Notes to the financial statements

Note 1: Statement of significant accounting policies

1.1  Purpose

The purpose of this note is to disclose the significant accounting policies applied in the financial report of the Australian Government (whole of government) and the general government sector (GGS). Except as otherwise noted, the accounting policies detailed in this note are applicable at both the whole of government level and for the GGS.

1.2  Statement of compliance

The Australian Government Consolidated Financial Statements (CFS) are required by section55 of the Financial Management and Accountability Act 1997 (FMA Act), and the regulations of that Act. As of 1 July 2014, the Public Governance, Performance and Accountability Act 2013 (PGPA Act) has replaced the FMA Act and the Commonwealth Authorities and Companies Act 1997 (CAC Act). Section 48 of the PGPA Act continues to require the annual preparation of the CFS. The implementation of the PGPA Act is not expected to have a material change in the content or reporting of the CFS.

The CFS is a general purpose financial report that has been prepared for the whole of government and the GGS in accordance with Australian Accounting Standards (AASs), including AASB 1049 Whole of Government and General Government Sector Financial Reporting (AASB 1049).

AASB 1049 stipulates that the GGS financial statements are not to be made available prior to the whole of government financial statements being made available. The GGS financial statements have therefore been included in the CFS and can be found in the Sector statements and the Notes to the financial statements.

Under the Charter of Budget Honesty Act 1998, the Australian Government is also required to publicly release and table a Final Budget Outcome (FBO) report. The 201314 Final Budget Outcome (FBO) for the Australian Government showed GGS budget aggregates for 201314 together with an analysis of the outcome against the revised budget prepared as part of the 201415 Budget update. The FBO was released by the Treasurer on 25September 2014. The FBO is unaudited but is derived from materially auditcleared financial statements. Under the Charter of Budget Honesty Act1998, the FBO must be based on external reporting standards; including AASs and the concepts and classifications set out in Government Finance Statistics (GFS), with any departures from those standards to be documented. These departures are detailed in Part 2, Note 2 of the 201314 FBO.

1.3  Basis of accounting

The financial report for the whole of government and the GGS has been prepared in accordance with the reporting requirements of AASB 1049, which requires compliance with applicable AASs. The purpose of this financial report is to provide users with information about the stewardship by the Australian Government and accountability for the resources entrusted to it; information about the financial position, performance and cash flows of the Australian Government; and information that facilitates assessment of the macroeconomic impact of the Australian Government.

AASB 1049 requires preparation of a whole of government financial report and a GGS financial report. The standard requires compliance with other applicable accounting standards, except as specified, and mandates disclosure of certain key fiscal aggregates.

There are three main general purpose statements that must be prepared in accordance with AASB 1049. These are:

•  an operating statement, including other economic flows, which shows net operating balance and net lending/borrowing (fiscal balance);

•  a balance sheet, which shows net worth; and

•  a cash flow statement, which shows the calculation of the cash surplus/(deficit) and includes GFS cash surplus/(deficit).

In addition to these general purpose statements, notes to the financial statements are required. These notes include a summary of accounting policies, disaggregated information and other disclosures required by the accounting standards.

The principles and rules in the Australian Bureau of Statistics (ABS) Australian System of Government Finance Statistics: Concepts, Sources and Methods2005 — ABS Catalogue No.5514.0 (ABS GFS manual) have been applied in the production of this financial report, except in instances in which the application would conflict with AASs.

The 201314 financial report for the whole of government and the GGS has been prepared on the basis of the ABS GFS manual effective as at 1 July 2012 with one exception as provided for in AASB 1049:

•  On 13 July 2010, the treatment of defence weapons platforms (DWPs) was amended in the ABS GFS manual. The ABS treatment of DWPs changed to treat DWPs as capital formation (assets). Previously DWPs were fully expensed in the period they were acquired. Under the ABS GFS manual, all assets are recognised at market value. In the financial report for the whole of government and the GGS, DWPs are classified as specialist military equipment and are recorded at cost. In accordance with AASB 1049, paragraph13C, the Australian Government has elected not to apply this amendment in the Consolidated Financial Statements for reporting periods ending before 30June2015. The impact of the change in the ABS GFS manual is currently being investigated.

Since the ABS GFS manual version as at 1 July 2012, there has been one amendment to the ABS GFS Manual:

•  20 November 2012 — This update to the amendments relates to the introduction and treatment of the various Commonwealth schemes that have been established by the Australian Government to reduce greenhouse gas (GHG) emissions, and it aligns the ABS GFS Manual with the ABS approach to emissions reduction schemes. As detailed below, the treatment of emission reduction schemes in the Consolidated Financial Statements, in particular the carbon pricing mechanism, is currently prepared in accordance with a preliminary interpretation based on the AASB issued staff paper.

Where the key fiscal aggregates presented on the face of the financial statements are materially different to that measured in accordance with the applied ABS GFS manual, a reconciliation between the two measures has been provided (refer Note 42).

The financial report has been prepared on an accrual basis and is presented in Australian dollars. No accounting assumptions or estimates have been identified that have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.

AASB 1049 also requires functional information to be disclosed by expenses and assets according to the Government Purpose Classification (GPC). The GPC is based on the ABS classifications used as part of the GFS reporting framework. The disclosures are as follows:

•  expenses, excluding losses and revaluations, that are reliably attributable to each function (refer Note 11); and

•  the carrying amount of assets recognised in the balance sheet that are reliably attributable to each function (refer Note 25).

With the exception of advances paid to the International Development Association (IDA) and the Asian Development Fund (ADF) and free carbon units issued under the carbon pricing mechanism, the key fiscal aggregates reported in the CFS GGS financial statements materially align to the GGS financial statements included in the FBO. As detailed in Part 2, Note 2 of the 201314 FBO, AASB 1049 requires the advances paid to the IDA and ADF to be recognised at fair value. Under the ABS GFS manual, these advances are recorded at nominal value. The ABS GFS treatment is adopted in the FBO while the AAS treatment is adopted in the CFS.

The price of carbon units was set under the Clean Energy Act 2011. A preliminary interpretation based on the AASB issued staff paper recognises transactions under the carbon pricing mechanism in the financial statements where they are expected to result in a receipt or payment of cash by the government at the amount of the expected cash settlement. The issuance and surrender of free carbon units and Australian Carbon Credit Units (ACCUs) used in the settlement of emissions liabilities do not qualify for recognition by the government as assets, liabilities, revenues or expenses. The Consolidated Financial Statements apply the AAS treatment. The carbon pricing mechanism legislation was repealed by Parliament on 17 July 2014, effective at 1July2014.

The 201314 FBO adopts the ABS GFS treatment as used in the 201314 Budget. Under ABS GFS, the issuance of free carbon units that are expected to be used to settle an emitter’s obligation are treated as an expense on issue and revenue when emissions occur. This had the effect of increasing both the revenue and expense with no impact on the net operating balance or fiscal balance.

1.4  New Australian Accounting Standards

Adoption of New Australian Accounting Standard Requirements

During 201314, the Australian Government adopted all applicable Australian Accounting Standards that became effective during 201314.

•  AASB 13 Fair Value Measurement streamlines the guidance for measuring assets and liabilities at fair value considering a market participant perspective. This requires assessment of an asset’s fair value based on highest and best use. Moreover, the Fair Value Hierarchy is extended to all assets and liabilities under the amendment to this standard. See Note 17 for Fair Value disclosures for the Australian Government.

•  AASB 119 Employee Benefits has been updated with accounting and disclosure requirements for employee benefits. Under the revised standard, actuarial gains and losses on defined benefit superannuation obligations are now fully recognised on the balance sheet, and included in other comprehensive income, in the reporting period in which they occur. Current service and net interest costs are now recognised in net profit. Net interest is now calculated by applying the discount rate to the net defined benefit liability; previously the return on the assets of a superannuation scheme was incorporated in this calculation. There is also clarification on the matter of short term employee benefits, which now requires annual leave liabilities not settled within a 12 month period to be classified as a long term benefit and measured on a discounted basis.

These amendments result in an increase in superannuation liability of $292 million ($614 million at 1 July 2012) and a cumulative reduction in reserves of $142 million being retrospectively recognised at 30 June 2013, with corresponding adjustments to the comparative figures for the reported total comprehensive income. The impact of these amendments on 201213 is included as part of the adjustments shown in Note 1.5.

No accounting standard has been adopted earlier than the application date as stated in the standard.

Future Australian Accounting Standards Requirements

The AASB has issued a number of new standards, amendments to standards and interpretations that are effective for future reporting periods:

•  The IASB has been progressively replacing the current standard for the measurement and recognition of financial instruments (IAS 39 Financial Instruments: Recognition and Measurement (in Australia AASB 139)) with a new standard IFRS 9 Financial Instruments (in Australia AASB 9). AASB 9 currently contains the requirements for the recognition and measurement of financial assets and liabilities and their derecognition and general hedge accounting. The requirements for amortised cost and impairment, and macro hedge accounting are expected to be incorporated into the standard at a later stage. The amendments will likely have an impact on the recognition and measurement of financial instruments. The final outcome will be considered once the project is complete. The new standard is effective from 1 July 2017;

•  AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB12 Disclosure of Interests in Other Entities and AASB 128 Investments in Associates and Joint Ventures (operative for 201415);

•  Under AASB10, the criteria to assess ‘control’ has changed. Under the new Standard, three criteria are required to assess whether control exists, being: the entity’s power over an investee; the entity’s exposure, or rights to variable returns from an investee; and the ability to affect those returns through power over an investee. AASB 11 replaces those requirements in AASB 131 Interests in Joint Ventures and requires entities that have an interest in arrangements that are jointly controlled to assess whether the arrangement is a joint operation or joint venture. Joint operations will be accounted for in accordance with AASB 11 while joint ventures will be accounted for in accordance with AASB 128 Investments in Associates and Joint Ventures. AASB12 requires disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, interests in other entities and the effects of those interests on the financial statements. The revised AASB 128 sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures. Other than disclosure, the above changes are not expected to materially impact the Consolidated Financial Statements;

•  AASB 1031 Materiality is planned to be withdrawn by the Australian Accounting Standards Board in 201415. As a result of the change, guidance on quantitative assessment of materiality will likely be removed. Judgement calls will be required on a casebycase basis as the quantitative rule will no longer be available;

•  AASB 1049 Whole of Government and General Sector Financial Reporting will require Defence Weapons Platforms (DWPs) to be measured at fair value from 201415, if fair value can be reliably measured. The cost basis of measurement is currently used for the valuation of DWPs. The question of reliable measurement of DWPs is yet to be settled, consequently the impact of this accounting standard change on the Consolidated Financial Statements cannot be quantified;

•  AASB 1055 Budgetary Reporting requires reporting of budgetary information and explanation of significant variance between actual and budgeted amounts by notforprofit entities within the General Government Sector. This Standard relocates the budgetary requirements currently in AASB 1049 Whole of Government and General Government Sector Financial Reporting into AASB 1055 to make it the complete reference on this topic. The new Standard applies to reporting periods beginning on or after 1 July 2014. AASB 1055 does not apply to the Consolidated Financial Statements but will see similar disclosures reported in entity financial statements to that already reported in Note 44.

Other than the above, current pronouncements related to future reporting periods are not expected to materially impact on future reporting periods or will not apply to the operations of the Australian Government.

1.5  Prior year adjustments and changes in accounting policy