CHAPTER 4 - FINANCIAL TABLES AND STATEMENTS
Introduction
The 1999-2000 PBS were the first to contain full accrual financial statements
for each agency. The other major changes to the way financial information
was presented in the 1999-2000 PBS was that the appropriation table (Table
1.1) was broken down by outcomes, divided between administered expenses
and price of outputs; new budget measures were presented in Table 1.2;
while total resources per outcome, contrasting the estimated actual expenditure
for 1998-99 and that for budget 1999-2000, was again presented by administered
expenses and price of outputs.
The committee does not intend to recanvass the purported benefits of
accrual budgeting as they have had sufficient exposure elsewhere. Suffice
it to say that, as Steve Bartos of DOFA told the committee, for the first
time we see full disclosure of the full set of financial statements for
Commonwealth agencies. [1] Not unexpectedly,
the new format attracted criticism from individual senators and legislation
committees who by and large do not use the estimates process as an expenditure
review committee might, for an overall examination of government finances.
And, despite many exposure sessions to accrual budgeting concepts and
many private briefing sessions by individual departments and agencies,
senators still experienced difficulties with the new outcomes/outputs
structure and with accrual based concepts.
Most agencies have no doubts about the benefits of the new approach.
Transport and Regional Development, for example, noted that there was
little doubt that the new framework provided estimates committees with
significantly improved information. [2] However,
most agencies considered there was room for improvement of elements of
the new format.
In this chapter, the committee identifies the major financial issues
that caused concern in the estimates hearings and considers whether they
are of a transitional nature and should not recur or whether they are
amenable to change.
Financial tables
A number of agencies noted the difficulties that senators had with the
appropriations, budget measures and resources tables. Defence felt that
Table 1.1 `Appropriations' and Table 2.2 `Total Resources for Planned
Outcomes' in the DOFA guidelines were difficult to interpret, resulting
in different presentations and, possibly, confusion on the part of users.
Defence suggested that Table 2.2 should be amended to incorporate a `total
price of outputs' line before the basis of funding from appropriations
and revenue from other sources. [3] Family and
Community Services suggested that some refinement might be needed to the
guidelines regarding the estimates tables. [4]
The ANAO indicated that `many non accountants will find difficulty reading
this form without terms such as `price of outputs', `revenues from government'
and `estimated expenditure' defined and, importantly, the distinctions
between them clearly articulated'. The ANAO also noted that `agencies
generally, including the ANAO, could have provided further explanatory
information and comments in each of the PBS sections to assist Members
and Senators understand how funds were to be expended and what measures
were to be used to assess performance in achieving government outcomes'.
[5]
Health and Aged Care noted:
the financial tables, probably considered the least accessible part
of the Portfolio Budget Statements, would benefit from a textual plain-English
summary to complement each table. The text would summarise the figures
presented in the table and highlight any important issues - such as
identifying significant changes and explaining their effect and cause.
[6]
Health and Aged Care also suggested that a larger format than the current
B5 size would allow the financial tables to be presented in a more user
friendly and accessible way.
Foreign Affairs and Trade also suggested that the tables be revised.
It noted:
the complexity and number of tables makes comparison between tabled
difficult. Revising current tables, by providing greater explanation
within the tables is desirable, it may reduce the number of tables,
and also improve transparency and readability. [7]
DFAT also suggested that the resource information should be re-engineered.
It noted such an examination might begin with identifying the resources
information necessary to enable committee members to satisfy themselves
that the proposed expenditure is in keeping with the Appropriation Bills.
The next step would be to determine the clearest and most succinct way
to present this core information in a manner that allows the reader to
follow a path from the Appropriation Bills to outcome expenditure.
The committee is aware that a great deal of cost has gone into programming
for the present appropriations, budget measures and resources for outcomes
tables and is wary of suggesting radical change at this stage. It is mindful
of the fact that output structures may take some time to stabilise and
believes it might assist in the familiarisation process if the financial
tables remained broadly the same for the time being. The committee will
continue to monitor the reception of the financial tables in estimates
and will consider them again following the 2000-2001 PBS.
The ANAO and DIMA supported proposals by DOFA to improve PBS readability
by including additional graphs and tables to show financial trends. The
committee has promoted this on previous occasions, and does so again.
It agrees that such presentational aids should be optional and the success
stories be highlighted in DOFA's proposed best practice guide to the PBS.
Variation tables
The committee notes that the PBS in their previous format included routinely
a percentage variation figure of budgeted program/sub-program expenditure
against the previous year's estimated actual outcome, plus an explanation
of `significant variations'. DOFA provided the following guidance for
the 1998-99 PBS as to what constituted a significant variation:
This is a matter of judgment having regard to materiality, parliamentary
interest and other factors. As a guide, significant year on year variations
might be: more than or equal to 5% of a programme's previous year underlying
outlays, or $10m, whichever is the greater. [8]
DIMA supported a requirement to provide a significant variation table
as part of the PBS in the future. It suggested that `the Committee may
wish to establish a threshold that required variations of over, perhaps,
1% of output funding for an agency be included in such a table'. [9]
The committee would support the reintroduction of such information, but
leaves the percentage figure to the wisdom and experience of DOFA. Outcomes
notwithstanding, one of the most logical actions on the part of a non-accountant,
confronted with financial tables, is to question why funding has varied.
If straightforward information can be provided, succinctly, the committee
believes this would be helpful.
The committee notes that much variation questioning in the 1999-2000
estimates round was based on a lack of understanding of the impact of
accrual budgeting. A difference in funding from $74.987 million to $79.421
million in Output Group 1 of Transport and Regional Services was understood
to be `increased funding' until officers explained that it resulted from
an appropriation for the full costs of providing the output, including
overheads and liabilities such as superannuation, plus cost of capital,
and the variation to all outputs was proportionately the same throughout.
[10] Similar differences in the future are
likely to relate to improved cost allocation. With the advantage of hindsight,
problems such as this should have been foreseen and avoided by means of
more ample explanations in the body of the PBS. In the event that changes
to cost attributions change the output figures significantly from year
to year, it would be wise for agencies to forestall pointless questioning
by noting the fact in the PBS or, at the very least, in pre-hearing briefings.
Total estimated expenditure
In reviewing Table 1.1, the committee considered the value of including
`total estimated expenditure' in the table. It noted that this column
was not part of the draft PBS guidelines on which the committee was consulted.
The column was added at a very late stage in the process.
Agencies interpreted the final PBS guidelines differently in addressing
the requirements of that column. For some agencies, including Defence
and DOFA, the figures in the column took account of the operating result
disclosed in the Operating Statement. Defence footnoted its treatment
while DOFA did not. Other agencies, including Health and Aged Care, did
not take account of their operating result. Several agencies have drawn
attention to the need for a better technical definition of `total estimated
expenses'. This would appear to be another instance in which agencies
have not been clear about requirements.
The committee, having already noted the complexity of Table 1.1, wonders
whether the inclusion of `total estimated expenses' serves any real purpose,
particularly given that the focus of the table is appropriations. Information
on expenses can be derived from the Operating Statements for each agency
if necessary.
Output pricing
One of the major concerns for senators was the extent to which agencies
had aggregated their estimates in some areas, in part rendering invisible
what senators believed they had been able to access in previous PBS. For
example, in reviewing Defence estimates, the Foreign Affairs, Defence
and Trade Legislation Committee noted in its estimates report that the
financial figures were aggregated to the point of being meaningless to
the Committee. [11]
The Rural, Regional Affairs and Transport Legislation Committee also
commented on the type of information not being provided in the PBS under
the new system. For example, that committee noted that AFFA's PBS did
not disaggregate information to the level of important agencies such as
AQIS, yet information had been provided in respect of Research and Development
Corporations which were industry funded and hence did not appear at estimates
hearings. [12]
Where the outcomes/outputs frameworks attracted particular attention
in estimates was from the fact that some agencies had elected to put a
dollar value against their outputs. Following lengthy questioning on the
matter in the Legal and Constitutional Legislation Committee, for example,
Geoff Hine of the Attoney-General's Department tried to explain the position:
With respect to the department, we have put some dollar values against
each of our outputs, but it was not a requirement in preparing the portfolio
budget statements. It is just that we have listed our outputs, as has
every other agency within the portfolio. We have linked those outputs
with outcomes. With respect to the department, we have put dollar values
against those, but those figures will change during the course of the
year, having regard to the fact that they were developed in November
last year as part of working up the budget process some six or seven
months ago.
Some of the other agencies have not put dollar values against their
individual outputs but have indicated activities that they would undertake
which would then form part of their achieving the outcome which the
government had set for it and for which government has indicated it
is willing to pay a price of the amount of money that has been appropriated.
It is similar to what occurred in the past when we got money at divisional
level but we would not necessarily break that down into what happened
in each individual section. ... this year is very much a transition
year and as we get more skilled and more experienced in it, there will
be this greater level of attribution, of identification of the costs
that will allow comparisons between what we hope to achieve and what
we actually achieved... [13]
The agencies which did not disclose outputs pricing were frequently criticised
for their failure to do so, even though it was not required of them for
the 1999-2000 PBS. Nor was it clear to all senators what outputs pricing
entailed. As Senator Hill explained in one estimates hearing, outputs
funding is `bureaucrats' money'. [14] Many
officers stressed, as did James Kelaher of the AFP, that while allocation
of dollars to outputs was perhaps imprecise in the transitional phase,
`one of the implicit deliverables during the current financial year is
that agencies must put in place systems to measure and report at the output
level' in order to demonstrate their ability to manage money. [15]
It also raises questions about the value of the output information in
the PBS and how agencies will assess in an open and transparent way whether
particular outputs have been delivered for the contracted price, quantity,
quality and timeframe.
Cost allocation to outputs
As Tony Blunn of the Attorney-General's Department suggested, `one of
the real dangers ... is to romanticise what we had in the past' and the
reality is that agencies always had considerable freedom under running
cost arrangements to reallocate funding from one project to another. For
the time being, cost allocation to outputs varies considerably in methodology
and rigour of application from one agency to the next. Many agencies indicated
they were refining their costing systems, so it is probable that output
pricing might fluctuate considerably for some time to come.
Many of the estimates committees attempted to come to terms with what
a specific output price entailed. The lengthy questioning of the Department
of Employment, Workplace Relations and Small Business on the $11.47 million
assigned to output 2.1.1, policy advice and advocacy, was illustrative
of the problems experienced. Rex Hoy explained that the output was costed
by adding the direct cost of staff involved from across the department,
including their salaries, superannuation, and administrative expenses.
That department had not adopted and was not planning to adopt a time based
activity costing system but relied on percentage estimates of people's
time per output. Enabling costs were assigned to outputs in some instances
on an actual usage basis, in others on a per capita basis across the department.
[16] Output prices are best estimates at the
time and highly likely to vary before the year is out. As Dr Shergold
pointed out, `This year, as in every previous year, decisions will have
to be made about reallocation of resources as government or indeed parliamentary
priorities change.' [17]
In its submission to the committee, the NCA voiced doubts about the process.
The agency described the process of identifying, in consultation with
DOFA and with regard to the specific requirements of its enabling legislation,
outputs relating to intelligence, coordination, law reform and impact
of investigations. But the NCA's operational effort is not discretely
divided into units producing those outputs, and nor do they necessarily
form discrete activities. As a result the effort of establishing systems
to record costs against the outputs has been significant and, in the view
of the NCA, `it is not clear what benefits flow from a necessarily artificial
split up of costs against [outputs]'. [18]
Given senators' clear preference, however, for the disaggregation of
appropriations to output level, and DOFA's support for this, [19]
the committee recommends the disaggregation of appropriations to
output level. The committee will monitor the reception of the disaggregated
figures in estimates hearings and if, after a decent interval, it becomes
apparent that the figures are so imprecise as to be meaningless, the committee
will again review its recommendation.
Administered expenses
Senators were also concerned at the treatment of estimates for administered
expenses in the budget year. While some agencies chose to provide breakdowns,
other agencies only showed bottom line aggregations in accordance with
DOFA guidelines.
In examining the estimates of the Employment, Workplace Relations and
Small Business portfolio, Senator Schacht took exception to one $500 million
appropriation for small business, unsupported by detail because a relevant
consultative committee had not completed its work:
I have every right to be a little agitated that a $500 million single
line appropriation is being made available to be spent. If it is carried
in the appropriation and there is no further requirement for legislation,
you will spend it how you like, when you like, on whom you like. There
will be nothing parliament will be able to do about it, other than come
back in 12 months time and try and expose you for maybe maladministration,
incompetent administration, or say that the $500 million did not work.
[20]
Senator Conroy drew attention to the lack of breakdown of administered
expenses for DOFA's outcome 2, `improved and more efficient government
operations' and questioned why the information had not been provided.
Dr Boxall replied:
This is again an issue about the design of the portfolio budget statements,
and this is another point that we shall be taking note of and seeing
whether, next year, it would make more sense to itemise the administered
items rather than give a total. [21]
The committee recommends the disaggregated itemising
of administered items.
Forward estimates
Another difficulty that individual senators and legislation committees
raised related to the lack of forward estimates. While agencies had complied
with DOFA guidelines in providing forward estimates in relation to budget
year new policy measures and in their financial statements, senators were
also keen to see forward estimates for outcomes and outputs. In the Defence
estimates, for example, Senator West commented:
It gets a bit confusing with this method of accounting: What we are
looking for is when a decision has been made but the money is not going
to be spent this year but will be coming up in forward years for expenditure.
We are not necessarily looking for the details of it, but the forward
planning of it. [22]
And again Senator Hogg's comment in relation to the Delamere air weapons
range:
one does not know what the allocation for that is in this year or what
stage is meant to be achieved during this 12 months, given that is now
going to stretch over a further two years. [23]
Frank Lewincamp from Defence argued, however, that forward estimates
projections had not been required under the previous PBS format at the
level of detail now being sought by senators. [24]
In its PBS submission, Defence went one step further and questioned the
reliability of such information, arguing against the inclusion of additional
forward estimates projections beyond those already provided by agencies.
[25] While not questioning the need for forward
estimates projections, the Attorney General's Department expressed caution
about the reliability of outyear figures in respect of financial statements
as agencies complete the outsourcing of information technology activities
in accordance with government policy, as outsourcing will result in a
change in the asset base, which will in turn impact on the application
of the capital usage charge and hence on the cost structure of some outputs.
[26]
However, several other agencies in their submissions conceded the need
for such information. The Department of Health and Aged Care, for example,
supported the inclusion of forward estimates in the PBS, commenting that
while they used to be included in other budget papers, the PBS were now
the logical place for those estimates to be presented. [27]
In its second submission to the committee, DOFA indicated its support
for the inclusion of forward estimates in the PBS. [28]
In view of the level of support from senators for such a measure, the
committee recommends the inclusion of forward estimates in the
PBS.
Budget measures
The information on new budget measures is, generally speaking, clearly
presented in a prominent position in section 1 of the agency budget statements.
While this duplicates information in Budget Paper No. 2, its presence
in the PBS is well liked and should remain, in the committee's view. What
is less clear to users of the PBS is what happens in subsequent years
when a long-term measure ceases, causing at times a radical change to
output pricing, or when information about the measure cannot be found
at all, because once it stops being a `new' measure, it is not separately
identified in the documents. The `Understanding Rural Australia' project
was one of many to cause concern in the last estimates round. [29]
This is not a new problem, but is one encountered regularly by senators
examining the estimates. The reality is that on every occasion it is possible
that there will be a new senator, or a senator not familiar with the portfolio,
involved in examining the estimates for a given portfolio and, as we have
suggested above, familiarity with the budgeting process should not be
assumed. Obvious differences should be explained in the body of the PBS
to the extent possible without making the documents unwieldy. And agencies
which know, or are told, of a senator's ongoing interest in a budget measure
which he or she may have introduced or taken a particular interest in,
in a previous government, should consider how best to deal with the provision
of ongoing information, at both price and performance level. Options would
be inclusion in the PBS, if it did not unbalance the general level of
detail provided, or provision of information at the estimates hearing
or on notice thereafter. It should not be assumed that once a budget measure
is not `new', interest in it dissipates.
The committee suggests that DOFA might consider the inclusion of guidance
along the above lines in its PBS guidelines.
Cross-portfolio issues
Senators and, the committee suspects, most users of the PBS are interested
in the funding of and outcomes of particular issues, in the broad, and
are less interested in the administrative manner by which this is achieved.
This has been recognised by successive governments, with the result that
we now have cross-portfolio budget statements on, for example, women's
issues and indigenous affairs. The PBS guidelines require basic information
to be provided on cross-portfolio matters, describing the outcomes and
outputs involved, the agency providing the outputs, other agencies involved
and their portfolio, reporting responsibilities, resourcing arrangements
and where performance information can be found.
An individual PBS therefore does not present the whole picture, but directs
users to other sources of information. What tends to occur in estimates
hearings is for senators to start questioning specific funding issues
from the basis of a ministerial press release or a cross-portfolio budget
statement and to try and translate from those sources to the PBS. [30]
While the committee cannot see any practical method of lessening this
difficulty in written form in the PBS, it notes that the practice is developing
whereby officers of distinct agencies within a portfolio are sometimes
present together at estimates hearings – for example, Family and
Community Services and Centrelink; and Office of Indigenous Policy and
ATSIC – to attempt to disentangle for senators their respective
contributions to the process. It notes too that occasionally a minister
will volunteer a consolidated across-portfolio response to a cross-portfolio
concern raised in estimates. It may also be that when performance information
against the 1999-2000 indicators is provided in individual annual reports,
it will reflect sufficiently broadly on achievements so that an appreciation
of the separate strands of input can be gleaned. The committee will monitor
closely the examination of performance information in additional estimates
hearings and, if such an examination gives rise to concerns, will consider
reporting again on this issue.
The committee is encouraged by the fact that the ANAO increasingly appears
to be targeting cross-portfolio matters for performance audits. It commends
the practice and exhorts the ANAO to continue its good work in this area.
Conclusions on the financial tables
The committee tends to agree that the financial tables as currently presented
are not readily understandable by non-accountants. It is also mindful
of the significant cost that the changes to date have caused agencies
to incur and does not wish to exacerbate this by too much tinkering around
the edges. It is hopeful that the budget 2000-2001 PBS, which will have
no comparisons with cash figures, will remove one level of misunderstanding.
That, combined with forward estimate information and appropriations disaggregated
to output level, the significant variations option, standardised sections
and a clear, standardised glossary of terms should suffice to render the
financial information of greater assistance to senators, without the need
for more basic structural change.
The committee will monitor carefully the forward year estimates when
and if they are introduced and expects DOFA to do likewise. If after a
decent interval, it can be seen that they are unreliable, it will review
its recommendation. It will also monitor the treatment of the other matters
it has raised to assess whether they remain difficulties and, if so, to
consider how best to overcome them.
Financial statements
The scrutiny of financial statements mainly gave rise to requests from
senators for clarification of particular concepts and explanations of
processes used by agencies in preparing their costing or estimates details.
The matters discussed below are illustrative of some of the issues encountered.
They are by no means unique to the portfolios or senators involved.
Reporting of depreciation
Senators focused on the use of, and reporting on, depreciation primarily
because of its importance in funding asset replacement within agencies
under the accrual framework. Agencies are required to use the deprival
method to value assets to generate funding (appropriations) via depreciation.
This method values assets in terms of the services or benefits they provide
and takes into account whether an agency decides to replace an asset or
not.
The committee is aware that the question of asset management has been
extensively reviewed in recent years by both the Australian National Audit
Office [31] and the Joint Committee of Public
Accounts and Audit. [32] And for good reason.
There is a substantial amount of money caught up in physical and intangible
Commonwealth assets: some $113.8 billion at June 1997. [33]
As has been noted, even a modest improvement in the management of those
assets could result in significant savings for the agencies concerned,
and the Commonwealth. Poor management of assets would be reflected in
higher than necessary output prices and could reflect badly on the agency
in comparative terms. Accrual accounting, particularly the process of
depreciation, allows the actual cost to be seen as the asset is consumed,
not at the time of purchase.
The following estimates excerpts illustrate the range of issues that
were raised by senators in probing the effect of asset depreciation on
agencies. In considering the estimates for the Family Court of Australia,
Senator McKiernan questioned a figure for funding of depreciation of $4.2
million, followed by a figure for accumulated depreciation as at 30 June
2000 of $14.5 million. He was advised:
that figure of $14.5 million is essentially a build-up of the opening
balances at the beginning of the 1999 financial year, the accumulated
build-up, various disposals and further charges predicted ... [34]
and was promised a further breakdown and explanation on notice.
In the Defence estimates hearing, Senator Quirke questioned how depreciation
was worked out and was informed, `Depreciation is a straight line method
based on the overall value of the asset and its useful life, dividing
the value by the useful life and depreciating it by that proportion each
year', from which he concluded that it bore no resemblance to the actual
asset replacement.
At the DOFA estimates hearings Senator Schacht questioned whether there
was any centralised monitoring of all agencies on a monthly basis of the
expenditure of the depreciation money paid. Dr Boxall advised that DOFA
would be compiling accounts each month to keep track of expenditure and
revenue; he also indicated that the only way a department could expend
depreciation of things they were not meant to spend it on would be to
run a net operating loss, a thing they could not do without the permission
of the Minister for Finance and Administration. A considered response
on notice indicated that:
Regular financial Reports will be collected from material agencies
for consolidation in General Government Sector statements and publicly
released in accordance with the Financial Management and Accountability
Act (as amended).
The financial statements will be grossed-up with an estimate for small
agencies based on their financial statements from their input for most
recent whole of government financial statements.
These reports will be presented at the General Government level and
not at the individual agency level. [35]
DOFA added that one of the quality assurance mechanisms for the acceptance
of agency financial statements into the central system would be comparison
against budget, and material agencies whose expenses or revenues were
inconsistent with the budget predictions or significantly different from
comparative figures would be followed up. The committee recommends
that, in addition to DOFA follow-up, any such expenses or revenues
of material agencies inconsistent with budget predictions or `significantly'
different (perhaps 10 per cent above or below) be disclosed, in disaggregated
form, in a publicly available document such as the General Government
Sector statements.
The capital use charge
For the first time, general government agencies were required to take
account of the cost to government of capital invested in them, as part
of the price of their outputs. Agencies were asked to base the charge
on net assets at a rate of 12 per cent to take appropriate account of
market investment risk. Some debate has centred on the choice of 12 per
cent, which includes a significant risk premium questionably necessary
for government entities. [36] At the DOFA estimates
hearings, Dr Boxall explained `The whole idea of having the capital use
charge is to provide an incentive to departments to manage their assets
better'. [37]
In other estimates hearings, senators also showed considerable interest
in the capital use charge (CUC) and its effect in each portfolio. In some
instances, senators queried how such a charge could be applied to assets
that, in their view, had no alternative market value. Senator Schacht,
for example, in querying the application of such a charge to the Australian
War Memorial, described it as `a meaningless figure ... for something
that is priceless and a national heritage' [38]
adding `I find it almost offensive that the War Memorial could have a
value put on it as a land development or resale value'. [39]
In explaining the calculation of the CUC, officials distinguished between
departmental controlled assets and administered items on which the capital
use charge was not levied. Officials also advised senators of the involvement
of the ANAO in deciding on asset classifications and of the Australian
Valuation Office in determining market considerations and land values.
The committee was interested to learn that the CUC was not levied uniformly.
DOFA explained that its property group already had a targeted rate of
return on capital and so to apply a CUC would be counter-productive; the
property group was therefore exempted from the application of the CUC.
[40]
Senators queried the CUC funding mechanism and were informed that it
was an `in and out' arrangement involving an appropriation at the beginning
of the year to agencies which was repaid by them at the end of that year.
Some senators were concerned about the size of such a float and the capacity
that agencies had to retain a portion of such funds from asset rationalisation
to spend on other priorities without appropriate scrutiny. In the event
that an agency rationalised its assets, it would show an improved net
operating surplus and a stronger balance sheet and might run the risk
of being penalised by the Expenditure Review Committee (ERC) for its efficiency.
Dr Boxall voiced the opinion that he did not believe the ERC would adopt
such a position. [41]
In its proposals for improving the PBS format, Defence noted that `disclosure
of the Capital Use Charge “below the line” was confusing for
the users of financial statements and should be revisited'. [42]
It also noted that the `below the line' treatment was a result of accounting
policy discussions between DOFA and the ANAO. However in Defence's view,
the CUC should have been reported, not as a return to government (i.e.
in the nature of a dividend), but as an expense in agencies' Statement
of Revenues and Expenses. Ms Morison, a consultant assisting agencies
in their accrual development, also acknowledged that the treatment of
the CUC was conceptually confusing. [43]
Given the magnitude of the sums involved, the committee believes that
the CUC will continue to be an area of major interest to Senate legislation
committees. It notes that Dr Boxall undertook to consider the provision
of information on the operation of the CUC, including the total of the
CUC across agencies at the start of the financial year, the amounts repaid,
efficiencies achieved and gains retained by agencies. [44]
The committee recommends that the opening and closing asset values
and the amount of CUC expected should be further explained in each agency's
notes to its financial statements. And as this is an issue which clearly
warrants tracking over time, comparative information should be disclosed
in annual reports for at least a three-year period, when available.
As regards aggregate information, the committee suggests that DOFA may
wish to consider a separate identification of CUC in its whole of government
financial reports. And finally, the ANAO may wish to review all aspects
of the CUC in the context of its ongoing scrutiny of asset management.
The committee has also noted comments made at its 17 June public hearing
that the CUC needed to be explained more fully to senators. [45]
The committee believes that this is essential, and encourages agencies
and DOFA to give this priority in future pre-estimates briefings and in
explanatory notes to the financial statements.
Asset valuation
In questioning officials about depreciation and the CUC, senators also
sought clarification on the way asset valuations were conducted by agencies.
Parliament House was an obvious case in point. In its own estimates hearings,
the committee was told that Parliament House was classified as an administered
asset because no-one was going to sell it. [46]
The situation was not so clearcut for other assets, however, where the
concept of control could be questioned.
In the 17 June public hearing, Senator Hogg probed this issue further
with DOFA officials using the Australian War Memorial as an example and
following up points raised by Senator Schacht in the Veterans' Affairs
estimates. He questioned how the depreciation charge was raised and how
a value was placed on the War Memorial in the first place. [47]
Mr Bartos indicated,
The issue of how to apply the accounting standards is a legitimate
one. …The valuation of it is done according to accounting standards
against the value of the land it is on, alternative uses and so on.
[48]
He went on to add:
One of the things we need to do as part of bedding down accruals is
actually to be a little more sophisticated in how we treat agencies
that have large assets. In the case of the War Memorial, for instance,
I think it is pretty clearly the case that there are some parts of the
War Memorial that would never be sold.
The committee believes that agencies such as the War Memorial, the National
Library of Australia or the National Gallery of Australia should not be
disadvantaged by a blanket application of accounting formulae on asset
valuations. The committee accepts that asset valuation per se, and consistency
in asset valuation practices across the board, is a challenge. It will
continue to monitor developments in the area, audit reports, outcomes
of the DOFA-sponsored accrual budgeting forums, and estimates questioning
to determine whether further action is required.
Statement of assets and liabilities
The presentation of the Statement of Assets and Liabilities (Balance
Sheet) created considerable interest among senators. Senator Schacht questioned
DOFA officials in the estimates hearing as to why their guidance to agencies
advocated an `equities plus liabilities' accounting convention over the
standard private sector practice of using a net assets accounting convention
of `assets minus liabilities'.
The issue was also raised at the June public hearing. Abdul Khan, representing
DOFA, explained:
I personally believe that net assets is what we should be doing. The
reason that this presentation was adopted was that there was a fear
that the net assets private sector presentation might focus too much
attention, and attention which was misplaced, on whether an organisation
has net assets or deficiency of net assets. While that particular indicator
is very forceful for a private sector organisation, because it has obvious
implications for liquidity and solvency, it was felt that in a public
organisation to focus too much attention on that item as a balance sheet
bottom-line measure probably was not desirable. [49]
Not all agencies accepted this line of argument. The Transport and Regional
Development portfolio indicated a preference for a net asset presentation
in the balance sheet. [50] Ms Morison also
drew attention to difficulties of adopting an `equities plus liabilities'
format. The Department of Defence, in its submission, also advocated a
net assets presentation in the interests of greater consistency with Australian
accounting principles and standard private sector practice. [51]
The Australian Law Reform Commission indicated that it was `particularly
dissatisfied with the DOFA direction that Balance Sheets which showed
other than a zero bottom line surplus/ deficit in any year would not be
accepted'. [52]
The committee is mindful of the fact that the PBS balance sheet presentation
has been developed in accordance with the new draft Finance Minister's
Orders for financial reporting for 1999-2000 and beyond. The committee
has also noted that a net assets presentation has been adopted in budget
documentation and in the consolidated financial statements of the government.
The committee is not, at this stage, advocating a change in the presentation
of the balance sheet in the PBS, but notes that it falls into the category
of matters which Mr Bartos of DOFA referred to as `things that were introduced
for good reason which in the light of actual practice are well worth reviewing'.
[53] The committee is inclined to prefer the
private sector balance sheet format and will continue to monitor closely
the reception of the PBS variant.
Explanatory notes
There were also a number of instances where senators felt that agencies
had not made appropriate use of their explanatory notes to the financial
statements. In the Defence estimates, for example, Senator Hogg was critical
of the note on leases under departmental assets and liabilities, indicating
that `when I read note No 5, I was none the wiser as to what it was about'.
[54]
A number of agencies themselves acknowledged room for improvement in
their use of notes to the accounts. For example, Defence noted in its
submission that:
there needs to be further clarification of the extent and nature of
the detail required in the financial notes to support the budgeted financial
statements (this was left largely to agencies to determine in 1999-2000).
[55]
The ANAO indicated that it intended to include additional notes to the
budget financial statements to further assist analysis of its annual budget
estimates, [56] while the Department of Environment
and Heritage noted the need for more work on the notes to the financial
statements to better explain variations between years. [57]
Mr Bartos of DOFA also agreed with the need to improve the use of explanatory
notes. [58]
At the committee's public hearing, Jody Fassina, representing senators'
staffers, identified other situations in which agencies had failed to
explain significant changes.
On page 89, the Treasury PBS has a write–down of assets - it is
an administered item - of $1.1b in 1999-2000 – and I think it is
about $1b the following year – with no explanation. A $1b write-down
of assets is certainly significant. One would have thought that it would
deserve some sort of comment or explanation as to what that is about.
[59]
And again:
Another example is the balance sheet for the ATO. Table 3.2 shows 1999-2000
total liabilities and equity of $5.9 billion, which is exclusively represented
by $5.5 billion in receivables. The next year that goes up to $10 billion.
You have a 100 per cent increase in your receivables which represents
about 95 percent of your equity base – no explanation.
The notes to the financial statements are an important means by which
agencies can draw attention to significant matters and should be used
effectively by agencies for that purpose. Of the notes which the committee
scrutinised, those of OASITO may provide a useful model for other agencies.
[60] The committee believes that the notes
to the financial statements should play a similar role to that of the
notes to the accounts under standard private sector practice.
Equity injections
Senators showed considerable interest in the Capital Budget Statement
and the treatment of equity injections. Most interest centred around the
treatment by agencies of carryovers as `departmental equity injections
and loans'. This accorded with advice provided by DOFA to agencies.
However, some agencies opted for a different treatment of carryovers.
For example, the Department of Foreign Affairs and Trade treated their
carryovers as a capital appropriation. [61]
The Attorney General's Department noted the confusion caused by the treatment
of carryovers and indicated that its figures represented neither an equity
injection nor a loan but rather funds which were estimated to be unspent
at 30 June 1999 and would represent a revenue injection for 1999-2000.
[62]
DOFA has acknowledged these differences. In its submission, it noted
that this is a transitional issue for 1999-2000 only. It has also indicated
that carryover funding is separately provided through a departmental equity
injection so as not to distort the price of outputs appropriations in
the Budget year; that in effect, these departmental equity injections
allow agencies to access their running cost carryovers in the 1999-2000
year; and that the departmental price of outputs and capital appropriations
from 1999-2000 onwards will not lapse at the end of the financial year.
[63]
While the concept of equity injections caused a great deal of angst in
certain estimates hearings, the committee does not propose to consider
it in detail as it is a transitional problem which should not recur.
Treatment of multi-year contracts
Senators were also interested in explanations relating to the expensing
of multi-year contracts in a single year. Some discussion ensued in the
Rural and Regional Affairs and Transport Legislation Committee estimates
hearings, with officers advising that while government could choose to
appropriate funds all at once, it should not arise as an expense for the
relevant department until the year it received the service. However, for
technical accounting reasons, this might vary. [64]
The committee is of the view that such explanations, where relevant,
should be contained in the notes to the financial statements.
Standardisation across agencies
Senators mentioned the need for standardisation by agencies of aspects
of PBS presentation in several contexts. There is no question that lack
of uniformity in the presentation of financial statements hindered understanding
of the new financial reporting system. At a fairly basic level, for example,
the Health and Aged Care portfolio financial statements were located in
Part D of its PBS, those of Defence in Section 2, and Foreign Affairs
and Trade in Section 3, despite fairly clear guidelines from DOFA. The
committee is not overly concerned about this. It takes the view that a
well-designed PBS will contain a table of contents that is sufficiently
detailed to assist users to find relevant sections. Of more assistance
in assisting users to pinpoint where they are in the PBS might be the
use of running headers or footers, particularly for the agency budget
statements. The committee stresses, however, that such `refinements' should
be at the discretion of portfolios and should not be mandated.
Another level of variation came in the presentation of the operating
statements. DOFA's Budgeted Statement of Revenues and Expenses presented
`revenues' first followed by `expenses'. Defence and Foreign Affairs and
Trade on the other hand were among those agencies that used a `net cost
of services' approach showing `expenses' first, followed by `revenues'.
While both approaches are consistent with accounting conventions, there
is scope for confusion in the minds of senators expecting a similar format
to be used by agencies.
Most agencies recognise the need for consistency of approach on financial
statements. DIMA has suggested the need for DOFA to develop a reference
document detailing definitions that aim for greater consistency of terminology
for all relevant uses. [65] DFAT has also noted
the importance of DOFA's providing clearer definitions with regard to
accrual concepts and classification of items as either administered or
departmental. [66]
The committee has commented on the issue of standardisation and consistency
across agency reporting elsewhere in this report. Notwithstanding, the
committee believes that accrual accounts such as operating, balance sheet
and cash flow statements are standard reports and should be presented
in the same way in each portfolio's PBS. It urges DOFA to try and broker
agreement amongst agencies on this particular issue.
While suggestions were made that financial statements could be placed
in an appendix at the back of the PBS rather than being interspersed throughout
it, the committee believes that the financial statements are an integral
part of each agency's budget statements and should remain where they are.
Consistency between the PBS and annual report financial statements
A number of agencies have noted the importance of maintaining consistency
between the financial statements presented in annual reports and the PBS.
As the Attorney- General's Department observed in its submission:
it is the information contained in Section 3 Budgeted Financial Statements
- a completely new addition to the PBS - which will enhance accountability
in terms of total resource management within the department or agency.
This information will enable a comparison of expected financial performance
with actual performance at the department or agency level when audited
financial statements are prepared as part of the Annual Report. [67]
However, the ANAO noted at the June public hearing that ensuring consistency
in the accounting policies and treatments adopted in the budget financial
statements with those which will be in the audited financial statements
will be an issue for a number of agencies. [68]
DIMA has also noted similar concerns in its submission: `it is also important
that in developing guidelines for the 1999-2000 annual report and financial
statements therein, departments take care to provide clear linkages to
the 1999-2000 format'. [69] The annual reporting
guidelines are coordinated by PM&C, with DOFA input on the financial
reporting requirements. Despite suggestions that DOFA be given overall
responsibility, the committee can see no particular advantage in such
a proposal and is content to maintain the status quo in terms of annual
reporting guideline responsibility. The committee will, however, monitor
closely the increased attention likely to be paid in estimates hearings
to performance information in the 1999-2000 annual reports (and in the
1998-99 annual reports for those agencies whose reporting framework permitted
it).
Conclusion
The committee recognises the value that accrual based financial statements
and appropriation tables can add to parliamentary scrutiny and agency
accountability. However, it also acknowledges that senators experienced
difficulties in interpreting the information contained in those statements
and tables in the 1999-2000 PBS. As noted above, several agencies have
themselves drawn attention to difficulties that arose with the new format,
difficulties which will undoubtedly be addressed in the accrual budgeting
forums convened by DOFA.
The committee has taken these matters into account. It believes that
the suggestions it has made in this chapter to improve the PBS format
and contents will, if acted upon, enhance parliamentary scrutiny while
remaining consistent with the established principles of accrual budgeting
and reporting.
Footnotes
[1] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 3.
[2] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 103.
[3] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 33.
[4] ibid., p. 129.
[5] ibid., p. 107.
[6] ibid., p. 26.
[7] ibid., p. 79.
[8] DOFA, 1998-99 Portfolio Budget Statement
Guidelines, p. 23.
[9] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 59.
[10] Senate Rural and Regional Affairs and
Transport Legislation Committee, Hansard, 31 May 1999, p. 4.
[11] Senate Foreign Affairs, Defence and Trade
Legislation Committee, Estimates Report June 1999, p. 3.
[12] Senate Rural, Regional Affairs and Transport
Legislation Committee, Estimates Report June 1999, p. 2.
[13] Senate Legal and Constitutional Legislation
Committee, Hansard, 31 May 1999, p. 85.
[14] Senate Environment, Communications, Information
Technology and the Arts Legislation Committee, Hansard, 7 June
1999, p. 41.
[15] Senate Legal and Constitutional Legislation
Committee, Hansard, 31 May 1999, p. 87.
[16] Senate Employment, Workplace Relations,
Small Business and Education Legislation Committee, Hansard, 7
June 1999, pp. 5-11.
[17] ibid., p. 12.
[18] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, pp. 12-13.
[19] ibid., p. 133.
[20] Senate Employment, Workplace Relations,
Small Business and Education Legislation Committee, Hansard, 7
June 1999, p. 63.
[21] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, p. 140.
[22] Senate Foreign Affairs, Defence and Trade
Legislation Committee, Hansard, 7 June 1999, p. 5.
[23] ibid., p. 6.
[24] ibid., p. 5.
[25] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 33.
[26] ibid., p. 114.
[27] ibid., p. 27.
[28] ibid., p. 134.
[29] Senate Rural and Regional Affairs and
Transport Legislation Committee, Hansard, 31 May 1999, p. 73.
[30] See, for example, Senate Finance and Public
Administration Legislation Committee, Hansard, 2 June 1999, p.
244; Senate Rural and Regional Affairs and Transport, Hansard, 2
June 1999, p. 329.
[31] Auditor-General, Asset Management,
Report no. 29, 1995-96, and Report no. 41, 1997-98; ANAO, Asset
Management Handbook, 1996.
[32] JCPAA, Asset Management by Commonwealth
Agencies, July 1998.
[33] ibid., p. 1.
[34] Senate Legal and Constitutional Legislation
Committee, Hansard, 31 May 1999, p. 9.
[35] Senate Finance and Public Administration
Legislation Committee, Budget 1999-2000, Additional Information Received,
vol. 2,August 1999, p. 414.
[36] See, for example, Joint Committee of Public
Accounts, Asset Management by Commonwealth Agencies, 1998, pp.
36-37.
[37] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, p. 134.
[38] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, p. 135.
[39] Senate Foreign Affairs, Defence and Trade
Legislation Committee, Hansard, 9 June 1999, p. 290.
[40] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 54.
[41] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, pp. 133-4.
[42] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 32.
[43] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 56.
[44] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, p. 134.
[45] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 40.
[46] Senate Finance and Public Administration
Legislation Committee, Hansard, 1 June 1999, p. 136.
[47] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 63.
[48] ibid., p. 64.
[49] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 57.
[50] ibid., p. 62.
[51] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 32.
[52] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 111.
[53] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 57.
[54] Senate Foreign Affairs, Defence and Trade
Legislation Committee, Hansard,7 June 1999, p. 64.
[55] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 33.
[56] ibid., p. 107.
[57] ibid., p. 108.
[58] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 63.
[59] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 40.
[60] Information and Research Services, Department
of the Parliamentary Library, Budget Features 1999-2000, 1999,
p. 153.
[61] DFAT, in Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 78.
[62] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 114.
[63] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 10.
[64] Senate Rural and Regional Affairs and
Transport Legislation Committee, Hansard, 31 May 1999, pp. 15-16.
[65] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 56.
[66] ibid., p. 78.
[67] ibid., p. 114.
[68] Senate Finance and Public Administration
Legislation Committee, Hansard, 17 June 1999, p. 59.
[69] Senate Finance and Public Administration
Legislation Committee, PBS Submissions, p. 56.
Top
|