5. 5.
Elements of Financial Reporting Elements of Financial Reporting ....................................................................................... 2
5.1 Types of Elements ...................................................................................................... 2 5.1.1 Assets ................................................................................................................... 2 Current Assets.......................................................................................................... 2 Non-Current Assets.................................................................................................. 2 5.1.2 Liabilities ............................................................................................................. 3 Current Liabilities .................................................................................................... 3 Non-Current Liabilities............................................................................................ 3 5.1.3 Equity................................................................................................................... 3 5.1.4 Revenues .............................................................................................................. 4 5.1.5 Expenses .............................................................................................................. 4 5.2 Relationship Between the Elements and Financial Statements ............................. 5 5.2.1 Statement of Financial Position ........................................................................... 5 5.2.2 The Statement of Financial Performance............................................................. 6 5.3
Principle of Recognition ............................................................................................ 7
5.4
Recognition Criteria .................................................................................................. 8
5.5
Departmental and Territorial (Administered) Items ............................................. 9 Departmental Items............................................................................................ 11 Territorial (Administered) Items........................................................................ 11 5.5.1 Departmental and Territorial (Administered) Revenues.................................... 11 5.5.2 Departmental and Territorial (Administered) Expenses .................................... 12 5.5.3 Departmental and Territorial (Administered) Assets......................................... 13 Infrastructure assets ........................................................................................... 13 5.5.4 Departmental and Territorial (Administered) Liabilities................................... 14 Policy ..................................................................................................................... 14 Disclosure .............................................................................................................. 14
5.
Elements of Financial Reporting
5.1
Types of Elements
The elements of annual accrual based financial reports are: !
assets;
!
liabilities;
!
equity;
!
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 Territorial (Administered) items for reporting purposes (Refer Section 5.4). 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.
5.1.1
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.
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 noncurrent liabilities. Liabilities are then further classified according to their type, eg creditors, borrowings or provisions.
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 not taken.
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. A more detailed explanation 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;
!
contributions such as grants or gifts to the entity, including resources received free of charge;
!
user charges;
!
interest; and
!
other revenue, eg from sales of inventory or other assets.
Revenues that a department might collect on behalf of the Territory include rates, taxes, fees, fines and Commonwealth Government grants. 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 provides a more detailed explanation 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 and services expenses. Chapter 10 provides a more detailed explanation of expenses.
5.2 5.2.1
Relationship Between the Elements and Financial Statements 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:
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 FINANCIAL PERFORMANCE
STATEMENT OF FINANCIALPOSITION
OPERATING RESULT PLUS CAPITAL INJECTIONS / DISTRIBUTIONS,
CHANGE IN
CHANGES IN THE ASSET REVALUATION RESERVE, NET
results in a
EQUITY
EFFECT OF ADOPTION OF NEW ACCOUNTING STANDARD, AND DIVIDENDS PAID OR PROVIDED FOR.
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 Performance 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. 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.
REVENUE
EXPENSES
= OPERATING DEFICIT FROM ORDINARY ACTIVITES
INCOME TAX EXPENSE/(REVENUE)
= OPERATING DEFICIT FROM ORDINARY ACTIVITIES AFTER INCOME TAX
OPERATING DEFICIT FROM EXTRAORDINARY ITEMS AFTER INCOME TAX
= OPERATING DEFICIT
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. “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.
5.4
Recognition Criteria
An asset shall be recognised when and only when: !
it is probable that future economic benefits embodied in the asset will eventuate; and
!
the asset possesses a cost or other value that can be measured reliably.
A liability shall be recognised when and only when: !
it is probable that the future sacrifice of service potential or future economic benefits will be required; and ! 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 when and only when: !
it is probable that the inflow or other enhancement, or saving in outflows, of future economic benefits, has occurred; and ! 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 when and only when: !
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 ! 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. Territorial (Administered) assets, liabilities, revenues and expenses of a department are disclosed separately as “Territorial (Administered) items” (Refer Section 5.4). In relation to the recognition criteria outlined above “probable” is taken to mean more likely than less likely. 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 the Model Financial Statements.
5.5
Departmental and Territorial (Administered) Items
Items of Departments will consist of two types: ! !
Departmental; and Territorial (Administered).
These items are to be accounted for and reported separately (refer to the Model Financial Statements). The Manual requires the financial statements to be split between Departmental and Territorial (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. The split between Departmental and Territorial items enables the full costs of outputs or other service delivery to be isolated, thereby avoiding the distortion caused by including costs which do 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. 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 Territorial 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. 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 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. The following guidance is aimed at achieving an appropriate split between Departmental and Territorial accounts.
Departmental Items Departmental items are those items over which the department has discretion, responsibility and authority. For example, it would be considered that the department controls the item 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.
Territorial (Administered) Items Territorial (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 Territorial (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 Territorial (Administered) where decisions relating to their use are primarily made by government. Examples of Territorial (Administered) items include rates and taxes.
5.5.1
Departmental and Territorial (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. Territorial (Administered) revenues are those revenues which a department collects as an agent of government. Examples of Territorial (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 Territorial (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.
5.5.2
Departmental and Territorial (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 Territorial (Administered) items. There will be many cases where departmental expenses directly relate to the collection of Territorial (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 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). Territorial (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 Territorial (Administered) as the department has no control over the amounts to be expended.
5.5.3
Departmental and Territorial (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 departments’ 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 Territorial (Administered) item. These Territorial (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.
Infrastructure assets The fact that 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. Infrastructure assets may only be classified as Territorial if specific approval is obtained from Treasury.
5.5.4
Departmental and Territorial (Administered) Liabilities
Departmental liabilities would include amounts owed but unpaid (eg trade creditors) at the end of an accounting period. Territorial (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 the concepts of Departmental (controlled) versus Territorial (Administered) classifications as specified above. Infrastructure assets, for instance, are for all practical purposes “controlled” and must be reported in the departmental financial statements. 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 that 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 Territorial (Administered) items are contained in the Model Financial Statements.
