefore,

the performance of the entity.



7-2

A liability should be recognised, when and only when the following criteria are satisfied:

(a) it is probable that a payment or other sacrifice of future economic benefits will be

required; and

(b) the amount of the liability can be reliably measured.

As discussed in section 5.3 “probable” is taken to mean more likely than less likely. Assessments of

the degree of uncertainty of the likely sacrifice of economic benefits must be made on the basis of

available evidence.

The amount recorded as a liability must represent in monetary terms the obligation that must be

settled by payment or other sacrifice of economic benefits.

The measurement of different liabilities can vary in reliability. Verifiable evidence (ie invoices, loan

agreements etc.) of the nominal amounts to be paid and the due dates for payment is usually

available for the majority of liabilities and should be available to support the liabilities included in

the financial reports. However, there will be circumstances where the nominal amount of a liability

may not be readily determined. In relation to the purchase of goods or services, a liability should be

recognised when those goods or services have been received.

Guidance on the measurement of specific classes of liabilities is provided in separate parts of this

section as follows:

• creditors (Section 7.5.1);

• borrowings (Section 7.5.2);

• leases (Section 7.5.3);

• employee entitlements (Sections 7.5.4);

• other provisions (Section 7.5.5);and


At the end of a reporting period, departmental liabilities are to be recognised in the Statement of

Financial Position. For Departments, Territory (administered) liabilities are to be disclosed in the

Statement of Territory (administered) Assets and Liabilities.



7-3

7.3 Disclosure of Liabilities

Policy

Liabilities that meet the recognition criteria must be reported in the Statement of Financial

Position of an entity, or the Statement of Territory (administered) Assets and Liabilities.

Where a liability does not meet the recognition criteria, and the item is material, the item

must be disclosed in the Notes to the Financial Statements.

It should be noted, however, that this does not allow entities a means of avoiding the

recognition of liabilities. For a liability to not satisfy the recognition criteria:

• it must be more likely than less likely that payment or other sacrifice of economic

benefits will not be required; or

• the liability must be unable to be reliably measured. Where a liability can be reliably

measured but an entity is having difficulty in doing so, the above recognition

exemption does not apply.

7.4 Classification of Liabilities

To facilitate financial analysis, assets are classified in accordance with their relative liquidity and

liabilities are classified on the basis of their expected timing of payment.

Liabilities reported in the Statement of Financial Position are to be classified as either current or

non-current depending on when the liability is due for payment.

Current Liabilities

Current liabilities are those obligations to other parties which must be met either on demand or

within a period not exceeding 12 months from the end of the reporting period, eg most creditors,

accrued expenses, advances, holiday pay to employees etc.

Non-Current Liabilities

Non-current liabilities are due for payment more than 12 months after the end of the reporting

period, eg longer term employee entitlements, lease liabilities or loans.



7-4

Within the current and non-current classifications, liabilities are further dissected into the following

categories:

• creditors (Section 7.5.1);

• borrowings (Section 7.5.2);

• leases (Section 7.5.3);

• employee entitlements(Sections 7.5.4);

• other provisions(Section 7.5.5); and


These categories, as reported in the Statement of Financial Position, may include an amalgamation

of classes of liabilities. A class of liabilities means a grouping of liabilities within a category having

a similar nature or function in the operations of an entity which, for the purposes of financial

reporting, are shown as a single item without supplementary dissection.

For external reporting, the Notes to the Financial Statements should show the composition of each

category of liability included on the face of the Statement of Financial Position by class.

Other classifications of liabilities within the categories required for reporting may be adopted for

internal management purposes.

7.5 Categories of Liabilities

7.5.1 Creditors

Creditors are a category for disclosure purposes in the Statement of Financial Position (refer

section 7.4) and includes the class “Accrued Expenses”. The components of creditors included in

the Statement of Financial Position (ie trade, other, or accrued) should, however, be separately

disclosed in the Notes to the Financial Statements (refer Disclosure below).

Definitions

“Creditors” (also known as accounts payable) represent the amount owing for goods and services

received prior to the end of the reporting period that is unpaid at the end of the period.



7-5

“Trade creditors” include all unpaid invoices received relating to the normal operations of the

entity.

“Other creditors” are those unpaid invoices that do not directly relate to the normal operations of

the entity, ie unusual transactions that do not relate to the normal course of business.

It is useful to distinguish “trade” and “other” creditors to assist management to focus on unusual

creditor items identified as “other creditors” and to analyse fluctuations in creditor balances.

“Accrued expenses” represent goods or services provided by other parties during the period that

are unpaid at the end of the reporting period and where an invoice has not been received. Examples

include electricity and rent.

Policy

• Documentation must be available to support the value recorded as a creditor. All

invoices that relate to goods and services received during the accounting period that

have not been paid at the close of the accounting period shall constitute creditors.

• Trade and other creditors should be collated for as long a period as practical, prior to

the preparation of the financial statements. All other liabilities for the accounting

period should be estimated and taken up as accrued expenses. These accrued

expenses are for amounts payable to other parties where goods/services have been

received prior to the end of the accounting period but the related invoice has not yet

been received.

• The balance of outstanding creditors shall reflect the actual balance after allowing for

credit notes and other adjustments.

• Creditors shall be categorised as:

- trade creditors;

- other creditors; or

- accrued expenses.

• Separately identifiable records shall be kept of “Departmental” creditors and

“Territory (Administered)” creditors (refer section 5.4 for guidance).



7-6

• “Departmental” and “Territory (Administered)” intra-Department creditors shall be

identified separately.

• “Departmental” and “Territory (Administered)” creditor balances relating to other

Government entities shall be separately identified by the Department.

Disclosure

Trade creditors, other creditors and accrued expenses at the end of the reporting period shall

be included in the Statement of Financial Position, and/or Statement of Territory

(Administered) Assets and Liabilities, under the title “Creditors”. Where a liability is not

expected to be paid within twelve months, it should be included as a non-current “Creditor”,

while amounts due for payment within twelve months are treated as current liabilities.

A note to the Financial Statements shall show the classes of creditors comprising the creditor

balance on the face of the Statement of Financial Position, or Statement of Territory

(Administered) Assets and Liabilities, including the portion of each class of creditor that

relates to:

1. entities outside Government; and

2. other ACT Government entities.

An age analysis as at the reporting date shall be disclosed in the Notes to the Financial

Statements. This will show amounts that are current and not overdue, and amounts that are

overdue for less than 30 days, overdue for 30 to 60 days, and overdue for more than 60 days.

Departments are to separately report “Departmental” and “Territory (Administered)”

creditors.

7.5.2 Borrowings

Definition

“Borrowing” in relation to the Territory or a Territory body includes raising money or obtaining

credit through transactions authorised under the appropriate legislation. Borrowings include loans

and advances received from either the Territory’s central financing unit or the Commonwealth

Government.



7-7

Policy

A borrowing by an entity constitutes a liability of that entity and should be recognised as such in

the accounts of that entity.

Disclosure

All borrowings are to be disclosed as liabilities in the Statement of Financial Position or

Statement of Territory (Administered) Assets and Liabilities of an entity.

All borrowings summarised in the Statements shall be detailed in a note to the accounts

(refer section 11.3.4.1) including classification by each type of borrowing and showing the

current and non-current portions.

7.5.3 Leases

Definition

A lease means an agreement conveying the right from the lessor to a lessee to use property for a

stated period of time in return for a series of payments by the lessee to the lessor. AAS 17

Accounting for Leases covers in detail the accounting treatment of leases. The requirements of this

Manual are consistent with that Standard.

Policy

Where an entity has a finance lease (for classification refer to decision table provided in

section 6.13.3), it should recognise:

• an asset;

• a liability; and

• interest and amortisation expenses.

Lease payments associated with an operating lease should be charged as expenses in the

period to which they relate.

Details of the outstanding commitments embodied in an operating lease (refer section 6.13.3)

should be disclosed separately in the Notes to the Financial Statements (refer section 11.3.7)

where the amounts are material.



7-8

Disclosure

Finance Leases

For finance leases the following shall be shown separately in the reporting entity's Financial

Statements:

(a) for each major class of asset, the aggregate of the amounts initially capitalised as lease

assets, with accumulated amortisation shown as a deduction therefrom;

(b) the total of lease liabilities, classified into current and non-current elements;

(c) the amount of amortisation of lease assets included in the determination of the

operating result for the accounting period;

(d) the amount of finance charges relating to the lease liabilities included in the

determination of the operating result for the accounting period;

(e) contingent rentals included in the determination of the operating result for the

accounting period; and

(f) lease commitments, as at balance date, reconciled to the lease liability and classified

into the following periods:

(i) not later than one year;

(ii) later than one year and not later than two years;

(iii) later than two years and not later than five years; and

(iv) later than five years.

(AAS 17, paragraph 59)

Operating Leases

(a) For operating leases, there shall be shown separately in the reporting entity's

Financial Statements the total amount of rental expense included in the determination

of the operating result for the accounting period.

(b) For non-cancellable operating leases with a lease term of more than one year, the

lessee's Financial Statements shall disclose lease commitments in aggregate and

classified into the following periods:


(ii) later than one year and not later than two years;

(iii) later than two years and not later than five years; and

(iv) later than five years.



7-9

(AAS 17, paragraphs 60 and 61)

7.5.4 Employee Entitlements

Definition

Employee entitlements are defined as:

“benefit entitlements which employees accumulate as a result of the

rendering of their services to an employer up to the reporting date and

include, but are not limited to, wages and salaries (including fringe

benefits and non-monetary benefits), annual leave, sick leave, long

service leave, superannuation and other post-employment benefits”.

(AAS 30, paragraph 10).

Provisions for employee entitlements are, therefore, liabilities or present obligations (refer section

7.1) arising as a result of the past or ongoing service of employees. AAS 30 Accounting for

Employee Entitlements covers in detail the accounting treatment of employee entitlements. The

requirements of this Manual are consistent with that Standard.

Policy

• Government entities should only provide for employee entitlements as an expense and

a liability at the end of a reporting period when:

- they are material;

- they can be reliably measured; and

- it is probable that settlement of the liability will be required.

• Entitlements accrue as employees provide their services in accordance with their

employment agreement. A liability for entitlements shall, therefore, be recognised in

the accounts of an entity as employees provide their services and their entitlements

accrue.

• Liabilities which arise in respect of:

(a) wages and salaries, annual leave and sick leave, regardless of whether they are

expected to be settled within 12 months of the reporting date; and

(b) other employee entitlements expected to be settled within 12 months of the

reporting date,



7-10

shall be measured at their nominal amounts – AAS 30, paragraph 21 - (based upon

current remuneration rates and undiscounted cash flows).

• Subject to the above point, employee entitlement liabilities shall be measured as the

present value of the estimated future cash outflows to be made by the employer in

respect of services provided by employees up to the reporting date - AAS 30,

paragraph 22 - (eg the non-current portion of long service leave liabilities).

• In measuring the present value of such liabilities, the interest rates attaching, as at the

reporting date, to the appropriate national Government guaranteed securities shall be

used to discount estimated future cash outflows. The national Government

guaranteed security rates used shall be those attaching to securities which have terms

to maturity that match, as closely as possible, the terms of the related liabilities (AAS

30, paragraph 23).

Disclosure

The Financial Statements of a reporting entity must disclose:

• the aggregate employee entitlement liability that is recognised at the reporting date;

• the asset, representing any prepaid employee entitlements recognised at the reporting

date;

• the nature and type of each element of employee entitlements in the Notes to the

Financial Statements, ie.:

- salaries and wages;

- annual leave and sick leave;

- superannuation;

- long service leave; and

- other employee entitlements and benefits.

• the details of the nature of employee entitlement assets, liabilities, revenues and

expenses which have not been recognised in the accounts because they do not meet the

recognition criteria in the Notes to the Financial Statements (refer Sections 5.3, 7.2,

9.2 and 10.2). (This event should rarely occur.)

Assets (eg prepaid employee entitlements) and the liability for employee entitlements cannot

be netted off and must be disclosed separately in the Statement of Financial Position.



7-11

In accordance with AAS 30 the Notes to the Financial Statements are to disclose the basis

used to determine employee entitlement liabilities.

7.5.4.1 Employee Entitlements - Salaries and Wages

Definition

Salaries and wages constitute regular periodic payment to employees for services rendered or work

performed by them during the reporting period. They represent costs to Government and,

therefore, need to be included in measuring the net result. The component of salaries and wages

not paid as at the reporting date will represent a liability as at that date.

Policy

• Salaries and wages shall be recognised as an expense of the accounting period in

which the services or work was/were performed by employees.

• The component of salaries and wages arising from the rendering of services by

employees during the accounting period, that is unpaid at the end of the accounting

period, will constitute an expense and liability that must be accrued in the accounting

reports of an entity at the end of the accounting period.

• The liability will be calculated at current gross pay rates.

• Where salaries and wages expenditure does not relate solely to revenue of the period

and can be clearly identified as contributing to the revenue-earning capability in the

future (refer to section 6.8), this expenditure should be carried forward at balance

date. In this case the expenditure shall be recognised as an asset (and not an expense)

to be allocated to the period to which it relates.

Disclosure

Entities must report any accrued expense for salaries as a “current” liability in the Financial

Statements of the reporting period. This liability should be included as an “Employee

Entitlement” in the Statement of Financial Position. The amount accrued should also be

recognised as an expense in the Statement of Financial Performance of the same period. The

disclosure requirements in relation to the Provision for Employee Entitlements are

summarised at section 7.5.4.



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Salaries and wages will normally be expensed in the relevant accounting period and any

outstanding amount accrued as an employee entitlement at the end of that period.

7.5.4.2 Employee Entitlements - Annual Leave

Definition

Annual leave and leave loading entitlements usually arise out of the requirements of an award or

other legislation. The annual leave entitlements for all Government employees are contained in the

Public Sector Management Standards and relevant awards. The provision, for annual leave

entitlements due at the reporting date, should be taken up as a liability as at that date.

Policy

• All annual leave entitlements accrued to the reporting date should be included in the


• The liability for officers covered by the Public Sector Management Standards for

annual leave accrued will be based on the records of all employees of the entity and

calculated at current pay rates.

• Where a specific award binds employees, the terms of that award must be applied

when calculating the leave liability.

• The maximum leave accrual per employee shall be governed by the Public Sector

Management Standards or applicable award.

• Annual leave entitlements shall include any applicable annual leave loading. The

provisions in relation to leave loading are detailed in the Public Sector Management

Standards or appropriate applicable award.

• The annual leave accrual of the entity should:

- include employees on extended leave, eg employees on maternity leave who

have outstanding leave;

- include seconded staff, where salaries are paid by the entity; and

- exclude those staff who are not employees of the entity (eg contractors who are

not subject to the direction of the employer with respect to their employment

service arrangements).

• When calculating annual leave entitlements, an employee's salary on which the

entitlement is based should include payments made as part of an employee's normal



7-13

salary package but should not include any allowance or penalty specified by an

industrial award, eg overtime, rostering, standby allowance etc. Further details on

what constitutes salary for leave entitlement purposes are contained in the Public

Sector Management Standards or can be obtained by contacting Personnel.

• Where an employee has taken her or his full annual leave entitlement, the Public

Sector Management Standards should be referred to for guidance on anticipating an

employee's annual leave entitlement.

• Negative annual leave balances shall be offset against the accrued annual leave

entitlement in the calculation of the total for such entitlements.

Disclosure

Entities must report any accrued expense for annual leave as a “current” liability in the

Financial Statements of the reporting period. The Statement of Financial Position should

include this liability as an “Employee Entitlement”. The Statement of Financial

Performance should also recognise the amount accrued as an expense of the same period.

Section 7.5.4 summarises the disclosure requirements for employee entitlement liabilities.

7.5.4.3 Employee Entitlements - Sick Leave

Definition

Under Government conditions employees are entitled to sick leave. The sick leave entitlements for

all Government employees are contained in the Public Sector Management Standards and relevant

awards.

Policy

• The provisions in relation to sick leave are governed by the Public Sector

Management Standards and relevant awards.

• Sick leave entitlements transfer with an employee if that employee changes

Department.

• Sick leave generally does not qualify for payment to an employee in the event of

termination or resignation, ie there is no legal obligation to pay an amount to the

employee. “Vesting” occurs where there is such an obligation to pay.



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• Sick leave of a non-vesting nature shall be recognised as a liability in the accounts of

an entity only to the extent that the entitlements accumulated as at the reporting date

are expected to result in payments to employees.

• Where a specific award requires that sick leave accumulate and vest to an employee in

a similar manner to annual leave entitlements, that award shall be complied with and

a liability acknowledged in the Financial Statements in the same manner as for annual

leave (refer 7.5.4.2).

Disclosure

The Financial Statements are to classify accrued sick leave entitlements as a liability (refer

Chapter 11).

7.5.4.4 Employee Entitlements - Superannuation

Definition

Superannuation liability represents an employers liability to superannuation funds that will provide

benefits to employees on retirement. The liability relates only to each employees period of service

up to the end of the reporting period.

The ACT Government’s superannuation liability in respect of employees who are members of the

CSS and PSS schemes is centrally administered by the Superannuation Provision Unit, Department

of the Treasury.

This section covers only employees who are members of the CSS and PSS. However, many

agencies have employees who are members of other schemes. Where an agency is liable for

employer funded superannuation benefits, in relation to another scheme, the agency should

recognise any applicable superannuation liability.

This section does not apply to Territory Authorities with employees in the CSS and PSS. Aside

from the productivity benefit, Territory Authorities do not have an unfunded superannuation

liability as they pay the full estimated expense to SPU, which then manages those funds and acquits

the Authority of meeting any changes to the estimates of superannuation liability.



7-15

Policy

• Only the entity responsible for reporting the operations of the Superannuation

Provision account should recognise a liability for superannuation.

• Throughout the year agencies shall pay their actual superannuation expense as it

accrues.

• Entities which make payments for superannuation, should record an accrued expense

for any unpaid liability as at the end of the reporting period.

• The Government funds superannuation through GPO. Where estimate amounts

exceed actual expense the resulting overpayment must be returned to Government.

Disclosure

An Accounting Policy Note should detail an entity's accounting policy with respect to

superannuation.

The Financial Statements of the entity reporting the operations of the Superannuation

Provision account should recognise the liability for the whole of the ACT Government. The

Financial Statements of other entities should include a summary of liabilities assumed. (See

also sections 7.5.7, 9.3.2, and 11.3.3.2.)

7.5.4.5 Employee Entitlements - Long Service Leave

Definition

Long Service Leave entitlement is the accumulated liability owed by an entity to its personnel for

long service leave, under Government conditions of employment. Long service leave is an

employee entitlement to a period of leave in recognition of a given period of service.

Policy

Long service leave entitlements accumulated by employees during the financial year must be

recognised as expenses with a corresponding liability.

A liability must be recognised for any component of long service leave entitlements not paid

at the reporting date.



7-16

Government entities shall, subject to the following, recognise their pro-rata long service leave

obligation for all employees with five or more years of service; notwithstanding that in most

instances a legal obligation does not exist until employees have had 10 years’ continuous

service.

In circumstances where an entity has established a more accurate benchmark, based on an

actuarial assessment of past service periods of employees, which determines a point in time

during an employee's service period where it is probable that the employee will be entitled to

take or be paid out long service leave, the entity shall use that more accurate benchmark.

The calculation of the long service leave liability shall be based on the record of all employees

of the entity. The calculation should be based on the present value of the estimated future

cash outflows to be made by the employer in respect of services provided by employees up to

the reporting date.

When considering an individual employee's long service leave entitlements, the following

should be taken into account:

• prior service with other ACT Government entities;

• prior service with other State, Commonwealth and Local Government agencies which

are recognised by the ACT Government for the purposes of long service leave; and

• long service leave taken.

The entity must ensure that all eligible employees are included when calculating the liability

including seconded employees whose salaries are being paid by the entity.

Long service leave entitlement liabilities where there are multiple individual employee claims

with differing probabilities of settlement should be calculated by estimating the amount of

cash outflows on a group basis.

The calculation of the long service leave entitlements remains the responsibility of HRMS.

Government entities should ensure they have the appropriate information on their long

service leave liability for inclusion in their accounts.



7-17

Disclosure

The provision for long service leave is to be classified in the Financial Statements as a

liability and the amount of long service leave accruing in the accounting period is to be

recognised as an expense.

The long service leave liability should be dissected into its current and non-current

components taking into account all known factors including:

• those employees who will reach retirement age in the twelve months following the

reporting date;

• any known historical trend in long service leave payments; and

• any benchmarks established, eg percentage of long service leave paid as against total

provision established on an annual basis.

Departments should contact the HRMS Unit to obtain information in relation to the actual

employee entitlement payments for the financial year, so that agencies may be able to

determine a rolling average, adjusted for unusual and material items. This information will

represent the current liability unless an agency is able to provide an accurate estimate of the

employees who will call on their employee entitlements in the next financial year. The

balance of the employee entitlements will appear as non-current, as they are not expected to

be paid in the next twelve months.

7.5.4.6 Other Employee Entitlements

This section addresses various specific employee entitlements and should be read in conjunction

with the policy set out in section 7.5.4.

Performance Pay

Performance Pay arises out of a negotiated performance agreement between the employee and the

employer entity. The employer makes an assessment of the employee at a predetermined time each

year and the payment is based on the rating the employee attains in that assessment.



7-18

As an employee's entitlement to performance pay is not known until an assessment is made, no

accrued expense for performance pay should be recognised in the Financial Statements of an entity

as at the reporting date, unless the amount is material and can be reliably measured (eg past

payments indicate that the amounts budgeted for performance pay have been the actual amounts

paid). In this instance the budgeted figure would be taken up as a liability and an expense as at

period end.

Terminations, Retrenchment, Retirements, Redundancies and Post employment benefits.

Expenses and liabilities for post-employment medical benefits should be recognised over the period

of service during which the employees became entitled to them.

Liabilities relating to retirement, retrenchment or redundancy payments only exist if there is a

present obligation on the employer at the reporting date.

There is an obligation to be met where there is an award or agreement that provides for payments

to be made under specified conditions and these conditions are satisfied. In the absence of such an

obligation, no accrual or provision is necessary.

Sundry Employee Entitlements

Employers may undertake obligations to employees to provide forms of employment compensation

other than annual leave, long service leave and superannuation. Such compensation may take

various forms, including paternity/maternity leave.

These employee entitlements should be accrued and recognised as a liability and an expense only

where the entitlements would vest with the employee if terminated at the reporting date. Otherwise

the benefits should simply be treated as forming part of the ongoing cost to the employer of

consuming the services of employees when incurred.

7.5.4.7 Employee Benefits and On-costs

In many instances an employee's remuneration package may comprise salary and non-salary

components, ie benefits. Likewise there are various other costs associated with employing staff



7-19

that are not employee entitlements but are imposed by legislation etc, eg Fringe Benefits Tax. The

accounting treatment of such items is as follows.

Benefits

The “non-salary” components of a wage or salary package (such as payments of an employee's

personal expenses), arising from the services rendered by an employee during the reporting period,

would constitute an expense of the entity.

This is because employees obtain their entitlement to salary (or non-salary entitlements) as they

provide their services.

The component of non-salary entitlements that is not paid as at the reporting date would constitute

an accrued expense (refer section 7.5.1) and, therefore, a liability of the entity.

Non-monetary Benefits

Government entities may also provide employee entitlements in the form of free or subsidised

goods or services. These benefits do not normally accumulate or accrue in proportion to an

employee's period of service, so no liability will exist at the reporting date for benefits not taken

during the reporting period. An expense will simply be recognised in the period in which the

benefits are taken.

Fringe Benefits Tax and other On-Costs

The Fringe Benefits Tax applicable to the non-salary component of employee entitlements included

at the reporting date should be included as a liability and expense in the financial statements for the

corresponding reporting period.

Expenses, such as payroll tax (in the case of Territory Authorities and Territory Owned

Corporations), workers compensation insurance premiums and other similar on-costs which are not

employee entitlements, must also be recognised as liabilities and expenses where the employee

entitlements to which they relate have been recognised as liabilities and expenses in the financial

reports of the employing entity.



7-20

7.5.4.8 Staff Transferring Between ACT Government Entities

Introduction

Given the portability of staff in the public sector and the restructuring that can occur within

Departments, staff often transfer between Government entities. Where an employee transfers from

one Government entity to another, liabilities accrued in respect of employee entitlements for that

employee up until the date of transfer will, in the majority of instances, be transferred with the

employee. The transfer of employee provisions will occur between output classes, between

agencies and between the Commonwealth and other government entities and the ACT Government.

Transfers between Output Classes

Agencies are not required to split their Statement of Financial Position to Output Class level,

however the expense transfer journals are required to enable the splitting of the Statement of

Financial Performance between output classes.

Transfers between Agencies

Agencies losing employees and their associated provisions would reverse those provisions. Where

the adjustment is not material, the required journal entry is: DR Employee Provisions (Liability),

CR Employee Expenses (Expense). Where the adjustment is material, the required journal entry is:

DR Employee Provisions (Liability), CR Write back of Provisions (Other Revenue). Note that if

the transfers are part of an administrative restructure, the treatment is to adjust capital (Refer

section 7.5.8).

Agencies gaining employees and their associated provisions would take up the liability and an

expense. The journal entry required is: DR Employee Expense, CR Employee Provisions. Note

that where employees have changed their staff level and their associated pay rate, the agency losing

employees should calculate the amounts using the pay rates employees were entitled to in their

agency. The gaining agency will be required to reflect the expense and liability calculated at the

new pay rates that apply (in the gaining agency).



7-21

Transfers between Agencies and the Commonwealth

ACTPS and APS employees can retain their employee entitlements and associated provisions if they

transfer between the two services. This is due to the reciprocal mobility arrangements currently in

place. The accounting treatment is the same as for transfers between agencies.

Agencies will require a report from HRMS listing all employees gained and lost to other ACT

Government Agencies and the Commonwealth during the month. The report should provide details

of the employees gained and lost and their associated recreation leave and long service leave

provisions. The report should also detail where the employees have been transferred to or from and

if their has been any differential in their remuneration and therefore their provisions.

Policy

Where employee entitlement liabilities transfer from one Department to another as a result

of the restructuring of administrative arrangements, the treatment of employee entitlement

liabilities is as outlined in section 7.5.8. Where an employee transfers from one Government

entity to another and not as part of a restructuring, the treatment of accrued employee

entitlements shall be as follows:

Transferor Entity

Any liabilities recognised by the transferor entity as employee entitlements in respect of an

employee, together with an equivalent employee expense amount should be reversed.

Therefore the accounting entry required is a debit to the employee entitlement account and a

corresponding credit to employee expenses.

Transferee Entity

Any liability in respect of a present obligation to pay employee entitlements received as a

consequence of a staff transfer shall be recognised as a departmental expense and liability in

the accounts of the transferee entity.

Disclosure

Where staff transfers occur, other than as part of a restructuring of administrative

arrangements; the Financial Statements should disclose any material adjustment (to a

provision for employee entitlements) as an appropriate (refer section 9.3.7).



7-22

7.5.5 Other Provisions

Definition

The existence of a present obligation to another party may require the establishment of a provision

in the Financial Statements of an entity to account for the identifiable and measurable liability.

Provisions means:

(a) in relation to the Statement of Financial Performance - amounts charged as expenses to

recognise accrued liabilities (eg long service leave) or reductions in the carrying amounts of

assets (eg depreciation) during the financial period; and

(b) in relation to the Statement of Financial Position - amounts referred to in paragraph (a) that

have accumulated from previous financial periods and the current financial period in relation

to assets or liabilities included in the Statement.

Policy

A provision shall be established by an entity where an identifiable and measurable material

liability exists eg:

• Provision for Doubtful Debts; and

• Provision for Depreciation.

The above allowances shall be treated as a reduction in the value of the applicable assets and

disclosed as a deduction from these assets in the Notes to the Financial Statements (refer

Sections 6.4.3 and 6.10).

Provisions for liabilities disclosed in the Statement of Financial Position shall not include

allowances for the diminution in value of assets.

Separate record shall be kept of “Departmental” and “Territory (Administered)” provisions

(refer section 5.4).

Disclosure

Other provisions shall be disclosed in the Statement of Financial Position.



7-23

A note to the Financial Statements shall disclose each class of provision (refer section

11.3.4.1).

“Departmental” and “Territory (Administered)” provisions shall be separately disclosed.

7.5.6 Other

7.5.6.1 Revenue Received in Advance

Definition

At the end of a reporting period:

• revenue invoiced but not earned at the end of the reporting period; and

• payments received in advance of performance.

Policy

• Amounts which constitute revenue received in advance shall be recognised as

liabilities at the end of the reporting period.

• Separate record shall be kept of “Departmental” and “Territory (Administered)”

revenue received in advance (refer Chapter 5 for guidance).

Disclosure

Revenue received in advance must be disclosed as “Other” liabilities in the Statement of

Financial Position.

The composition of “other” liabilities by class shall be provided in the Notes to the Financial

Statements.



7-24

7.5.7 Assumed Liabilities

Definition

From time to time the Commonwealth Government, ACT Government, or some other entity may settle

obligations on behalf of an ACT Government entity. The assuming entity is said to have “assumed

liabilities”.

Policy

A reporting entity that has a liability assumed by the Government or another entity is to

account for that item in the following manner:

(a) on initial incurrence of the liability, the entity shall recognise a liability and an

expense; and

(b) on assumption of the liability by the Government or another entity, the reporting

entity shall extinguish the liability and recognise revenues equivalent to the liability

assumed (AAS 29, paragraph 9.2). Note that for superannuation, entities may adopt

the alternative treatment outlined in section 9.3.2.

A reporting entity that assumes a liability shall recognise a liability and an expense

equivalent to the liability assumed. The liability and expense will be included as either

“departmental” or “Territory (Administered)” items as appropriate (refer section 5.4).

Disclosure

Entity from Which the Liability Has Been Assumed

An accounting policy note in the Financial Statements should detail the accounting policy

adopted with respect to the assumption of liabilities (refer section 11.3.2).

The Notes to the Financial Statement should include a summary of liabilities assumed by

other entities (refer section 11.3.3.2).

Entity Assuming the Liability

A liability should be recognised in the Statement of Financial Position, or Statement of

Territory (administered) Assets and Liabilities, as appropriate. An expense equivalent to the



7-25

liability assumed should correspondingly be recognised in the Statement of Financial

Performance or Statement of Territory (administered) Revenues and Expenses.

The Notes to the Financial Statement should include a summary of liabilities assumed from

other entities (refer section 11.3.3.2).

7.5.8 Liability Transfers Resulting from Restructuring of Administrative

Arrangements

Definition

In the public sector, assets and liabilities are often transferred from one entity to another as a result

of changes in the administrative arrangements of Government, or for other administrative reasons.

The restructuring process may result in the transfer of assets to, and the assumption of liabilities by

other Departments. Restructuring may also include the creation and termination of some existing

Departments. (Note: The treatment outlined in this section specifically addresses the transfer of

departmental liabilities).

Policy

Where liabilities are transferred from a transferor (or relinquishing Department) to a

transferee (or recipient Department) as a consequence of a restructuring of administrative

arrangements, the following policies shall be adopted:

• The transferor Department shall recognise:

(a) an increase in capital in respect of liabilities transferred to other entities; and

(b) the transfer of the liabilities by removing such liabilities from the Statement of

Financial Position.

• The transferee (recipient) Department shall recognise:

(a) a reduction in capital in respect of liabilities for which it gains responsibility;

and

(b) liabilities equivalent to the book value of the liabilities, as determined by the

transferor Department immediately prior to the restructuring of

administration arrangements.



7-26

Disclosure

Transferor Entity

A capital contribution equivalent to the liability transferred shall be disclosed in the

Statement of Financial Performance of an entity as “Decrease in Liabilities from

Administrative Restructure”.

The liability transferred shall be removed from the Statement of Financial Position. Details

of the liabilities transferred shall be disclosed in a note to the Financial Statements.

Transferee Entity

The Statement of Financial Performance shall disclose a capital reduction equivalent to the

liability received, as “Increase in Liabilities from Administrative Restructure”.

The Statement of Financial Position shall include the liability received. Details of the

liabilities received shall be disclosed in a note to the Financial Statements of the recipient

entity (refer Sections 11.3.3.2 and 11.3.4.4).

Where output classes or activities are transferred from one Department to another, the

transferee Department shall disclose, by way of note:

• the change in capital related to the transferred output classes or activities, showing

separately the movement in capital recognised by the transferor Department during

the reporting period; and

• the expenses and revenues related to the transferred output classes or activities,

showing separately those expenses and revenues recognised by the transferor

Department during the reporting period.

7.6 Liabilities vs. Future Commitments

Definition

A commitment is a firm intention at the end of the reporting period to incur a future obligation

which will give rise to a future payment or sacrifice of economic benefits, eg the placing of an

order.



7-27

In contrast a liability constitutes a present obligation to a payment or future sacrifice of economic

benefits, eg the acceptance by the other party of the order (usually acknowledged by the receipt of

goods and services).

The terms are, therefore, mutually exclusive.

Policy

Entities shall record Future Commitments and report them separately in the Notes to the

Financial Statements. However, they do not form part of the Statement of Financial

Position.

Guidance

The following provides examples of the distinction between commitments and liabilities.

Purchase of goods and services

A commitment arises when an order is placed.

A liability may arise when the other party accepts the order placed. In normal circumstances a

liability is generally evidenced by the receipt of the goods or completion of the service.

Letting a Contract

A commitment arises when a contract is accepted.

In normal circumstances a liability is generally evidenced by the receipt of the goods or delivery of

the service in accordance with the terms and conditions of the contract.

Payment of Grants

A commitment arises when a decision to offer the grant is formalised.

A liability arises when the beneficiary accepts the grant conditions (evidenced by the signing of a

contract) and some or all of the services specified in the contract have been delivered.



7-28

Disclosure

A commitment does not meet the recognition criteria for liabilities. However, it may still

require disclosure in the Notes to the Financial Statements where information on such

commitments is useful to users of Financial Statements (Refer section 7.3).

The information to be included in the note are the amounts (or estimates of the amounts)

and particulars of commitments that are expected to be payable:

• not later than one year;

• later than one year but not later than five years; and

• later than five years

after the end of the financial year being reported. (Refer section 11.3.7.)

7.7 Agreements Equally Proportionately Unperformed

Definition

Agreements Equally Proportionately Unperformed arise where an agreement or obligation has been

entered into and, at the end of accounting period, part of the agreement and/or obligation has not

been satisfied by both parties to the same extent.

7.8 Guarantees and Undertakings

Definition

A guarantee or undertaking is a formal promise to do something, usually with an associated offer of

an item or funds as security.

Policy

Chief Executives shall disclose details of any guarantees or undertakings given by the

Territory in respect of any loans, interest payments, advances, overdrafts, joint ventures etc.

coming within the responsibilities of the Minister for the Department and which relate to the

activities of the Department (but not including guarantees given by Territory authorities).

In the case of guarantees, Chief Executives shall include in their disclosure the legislative

basis for authorising the guarantee.



7-29

Disclosure

Where such guarantees and undertakings require disclosure, the notes to the Financial

Statements must detail the particulars of the guarantees or undertakings, referring to the

specific legislation authorising such a guarantee or undertaking.

7.9 Contingent Liabilities

Definition

Contingent liabilities are items which may in the future constitute a liability. Their existence is

determined by the occurrence of a future specified event.

Policy

Contingencies do not meet the recognition criteria for liabilities. Where information on

contingent liabilities is useful to users of the Financial Statements, these items must be

disclosed in the Notes to the Financial Statements (and not in the Statement of Financial

Position).

Disclosure

Where disclosure of a contingent liability is warranted, such disclosure shall consist of a

statement as to the general nature of the contingent liability and, so far as practicable, the

maximum amount or range of amounts for which the entity could become liable in the Notes

to the Financial Statements. Due regard should be paid to the commercial or legal sensitivity

of the information disclosed.


3/07/2001i


8. Equity .............................................................................. 8.1-1

8.1 Introduction ............................................................................. 8.1-1

8.2 Contributions by Owners and Distributions to Owners....... 8.2-2

8.2.1 Capital Injections ............................................................................. 8.2-2

8.2.2 Injection for Operations................................................................... 8.2-4

8.2.3 Restructuring of Administrative Arrangements............................. 8.2-5

8.2.4 Capital Distributions to Government .............................................. 8.2-7

8.3 Accumulated Funds................................................................. 8.3-8

8.4 Reserves.................................................................................. 8.4-10

8.5 Capital Charge ...................................................................... 8.5-10



8.1-1

8. Equity

8.1 Introduction

Definition

Equity is the residual interest in the assets of an entity after deduction of its liabilities. Equity can

be classified on a number of bases to assist users in identifying its source or nature. Examples of

classes of equity include Accumulated Funds, and Asset Revaluation Reserves. The equity interest

in a Department’s net assets is held by the Government and, through it, the community. (AAS 29,

paragraph 12.2.6).

Policy

Equity equals the value of assets less the value of liabilities.

Equity shall comprise the following classes:

• Accumulated Funds; and

• Reserves, eg Asset Revaluation Reserves.

Departments shall account for Departmental equity separately from equity held on behalf of

the Territory.

Disclosure

Equity is disclosed as Total Funds Employed in the Financial Statements.

The Statement of Financial Position shall disclose each class of Departmental equity. The

Statement of Assets and Liabilities Held on Behalf of the Territory shall disclose each class of

Territory (administered) equity.

A Note to the Financial Statements must detail the changes to each class of equity, ie opening

and closing balances of each class of equity and the nature and amount of any changes or



8.2-2

movements in each class (refer section 11.3.4.4). A description of the nature and purpose of

each reserve is also to be disclosed.

8.2 Contributions by Owners and Distributions to Owners

Definition

“Contributions by owners” means future economic benefits that have been contributed to the

entity by parties external to the entity, other than those which result in liabilities of the entity, that

gives rise to a financial interest in the net assets of the entity which:

(a) conveys entitlement both to distributions of future economic benefits by the entity during its

life, such distributions being at the discretion of the ownership group or its representatives,

and to distributions of any excess of assets over liabilities in the event of the entity being

wound up;

(b) can be sold, transferred or redeemed.

“Distributions to owners” means future economic benefits distributed by the entity to all or part of

its ownership group, either as a return on investment or as a return of investment (AAS 29,

paragraph 17.1).

Policy

Under the financial management model adopted by the government there will regularly be

transactions that departments should classify as “contributions from or distributions to

owners”, which require adjustments to equity.

8.2.1 Capital Injections

Definition

Capital appropriations are the means by which Government injects equity funds into an entity. The

entity may require this additional funding for purposes such as the purchase of assets, the payment

of debt, or to increase the entity’s working capital (ie to improve the cash flow without having to

borrow funds). A further form of capital injection arises under the Comparative Pricing framework,

where an injection is made to allow the Department to maintain operations at an agreed level or



8.2-3

standard which may be greater than the average benchmark. Capital appropriations are different to

output appropriations, which are for Government’s purchase of outputs from departments (Refer

section 9.3.1).

Capital appropriations may be for either departmental or Territory purposes. A departmental

capital appropriation is normally an equity contribution to a department. However, a capital

contribution which is an Injection for Operations in the Comparative Pricing regime is brought to

account in the Statement of Financial Performance. This treatment allows the input of policy

decisions in relation to service to be transparent. On the other hand, a capital appropriation for

Territory purposes is a mechanism to enable capital expenditure, and does not represent an equity

contribution to the Territory. Hence, the latter is appropriated as an “Appropriation for Expenses

on Behalf of the Territory” (Note that departments may also receive this type of appropriation as an

operating revenue, when it does not relate to capital expenditure - [refer section 9.3.8.1]).

Policy

A Department is to account for a capital appropriation as an adjustment to “Accumulated

Funds”, in the period in which the entity receives the appropriated funds, unless the capital

appropriation is an injection under the Comparative Pricing regime.

Departments are to account for: (a) appropriations received as Departmental Equity

Contributions (b) appropriations received as payments from Government for capital

expenditure on behalf of the Territory and (c) appropriation for an injection for operations.

Disclosure

Equity contributions are to be disclosed in the Statement of Financial Performance or the

Statement of Revenues and Expenses on Behalf of the Territory, in the movement of

Accumulated funds [(refer Chapter 11).]

The Notes to the Financial Statements should disclose details of equity contributions (and

capital payments for expenditure on behalf of the Territory) that the agency has received

during the reporting period [(refer section 11.3.4.4).]



8.2-4

8.2.2 Injection for Operations

Definition

An injection for operations is funding provided by the Government, after negotiation and agreement

with the recipient department, to maintain the viability of operations whose cost of operations is

higher than the agreed price paid by Government for the purchase of their services. Injections

provided to Departments may relate to the operations of the Department itself, or for the

subsequent distribution to a Statutory Authority or Territory Owned Corporation. The latter

reflects provisions of the Financial Management Act 1996 (FMA) which allows for appropriations

to be made only to Departments as defined in that Act.

Policy

Receiving entities are to account for an injection for operations in the Statement of Financial

Performance as an item after extraordinary items, in the period in which the entity receives

the appropriation. This requirement applies to injections paid to Departments in respect of

their own operations, as well as those paid for subsequent distribution to Statutory

Authorities or Territory Owned Corporations. Where injections for operations have been

paid to a Department for subsequent distribution to such entities, that distribution is to be

accounted for as an expense.

Where a Department receives an Injection for Operations for subsequent distribution to a

statutory authority or territory owned corporation the Department itself has effectively

received an injection for operations relating to above benchmark costs paid for services. As

such it is important that the reported cost structure for the Department reflects the full cost

of service provision including the Injection for Operations.

Disclosure

All injections for operations receipts are to be disclosed in the Statement of Financial

Performance after ‘Operating Result After Extraordinary Items’ and before ‘Increase (or

Decrease) in Accumulated Funds’. Any subsequent on-forwarding of amounts to Statutory

Authorities or Territory Owned Corporations by Departments are to be accounted for as an



8.2-5

expense under ‘Grants and Purchase of Services’. Guidance on the format of the Statement

of Financial Performance is provided at Table A1, Section 11.2.1.

All injection for operations receipts are to be disclosed in the Statement of Cash Flows as a

‘Cash Flow from Operating Activities’ revenue item. Any subsequent on-forwarding of

amounts to Statutory Authorities of Territory Owned Corporations by Departments are to

be accounted for as a ‘Cash Flow from Operating Activities’. Guidance on the format of the

Statement of Cash Flows is provided at Table C, Section 11.2.3.

8.2.3 Restructuring of Administrative Arrangements

Definition

In accordance with the Public Sector Management Act 1995, the Chief Minister may, from time to

time, change the allocation of Government functions and responsibilities. Such changes are known

as a restructuring of administrative arrangements. One impact of these changes is that responsibility

for assets and liabilities may transfer between Government reporting entities. (Note: This section

also applies to other transfers of assets and liabilities that have the nature of a capital redistribution

by Government. For capital distributions to Government, refer section 8.2.3.)

Policy

Where assets and liabilities of a department are transferred from a transferor (or

relinquishing department) to a transferee (or recipient department), as a result of a

restructuring arrangement or for other administrative reasons, the following policies apply:

Transferor Entity

The transferor Government entity shall recognise in its financial accounts:

(a) an equity contribution, equivalent to the value of liabilities transferred (see also

section 7.5.8); and

(b) a capital distribution, equivalent to the value of assets transferred (see also section

6.6.1).



8.2-6

Transferee Entity

The transferee Government entity shall recognise in its financial accounts:

(a) a capital distribution, equivalent to the value of liabilities received (see also section

7.5.8); and

(b) an equity contribution, equivalent to the value of assets received (see also section

6.6.1).

Departments are to separately identify and account for any assets and liabilities received as

departmental items from assets and liabilities received as Territory (Administered) items.

Disclosure

As outlined in sections 11.3.4.2 and 11.3.4.3, departments are required to disclose:

• “separately, the total amounts of any assets and liabilities recognised as a result of a

restructuring of administrative arrangements during the reporting period” (AAS 29,

paragraph 12.2); and

• equity adjustments arising from a transfer of assets and liabilities, as a result of a

restructuring of administrative arrangements or other administrative reasons.

The Statement of Cash Flows should reflect any cash inflows and outflows that occurred as

part of a restructuring of administrative arrangements, ie where cash has been transferred.

These should appear as “Cash Flows from Financing Activities”.

Comparative Information

Where a restructuring occurs, this does not affect the amounts disclosed in the comparative

information, on the face of the statements, though it may affect other disclosures, such as the

categories. A department’s comparative information should still only reflect the operations

that the department was responsible for, in the comparative period, ie the comparative

information should be the audited figures (if any) for the previous financial year, as shown in

the previous financial statements (if any) for that department.



8.2-7

Accordingly, where a department has received a function in the current period, the

department will not report any comparative information on the face of the financial

statements, as the department was not responsible for that function in the comparative

period. Likewise, where a department has lost a function in the comparative period, the

department will not report any current period information on the face of the financial

statements, as the department was not responsible for that function in the current period.

8.2.4 Capital Distributions to Government

Definition

A capital distribution to Government is a cash payment, by an entity, to the Central Territory Bank

Account, where the cash payment has the nature of a distribution of accumulated funds to owners.

Payments from departmental accumulated funds are similar in nature to a dividend. However,

Government may also require such payments from Accumulated Funds held on behalf of the

Territory (ie administered funds).

Departmental capital distributions might occur where an entity has surplus funds, either resulting

from one or more operating surpluses or due to a reduced need for working capital. Territory

(administered) capital distributions might occur where an entity has received equity funding which

is subsequently not required for its intended purpose, or where an entity has sold Territory assets

which were not held as inventory (which would give rise to an extraordinary revenue on behalf of

the Territory, in accordance with section 9.3.7).

Policy

A department should account for a capital distribution as an adjustment to “Accumulated

Funds”, in the period in which the department makes the capital distribution.

Departments should account for capital distributions paid from departmental funds,

separately from capital distributions paid from Territory (administered) funds.



8.3-8

Disclosure

Capital distributions to government are to be disclosed in the Statement of Financial

Performance or the Statement of Revenues and Expenses on Behalf of the Territory in the

movement of Accumulated Funds (refer Chapter 11).

The Notes to the Financial Statements should disclose details of capital distributions paid to

Government during the reporting period (refer section 11.3.4.4).

8.3 Accumulated Funds

Definition

Departmental Accumulated Funds represent the accumulated net result after capital charges of an

entity, adjusted for any transfers to or from reserves (refer section 8.4), any equity contributions

received (refer section 8.2.1), any restructuring (refer section 8.2.3), and any capital distributions

paid (refer section 8.2.4).

Accumulated Funds held on behalf of the Territory represent the accumulated results of an entity’s

revenues and expenses on behalf of the Territory, adjusted for any transfers to or from reserves

(refer section 8.4), any payments from Government for capital expenditure on behalf of the

Territory (refer section 8.2.1), any restructuring (refer section 8.2.3), and any capital distributions

paid (refer section 8.2.4).

Policy

The Accumulated Funds shall be affected by any adjustments necessary when first applying

any changes to the requirements of this Manual or any other policy changes.

Entities should record the net amount of required adjustments against the opening

Accumulated Funds of the reporting period in which the new requirements or other changes

first apply. Note that this does not alter the comparative disclosures for the previous period.



8.3-9

The Accumulated Funds thereafter are determined by adding the net result after capital

charge (or the net amount of Territory revenues less Territory expenses) for the reporting

period, reflected in the Statement of Financial Performance “Net Result After Capital

Charge” (or in the Statement of Revenues and Expenses on Behalf of the Territory), to the

Accumulated Funds brought forward from the previous reporting period.

Disclosure

The Statement of Financial Position shall disclose the amount of Departmental Accumulated

Funds. The Statement of Assets and Liabilities Held on Behalf of the Territory shall disclose

the amount of Accumulated Funds held on behalf of the Territory.

The Statement of Financial Performance is to record the operating result for the accounting

period. This amount is adjusted by the capital charge to determine the “Net result After

Capital Charge”. This amount is then added to the opening balance of Accumulated Funds,

and adjusted for transfers to/from reserves and for capital distributions/contributions, to

give the closing balance of Accumulated Funds. This must agree to the amount of

Accumulated Funds disclosed in the Statement of Financial Position.

The net amount of revenues less expenses, from the Statement of Revenues and Expenses on

Behalf of the Territory, is to be added to the opening amount of Accumulated Funds held on

behalf of the Territory. This amount is to be adjusted for transfers to/from reserves and for

capital distributions and contributions (including in the latter any payments from

Government for capital expenditure on behalf of the Territory), to give the closing balance of

Accumulated Funds held on behalf of the Territory. The closing balance must agree to the

amount of Accumulated Funds disclosed in the Statement of Assets and Liabilities Held on

Behalf of the Territory.



8.5-10

8.4 Reserves

Definition

Reserves are amounts set aside out of profits (of a commercial entity) or gains or increments such as

gains on revaluation of assets.

Policy

Reserves shall be recognised for:

• increments on revaluation of non-current (refer section 6.11 for more detailed

information on the revaluation of non-current assets); and

• other intended uses of accumulated funds.

Departments are to account for Departmental reserves separately from Territory

(administered) reserves.

Disclosure

The Statement of Financial Position shall disclose departmental reserves. The Statement of

Assets and Liabilities Held on Behalf of the Territory shall disclose Territory (administered)

reserves.

A note to the Financial Statements shall provide a description of the nature and purpose of

each reserve and detail the opening and closing balances of each reserve and the nature and

amount of any changes in these reserves (including transfers to and from reserves). (Refer

section 11.3.4.4.)

8.5 Capital Charge

Definition

“Capital Charge” is a charge that Government levies on an entity’s net fixed assets to reflect the

cost of financing Territory operations.



8.5-11

Policy

Government levies the Capital Charge on the value of an entity’s (Departmental) net fixed

assets (written down value of property, plant & equipment). Capital Charge is a charge

against the period to which the net fixed asset value relates, ie the period during which those

resources were employed by the agency. The Capital Charge is funded through GPO.

Disclosure

The capital charge should be recognised in the Statement of Financial Performance as an

Administrative Expense to departments. The revenue for capital charge is included in GPO.



9. Revenues.......................................................................... 9.1-1

9.1 Introduction ............................................................................. 9.1-1

9.2 Definition and Recognition..................................................... 9.2-1

9.2.1 Intra-entity Transactions and Output Class Disclosure ................. 9.2-3

9.3 Revenue Categories ................................................................. 9.3-3

9.3.1 Government Payment for Outputs .................................................. 9.3-4

9.3.2 Liabilities Assumed by Government ............................................... 9.3-5

9.3.3 Resources Received Free of Charge ................................................ 9.3-7

9.3.4 User Charges .................................................................................... 9.3-8

9.3.5 Interest Earned................................................................................. 9.3-9

9.3.6 Other Revenues .............................................................................. 9.3-10

9.3.6.1 Profit on Sale of Assets................................................................................. 9.3-11

9.3.7 Extraordinary Items ...................................................................... 9.3-11

9.3.8 Territory (Administered) Revenues .............................................. 9.3-12

9.3.8.1 Appropriation for Expenses on Behalf of the Territory.............................. 9.3-13

9.3.8.2 Taxes, Fees and Fines ................................................................................... 9.3-14

9.3.8.3 Commonwealth Government Grants........................................................... 9.3-15

9.4 APPENDIX - Guidance on Accrued Revenue..................... 9.4-16



9.2-1

9. Revenues

9.1 Introduction

The recognition of revenues on an accrual basis, by a Government entity, provides users of financial

reports with information on that entity's performance by identifying:

• the inflows of financial resources earned;

• the extent to which costs were recovered; and

• the sources of those cost recoveries.

This information is useful input to assessments of the efficiency of service delivery, the resources

necessary to enable the entity to continue to provide goods and services in the future and the likely

cost of those goods and services. Such information is necessary for accountability purposes and

is relevant to decisions about matters such as the likely future funding requirements of the entity.

(AAS 29, paragraph 10.3.1)

Revenue results in an increase in the entity’s net assets, as reflected in the “Net Result” in the

Statement of Financial Performance. The Statement of Revenues and Expenses on Behalf of the

Territory likewise reflects revenues that an entity collects on behalf of the Territory (administered).

The change in net assets resulting from operations, which is reflected in the Net Result in the

Statement of Financial Performance, is included in the determination of the “Accumulated Funds”

in the Statement of Financial Position.

9.2 Definition and Recognition

Definition

“Revenues” means inflows or other enhancements, or savings in outflows, of future economic

benefits in the form of increases in assets or reductions in liabilities of the entity, other than those

relating to contributions by owners, that result in an increase in equity (ie capital) during the

reporting period. (AAS 29, paragraph 17.1)



9.2-2

Revenues may be controlled by either the entity or Government as a whole (refer sections 5.4 and

9.3). The Statement of Financial Performance reports revenues that the reporting entity controls,

and the Statement of Revenues and Expenses on Behalf of the Territory reports revenues that the

Territory (ie Government as a whole) controls, which the entity collects on behalf of the Territory

(refer section 11.2). Transactions and other events that give rise to revenue result in an increase in

an entity’s net assets.

Transactions and other events that give rise to an asset and a corresponding liability are not

revenues. As such, when an entity receives money on behalf of another entity (ie. the former

entity does not control or is not responsible for the administration of the money), the amounts are

not to be recognised as revenue. The amounts may be recognised as trust money’s if the amounts

are owing to parties external to the ACT Government (see also 11.3.7 Matters not Brought to

Account). Alternatively, if the amounts are owing to another ACT Government entity who is

actually responsible for the money, the entity collecting the money on it’s behalf must record an

asset and a corresponding liability upon the money’s receipt. When the receiving entity passes on

the moneys to the entity responsible the asset and liability are extinguished. See “Cash Transfers to

Government” for moneys transferred to CFU.

Transactions that lead to the recording of revenues, may or may not involve a movement of cash,

eg the use of credit defers the movement of cash. Other events that give rise to revenue can

include the self-generation or regeneration of an asset (eg a forest).

Policy

The accounting records and reports are to record revenues satisfying the definition of

revenue and the recognition1 criteria outlined below. The records are to be accrual based.


An entity shall recognise a revenue when, and only when, the following criteria are satisfied:

1 For an explanation of the term “Recognition” refer to section 5.4.



9.3-3

(a) it is probable that the inflow or other enhancement, or saving in outflows, of future

economic benefits has occurred; and

(b) the inflow or other enhancement, or saving in outflows, of economic benefits or service

potential can be measured reliably (AAS 29, paragraph 10.1).

Where an item does not satisfy the recognition criteria, and that information is material and

relevant to users of the Financial Statements, the Notes to the Financial Statements should

disclose the item (refer section 11.3.7).

An entity should recognise revenues for the period the entity was responsible for the relevant

functions.

9.2.1 Intra-entity Transactions and Output Class Disclosure

Where an entity reports “activities” and does not report “output classes”, the entity’s Statement of

Financial Performance should include elimination details to eliminate any transactions between its

separate activities, in deriving the amounts for the entity as a whole.

Where an entity reports output classes and has intra entity trading (eg with commercial activities

that the entity reports as an output class), the amounts reported in the Statement of Financial

Performance should include intra-entity transactions. That is, the Statement of Financial

Performance should reflect the Net Result for each output class. The entity’s Statement of

Financial Performance should also include elimination details to eliminate any intra entity

transactions. This enables the amounts reported for the entity as a whole to reflect only the

transactions relating to external parties. Refer section 11.2.1 for further details.

9.3 Revenue Categories

The categorisation of revenues (according to their nature or type) included in this section reflects

revenue categories common to Government agencies. These categories include:

• Government Payment for Outputs (section 9.3.1);



9.3-4

• Liabilities Assumed by Government (section 9.3.2);

• Resources Received Free of Charge (section 9.3.3);

• User Charges (section 9.3.4);

• Interest Earned (section 9.3.5);

• Other Revenues (section 9.3.6);

• Extraordinary items (section 9.3.7); and

• Territory (Administered) Revenues (section 9.3.8).

The availability of this level of information will enable users of Financial Statements to identify the

specific inflows of financial resources received by the entity during the accounting period.

Policy

Departmental or Territory (Administered) Revenues

Entities reporting in accordance with Chapter 11 should separately identify revenues as

being either Departmental revenues or revenues collected on behalf of the Territory.

Disclosure

The Statement of Financial Performance is to disclose each material category of

Departmental revenue (refer section 11.2.1). The Statement of Revenues and Expenses on

Behalf of the Territory is to disclose each material category of Territory (administered)

revenue (refer section 11.2.5).

9.3.1 Government Payment for Outputs

Definition

“Government Payment for Outputs” (GPO) is the revenue that departments earn from producing

outputs for Government. The Government’s annual budget (as shown in the Budget Papers)

specifies the price that Government is prepared to pay for departmental outputs. The Legislative

Assembly approves these output prices as part of the approval of the total budget. The price is

formalised in the Appropriation Act, in the form of “Output appropriation”. Payments by

Government to departments for Community Service Obligations are a sub-category of GPO.



9.3-5

There are also other types of appropriation, which are:

- Capital Injection - There are two types of Capital Injection:

“Injection for Operations” which is cash provided to maintain the viability of operations.

It is the difference between the current cost of service provision and the price which

Government has agreed to pay. This is not a revenue item. For further details see

Chapter 8 “Equity”.

“Capital Injection” which is injection for increasing an entity’s capital base, for instance,

funding of asset purchases.

- Payments on behalf of the Territory - These are Government’s funding of activities that agencies

administer. (Refer sections 10.3.10 and 8.2.1.)

Policy

Entities should recognise revenue from Output appropriations as “Government Payment for

Outputs”.

Output appropriations are revenues of the period in which the entity earned the

appropriation.

Disclosure

The Statement of Financial Performance is to recognise “Output appropriations” earned

(from the delivery of outputs) as “Government Payment for Outputs” (refer section 11.2.1).

9.3.2 Liabilities Assumed by Government

Definition

“Liabilities Assumed by Government” is a notional revenue item which is recognised by an agency

incurring an expense when the liability arising from the expense is held by another entity.

(For example, where a liability first arises with the agency incurring the expense and is subsequently

transferred to another entity without a payment being involved or where payment is less than the

liability transferred).



9.3-6

The assumption of the liability is revenue to the department incurring the expense. This is because

the assumption represents savings in outflows of future economic benefits (Refer AAS29,

paragraph 17.1).

Conversely, the assumption is an expense of the entity receiving the liability, because it is a loss of

future economic benefits in the form of an increase in liabilities (Refer AAS29, paragraph 17.1).

Accordingly, the entity receiving the liability should recognise an expense equivalent to the amount

of liability assumed. In cases where a “Liability Assumed by Government” arises the agencies

involved in the transaction must agree the amounts, and these must be disclosed in their respective

financial statements.

Policy

Where Government or another arm of Government assumes a liability of an entity (refer

Section 7.5.7), the entity incurring the expense but not recognising the liability shall:

(a) recognise the amount of expense incurred during the period (which represents the

amount of liability to be assumed); and

(b) recognise a revenue equal to the savings in outflows, ie equal to the liability assumed.

This policy recognises that the initial occurrence of a liability and the assumption of that

liability by the Government or other entity will occur simultaneously (there is no separate

accounting entry required). Where this does not occur simultaneously, the appropriate

treatment is as outlined in Section 7.5.7 “Assumed Liabilities”.

There is no revenue for the agency receiving (ie assuming) the liabilities. The treatment by

the recipient is addressed in Section 7.5.7.

Disclosure

Departments should report revenue for the amount of liability assumed. The Statement of

Financial Performance should include this revenue as “Liabilities Assumed by Government”.



9.3-7

Employee expenses, reported in the Statement of Financial Performance, should include an

equivalent amount to reflect the expense that the department has incurred. However, the

revenue and expense items should not be recognised in the Cash Flow Statement, because no

cash flow occurs.

An accounting policy note in the Financial Statements should detail the accounting policy

adopted with respect to the assumption of liabilities (Refer section 11.3.2).

9.3.3 Resources Received Free of Charge

Definition, Policy, Commentary, Guidance and Disclosure of revenues and expenses related to

resources received free of charge is discussed in section 10.3.7.

Note that “resources received free of charge” includes resources received free from both other

Government entities and non-ACT Government entities. However, where free resources come

from non-ACT Government sources, entities should recognise revenues arising as ‘donations’.

Note also that assets provided free of charge are covered in section 6.6.1.1 (Asset Transfers

Resulting from Restructurings and Other Resource Transfers) and section 6.6.1.2 (Assets Gifted or

Donated).

When resources are received free of charge the accounting treatment is consistent with AAS29 and

is as follows:

The recipient agency will recognise a revenue and an expense equivalent to the fair value of the

resources received where that can be reliably established;

The provider agency will continue to disclose the actual expenses incurred by it in providing the

resources, but will provide a note to their financial statements indicating the value of resources

provided to other agencies free of charge. This is more fully detailed in section 10.3.7.



9.3-8

9.3.4 User Charges

Definition

“User charges” are revenues directly related to the sale of goods or provision of services to other

entities, which may include other ACT Government entities. User charges are generated by

consumer demand, are market related and have a commercial nature. They are non-regulatory in

nature, in that they are not a policy instrument that Government uses to regulate an activity.

Agencies are required to separately account for user charges earned from sales to other government

agencies and from non government agencies.

User charges do not include revenue from:

• Government payment for outputs (refer section 9.3.1), which should separately appear in

the Financial Statements;

• rates, taxes, fees and fines; where the revenues are regulatory in nature (refer section

9.3.8.2); and

• the sale of assets, and other sources where the revenues do not directly relate to the sale of

goods or provision of services to other entities (refer section 9.3.6).

User charges are controlled revenues of the entity that provided the goods or services. Note: this

applies no matter whether a department is ‘gross’ or ‘net’ appropriated.

User charges are controlled revenues and an item “User Charges” should not appear in Territorial

financial statements. Rather, revenues directly related to activities that a Department does not

control should be classified as Fees and reported within the group of Taxes, Fees and Fines.

Policy

Entities must keep a record of user charges, and must be able to separately identify user

charges revenue from ACT Government sources.



9.3-9

Where an entity charges users for the provision of particular goods and services, the entity

will only recognise the associated revenue when control arises over the resulting assets.

Disclosure

The Statement of Financial Performance is to report user charges, separately identifying

user charges from ACT Government sources (“User charges - Government”) and user

charges from other sources (“User charges - non-Government”).

9.3.5 Interest Earned

Definition

“Interest Earned” is the earnings on funds invested and on departmental bank account balances (see

also section 6.4.4, for details of what constitutes an investment). Interest excludes capital gains

and dividends (refer section 9.3.6).

“Interest Earned” is controlled revenue of the entity that obtains control of the associated assets, ie

the entity that is able to spend the earnings. Normally, where an investment is a controlled asset,

interest on that investment will be controlled revenue; and where an investment is a Territory

(Administered) asset, interest on that investment will be Territory (Administered) revenue. Interest

earned includes interest revenue received from other Government entities.

Policy

Entities must keep a record of interest earned. This record must enable separate

identification of Territory (administered) interest, and interest earned from ACT

Government sources.

An entity should recognise interest as revenue when the entity gains control over the

resulting assets.



9.3-10

Disclosure

The Statement of Financial Performance is to report departmental interest. The “Statement

of Revenues and Expenses on Behalf of the Territory” is to report Territory (administered)

interest. The Notes to the Financial Statements are to separately identify interest received

from ACT Government sources and interest received from other sources. (Refer section

11.2)

9.3.6 Other Revenues

Definition

There may be other categories of revenue that occur because of the specific activities of the

department, and that would not be appropriately classified in the above categories. These items

should be included under the category “Other Revenue”, in the Statement of Financial Performance

or Statement of Revenues and Expenses on Behalf of the Territory. The Notes to the Financial

Statements should also contain adequate disclosure of the nature and amount of these items.

Policy

Entities must keep a separate record of each class of other revenues. This record must

enable separate identification of Territory (administered) revenues, and revenues earned

from ACT Government sources.

Disclosure

The Statement of Financial Performance is to report departmental revenue, and the

“Statement of Revenues and Expenses on Behalf of the Territory” is to report Territory

(Administered) revenue (refer section 11.2). The Notes to the Financial Statements are to

disclose each class of revenue, separately identifying revenue received from ACT

Government sources and revenue received from other sources (refer section 11.3.3.1).



9.3-11

9.3.6.1 Profit on Sale of Assets

For Definition, Policy, Commentary, and Disclosure of profit (ie revenue) on sale of assets, refer to

section 6.12.

9.3.7 Extraordinary Items

Definition

AAS 1 Statement of Financial Performance defines Extraordinary items as:

“items of revenue and expense which are attributable to transactions or

other events of a type that are outside the ordinary activities of the

entity and are not of a recurring nature”.(paragraph 8.1)

For an item to be classified as extraordinary it is necessary for it to be both outside ordinary

operations and for the underlying event or transaction to be of a type that is not of a recurring

nature.

AAS 1 also requires that

“Where a revenue or an expense from ordinary activities is of such a size,

nature or incidence that its disclosure is relevant in explaining the financial

performance of the entity for the reporting period, its nature and amount

must be disclosed separately in the notes to the financial report.”

(paragraph 5.4)

Policy

There may be occasions where an item is either non-recurring in nature or traceable to

events that have occurred outside the ordinary activities of the entity. In cases where both of

these situations apply to an item, the Financial Statements should report the item as an



9.3-12

extraordinary item. This involves disclosure below the “Operating Result before

Extraordinary Items” to establish a further item “Operating Result”.

Disclosure

After the operating result, the Statement of Financial Performance is to disclose the

aggregate amount of any extraordinary items. The reporting entity shall disclose the nature

and amount of each extraordinary item that the entity has recognised in the Statement of

Financial Performance or the Statement of Revenues and Expenses on Behalf of the

Territory by way of note.

Where a revenue from ordinary activities is of such a size, nature or incidence that its

disclosure is relevant in explaining the financial performance of the entity for the reporting

period, its nature and amount must be disclosed separately in the notes to the financial

report.

9.3.8 Territory (Administered) Revenues

Definition

Territory (administered) revenues arise either in relation to the reporting entity acting on behalf of

Government, or in relation to assets or liabilities that the reporting entity administers on behalf of

Government.

An example of acting on behalf of Government is an entity collecting taxes, rates, fees, fines or user

charges (refer section 9.3.8.2) where the entity cannot use the proceeds without further

authorisation (such as appropriation of those funds). Examples of revenues arising in relation to

assets that the entity administers, are interest on Territory (Administered) investments, and donated

assets (see also sections 9.3.5 and 6.6.1.2).

Territory (administered) revenues include “Appropriation for Expenses on Behalf of the Territory”

(Refer section 9.3.8.1), which Government appropriates for payment of grants, subsidies and

transfer payments (see also section 10.3.10.1).



9.3-13

Policy

An entity shall separately identify and record as Territory (administered) revenues those

revenues that the entity is entitled to collect on behalf of the whole of Government.

Disclosure

The Statement of Revenues and Expenses on Behalf of the Territory is to disclose all

Territory (administered) revenues.

The Notes to the Financial Statements are to disclose each material class of Territory

(administered) revenue.

For more specific details on disclosure, refer to Chapter 11.

9.3.8.1 Appropriation for Expenses on Behalf of the Territory

Definition

Revenue in the form of “Appropriation for Expenses on Behalf of the Territory” only includes

those funds received for payment of grants, subsidies and transfer payments (see also section

10.3.10.1). This revenue does not include any “Appropriation for Expenses on Behalf of the

Territory” that a department receives for capital expenditure (refer section 8.2.1).

Policy

An entity shall recognise revenue for “Appropriation for Expenses on Behalf of the

Territory” when the entity receives the cash. This appropriation revenue is not earned in

the sense that departmental revenue is earned. It is mostly in the form of grants or transfer

payments administered by the agency.

Disclosure

The Statement of Revenues and Expenses on Behalf of the Territory is to disclose revenue

from “Appropriation for Expenses on Behalf of the Territory”.



9.3-14

The Statement of Cash Flows on Behalf of the Territory should recognise the receipt of this

appropriation as an Operating Inflow (to fund expenses on behalf of the Territory).

9.3.8.2 Taxes, Fees and Fines

Definition

Taxes

Taxes are compulsory levies imposed by Government to raise revenue. There is usually no clear

and direct link between payment of specific taxes and the provision of associated goods and

services. Taxes include any related penalties imposed, eg penalties for late payment.

Government normally uses taxation revenue to finance the production and supply of public goods

and services. Taxes are distinguished from fees in that their main purpose is not to regulate a

particular activity. Rather, taxes are levied to raise general revenue, enabling government to meet

its public policy obligations. Examples of taxes include stamp duties, payroll tax, land tax, *motor

registration charges, and municipal rates. (*Note: Because of the significant revenue they generate,

drivers licence fees and vehicle registration fees are treated as taxes.)

Fees

Fees (also known as regulatory fees) are usually associated with the granting of a permit or

privilege, or with the regulation of an activity. Fees are a compulsory payment with an identifiable

benefit attached. Fees are an instrument of public policy that Government uses to regulate certain

activities. Examples of fees are water pollution licences, weapons licences, and public weighbridge

fees. Regulatory Fees do not include audit fees, which are a user charge (refer section 9.3.4).

Fines

Fines are civil and criminal penalties that Government imposes on law-breakers. Fines exclude

penalties imposed by tax authorities, except where such penalties include a component imposed by

the judicial system. In the latter case, the judicial component is treated as a fine.



9.3-15

Fines impose penalties related to a breach of government regulation. They are compulsory without

an associated benefit to the payer. Examples of fines are parking fines, court fines and library fines.

Policy

Entities should recognise the proceeds of taxes, fees and fines, as Territory (administered)

revenue.

Entities must keep a separate record of each class of revenue from taxes, fees and fines.

Disclosure

The “Statement of Revenues and Expenses on Behalf of the Territory” is to report all

Territory (administered) revenues under the applicable revenue category, as shown in

section 11.2.

In addition, the Notes to the Financial Statements are to

• provide details of each class of revenues; ie taxes, fees and fines (refer section

11.3.3.1);

• separate Departmental revenues from Territory (administered) revenues; and

• separately identify revenues from Government sources and revenues from

non-ACT Government sources.

9.3.8.3 Commonwealth Government Grants

Definition

Commonwealth Government grants include general purpose and specific purpose grants that the

ACT Government receives, from the Commonwealth Government. Where the Territory Bank

Account receives these funds, they are treated as revenues of the Territory, which the ACT

Government then appropriates to ACT agencies. In addition, where an agency directly receives a

Commonwealth grant for on-passing in the form of a transfer payment, the agency should treat the

receipt of the grant as a Territory (administered) revenue and its subsequent payment as a Territory

(administered) expense.



9.4-16

Commonwealth Government ‘grants’ exclude any Commonwealth Government payments that have

the nature of a user charge revenue, ie where an ACT Government agency is providing goods or

services and charging the Commonwealth Government for that service provision (refer section

9.3.4). One -off Commonwealth grants are to be treated as Specific Purpose Payments (SPPs).

Policy

Territory (administered) revenues include Commonwealth Government grants.

Disclosure

The “Statement of Revenues and Expenses on Behalf of the Territory” is to report Territory

(administered) revenues from Commonwealth Government grants (refer section 11.2).

9.4 APPENDIX - Guidance on Accrued Revenue

If entities are using a full accrual accounting system it will not be necessary to conduct a

reconciliation similar to the one below to calculate the accrued revenue for the period. Officers

may find this reconciliation useful as reference material.

Note: Most accrual entries also adjust either user charges or expenses. This is because of the

double entry equation that for every debit (Dr) there must be a corresponding credit (Cr).

Example 1: When taking up (ie Debiting) receivables for “accrued revenue” as at year end,

there must be a corresponding Cr to the appropriate user charge category to which

each receivable relates (eg sales, or seminars). This applies when a receivable

relates to user charges that the entity has earned in the financial period and not

raised an invoice for, by the end of the period.

Example 2: Cr revenue received in advance, Dr user charges. When taking up “revenue

received in advance”, as a current liability as at year end, this reduces the revenue

recorded for the user charge codes to which those current liabilities relate.



9.4-17

When calculating the accrued user charges for the period, the cash figures should be adjusted to

show the accrued position. The following adjustments should be put through by user charge

sub-category and output class, to reflect the accrual position.

User Charges as per the Cash Ledger

Add: Opening Revenue received in Advance

Less: Closing Revenue received in Advance

Less: Opening Receivables

Add: Closing Receivables

Total: Accrued User Charges

Note that the above adjustments are not all encompassing and entities may not have to take up all

of the above entries. These entries should act as a guide.

Further details on “accrued revenue” are available in section 6.4.2 (Receivables). Further details on

“revenue received in advance” are available in section 7.5.6.1.


3/07/2001 i


10.Expenses ........................................................................... 10-1

10.1 Introduction ........................................................................... 10-1

10.2 Definition and Recognition ................................................... 10-1

10.2.1Intra-entity Transactions and Output Class Disclosure .................. 10-2

10.3 Categories of Expenses.......................................................... 10-3

10.3.1Employee Expenses ........................................................................... 10-4

10.3.2Administrative Expenses................................................................... 10-5

10.3.3Borrowing Cost Expense................................................................... 10-6

10.3.4Depreciation and Amortisation......................................................... 10-7

10.3.5Loss on Disposal of Non-Current Assets .......................................... 10-7

10.3.6Inventory Expense............................................................................. 10-8

10.3.7Bad and Doubtful Debts.................................................................... 10-8

10.3.8Resources Provided or Received Free of Charge ............................ 10-9

10.3.9Expenses Relating to Assumed Liabilities ...................................... 10-12

10.3.10 Extraordinary Items .................................................................... 10-12

10.3.11 Territory (Administered) Expenses ............................................ 10-12

10.3.11.1 Grants and Purchased Services................................................................. 10-13

10.3.11.2 Transfers to Government .......................................................................... 10-14

10.3.12 Tax Equivalent Payments ............................................................ 10-15



10-1

10. Expenses

10.1 Introduction

An entity’s recognition of expenses on an accrual basis, incorporating all cash and non-cash

transactions, provides users of financial reports with information on that entity's performance, by

identifying:

• the outflows of goods and services used or provided;

• the extent to which costs were incurred; and

• the types of costs incurred.

This information is useful input to assessments of the efficiency of service delivery, the resources

necessary to enable the entity to continue to provide goods and services in the future and the likely

cost of those goods and services. Such information is necessary for accountability purposes and

is relevant to decisions about matters such as the likely future funding requirements of the entity.

(AAS 29, paragraph 11.3.1)

An expense results in a decrease in the entity’s net assets, as reflected in the “Net Result” in the

Statement of Financial Performance. (Expenses incurred on behalf of the Territory are likewise

reflected in the Statement of Revenues and Expenses on Behalf of the Territory.) The change in

net assets resulting from operations, which is reflected in the Net Result in the Statement of

Financial Performance, is included in the determination of the “Accumulated Funds” in the

Statement of Financial Position.

10.2 Definition and Recognition

Definition

“Expenses” means consumptions or losses of future economic benefits in the form of reductions in

assets or increases in liabilities of the entity, other than those relating to distributions to owners,

that result in a decrease in equity (ie Capital) during the reporting period. (AAS 29, paragraph

18.1)



10-2

Expenses are the costs incurred in providing goods and services, and reflect the use of resources

available to an organisation to satisfy its objectives. The recognition of expenses can result from

both cash and non-cash transactions.

Policy

Entities are to determine each period’s expenses on an accrual basis.

The accounting system and reports should record each consumption or loss of service

potential or of future economic benefits, where the consumption or loss satisfies the

definition of an expense and the following recognition criteria. An entity shall recognise an

expense when and only when:

(a) it is probable that the expense has occurred; and

(b) the expense can be measured reliably.

Where an item does not satisfy the recognition criteria, and that information is material and

relevant to users of the Financial Statements, the Notes to the Financial Statements should

disclose the item (refer section 11.3.7).

An entity should recognise expenses for the period the entity was responsible for the relevant

functions.

10.2.1 Intra-entity Transactions and Output Class Disclosure

Where an entity reports “activities” and does not report “output classes”, the entity’s Statement of

Financial Performance should include elimination details to eliminate any transactions between its

separate activities, in deriving the amounts for the entity as a whole.

Where an entity reports output classes and has intra entity trading (eg with commercial activities

that the entity reports as an output class), the amounts reported in the Statement of Financial

Performance should include intra-entity transactions. That is, the Statement of Financial

Performance should reflect the Net Result for each output class. The entity’s Statement of

Financial Performance should also include elimination details to eliminate any intra entity



10-3

transactions. This enables the amounts reported for the entity as a whole to reflect only the

transactions relating to external parties. Refer section 11.2.1 for further details.

10.3 Categories of Expenses

The categories of expenses (according to their nature or type) included in this section reflect

common expense categories. Categories covered in this section include:

• employee expenses (section 10.3.1);

• administrative expenses, including supplies and services (section 10.3.2);

• borrowing cost expense (section 10.3.3);

• depreciation and amortisation (section 10.3.4);

• loss on disposal of non-current assets (section 10.3.5);

• inventory expenses (section 10.3.6);

• bad and doubtful debts (section 10.3.7);

• resources provided or received free of charge (section 10.3.8);

• expenses related to assumed liabilities (section 10.3.9);

• extraordinary items (section 10.3.10); and

• Territory (Administered) expenses (section 10.3.11).

Departmental or Territory (Administered) Expenses

Entities reporting in accordance with Chapter 11 should separately identify expenses as being either

expenses of the entity (ie Departmental expenses) or expenses incurred on behalf of the Territory

(Refer section 5.4).

For external reporting, departments should report Departmental expenses at output class level by

each major class of expense. For internal management purposes, financial reports should present

cost centre information, with separate reports presenting information disaggregated by outputs.

Disclosure

The Statement of Financial Performance should disclose each material category of

Departmental expense (refer section 11.2.1). The Statement of Revenues and Expenses on



10-4

Behalf of the Territory should disclose each material category of Territory (administered)

expense (refer section 11.2.5).

Where an expense relating to an agencies ordinary activities is of such size, nature or

incidence that its disclosure is relevant in explaining the financial performance of the entity

for the reporting period, its nature and amount must be disclosed separately in the Notes to

the Financial Statements.

10.3.1 Employee Expenses

Definition

Employee expenses are the entitlements which employees accumulate as a result of the rendering of

their services to an employer.

Further details on accounting for employee entitlements are contained in AAS 30 Accounting for

Employee Entitlements, and in Chapter 7 of this Manual.

Policy

Employee expenses are the employing entity’s own expenditure, even where they relate to

the employing entity’s activity on behalf of the Territory.

Employee expenses should reflect the “full cost” of staff as they provide their services, ie on

an accrual basis. This means including employee expenses that another entity pays or

assumes on behalf of the reporting entity (refer sections 10.3.7 and 7.5.7) to enable an

assessment to be made of the full cost of the reporting entity’s activities. Employee expenses

include, but are not limited to, benefits to employees in the form of:

• salaries and wages;

• annual leave;

• sick leave;

• long service leave;

• superannuation;

• redundancy payments;



10-5

• other post-employment benefits, eg special pensions; and

• other employee entitlements, eg maternity and paternity entitlements, on-costs.

Amounts paid or owed to employees as reimbursement of out of pocket expenses are

administrative expenses and should not be accounted for as employee expenses.

Disclosure

The Statement of Financial Performance is to disclose the aggregate amount of “Employee

Expenses” for the period.

10.3.2 Administrative Expenses

Definition

Administrative expenses are those expenses of a recurrent nature that are not included in the other

classifications outlined in section 10.3.

Policy

Administrative expenses are generally Departmental expenditure, whether they relate to

Departmental or Territory (Administered) functions. Administrative expenses include

recurrent expense items such as:

• accommodation;

• repairs and maintenance (See also section 6.8);

• minor assets not required to be capitalised (refer sections 6.5.4 and 6.9);

• travel and associated travel costs;

• office requisites;

• postage;

• audit fees;

• computer services;

• legal services;

• consultants;

• telecommunications services;



10-6

• insurance premiums (see Commentary);

• Community Service Obligation (CSO) payments to agencies; and

• other administrative expenses.

Disclosure

The Statement of Financial Performance should report Departmental Administrative

Expenses as a separate, collective item. The Statement of Revenues and Expenses on Behalf

of the Territory should disclose Territory (Administered) Administrative Expenses. The

Notes to the Financial Statements may provide further dissection where this additional

information is likely to assist the users of the Financial Statements. (See also, section

11.3.3.1.)

10.3.3 Borrowing Cost Expense

Definition

Borrowing cost expense is defined by AAS 1 “Statement of Financial Performance” as

“interest and other costs incurred by an entity in connection with the borrowing of funds”.

Policy

Agencies are to disclose borrowing cost expense in accordance with AAS 1.

Disclosure

The Statement of Financial Performance is to report borrowing cost expense for

Departmental borrowings, and the Statement of Revenues and Expenses on Behalf of the

Territory reports borrowing cost expense for Territory (Administered) borrowings.

Borrowing cost expense includes:

• interest on bank overdrafts and short term and long term borrowings;

• amortisation of discounts or premiums relating to borrowings;

• amortisation of ancillary costs incurred in connection with the arrangements of

borrowings;



10-7

• finance charges in respect of finance leases recognised in accordance with AAS 17

Accounting for Leases; and

• exchange differences arising from foreign currency borrowings net of the effects of

any hedge of the borrowings.

10.3.4 Depreciation and Amortisation

Definition

Depreciation (and amortisation) is a periodic expense of operations and is associated with the

consumption or loss of service potential of non-current assets. This consumption or loss may occur

through use, wear and tear, or obsolescence. Amortisation is used in relation to intangible and

leased assets, while depreciation is applied to physical assets such as property, plant and equipment.

Policy

• Entities should account for depreciation as a periodic operating expense, calculated in

accordance with sections 6.10.1 and 6.10.2.

• Entities should amortise intangible assets in accordance with section 6.5.5.

• Entities should amortise leased assets in accordance with section 6.13.3.

Disclosure

The Statement of Financial Performance reports depreciation/amortisation expense for

Departmental assets, and the Statement of Revenues and Expenses on Behalf of the

Territory reports depreciation/amortisation expense for Territory (Administered) assets

(refer sections 5.4, 11.2.1 and 11.2.5). The Notes to the Financial Statements are to disclose

details of the Provision for Accumulated Depreciation (refer section 11.3.4.2).

The Cash Flow Statement will not reflect depreciation and amortisation as these expenses

are non-cash items.

10.3.5 Loss on Disposal of Non-Current Assets

For “loss on disposal of non-current assets”, refer section 6.12 “Disposal of Non-Current Assets”.



10-8

10.3.6 Inventory Expense

Definition

Inventory expense is the reduction in the inventory asset (refer section 6.4.5) by way of use or loss

(eg theft, damage or obsolescence). Where the inventory asset is a Departmental asset, the

inventory expense is a Departmental expense. Likewise, where the inventory asset is a Territory

(administered) asset, the inventory expense is a Territory (administered) expense.

Policy

Entities are to account for the use or loss of inventory in a period as an expense of that

period.

Disclosure

The Statement of Financial Performance should report “Departmental” inventory expense.

The Cash Flow Statement should reflect the total amount of cash that the entity has spent on

“Departmental” inventories, regardless of whether an item was expensed or capitalised.

The Statement of Revenues and Expenses on Behalf of the Territory should report Territory

(administered) inventory expense. The Statement of Cash Flows on Behalf of the Territory

should reflect the total amount of cash that the entity has spent on Territory (administered)

inventories, regardless of whether an item was expensed or capitalised.

10.3.7 Bad and Doubtful Debts

Definition

Bad and doubtful debts expense is, in effect, a reduction of the “receivables” asset.

Doubtful debts expense is an estimate of the amount of receivables outstanding at the end of the

reporting period that the entity anticipates it will not recover, but has not written off as a bad debt.



10-9

Bad debts expense represents receivables that the entity has written off as uncollectable. The

debtor may not be able to make payment, or may be uncontactable, or the entity may have decided

that it is impracticable to enforce payment.

(Note: For further details on bad and doubtful debts, refer to sections 6.4.2 and 6.4.3).

Policy

When an entity considers it probable it will not receive full or part payment of a receivable,

the entity shall recognise an expense as soon as it considers that the receivable will not be

recovered. This may be done by writing off the receivable as a bad debt or by making a

provision for a doubtful debt (refer section 6.4.3).

Disclosure

The Statement of Financial Performance and the Statement of Revenues and Expenses on

Behalf of the Territory, as appropriate, should report amounts expensed as bad and doubtful

debts. As the expenses are non-cash items, the statements of Cash Flow should not reflect

these expenses.

Entities are to identify the specific debts that are expensed as bad debts and disclose them, in

the Financial Statements, in aggregate for each class of receivables.

10.3.8 Resources Provided or Received Free of Charge

Definition

Resources provided or received free of charge relate to goods and services provided to, or received

from, another entity. Where the providing entity does not charge for those goods and services, the

recipient entity receives those goods or services free of charge. The providing or the receiving

entity may be either another Government entity or a non-Government entity. Examples of

resources that an entity might provide or receive free of charge include seconded staff, office

accommodation, use of motor vehicles, car parking, power and lighting, photocopying, payroll, and

audit services.



10-10

Entities should disclose the shift in allocation of resources resulting from such transactions, to

improve accountability and achieve more accurate costing of service delivery.

Resources provided or received free of charge exclude assets that transfer from one entity to

another either as a result of the machinery of Government changes and/or changes in Government

policy (refer section 6.6.1.1), or in the form of grants, subsidies and transfer payments (Refer

section 10.3.10.1). Resources received free of charge also exclude assets gifted or donated (refer

section 6.6.1.2).

Where an entity provides assets free of charge to a non-Government entity, the providing entity

should account for those assets in accordance with section 6.12 - Disposal of Non-Current Assets.

Policy

Entities should only recognise resources provided or received free of charge where the goods

or services involved are material (Refer section 2.2.2.4).

A recipient entity should only recognise resources received free of charge if it would

otherwise have paid for those goods or services.

Where an entity provides resources free of charge to another entity, the providing entity

shall separately account for the costs of those resources as “resources provided free of

charge”. Unless the providing entity charged for the resources it provided, it cannot

recognise a revenue from the recipient entity, nor can it allocate its expenses to the recipient

entity.

An entity receiving resources free of charge:

(a) shall recognise a *revenue, because the resources received free of charge represent a

savings in outflows of resources, as no cash was necessary to purchase the resources;

(b) can only recognise a revenue when the value of the resources received free of charge

can be reliably measured; and



10-11

(c) shall recognise an expense equal in amount to the revenue. The expense category is to

reflect the nature of the expense and will enable the real cost of operations to be

established notwithstanding that the cash outflows are from another entity.

*Note: The recipient entity shall recognise the above revenue as “resources received free of

charge”, where another Government entity is the providing entity. Where the providing

entity is a non-Government entity, the recipient entity shall recognise the above revenue as

“donations” from non-Government sources (Refer sections 9.3.6 and 11.3.3.1).

Disclosure

The Financial Statements should separately disclose “resources received free of charge”.

The Notes to the Financial Statements should provide details of the resources received and

the dollar value of those resources. Entities should include an equivalent amount of expense

under the relevant expense category (allocated to the same output class as the revenue).

Where an entity has provided resources free of charge, this does not change the amounts

recognised in the Financial Statements, which should continue to disclose the full amount of

expense that the entity has incurred. The Notes to the Financial Statements should disclose

details of resources provided free of charge and the recorded cost of those resources.

Because a providing entity has had a cash outflow in providing resources (eg for salaries),

the relevant statement of cash flows should continue to reflect that cash outflow, within

Operating Cash Flows. The Statement of Cash Flows for the receiving entity do not include

resources received free of charge, as the revenue and the expense are both non-cash items.

Where resources provided (or received) free of charge cannot be reliably measured, the

Notes to the Financial Statements should disclose details of these resources, listing the goods

and services provided (or received) and the recipient (or supplier).



10-12

10.3.9 Expenses Relating to Assumed Liabilities

An entity whose liability is assumed should refer to sections 7.5.7 and 9.3.2 for details of expenses

relating to assumed liabilities. An entity assuming a liability should refer to section 7.5.7 for details

of expenses resulting from assumed liabilities.

10.3.10 Extraordinary Items

For details of extraordinary items, refer to section 9.3.7.

10.3.11 Territory (Administered) Expenses

Definition

Territory (administered) expenses are expenses of the Territory rather than costs of an entity’s

activities (Refer section 5.4). Territory (administered) expenses occur where an entity incurs

expenses on behalf of the Territory, eg as an agent of the Territory, or where expenses arise in

relation to assets that the entity holds or liabilities the entity administers on behalf of the Territory.

An entity incurs expenses on behalf of the Territory after the entity receives an “Appropriation for

Expenses on Behalf of the Territory (EBT)”, which enables the entity to make payments on behalf

of the Territory (Refer section 9.3.8.1). This EBT appropriation entitles the entity to spend money

that the entity holds on behalf of the Territory. However, the entity is obliged to use that

appropriation to pay grants, subsidies or transfer payments (refer section 10.3.11.1); and is not

permitted to divert those funds for other purposes. Hence, all expenses relating to EBT

appropriation must be recognised as Territory (administered) expenses.

Territory (administered) expenses that may arise, in relation to assets held on behalf of the

Territory, include items such as:

• bad or doubtful debts relating to receivables held on behalf of the Territory (refer section

6.4.2),

• depreciation of Territory (administered) assets (refer section 6.10),

• loss on disposal of Territory (administered) assets (refer section 6.12),

• finance lease expenses (for assets held on behalf of the Territory) (refer section 6.13.3), and



10-13

• cash transfers to the Territory Bank Account from an account that contains Territory

(administered) moneys (refer section 10.3.11.2).

Territory (administered) expenses that arise in relation to liabilities that the entity already holds on

behalf of the Territory include, for example, interest on Territory borrowings. An expense would

generally be regarded as a Territory (Administered) expense if the entity:

• has restricted or no discretion in relation to the funds expensed;

• has restricted or no discretion to increase or reduce the amount expensed;

• has responsibility for the funds expensed but restricted or no authority over its use;

• only has responsibility for the transfer or on-payment of the funds expended; or

• incurred that expense otherwise than as part of the cost of production or delivery of an

output.

Policy

An entity shall separately identify and record as Territory (administered) expenses those

amounts the entity incurs on behalf of the Territory (Refer section 5.4), or which arise in

relation to assets or liabilities that the entity holds (administers) on behalf of the Territory.

Disclosure

The Statement of Revenues and Expenses on Behalf of the Territory is to disclose all

Territory (administered) expenses. For more specific details on disclosure, entities should

refer to Chapter 11.

10.3.11.1 Grants and Purchased Services

Definition

Grants and Purchased Services are expenses that an entity incurs on behalf of the Territory. The

entity responsible for the funding transfers to third parties might determine to whom the funds are

paid, how much each recipient receives and under what conditions. The responsible entity does not

have the authority to divert those funds into an alternative use, eg to fund the entity’s own

employee or administrative costs which are Departmental in nature.



10-14

Grants and Purchased Services do not include transfers of cash to or from the Territory Bank

Account.

Policy

Grants and Purchased Services were previously recorded and disclosed as Grants, Subsides

and Transfer Payments.

An entity shall separately identify and record as Grants and Purchased Services those

amounts the entity incurs on behalf of the Territory, ie on behalf of the whole of

Government rather than the entity’s own behalf (Refer section 5.4).

If an entity has issued a grant and the recipient third party is presently obliged to repay all

or part of the grant; the issuing entity should recognise the amount repayable as a Territory

asset to the extent that repayment is probable.

Disclosure

Entities should recognise “Grants and Purchased Services” as Territory (administered)

expenses, in the Statement of Revenues and Expenses on Behalf of the Territory (refer

section 11.2.5).

10.3.11.2 Transfers to Government

Definition

“Transfers to Government” is a Territory (administered) expense. It represents the transfer, to the

Central Financing Unit, of operating revenue of the Territory that the transferring entity has

collected on behalf of the Territory. The Territory’s operating receipts include the proceeds of

rates, taxes, fees and fines, Commonwealth Government Grants, interest on deposits of Territory

moneys, and sales of Territory (administered) inventory.

“Cash Transfers to Government” excludes transfers of Departmental cash to the Territory Bank

Account; eg to pay Departmental expenses such as superannuation (refer section 10.3.1), to

purchase investments (refer section 6.4.4), or to pay capital distributions (refer section 8.2.3).



10-15

Policy

Entities are to recognise “Cash Transfers to Government” as a Territory (administered)

expense.

Disclosure

Entities should recognise Transfers to Government as Territory (administered) expenses, in

the Statement of Revenues and Expenses on Behalf of the Territory (refer section 11.2.5).

Agencies should advise CFU of the amount taken up in their Statement of Revenues and

Expenses on Behalf of the Territory so that CFU can record the corresponding amount in its

financial statements. This will be an accrual based amount so the difference between it and

the amount of cash transferred to CFU must be recorded as a liability in the Agency’s

Statement of Assets and Liabilities held on Behalf of the Territory.

10.3.12 Tax Equivalent Payments

Definition

Tax equivalent payments are made by Government Business Enterprises to the Government for

taxes “avoided” through the sales and income tax exemption status. The tax equivalent payments

are required as part of the Government’s commitment to the National Competition Policy.

Fringe benefits tax and the Goods and Services Tax are payable by all Australian governments to

the Commonwealth and are not considered to be a tax equivalent payment.

Policy

The tax equivalent payments include but are not limited to the following taxes:

• income tax

• rates

• land tax

• stamp duties

• financial institutions duty

• BAD tax

• payroll tax



10-16

The following Government Business Enterprises will be subject to income tax equivalents

and are required to pay the relevant amounts:

• Exhibition Park In Canberra

• Australian International Hotel School - Hotel only

• Gungahlin Development Authority

• ACT Housing

• ACT Forests

• Canberra Cemeteries Trust

• InTACT

• ACTION

• Canberra Tourism and Events Corporation

• Canberra Cultural Facilities Corporation

Payroll tax is to be paid monthly on the seventh day of the following month. Rates and land

tax will be payable to the Revenue Office upon the issue of a quarterly assessment notice.

The timing of the issue of the assessment depends upon the location of the land.


3/07/2001 a

FINANCIAL STATEMENT GUIDELINES

FOR DEPARTMENTAL REPORTING ENTITIES

Issued for application to

Government Departments

for reporting periods

ending on or after

30 June 2001

ACT GOVERNMENT

UPDATED MAY 2001


3/07/2001 i


11.Financial Statement Guidelines for DepartmentalReporting Entities ................................................................. 11-1

11.1 Introduction ........................................................................... 11-1

11.1.1Application ........................................................................................ 11-1

11.1.2Application Date................................................................................ 11-1

11.1.3General Points ................................................................................... 11-2

11.1.4Certification....................................................................................... 11-3

11.1.5Submission Date For Financial Statements...................................... 11-4

11.1.6Guideline Amendments ..................................................................... 11-4

11.1.7Application of Accounting Standards, Concepts and GuidanceReleases........................................................................................................ 11-4

11.1.8Currency, language and comparative amounts................................ 11-5

11.1.9Consolidation..................................................................................... 11-6

11.1.10 Valuation of Assets......................................................................... 11-7

11.2 Format of the Financial Statements ..................................... 11-7

11.2.1Statement of Financial Performance ................................................ 11-8

11.2.2Statement of Financial Position ...................................................... 11-12

11.2.3Statement of Cash Flows................................................................. 11-14

11.2.4Statement of Performance .............................................................. 11-16

11.2.4.1 Background – the Regulatory Framework ............................................... 11-16

11.2.4.2 Statement of Performance......................................................................... 11-16

11.2.4.3 Guiding Principles..................................................................................... 11-18

11.2.4.4 Materiality in Outputs and Performance Reporting................................ 11-19


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11.2.4.5 Consistency of performance information.................................................. 11-21

11.2.4.6 Reporting Variations to Output Measures............................................... 11-21

11.2.4.7 Compulsory Guidelines for the Compiling of Performance Schedules.... 11-22

11.2.5Statement of Revenues and Expenses on Behalf of the Territory . 11-29

11.2.6Statement of Assets and Liabilities held on Behalf of the Territory11-31

11.2.7Statement of Cash Flows on behalf of the Territory...................... 11-33

11.2.8Statement of Appropriation............................................................ 11-35


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11. Financial Statement Guidelines for DepartmentalReporting Entities

11.1 Introduction

If a Department is of the view that following Chapter 11 will result in non-compliance by the

Department with the generally accepted accounting practice (GAAP) or the Financial

Management Act 1996 (FMA) this should be brought to the attention of the Accounting

Policy Branch of the Department of the Treasury immediately.

11.1.1 Application

The accounting policies set out in the Financial Statement Guidelines for Departmental Reporting

Entities, hereafter referred to as the Guidelines, apply to all ACT Government departments.

The provisions of section 27 of the Financial Management Act 1996 require that each department

prepare Annual Financial Statements. Subsection 67(2) of the FMA empowers the Treasurer to

issue financial management guidelines, for the purposes of the FMA. This Chapter of the ACT

Accounting Policy Manual is approved under subsection 67(2), and is issued for the purposes of

section 27 of the FMA.

Where the Financial Statement Guidelines make reference to ‘Departments’, the Guidelines apply

(as appropriate) to all entities determined to be departments for reporting purposes under the

Financial Management Act 1996. Likewise, where the Guidelines refer to an ‘entity’, this shall be

taken to include departments. Similarly, references to Chief Executives should be read as including

Chief Executive Officers.

Where specifically stated by a particular section of these Financial Statement Guidelines, the

guidance provided is not mandatory.

11.1.2 Application Date

These Guidelines are mandatory for reporting periods ending on or after 30 June 2001.


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11.1.3 General Points

These Guidelines incorporate the Statements of Accounting Concepts (SACs) and Australian

Accounting Standards (AASs) prepared by the Australian Accounting Standards Board (AASB),

where appropriate. The Guidelines reflect the ACT’s application of AAS 29 Financial Reporting

by Government Departments.

The Guidelines deal with the consistency and quality of financial information considered necessary

to meet the information needs of users. The Financial Statements required by these Guidelines are

known as ‘general purpose financial reports’ and are concerned with providing information to meet

the common needs of external users who rely on information communicated to them by an entity’s

published Financial Statements.

The Guidelines set out minimum disclosure requirements for Financial Statements. Where Financial

Statements prepared in accordance with those requirements would not otherwise show fairly the

matters required by Parts 2 and 3 of the Guidelines, the Chief Executive must add such information

and explanations as will show fairly those matters. Additional disclosure should also be presented

where the information is considered to enhance the comprehension of the Financial Statements and

is of relevance to readers.

The disclosure requirements outlined in the Guidelines have been determined having regard to the

reliability, timeliness, relevance and cost-effectiveness of information disclosed in the Financial

Statements. The following principles underpin these Guidelines:

Accountability - Chief Executives are accountable for the efficient and effective use of resources

for which they are responsible and the safekeeping of public moneys. Financial

Statements should disclose information relevant to assessing their performance in

this respect.

Compliance - the Financial Statements should disclose the information required by legislation.

Comparability - the Financial Statements should provide operational information that is

comparable between periods and departments.


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Where the subject matter of a provision in these Guidelines is also the subject matter of a provision

in legislation that applies to an entity, the latter provision must take precedence to the extent of any

conflict. The Chief Executive must cause this fact to be disclosed in the notes to the Financial

Statements.

The Financial Statements must:

(a) in the manner set out in section 11.2, show the aggregate amount and description of each

item that section 11.2 refers to; and

(b) include notes that:

(i) disaggregate, qualify or otherwise explain the matters to which paragraph (a) applies; and

(ii) give particulars of other matters;

as required in these Guidelines.

The definitions to be applied in using these Guidelines are the definitions contained in the Glossary

section of this Manual. Those definitions are consistent with the definitions provided in Australian

Accounting Standards.

11.1.4 Certification

Audit Report

The audit report on an entity’s Financial Statements must be attached to the front of those

statements directly before the Statement by the Chief Executive.

Statement by the Chief Executive

A statement must be attached to the front of the Financial Statements directly after the audit report,

signed by the Chief Executive and the officer responsible for the financial operations of the

department, stating whether, in their opinion the financial statements fairly reflect the financial

operations and service performance of the department during the year to which they relate and the

financial position of the department at the end of the year. The names of the Chief Executive of the

department and the Officer(s) responsible for the financial operations of the department must be

clearly printed on the statement.


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11.1.5 Submission Date For Financial Statements

Timeliness is a critical factor in the usefulness of information. Guidance on inclusion of Financial

Statements in Annual Reports of departments may be found in the Chief Minister’s directions on

Annual Reports for ACT Government bodies. Agencies may obtain a copy of these directions from

the Manager, Corporate Strategy, CMD (phone: 620 76502).

Each entity is to submit accurate, completed, and certified Annual Financial Statements to the

Auditor-General in accordance with deadlines imposed by applicable legislation, eg annual reporting

requirements.

11.1.6 Guideline Amendments

Chief Executives may seek amendments to the Guidelines. Such amendments form a part of these

Guidelines, in respect of the department(s) named in the instrument(s) of amendment. Chief

Executives must seek the advice of the Auditor-General before seeking an amendment. Chief

Executives are then to forward this advice to the Chief Executive, Department of the Treasury,

along with the request for amendment.

11.1.7 Application of Accounting Standards, Concepts and Guidance Releases

The Financial Statements of an entity must comply with applicable requirements of Australian

Accounting Standards, subject to the following:

(a) the Financial Statements are not required to comply with AAS 16 Financial Reporting by

Segments and AAS 22 Related Party Disclosures (Refer AAS 29, paragraph 4.1);

(b) where AAS 1 to AAS 18 refer to public sector business undertakings, this should be taken

to include all entities that are subject to these Guidelines;

(c) entities must comply with the disclosures required by these Guidelines;

(d) subject to the transitional requirements outlined in paragraph 16.5 of AAS 29, revaluation of

non-current assets must be accounted for in accordance with AAS 38;


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(e) the transitional requirements outlined in AAS 29 paragraphs 16.1 and 16.4, relating to

recognition of certain assets, shall apply only to heritage and community assets (Refer section

6.5.4.5 and Chapter 12A);

(f) in relation to the provisions outlined in AAS 29 paragraphs 187 and 188, the preferred

option is to elect not to recognise items which arise from Agreements Equally Proportionately

Unperformed; and

(g) Statements of Accounting Concepts and Guidance Releases are considered to be guidance

only, and can be referred to where there is no Accounting Standard dealing with an accounting

treatment or disclosure issue.

11.1.8 Currency, language and comparative amounts

Amounts may be rounded to the nearest $1,000 in all statements, provided that:

• rounding off is applied consistently; and

• the level of rounding off is clearly indicated.

Unless otherwise specified in Part 1 of these Guidelines, the Financial Statements must:

(a) express all amounts and particulars in Australian currency and the English language as the

case may be;

(b) show amounts and particulars for the reporting period, comparatives for the preceding

reporting period, and the amounts originally budgeted for the reporting period (in accordance with

the Budget Papers and/or Appropriation Act schedules); in the Statement of Financial Performance,

Statement of Revenues and Expenses on Behalf of the Territory and Statement of Appropriation;

(c) show amounts and particulars for the reporting period, and comparatives for the preceding

reporting period, and the amounts originally budgeted for the reporting period (in accordance with

the Budget Papers and/or Appropriation Act schedules); in the Statement of Cash Flows and

Statement of Cash Flows on Behalf of the Territory; and

(d) show amounts and particulars for the end of the reporting period and comparatives for the

end of the preceding reporting period, and the amounts originally budgeted for the reporting period

(in accordance with the Budget Papers and/or Appropriation Act schedules); in the Statement of

Financial Position and Statement of Assets and Liabilities Held on Behalf of the Territory.


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The requirements outlined in clause 2, to show amounts and particulars in relation to the preceding

reporting period, do not apply to:

• an entity’s first accounts after its commencement;

• an entity’s initial adoption of particular disclosures; or

• in relation to a new subsidiary - the parent entity’s first consolidated accounts after it

becomes a parent entity.

In an entity’s first accounts after its commencement, where the entity can reliably obtain amounts

and particulars in relation to the preceding reporting period, the entity may provide those amounts

and particulars.

Where the respective reporting periods are not equal in length, the periods covered must be clearly

indicated in the notes to the Financial Statements.

An amount in relation to the preceding reporting period must be shown notwithstanding that there

may be no corresponding amount for the current reporting period.

11.1.9 Consolidation

Departments must prepare and present consolidated Financial Statements, in accordance with AAS

24 Consolidated Financial Reports, for the department and all entities the department controls.

“Control of an entity” is defined as the capacity of an entity to dominate decision making, directly

or indirectly, in relation to the financial and operating policies of another entity so as to enable

that other entity to operate with it in pursuing the objectives of the controlling entity.

(AAS 24, paragraph 18; and AAS 29, paragraph 18.1)

Unincorporated joint bodies in the nature of joint ventures should be consolidated in accordance

with AAS19 Accounting for Interests in Joint Ventures, that is each department shall recognise its

share of revenues, expenses, assets and liabilities.


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11.1.10 Valuation of Assets

Asset valuation policies are set out in Chapter 6 of this Manual.

11.2 Format of the Financial Statements

A number of individual financial reports constitute the Financial Statements of an entity that is

required to report in accordance with these Guidelines. The basis of the format of those reports is

the Australian Accounting Standards, the principles of which are embodied in the Accounting

Policy Manual. Although there will be subtle differences in format across ACT Government

reporting entities to reflect their own particular operating circumstances, such differences should

not compromise the primary requirement for accounts to be comparable across the ACT

Government sector1.

An overriding requirement is for annual financial statements to be in a form consistent with budget

information. For reasons of accountability and performance assessment, the financial statements

should include budget information.

The Financial Statements of all entities consist of the:

Statement of Financial Performance (for departments, this includes disclosure by

Output Class);

Statement of Financial Position;

Statement of Cash Flows; and

Statement of Performance (entities should include this statement after the Notes to

the Financial Statements).

In addition, departments are to include the:

Statement of Revenues and Expenses on Behalf of the Territory;

Statement of Assets and Liabilities held on Behalf of the Territory;

Statement of Cash Flows on Behalf of the Territory;and

Statement of Appropriation.


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Chapter 5 provides details of the elements comprising each of the above Financial Statements.

11.2.1 Statement of Financial Performance

The Statement of Financial Performance reports the revenues and expenses for the reporting period.

The Statement of Financial Performance enables readers to identify the extent of revenues for the

period, the sources of those revenues, the cost of goods and services provided during the period,

and the change in the financial position as a result of operations during the period. Information

about revenues and expenses is relevant for assessing an entity's performance in a reporting period.

For this reason, a department’s Statement of Financial Performance should include Departmental

transactions and exclude transactions on behalf of the Territory.

The Statement of Financial Performance should disclose each major category of revenue and

expense. Departments should produce a Statement of Financial Performance for each appropriation

unit and Output Class. Other entities should produce a Statement of Financial Performance for

each material activity of the entity.

The disclosure for each Output Class, or activity, should reflect the total revenues and expenses of

that activity, inclusive of transactions relating to the entity’s other activities. Where an entity has

transactions between its Output Classes, or activities, the entity should eliminate these transactions,

in deriving the reported amounts for the entity as a whole. (Refer section 9.2.1).

For further guidance on the items included in the Statement of Financial Performance, refer to:

• Section 5.4 - “Departmental” and “Territory (administered)” Activities;

• Chapter 8 - Capital;

• Chapter 9 - Revenues; and

• Chapter 10 - Expenses.

1 The users of general-purpose financial reports need to be able to compare aspects of an entity at one time and over

time, and between entities at one time and over time (SAC 3 para 31).


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Table A1: Statement of Financial Performance for Departmentfor the period ended 30 June 20X1

Actual20X1

$’000s

Budget20X1

$’000s

Actual20X0$’000

REVENUESGovernment Payment for Outputs2

User Charges-Non GovernmentUser Charges-ACT GovernmentInterestRevenue of Associates and Joint VenturesResources Received free of chargeOther RevenueTotal Ordinary Revenue

EXPENSESEmployee expensesSuperannuation ExpensesAdministrative expensesDepreciation & AmortisationBorrowing Costs3

Grants and Purchased ServicesExpenses of Associates and Joint VenturesOtherTotal Ordinary Expenses

Operating Result before Extraordinary Item(s)

Extraordinary Item(s)

Operating Result

Injection for Operations

Operating Result after Injection for Operations

Increase /Decrease in accumulated funds on adoption of a newaccounting standardAmounts transferred (to)/from Asset Revaluation Reserves

Change in equity other than those resulting from transactionswith owners as owners

Capital Injection/(Distribution) – OtherInc/Dec in Net Assets due to Admin Restructure

Total Changes in Equity including those resulting fromtransactions with owners as owners

The above Statement should be read in conjunction with the accompanying notes.

2 Capital charge interest and superannuation will impact the GPO.3 This item was specifically included in the new AAS 1 and includes interest and the capital charge attribution aswell as all other borrowing costs.


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Table A2: 4Summary of Department Output Classesfor the period ended 30 June 20X1

___________________________________________________________________________

20X1 20X0 Totalrevenue$’000

Totalexpenses$’000

Result

$’000

Totalrevenue$’000

Totalexpenses$’000

Result

$’000

1. Output Class 12. Output Class 23. Output Class 34. Output Class 4

Intra DepartmentEliminations

Total Department

4 For entities other than departments, this should be a summary of entity activities. Total revenues and expenses

include extraordinary items and injections for operations.


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Table A3: Statement of Financial Performance for Output Class XXfor the period ended 30 June 19X1

Actual Budget Actual19X1 19X1 19X0$’000 $’000 $’000

REVENUESGovernment Payment for Outputs1 User Charges-Non GovernmentUser Charges-ACT GovernmentInterestRevenue of Associates and Joint VenturesResources Received free of chargeOther RevenueTotal Revenue

EXPENSESEmployee expensesSuperannuation ExpensesAdministrative expensesDepreciation & AmortisationBorrowing Costs3

Grants and Purchased ServicesExpenses of Associates and Joint VenturesOtherTotal Expenses

Operating Result before Extraordinary Item(s)

Extraordinary Item(s)

Operating Result

Injection for Operations

Operating Result after Injection for Operations

Amounts transferred (to)/from Asset Revaluation ReserveIncrease (or) Decrease in Accumulated Funds on adoption of anew Accounting Standard

Changes in Equity other than those resulting fromtransactions of owners as owners


1 Capital charge interest and superannuation will impact the GPO.3 Includes capital charge attribution


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11.2.2 Statement of Financial Position

The Statement of Financial Position discloses the assets, liabilities and the net investment capital in

an entity as at the reporting date. The Statement reflects the financial position of the entity on the

last day of the financial reporting period.

Information about the assets and liabilities of an entity is useful for assessing the resources of the

entity, its financial structure and capacity for adaptation. Information about financial structure

and capacity for adaptation can be useful when deciding about the allocation of scarce resources

in the future and the methods used to deliver services. (AAS 29, paragraph 7.4.1.)

The Statement of Financial Position should disclose each specified category of assets and liabilities

of the entity. For departments, the Statement of Financial Position is to only include departmental

items and is to exclude items held on behalf of the Territory.

In respect of the Statement of Assets and Liabilities Held on Behalf of the Territory the general

position would be that residual equity should equal non-current assets. This is because as revenue

is collected and regularly ‘cleared’ on behalf of the Territory, current assets would normally offset

current liabilities.

For further guidance on assets, liabilities, and capital, refer to Chapters 6, 7 and 8 of the APM.


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Table B: Statement of Financial Positionas at 30 June 20X1

NoteActual20X1$'000

Budget20X1$'000

Actual20X0$'000

CURRENT ASSETSCashReceivablesInvestmentsInventoriesOtherTotal current assets

NON-CURRENT ASSETSReceivablesInvestmentsInventoriesProperty, Plant and EquipmentIntangiblesCapital Works in ProgressOtherTotal non-current assets

Total AssetsCURRENT LIABILITIES

CreditorsInterest Bearing LiabilitiesFinance LeasesEmployee EntitlementsOther ProvisionsOtherTotal current liabilities

NON-CURRENT LIABILITIESCreditorsInterest Bearing LiabilitiesFinance LeasesEmployee EntitlementsOther ProvisionsOther

Total non-current liabilitiesTotal LiabilitiesNet Assets

REPRESENTED BY:Accumulated FundsReserves

Total Funds EmployedThe above Statement should be read in conjunction with the accompanying notes.


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11.2.3 Statement of Cash Flows

The Statement of Cash Flows identifies the sources of cash inflows5 during the reporting period,

the purposes for which cash was expended during the period and the cash balance as at the

reporting date. The information disclosed by a Cash Flow Statement will be relevant to

assessments of the future cash flow needs of the entity and to the discharge of accountability

obligations. (AAS 29, paragraph 6.3.9)

In accordance with AAS 28 Statement of Cash Flows, separate disclosure of gross cash inflows and

outflows is required, except that the following items may be reported on a net basis:

• items where the entity is, in substance, holding or disbursing cash on behalf of its customers

(eg the investing activity of the Central Financing Unit); and

• items where turnover is quick, the amounts are large, and the maturities short such as

investments, loans receivable and loans payable. (AAS 28, paragraph 8.1)

5 It should be noted that the definition of cash includes both ‘cash’ and ‘cash equivalents’.


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Table C: Statement of Cash Flowsfor the period ended 30 June 20X1

NoteActual20X1$’000

Budget20X1$’000

Actual20X0$’000

Cash at the beginning of the reporting periodCASH FLOWS FROM OPERATING ACTIVITIES

RECEIPTSCash from Government Payment for OutputsUser ChargesInterest ReceivedOther

Injection for OperationsPAYMENTSRelated to Employees expenses

Related to Superannuation expensesRelated to Administrative expensesInterest PaidOther

Net cash inflow/(outflow) from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES RECEIPTSProceeds from sale of property, plant & equipmentProceeds from sales/maturities of investmentsPAYMENTSPurchase of property, plant & equipmentPurchase of Investments

Net cash inflow/(outflow) from investing activities

CASH FLOWS FROM FINANCING ACTIVITIESRECEIPTSCapital contributions from Government (not operations)Proceeds from borrowingsPAYMENTSDistributions to GovernmentRepayment of borrowings

Net cash inflow/(outflow) from financing activitiesNet increase/ (decrease) in cash heldCash at the end of the reporting periodThe above Statement should be read in conjunction with the accompanying notes.


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11.2.4 Statement of Performance

This section:a) outlines output reporting requirement for agencies;b) prescribes criteria to be applied when performance measures are developed for use in the

reporting process;c) details materiality guidelines to be applied when statements of performance are audited; andd) details specific reporting and disclosure requirements.

11.2.4.1 Background – the Regulatory Framework

A central aspect of the ACT’s financial management regime is the express recognition ofgovernment outputs. Section 8 of the FMA provides that appropriations can be made in respect ofa department for “the provision of outputs by the department”. Budgets must be prepared byoutput class (s.12) and the annual financial statements must report on the departments’ performancein providing outputs (s.27). Quarterly performance reports for each department must be preparedand presented to the Legislative Assembly within 30 days of the end of each quarter. These reportsmust include a progress report on delivery of outputs and an explanation of significant variationsfrom performance targets (s.25A). (Separately, the Purchase Agreements provide for more detailedreports from CEO’s to Ministers, covering each of the first three quarters, with the fourth quarterto be reflected in the full-year information provided in the Annual Reports).

11.2.4.2 Statement of Performance

The Statement of Performance reports an entity’s actual performance against that budgeted for itsoutput measures. Its prime purpose is to report against performance criteria and targets specifiedfor the financial year being reported, as detailed in the Budget Papers for Departments and inStatements of Intent for Territory Authorities.

The Statement of Performance enables readers to identify the extent to which the entity hasdelivered outputs against quantity, timeliness, quality and cost targets for the year being reported,and the reasons for any material variations from budget targets. The Statement should also enablereaders to identify the extent to which the entity has performed against amended targets andmeasures, as agreed between the Minister and Chief Executive (or Chief Executive Officer).

The annual financial statements for each department must include a Statement of Performancecomparing the actual level of output achieved to the budgeted targets for all material outputs andmaterial variances. The Statement of Performance should be in a format consistent with thatincluded in the budget papers, along with additional columns for the amended target (if applicable),the result, the variance from the original target, and the variance from the amended target (if


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applicable). Explanation and variances are not required for statutory authorities, although it isdesirable that these be provided.

For departments, disclosure is only required at output class level. However, where an agency doesnot have performance criteria at output class level, the department will have to discloseperformance information for each output. Against each criterion should appear the budgetedtargets, the actual result, and the variances (%) between the targets and result. Departments shouldalso provide reasons for any material variation from the original target and, if applicable, theamended target.

The Statement of Performance, and accompanying notes, should be included at the end of theFinancial Statements, ie after the Notes to the Financial Statements. The notes may need to providesupplementary detail about measures, outputs and other terms used.

Policy

Agencies are to prepare a Statement of Performance for inclusion in their Annual Financial

Statements. That statement is to detail the degree to which outputs were provided in

accordance with quantity, timeliness, quality/effectiveness and cost targets agreed between

the department and minister as detailed in the budget papers. Where actual performance

differed materially from target levels and if applicable amended targets, information

detailing the reasons for and nature of that variance is to be included in the statement.

The Statement of Performance should be in a format consistent with that included in the

budget papers, along with additional columns for the amended target (if applicable), the

result, the variance from the original target, and the variance from the amended target (if

applicable).

For departments, disclosure is only required at output class level. However, where an agency

does not have performance criteria at output class level, the department will have to disclose

performance information for each output.

Explanation and variances are not required for statutory authorities, although it is desirable

that these be provided.


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11.2.4.3 Guiding Principles

Statement of Accounting Concepts Three (SAC3) Qualitative Characteristics of FinancialInformation discusses qualities necessary if information is to be useful to users in decisions makingforums and processes. While focussing on financial reports, principles articulated in the statementare equally applicable to performance reporting generally and are to be adhered to in thedevelopment and implementation of all performance measures used for reporting purposes.Principles articulated in the statement are discussed below in the context of performance reporting.

Performance reports are to assist in the decision making process through the provision ofinformation that is relevant, reliable and material. Further, for information to be accessible andhence useful to users it needs to effectively address the goals of comparability andunderstandability.

No single quality can be considered to take precedence, so potential measures will need to beassessed against each criterion and a balanced assessment of its overall usefulness made. Forexample a measure that can be measured reliably but is not relevant or understandable should not beused, and vice versa. While most measures will be fully compliant with all principles, in some casesit may be necessary to select a measure that provides the “best fit” given prevailing environmentalconditions and specific issues facing the agency and the ACT government overall at that time.

SAC 3 provides a useful discussion of each of the criteria discussed above. This is brieflysummarised in the following:• reliability – measures should faithfully represent underlying events, reporting them without

undue error or bias;

• materiality – measures should be included if their omission or non-disclosure would, or has thepotential to, adversely affect the decision making process;

• comparability – measures should enable agency performance to be compared from period toperiod so that trends can be identified and monitored, and against the performance of otheragencies or jurisdictions where relevant so that comparative performance levels can be assessed.

• understandability - measures should be capable of being understood by intended and likely usersof agency performance reports. They should not require the reader to possess specialisedtechnical knowledge or expertise in order to understand and interpret them.

• timeliness – measures must be capable of being collected and or calculated in a timely mannerthat meets the timetable established for quarterly and annual performance reporting.


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• cost effectiveness – benefits provided to the management and decision-making processes byreporting a specific measure should outweigh the costs incurred in collecting and collatingrelevant data and calculating the value for the measure.

Materiality is discussed further below.

In addition to meeting the requirements of SAC 3 output measures must provide informationregarding the provision of recognisable final goods and services to the community or other externalconsumers of a Department’s outputs such as Ministers. Measures should collectively provide acohesive and complete overview of the provision of specific goods and services in terms ofquantity, quality/effectiveness, timeliness and cost. As a result measures should not be used if:• they are broad brush measures such as cost per 1,000 head of population; or• cannot be linked directly to a specific good or service for which the agency received payment,

or focus on intermediate or subsidiary processes or functions.

Policy

When formulating measures that will be used to detail a Department’s delivery of outputs,consideration will be given to their usefulness to the users of this information in the decisionmaking process. This assessment will be based on the likely reliability, materiality,comparability, understandability, timeliness and cost effectiveness of each candidatemeasure. Measures will be adopted for reporting purposes only if they substantially meeteach criterion, and represent the “best fit” against criteria overall.

All measures must relate to the provision of identifiable goods or services to the public orother consumers who are external to the department.

11.2.4.4 Materiality in Outputs and Performance Reporting

While AAS 5 Materiality is concerned with financial information its principles are applicable to

performance reporting generally, and are to be applied in the preparation and review of

performance schedules. AAS 5 defines material information as “that information which if omitted,

misstated or not disclosed has the potential to adversely affect decisions about the allocation of

scarce resources made by users of the financial report or the discharge of accountability by the

management of or governing body of the entity”. Further, the concept of materiality “guides the

margin of error that is acceptable in the amount attributed to an item or an aggregate of items and

the degree of precision required in estimating the amount of an item or an aggregate of items”.


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The following guidelines on materiality shall apply to reporting of output information in thefinancial statements:

Output Class Level - all output classes are material for reporting purposes. A narrativesummary of performance should be provided but a numerical measure of performance will not beexpected at this level.

Output level - An output is material if it represents more than 5% of the relevant GPO for theappropriation unit OR where the output was included in the Budget Papers. The measureswithin each output should be weighted and then summed so that a single measure of output isderived. Differences between target outputs and actual performance should be addressed at theoutput level.

Measure level - Individual measures are material where:

1. there is not a weighted score or single means of reporting for the relevant output;AND

2. the measure represents more than 10% of the output; OR3. where the measure was a principal measure included in the Budget Papers.

Variance between targets and actual performance - a variance between a target and an actualresult is material if the output or measure is material (in accordance with the materialityguidelines set out above) and the variance is more than 10% of the weighted target output. Suchvariances require explanation in the annual report. Where an output represents less than 10% ofthe value of an appropriation’s GPO then detailed reporting of variances is not required.

Errors in reported outputs and measures - if the result proposed to be reported by adepartment for an outcome or measure varies from the audited result for that outcome ormeasure then the following guidelines apply:

• the department should review its own records in light of information provided bythe Auditor General and through consultation with him determine whether thevariance is material and if it requires amendment;

• an error in the reported result is considered material if the output or measure ismaterial and the variance is more than 10% of the weighted output target.

Policy

When assessing a Department’s performance in delivering outputs against target levels,prime consideration is to be given to determining the degree, or extent, to whichperformance met quantity, timeliness, quality/effectiveness, and cost targets for the outputoverall. The significance of each measure and the level of attainment for that measure are tobe assessed in the context of their materiality for the output overall.


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11.2.4.5 Consistency of performance information

Financial information detailed in performance schedules is to be consistent with that disclosed in theStatement of Financial Performance. As a result:• the cost of outputs is to reflect the full cost to the agency of producing the output including

both direct expenditures and an assignment of relevant overhead costs. Costs reported at theoutput level or for a particular activity must be consistent with, and using quantity details, mustbe able to be reconciled to expense information reported in the financial statements; and

• consistent costing methodologies need to be developed for all outputs, and a basis developedfor these costs to be reported periodically through the year.

To ensure consistency between target and reported costs where changes are made to costingmethodologies during the year, original cost targets must also be revised to ensure that meaningfulquarterly reporting and audit trails are maintained.

Policy

Financial information detailed in the Statement of Performance is to meet the requirementsof internal and external consistency. To ensure internal consistency any implementedrevisions made to measurement methodologies must be reflected in both target and reportedamounts. To meet the requirements of external consistency, all financial informationdetailed in the Statement of Performance is to be consistent with, and reconcilable to,information disclosed in the Financial Statements for the reporting period. Informationincluded in Financial Statements must satisfy the requirements of comparability withinformation included in the Budget papers.

11.2.4.6 Reporting Variations to Output Measures

Generally, variations should be kept to a minimum. Measures are expected to be stable during theyear. However, targets may need to be varied to take account of the Government’s management ofits priorities during the year.

The Statement of Performance should reflect all variations to measures, for instance:• addition of a new measure;• deletion of an existing measure;• change in the basis of a measure (eg from weeks to days); or• increase/decrease in a target or targets.

Variations to measures should be reported together with existing measures for each output. Toenable comparability of all budgeted measures, replacement of one measure by another, or a changein the basis of a measure, the Statement of Performance will need to reflect the discontinuanceand/or a new measure.


3/07/2001 11-22

For each variation agencies should include a concise explanation of the reason for the variation, ie‘why was the change necessary and how did it improve output reporting?’ It is expected thatvariations should provide more relevant, accurate, timely or cost effective information. The reasonfor the variation should be included in the Explanation of Material Variances column.

The explanation for the variation should also state the period for which the measure has applied, iethe quarter from which it took effect. Back-casting of new measures is not required. Reporting ofdiscontinued measures will be required up to the quarter in which they ceased to apply. Othervariations such as a change of basis for the measure or an increase/decrease in target should bereported for the full year.

Policy

The Statement of Performance is to reflect and detail all changes to measures agreed to bythe Minister during the reporting period.

When assessing performance against target, changes in target levels agreed to by theMinister during the reporting period are to be taken into consideration.

11.2.4.7 Compulsory Guidelines for the Compiling of Performance Schedules

1. Budget papers, purchase agreements and quarterly reports

The purchase agreement provides the basis for performance and output measurement. Thepurchase agreement is tabled in the Assembly with the presentation of the budget.

Schedule 2 – Performance Measures should be included in purchase agreementsand in the budget papers.

It provides a summary level of information for the outputs to be included in the budget. Informationincluded in Financial Statements must satisfy the requirements of comparability with informationincluded in the Budget papers.

Agencies have been provided with the option to include a second schedule (Schedule 2.1) in theirpurchase agreements which includes deliverables and other supporting measures leading to outputsidentified in Schedule 2.

Schedule 2.1 should only include quantity and timeliness measures, with the qualitymeasures in Schedule 2 applicable to the overall output. Schedule 2.1 is not to beincluded in the budget papers.


3/07/2001 11-23

This approach will provide further flexibility to agencies in formulating measures and taking actionto upgrade their overall quality.

Territory authorities are not subject to the requirements of departments.

2. Weighting

Schedule 2.1 to each purchase agreement details the quantity and timeliness measures to apply tothe outputs contained in Schedule 2 of the agreement. The measures in Schedule 2.1 must beweighted so that each output has one aggregate score for performance reporting purposes.

The basis of weighting should reflect the significance of each particular activity. While open for

Departments and Ministers to determine, it is suggested that weightings be based on estimates of

work effort, community importance or the Minister’s priorities. Departments should document the

basis on which individual weightings have been determined, indicating results of surveys, etc used

in estimating work effort. The weighting for each measure should be presented as percentage of

the output, ie so that the sum of weighted values is 100%.

Weightings should be output specific, ie it is not expected that weightings applied to measures indifferent outputs will be comparable.

In cases where a Schedule 2.1 is not presented, the cost measures in Schedule 2 must be sufficient

to allow an assessment of output delivery in association with the relevant quality measures.

3. Workpapers

The Auditor General is required to provide an opinion on information contained in the Statement ofPerformance. In order to determine that opinion, the Auditor General may seek to verify all dataand systems used to compile the performance information. The Auditor General will exerciseprofessional judgement to determine what is sufficient, relevant and reliable data.

An audit trail is to be maintained for all performance information from the source data, and thesystems used for collection of that data are secure and complete. In the case of Schedule 2.1information the onus will be on departments to ensure that Schedule 2.1 measures are reliable,through a process of internal audit and quality control. These measures will also assist in theexternal audit of Schedule 2.


3/07/2001 11-24

Guidance on the requirements for performance information workpapers is at Paragraph 11.3.9 ofthis Manual.

4. Format of Variance Disclosures

Where a target is expressed as a quantity, the variance column should report the percentagedifference between the target and the result (eg if the target is 200 and the result is 210, thevariance is +5%).

Where a target is expressed as a percentage, the variance column should report the simpledifference between the target and the result (eg if the target is 87% and the result is 85%, thevariance is -2%).

Further Guidance

For further guidance on the elements of the Statement of Performance please refer to GuidancePaper No.1 - Outputs and Output Classes (January 1998).


3/07/2001 11-25

6Table D: Statement of Performancefor the period ended 30 June 20X1

Output Class: Name of output class Price: $Description: Brief description of theoutput class.Measure Show the performance criteria,under the following headings:

OriginalTarget

AmendedTarget

Result Variancefrom

AmendedTarget

%

Explanation of Material Variances 7

Quantity

Quality/Effectiveness

Timeliness

Cost

Total Cost $ $The original Target is as specified in the Budget Papers. The Amended Target indicates a change from the Original Target, and requires agreement between the Minister and

the Chief Executive. The inclusion of the Amended Target, or the discontinuance or introduction of a measure in this Statement of Performance constitutes formal notification

of the variations to the relevant Schedule in the Budget Papers.

6 Total cost includes extraordinaries and injection for operations; unit cost calculations should include these.7 The Explanations column can take the form of a list of numbered notes cross-referenced to a list of explanations. In all cases the note must indicate the quarter in which thevariation was agreed between the Chief Executive and the Minister. Explanations need to be provided for variances for each cost item and for total cost.


3/07/2001 11-26

Table D1: Statement of Performance

for the period ended 30 June 20X1

Output Actual output

as a %age of

revised target

Actual GPO

received

$’000

Revenue

earned

$’000

Budgeted cost

$’000

Actual cost

$’000

Explanation of performance variance and cost variance.

Achievement of desired outcomes.

OUTPUT CLASS 1 Policy advice and Ministerial Servicing •

1.1 Example output -

Policy advice

110% 500 550 505 560 • An unbudgeted inquiry into XX was approved by theMinister which cost $yy. The inquiry contributed toformulation of legislation that met the Government’scommitment to ZZZ. Other outputs were within 7% oftargets.

1.2 xxxx •

OUTPUT CLASS 2 Advice to industry and regulatory activity •

2.1 Example output -

Regulatory activity

85% 725 600 740 700 • The number of site inspections was reduced to less than thetarget number to allow increased extent of each inspection.This resulted in cost savings as well as improved successrates for prosecutions. Inquiries from members of the publicwere more than budgeted resulting in slightly increased costsfor the that particular function.

2.2 yyyy •

•

•

•

TOTAL


3/07/2001 11-27

Table D2: Statement of Performance (for a Territory Authority)for the period ended 30 June 19X1

Objectives for the year: Briefly outline the authority’s objectives for the yearMeasure Show the performance criteria,under the following headings (asapplicable):

Target Result Variance%

Explanation of Material Variances

Financial Performance MeasuresProfitability

Liquidity

Financial Stability

Debt

Economic Value Added

Non-Financial Performance MeasuresQuantityQuality/EffectivenessTimelinessCost


3/07/2001 11-28

The Targets should be as specified in the Statement of Intent.

• particulars, in summary form, of amounts written off during the financial year, in respect of:- losses or deficiencies of public moneys;- irrecoverable amounts of revenue;- irrecoverable debts and overpayments;- amounts of revenue, debts, or overpayments, the recovery of which has been determined to be uneconomical; and- the value of lost, deficient, condemned, unserviceable or obsolete stores;

• particulars, in summary form, of amounts recovered from crimes or fraudulent activities, in respect of which action was taken during the financialyear; and

• particulars, in summary form, of cases of loss of, or deficiency in, public moneys, or of loss or destruction of, or damage to, other property under the

control of the department, in respect of which action was taken during the financial year.


3/07/2001 11-29

11.2.5 Statement of Revenues and Expenses on Behalf of the Territory

The Statement of Revenues and Expenses on Behalf of the Territory reports the Territory revenues

and expenses, for which the Department is responsible, and which occurred during the reporting

period. The Statement enables readers to identify the nature and size of these transactions, and

assists in evaluating the performance of the Department. It should disclose each category of

Territory revenues and expenses, for which the Department is responsible.

For further guidance on revenues and expenses, refer to Chapters 9 and 10 of the APM.


3/07/2001 11-30

Table E: Statement of Revenues & Expenses on Behalf of the Territoryfor the period ended 30 June 20X18


Budget20X1$’000

Actual20X0$’000

TERRITORY REVENUES* Payment for Expenses on behalf of the TerritoryTaxes, Fees and FinesCommonwealth Government GrantsInterestOther9Transfers from agencies

Total RevenuesTERRITORY EXPENSES

Related to Employees ** Related to Administrative Expenses ** Grants, subsidies and transfer payments

10Transfers to Government11Payments to agenciesDepreciation and AmortisationBorrowing CostsOther

Total ExpensesNet Result before Extraordinary Item(s)

Extraordinary Item(s)Operating ResultIncrease /Decrease in Accumulated Funds on adoptionof a new accounting standardAmounts transferred (to)/from Asset RevaluationReserves

Change in equity other than those resulting fromtransactions with owners as owners

Capital Injection/(Distribution) – Other

Inc/Dec in Net Assets due to Admin Restructure

Total Changes in Equity including those resultingfrom transactions with owners as ownersThe above Statement should be read in conjunction with the accompanying notes.* Note: This represents appropriation received to pay grants, subsidies and transfer payments, and does not includeany appropriation for capital expenditure. Operating results for Territorial should generally be nil except fordepreciation.

** Where appropriate.

8 The form of Statements may differ for some agencies (in particular, the legislative assembly, CFU and SPA).9 (CFU only.) This represents the Central Financing Unit’s receipt of Territory Revenue from ACT Government entities.10 This represents the transfer of Territory Revenue to the Central Financing Unit. (Refer 10.3.10.2)11 (CFU only.) This represents the incidence of an obligation to pay appropriated funds to agencies, and should correspond to the amounts agenciesrecognise as revenue from both “Government payment for outputs” and “Payment for Expenses on behalf of the Territory”.


3/07/2001 11-31

11.2.6 Statement of Assets and Liabilities held on Behalf of the Territory

The Statement of Assets & Liabilities held on behalf of the Territory discloses the assets and

liabilities that a department holds on behalf of the Government, as at the last day of the financial

reporting period. Information about these assets and liabilities of the Territory is useful for

establishing the financial position of the Territory and in assessment of the administrative

performance of management in regard to these assets and liabilities.

The Statement of Assets & Liabilities held on behalf of the Territory should disclose each specified

category of assets, liabilities, and capital.

The operating result should generally be nil except for depreciation. Similarly, net assets should be

nil for most Territorial financial statements reported by agencies - likely exceptions include CFU,

SPU and the Legislative Assembly Secretariat.

For further guidance on assets, liabilities, and capital, refer to Chapters 6, 7, and 8, of the APM.


3/07/2001 11-32

Table F: Statement of Assets & Liabilities held on behalf of the Territoryas at 30 June 20X1

NoteActual20X1$'000

Budget20X1$'000

Actual20X0$'000

CURRENT ASSETSCashReceivablesInvestmentsInventoriesOtherTotal current assets

NON-CURRENT ASSETSReceivablesInvestmentsInventoriesProperty, Plant and EquipmentIntangiblesCapital Works in ProgressOtherTotal non-current assets

Total AssetsCURRENT LIABILITIES

CreditorsBorrowingsFinance LeasesEmployee EntitlementsOther ProvisionsOtherTotal current liabilities

NON-CURRENT LIABILITIESCreditorsBorrowingsFinance LeasesEmployee EntitlementsOther ProvisionsOtherTotal non-current liabilities

Total LiabilitiesNet Assets

REPRESENTED BY:Accumulated FundsReserves

Total Funds Employed on behalf of theTerritoryThe above Statement should be read in conjunction with the accompanying notes.


3/07/2001 11-33

11.2.7 Statement of Cash Flows on behalf of the Territory

The Statement of Cash Flows on Behalf of the Territory identifies the sources of cash inflows

received on behalf of the Territory during the reporting period, and nature of the cash

disbursements paid on behalf of the Territory during the same period. This statement should

disclose the cash flows relating to items held on behalf of the Territory, to discharge accountability

obligations.


3/07/2001 11-34

Table G Statement of Cash Flows on Behalf of the Territoryfor the period ended 30 June 20X1


Budget20X1$’000

Actual20X0$’000

Cash at beginning of the reporting periodCASH FLOWS FROM OPERATING ACTIVITIES

RECEIPTSGovernment payment for expenses on behalf ofthe TerritoryTaxes, Fees and FinesInterest receivedGrants received from CommonwealthOtherPAYMENTSRelated to EmployeesRelated to Administrative expensesGrants, Subsidies and Transfer PaymentsInterest paidTransfer of Territory receipts, to GovernmentOther

Net cash inflow/(outflow) from operating activitiesCASH FLOWS FROM INVESTING ACTIVITIES

RECEIPTSProceeds from sale of property, plant &equipmentProceeds from sales/maturities of investmentsPAYMENTSPurchase of property, plant & equipmentPurchase of Investments

Net cash inflow/(outflow) from investing activitiesCASH FLOWS FROM FINANCING ACTIVITIES

RECEIPTSCapital payments from GovernmentAdvances received from GovernmentProceeds from BorrowingsPAYMENTSCapital distributions to GovernmentAdvances repaid to GovernmentRepayment of borrowings

Net cash inflow/(outflow) from financing activities

Net cash inflows/(outflows) from transactions onbehalf of the Territory

Cash at the end of the reporting periodThe above Statement should be read in conjunction with the accompanying notes.


3/07/2001 11-35

11.2.8 Statement of Appropriation

The Statement of Appropriation enables Financial Statement readers to compare the originally

budgeted appropriation amounts for a reporting period with the amount of appropriation actually

used in that period. This information is relevant for the purposes of economic decision making,

and assessments of accountability. Where the amount of appropriation used varies materially

from the originally budgeted amount, the reason(s) for such a variance, and its amount, is

relevant for assessing the performance of management. (AAS 29 Paragraph 13.6.2.)

Disclosure is only required at department level.

The Statement of Appropriation is to be prepared on a cash basis, to reflect the cash nature of

appropriations. Therefore “appropriation drawn” amounts should be consistent with cash receipts

from Government disclosed in the Statement of Cash Flows.

The reporting period’s comparative figures and the preceding period's comparative figures should

reflect the transactions and amounts over which management has had responsibility. Accordingly,

those comparative figures should be the audited figures (if any) for the preceding period, as shown

in the previous Financial Statements for the Department.

“Original Budget” figures are the appropriation amounts, as shown in the schedules to the

Appropriation Act(s); except that “Expenses on Behalf of the Territory” should provide details for

each item that the budget papers separately list.

The “Total Appropriated” figures are the original budget amounts plus or minus all adjustments to

the amount appropriated for the reporting period, such as adjustments in accordance with

legislation, (eg Appropriation Act provisions for salary increases, or FMA provisions for increased

appropriations - such as for increased Special Purpose Payments from the Commonwealth). “Total

Appropriated” figures exclude any “deemed” appropriations, for user charges. Note that

adjustments for Treasurer’s Advance should only reflect the final charge.

All amounts appropriated are to be disclosed, including amounts on-forwarded to other agencies.


3/07/2001 11-36

The Statement of Appropriation should include information on the same basis as the Appropriation

Act. This is to reflect the extent of each department’s drawdown against the Appropriation Act(s)

for the year. The Statement is designed to enable compliance with the AAS 29 requirements

regarding “Compliance with Parliamentary Appropriations and Other Externally-Imposed

Requirements”.

Table H: Statement of AppropriationFor the period ended 30 June, 20X1

Note20X1

OriginalBudget$’000

20X1Total

Appropriated$’000

20X1Appropriation

Drawn$’000

20X0Appropriation

Drawn$’000

Government payment forOutputsAmount for each appropriation unit

Total

Capital Contributions –DepartmentalAmount for each appropriation unit

Total

Expenses on Behalf of theTerritory

For each appropriation unit, show detailsfor each item listed in the Budget Papers

Total


Note: Disclosure should be included where contributions received were not correctly budgeted (e.g.

budgeted as EBT but actually received a capital contribution).


1/09/9911.3-1

Table of Contents

Page

11.3 Notes to the Financial Statements 11.3-2

11.3.1Summary of Department’s Objectives 11.3-2

11.3.2Accounting Policies Note 11.3-2

11.3.3Notes relating to Revenues and Expenses 11.3-3

11.3.3.1 Items of Revenues and Expenses 11.3-3

11.3.3.2 Other Disclosures Relating to Revenues and Expenses 11.3-5

11.3.4Notes relating to Assets, Liabilities and Equity 11.3-8

11.3.4.1 Classes of Assets, Liabilities and Equity 11.3-8

11.3.4.2 Other Disclosures relating to Assets 11.3-11

11.3.4.3 Other Disclosures relating to Liabilities 11.3-14

11.3.4.4 Other Disclosures relating to Equity 11.3-15

11.3.5Notes Relating to the Presentation and Disclosure of Financial

Instruments 11.3-15

11.3.6Notes relating to the Statement of Cash Flows 11.3-15

11.3.7Notes to the Statement of Appropriation 11.3-16

11.3.8Matters not brought to Account 11.3-16

11.3.9Related Entities, Associates and Other Interests 11.3-18

11.3.9.1 Interests in Partnerships and Trusts 11.3-18

11.3.9.2 Interests in Entities or Corporations Not Being Subsidiaries 11.3-19

11.3.9.3 Interests in Joint Ventures 11.3-20

11.3.9.4 Related Entities 11.3-21

11.3.9.5 Outside Equity Interests 11.3-21

11.4 Impact of Environmental Matters on the Financial

Statements 11.4-21


3/07/2001 11.3-2

11.3 Notes to the Financial Statements

General Points

Unless stated otherwise, the requirements for disclosures in the Notes apply both to entity

(Departmental) and Territorial (administered) items, ie the disclosures apply to all Statements.

Note however, that there is no requirement for the Notes to the Financial Statements to include a

breakdown of trading internal to Government. However, this information is required for

consolidation purposes and for the whole of government audit process. Accordingly, agencies

should prepare detailed supporting working papers to identify inter-entity transactions. Internal

trading can include revenues and expenses (eg user charges and administrative expenses), as well

as assets and liabilities (eg debtors, creditors, prepayments, and revenue received in advance).

Agencies should confirm each other’s balances. Assuming a simple process is required, then this

can take the form of sign-offs between agencies on stated balances.

11.3.1 Summary of Department’s Objectives

If not otherwise disclosed in, or in conjunction with, the Department’s Financial Statements, the

initial note to the Financial Statements shall disclose a summary of the department’s objectives.

[Refer AAS 29, paragraph 12.7]

11.3.2 Accounting Policies Note

Subject to section 11.3.1, a summary of accounting policies should form the initial section of the

notes to the Financial Statements. Disclosure is to include:

(i) a statement that the financial report is a general purpose financial report;

(ii) a statement as to whether the financial report has been prepared in accordance with:

• Australian Accounting Standards;

• Other authoritative pronouncements of the AASB; and

• Urgent Issues Group Consensus Views;

(iii) a description of the measurement basis or bases used in preparing the financial report; and

(iv) a description of each specific accounting policy that is necessary for an understanding of

the financial report.


3/07/2001 11.3-3

Where there is a change to an accounting policy in the current period, the notes to the Financial

Statements are to disclose:


• the reason for the change and the financial effect of the change;

• the amount of any adjustment recognised as a revenue or expense in the reporting period , or

made to the opening balance of accumulated results; and

• the amount of the adjustment relating to prior accounting periods, including where practical a

restatement of comparative information and details of the amount of the adjustment relating

to reporting periods prior to those included in the report.

Where a change in accounting policy made in the prior reporting period did not have a material

effect in that reporting period, but does so for the current, the following is to be disclosed:


• the reasons for the change;

• that the change was made in a preceding period; and

• the financial effect of the change in the current reporting period.

11.3.3 Notes relating to Revenues and Expenses

11.3.3.1 Items of Revenues and Expenses

There must be shown, in a Note, the amounts and particulars of the following classes of revenues

and expenses included in the aggregate amounts shown in Statement of Financial Performance

and Statement of Revenues and Expenses on Behalf of the Territory:

(a) each of the following items credited as revenue:

(i) dividends;

(ii) increments arising from the revaluation of a class of non-current assets, to the

extent that each increment reverses a revaluation decrement previously recognised

as an expense in the Statement of Financial Performance or Statement of Revenues

and Expenses on Behalf of the Territory, in respect of that same class of assets;

(iii) transfers from provisions;

(iv) Commonwealth Government grants, by type: and


3/07/2001 11.3-4

(v) each other material class of revenue using total operating revenue as the

appropriate base amount (i.e. meets materiality tests in AAS 5 - refer section

2.2.2.4 in Manual).

(b) each of the following items charged as an expense:

(i) bad and doubtful debts in each class of receivables;

(ii) decrements arising from the revaluation of a class of non-current assets, except to

the extent that the decrement reverses on increment previously credited to, and still

included in the balance of, the asset revaluation reserve in respect of that same

class of assets;

(iii) the amounts provided for depreciation, amortisation or diminution in value, as the

case may be, of each of the following classes of assets:

(a) investments;

(b) inventories/supplies;

(c) property, plant and equipment (including leased assets capitalised);

(d) intangibles; and

(e) assets other than assets specified in (a), (b), (c) and (d);

(iv) finance charges relating to finance leases;

(v) contingent rentals expense relating to finance leases;

(vi) rental expense relating to operating leases; and

(vii) any other material classes of expenses using total operating expenses as the

appropriate base amount (i.e. meets materiality tests in AAS 5 - refer section

2.2.2.4 in the Manual).

(c) Following the deletion of abnormal items as an item on the face of the Statement of

Financial Performance the following reporting requirements have been inserted into

AAS 1. “When a revenue or an expense item from ordinary activities is of a size, nature

or incidence that its disclosure is relevant in the explaining the financial performance of

the entity for the reporting period, its nature and amount must be disclosed separately in

notes to the financial statements” (para 5.4).

(d) Further Note disclosures are required under AAS 1 Statement of Financial Performance,

where there is a revision to accounting estimates (AAS 1 para 6.3), or where a

‘fundamental error’ is disclosed (AAS 1, para 7.3). A fundamental error being a material

error from a prior reporting period detected during the current financial year.


3/07/2001 11.3-5

11.3.3.2 Other Disclosures Relating to Revenues and Expenses

Extraordinary Items

The nature and amount of each extraordinary item shall be disclosed in the Statement of Financial

Performance, by way of note or otherwise (Refer AAS 1 sections 4.1 and 5.5 Disclosure of

Extraordinary Items). Where an extraordinary item relates directly to one or more prior reporting

periods, such reporting periods shall be identified.

Resources Provided and Received Free of Charge

The Notes to the Financial Statements are to provide details of resources provided (or received)

free of charge (Refer section 10.3.7), where the recipient entity would otherwise have paid for

those goods or services. These details should, include a description of the resources and their

estimated value, where that value can be reliably measured. Where the value cannot be reliably

measured, the Notes should list the goods and services provided (or received) and the recipient

(or supplier). [Refer to Note 14 of the Model]

The Statement of Financial Performance is to include resources received free of charge under the

appropriate expense category, with an equivalent amount of notional revenue from Government.

Where an entity reports more than one activity (or output class), the Statement of Financial

Performance should include related revenues and expenses in the same activity (or output class).

Agencies are to ensure that a sign off occurs between affected parties for the resources

exchanged. This is to be in the form of a document to be kept as part of the end of year

workpapers.

Assumption of Liabilities

A Note to the Financial Statements should include a summary of liabilities assumed by or from

other entities.


3/07/2001 11.3-6

Net Revenues/(Expenses) from Disposal of Non-Current Assets

Where an entity has disposed of assets during the period, a Note must be given which separately

discloses by class:

- gross proceeds from sale;

- carrying value of assets, at the date of disposal; and

- net revenues/(expenses) from disposal of non-current assets.

Auditors' Remuneration

The Financial Statements in respect of a financial year shall include the aggregate of the

remuneration received, or due and receivable, in respect of that financial year, by the Auditor-

General, directly or indirectly, from the Department in connection with:

• auditing the Financial Statements of the Department; and

• any other services provided by the Auditor-General to the Department.

Act of Grace Payments, Waivers, Write-offs and Others

The Notes to the Financial Statements shall disclose the following information, where applicable:

• the number, and aggregate amount, of Act of Grace payments made during the financial year in

accordance with section 64 of the FMA. Also to be disclosed are the amount of, and grounds

for, each payment;

• the number and aggregate amount of amounts owing to the Territory, the recovery of which

was waived during the financial year:

- pursuant to section 65 of the FMA, and

- pursuant to other legislation (specify);

being amounts that the department would, but for the waiver, have been entitled to receive on

behalf of the Territory. Details of each amount waived are also to be disclosed;

• particulars, in summary form, of amounts written off during the financial year, in respect of:

- losses or deficiencies of public moneys;

- irrecoverable amounts of revenue;

- irrecoverable debts and overpayments;

- amounts of revenue, debts, or overpayments, the recovery of which has been

determined to be uneconomical; and


3/07/2001 11.3-7

- the value of lost, deficient, condemned, unserviceable or obsolete stores;

• particulars, in summary form, of amounts recovered from crimes or fraudulent activities, in

respect of which action was taken during the financial year; and

• particulars, in summary form, of cases of loss of, or deficiency in, public moneys, or of loss, or

destruction of, or damage to, other property under the control of the Department, in respect of

which action was taken during the financial year.

The following information shall be included on the face of the Statement of Financial

Performance, where:

• the amount of waivers is material, the total dollar amount of waivers is to be included as

revenue and as expenditure.

Restructuring of Administrative Arrangements

Consequent to a restructuring of administrative arrangements the transferee (recipient)

Department shall disclose, by way of note, the complete revenues and expenses of the reporting

period related to the transferred functions or activities, showing separately those parts of the

revenues and expenses recognised by the transferor Department. Note: The Statement of

Financial Performance of the transferee should exclude revenues and expenses that the transferor

Department has recognised.

Following a restructuring of administrative arrangements, Chief Executives should jointly agree

on the amounts of assets and liabilities being transferred, to ensure that both the gaining and

losing agency reflect the correct values. There should also be joint agreement on the transfer of

appropriation, where applicable, and on the details of year to date operations and performance.

Formats for documenting these transfers are contained in Treasury Memorandum 1998/1. The

Department of the Treasury will determine the treatment in borderline situations, following each

restructuring of Administrative Arrangements.


3/07/2001 11.3-8

11.3.4 Notes relating to Assets, Liabilities and Equity

11.3.4.1 Classes of Assets, Liabilities and Equity

• In relation to each item referred to under a heading in the Statement of Financial Position and

the Statement of Assets and Liabilities Held on Behalf of the Territory, the Notes must show

separately, according to its nature and function in the entity, the aggregate amount and particulars

of each class of assets, liabilities and capital included in determining the aggregate amount of that

item.

• Without limiting the classes that may be included in the Notes, these classes must include,

for “Departmental” and “Territorial” items as the case may be, the following classes:

Classes of Current Assets

(a) each of the following classes relating to Cash, as a current asset:

(i) cash on hand;

(ii) cash at bank; and

(iii) cash equivalents.

(b) each of the following classes relating to Receivables, as a current asset:

(i) trade debtors;

(ii) other debtors;

(iii) loans; and

(iv) accrued revenue.

(c) each of the following classes relating to Investments, as a current asset:

(i) at call deposits & term deposits;

(ii) short term securities;

(iii) government fixed interest bonds;

(iv) shares & equities;

(v) property investments;

(vi) interests in business undertakings; and

(vii) other investments.

(d) each of the following classes relating to Inventories, as a current asset:

(i) raw materials and stores;

(ii) work in progress;


3/07/2001 11.3-9

(iii) finished goods; and

(iv) land held for resale.

(e) each of the following classes relating to Other, as a current asset:

(i) prepaid employee entitlements;

(ii) other current prepayments; and

(iii) consumable stores and supplies.

Classes of Non - Current Assets

(f) each of the following classes relating to Receivables, as a non-current asset:

(i) trade debtors;

(ii) other debtors;

(iii) loans; and

(iv) accrued revenue.

(g) each of the following classes relating to Investments, as a non-current asset:

(i) at call deposits & term deposits;

(ii) short term securities;

(iii) government fixed interest bonds;

(iv) shares & equities;

(v) property investments;

(vi) interests in business undertakings; and;

(vii) other investments.

(h) each of the following classes relating to Inventories, as a non-current asset:

(i) raw materials and stores;

(ii) work in progress;

(iii) finished goods; and

(iv) land held for resale.

(i) each of the following classes relating to Property, Plant and Equipment as a non-

current asset (with leased assets being separately disclosed):

(i) land;

(ii) buildings;

(iii) leasehold improvements;

(iv) plant and equipment;


3/07/2001 11.3-10

(v) heritage and community assets; and

(vi) infrastructure assets.

(j) each of the following classes relating to Intangibles, as a non-current asset:

(i) goodwill;

(ii) patents, trademarks and licences; and

(iii) capitalised research and development expenditure.

(k) Capital Works in Progress as a non-current asset.

(l) each of the following classes relating to Other, as a non-current asset:

(i) non-current prepayments; and

(ii) consumable stores and supplies.

Classes of Current Liabilities

(m) each of the following classes relating to Creditors, as a current liability:

(i) trade creditors;

(ii) other creditors; and

(iii) accrued expenses.

(n) each of the following classes relating to Borrowings, as a current liability:

(i) classification by each type of borrowing.

(o) each of the following classes relating to Leases as a current liability:

(i) the lease liability for the next 12 months.

(p) each of the following classes relating to Employee Entitlements, as a current

liability:

(i) salary and wages;

(ii) annual leave & sick leave;

(iii) long service leave; and

(iv) other employee benefits and entitlements.

(q) each of the following classes relating to Other Provisions, as a current liability:

(i) each class of provision (Refer Chapter 7, for “Other Provisions”).

(r) each of the following classes relating to Other, as a current liability:

(i) revenue received in advance, and

(ii) each other class of other current liabilities.


3/07/2001 11.3-11

Classes of Non - Current Liabilities

(s) each of the following classes relating to Creditors, as a non-current liability:

(i) trade creditors;

(ii) other creditors; and

(iii) accrued expenses.

(t) each of the following classes relating to Borrowings, as a non-current liability:

(i) classification by each type of borrowing.

(u) each of the following classes relating to Leases, as a non-current liability:

(i) the lease liability for later than 12 months.

(v) each of the following classes relating to Employee Entitlements, as a non-current

liability:

(i) long service leave; and

(ii) other employee benefits and entitlements.

(w) each of the following classes relating to Other Provisions, as a non-current liability:

(i) each class of provision.

(x) each of the following classes relating to Other; as a non-current liability:

(i) revenue received in advance, and

(ii) each other class of other current liabilities.

11.3.4.2 Other Disclosures relating to Assets

Restricted Assets

The department shall disclose by way of Note to the Financial Statements:

(i) those assets which have been recognised in the Statement of Financial Position or

Statement of Assets and Liabilities Held on Behalf of the Territory and are restricted,

wholly or partially by regulations or other externally imposed requirements, where

information about those restrictions is relevant to assessments of the performance or

financial position of the entity (eg where a restriction has affected an asset’s valuation);

and

(ii) the nature of those restrictions. (Refer AAS 29, paragraph 12.3)


3/07/2001 11.3-12

Provisions against Assets

If at the end of the financial year a provision for depreciation, amortisation, diminution in value or

doubtful debts exists in relation to a class of assets for the department and that class has been

disclosed in the Notes to the Financial Statements, then the disclosure of that class in the Notes

will include:

(i) the total amount of the provision against that class; and

(ii) the amount equal to the residue remaining after deducting the provision from the total

amount.

In the Statement of Financial Position and the Statement of Assets and Liabilities Held on Behalf

of the Territory the value of the assets will be stated net of any provision.

Aging of Receivables

An age analysis for current receivables as at the end of the reporting year shall be disclosed in the

Notes to the Financial Statements. This analysis will show amounts (before provision for doubtful

debts) that are:

• current and not overdue;

• overdue for less than 30 days;

• overdue for 30 to 60 days; and

• overdue for more than 60 days.

Heritage and Community Assets

A description of individual Heritage and Community assets is to be included in the Notes to the

Financial Statements. Refer Chapter 12 for guidance.

Revalued Non-Current Assets

Where an entity has revalued either a non-current asset or a class of non-current assets, refer to

AAS 38 Accounting for the Revaluation of Non-current Assets and Chapter 6 for required

disclosures.


3/07/2001 11.3-13

Land held Primarily for Resale

Where land is held primarily for sale:

(i) the cost of acquisition of the land;

(ii) costs in developing the land which have been recognised as part of its carryingamount;

(iii) other costs which have been recognised as part of the carrying amount of the land;

(iv) the carrying amount of the land.

Property, Plant & Equipment

The financial report must disclose, for each class of non-current assets, a reconciliation of thecarrying amount at the beginning and end of the reporting period showing:

• additions;

• disposals;

• additions and disposals through administrative restructure;

• the net amount of revaluation increments less decrements;

• recoverable amount write downs recognised under AAS 10;

• reversals of recoverable amount write downs;

• depreciation expense; and

• other movements (refer AAS 38).

Transfers of Assets as a Result of a Restructuring

The Department shall separately disclose the total amount of any assets recognised as a result of

a restructuring of administrative arrangements during the reporting period. [AAS 29, paragraph

12.2]


3/07/2001 11.3-14

11.3.4.3 Other Disclosures relating to Liabilities

Ageing of Creditors

The Financial Statements should include an age analysis, for creditors as at the reporting date,

disclosing:

• amounts that are current and not overdue; and

• amounts that are overdue for

- less than 30 days,

- 30 to 60 days, and

- more than 60 days.

Finance Lease Liabilities

Where amounts have been taken up as lease liabilities, disclosure will be required in a separate

note of the following details:

(i) future lease payments;

(ii) interest component of future lease payments; and

(iii) the liability component of future lease payments.

Each of the above categories is to be disclosed by aging in the following form:

(i) not later than 1 year;

(ii) later than 1 year but not later than 5 years; and

(iii) later than 5 years. [AAS 17, paragraph 59(f)]

Transfers of Liabilities as a Result of a Restructuring

The Department shall separately disclose the total amount of any liabilities recognised as a result

of a restructuring of administrative arrangements during the reporting period. [AAS 29,

paragraph 12.2]


3/07/2001 11.3-15

11.3.4.4 Other Disclosures relating to Equity

Changes in Equity

The Financial Statements shall disclose, by Note or otherwise, the opening and closing balances of

each class of equity, identifying the nature and amounts of any changes or movement in each

class. (AAS 29, paragraph 12.5)

11.3.5 Notes Relating to the Presentation and Disclosure of FinancialInstruments

Disclosure

Departments must disclose information about financial instruments according to the

requirements of Australian Accounting Standard (AAS 33).

AAS 33 has particular requirements on the disclosure of risks, terms and conditions relating to,

and fair values of, financial instruments. While AAS 33 is relatively complex, the disclosure

requirements for most departments will be relatively elementary.

Notes relating to the Statement of Cash Flows

Reconciliation of Net Result After Capital Charge to Net Cash Flow from Operations and

Reconciliation of Net Result on Behalf of the Territory to Net Cash Flow from Operating

Activities on Behalf of the Territory.

The Financial Statements shall disclose, by way of a Note, a reconciliation of the Net Result, for

the Department, to the Net Cash Flow from Operations.

Other Disclosures

The Financial Statements shall separately disclose other information, as required by AAS 28

Statement of Cash Flows.


3/07/2001 11.3-16

11.3.7 Notes to the Statement of Appropriation

The Financial Statements are to include a Note reconciling the difference between the original and

total amounts appropriated. This Note is to include details of each adjustment.

The Financial Statements are to include a Note disclosing the reasons for any material variances

between the amounts appropriated or otherwise authorised and the expenses or expenditures

therein for the reporting period. (AAS 29 paragraph 12.6)

The Financial Statements are to include a Note disclosing the nature and probable effect of any

non-compliance by the Department with any externally imposed requirements for the reporting

period which is relevant to assessments of the Department's performance, financial position or

financing and investing activities, not already disclosed. (AAS 29 paragraph 12.6)

11.3.8 Matters not brought to Account

Commitments for Expenditure

(a) Operating Leases

For non-cancellable operating leases, with a term of more than one year, the lessee’s Financial

Statements shall disclose lease commitments in aggregate and classified into the following

periods:


(ii) later than one year but not later than five years; and

(iii) later than five years. (AAS 17, Paragraph 61; and refer to section 7.5.3 of this

Manual)

(b) Commitments for Capital Expenditure

In relation to contracts the Government has entered into for capital expenditures (that have not

been recognised as liabilities), as at balance date, there must be shown the amounts or estimate of

the amounts, and particulars of commitments that are expected to be payable:


(ii) later than 1 year but not later than 5 years; and

(iii) later than five years, after the end of the last financial year. (Refer section 7.6)


3/07/2001 11.3-17

(c) Other commitments

The Financial Statements must also provide details of any other material commitments entered

into, as at balance date.

Contingent Liabilities

Where contingent liabilities are material, these items must be disclosed in a Note to the Financial

Statements. The Note shall include a statement as to the general nature of the contingent liability

and, so far as is practicable, the maximum amount or range of amounts which may become

payable. Due regard should be given to the commercial or legal sensitivity of the information

disclosed. (Refer section 7.9).

Guarantees and Undertakings

Particulars must be given of any guarantees or undertakings given by the Department, including

guarantees or undertakings in respect of (but not restricted to) loans, interest payments, or

overdrafts of the Department which:

(a) are within the responsibility of the Minister to whom the Department is

responsible;

(b) relate to the functional responsibilities of the Department;

(c) are not required to be shown as liabilities in either the Statement of Financial

Position or the Statement of Assets and Liabilities Held on Behalf of the Territory.

The particulars of any guarantees required to be disclosed must include a reference to the

legislation authorising the guarantee. (Refer section 7.8)

Other Items not recognised in the Statements contained in Part 2

Property Plant & Equipment

When it is not possible to measure reliably the value of land, details of land holdings such as size,

use and location should be disclosed in the Notes to the Financial Statements.


3/07/2001 11.3-18

Intangibles

A note to the Financial Statements must disclose details of any Intangible Asset that complies

with the definition of assets, but does not meet the recognition criteria. (Refer sections 6.2 and

6.5.5)

Leasehold Improvements

Where Leasehold Improvements comply with the definition of assets, but do not meet the

recognition criteria, they must be disclosed by way of a note to the Financial Statements. (Refer

sections 6.2 and 6.5.4.3)

Other Items

The Notes to the Financial Statements should disclose details of any other asset, liability, revenue

or expense that does not satisfy the recognition criteria, where that information is material and

relevant to readers of the Financial Statements. (Refer sections 6.2, 7.2, 7.3, 9.2, and 10.2.)

Third Party Monies (held in trust)

The Notes to the Financial Statements should include details of any third party monies that the

entity held during the reporting period.

Where a trust has assets and liabilities (other than cash), the Financial Statements should include

an accrual presentation of that trust’s activities during the year and financial position at the end of

the year. If a trust has no assets or liabilities apart from cash, the Financial Statements need only

provide cash disclosure of the trust’s activities during the year, and financial position at the end of

the year.

11.3.9 Related Entities, Associates and Other Interests

11.3.9.1 Interests in Partnerships and Trusts

Where, at the end of a financial year, an entity has a right or interest in a partnership or trust that

is material to the entity, particulars shall be given of:


3/07/2001 11.3-19

• the nature of that right or interest;

• the name and the principal activities of that partnership or trust;

• the amount and percentage of that right or interest;

• the method of accounting used to record that right or interest;

• the contribution of that partnership or trust to the result of the entity; and

• the value of products or services directly received by the entity from that partnership or trust

after allowing for costs incurred by that entity in receiving those products or services.

Where, at the end of a financial year, an entity has rights or interests in more than one partnership

or trust, none of which rights or interests are material to the entity individually but in aggregate

are material to the entity, particulars shall be given in summary form of:

• the principal activities carried on during that financial year in the course of those partnerships

or trusts;

• the methods of accounting used to record those rights or interests and, in respect of each of

those methods, the amount at which those rights or interests are recorded in the accounting

records of the entity;

• the aggregate contribution of those partnerships or trusts to the result of the entity; and

• the aggregate value of products or services directly received by the entity from those

partnerships or trusts after allowing for costs incurred by the entity in receiving those products

or services.

11.3.9.2 Interests in Entities or Corporations Not Being Subsidiaries

In this section ‘interest’ includes shares in a corporation, convertible notes issued by a corporation

and loans and advances made to a corporation.

Where, at the end of the financial year, an entity had an interest in another entity or a corporation

(referred to as “the subject corporation”), not being a subsidiary or related entity, particulars shall

be given of:

• the name and the principal activities of the subject corporation;

• the percentage of capital of the subject corporation held by the entity;

• the separate contribution by the subject corporation to the result of the entity;


3/07/2001 11.3-20

• the amount of that interest at the end of that financial year showing separately:

- the aggregate amount of that interest in:

: the capital of the subject corporation;

: any convertible notes in the subject corporation; and

: the amount of any loans or advances by the entity to the subject corporation.

For the purposes of paragraph 2, in showing the amount of any loans or advances made to a

corporation, any loans and advances between those parties shall not be set off against each other.

Where an entity has “significant influence”1 over an investee entity, that falls short of “control”2 of

that entity, it must meet the requirements of AAS 14 Accounting for Investments in Associates.

An investor entity will then be required to account for their interest in the investee using either the

cost or equity methods depending on the circumstances. There are also more detailed disclosures

required. Where an entity may have a significant influence over an investee entity they should

seek further professional assistance from the Accounting Policy Branch of the Department of the

Treasury.

11.3.9.3 Interests in Joint Ventures

The Financial Statements shall disclose, by way of Note, the following information in respect of

each interest in a joint venture:

(a) identification of the joint venture and a description of the principal activities of the joint

venture; and

(b) the venturer's percentage interest in the output of the joint venture in the accounting

period.

The Financial Statements shall disclose, in aggregate for all interests in joint ventures, contingent

liabilities and capital expenditure commitments of the venturer.

1 See definition at para 9.1 of AAS 14 “Accounting for Investments in Associates”.2 See definition at commentary at para 21 and following of AAS 24 “Consolidated Financial Reports”.


3/07/2001 11.4-21

11.3.9.4 Related Entities

Entities reporting under these Guidelines are not required to comply with AAS 22 Related Party

Disclosures.

11.3.9.5 Outside Equity Interests

Where applicable entities reporting under these guidelines must also comply with the requirements

of AAS 24 (paragraphs 80 to 84), in relation to the disclosure of outside equity interests.

11.4 Impact of Environmental Matters on the Financial Statements

There are no separate disclosures required for environmental matters. However, Departments

must consider the impact of environmental matters in relation to the disclosure requirements of

the Manual and existing Australian Accounting Standards.

“Environmental Matters” are defined as:

(a) initiatives to prevent, abate or remedy damage to the environment, or to deal with

conservation of renewable and non-renewable resources (such initiatives may be

required by environmental laws and regulations or by contract, or they may be

undertaken voluntarily);

(b) consequences of violating environmental laws and regulations;

(c) consequences of environmental damage done to others or to natural resources; and

(d) consequences of vicarious liability imposed by law (for example, liability for damages

caused by previous owners).

“Environmental Matters” which may impact on the financial reports include:

(a) the introduction of environmental laws and regulations may involve an impairment of

assets and consequently a need to write down their carrying value;

(b) failure to comply with legal requirements concerning environmental matters, such as

emissions or waste disposal, or changes to legislation with retrospective effect, may

require accrual of remediation, compensation or legal costs;


3/07/2001 11.4-22

(c) some departments, for example, involved in chemical handling or having specialised

waste disposal needs, may incur environmental obligations as a by-product of these

activities;

(d) constructive or equitable obligations which arise from other than legally enforceable

obligations, for example a voluntary initiative such as where an entity may have

identified contamination of land and, although under no legal obligation, it may have

decided to remedy the contamination, because of its concern for its long-term

reputation, and its relationship with the community;

(e) an entity may need to disclose in the notes the existence of a contingent liability where

the expense relating to environmental matters cannot be reasonably estimated, or

there is a significant uncertainty as to whether a sacrifice of future economic benefits

will be required; and

(f) in extreme situations, non-compliance with certain environmental laws and regulations

may affect the continuance of an entity as a going concern, and consequently may

affect the disclosures and the basis of preparation of the financial statements.

3/07/2001 1

Appendix 11 A

Financial Statement Workpapers

The information contained in the Statement of Performance is central to the achievements of a

department. This section provides guidance on the recommended workpapers which should be

created to evidence the:

• Statement of Financial Performance;

• Statement of Financial Position; and

• Statement of Cash Flows;

produced by the department for both it’s departmental and territorial statements.

The guidance provided in these sections for workpapers may be used by departments, authorities

and Territory owned corporations where appropriate.

Structure of the Working Papers

The following structure has been identified from best practice :

Folders

• Folders are used to keep copies of all primary statements (excluding notes) and should be

separately numbered (eg 1-5).

3/07/2001 2

Index

• The index to the folders should follow the following format :

TABLE OF CONTENTS

1. Checklist

2. Trial Balance (Departmental and Territory)

3. Statement of Financial Performance - Departmental and Territory (Oracle Report)

4. Balance Sheet - Departmental and Territory (Oracle Report)

5. Statement of Responsibility

6. Statement of Financial Performance - Department

7. Statement of Financial Position - Department

8. Statement of Cash Flow - Department

9. Statement of Expenses and Revenues on Behalf of Territory

10. Statement of Assets and Liabilities on Behalf of Territory

11. Statement of Cashflow on Behalf of Territory

12. Statement of Appropriation

13. Notes to and forming part of Financial Statements

14. Statements of Financial Perfomance for each Output Class

3/07/2001 3

15. Statement of Financial Performance - Summary of Output Classes

Numbered dividers are used to separate each statement.

Checklist

• The first item on the Table of Contents is a checklist. The purpose of the checklist is to provide

an overall quality assurance review of the statements. The following is provided as the suggested

format :

Financial Statements Checklist

Please tick boxes when checking process has been completed and initial.

Tick whencompleted

Initial whencompleted

Date

Arithmetic Checks(a) Check that all amounts in the statements and notes arecorrectly added.(b) Check that all total amounts in the financial statementsagree with amounts in the notes.(c) Agree comparatives to previous year financialstatements.(d) Agree budget amounts to budget papers.(e) Check note amounts to supporting documentation.

Formatting(a) Check the heading for all statements is correctlystated.(b) Check for consistency of formatting on each statementand across statements.(c) Check that note numbers in the statements agree withnote numbers in the notes.(d) Check for consistency of formatting across notes.

Completeness

3/07/2001 4

Tick when

completed

Initial when

completed

Date

Is the following included:

Statements

• Statement of Financial Performance - Department

• Statement of Financial Perfomance - summary of

output classes

• Statements of Financial Performance for each output

class

• Statement of Financial Performance - Territorial

• Statement of Financial Position - Department

• Statement of Assets and Liabilities - Territory

• Statement of Cashflows - Department

• Statement of Cashflows - Territory

Statement of Appropriation

Notes

• Summary of department’s objectives

• Accounting policies

- have all changes in accounting policies been

explained

3/07/2001 5

Tick whencompleted


Date

Revenue• Dividends• Revaluation increments• Abnormal items - revenue• Transfers from provisions• Revenue from ACT Government• Commonwealth Government grantsExpenses• Bad and doubtful debts• Decrements from revaluation• Abnormal items - expenditure• Depreciation expense• Finance charges for finance leases• Operating lease costs• resources provided• Resources provided free of charge• Liabilities assumed• Net revenue/cost from disposal of non-current assets• Auditor’s remuneration• Act of grace payments• Waivers

- Numbers and amounts• Write - offs

- Numbers, amounts and description• Restructuring of administrative arrangements• Cash

- cash at bank- cash on hand

3/07/2001 6

Tick whencompleted


Date

• Receivables- trade debtors- other debtors- loans- accrued revenue-ageing of debtors

• Investments• Other current assets

- prepaid employee entitlementsother prepayments

• Non-current receivables- loans

• Property, plant and equipment- land- buildings- plant and equipment

• Capital works in progress• Creditors

- trade creditors- other creditors- accrued expenses- ageing of creditors

• Employee entitlements- salary and wages- annual leave- long service leave- purchased leave

• Other current liabilities- revenue received in advance- other

3/07/2001 7

Tick whencompleted


Date

• Finance leave liabilities- future lease paymentsinterest component of future lease payments- liability component of future lease payments- breakdown of future payments into yearbands

• Commitments- operating leases- other commitments- capital commitments

• Contingent liabilities• Third party moneys held in trust• Interests in joint ventures

- description and principal activities of trust- department’s interest in the joint venture

Notes to the Cashflow Statements• Reconciliation of net result statement of financial

performance to cashflows fromoperations.

• Reconciliation of cash

Appropriation Statement• Material variances between original budget and

appropriation used

3/07/2001 8

Line Item Folders

• Separate folders should also be maintained for major line items such as :

each line item in the Statements of Financial Position

cashflow statements

statement of appropriation

revenue (Departmental)

revenue (Territorial)

expenditure (Departmental)

expenditure (Territorial)

notes to the financial statements

• Each of the above folders are to be numbered (eg 6 of 18) to identify if any have gone

astray.

3/07/2001 9

Lead Schedules

• All of the folders used for the line items in the Statement of Financial Position and

Statements of Financial Performance should have a “Lead Schedule at the front of the

folder. The following is a suggested format :

DEPARTMENT OF ___________________________________________________

2000-01 FINANCIAL STATEMENTS

LEAD SCHEDULE

LINE ITEM: ___________________________________________

Natural Code Description Actual1999-2000

$’000

Actual2000-01$’000

Variance

$’000

Variance

%

TOTAL

3/07/2001 10

For all significant variances ie >5%; provide reasons for variances.

Natural Code Reasons for Variance

Purpose of lead Schedule

• The purpose of the “Lead Schedule” is to identify the various natural codes which aggregate

to the line item (for example all revenue accounts aggregating to “User Charges”).

• Also, the schedules provide an analytical review of each item.

• Through performing comparisons to either and/or prior year amounts/budgets, the

identification of possible errors or omissions is assisted.

• It also forces the preparer to identify reasons for variances. This assists the auditors and

also provides needed explanations for management as to significant movements in amounts.

• The “Lead Schedules” should be set up as EXCEL documents to allow for variances to be

automatically calculated and amounts totalled.

Natural Codes

• Each folder for a line item in the Statement of Financial Position should also contain

information each natural code, where the amounts are significant.

• Dividers with tags can be used to identify natural codes to facilitate ready reference from the

Lead Schedule to the more detailed information.

• Information maintained for each natural code (where relevant and significant) includes :

3/07/2001 11

- copy of any related reconciliations (eg for creditors)

- copies of any significant entries such as significant journals of

vouchers.

• For the Statement of Financial Performance line items, the Lead Schedules should not

identify the relevant natural codes as there are too many to list for some of the line items. A

schedule is provided which maps natural codes to line item codes in the Statement of

Financial Performance. A copy of the trial balance and ORACLE generated Statement of

Financial Performance should also be included.

Variance Explanations

• Variance explanation information should be completed for each line item on the Statement

of Financial Performance Lead Schedule.

Guidance

Although the above information may appear prescriptive in nature, the overall suggestions are of a

general nature. Agencies are encouraged to liaise with each other to develop workpapers that suit their

specific needs.


3/07/2001 11 - B - 1

Appendix 11 B

Statement of Performance - Workpapers & Information

The information contained in the Statement of Performance is central to theachievements of the ACT Public Service financial management reform process. It isthe primary method of reporting the provision of outputs within the accountabilityframework. As this information is included in the Annual Report and subject to audit,agencies are required to produce evidentiary workpapers supporting that informationto the same standard as required for financial information. It is essential that theoutputs reporting process is continually refined and improved. This section seeks toprovide guidelines and best practice examples in the process of improving theprovision of the statement of performance.

This means that a department will need to provide evidence of the process used tocalculate the result, the records of authority confirming the results (includingdefinitions), and appropriate cross-referencing for each output and/or measureincluded in the Statement of Performance.

Quality Assurance

It is good practice to have an officer from an unrelated part of the organisationundertake a “peer review” of the performance management and reporting system andits results well in advance of the annual audit. This will assist the individual elementsof the agency to fine tune/correct (as necessary) and to provide a more robust agencywide set of information to the Auditor General.

Contents of the Statement of Performance

Agencies must report on all performance measures that are set out in the budgetpapers for that agency and functions transferred to it during the year. Where thebudget papers include for comparison a discontinued measure from a previous year,those discontinued measures do not require reporting in the current year Statement ofPerformance.

The Statement of Performance should reflect all variations to measures, for instance:


3/07/2001 11 - B - 2

• addition of a new measure;• deletion of an existing measure;• change in the basis of a measure (eg from weeks to days);• increase/decrease in a target or targets.

Variations to measures should be reported together with existing measures for eachoutput. To enable comparability of all budgeted measures, replacement of onemeasure by another, or a change in the basis of a measure, the Statement ofPerformance will need to reflect a discontinuance and/or a new measure. For each variation agencies should include a concise explanation of the reason for thevariation, ie ‘why was the change necessary and how did it improve output reporting?’. It is expected that variations should provide more relevant, accurate, timely or costeffective information. The reason for the variation should be included in theExplanation of Material Variances column. The explanation for the variation should also state the period for which the measurehas applied, ie the quarter from which it took effect. Back-casting of new measures isnot required. Reporting of discontinued measures will be required up to the quarter inwhich they ceased to apply. Other variations such as a change of basis for the measureor an increase/decrease in target should be reported for the full year. Beginning in 1998-99, agencies should only include their “Schedule 2” in the budgetpapers (Refer CMD Memo 1998/13). Main Workpapers

Agencies should be aware that the Auditor General will expect to be provided withdocumentation in a similar structure to the financial workpapers. The main aims ofworkpapers is to provide an adequate audit trail and help facilitate an efficient and costeffective audit. All workpapers need to be gathered to a single central area, preferably in the proximityof the officers responsible for the collection and reporting of the data. The followingare the desired features of the main workpapers:• The workpapers should be filed in a logical order that corresponds with the format

of the Statement of Performance and its explanatory notes. (Suggested formats forthe Statement of Performance are provided at Section 11.2.4).

• There should be complete cross-references with an index including lead schedules.


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• There should be documentation of definitions and terms in a Glossary, includingchanges/variations over the course of the year.

• A workpaper should reconcile the Statement of Financial Performance Expenditureto the Total Cost of Outputs.

• A workpaper should contain summary data, calculations and/or reconciliations foreach item in the Statement of Performance or notes to the Statement ofPerformance.

• Each workpaper should be referenced to source documentation.• Each workpaper should be referenced to the contact officer or area responsible for

the recording of the source documentation.• Each workpaper should record the basis of calculations and assumptions used.• Each workpaper should contain copies of source data where convenient.• A description of each system or process used to record performance data indicating

the key control procedures ensuring the system/process operates correctly,including evidence that it has operated correctly.

• There should be sign-off of the accuracy of information in workpapers and sourcedocumentation by the officers providing the information to ensure quality assurance.

Materiality and Variance

For guidance on the application of materiality and the requirements of variancereporting please refer to Section 11.2.4. Authority of Guidance Material

Although the above information may appear prescriptive in nature, the overall suggestionsare of a general nature. Agencies are encouraged to liaise with each other, and with theAuditor General, to develop workpapers that suit their specific needs. Examples

The following examples demonstrate the elements required to be documented in aworkpaper in a suitable format. They are for guidance only and agencies are advisedto develop formats that suit their own specific needs. Example of Clearance or Sign-Off Sheet.


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Quarterly Report Against the Purchase Agreement CLEARANCE SHEET XX Quarter 19XX-XX The results for the following outputs as keyed into the Purchase Agreement Document Setup database are

accurate and documentation is available for verification

Output Manager - Signature Director - Signature/Date

X1.1

X1.2

X1.3


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Workpaper Folders

• Folders should be used to keep copies of all primary items in the Statement of

Performance and each should be separately numbered (eg 1-5). This could be eitherfor each Output Class or for each Output reported. Agencies will need to make ajudgement which balances the requirement for verification with the size ofsupporting documentation.

Index

• The folders should be indexed in logical order, and each subsidiary folder should

have a table of contents.• Numbered dividers should be used to separate each statement.• Each folder should contain a checklist for signing off the completion of the

contents. Example 1.1 MAIN INDEX 1. Statement of Performance 2. Output X1.1 3. Output X1.2 4. Output X2.1 5. Output X2.2 6. Output X2.3 7. Output X3.1 8. Output X3.2 Example 1.2 TABLE OF CONTENTS - FOLDER 1 - Statement of Performance 1. Checklist


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2. Main Index 3. Statement of Performance 4. Notes to Statement of Performance 5. Reconciliation of Statement of Financial Performance Expenditure toTotal Output Cost 6. Variations - Records of Changes During the Year 7. Glossary - Definition of Terms 8. Map Relationship of Outputs to Summary of Departmental Objectives. 9. Methodology - Assumptions and Principles behind Weightings, etc. 10. Summary Information - Output Classes Reconciliation to Outputs


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Example 1.3 TABLE OF CONTENTS - FOLDER 2 - Output X1.1 1. Checklist 2. Summary/Reconciliation 3. Table of Component Measures 4. Measure XX1.X1 Each Measure containing: • Description and assumptions including systems/processes and controls.• Contact Officer/Area.• Summary data, calculations, reconciliations.• Appropriate source documentation Sign-offs are necessary for all summary and source documentation. Pleaseinclude a copy of the sign-off. 4. Measure XX1.X2 As per Measure XX1.X1, Etc.


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Checklist

• The first item on the Table of Contents is a checklist. The purpose of the checklistis to provide an overall quality assurance review of the workpapers and statements.Each item required to be included in the relevant folder should be noted on thechecklist. The following is provided as a suggested format:

(Checklist on next page)


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Statement of Performance Checklist

Please tick boxes when checking process has been completed and initial.

Tick whencompleted


Date

Arithmetic Checks(a) Check that all amounts in the performance statementand accompanying notes are accurate(b) Check that all total amounts in the performancestatement agree with amounts in the accompanying notes(c) Agree comparatives to previous year whereappropriate(d) Agree budget amounts to budget papers(e) Check calculations of additions/deletions of measures(f) Check notes details to supporting documentation

Formatting(a) Check the heading for all statement items is correctlystated(b) Check for consistency of formatting on eachstatement item and across statement items(c) Check that note numbers in the statement agree withnote numbers in the notes(d) Check for consistency of formatting across notes

CompletenessIs the following included for each measure(a) Sign off by responsible officer(b) Name and Phone of Contact Officer/Area(c) System description including definition anddescription of data to be collected(d) Format and location of source documents(e) Documentation of any changes to the measure/outputincluding changed measures & targets or methodology(f) Data summary and calculations workpapers(g) Analysis of data including significant varianceexplanations(h) All documents requiring sign-off completed


11-C-1 3/07/2001

Appendix 11 C

Government Departments 2000-01

(For purposes of reporting under the Financial Management Act 1996)

This appendix is provided as guidance only, and represents a list of the entities expected toseparately report under these Guidelines.

With effect as from December 2000, Government departments are as follows:

ACT ExecutiveACT Legislative AssemblySuperannuation Provision AccountLand and Property

Department of Justice and Community SafetyChief Minister’s DepartmentDepartment of TreasuryCentral Financing UnitDepartment of Education and Community ServicesDepartment of Health Housing and Community CareDepartment of Urban ServicesAuditor GeneralInTACT


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APPENDIX 11 D

Disclosure Requirements for Financial Instruments

Table of Contents11D.1. Background------------------------------------------------------------------------------11D.1—1

11D.2. Disclosure of Terms, Conditions and Accounting Policies ----------------------11D.2—2

11D.3. Interest Rate Risk Disclosures -------------------------------------------------------11D.3—3

11D.4. Credit Risk Disclosures----------------------------------------------------------------11D.4—4

11D.5. Net Fair Value Disclosures------------------------------------------------------------11D.5—5

11D.6. Disclosure of Financial Assets Carried at an Amount in Excess of Net

Fair Value ----------------------------------------------------------------------------------------11D.6—6

11D.7. Other Disclosure Requirements of AAS 33 ----------------------------------------11D.7—6

11D.8. Suggested Format for the Presentation of AAS 33 Disclosures ----------------11D.8—7


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11D.1. Background

• Australian Accounting Standard 33, “Presentation and Disclosure of Financial Instruments”(AAS 33) mandates the disclosure requirements for financial instruments, for reportingperiods beginning on or after 1 January 2000. A financial instrument is any contract thatgives rise to both a financial asset1 of one entity and a financial liability2 or equityinstrument3 of another entity.

The purpose of AAS 33 is to enhance understanding of the significance of financial instruments onthe financial position, operating result and cash flows of the reporting entity.

The standard is concerned primarily with the disclosure requirements for financial statements, ratherthan recognition or measurement issues. Accordingly, the standard also applies to financialinstruments which may or may not be recognised in the face of the Statement of Financial Position.

The required disclosures relate to the following aspects of financial instruments:

• terms conditions and accounting policies (AAS 33 para 5.2)• interest rate risk (AAS 33 para 5.4)• credit risk (AAS 33 para 5.5)• net fair value (AAS para 5.6)• those financial assets carried at an amount in excess of net fair value (AAS 33 para 5.7)• other disclosure and presentation requirements (AAS 33 paras 4.1-4.4; 5.3; & 5.8-5.9)

The following financial instruments are excluded from AAS 33 (para 14):

• interests in subsidies;• interests in associated companies (AAS 14);• operating leases (AAS 17);• provisions for employee entitlements and employers’ superannuation plans’ obligations (AAS 30

& AAS 25);• employer’s obligations under employee share option and share purchase plans; and• obligations arising under insurance contracts.

It should also be noted that certain rights to receive or pay cash may not be contractual andtherefore do not meet the definition of financial asset in the standard. Non-contractual rights orobligations may for instance have their authority in legislation (eg taxation receivable) or mayinvolve transactions internal to the ACT Public Service. Hence, internal Territory transactions areto be excluded, including trade receivables and payables between entities within the ACT Body

1 a financial asset means any asset that is cash, or a contractual right to receive cash or another financial asset fromanother entity, or a contractual right to exchange financial instruments with another entity under potentiallyfavourable conditions, or an equity instrument of another entity.2 a financial liability means any liability that is a contractual obligation to either deliver cash or another financialasset to another entity, or to exchange financial instruments with another entity under conditions that are potentiallyunfavourable.3 an equity instrument means any contract that evidences a residual interest in the assets of an entity after deductingall of its liabilities.


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Politic (ie. Territory Owned Corporations, corporate bodies established by ACT law,unincorporated associations and Statutory Authorities are separate legal entities and arrangementswith the Territory can be contractual).

Although the standard is relatively complex, in most instances, there will be little practical impacton agencies beyond preparing an additional note to the financial statements using elements of thesuggested presentation and format at section 11D.8 of this appendix.

11D.2. Disclosure of Terms, Conditions and Accounting Policies

The Standard requires (para 5.2):

“For each class of financial asset, financial liability and equity instrument, both recognised andunrecognised, the following information must be disclosed:

(a) the accounting policies and methods adopted, including the criteria for recognition andthe basis of measurement applied; and

(b) information about the extent and nature of the underlying financial instruments, includingsignificant terms and conditions that may affect the amount, timing and certainty of futurecash flows”.

If an instrument is individually immaterial to the future cash flows of a particular entity, the essentialcharacteristics of the instruments may be described by reference to appropriate groupings of likeinstruments. Further guidance on these requirements is provided in AAS 33 (para 5.2.1 to 5.2.10).

Terms and Conditions

The following terms and conditions are normally disclosed if the financial instruments, held eitherindividually or as a group, create a potentially significant exposure to risk:• the principal, face, or other similar amount;• the stated rate or amount of interest, dividend or other periodic return on principal;• the date of maturity, expiry or execution;• the collateral held, in the case of a financial asset, or pledged, in the case of a financial liability;• in the case of an instrument that provides for an exchange, the information described in items (a)

to (d) for the instrument to be acquired in the exchange.

Other terms and conditions that may also warrant disclosure include:

(a) early settlement options held by either party to the instrument;(b) details of options held to convert or exchange the instrument;(c) the amount and timing of scheduled future cash receipts or payments of the principal

amount of the instrument, including instalment repayments and any sinking fund orsimilar requirements;

(d) if relevant, the foreign currency in which receipts or payments are required; and(e) any condition of the instrument or associated covenant that, if contravened, would

significantly alter any of the other terms.


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Significant terms and conditions are disclosed whether the financial instruments are recognised orunrecognised. For example, guarantees and securitisation of assets may leave an entity exposed tosignificant credit risk and would therefore require these disclosures. The substance, rather than the legal form, is to be the financial statement classification determinant.If the legal form of a financial instrument differs from its representation on the Statement ofFinancial Position, it is desirable for an entity to explain in the notes to the financial statements thenature of the instrument.

Information about the inter-relationships of financial instruments (eg hedging) that may affect theamount, timing or certainty of future cash flows of an entity, may also enhance the informationdisclosed.

Accounting Policies

Disclosures of accounting policies must indicate not only whether cost, net fair value or some otherbasis of measurement has been applied to a financial instrument but also the method of applying thatbasis. For example, for financial instruments carried on the cost basis, an entity may disclose how itaccounts for the cost of acquisition, premiums and discounts and declines in net fair value offinancial assets below their carrying amount.

For financial assets and liabilities carried at net fair value, agencies should indicate whether carryingamounts are determined from quoted market prices, independent appraisals, discounted cash flowanalysis or another appropriate method, and disclose any material assumptions made in applyingthose methods.

The basis for reporting realised and unrealised gains and losses, interest, and other items or revenueand expense associated with financial assets and financial liabilities should also be disclosed.

11D.3. Interest Rate Risk DisclosuresThe Standard requires (para 5.4): “For each class of financial asset and financial liability, both recognised and unrecognised,information about the entity’s exposure to interest rate risk must be disclosed, including:

a) contractual repricing or maturity dates, whichever dates are earlier

b) when applicable, effective interest rates or the weighted average effective interest rate”.

Disclosure of this information provides financial report users with a basis for evaluating the interestrate price risk to which an entity is exposed and thus the potential for gain or loss. In determining suitable classes for interest rate risk disclosures, an entity considers which of itsfinancial assets and financial liabilities are:

a) exposed to interest rate price risk, such as monetary financial assets and financialliabilities with a fixed interest rate; or


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b) exposed to interest rate cash flow risk, such as monetary financial assets and financialliabilities with a floating interest rate that is reset as market rates change; or

c) not exposed to interest rate risk, such as some investments in equity securities.

The nature of an entity’s business and the extent of its activity in financial instruments willdetermine whether information about interest rate risk is presented in narrative form, in tables, or bya combination of the two. When an entity has a significant number of financial instruments exposedto interest rate price or cash flow risks, it may adopt one or more of the following approaches topresenting information.

(a) The carrying amounts of financial instruments exposed to interest rate price risk maybe presented in tabular form, grouped by those that are contracted to mature or berepriced:

(i) within 1 year of the reporting date

(ii) more than 1 and less than 5 years from the reporting date

(iii) 5 years or more from the reporting date.

(b) When the performance of an entity is significantly affected by the level of itsexposure to interest rate price risk or changes in that exposure, more detailedinformation is desirable. An entity such as a financial institution may disclose, forexample, separate groupings of the carrying amounts of financial instrumentscontracted to mature or be repriced:

(i) within 1 month of the reporting date

(ii) more than 1 and less than 3 months from the reporting date

(iii) more than 3 and less than 12 months from the reporting date.

(c) Similarly, an entity may indicate its exposure to interest rate cash flow risk through atable indicating the aggregate carrying amount of groups of floating-rate financial assets andfinancial liabilities maturing within various future time periods.

11D.4. Credit Risk DisclosuresThe Standard requires (para 5.5):

“For each class of financial asset, both recognised and unrecognised, information about theentity’s exposure to credit risk must be disclosed, including:

(a) the amount that best represents its maximum credit risk exposure at the reportingdate, without taking account of the value of any collateral or other security, in theevent other parties fail to perform their obligations under financial instruments;

(b) in respect of concentrations of credit risk that arise from exposures to a single debtoror to a group of debtors having a similar characteristic such that their ability to meet


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their obligations is expected to be affected similarly by changes in economic or otherconditions:

(i) a description of the similar characteristic that identifies each concentrationarising from exposure to a group of debtors;

(ii) the amount that best represents the maximum credit risk exposure for eachconcentration, without taking account of the value of any collateral or othersecurity held, in the event other entities fail to perform their obligations underfinancial instruments”.

In the case of recognised financial assets exposed to credit risk, the carrying amount of the assets inthe statement of financial position, net of any applicable provisions for loss, usually represents theamount exposed to credit risk. An entity may disclose the extent to which exposure to credit risk at a particular point in time hasbeen reduced by rights of set-off.

The characteristics that may give rise to a concentration of risk include the nature of the activitiesundertaken by debtors, such as the industry in which they operate, the geographic area in whichactivities are undertaken and the level of credit worthiness of groups of borrowers. The standard also contains detailed guidance for disclosing unrecognised financial instruments. Iffurther guidance is required please contact Accounting Policy and Projects.

11D.5. Net Fair Value DisclosuresThe Standard requires (para 5.6):

“For each class of financial asset and financial liability, both recognised and unrecognised,the following information about net fair value must be disclosed:

(a) the aggregate net fair value as at the reporting date, showing separately theaggregate net fair value of those financial assets or financial liabilities which are notreadily traded on organised markets in standardised form;

(b) the method or methods adopted in determining net fair value; and

(c) any significant assumptions made in determining net fair value.

The Standard also provides the following definitions: Fair value means the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable, willing parties in an arm’s-length transaction, and is determined as follows:

(a) the quoted market price in an active and liquid market; or

(b) when there is infrequent activity in a market, the market is not well established,small volumes are traded relative to the asset or liability to be valued, or a quoted


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market price is not available – an estimate of a price for the asset or liability in anactive and liquid market.

Net fair value means:

(a) in relation to an asset, the fair value after deducting costs expected to be incurredwere the asset to be exchanged; or

(b) in relation to a liability, the fair value plus costs expected to be incurred were theliability to be settled.

The net fair value of a financial asset or financial liability may be determined by one of severalgenerally accepted methods. Disclosure of net fair value information includes disclosure of themethod adopted and any material assumptions made in its application. When a financial instrument is traded in an active and liquid market, its quoted market price,adjusted for the transaction costs that would be incurred in an actual transaction, provides the bestevidence of net fair value. The standard also provides guidance on valuing financial instruments when market prices may beinadequate or indeterminable, for instance, where volumes are very low.

11D.6. Disclosure of Financial Assets Carried at an Amount in Excess of NetFair ValueThe Standard requires (para 5.7):

“When one or more financial assets are recognised at an amount in excess of their net fairvalue, the following information must be disclosed:

(a) the carrying amount and the net fair value of either the individual assets orappropriate groupings of those individual assets; and

(b) the reasons for not reducing the carrying amount, including the nature of theevidence that provides the basis for management’s belief that the carrying amountwill be recovered”.

Where non-current financial assets are carried at amounts in excess of their net fair value, therecoverable amount test in Australian Accounting Standard AAS 104 "Accounting for theRevaluation of Non-Current Assets" needs to be satisfied.

11D.7. Other Disclosure Requirements of AAS 33

The standard prescribes a number of presentation requirements relating to:

4 Further details are provided at Section 6.11 Revaluation of Non-Current Assets


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• the classification of a financial instrument or its component parts as a liability or as equityaccording to substance and the definitions in the standard (para 4.1);

• the separate classification of the financial liability and equity components of aninstrument (para 4.2);

• the classification of interest, dividends, losses and gains consistent with their relatedfinancial instrument (para 4.4); and

• the requirement that set-off be used only when their is a legally recognised right of set-offand there is an intention to settle simultaneously (para 4.5).

An entity is also required to make specific disclosures on any:• derivative financial instruments (para 5.3);• hedging transactions (para 5.8); and• commodity contracts regarded as financial instruments (para 5.9).

11D.8. Suggested Format for the Presentation of AAS 33 Disclosures

A suggested format for the presentation of AAS 33 disclosures follows. Although, the formatdisplayed is based on better practices gleaned from the 1997-98 reporting cycle, the suggestedpresentation may be amended by individual agencies to suit their own requirements as appropriate.


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[EXAMPLE FORMAT ONLY]

Note XX - Financial Instruments

(a) Terms, conditions and accounting policies

FinancialInstrument

Notes Accounting Policies and Methods (Includingrecognition criteria and measurement basis)

Nature of underlying instrument (includingsignificant terms & conditions affecting the amount,timing and certainty of cash flows)

Financial Assets Financial assets are recognised when control overfuture economic benefits is established and the amountof the benefit can be reliably measured

Cash - deposits atcall

Deposits are recognised at their nominal amounts.Interest is credited to revenue as it accrues.

The department/ agency invests surplus funds with...Interest is earned on the daily balance at rates basedon.... Rates have averaged x% for the year (1996/97:x%). Interest is paid at.......

Receivables forgoods and services

These receivables are recognised at the nominalamounts due less any provision for bad and doubtfuldebts. Collectability of debts is reviewed at balancedate. Provisions are made when collection of the debtis judged to be less rather than more likely

All receivables with entities external to the ACTgovernment sector. Credit terms are net 30 days (1996-97: 30 days)

Other debtors As for receivables for goods and services. As for receivables for goods and servicesLoans Loans are recognised at the amounts lent.

Collectability of amounts outstanding is reviewed atbalance date. Provision is made for bad and doubtfulloans where collection of the loan or part is judged tobe less rather than more likely. In rare circumstances,loan repayment may be waived. Interest is credited torevenue as it accrues

Loans are made under contract for periods up to ......Security is/is not generally required. Principal is repaidin full at maturity. Interest rates are fixed/variable.Effective interest rates average x% (1996-97: x%).Interest payments are due on the .......

Government Commonwealth Government Bonds are recognised at These securities have terms up to x years. They are


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securities amortised cost (ie at original cost adjusted foramortisation to date of any discount or premium whichoriginally issued). Interest is credited to revenue as itaccrues.

guaranteed by the issuing Government and are traded inactive markets. Effective interest rates average x%(1996-97: y%) Interest is paid ....in A and B.

Term deposit The deposit is recognised at cost. Interest is accrued asit is earned.

The deposit is with the agency’s bank, maturing in xx,and earns an effective rate of interest of y% payablequarterly.

Interest in businessundertaking

On ..... 199x, the agency acquired a x% interest in theY partnership, which was initially carried at cost. Sinceacquisition, the interest is carried at the lower of costor recoverable amount. The increased carrying amountat 30 June 1998 represents the agency’s proportionateshare of an agreed increase in the capital invested in thepartnership.

The terms of the partnership are that any annual surpluswill be retained in the partnership unless unanimouslyagreed otherwise by the partners. The agency’s share ofthe partnership’s distributed surplus for 1997-98 is $x($y: 1996-97)

Fees receivable Fees accrue and are recognised at the time services areperformed

As for receivables for goods and services

Accrued revenue Interest is credited to revenue as it accrues. Interest ispayable ..... Dividends from .....are recognised when adetermination is made by the Minister.

Interest: as for loans. The basis for the payment ofdividends is ......

Financial Financial liabilities are recognised when a present


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Liabilities obligation to another party is entered into and theamount of the liability can be reliably measured

Bank loan Bank loans are recognised at their principal amounts.Interest is expensed as it occurs.

Loans are carried at the amounts borrowed. Effectiveinterest rates average x% on fixed rate loans to y% onfloating rate loans, with effective rate of x% (1996-907:y% and z% respectively), with interest payable quarterly.Terms are x years or less. All loans are unsecured. Eachloan is to be repaid in full at maturity. The loans aremade under a loan facility arranged in 1996 with theagency’s bank which allows amounts up to $x to beoutstanding at any time. The facility runs to xxx19xxand costs z% fixed on the unused end of month balance.

Non-bank loans The loan is carried at the balance yet to be repaid.Interest is expensed as it accrues.

The loan is repayable in monthly instalments. Interest iscalculated on the reducing balance of the loan. Theeffective interest rate is x%. The last instalment is due tobe paid in xxx. The loan is unsecured.

Finance leaseliabilities

Liabilities are recognised at the present value of theminimum lease payments at the beginning of the lease.The discount rates used are estimates of the interestrates implicit in the leases

At reporting date, the Department/agency had financeleases with terms averaging x years and a maximum termof y years. The interest rate implicit in the leasesaveraged x% (1996-97: y%). The lease liabilities aresecured by the lease assets.

Lease incentives The lease incentive is recognised as a liability on receiptof the incentive. The amount of the liability is reducedon a straight-line over the life of the lease by allocatinglease payments between rental expense and reductionof the liability.

The Department has received fitout incentives onentering a property operating lease in... Lease paymentsare made monthly.

Deposits The liabilities are recognised at their principal amounts.Interest is charged as it accrued

The agency takes fixed term deposits unsecured forperiods up tox years at effective interest rates ranging from x% to y%


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(1996-97 a% to B%). Interest is paid at each month end.Surplus lease space A liability for surplus space is recognised at the time it

is first determined that leased space will be of no futurebenefit to the department. The liability is measured asthe total expected outlay relating to the surplus space.The amount of the liability is reduced on a straight lineover the life of the lease by allocating lease paymentsbetween rental expense and reduction of the liability.

The liability of $xx (1996: $yy) arises under theDepartment’s non cancellable operating leases for officeaccommodation.

Trade creditors Creditors and accruals are recognised at their nominalamounts, being the amounts at which the liabilities willbe settled. Liabilities are recognised to the extent thatthe goods or services have been received (andirrespective of having been invoiced).

All creditors are entities that are not part of the ACTgovernment legal entity. Settlement is usually made net30 days.

Grant liabilities Multi-year grants to organisations are expensed whenthe agreed services are provided by the recipient.Other grants are recognised as liabilities and expensesin the years in which the grant agreements are made.Amounts reported as liabilities at balance date relatemainly to reimbursements due from the Department foragreed expenditure undertaken in the reporting period/

If these grants are not contractual in nature, no furtherdisclosures required by AAS 33 are made in this note.

The Department administers other grants which, in themajority of cases cover only the financial year in whichthe agreement is made.

Unrecognisedfinancial liabilitiesOther Guarantees The amounts guaranteed by the ACT are disclosed in

the Schedule of Contingencies and note xx. At the timeof completion of the financial statements, there was noreason to believe that the guarantees would be called

Guarantees given by the ACT to assist communitysupport groups in relation to....


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upon, so recognition of a liability was not required.The guarantees are measured as the sum of all futurepayments and the principal and interest outstandingrespectively.

Indemnities The maximum amount payable under the indemnitiesgiven is disclosed in the Schedule of Contingencies. Atthe time of completion of the financial statements, therewas no reason to believe that the guarantee would becalled upon, and recognition of the liability wastherefore not required. An indemnity has also beengiven on .....which occurred in 199x-y (an earlier period)

Indemnities are given to community support groups....inrelation to approved public activities up to a specifiedmaximum amount for each activity.


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Note XX - Financial Instruments (cont)

(b) Interest Rate Risk: Department/Territory/Agency (indicative listing)

FinancialInstrument

Notes FloatingInterestRate

FixedInterest Rate

Non-InterestBearing

Total WeightedAverageEffectiveInterest Rate

1 year or less 1 to 2years

2 to 5years

over 5years

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98$’000

1996-97$,000

1997-98%

1996-97%

Financial AssetsCash at Bank ? $x $y - - - - - - - - $a $b $x+a $b+y c.d% e.f%Receivables for goodsand services

? - - - - - - - - - - $z $zz $z $zz n/a n/a

Total FinancialAssets(Recognised)

$x $y - - - - - - - - $a+z $b+zz $x+a+z $b+y+zz

n/a n/a

Total Assets $x $y - - - - - - - - $a+z $b+zz $x+a+z $b+y+zz

n/a n/a

Financial LiabilitiesFinance leaseliabilities

? - - $a $aa $b $bb $c $cc $d $dd $x $y $a+b+c+d+x

$aa+bb+cc+dd+

x% y%

Lease incentives ? - - - - - - - - - - $aa $bb $aa $bb n/a n/aTrade creditors ? - - - - - - - - - - $cc $dd $cc $dd n/a n/aSurplus lease space ? - - - - - - - - - - $ee $ff $ee $ff n/a n/aTotal FinancialLiabilities(Recognised)

$x+aa+cc+ee

$y+bb+dd+ff

$sumabove

$sumabove

Total Liabilities - - $a $aa $b $bb $c $cc $d $dd $sumabove

$sumabove

$sumabove

$sumabove

n/a n/a

UnrecognisedIndemnity

? - - - - - - - - - - $z $z $z $z n/a


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Note XX - Financial Instruments (Cont.)

(c) Net Fair values of Financial Assets and Liabilities (Indicative table only)

1997-98 1996-97Total Aggregate Total Aggregate

Note $’000 $’000 $’000 $’000Departmental Financial Assets

Cash at BankReceivables for Goods & Services

Total Financial Assets

Financial Liabilities (Recognised)

Finance lease liabilitiesLease incentivesTrade CreditorsSurplus lease space

Total Financial Liabilities

Financial LiabilitiesIndemnity on land sale Schedule of

Other guarantees contingencies

Assets held on behalf of theFinancial Assets

CashLoansFees receivableAccrued revenue

Total Financial Assets

Financial Liabilities (Recognised)

Grant liabilitiesTrade creditors


Financial Liabilities

Guarantees Schedule of

Indemnities contingencies



3/07/2001 11D.8- 13


Note XX Financial Instruments (Cont.)

(c) Net Fair Values of Financial Assets and Liabilities (cont.)

Financial Assets

The net fair values of cash and non-interest bearing monetary financial assetsapproximate their carrying amounts.

The net fair values of loans receivable are based on discounted cash flows usingcurrent interest rates for assets with similar risk profiles.

Financial Liabilities

The net fair values of finance lease, surplus space and lease incentive liabilities, andguarantees are based on discounted cash flows using current interest rates for liabilitieswith similar risk profiles. (Where the liability is on a floating rate of interest, themethod returns the principal amount).

The net fair values for trade creditors and grant liabilities are short-term in nature andare approximated by their carrying amounts.

The net fair values of indemnities are regarded as the maximum possible loss which theCommonwealth faces while the indemnity remains current.

(d) Credit Risk Exposures

The agency’s maximum exposures to credit risk at reporting date in relation to eachclass of recognised financial assets is the carrying amount of those assets as indicatedin the Statement of Assets and Liabilities.

The Agency has no significant exposures to any concentrations of credit risk.

All figures for credit risk referred to, do not take into account the value of anycollateral or other security.


3/07/2001 i

Table of Contents

12.CONTINGENT LIABILITIES ................................... 12.1-1

12.1 Purpose................................................................................ 12.1-1

12.2 Indemnities.......................................................................... 12.2-2

12.2.1Contracting Out and Potential Liabilities ..................................... 12.2-6

12.2.2Indemnity Contracts ...................................................................... 12.2-7

12.3 Guarantees .......................................................................... 12.3-9

12.4 Letters of Comfort............................................................ 12.4-10

12.5 Risk Management............................................................. 12.5-11

12.6 Agency Registers .............................................................. 12.6-13

12.7 Central Registers .............................................................. 12.7-14

12.8 Financial Reporting.......................................................... 12.8-15


3/07/2001 ii



12.1-1

12. CONTINGENT LIABILITIES

ISSUING INDEMNITIES, GUARANTEES & LETTERS OF COMFORT ON BEHALFOF THE TERRITORY.

12.1 Purpose

Annually, the ACT enters into numerous contractual arrangements (in writing or oral), eachinvolving the assignment of risks between the contracting parties (commercial and legal).Some contracts involve the transfer of risks from one party to another through instrumentscalled indemnities and guarantees. The assessment and management of such instruments, andtheir associated risks, is essential as they extend the potential liabilities of the Territory.

These guidelines answer the following:

• definitions of indemnities, guarantees and letters of comfort and their use;

• the types of risks covered by indemnities and guarantees;

• the basis of authority for issuing guarantees and indemnities;

• the need to seek legal advice on relevant instruments;

• the need to record all contingent liabilities in agency registers; and

• the need to monitor, report and review all contingent liabilities.



12.2-2

12.2 Indemnities

What is an indemnity?

An indemnity is a legally binding promise (written or oral) whereby one party undertakes to

accept the risk of loss or damage another may suffer.

Indemnities issued by the Territory essentially provide for the transfer of the contracting

party’s risks to the Territory, thereby increasing the size of the Territory’s potential liabilities.

For example:

• the Territory, in using goods or property owned by another party, may indemnify the

owner against losses that may be suffered if a third person damages those goods (such

as the losses that may arise from the destruction of an exhibit by a member of the

public).

• the Territory, may indemnify a person who has been acting on behalf of the Territory

for any liability that the person incurs in performing a function on behalf of the

Territory.

What is the Territory’s policy on issuing indemnities?

The Territory’s policy on issuing indemnities to another party, is to accept such risks only

when the expected benefits (financial or otherwise, including co-operation from that party)

outweigh the potential losses. Before issuing an indemnity, potential losses should be

TerritoryContracting

Party

Indemnity Issued

Risk Transfer



12.2-3

rigorously identified and assessed in the context of each agencies overall risk management plan

(see section 12.5 - Risk Management).

Whom can the Territory indemnify?

The Territory can indemnify any “legal person” other than itself. The Territory itself means theBody Politic, as the composite legal entity which can sue and be sued. The body politicincludes the Executive, the Legislature, and the Judiciary. Indemnities cannot be issued by one“entity” to another “entity” within “the body corporate”, as these entities are ‘one’ for thepurposes of the law. Entities within the “Body Corporate” are subject to the FinancialManagement Act 1996 (FMA).

There are four types of ACT Government entities which have not been established as part ofthe Body Politic:• Territory Owned Corporations (TOC) which have been established by the Territory

Owned Corporations Act 1990;

• corporations established by ACT law , such as statutory authorities;

• corporate bodies established by ACT law, such as the Public Trustee and the Registrar

General; and

• unincorporated associations, for example the Office of the Director of Public

Prosecutions.

These entities, are separate legal entities, capable of contracting in their own names. Therefore,the Territory is capable of indemnifying these entities.

Who has the authority to issue an indemnity?

There are no specific statutory requirements establishing responsibility for the authorisation ofindemnities. However, under section 67 (2) the FMA the Treasurer may issue financialmanagement guidelines, not inconsistent with this Act or the regulations, for the purposes ofthis Act or regulations.

The Chief Executive of a department under section 31 (1) of the FMA is accountable to theresponsible Minister of the department for efficient and effective financial management of thedepartment. In addition, under section 31 (2) (c) the Chief Executive of a department isresponsible for ensuring that the officers and employees of a department comply with therequirements of the financial management guidelines. The Chief Executives of a department in



12.2-4

managing the finances of a department may authorise an indemnity which commits theTerritory, provided the guidelines in this memo are met.

A Chief Executive of a Statutory Authority can also authorise an indemnity provided theguidelines in this memo are met.

All indemnities must be referred to the ACT Government Solicitor for clearance (unless theymeet the criteria in the section below on legal advice).

In addition, the following indemnities due to their nature and amount must be forwarded to theChief Executive, the Department of the Treasury to be authorised by the Treasurer:

• indemnities in excess of $1m;

• indemnities considered to have a high probability of an impending dispute or claim (ie.

high risk); and

• non quantifiable indemnities both in the level of risk and amount.

Who should authorise an indemnity where inter-agency contractual arrangements areinvolved?

If an agency has contracted with another agency for the provision of goods or services forwhich an indemnity is being sought by another party, it is important to determine which of thetwo agencies should authorise or seek authorisation from the Treasurer for the issuance of theindemnity to the third party.

The agency which authorises an indemnity would be expected to meet, to the maximum extentpossible by their existing appropriations, the claims resulting from the indemnity.

To determine which party should authorise the indemnity , consideration must be given to:

• which agency owns the asset; and

• who is ultimately responsible for the provision of the good or service;



12.2-5

for which an indemnity is being sought.

For instance, if a department contracts with a statutory authority for the provision of a good orservice required by the department’s Purchase Agreement, the statutory authority may seek anindemnity for third party clients from the Department. This recognises the fact that thestatutory authority may not have contracted to deliver the good or service but for an indemnityfrom the purchasing department.



12.2-6

12.2.1 Contracting Out and Potential Liabilities

It is important to recognise that the Territory may be exposed to unintentional risks whencontracting with a third party for the provision of goods or services which would normallyhave been provided by the Territory. For instance: • the Territory decides to outsource a public sector program activity to a private sector

contractor who, in turn, is negligent in delivering a service to which a member of the

public has an entitlement; or

• the other party to a contract agrees to insure all the risks involved in an activity in its

name, but does not provide the Territory with an indemnity in the event of a third party

suing both the contractor and the Territory.

In both these situations the Territory, unless indemnified by the contractor, remains exposed topotential liabilities which rightly are the responsibility of the contractor. This exposure remainsregardless of whether a contractor self-insures or purchases commercial insurance.

The Territory should seek an indemnity from the contracting party against any loss ordamage to the Territory from non-performance on part of the contractor. In thiscontext, the agency may also insist on the contractor taking out insurance to back up theindemnity (eg. covering negligence, breach of contract or public, product or professionalliability).



12.2-7

12.2.2 Indemnity Contracts

Indemnities can form separate contracts or they can be contained in another contract as aclause(s).

Indemnity contracts/clause(s) must exclude the Territory’s exposure to potential losses causedby the other parties’ own shortcomings, eg. fraud, bad faith or other culpable behaviour.

The contracts should include:

• a financial limit (minimum and maximum limits), where possible;

• specified events or periods covered by the indemnity, and/or include

termination clauses: alternatively an indemnity should be reviewed

periodically;

• specified conditions regarding the requirements to notify the Territory of any

impending disputes or claims (including those from third parties); and

• subrogation clauses giving the Territory the right to exercise the option of

conducting, or participating in, the defence of any claims against the indemnified

party, and to require full assistance from that party.

All contracts for indemnities must proceed on the basis of utmost good faith. Furthermore, theparty seeking an indemnity must be required to notify the Territory of any changes incircumstances or events, as they arise, which may significantly impact on the risks associatedwith the instrument.

Should legal advice be sought on the terms and conditions of each indemnity?

Legal advice and contract vetting is needed when agencies enter into any form of writtencommercial arrangement, to ensure the Territory is exposed to the minimum risk necessary toachieve the particular objective.

As a general rule, an agency must seek legal advice unless an essentially identical indemnity hasbeen issued recently covering the same activity or responsibilities.



12.2-8

Routine indemnities can be issued on the basis of generic advice provided that additional advice issought where circumstances change or the specifications for the indemnity fall outside theparameters of the generic advice.

Determining the terms and conditions of an indemnity may require careful negotiations withseveral parties, including a commercial insurer. For instance, if the Territory indemnifies aparty for losses above those covered by insurance, the Territory may have to negotiatesubrogation rights with the insurance company. Both parties interests to assume the rights ofthe indemnified party and conduct the defence or settlement of any claim relating to theindemnity it has provided, may otherwise be in conflict.



12.3-9

12.3 Guarantees

A guarantee is a legally binding promise whereby one party undertakes to another party to beresponsible for the debt or obligations of a third party, should that third party default in someway. Guarantees issued by the Territory cover potential losses that would not otherwise bemet by the Territory.

Guarantees are provided by the Territory when it is considered in its interest to accept the risk ofassuming responsibility for performance, debts or liabilities of another party, if that party failsto fulfil its obligations.

Under section 47 of the FMA the Treasurer may approve a guarantee by the Territory forthe payment of money or the performance by any person of an obligation under acontract. This power has not been delegated to other officers.

Agencies must therefore address requests for a Guarantee to the Treasurer and forward therequest to the Department of the Treasury.

As with indemnities, guarantees can form separate contracts or they can be contained inanother contract as a clause(s). All contracts/clause(s) for guarantees must be referred to theACT Government Solicitor for clearance.



12.4-10

12.4 Letters of Comfort

A letter of comfort is a form of reassurance that may be used to facilitate an action ortransaction that might not otherwise occur. Unlike indemnities or guarantees, letters ofcomfort are not intended to give rise to legal obligations. The reason for drawing attention tothem in these guidelines is to warn agencies that there are some circumstances in which such“letters’ could be considered at law to be tantamount to indemnities or guarantees, andtherefore legally or morally binding on the Territory. Letters of comfort should generally beavoided.

Chief Executives of an agency may authorise a letter of comfort if the benefits outweigh thepotential losses. The potential losses should also be limited in some way to minimise theTerritory’s exposure.

All letters of comfort must be referred to the ACT Government Solicitor for clearance.



12.5-11

12.5 Risk Management

In view of the ultimate impact on output delivery and the fact that claims resulting from theindemnities or guarantees would be expected to be met by an agency’s existing appropriations,proposals to issue indemnities and guarantees should be considered in the context of eachagency’s overall risk management plan.

Managing the risks from contingent liabilities involves:

• establishing an awareness of the agency environment;

• identifying the risks;

• analysing the risks;

• assessing the risks;

• treating the risks (such as they are retained, reduced, eliminated, controlled or

transferred); and

• monitoring and reviewing the risks.

It is essential that risks associated with contingent liabilities be examined together with other risksfaced by an agency. In terms of their impact on output delivery, risks which involve contingentliabilities cannot be assessed in isolation from strategies to manage other risks (such as the riskof non-compliance with required product/service delivery) which, depending on their success,may reduce or exacerbate potential losses related to indemnities or guarantees.

Proposals to issue a guarantee or indemnities must be scrutinised in the following ways: • test if there is an alternative means of achieving the expected benefits. This may require

negotiation to determine whether the other party is prepared to accept and transfer all

or some of the risks to a commercial insurer; and

• if no other means are considered viable determine if the benefits are reasonably

expected to outweigh any potential losses.



12.5-12

Risk assessments of proposals to issue indemnities and guarantees should be analysed and wellexplained and documented by managers before authorisation is sought to issue the particularinstruments.

Agency Ownership Agreements and Statement of Intents should recognise:

• plans to enter into commitments of this nature; and

• a management framework to monitor and manage the risks from contingent

liabilities.

From 1 July 1998 agencies will be able to pay insurance premiums into a centrally managedfund. This fund management scheme will provide the benefits of internal pooling and financingof the diversified risks within the Territory. The insurance premiums paid into the fund willreflect an agency’s exposure to risk, including the risk of indemnity claims. The fund is beingdeveloped by the Superannuation and Insurance Provision Unit. Any queries can be directedto the contact officer managing the fund on (02) 6207 0266.



12.6-13

12.6 Agency Registers

Once an indemnity, guarantee or letter of comfort has been issued, the agency concernedshould record the details on a register. The registers must include all instruments authorised byor which relate to the activities of the agency.

For indemnities issued via standard contracts each year, it is sufficient to record the name of theactivity, the name(s) of indemnified parties, the cumulative number of indemnities issued forthis activity each year and, if possible, the cumulative known or estimated financial limit towhich the Territory has a potential commitment.

The registers for guarantees, indemnities and letters of comfort should be kept up to date on thefollowing details:

• description of the indemnity, guarantee or letter of comfort;

• name(s) of the parties involved;

• financial limit (minimum and maximum limits), where possible;

• specified events or periods covered by the indemnity, and/or

• termination date.

All indemnities and guarantees should be periodically reviewed to ensure that they are still themost appropriate means of achieving the particular benefits they were intended to deliver. Forexample, a risk for which a consultant was indemnified because insurance was unavailable, maylater become insurable.



12.7-14

12.7 Central Registers

To comply with the terms of the Territory’s catastrophe insurance the Government is requiredto monitor and notify the Territory’s insurer of potential risks above $250,000 on a quarterlybasis. All indemnities, guarantees and letters of comfort over $250,000 must therefore bereported on a quarterly basis.

Information on these instruments will also be required after 1 July 1998 to determine and monitoran agency’s premiums into the centrally managed insurance fund.

A hard copy of each agency’s register should be returned each quarter with the monthlyownership reports to the Ownership Reporting Section of the Department of the Treasury.



12.8-15

12.8 Financial Reporting

Contingent liabilities authorised by or which relate to the activities of an agency, must bereported in the agency’s annual financial statements as required in accordance with theAustralian Accounting Standards (AAS) and the APM.

SAC 4 and APM 7.8-9 recognise that indemnities and guarantees do not meet the recognitioncriteria for liabilities until it becomes probable that there will be a default and settlement will berequired. The instruments however, may warrant disclosure in the Notes to the FinancialStatements because the knowledge of the liabilities is considered relevant to users in makingand evaluating decisions about the allocation of scarce resources.

AAS 5 “Materiality” guides whether the contingency warrants disclosure. The standardrecognises that the nature and amount of an item or an aggregate of items usually needs to beevaluated together when determining materiality.

It is important to note, that all indemnities requiring the Treasurer’s authorisation areconsidered material.

Compliance with AAS 33 “Presentation and Disclosure of Financial Instruments” is alsorequired. This standard applies to financial years ending on or after 31 December 1997,includes the disclosure of financial liabilities which are contingent on the occurrence of a futureevent. If the unrecognised instrument is material the terms and conditions must be disclosed.If no single instrument is individually material to the future cash flows of a particular entity, theessential characteristics of the instruments are described by reference to appropriate groupingsof like instruments.


Section-Page3/07/2001 i

Table of Contents

Page

12A. Cultural and Community Assets ........................... 12A.1-1

12A.1 Recognition .................................................................... 12A.1-2

12A.2 Valuation........................................................................ 12A.2-4

12A.2.1 Grouping Similar Assets.......................................................... 12A.2-8

12A.2.2 In House Experts v External Valuations................................. 12A.2-8

12A.2.3 Sampling Methodology ............................................................ 12A.2-9

12A.3 Revaluation .................................................................. 12A.3-10

12A.4 Depreciation................................................................. 12A.4-10

12A.5 Land.............................................................................. 12A.5-10

12A.6 Reporting and Recording of Cultural and Heritage

Assets....................................................................................... 12A.6-11


Section-Page03/07/01 12A.1-1

12A. Cultural and Community AssetsBackground

The requirement to recognise cultural and heritage assets in the statement of financial

position is prescribed in AAS29. AAS29 has recently been amended, by the Public

Sector Accounting Standards Board, to extend the transitional clause which allows for

the non recognition of difficult to measure assets acquired prior to 1 July 1996. These

assets now have to be recognised from reporting periods ending on or after 30 June

1999. Agencies should however, commence/continue with the recognition and valuation

process for cultural and heritage assets.

Definition

Cultural and heritage assets are those assets that have unique cultural, historical,

geographical, scientific, and/or environmental attributes. They are not usually available

for sale or redeployment (for alternative use). Cultural and heritage assets may include

art, museum, and library collections, historical buildings, monuments, certain land, and

other cultural assets.

Framework

The asset valuation policy adopted to value cultural and heritage assets is the deprival

valuation framework, consistent with the measurement policies applied to other physical

non-current assets.

The deprival value is defined as the loss which results to an owner from being deprived

of an asset. It is the minimum cost of replacing the services rendered by the asset. The

value aims to approximate the true economic value of the asset in terms of its utility to

the entity. The choice of valuation method will depend on which approach will actually

best measure the service potential of future economic benefits currently embodied in the

particular asset, taking into account the manner in which that service potential is actually

consumed over the useful life of that asset.

It is important to note that cultural and heritage assets have two components of value: a

market-related value and an aesthetic, social or environmental worth. The latter



component, however, is very difficult to measure reliably. Accordingly, only the market

value or the cost of a replacement/reproduction with similar characteristics should be

disclosed in the financial statements. However, additional information on the cultural

and heritage significance component may be included in a note to the financial

statements.

12A.1 Recognition

Policy

Cultural and heritage assets that meet the recognition criteria shall be recorded in

the departmental financial statements of an entity.

Most cultural and heritage assets will meet the recognition criteria.

If an asset meets all the recognition criterion but cannot be measured reliably,

relevant information on the asset should be disclosed in the notes to the financial

statements. This information should include the reasons for the inability to

measure the asset reliably, the nature and functions of the asset and its cultural

and heritage significance together with the annual costs of

maintenance/preservation, where appropriate.

When previously unrecognised assets are recognised, a corresponding adjustment

must be made to the opening accumulated funds of the agency.

Commentary


The following diagram is designed to assist agencies in determining whether or not a

cultural and/or heritage asset should be recognised or disclosed in the notes to the

financial statements. The diagram should be read in conjunction with the following notes

on the asset recognition criteria.



NoWill the item generate service potential for

the entity?

Does the entity control the service potential?

Has the transaction giving the entity control

occurred?

ServicePotential

Control

PastTransaction

Not an asset of the entity

RECOGNITION

No

No

Does the estimated value of the item or

group of like items exceed the asset

recognition threshold?

Will the service potential eventuate?

Can the value be measured reliably?

Recognise in the Statement of Assets

and Liabilities

RecognitionThreshold

Probability ofBenefits

Reliability

Do not recognise in the

Statement of Assets and

Liabilities or report in the notes

Disclose in the notes to the

financial statements

Yes

No

No

No

Yes

Yes

Yes

Yes

Yes



As with all non current physical assets the recognition criterion are:

Service Potential The asset must generate service potential for the entity. That is,the asset is capable of contributing significantly toward theachievement of the entity’s objectives/outputs which mayinclude exhibitions, research, protection/preservation andeducation. Assets need not generate cash flows, either directlyor indirectly, to generate service potential. Furthermore, theinability to sell or modify an asset does not remove its ability toyield service potential for the entity. For example, an agencymay not be able to sell a heritage asset or use it for any otherpurpose. But this limitation does not eliminate the contributionthe asset makes to the entity in achieving its objectives, althoughit may affect the level of contribution.

Control The entity has the capacity to control the service potentialof the asset (APM Section 5.4). The agency responsiblefor the provision of a particular service would normallycontrol the cultural and heritage assets linked to thatservice.

Past Transaction An event giving the entity control over the service hasactually occurred (APM Section 6.1).

Threshold The estimated value of the asset or group of assets must beabove the recognition threshold for the entity, ie. $2000,unless a variation is approved by the Department ofTreasury (APM Section 6.5.4). See also Grouping SimilarAssets.

Probable Benefits It is probable that the service potential will in fact begenerated. The majority of cultural and heritage assets willcontribute at least a degree of service potential and thusqualify as assets for recognition under this criterion.

Reliably Measured The asset has a cost or value that can be reliably measured.See also Valuation.

12A.2 Valuation

Policy

The valuation of cultural and heritage assets is to be guided by the deprival valuation

decision framework. The framework has the following three rules:



• Cultural and heritage assets which no longer meet an agency’s objectives and are

surplus to requirements are to be valued at market selling price.

• Cultural and heritage assets held for continued use where the service potential

would not be replaced if the agency were deprived of the asset(s) are to be valued

at the greater of:

• the net present value of future cash flows; and

• market selling value.

• Cultural and heritage assets held for continued use where the service potential

would be replaced are to be valued at written down current cost. That is:

• current market buying price;

• current replacement cost; or

• current reproduction cost.

Commentary

Valuation Process

The most effective approach to the valuation process is a collaborative approach

involving collection managers, curatorial staff, valuers and finance officers. Furthermore,

given the choice of valuation methods for cultural and heritage assets, it is recommended

that agencies consult with auditors at an early stage of the valuation process.

Identification of Cultural and Heritage Assets

The first stage in the valuation process is the identification of cultural and heritage assets

and the establishment of cultural significance.

Where an asset or group of assets have been purchased or created/collected by an agency

it is assumed the cultural significance of the asset has been established. If the asset was

donated, or acquired as a result of a restructuring of administrative arrangements, the

cultural significance of the assets must be assessed.



It is important to note that under AAS29, the non valuation of unidentified/unassessed

assets (which might be material in value) may result in a qualified audit opinion.

Choice of Valuation Method

Once cultural and heritage assets have been identified there are a series of questions/tests

in the deprival valuation framework to determine the appropriate valuation methodology.

These questions are presented in the flowchart below and should be read in conjunction

with the following notes.

Is the asset surplus?

Cultural and heritage assets are considered surplus to the agency if the assets are no

longer required to meet the agency’s objectives. If there is a market for the asset, then

Would the service potential be replaced if the

entity were deprived of the asset?

Does the asset have an alternative use or has

it recently been acquired?

Does the asset meet the agency’s objectives?

Greater of net present value of

future cash flows and market

selling price.

Current market buying price/ cost

of acquisition

Lower of current reproduction

cost or replacement cost

Deprival

Alternative Use

/ Acquisition

VALUATION

SurplusMarket selling priceNo

No

No

YesYes

Yes



the asset should be valued according to the selling price in this market. If there is no

reliable market, the value of the surplus asset is likely to be zero.

If the items or collections declared surplus are material, taken singly or together, a

statement on why the assets were declared surplus would be appropriate.

Would the service potential be replaced if the agency was deprived of the asset?

In other words, does the item or collection contribute to the entity’s purpose and would

the entity replace it?

If the asset would not be replaced if the entity were deprived of the asset, then the asset

should be valued at the greater of either the net present value of future cash flows or the

market selling price.

Does the asset have an alternative use or has it recently been acquired?

Cultural and heritage assets held for continued use which would be replaced upon

deprival should, if possible, be valued at the cost of acquisition or market buying price.

The current market buying price of an asset is defined as the amount for which the asset

could be bought by a knowledgable willing buyer from a knowledgeable willing seller in

an arm’s length transaction at current prices plus buyer’s transaction costs. It is

important to note that sale restrictions are irrelevant in determining the market purchase

price for a replacement.

The specialised nature of an asset(s) and/or the absence of an orderly market may

preclude its market buying price being determined by reference to the amount which

would be exchanged between a knowledgeable buyer and seller. The assets fair value

however, may be approximated by referring to the replacement or reproduction cost.

Where both replacement and reproduction cost are available the asset(s) should be

valued at the lower of these two values.



Current reproduction cost is the cost of producing a replica or close imitation of the

asset being valued. Reproduction costs may include costs such as:

• research and development;

• reconstruction;

• reproduction from mould or caste;

• redrafting;

• recopying;

• recollecting etc.

An asset may be valued at the cost of replacing it with a similar asset which is not

identical but provides a similar benefit/function and state of wear and tear. Unique items

are not necessarily incapable of valuation. The service potential or cultural significance

may be compared to other items which, whilst different, have a similar level of service

potential or cultural significance. For example, a unique asset which demonstrates

clothes from a particular period may be replaced by a different piece of clothing from

that same period. However, if the clothing was held because it had been worn by a

particular person, the replacement item must relate to that specific person.

Cultural and heritage assets which cannot be measured reliably, by either the market

buying price, reproduction price or replacement price must be disclosed in the notes to

the accounts. Items that can not be measured reliably may include items sacred to a

particular community.

12A.2.1 Grouping Similar Assets

Regard should be given to valuing collections as a whole when individual collection

items do not meet the recognition threshold. Furthermore, where a collection is worth

more than the sum of the individual items, the collection should be valued as a whole.

12A.2.2 In House Experts v External Valuations

The following factors should be considered when determining whether to employ an

external valuer:



• the expertise required to value the assets;

• the expertise of internal valuers;

• the availability of in house expertise; and

• the objectivity of in house valuers.

Where an agency does not have the in-house expertise to value their cultural and heritage

assets the agency should employ an external valuer .

A collaborative approach between in-house and external valuers can improve the

independence of the project and the efficiency and effectiveness of the valuation process.

The valuation methodology employed by either an in-house or external valuer must be

documented and signed off by the valuer.

12A.2.3 Sampling Methodology

The objective of the valuation process is to obtain a valuation which is materially

accurate but at a reasonable cost. Having regard to this objective, agencies should

consider the use of sampling techniques for valuing collection items. Agencies may

individually value the “high value” items in a collection and use a random sampling

technique to value the remainder of the collection (below a predetermined threshold).

Auditors should be consulted prior to undertaking sampling techniques to ensure an

acceptable level of accuracy is achieved.

Sampling methodologies require technical expertise and involve a number of steps, such

as determining the collections to be sampled, the sample size, selecting the sample,

valuing the sample and extrapolating to determine the collection’s value. Sampling

methodologies will consider the location, and manner of storage, and the homogeneity of

the items within the collection as well as the expected range of values in the population

to be sampled.



12A.3 Revaluation

Policy

Agencies are encouraged to regularly revalue cultural and heritage assets using the

deprival framework.

As noted in APM section 6.11, a class of assets may be revalued over a 3 year period.

This period is however, extended to a five year period for items within a class of

property, plant and equipment controlled by a government department. The five year

period applies until the end of the first period ending on or after 30 June 2004.

12A.4 Depreciation

Policy

All cultural and heritage assets with limited useful lives must, subject to materiality, be

depreciated (refer APM section 6.10). However, assets with long indeterminate useful

lives with no material consumption in service potential during the reporting period do not

have to be depreciated.

12A.5 Land

Policy

As with other core land assets, the land component of heritage assets and heritage land

assets (such as national parks) should, in general, be valued at the current market buying

price.

Certain heritage assets and crown land holdings may generate substantial revenues from

a variety of sources. In these cases, the asset should be valued at the greater of the

current market buying price and the net present value of future cash flows. Valuation

should assume the present use of the land will continue.



12A.6 Reporting and Recording of Cultural and HeritageAssets

Policy

Agencies should develop a comprehensive cataloguing system of cultural and heritage

assets over the longer term. It is important to note, however, that the existence of a

comprehensive cataloguing system is not essential to the valuation process.

Cultural and heritage assets recognised in financial statements shall be classified as

Property, Plant and Equipment.

The notes to Property Plant and Equipment shall include information on the recognised

cultural and heritage assets on the basis of the following classes:

• Land and Reserves;

• Buildings;

• Art, Museum, and Library Collections;

• Other.

The note should also state that the assets are valued on the basis of the deprival valuation

framework and where appropriate, sample methodologies. An example of the notes to

the financial statements is presented on the next page.



NOTES TO THE FINANCIAL STATEMENTS

NOTE 11: PROPERTY, PLANT AND EQUIPMENT (Continued)1998-99 1997-98

$’000 $’000CULTURAL AND HERITAGE ASSETS 1

Land and Reservesat costat valuation

- valued by AVO at 30 June 1998- valued by internal officers at 30 June 1998

less: accumulated depreciationTotal Land and Reserves

Buildingsat costat valuation


less: accumulated depreciationTotal Buildings

Art, Museum, and Library Collectionsat costat valuation2


less: accumulated depreciationTotal Art, Museum and Library Collections

Otherat costat valuation


less: accumulated depreciationTotal Other

Non valued Cultural and Heritage assetsThe following specific cultural and heritage assets were not able tobe measured reliably:

Item XItem Y

Miscellaneous improvements in non valued cultural andheritage assets at cost

Total cultural and heritage assets

1 The cultural and heritage assets are valued using the deprival valuation method. Assets whichare surplus or would not be replaced if the entity were deprived of the asset are valued at the marketselling price or net present value and assets which would be replaced upon deprival are valued atwritten down current cost.2 Sample methodologies are used to value collections based on the application of indicativebenchmark values to relevant categories of archives, plus individual valuation of exceptional items.


03/07/01 1

Chapter 13

Accounting for Insurance Purposes


03/07/01 2

From 1 July 1998 the Territory has established a Risk Management Fund as part of the

arrangements for ensuring that the Territory efficiently and effectively manages its insurance risks

and exposures. The ACT Insurance Authorityis responsible for the management of this function.

This section is primarily concerned with drawing attention to the differences apparent between

accounting data as required to be disclosed in the general purpose financial reports of ACT entities

and the accounting data which is required for insurance and risk assessment purposes. This section

only contains discussion on key issues and detailed guidance should be sought from the ACT

Insurance Authority.

In managing insurance issues there are many responsibilities, including:

• a duty to disclose and report insurance matters as required by legislation and contract law;

• a duty to identify risks that can be indemnified against; and

• a duty to insure and maintain adequate cost-effective insurance to cover those business risks.

While a fuller consideration of insurance issues lies outside this Manual, it is apparent that in some

instances there can be similar disclosure requirements for both accounting and insurance purposes.

In many cases, this has led to the use of common terms within the two industries, to describe what

are essentially separate accounting and insurance practices and functions. To avoid confusion, a list

of these terms is appended below to assist in describing what sound insurance practices require.

Such a list has the added benefit of relevance to those officers charged with managing insurance

responsibilities in Departments.

The following relates therefore to insurance purposes only, and not to general purpose financial

reports.

Acquisition cost: all acquisitions of insurable assets are to be recorded at the greater of cost of

acquisition (which is the sum of the purchase price plus any costs incidental to acquisition) or,

reinstatement replacement value (see below) on occasions where the latter value is clearly greater

than acquisition value.


03/07/01 3

Asset registers: for insurance purposes, asset registers need to be designed to include particular

insurance values and other required data. This data could be combined with existing asset registers

where appropriate. Unique numbering of assets is vital for insurance purposes and should be

carried out in such a manner as to identify individual contents within specific buildings.

Capital works in progress: for the purposes of insurance the value reported will include the

greater of the value of the works at time of completion or for major capital works, the value that

would be incurred at the future date of reinstatement following a major damage or destruction

event. For example, works built over a three year period would have a particular value, but if

destroyed before handover and take another three years to build from the date of destruction,

would have a different (higher) value, that needs to be estimated and built into the overall insurance

agreement.

Cash: for insurance purposes, cash is the sum of the highest single exposure estimated for the year

ahead which the entity may hold in its premises (ie. outside of a commercial bank), which might be

subject to loss by fraud, fire, burglary or theft.

Cash on hand: for insurance purposes, cash on hand (or in transit) includes the highest value of

cash in cash, cheques, cash advances, and cash equivalents which are held at any one time at the

entity’s premises (ie. does not include cash deposited in banks, etc).

Computer software: where software is at risk of loss due to damage or destruction from a peril, it

should be declared at its cost price or development price for insurance purposes.

Construction contracts: once a capital works project is completed, the newly acquired asset or

capital value of additions to existing assets, must be declared by the entity who shall make a proper

record of such assets in its own insurable asset listings.

Consumable stores: the insurance value of consumable stores to be reported is the highest value

held at any one date within the reporting period (ie. the sum total of the risk of loss by fire or theft

at any one time).


03/07/01 4

Depreciated asset: values are not appropriate measures of insurable values as they could result in

an inadequate level of indemnity cover, in cases where these items are lost, damaged or destroyed.

Disclosure: there are obligations of law which apply to the Territory and create the need for

disclosure of all contractual indemnity agreements in which the Territory:

(i) assumes any risk from an outside party (ie. grants an indemnity to a non ACT entity or person;

and

(ii) waives the rights of the Territory to recover losses or liability costs from any person or entity

who may create such loss or liability (note that the description of entity or person used in this

regard is any non ACT entity or staff person).

Where any doubt remains as to disclosure obligations Territory Solicitor or the Territory Risk

Manager (Department of Treasury) should be contacted for advice.

Finance leases: it is important when declaring assets for insurance that the full value of the finance

lease or leased item, which ever is the greater, should be declared, unless, the lessor has proven by

production of insurance certificates of currency that the lessor has adequately insured the item on

behalf of the lessor and lessee. In circumstances where the lessor has transferred the risk of loss or

damage to the lessee, the liability for loss or damage must be properly recorded, and the leased

items must be effectively insured by the lessee at the amount agreed in writing with the lessor.

Forests, livestock or similar regenerative natural resources: should for insurance purposes be

valued at their incurred costs (ie. whether or not they are in a harvested or pre-harvested state at

the time of such valuation and declaration). This is contrary to normal accounting treatment which

would require recognition at market value.

General insurance: a Department may consider for insurance (in consultation with FM), the

financial risks associated with any disruption to output which may arise due to loss or damage or

destruction of the assets used by the entity for the purposes of providing the output.

Heritage, community & cultural assets: for the purposes of insurance such items are generally

valued as follows:


03/07/01 5

• buildings, improvements to land (excluding regenerating items) which are subject to heritage

classification should be valued at reinstatement cost, including extra costs of reimbursement as

this recognises the unique high cost of repairing heritage assets; and

• art works, museums and library collections, monuments and other cultural assets (including

valuable reference works), should be declared for the purpose of insurance at the greater of:

− cost price; or

− market value (saleable value); or

− that value at which a relevant, skilled executive places on the item(s) which would represent a

sum adequate to be the greater of:

(a) restore as much as it can be restored to like original condition a damaged item; or

(b) replace with a similar style/type of item if such item was lost, stolen or destroyed.

Additionally, cultural and heritage assets are likely to have a different insurance value so due regard

should be applied to establishing appropriate methodology for insurance valuation purposes.

Inventory: for insurance purposes, inventory includes consumable stores and supplies that do not

relate to the production of goods or services for sale, and should include the value of the records

kept within an entity or at a place of archival.

Land: land is not generally insured, although improvements to land may be insured and should be

reported as other infrastructure items for the purposes of insurance. They include such items as

fencing, carparks, bridges, culverts, drains, piping, etc. Land is commonly included in accounting

records within the category “Property, Plant & Equipment”, but needs to be separated out in order

to arrive at insurable values.

Leases: under each type of lease the risks of loss or damage, destruction and liability are to be

evaluated. Such evaluations may have a material impact on insurance obligations, as well as asset

categorisation for the purpose of insurance reporting.

Measurement: asset values for the purposes of insurance should be recorded separately and are

not depreciated in many cases. Inappropriately depreciated assets could result in an inadequate


03/07/01 6

payment for a claim made for that asset’s replacement, following any loss, damage or destruction of

the asset. Asset values that are considered to be below the reporting threshold (ie. for accounting

purposes these as usually above $2,000), should be reported in gross. Where such items are

insured, it is important to retain the historic cost information for insurance reporting purposes.

Nature of insurance risks: in order to achieve insurance protection for any risks Departments

wish to have included in their insurances with the centrally managed fund, it is essential that the

contact officer be aware of and understand those risks. Consequently, Departments must apprise

the officer who is responsible for managing the central fund of any indemnities, letters of comfort,

or other agreements whereby the agencies assume any risks of others or give others any protection

against loss, damage or liability.

Prepaid assets: these occur where prepayments are made for physical items that may have been

delivered to the entity prior to final payment or are yet to be delivered. Such items may be an

exposure to loss to the entity for either the amount of the prepayment or the full purchase price.

Consideration of the risk and the insurance position should be known and such items together with

the value of the sum of risk exposure should be identified and reported for insurance purposes.

Property, plant & equipment: for insurance purposes, these items need to be separated and

individually reported as follows:

• plant and equipment forming part of the building or structure of a non-moveable nature; and

• motor vehicles, mobile plant and other items of a moveable nature eg. portable trailers,

compressors and other items usually used in the open (ie. not usually part of the building or site

itself).

Reinstatement value: includes the value to restate the item at the time of reinstatement (whichmay be a period in the future, to allow for instance rebuilding or other delay) plus the costs ofdemolition and removal of debris of the damaged item, and allowance for extra costs ofreinstatement such as design fees, increases due to other reasons and inflationary impact (eg. CPI)as appropriate.

Value of inventory: where insignificant inventory items are held, is adequate to detail such values

as a best estimate, at the reporting date.


03/07/01 7

Value of records: if no intrinsic value can be ascertained, an estimate of the cost of rewriting,

reinstating the records shall be the value of the records.



i

TABLE OF CONTENTS

PAGE

14. EQUITY ACCOUNTING 14-1

14.1BACKGROUND 14-1

14.2ISSUES 14-214.2.1 Identifying associates 14-214.2.2 Equity accounting for associates 14-214.2.3 Share of the associate 14-314.2.4 Accounting for the initial investment 14-314.2.5 Transactions between associate and investor 14-414.2.6 Subsequent adjustments to equity-accounted investment 14-414.2.7 Post acquisition reserve changes 14-514.2.8 Recoverable amounts test 14-514.2.9 Other preparation issues 14-514.2.10 Disclosures 14-614.2.11 An illustrative equity accounting example 14-6



14-1

14. Equity Accounting

Equity accounting issues are quite complex and often requiring detailed technical application Theapplication of AAS14/ AASB1016 Accounting for Investments in Associates will be limited andonly have minor application for ACT entities. A simple model example of the commonrelationships are provided at Attachment A, for those entities which are affected.

14.1 Background

AASB 1016 Accounting for Investments in Associates and AASB 1016A Amendments toAccounting Standard 1016, were recently issued by the Australian Accounting Standards Board(AASB), following the removal of the legal impediment to equity accounting by the Company LawReview Act 1998, which came into effect on 1 July 1998. AASB 1016A was issued in order toamend the operative date of AASB 1016 so that it applies to financial years ending on or after 30June 1999.

It should be noted that the AASB series of Standards applies to entities who have reportingobligations under the Corporations Law.

AAS 14 Accounting for Investments in Associates, which is consistent with the amended AASB10161, applies to reporting entities to which Accounting Standards operative under theCorporations Law do not apply, which includes Departments.

AAS14/AASB 1016 require2 investments in associates to be recognised in the consolidatedfinancial report of the investor on an equity accounting basis. In particular, the revised Standard:

• defines associates and prescribes the circumstances in which investors must use the equitymethod of accounting for investments in associates; and

• prescribes rules for the implementation of the equity method of accounting under which:

i. the carrying amount of the investment is increased or decreased to recognise the investor’s shareof the post-acquisition profits or losses and other changes in net assets of the associate;

ii. the investor’s share of the post-acquisition profits or losses of the associate is included in the

consolidated profit and loss statement of the investor; and iii. prescribes disclosure requirements in respect of investments in associates, including those for

which the equity method of accounting is not required.

The Urgent Issues Group has also issued UIG Consensus Views relating to the elimination ofunrealised profits and losses on transactions with associates and whether certain financialinstruments (eg. preference shares), are included in the carrying amount of an investment in anassociate when determining whether the equity method is to be discounted.

1 All para references are also consistent with both AAS14 & AASB 1016.2 AASB 1016A applies to financial years ending on or after 30 June 1999. This Standard may beapplied to financial years ending before 30 June 1999 where an election has been made inaccordance with subsection 334(5) of the Corporations Law.



14-2

14.2 Issues

14.2.1 Identifying associates

An associate relationship exists when the investor has the capacity to exert significant influenceover the investee. Significant influence is defined in para 9.1 of the Standard as ‘the capacity of anentity to effect substantially (but not control) either, or both, of the financial and operating policiesof another entity’.

An associate is defined3 in paragraph 9.1 of AAS14/AASB 1016 as inter alia ‘an investee, notbeing:• a subsidiary of the investor; or• a partnership of the investor; or• an investment acquired and held exclusively with a view to its disposal in the near future over

which the investor has significant influence’.

Significant influence would normally stem from the investor’s voting power. However, otherindicative factors include:

• representation on the board of directors;• dependence on technical information;• economic dependency, interchange of managerial personnel;• participation in dividend policy; and• participation in policy making.

Significant influence is unlikely to exist if the investee is operating under severe long-termrestrictions which impair its ability to distribute profits to the investor.

14.2.2 Equity accounting for associates

An investor that is required to prepare a consolidated financial report must recognise an investmentin an associate by applying the equity method in its consolidated financial report, and by applyingthe cost method4 of accounting in its own financial report. Where an investor is not required toprepare a consolidated financial report, the investor must account for its investments in associatesusing the equity accounting method in its own financial report (para 4.2).

The only exception to applying the equity method to associates (paras 1.3), is where the investmentis measured at net market value method as required by or adopted in accordance with anotherAccounting Standard (eg. AASB 1023 and AASB 1030). Under the net market value method,changes in net market value are recognised as revenues and expenses in the profit and loss accountin the financial year in which the changes occur. The application of the net market value method islimited and is unlikely to be available for ACT Government associates. 3 NB: this definition does not include unincorporated joint ventures.4 The cost method requires the recognition of investments at the cost of acquisition.



14-3

An investor should discontinue use of the equity method when it ceases to have significant influenceIf significant influence ceases and the investment is retained, it must be accounted for using the costmethod (para 5.12.1).

The equity method incorporates the following features:

• the initial amount is brought to account at cost (eg. any goodwill or discount on acquisition isnot separately disclosed);

• the investor’s profits or losses and investment carrying amount are both adjusted for the

investor’s share of investee post-acquisition profits and losses, after allowing for:

◊ preference dividends;◊ revisions in depreciation of depreciable assets and amortisation of◊ goodwill arising from notional adjustments made as at the date of acquisition;◊ dissimilar accounting policies (para 5.9); and◊ the effects of certain inter-entity transactions.

• the investor’s share of investee post-acquisition losses should be brought to account until thecarrying amount of the investment is zero. Moreover, when application of the equity methodrecommences, the investor’s share of associate profits and reserve increments can only berecognised after recognising the investor’s share of losses and reserve decrements not previouslyrecognised (para 5.14);

• all dividends received or receivable from the associate are deducted from the carrying amount ofthe investment; and

• the investment must take into consideration all sources of post-acquisition changes in net assetsof the investee.

14.2.3 Share of the associate

The investor’s share of the items contained in the financial statements of the associate is determinedin accordance with the ownership interest (para 5.5).

Ownership interest is calculated with reference to both the investor’s direct and indirect equityinterest in the associate. The latter involves equity interests held through subsidiaries or otherassociates. Any interests held to obtain a specified distribution, but with no other rights (eg. non-participating cumulative preference shares) should be excluded from the calculation of ownershipinterest. These interests should be accounted for using the cost method. Where an associate doeshave an obligation for preference distributions, they will not be available to owners other thanpreference equity-holders, and hence must be deducted from the net profit after tax of the associatewhen calculating the investor’s share of associate profits (para 5.3(a)).Accounting for the initial investment

Initially, the investment must be accounted for at cost of acquisition. This amount is equal to theinvestor’s share of the fair value of the net assets of the associate plus (minus) goodwill (discount



14-4

on acquisition). These amounts are not separately disclosed but must be calculated to adjust theinvestor’s share of associates profits for the amount of goodwill amortisation charges (para 5.1.1).The amount of goodwill (discount) on acquisition is the excess of cost of acquisition of theinvestment in the associate over the fair value of the investment at acquisition date.

If the fair value of the net assets at acquisition date is not stated in the accounts of the associate, theinvestee must also use the fair values to determine depreciation charge adjustments against theinvestor’s share of associates profits (para 5.1.1).

14.2.5 Transactions between associate and investor

In a similar manner to consolidation accounting (AAS24), AASB 1016 requires the elimination ofunrealised profits and losses on transactions between the investor (or it’s economic entity) and anassociate, or between two associates (para 5.10). However, in contrast to AAS24, a partialelimination approach is adopted with the amount of the elimination depending on whether thetransaction is between:

• a member of an economic entity and an associate, where the elimination is in accordance withthe investor’s ownership interest; or

• between the two associates, where the product of the investor’s ownership interest in each of theassociates is used (para 5.11).

If the unrealised profit (loss) is made by the associate (eg. if the associate sells an asset to theinvestor) the elimination adjustment is against the ‘Share of Profits of the Associate’. Alternatively,if the unrealised profit or loss is in the accounts of the investor, the adjustment must be madeagainst the ‘Investment in the Associate’.

The tax effect of eliminating unrealised profits and losses also needs to be recognised.

14.2.6 Subsequent adjustments to equity-accounted investment

Subsequent to initial recognition at cost, investments in Associates must be adjusted thereafter forthe post-acquisition change in the investor’s share of net assets of the investee (ie. the investor’sshare of post-acquisition retained profits and reserves of an investee) as follows:

Share of current profits

DR Investment in AssociateDR Investor’s share of associate’s income tax expenseCR Investor’s share of associate’s operating profit before taxCR Investor’s share of associate’s extraordinary items (net of tax)



14-5

Amortisation of goodwill

DR Investor’s share of associate’s operating profit before taxCR Investment in Associate

Dividend income from the associate

The following journals are required in order to prevent double accounting:

If the investor is applying the equity method in it’s own financial report

DR Bank/Dividend ReceivableCR Investment in Associate

If the investor applies the cost method (ie. it prepares a consolidated financial report), the investorwould account for post-acquisition dividends as revenue (dividend income). Therefore, to applythe equity method in it’s consolidated accounts, the consolidated journal would be:

DR Bank/Dividend IncomeCR Investment in Associate

14.2.7 Post acquisition reserve changes

The investors share of post acquisition reserves must be accounted for, unless it has already beenreflected in the carrying amount of the investment (eg. transfers from profit and lossappropriations). The investor’s share of post acquisition increments or decrements fromrevaluations of an associate’s assets, from fair value at acquisition date, must also be accounted for.An example journal is as follows:

DR Investment in AssociateCR Share of Associate Reserves

14.2.8 Recoverable amounts test

Paragraph 5.15 of AAS 14/AASB 1016 requires that the carrying amount of an investment in anassociate must not exceed its recoverable amount.

14.2.9 Other preparation issues

Other issues include:

• acquisition of an associate in discrete steps (para 5.2.2 and Appendix to AAS 14/AASB 1016);• reciprocal equity holdings between investor and associate (para 5.18 to 5.20.1); and• changes in an investor’s ownership interest (para 5.21).



14-6

14.2.10 Disclosures

Disclosures are prescribed in paras 6.1 and 6.2 of AASB 1016. Paragraph 6.1 disclosures include:• name and principal activities of each associate;• investor’s ownership interest (and voting power if different);• carrying amount of the investment;• the investor’s share of associate’s contingent liabilities, capital commitments, and other

expenditure contracted for; and• where investments in associates are material, a summary of the recognised amounts of assets,

liabilities and the profit and loss of associates.

Paragraph 6.2 disclosures include:

(a) the amount of the investor’s share of associates: (i) operating results (profit or losses) before income tax; (ii) income tax expense attributable to operating results (profits or losses); and (iii) extraordinary items (net of income tax).

(b) the amounts of retained profits (surplus) or accumulated losses (deficiency) as at the beginningand end of the reporting period which are attributable to associates;

(c) the amounts of other reserves as at the beginning and end of the reporting period which areattributable to associates;

(d) a schedule setting out the movements in the carrying amount of investments in associates,separately identifying the carrying amount as at the beginning and end of the reporting period, andthe amounts of new investments, disposals, share of the result (profit or loss), dividends and othermovements;

(e) the financial effects of events or transactions which have occurred after the reporting date of anassociate and which could materially affect the financial position or operating performance of thatassociate for the next reporting period;

(f) where adjustments to eliminate the effect of dissimilar accounting policies cannot be made, thenature of the dissimilarities.5

14.2.11 An illustrative equity accounting example

• Chief Minister’s Department owns 49% of the issued shares in company ABC Ltd but does notcontrol ABC Ltd.

• ABC Ltd owns 25% of the ordinary shares in XYZ Ltd and all of the 200,000 RedeemablePreference Shares (with no voting rights) in XYZ Ltd.

5 Extracted from ASCPA member’s handbook December 1998 issue, AASB 1016.



14-7

Identifying Associates and Ownership Interests

• ABC Ltd is an associate of CMD as the direct ownership interest is 49% which is greater than20%;

• XYZ is an associate of ABC as the direct ownership interest is 25 % which is greater than 20%.The 200,000 Redeemable Preference shares are not included in the determination of ownershipinterest and should be accounted for using the cost method. Furthermore, the preferencedistributions will not be available to owners other than preference equity-holders and hence mustbe deducted from the net profit after tax of the associate when calculating the investor’s share ofassociate profits (para 5.3(a)); and

• XYZ is not an associate of CMD as the indirect interest in CMD is only 12% (49%*25%) whichis less than 20%.

Transactions between associate and the investor

The diagram below illustrates the eliminations required when preparing the following FinancialStatements6:a) Consolidated Whole of Government;b) CMD; andc0 ABC Ltd.

6 Note: Eliminations are not required between XYZ Ltd (an associate of an associate) and CMD or any othercontrolled ACT Government entity (ie. the economic entity). This relationship is considered too far removed toaccount for unrealised profits or losses. However, if XYZ Ltd was an associate of CMD Ltd (either through direct orindirect interests) eliminations would have to be made between:a) the economic entity (CMD and any other controlled ACT Government entity) and the associate; andb) between ABC Ltd and XYZ Ltd (the two associates) using the product of the investors ownership interest in each

of the associates.

For the Whole of Government Financial Statementseliminate 49% of unrealised profits and losses betweenABC Ltd and CMD and between ABC Ltd and othercontrolled ACT Government entities (ie. between theeconomic entity and the associate1).

For Chief Minister’s Department Financial Statementseliminate 49% of unrealised profits and losses betweenCMD and ABC Ltd.

WoGConsolidated

Accounts

ChiefMinister’s

Department

All otherDepartmentsand Agencies

XYZ Ltd

ABC LtdSignificant Influence49% Ownership Interest

Significant Influence25% Ownership Interest

Control

Control

For ABC Ltd financial statements eliminate 25% ofunrealised profits and losses between ABC Ltd andXYZ Ltd.


03/07/01 i

TABLE OF CONTENTS

PAGE

15. ISSUES RELATING TO CONTROL ...................................15-1

15.1 Introduction............................................................................................. 15-1

15.2 ATTACHMENT A.................................................................................. 15-3


03/07/01 15-1

15. Issues Relating to Control

15.1 Introduction

The Accounting Standards and the conceptual framework on which they are based increasinglyrefer to the concept of ‘control’ rather than relying on the test of ‘ownership’. An example iswhere the definition of an asset according to the Statement of Accounting Concepts SAC 4Definition and Recognition of the Elements of Financial Statements is related to future economicbenefits controlled by the reporting entity. The concept of control is also an important determinantof whether the general purpose financial reports of one entity should be consolidated with thefinancial reports of another.

Australian Accounting Standards AAS 31 Financial Reporting by Governments and AAS 24Consolidated Financial Reports prescribe the circumstances in which consolidated financial reportsare to be prepared and the financial information to be included in those reports. These standardsrequire groups of entities who operate as a single economic unit to consolidate their financialreports. For a number of entities to be able to operate together as a single economic unit, they needto be under a common direction, thereby providing consistency in the overall objectives beingpursued. The standards (particularly AAS 24) recognises that this occurs when entities are relatedby being under the common control of one entity. Hence the standards mandate that it is thecapacity to ‘control’ or dominate the affairs of the other, rather than ownership which provides themore appropriate criterion for which presentation of consolidated financial reports is required.

Professional judgement is required to determine whether control exists according to the particularcircumstances. The following framework (Attachments A, C & D) which is based on the criteriawithin the standards, was developed as a model by which to analyse the facts of each case and toassist in the exercise of professional judgement. The model is based on the application of thefollowing positive tests of control:

• capacity to control management;• exposure to responsibilities and risks;• accountability for financial, policy and operational performance; and• evidence of control being exercised. The model also applies the following negative tests. Under this rationale for example, the ACTGovernment does not control an entity where the Government: • cannot dominate the financial and operating policies of the entity which are necessary to enable

the entity to operate towards achieving government objectives, notwithstanding that both entitieshave similar objectives;

• cannot benefit from the resources or residual resources of the entity, notwithstanding that it mayhave the capacity to dominate the entity’s financial and operating policies; and

• influences, rather than dominates, the financial and operating policies required to enable theentity to operate towards achieving the Government’s objectives.

It is important to note that where control is found not to exist, that there may also be a relatedquestion of the existence of significant influence. AAS 14 Accounting for Investments in


03/07/01 15-2

Associates requires investments in associates to be recognised in the consolidated financial reportsof the investor on an equity accounting basis1. An associate relationship exists when the investorhas the capacity to exert significant influence over the investee. Significant influence is defined inpara 9.1 of AAS 14 as the ‘capacity of an entity to significantly affect substantially (but not control)either, or both of the financial operating policies of another entity’.

Further details of the application of tests for control are contained in the following attachments.Readers of the APM should also note that ‘substance over form is a crucial’ aspect of applyingprofessional judgement in this area, and both AAS 31 and AAS 24 contain extensive explanationsof the rationale for each particular requirement.

1 The equity accounting method is detailed in Chapter 14 of the APM.



15-3

15.2 ATTACHMENT A

Consolidation Assessment Matrix

Assessment Criteria Ref Applicableto agencyY / N / n/a

Comments

1. Capacity to control management:To determine with whom control lies, it will be necessary to examinethe manner in which major policy decisions are reached and thenature of the control over ongoing activities of the entity, rather thanaccepting that the nominal powers reflect the substance of therelationship.

Any of the following factors would normally indicate the existenceof control by the government over an entity.

AAS 24para 27

N Summary:

(a) the capacity to dominate the composition of the board ofdirectors or governing board of the entity;

AAS 24para 22(a)

Y

(b) the capacity to appoint or remove all or a majority of thedirectors or governing members of the entity;

AAS 24para 22(b)

N

(c) the capacity to control the casting of a majority of the votescast at a meeting of the board of directors or governing boardof the entity;

AAS 24para 22(c)

N

(d) the capacity to cast, or regulate the casting of, a majority of thevotes that are likely to be cast at a general meeting of theentity, irrespective of whether the capacity is held throughshares or options; and

AAS 24para 22(d)

N



15-4


Comments

(e) if in the absence of another entity dominating the compositionof the board of directors, the voting rights held by thegovernment, while less than 50 per cent, constitute a majorityof those voting rights which are exercised.

AAS 24para 26

Y/Y

2. Exposure to responsibilities and risksAny of the following factors would normally indicate the existenceof control by the government over an entity:

AAS 24

para 22(e)

AAS 31

para 9.1.4 (a)

Y/N Summary:

(a) the existence of a statute, agreement, or trust deed, or any otherscheme, arrangement or device, which, in substance, gives thegovernment the capacity to enjoy the majority of the benefitsand to be exposed to the majority of the risks of the entity,notwithstanding that control may appear to be vested in anotherparty.

AAS 24para 22(e)

Y/N

(b) the existence of a Ministerial or other government power(including legislation) which enables the government to givedirections to the governing body of the entity so that the entityacts as an agent of the government to achieve governmentpolicy objectives; or

AAS 31para 9.1.4(a)

N



15-5


Comments

(c) the capacity to require an entity’s assets to be deployedtowards achieving government objectives. This may mean, butneed not require, that the government can do, or require theentity to do, one or more of the following with the controlledentity’s assets:

(i) exchange them; or(ii) use them to provide goods and services consistentwith the government’s objectives; or(iii) charge for their use; or(iv) use them to settle liabilities; or(v)hold them.

AAS 31para 9.1.6

Y/N

(d) the government holds a majority ownership interest in theentity’s equity.

AAS 24para 23

Y/N

(e) the government is exposed to the residual liabilities of theentity; or

AAS 31para 9.1.5(a)

Y/N

(f) the government has the right to receive the residual net assetsof the entity if that entity is dissolved.

AAS 31para 9.1.5(b)

Y/N

3. Accountability for financial, policy and operationalperformanceAny of the following factors would normally indicate the existenceof control by the government over an entity:

AAS 24 para24

AAS 31paras9.1.4(a, b, c,e & f)

Y/N



15-6


Comments

(a) the entity is required to submit to the Legislative Assemblyreports on operations which include audited financialstatements, such requirements arising either under the generalreporting requirements of legislation concerned with financialreporting and/or audit of "public sector" entities or under theentity’s enabling legislation; or

AAS 31para 9.1.4(e)

Y/N

(b) the mandate of the entity and its broad financial andoperational objectives and policies are established, or limited,by its enabling legislation. However, the impact of enablinglegislation also needs to be evaluated in the light of otherprevailing circumstances. For example, a marketing boardwhose mandate is created, and limited, by legislation is notcontrolled by a government if the legislation unequivocallyassigns capacity to dominate financial and operating policies toother entities such as relevant commodity producers, and thegovernment does not have the capacity to appoint or remove amajority of members of the governing body.

AAS 31para 9.1.4(f)

Y/N

(c) Control specified by legislative or executive authority or byadministrative arrangements where there is power to givepolicy directions including:

• Ministerial or government approval being required for operatingand capital budgets or ability to veto those budgets;

• the power of the government, a Minister or a central authority toappoint and remove members of the board of management; or

• a Ministerial power of direction for the entity to act as an agentof the government.

AAS 24para 24 andAAS 31para 9.1.4(a,b,c)

Y/N



15-7


Comments

4. Evidence of control being exercised AAS 24

para 25

AAS 31paras 9.1.7(a, b, c, d, &e)

Y/N Summary:

If doubt exists as to whether the government has the capacity todominate an entity, there may, on occasions, need to be an activedemonstration of control. This may be evident, for instance, by thegovernment being able to obtain financial information, internalmanagement forecasts and budgets, and entity records from theentity on request.

AAS 24para 25

5. Negative testsThe government does not control an entity where the government:

Summary:

(a) cannot dominate the financial and operating policies of theentity which are necessary to enable the entity to operatetowards achieving government objectives, notwithstanding thatboth entities have similar objectives. For example, a charitableentity and a government may share common objectives withrespect to care of the homeless. However, the charitable entityis not controlled by the government when its governing bodymaintains discretion as to how its resources are to be deployedand whether it will accept resources from the government; or

AAS 31para 9.1.7(a)



15-8


Comments

(b) cannot benefit from the resources or residual resources of theentity, notwithstanding that it may have the capacity todominate the entity’s financial and operating policies. Forexample, where a government acts as a trustee for a trust andits relationship with the trust does not extend beyond thenormal responsibilities of a trustee, the government does notcontrol the trust as it cannot deploy the resources or residualresources of the trust for its own benefit; or

AAS 31para 9.1.7(b)

(c) influences, rather than dominates, the financial and operatingpolicies required to enable the entity to operate towardsachieving the government’s objectives. Where the governingbodies of entities maintain discretion with respect to whetherthey will accept resources from the government or the mannerin which their resources are to be deployed, they are notcontrolled by the government. For example, this will normallybe the case with religious organisations that provide aged-careservices. While these organisations may receive governmentgrants for capital construction and operating costs, and thegovernment providing the grant may require them to complywith certain service standards and restrictions on user fees,they will not usually be controlled by the government becausetheir governing body will maintain the ultimate discretion aboutwhether assets are deployed to those services; or

AAS 31para 9.1.7(c)

(d) merely has the power to regulate the behaviour of the entity byuse of its legislative powers. For example, governmentsregulate the operations of entities operating in the gamingindustry, but those entities are not controlled by governmentunless the assets or residual assets of those entities can bedeployed for the benefit of government; or

AAS 31para 9.1.7(d)



15-9


Comments

(e) is presently unable to redeploy the assets of the entity for itsown benefit. For example, under existing legislativearrangements, state and territory governments do not controllocal governments because:

(i) they cannot sell the assets of a local government andredeploy the proceeds from the sale towards the state orterritory budget; and

(ii) the governing body of the local government, whether anelected council or administrators appointed by a government, isbound to deploy its assets for the benefit of the local community(and not the state or territory government)

AAS 31para 9.1.7(e)



i

TABLE OF CONTENTS

PAGE

16. BENCHMARKING ACCOUNTS 16-1

16.1Executive Summary 16-1

16.2Background 16-2

16.3Choice within accounting standards 16-2

16.4Common areas of variation 16-316.4.1 Depreciation 16-316.4.2 Non-Current Asset Revaluations 16-416.4.3 Use of deprival value methods: 16-416.4.4 Inventories 16-416.4.5 Revenues 16-516.4.6 Receivables (assets) 16-516.4.7 Expenses 16-616.4.8 Intangibles (Assets) 16-616.4.9 Employee Benefits 16-616.4.10 Financial instruments 16-616.4.11 Capitalise or Expense 16-616.4.12 Control 16-716.4.13 Leases 16-716.4.14 The Financial Statements as a Whole 16-716.4.15 Incorrect application of accounting standards 16-7

16.5Summary 16-8

16.6Attachment A 16-9



16-1

16. Benchmarking Accounts

16.1 Executive Summary

A fundamental objective of general purpose financial reporting is to provide information useful formaking decisions about resource allocation. Information contained in financial reports must bereliable and relevant if the reports are to be useful. In this respect, financial reports also need to bepresented in a similar format to enable users to compare1 and evaluate financial performance andfinancial position.

Much of the above objectives are largely achieved by the accounting framework containingstandards, generally accepted accounting practices, and conceptual statements. However, there aremany areas of accounting where alternative choices of method are available which give rise todifferent accounting numbers within the elements of the general purpose information.

The following paper has been prepared by the Accounting Policy and Projects Section in order toassist benchmarking and performance assessment where financial reports are used. In general, thepaper concentrates on the common differences that are encountered within the public sector andrelated service industries.

Any queries in respect of the issues contained is paper can be directed to the Manager, AccountingPolicy and Projects, Financial and Budgetary Management Branch, Department of the Treasury.

1 Individual accounting standards contain requirements for the disclosure of comparative information. There are

only three exceptions to the requirement to disclose comparative information: 1. the first accounting period in which

the accounting standard is applied; 2. the first general purpose financial report prepared for the entity; and 3. the first

consolidated general purpose financial report after the entity becomes a parent entity (The CPA Summary of

Australian GAAP, 1998).



16-2

16.2 Background

Accounting is not an exact science, and there are many areas of accounting theory and practice thatremain unsettled in Australia. It is important for those undertaking benchmarking assignments toconsider these areas and avoid some of the potential pitfalls and risks in (inadvertently) comparinglike with unlike etc.

This is a short summary of some of the current gaps in accounting practice that lead to inconsistentand sometimes incomparable information reported in financial reports.

In Australia, accounting standard setting is a political process. This means that:

• standards in place may not always be the most appropriate for each circumstance, but may tendto reflect that which has been advocated by the most influential lobby group; and

• as there are difficulties in making ‘one size fit all’ accountants will always have a choice ofmethods requiring individual judgement (ie. leading to flexibility in application).

To overcome this problem, standard setters have continually emphasised the need for stricterdisclosure rules, on the premise that if there is a departure from a standard or a method, then thisfact should be disclosed to users of the accounting information.

16.3 Choice within accounting standards

In the absence of a specific standard, accountants are guided by the Statements of AccountingConcepts (SAC’s 1, 2, 3 & 4). At present there is no concept on measurement2 which means thatAustralia has adopted a hybrid system somewhere between the extremes of historical costaccounting (ie. where measurement is based on the price paid in historical dollars), and currentprice based accounting (where measurement is based on a constant dollar adjusted for currentprices), which adds a great deal of complexity to end data/information.

In addition, there are many conservative practices (eg. the requirement that inventory be reported atthe lower of cost or net realisable value) which further extend the number of alternatives available.

Even where there are accounting standards, they often contain alternative methods with no clearindication of the criteria which should be used in choosing between them3 (eg. depreciationmethods).

Accountants are therefore required to make professional judgements about such things as usefullife, the amount of doubtful debts, recoverable amount, probability of occurrence, or materiality.This often boils down to the practicalities of choosing from a range of alternative estimates.

2 The standard setters are currently working on a proposed SAC 5 Measurement.3 Henderson & Peirson Issues in Financial Accounting.



16-3

As accounting numbers are often used to justify wealth transfers, financial performance, andinvestor/debt contracts, there are many incentives for accountants to be selective about disclosingaccounting information. There are four basic ways in which accountants may achieve theirobjectives and still comply with accounting standards:

• choose an accounting method or change accounting methods to achieve a desired outcome;• make estimates or predictions of future events in a way biased towards achieving a desired

outcome;• disclose transactions or events in a way which influences the interpretation of the financial

reports; and• time transactions to take advantage of generally accepted accounting practices.

Examples of accounting choices

Accounting issue Profit/asset increasing Profit/asset decreasing

• Depreciation • Straight-line method• Longer life + higher

residual value

• reducing balancemethod or expense asincurred

• Shorter life + lowerresidual value

• Interest cost • Capitalise as asset • Expense as incurred

• Research anddevelopment costs

• Capitalise as asset • Expense as incurred

16.4 Common areas of variation

16.4.1 Depreciation

This is a method to allocate the costs of using an asset over a period of time. However, difficultiesarise in determining:

• What costs should be allocated? For instance, what is the residual value at the end of the assetsuseful life?

• Over what period should the cost be allocated? How do you estimate the useful life of thedepreciable asset?

• How should the cost be allocated to reporting periods? There are some five main approaches tothe allocation of depreciable amount.4

4 1. Arbitrary approaches (eg. the use of a standard formula regardless of circumstances); 2. Net revenue

contribution approaches (eg. trying to match the depreciation charge with the revenues received from using the

asset); 3. Other services approaches (eg. Discounted-contribution approaches (eg. using a surrogate measure to

approximate depreciation expense versus revenue received, say machine hours or vehicle mileage); 4. Discounted



16-4

• What method should be used to allocate costs? Which method is the most suitable means ofmatching the use of the particular asset with the revenue generated through its use?

16.4.2 Non-Current Asset Revaluations

In pure historic cost systems (eg. in the USA) revaluations of assets are not permitted. In Australia,revaluations can occur provided certain rules are followed. This means, that comparing databetween jurisdictions may be difficult depending on whether assets have been revalued, howconsistently and when they have been revalued, and the net effects of any valuation activity (eg.increments offset by decrements).

16.4.3 Use of deprival value methods:

The concept of deprival value has its origins in the insurance industry in terms of the legal notion ofcompensation for losses. The deprival value framework is set out in the Guidelines on AccountingPolicy for Valuation of Assets of Government Trading Enterprises, and has been adopted for use inseveral jurisdictions. The use of the method has two basic advantages:

• it prevents inter-generational inequities; and• improves current cost values

However, in most instances, particularly in relation to long lived assets, deprival values will begreater than historic cost. In addition, the use of deprival values will be inflationary5 (increasedprices) unless target rates of return are be adjusted downwards.

16.4.4 Inventories

Whilst not likely to be a major component6 for the service orientated sector, inventory amounts canvary significantly based on normal/ abnormal operations (cycles); cost versus net recoverable valuetests (whether applied consistently); and recording methods (average balance, first-in-first-out, etc).

contributions approaches (eg. value the asset at the present value of the future economic benefits expected to flow

from using the asset; and 5. Current price valuation approaches (eg. the depreciation charge is based on the current

cost value of depreciable assets). It should be noted that although methods 4. and 5. have theoretical support, they

are not acceptable under current accounting standards (nomenclature from Henderson & Peirson, Issues in Financial

Accounting).5 Depreciation will be greater, and where target rates of return are based on the use of deprival-value based

depreciation, there may be significant increases in the prices charged for goods and services sold by the private sector

entities.6 This may change depending on owner/purchaser models adopted.



16-5

16.4.5 Revenues

Accounting policies in respect of revenue can vary and significantly affect amounts disclosed.

The two major revenue types are7:

Type of Revenue Measurement Criteria

Providing services Revenue must be recognised by reference to the stage ofcompletion and to the extent to which each of the followingconditions have been met: the entity controls the right to becompensated; it is probable that consideration will be receivedby the entity; and the revenue and the stage of completion canbe measured reliably.

Sale of goods8 Revenue must be recognised when control has passed to thebuyer; it is probable that consideration will be received by theentity; and the revenue can be measured reliably. Generally,control occurs with the transfer of legal title or possession.

Recognition criteria can vary between traditional public sector accounting models (cash-based oraccrual-based systems) and the new purchaser/provider systems.

In the ACT, transfers of assets within the same ‘body politic’ (ie. department to department, notdepartment to TOC) occurs through the balance sheet only (ie. an equity adjustment as acontribution by owner - AAS 29). The general approach however has been to limit this type oftransfer by bringing these types of transactions through the Profit & Loss accounts, and this couldstill be the practice in many jurisdictions.

16.4.6 Receivables (assets)

The various accounting principles adopted for revenue will impact on the recognition of someassets like revenue receivable (ie. where revenue has been recognised as having been earned, butpayment has not been received). Particular, debt management policies in operation will also affectnet amounts disclosed.

7 AAS 15 Revenue (issued in June 1998 and operating on or after 30 June 1999, and may be applied earlier) contains

specific guidance for the following categories of revenues: sale of goods; rendering of services; use by others of the

entity’s assets yielding rents, interest, royalties and dividends; disposal of assets; forgiveness of liabilities; and other

sources.8 It should be noted that the introduction of purchaser/provider accounting models has meant a likely shift in the

emphasis in the public sector to ‘sales of goods’ categories. Presently, the accounting standards are lagging behind

these new commercial environments. This could mean that revenue recognition criteria is not consistent across

jurisdictions.



16-6

16.4.7 Expenses

The comments above on Revenue and Receivables generally hold true for Expenses and Liabilities,which can be direct opposites of Revenue & Receivables. See also the decision to capitalise orexpense as discussed below.

16.4.8 Intangibles (Assets)

There is wide scope for recognising internally generated assets as intangibles. For example, thoseorganisations that employ a lot of computer resources often recognise their inhouse-developedsoftware as intangibles. For comparative purposes, purchaser/provider models like the ACT wouldtend to have less scope for this than say the less “outsourced” counterparts. Comparisons shouldanalyse accounting policies and compensate for intangibles (where material).

16.4.9 Employee Benefits

Although many of the accounting rules have been settled in this area, considerable scope remainsbecause the industry relies heavily on estimates. In relation to superannuation (a major publicsector liability), amounts may vary depending on schemes (unfunded/ funded and extent of benefitsagreed), estimate criteria (conservative/non-conservative), estimate cycles, industry characteristics(redundancies/stable staffing), and amounts actually paid off debts. Queensland is currently theonly State that has fully funded its superannuation liabilities9.

16.4.10 Financial instruments

Previously much scope existed for movement of financial assets off balance sheet by the emergenceof new types of financial instruments that did not fit the traditional descriptions of asset, liability orequity. The recently issued accounting standard AAS 33 Financial Instruments has removed muchof this scope.

16.4.11 Capitalise or Expense

The basic rule is that if an asset or benefit is to be used over a number of accounting periods, thenit’s cost is capitalised10. If it is to be consumed within a single accounting period, then it is to beexpensed. However, complexities arise in determining the exact impact in particular situations. Acommon example is repairs and maintenance. For instance, if a new roof is put on a building thatimproves the building then the cost is capitalised. However, if the roof has only resulted in thebuilding being restored to its former state, then the cost is expensed. There are many cases in taxlaw where capital/expense has been argued either way.

9 pp17-19 of Report - Select Committee on the Territory’s Superannuation Commitments10 This is a complex area of accounting on which it is difficult to generalise. AAS 34 Borrowing Costs for instance,

contains specific requirements relating to the capitalising of borrowing costs for ‘qualifying’ assets.



16-7

16.4.12 Control

The accounting concepts have recently tended to move away from ‘ownership’ to ‘control’ as ameans of assessing accounting recognition criteria. This affects a whole range of underlyingtransactions including the very ‘elements’ (eg. assets, liabilities, revenue, expenses, etc) of thefinancial reports themselves, as well as, the rules for disclosing associates and other related parties.Although AAS 29 Financial Reporting by Government Departments exempts the public sector fromcomplying with AAS 22 Related Parties, the other general rules in respect of a ‘capacity to control’still apply. The accounting numbers disclosed will ultimately depend on the nature of therelationships between the parties themselves and the accounting policies in application at that time.

16.4.13 Leases

The application of ‘control’ above also affects the type of leases disclosed (eg. generally, anoperating lease occurs when control over the risks and benefits of asset remains with the lessor, onthe other hand, a financing lease occurs when control over the risks and benefits passes to thelessee). Payments under an operating lease are generally expensed, whereas payments under afinancing lease are capitalised and the interest component only is expensed.

The revised standards have substantially reduced many of the choices previously available. In therecent past, scope existed for turning non-current assets (eg. owned buildings) in to lease-backswithout requiring disclosure on the financial statements (ie. as a means of getting hold of cashwithout necessarily alerting financial statement users). Now the choices are essentially betweendisclosure of an operating lease or a financing lease, as sale and lease-back arrangements are nowconsidered to be finance leases.

16.4.14 The Financial Statements as a Whole

Generally, the system is intended to work with a snapshot of the financial position (balance sheet) ata particular date, the reporting of financial performance over a period (statement of profit and loss),a cash flow statement over the same period, and notes to the reports. Material amounts that are notincluded in the reports because they fail the various accounting tests applied, are usually disclosedwithin the notes (eg. contingent liabilities), and these could be significant, especially because forexample, the balance sheet reflects the balances on a particular day.

16.4.15 Incorrect application of accounting standards

While considerable efforts are made by most jurisdictions to comply with accounting standards andconceptual statements, it should be recognised that there is a risk that some aspect of the standardsmay not be correctly interpreted or applied.

This risk is higher when there is accelerated reform through harmonisation with internationalstandards (ie. many revised standards), revision of concepts (ie. often subtle changes to existingstandards), promulgation of new standards (ie. as these are being applied for the first time, practicalapplication may require a high degree of interpretation). The risk is also increased if accountants



16-8

do not keep up to date with the changing scene or by assuming that they already know all of theapplicable rules and procedures.

A recent example of this is where one State has advocated approval for a new method of applyingdepreciation. In assessing the case it appears that the existing rules have not been applied correctly,with some jurisdictions taking a ‘softer’ approach to its interpretation of the standards (ie. byemphasising ‘form’ over ‘substance’).

The outcome of this approach is that one State currently does not depreciate its housing portfolioon the grounds that all houses are ‘kept in sound condition,’ and all properties are ‘currently heldfor sale’ (ie. it appears therefore, that while everyone else who rents ‘housing commission’ typeproperties to eligible clients over considerable time periods, and correctly discloses these asdepreciable non-current assets, the other jurisdiction acts as if their real business is selling houseswhich are rented only while ‘awaiting sale’, and therefore treated in a manner similar to inventory,which is a current asset and not depreciable).

What this means is that while jurisdictions are applying the generally accepted accounting practicesto varying degrees of interpretation, there are considerable risks in assuming that the numbersdisclosed actually reflect comparable treatment.

16.5 Summary

The suggested approach to be adopted in each circumstance will vary depending on the nature ofthe actual accounting item involved. Generally, source documents would include financialreports11 (eg the annual financial report and financial statements), disclosure notes12 includingaccounting policies, other supporting documentation provided with the financial statementsthemselves (eg. the annual report). In many cases, a specific knowledge of the particular industryor business being compared would be essential.

A Summary of Accounting Differences is at Attachment A which provides an overview of theaccounting items discussed in this paper.

11 Financial reports in the public sector consist of budgets, financial statements (financial position, financial

performance, cash flows, commitments and contingencies), annual reports, and other miscellaneous submissions and

responses to Parliament and/or external scrutiny bodies.12 Disclosure notes are required by various accounting standards, a significant disclosure being ‘accounting policies’

which is required by AAS 6 Accounting Policies. Compliance with AAS 6 involves disclosing a summary of

accounting policies (eg. where alternative approaches are permitted under the accounting standards), and changes in

accounting policies.



16-9

16.6 Attachment A

Summary of Accounting Differences

Item Factors InfluencingDifferences

Information to Evaluate

Depreciation • depreciable asset or not• useful life• residual value• depreciation method• taxation effects

• financial reports• accounting policies• note disclosures• knowledge of type of

industryNon-CurrentAssets

• recognition policies• revaluation and measurement

policies (eg. deprival method)• revaluation method• useful life• residual value

• financial reports• accounting policies

Inventories • operating cycles• accounting method (eg.

average cost, FIFO, etc)

• financial reports• accounting policies• knowledge of particular

industryRevenues • recognition criteria (eg.

owner/purchaser model ormore traditional model)

• measurement criteria (eg.service provision or sale ofgoods)

• financial reports• accounting policies• knowledge of the type of

business and/or industry

Receivables • recognition criteria (seerevenues);

• measurement criteria• debt management policies

• financial reports• accounting policies• budgets• knowledge of type of

businessExpenses • recognition criteria (see

revenues)• measurement criteria

• financial reports• accounting policies• knowledge of type of

businessIntangibles • recognition criteria

• measurement criteria• financial reports• accounting policies• knowledge of type of

business (eg IT industry)EmployeeBenefits

• recognition criteria• measurement criteria• extent and type of benefits/

entitlements (eg. EBA’s,FBT, etc)

• financial reports• accounting policies• knowledge of type of

industry• remuneration and entitlement

disclosures



16-10

FinancialInstruments

• recognition criteria• measurement criteria

• financial reports• accounting policies• knowledge of industry

Capitalise orExpense

• decision how and when theasset is to be used (eg.repairs, maintenance, etc)

• recognition criteria• measurement criteria

• financial reports accountingpolicies

• knowledge of type ofbusiness

Control orSignificantInfluence ofAssociates

• management policies• legislative framework• associates (eg. incorporated

or not)• recognition criteria• exemptions within accounting

Standards (eg. AAS 29exempts disclosures ofRelated Parties required byAAS 22)


Leases • leasing policies• operating or financial leases• tax incentives


FinancialStatements as aWhole

• differing interpretations ofaccounting policies

• differing application ofstandards

• unqualified or out-of-dateaccounting staff

• financial reports• accounting policies• disclosure notes• budget statements• annual reports• other general information (eg.

UIG13 submissions,HOTARAC14 minutes, etc)

IncorrectApplication ofAccountingStandards

• differing interpretations• differing application• unqualified or out-of-date

accounting staff

• financial reports• accounting policies• annual reports and budget

statements• accounting standards and

concepts (eg the ACTAccounting Policy Manual)

• UIG pronouncements• HOTARAC Minutes

13 The Urgent Issues Group meets regularly to resolve interpretative and practice accounting issues.14 The Heads of Treasuries Accounting and Reporting Advisory Committee which reports quarterly on public sector

accounting issues. The HOTARAC Minutes are held by Accounting Policy & Projects.


3/07/200117-1

Table of contents

17. The GOODS AND SERVICES TAX........................... 17-217.1. Introduction ............................................................ 17-217.2. Background ............................................................. 17-217.3. General Accounting for Revenues, Expenses andAssets ................................................................................ 17-217.4. Treatment of Cash flows ........................................ 17-317.5. System Enhancements ............................................ 17-317.6. Contingent Liabilities and Commitments ............. 17-317.7. Examples of Accounting Treatments..................... 17-4

17.7.1 External Transactions ...........................................17-417.7.2 Internal Transactions............................................17-517.7.3 Asset Purchases .....................................................17-6


3/07/200117-2

17. The GOODS AND SERVICES TAX

17.1. Introduction

This chapter provides guidance on the general principles to be followed in accountingfor GST. This advice is based on Abstract 31 from the Australian AccountingResearch Foundation’s Urgent Issues Group (UIG). Guidance on operational issuesrelating to the GST is provided in Memorandum 2000/05 which provides an overviewof the most common business procedures which need to be considered in the GSTenvironment. Similarly Memorandum 2000/07 provides information relating toseveral GST related issues including changes to the chart of accounts.

17.2. Background

The main issues considered by the UIG in dealing with the GST, were:

! should the GST received by agencies be recognised as revenue, shouldGST paid be recognised as an expense, and should the GST paid topurchase an asset be included as part of the asset;

! whether amounts reported on the cash flow statement should be reportedon a gross basis; and

! whether costs incurred in implementing systems to comply with GSTshould be recognised as an expense, or an asset.

17.3. General Accounting for Revenues, Expenses and Assets

The GST received on the provision of goods and services is not revenue to the agencysince it is to be on-passed to the ATO. Similarly the GST paid by an agency for theprovision of goods and services or the purchase of an asset is not an actual expense tothe agency since it is to be claimed from the ATO.

The one exception to showing purchases net of GST is where the GST incurred by thepurchaser is not recoverable from the ATO and must therefore be recognised as partof the cost of an asset purchased or as included with the expense. This would onlyapply to agencies providing services which are input taxed.

Revenues, expenses and assets purchases, such as inventories and fixed assets,must be accounted for net of recoverable GST. However, on the balance sheet,receivables and payables must be stated with the amount of GST included inorder to reflect the total amount shown on the invoice.


3/07/200117-3

The net amount of GST refundable and owing to the ATO must be includedrespectively, as part of receivables and payables in the statement of financialposition. A separate GST Receivable and a separate GST Payable accountmust be used to for the recording of GST paid for goods, services and purchaseof assets or GST received on goods, services or assets sold.

The separate treatment of GST Receivable and GST Payable is important, as it isrequired information to be included on Business Activity Statements provided to theATO at the end of each reporting period. If this information is not kept in this waythere is the potential to miss out on being refunded GST credits.

17.4. Treatment of Cash flows

Cash flows must be recorded in the statement of cash flows on a gross basis (thatis inclusive of GST), although the GST portion of these transactions is separatedinto specific accounts. All GST cash flows are cash flows from operatingactivities regardless of whether they apply to operating, investing or financingactivities.

Any GST amounts applicable to financing and investing activities should be shown inthe relevant GST accounts under cash flows from operating activities.

GST paid and received on all cash flows should be accounted for under specificaccounts. These include codes to record “GST paid on receipt of goods and services”,and “GST remitted to the ATO” for payments, and “GST collected on delivery ofgoods and services” and “GST refund from ATO” for receipts.

17.5. System Enhancements

Costs incurred in developing and implementing GST accounting systemrequirements can be treated as capital expenditure.

The appropriate test to determine this is whether the system enhancements willprovide future economic benefits or not. In this instance, systems changes will clearlyprovide future economic benefits. Please refer to SAC 4 “Definition and Recognitionof the Elements of Financial Statements” from paragraph 18 in regard to whatconstitutes future economic benefits.

17.6. Contingent Liabilities and Commitments

The amount, or estimated amount, of contingent liabilities and commitmentsdisclosed by way of note in the financial statements should include theappropriate amount, if any, of GST, or estimated GST, which is expected to berecovered (or not expected to be recovered) by way of input tax credit.


3/07/200117-4

This is the same approach being taken by most government bodies in addressing thisissue at this stage. This approach has not as yet been ratified by the UIG and is likelyto be considered as a separate issue in addressing the accounting standard oncommitments. Further advice on this matter may be necessary if it appears that thisapproach will not be adopted by the standard setting bodies.

17.7. Examples of Accounting Treatments

Note: Cash flow transactions are shown below, and have been shaded to separatelyidentify them.

17.7.1 External Transactions

Sales JournalAccountCode1

IT2

28/07/2000 Dr 12100 99 Trade Debtors 6,600.00Cr 81106 99 Revenue – Sales of Books and Publications 6,000.00Cr 31400 99 GST liability (Payment to ATO) 600.00

(being sale of publications)

31/07/2000 Dr 11200 99 Cash at bank 6,600.00Cr 12100 99 Trade Debtors 6,600.00

(being receipt of payment for publications)

Treasury Monthly Workbook/BDA Cashflow Adjustment31/07/2000 Cr R2405 99 Revenue - Sales 6,000.00

Cr R2612 99 GST collected on delivery ofgoods/services

600.00

(cash received on sale of books and publicationsinclusive of GST received)

21/08/2000 Lodge the Business Activity Statement formonth of July

21/08/2000 Dr 31400 99 GST liability (Payment to ATO) 600.00Cr 11200 99 Cash at bank 600.00

(being payment of GST on sale ofpublications)

Treasury Monthly Workbook/BDA Cashflow Adjustment21/08/2000 Dr P2612 99 GST Remittance to ATO 600.00

(remittance of GST received on sale of booksand publications)

1 The account codes used in these examples are taken from the Whole of Government chart of accountsused by Treasury. They are the same codes that would be used in the monthly workbooks submitted toTreasury or in the BDA application for submitting budget data. They are not necessarily the codechanges entities should implement on their own finance systems.2 IT = internal trading. This refers to the internal trading codes used by Treasury in its whole ofgovernment reporting. 10 = GGS sector, 20 = PTE sector, and 99 = external trading.


3/07/200117-5

External Transactions (cont)

Purchase Journal

14/07/2000 Dr 72100 99 Consulting expense 50,000.00Dr 12400 99 GST receivable (refund due from ATO) 5,000.00Cr 31100 99 Accounts payable/creditors 55,000.00

(receipt of consultants invoice)

28/07/2000 Dr 31100 99 Accounts payable/creditors 55,000.00Cr 11200 99 Cash at bank 55,000.00

(payment of consultant fees)

Treasury Monthly Workbook/BDA Cashflow Adjustment28/07/2000 Dr P2201 99 Administration expenses (consultancy fees) 50,000.00

Dr P2611 99 GST payment on receipt of goods/services 5,000.00(cash payment for consultancy services inclusive of GST paid)

21/08/2000 Lodge the Business Activity Statement for month of July

28/08/2000 Dr 11200 99 Cash at bank 5,000.00Cr 12400 99 GST receivable (refund from ATO) 5,000.00

(refund of GST from the ATO)

Treasury Monthly Workbook/BDA Cashflow Adjustment28/08/2000 Cr R2613 99 GST refund from ATO 5,000.00

(refund of GST from ATO)

17.7.2 Internal Transactions

GGS Sales Journal – TotalCare sale of services to The Canberra Hospital (TCH)Account

CodeIT

28/07/2000 Dr 12100 10 Trade debtors – GGS 6,600.00Cr 81501 10 User charges – ACT Government 6,000.00Cr 31400 99 GST liability (payment due to ATO) 600.00

(user charges revenue received from TCH for services provided)

31/07/2000 Dr 11200 99 Cash at bank 6,600.00Cr 12100 10 Trade debtors - GSS 6,600.00

(receipt of payment for services provided to TCH)

Treasury Monthly Workbook/BDA Cashflow Adjustment31/07/2000 Cr R2413 10 User charges – ACT Government 6,000.00

Cr R2612 99 GST collected on delivery ofgoods/services

600.00

(cash received on services provided inclusiveof GST received)

21/08/2000 Lodge the Business Activity Statement formonth of July


3/07/200117-6

Internal Transactions (cont)

21/08/2000 Dr 31400 99 GST liability (payment to ATO) 600.00Cr 11200 99 Cash at bank 600.00

(payment of GST on services provided to TCH)

Treasury Monthly Workbook/BDA Cashflow Adjustment21/08/2000 Dr P2612 99 GST remittance to ATO 600.00

(remittance of GST received on services provided)

GGS Purchase Journal – TCH purchase of services from TotalCareAccount

CodeIT

28/07/2000 Dr 72100 10 Administration expense – GGS 6,000.00Dr 31400 99 GST receivable (refund due from ATO) 600.00Cr 31100 10 Accounts payable/creditors 6,600.00

(receipt of invoice for services from TotalCare)

28/07/2000 Dr 31100 10 Accounts payable/creditors – GGS 6,600.00Cr 11200 99 Cash at bank 6,600.00

(payment of invoice from TotalCare)

Treasury Monthly Workbook/BDA Cashflow Adjustment28/07/2000 Dr P2201 10 Administration expenses – GGS 6,000.00

Cr P2611 99 GST payment on receipt of goods/services 600.00(cash paid for services provided inclusive of GST paid)

21/08/2000 Lodge the Business Activity Statement for month of July

28/08/2000 Dr 11200 99 Cash at bank 600.00Cr 12400 99 GST receivable (refund from ATO) 600.00

(receipt of GST refund)

Treasury Monthly Workbook/BDA Cashflow Adjustment28/08/2000 Cr R2613 99 GST refund from ATO 600.00

(refund of GST paid on services provided)

17.7.3 Asset Purchases

Purchase of Fixed AssetDate D/C Account

CodeIT Account Description Dr Cr

31/10/2000 Dr 99 Property, plant and equipment 8,000.00Dr 12400 99 GST receivable (refund due from ATO) 720.00Cr 99 Accounts payable/creditors 8,720.00

(purchase non-current asset)

12/11/2000 Dr 11200 99 Accounts payable/creditors 8,720.00Cr 99 Cash at bank 8,720.00

(pay for non-current asset)


3/07/200117-7

Treasury Monthly Workbook/BDA Cashflow Adjustment12/11/2000 Dr P3101 99 Purchases of property, plant and equipment 8,000.00

Dr P2611 99 GST payment on receipt of goods/services 720.00(payment for non-current assets)

21/11/2000 Lodge the Business Activity Statement for month of October

28/11/2000 Dr 99 Cash at bank 720.00Cr 12400 99 GST receivable (refund from ATO) 720.00

(Receipt of GST from ATO)

Treasury Monthly Workbook/BDA Cashflow Adjustment28/11/2000 Cr R2613 99 GST refund from ATO 720.00

(Receipt of refund from ATO)


3/07/2001Glossary

Page 1

Glossary

Abnormal Items are items of revenue and expense included in the net result for the reporting

period, which are considered abnormal by reason of their size and effect on that net result. This

item is no longer to be used in financial statements, following the re-issue of AAS 1 “ Statement of

Financial Performance”.

Accounting Policy: The specific accounting principles, basis or method applied in preparing and

presenting financial statements.

Accrual Accounting involves the recognition of revenue, expenses, assets, liabilities and equity

when the economic transaction giving rise to the movement of resources occurs, irrespective of the

timing of any related movement in cash.

Accruals adjust the cash position at year end to reflect the true financial position of the entity.

Adjusting accounts at year end may be reversed in the subsequent period to show the true financial

position for that period.

Accrued Expenses represent goods or services provided by other parties during the period that are

unpaid at the end of the reporting period and where an invoice has not been received.

Accrued revenue is a class of receivables that represents revenue earned at the end of the reporting

period that the entity has not raised an invoice for, or otherwise billed, by the close of the reporting

period. A previous period accrual may be reversed at the beginning of the new financial year, to

show the true financial position in that new period.

Accumulated Depreciation is the total, at a given point in time, of the depreciation expense

charged for a particular depreciable asset or a class of assets.

Accumulated Funds represents the capital Government has injected into an entity, less any capital

distributions to Government, plus the surpluses and deficits accumulated in an entity as a result of


3/07/2001Glossary

Page 2

operations. Note that, for Departments, capital injections and distributions may occur as a result of

a restructuring of administrative arrangements (Refer Chapter 6).

Acquisition, in relation to assets, means undertaking the risks, and receiving the rights to future

benefits, as would be conferred with ownership, usually in exchange for a cost of acquisition.

Acquisition includes establishing control over an asset.

Acquisition Cost is the purchase consideration plus any costs incidental to the acquisition.

Administrative unit: means a unit of the Government Service referred to in section 13 of the

Public Sector Management Act 1994.

Aggregate Assets are a group of assets with similar characteristics, or that constitute an

interdependent unit, which individually fall below the recognition threshold of an entity but which in

total are significant and may be recorded as a single asset in the asset register.

Appropriations are the legal mechanism by which the Legislative Assembly authorises expenditure

for a specific purpose principally through an Appropriation Act or Supply Act. An appropriation is

the maximum amount of public moneys authorised by the Assembly under the authority of a law for

transfer from the Territory Bank Account to a department bank account.

Asset: Future economic benefits controlled by an entity as a result of past transactions or other past

events.

Asset Classes are the means by which categories of assets may be disclosed in the notes to the

financial statements.

Australian Accounting Standards: the accounting and reporting framework issued and

maintained by the Australian Accounting Research Foundation with approval of the Australian

Accounting Standards Board and the Public Sector Standards Board. The standards provide a

prescription of the acceptable methods of measuring and recording specific types of accounting

transactions and of the required level of disclosure of those transactions in the financial statements


3/07/2001Glossary

Page 3

Bank Account is an account maintained for banking purposes and associated activities at a bank or

credit union or building society.

Budget Papers are those which accompany the Treasurer’s Budget Speech and contain detailed

information on the Budget, as well as explanatory material on the broader context of the Budget.

Capital: the accumulated wealth that an entity possesses and relates to owner’s equity in the entity.

Capital Charge is a cost, based on the written down value of non-current assets, is applied to

departments which allocates the interest expense incurred on centrally managed Government debt.

This cost is included in the calculation of the price paid for outputs.

Capital Expenditure is costs incurred in the course of adding to the future economic benefits

provided by an asset as a result of physical addition, improvement or extension of the useful life of

the asset. Capital Expenditure is also the purchase of any new assets above the asset recording

threshold.

Capital Injections are the means by which the Government injects equity funds into an entity, to

increase the entity’s net asset position. The entity may require this additional funding for purposes

such as purchase or development of assets, the payment of debt, or to increase an entity’s working

capital. On occasion capital injections may be repayable.

Carrying Amount (or carrying value) also known as written down value means:

a) in relation to an asset, the amount at which the asset is recorded in the accounting records as at a

particular date. In relation to a depreciable asset, carrying amount means the net amount after

deducting accumulated depreciation or amortisation, (For depreciable assets, the carrying

amount is known as the “written down value”); and

b) in relation to a class of assets, the sum of the carrying amounts of the assets in that class.

Cash comprises cash on hand, cash in bank accounts, and cash equivalents.


3/07/2001Glossary

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Cash Accounting (or Cash Basis of Accounting): Involves recognising and recording transactions

solely on the basis of the receipt and payment of cash, and does not recognise the timing of related

resource movements or the stocks of resources (other than cash) at the end of a reporting period.

Cash at Bank means cash at a bank, credit union or building society.

Cash Equivalents are highly liquid investments which are readily convertible to cash on hand at the

entity's option, and which an entity uses in its cash management function on a day-to-day basis.

Cash Flows are cash movements resulting from transactions with parties external to the entity.

Cash on Hand comprises counter advances; cash advances; and notes, coins and cheques held.

Chart of Accounts is a systematic coding system for classification and arrangements of accounts

within the accounting system.

Commitment is a firm intention (usually represented by a contractual obligation) at the end of the

reporting period which will give rise to a future payment or sacrifice of service potential or benefits.

Commonwealth General Purpose Grants (consisting of general purpose current grants and

general purpose capital grants) are paid by the Commonwealth to the Territory unconditionally, that

is, they can be used according to the policies and priorities of the Territory Government without

further Commonwealth influence.

Comparative pricing is a framework used by the Territory Government and agencies to determine

prices for outputs through a negotiation process guided by benchmarking. Under the framework,

the Government is able to purchase outputs at what it regards as a “fair price” which will not

include inefficiencies. The fair price however, may include acceptable premiums related to quality

and the inability to achieve comparable economies of scale because of the size of the ACT (see

‘Capital Charge’).


3/07/2001Glossary

Page 5

Contingent lease rentals: The increases or decreases in lease payments that result from changes

occurring subsequent to the “inception of the lease” in the factors (other than the expiration of

time) on which lease payments are based.

Contingency: A condition or situation, the ultimate outcome of which, gain or loss, will be

confirmed only on the occurrence, or non-occurrence, of one or more uncertain future events.

Contributions by Owners: Service potential or future economic benefits that have been

contributed to the entity by parties external to the entity, other than those which result in liabilities

of the entity, that establish a financial interest in the net assets of the entity which:

a) convey entitlement both to distributions of service potential or future economic benefits by the

entity during its life, such distributions being at the discretion of the ownership group or its

representatives, and to distributions of any excess of assets over liabilities in the event of the

entity’s being wound up; and/or

b) can be sold, transferred or redeemed.

Control

• of an Asset is the capacity of an 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.

• of an entity is the capacity of an entity to dominate decision making, directly or indirectly, in

relation to the financial and operating policies of another entity so as to enable that other entity

to operate with it in pursuing the objectives of the controlling entity.

Current Assets: Cash or other assets of the department that would in the ordinary course of

operations of the department be consumed or converted into cash within twelve months.

Current Liabilities: Liabilities of the department that would in the ordinary course of operations

of the department be due and payable within twelve months.

Current Cost, in relation to an asset, means its cost measured by reference to the lowest cost at

which the gross service potential of that asset could currently be obtained in the normal course of

business.


3/07/2001Glossary

Page 6

Current Replacement Cost, in relation to an asset, refers to a basis of determining the current cost

of an asset. Replacement cost measures what it currently costs to obtain the service potential or

economic benefits embodied in the existing asset by using a technologically up-to-date reference

asset.

Date of Acquisition is the date on which the risks and rights to future benefits of an asset, as

would be conferred with ownership, pass to the acquiring entity.

Departmental items are those items which the department has discretion, responsibility and

authority. If the department has:

• the capacity to benefit from use of the asset funds in pursuit of its objectives and to deny or

regulate the access of others to those assets or funds;

• discretion and responsibility for how the funds are spent; or

• expended funds, incurred a liability, or received free services, related to the operations under its

control;

it would be considered that the department controls the item.

Depreciable Amount is the historical cost of a depreciable asset, or other revalued amount

substituted for historical cost, in the financial report, less in either case the net amount expected to

be recovered on disposal of the asset at the end of its useful life.

Depreciable Asset: A non-current asset having a limited useful life.

Depreciation Expense: A periodic expense of operations associated with the consumption or loss

of service potential of non-current assets caused by the use of an asset.

Economic Entity: means a group of entities comprising the parent entity and each of its

subsidiaries.

Employee: A natural person who receives benefits in exchange for services provided to an

employer.


3/07/2001Glossary

Page 7

Employee Entitlements are benefit entitlements that employees accumulate as a result of rendering

their services to an employer up to the reporting date, and includes, but is not limited to, wages and

salaries, annual leave, sick leave, long-service leave, superannuation benefits, and other post-

employment benefits.

Employer: An entity that consumes the services of employees in exchange for providing employee

entitlements.

Entity: Any legal, administrative, or fiduciary arrangement, organisational structure or other party

having the capacity to deploy scarce resources in order to achieve objectives.

Equity Instrument: Any contract that evidences a residual interest in the assets of an entity after

deducting all of its liabilities.

Expense: Consumption or loss of future economic benefits in the form of reductions in assets or

increases in liabilities of the entity that result in a decrease in capital during the reporting period.

Extraordinary Items: Items of revenue and expense which are attributable to transactions or other

events of a type that are outside the ordinary operations of the entity and are not of a recurring

nature.

Fair Value is the amount for which an asset could be exchanged, or a liability, settled, between

knowledgeable, willing parties in an arm's length transaction. For non-current assets fair value is

measured having regard to its highest and best use, which may differ from the entity’s existing or

intended use for the asset.

Finance Lease: A lease which effectively transfers from the lessor to the lessee substantially all the

risks and benefits incident to the ownership of the leased property.


3/07/2001Glossary

Page 8

Financial Asset: Any asset that is cash, or a contractual right to receive cash or other financial

asset from another entity, or a contractual right to exchange financial instruments with another

entity under potentially favourable conditions, or an equity instrument of another entity.

Financial Instrument: Any contract that gives rise to both a financial asset of one entity and a

financial liability or equity instrument of another entity.

Financial Liability: Any liability that is a contractual obligation to either deliver cash or another

financial asset to another entity, or to exchange financial instruments with another entity under

conditions that are potentially unfavourable.

Financial Statements ordinarily means an Statement of Financial Performance, Statement of

Financial Position, Cash Flow Statement, and associated notes to the Financial Statements.

Departments are also required to produce other Financial Statements, as specified in the Financial

Statement Guidelines (refer Chapter 11).

Fundamental Errors: Australian Accounting Standard 1 “Statement of Financial Performance”

has introduced this term as a new line item on the Statement of Financial Performance, previously

the Operating Statement. Fundamental error refers to material errors discovered during the current

reporting period that refer to the financial reports of one or more prior reporting periods that can

not now be considered to have been reliable at the dates of their issue.

General Purpose Financial Report: A financial report intended to meet the information needs

common to users who are unable to command the preparation of reports tailored so as to satisfy,

specifically, all of their information needs.

Heritage Assets: Assets such as art works, library collections, monuments and historic buildings

and other treasures which are irreplaceable and are held in perpetuity because of their unique

historical, cultural or environmental attributes.


3/07/2001Glossary

Page 9

Historical Cost: The amount representing the original cost of an asset.

Index: A number calculated by reference to price movements over time against an established base

amount.

Indexation: The process by which an index number is applied to the amount of an asset to amend

its cost.

Injection for Operations: a payment in the nature of capital or a contribution by the owner. It is

not a revenue that can be earned or accrued.

Infrastructure Assets are assets that comprise public facilities and which provide essential services

and enhance the productive capacity of the economy including roads, bridges, railways, sewerage

systems, water supply systems and reservoirs.

Inventories: Includes goods, other property and services:

a) held for sale or consumption in the ordinary course of service delivery;

b) in the process of production for such sale or consumption; or

c) to be used up in the production of goods, other property or services for sale or consumption

including consumable stores and supplies, but does not include depreciable assets.

Investments: Assets held by an entity primarily for the accretion of wealth through receipt of

distributions (such as interest, royalties, dividends and rentals) or for capital appreciation, and

includes items of property, plant and equipment which are held for sale other than in the ordinary

course of the department's operations which do not satisfy the definition of “property, plant and

equipment”.

Liabilities: Future sacrifices of economic benefits that an entity is presently obliged to make to

other entities as a result of past transactions or other past events. Liabilities are a broader concept

than debt. They also include obligations which do not have a predetermined repayment schedule,

and those which do not require payments of interest - such as unfunded liabilities of superannuation


3/07/2001GlossaryPage 10

funds, liabilities in respect of other employee entitlements (eg. long service and annual leave), trade

creditors, and provisions for deferred maintenance.

Maintenance: Expenditure on an asset that does not substantially improve its future economic

benefit, and which generally restores the asset to a reasonable condition without substantially

increasing or decreasing the useful life of the asset.

Market Value: The price at which an interest in an asset might reasonably be expected to be sold

at the date of valuation assuming:

a) a willing seller and a willing buyer;

b) a reasonable period within which to negotiate the sale, taking into account the nature of the

interest and the state of the market;

c) values will remain static during that period;

d) that the asset will be freely exposed to the open market; and

e) that no account will be taken of any higher price that might be paid by a purchaser with a special

interest.

Market value should take into account any costs of sale which might be incurred by the seller in

effecting the sale.

Materiality: The concept of establishing the importance of financial data in accordance with

Australian Accounting Standard AAS 5. In general an item of information is material if its

omission, non-disclosure or misstatement would cause the financial statements to mislead users

when making evaluations or decisions.

Net Result is the result for the period, determined by deducting the Capital Charge from the

Operating Result after extraordinary items.

Net Worth (ie Capital) is the residual interest in the assets of the entity after deduction of its

liabilities.

Non-current Asset: Any asset other than a current asset.



Non-current Liability: Any liability other than a current liability.

Obsolescence: The process of ageing of an asset due either to commercial or technical factors.

Officer: includes

a) an employee;

b) a statutory officer holder; and

c) a person employed by a Territory authority or by a statutory office holder.

Operating Activities: Those activities which relate to the provision of goods and services.

Operating Lease: a leasing arrangement by which substantially all risks and benefits incidental to

the ownership of the leased property effectively remain with the lessor (the owner of the property)

rather than passing to the lessee (which would make it a ‘finance’ lease).

Ordinary Operations: Operations of a kind carried on regularly from reporting period to reporting

period to achieve the objectives of the entity.

Operating Result is the operating surplus or deficit for the period being reported.

Parent entity: means an entity which controls another entity.

Payments: Cash outflows for a period, irrespective of when related costs are incurred.

Prepayments are payments made in one reporting period, in respect of goods or services that the

entity expects to receive or consume in future periods. (See also, section 6.4.7.1.)

Property, Plant and Equipment are assets that:

a) are held by the entity for use in the production or supply of goods and services, for rental to

others, or for administrative purposes, and may include items held for the maintenance,

construction or repair of such assets;



b) have been acquired, obtained or constructed with the intention of being used on a continuing

basis; and

c) are not intended for sale in the ordinary course of business or service delivery.

Provision means:

a) in relation to an Statement of Financial Performance, an amount charged as an expense to

recognise:

(i) a liability that accrued; or

(ii) a reduction in the carrying amount of an asset by way of:

− depreciation or amortisation of the asset; or

− diminution in the value of the asset;

b) in relation to a Statement of Financial Position, amounts referred to in paragraph (a) that have

accumulated from previous reporting periods and the current reporting period in relation to assets

or liabilities included in that statement.

Public Financial Enterprises (PFEs) are government controlled enterprises which may have one

or more of the following characteristics:

• they perform central bank functions;

• they accept demand, time or savings deposits; and

• they have the authority to incur liabilities and acquire financial assets in the market on their own

account1.

Public Trading Enterprises (PTEs) are government owned entities which provide goods and

services for sale in the market with the aim of recovering all, or at least a significant proportion of,

their operating costs.

Purchase Consideration is the fair value of assets given or liabilities undertaken in exchange for

assets (net, where applicable).

Receipts are cash inflows for a period, irrespective of when the moneys are earned.

1 The ACT’s only PFE is the Home Loan Trust Account, the purpose of which is to account for home loans providedto low income earners through off-budget funding arrangements.



Recognise: To recognise an item (in an accounting sense) means to report the item, or include it in

an amount reported, in the financial statements of an entity. (See also section 5.3.)

Recognition in an accounting sense refers to the reporting of an item, or its incorporation in

amounts reported, in the financial statements of an entity.

Recoverable Amount means, in relation to an asset, the net amount that is expected to be

recovered through the cash inflows and outflows arising from its continued use and subsequent

disposal.

Replacement Cost: See “Current replacement cost”.

Reporting Date: The end of the reporting period to which the financial report relates.

Reporting Entity: Means an entity in respect of which it is reasonable to expect the existence of

users dependent on general purpose financial reports for information which will be useful to them

for making and evaluating decisions about the allocation of scarce resources.

Residual Life: The remaining useful life of an asset at a specified date.

Revaluation: The act of recognising a reassessment of values of non-current assets at a particular

date.

Revaluation Decrement: The amount by which the revalued written down value of a non-current

asset, as at the revaluation date, is less than its previous written down value.

Revaluation Increment: The amount by which the revalued written down value of a non-current

asset, as at the revaluation date, exceeds its previous written down value.



Revenue Retention Arrangement: An administrative arrangement whereby an entity is able to

retain revenue that it has received (eg through establishment as a Territory authority or Territory

Owned Corporation, or through other legislative means).

Revenues are inflows or other enhancements, or savings in outflows, of future economic benefits in

the form of increases in assets or reductions in liabilities of the entity, that result in an increase in

capital during the reporting period.

Service Potential, in relation to an asset, means its economic utility to an entity, based on the total

benefit expected to be derived by the entity from use (and/or through sale) of the asset.

Service Purchasing refers to contractual arrangements by which the Territory (as purchaser)

contracts with a provider for delivery of specified services. These are identified as specific outputs

which contribute toward the achievement of the Government’s desired outcomes, with outputs

often defined in terms of quantity, quality, timeliness, price and/or a contribution toward cost.

Providers are required to report against agreed indicators in order to assist the Territory to meet its

accountability obligations to the community.

Statements of Accounting Concepts are statements released by the Australian Accounting

Research Foundation, with the approval of The Institute of Chartered Accountants in Australia and

CPA Australia. They provide the conceptual framework for general purpose financial reporting.

Statements of Accounting Practice are statements released by the Australian Accounting

Research Foundation, with the approval of The Institute of Chartered Accountants in Australia and

the Australian Society of CPA’s. These statements do not have the authority of Australian

Accounting Standards but provide guidance on specific issues.

Subsidiary: An entity that is controlled by a parent entity.

Threshold: The dollar amount above which an item is recognised in the register of non-current

physical assets or other accounting record.



Transfer Payments are amounts transferred by a department to third parties consistent with

departmental objectives and legislation or other authority.

Trust Money is money that an agency is holding in trust, on behalf of third parties. The agency

acts as administrator of these funds, and is not permitted to spend these funds on the agency’s

controlled activities.

Unit of Measure: The units by which assets are to be measured to enable recording in the asset

register of an entity.

Useful Life is:

a) the estimated period of time over which a depreciable asset is expected to be able to be used, or

the benefits represented by the asset are expected to be able to be derived; or

b) the estimated total service, expressed in terms of production or similar units, that is expected to

be obtained from the asset.

User Charges are revenues resulting from the sale of goods and services to consumers. User

charges includes revenue that the reporting entity controls, and excludes Territory (administered)

revenue. User charges exclude Government payment for outputs, by means of Output

Appropriation.

Valuation: The process of placing a value on an asset, liability, revenue or expense.

Vesting: The transfer of certain rights in relation to an asset or assets to an entity. In most cases

the transfer of the rights does not amount to a transfer of legal ownership. It does generally amount

to a transfer of the economic benefits embodied in the asset or assets.

Write Off means, in relation to amounts receivable, recognition that an amount so receivable is

uncollectable.

Written Down (Book) Value: See “Carrying Amount”.

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