Appendix D: Accounting principles followed in the Budget Papers The Public Finance and Audit Act 1983 requires Budget Papers to include three primary financial statements for the general government sector, prepared and presented in accordance with Australian accounting standards: operating statement statement of financial position (referred to as the balance sheet in the Budget Papers) cash flow statement. Budget Paper No. 2 Budget Statement presents the general government sector in aggregate while Budget Paper No. 3 Budget Estimates presents the budgets for individual agencies within the general government sector. Budget Paper No. 2 is presented in accordance with accounting standard AASB 1049 Whole of Government and General Government Sector Financial Reporting. AASB 1049 follows Government Finance Statistics (GFS) principles where these do not conflict with Generally Accepted Accounting Principles (GAAP). However, agency budgets in Budget Paper No. 3 are presented purely on a GAAP basis. The GFS-GAAP and pure GAAP presentations give the same operating result. However, GFSGAAP harmonised presentation for the general government sector dissects income and expenses into transactions and other economic flows. The net result of income and expense transactions is the net operating balance or Budget result reported in Chapter 3 of Budget Paper No. 2. Presentational differences between the statements for the general government sector shown in Budget Paper No. 2 and individual agency budgets in Budget Paper No. 3 are explained below. General government sector Budget (Budget Paper No. 2) Budget scope The general government sector incorporates the activities of agencies as defined by the GFS framework. Appendix E explains this framework, and also lists NSW Government agencies and classifies them as general government sector, public trading enterprise (PTE) sector or public financial enterprise (PFE) sector. The general government sector also includes: explicit grant payments to the PTE sector for the delivery of non-commercial programs with social objectives, as required by the Government dividends, tax equivalents and guarantee fees receivable from the PTEs and PFEs, which are shown as revenues on the operating statement Budget Statement 2012-13 D-1 equity in the PTE and PFE sector entities, which is classified as an investment on the balance sheet. The financial transactions of PFE and PTE sector agencies are not consolidated on a line-by-line basis in the budget aggregates. However, the value of net PTE and PFE sector assets is reflected in the general government sector’s equity investment. AASB 1049 principles The general government sector budget is presented on a GFS-GAAP harmonised basis using the following general principles drawn from AASB 1049: General government sector (and whole-of-government) financial statements are prepared in accordance with the recognition, measurement and disclosure requirements of GAAP. Where options exist in GAAP, the option that is consistent with GFS must be chosen, to minimise convergence differences. Where there is any conflict between GAAP and GFS, GAAP prevails. The statement of comprehensive income (referred to as the operating statement in the Budget Papers) dissects income and expenses into transactions and other economic flows, as defined by the ABS GFS Manual. The net result of income and expense transactions gives the net operating balance, which is also the Budget result for the general government sector, as reported in Chapter 3 of Budget Paper No. 2. Other economic flows are excluded from the net operating balance (Budget result) as they represent changes in the volume or value of assets or liabilities that do not arise from transactions with other entities, and they are often outside the control of government. Differences between reporting frameworks There are some differences between AASB 1049 GFS-GAAP harmonised aggregates shown in the Budget Papers and pure GFS information reported by the Australian Bureau of Statistics. These convergence differences are not departures from accounting standards, but merely variations in measurement or treatments between the two frameworks. Details of the main convergence differences between GFS and GAAP are explained in Chapter 9 of Budget Paper No. 2. Accounting Standards issued but not effective AASB 119 Employee Benefits was revised in September 2011, and will come into effect for 2013-14. The new standard will modify how the operating statement presents defined benefit superannuation expenses. Under the existing standard, a net interest expense is calculated after deducting the expected return on superannuation assets. Under the new standard, expected investment returns must be calculated using the same discount rate used to value liabilities (ie a long term Commonwealth Government bond rate). This is likely to result in higher reported superannuation net interest D-2 Budget Statement 2012-13 costs and lower financial distributions from PTEs to the general government sector. Both these factors will worsen the budget result. However, the worsening in the net operating balance or budget result will be offset by corresponding increases in actuarial gains, which will be reflected in other comprehensive income. The introduction of the new standard will therefore not impact on the comprehensive result. As the new standard is not in effect for the 2012-13 Budget year, it has not been applied in the 2012-13 Budget. The following table summarises the estimated impact of the new standard on future general government sector operating statements. Table D.1: Financial Impact of changes to AASB 119 Employee Benefits $ million Budget Result Year Surplus/ (Deficit) as Published in 2012-13 Budget Papers Estimated increase in interest expense (a) Other Comprehensive Income Estimated reduction in revenue from financial distributions (a) Surplus/ (Deficit) post adoption of revised AASB 119 OCI as published in 2012-13 Budget Papers Estimated increase in other comprehen sive income Comprehensive Result OCI post adoption of revised AASB 119 As published in 2012-13 Budget Papers, and post adoption of revised AASB 119 (ie no change) 2008-09 (862) ... ... (862) (9,867) ... (9,867) (10,729) 2009-10 988 ... ... 988 9,757 ... 9,757 10,745 2010-11 1,340 ... ... 1,340 9,055 ... 9,055 10,395 2011-12 est. (337) ... ... (337) (16,033) ... (16,033) (16,370) 2012-13 (824) ... ... (824) 11,206 ... 11,206 10,382 2013-14 289 946 52 (709) 10,248 998 11,246 10,537 2014-15 562 738 42 (218) 6,262 780 7,042 6,824 1,172 659 40 473 4,772 699 5,471 5,944 2015-16 (a) Assumes long term commonwealth bond rate of 4.8 per cent (2013-14), 5.6 per cent (2014-15), and 5.8 per cent (2015-16). Comparative information Accounting standards require comparative information to be restated for changes in accounting policies and corrections. Where practicable, any new accounting policy is applied retrospectively from the earliest prior period presented, as if the new accounting policy had always been applied. However, it is normally only practicable to adjust the immediate prior period. Agency budgets (Budget Paper No. 3) Individual agency budgets are not presented on a GFS-GAAP harmonised basis. Therefore, they do not distinguish between transactions and other economic flows and do not disclose a net operating balance. Consequently, an agency’s budgeted operating result includes the following income and Budget Statement 2012-13 D-3 expense items that are excluded from the Budget result (due to their classification as other economic flows): leave expenses associated with changes to liability discount rates gains or losses on the sale of assets gains or losses associated with debt management activities. Agency budgets in Budget Paper No. 3 Budget Estimates focus on operations, rather than complying with all the presentation requirements of accounting standards. D-4 Budget Statement 2012-13