NOTES TO THE FINANCIAL STATEMENTS
INDEX TO NOTES
Note 1: Statement of significant accounting policies ......................................................... 77
Note 2: Reconciliation of cash ............................................................................................... 97
Revenue and expenses
Note 3: Analysis of sub-functions....................................................................................... 101
Note 4: Income tax ................................................................................................................ 102
Note 5: Indirect tax ............................................................................................................... 102
Note 6: Other taxes ............................................................................................................... 103
Note 7: Charges for goods and services............................................................................. 103
Note 8: Interest and dividends ............................................................................................ 104
Note 9: Net foreign exchange gains/ (losses) ................................................................... 104
Note 10: Sale of assets .......................................................................................................... 105
Note 11: Other sources of non-taxation revenue .............................................................. 106
Note 12: Employees .............................................................................................................. 106
Note 13: Suppliers ................................................................................................................. 106
Note 14: Depreciation and amortisation ............................................................................ 107
Note 15: Net write-down and impairment of assets ........................................................ 107
Note 16: Other goods and services expenses .................................................................... 108
Note 17: Grants ..................................................................................................................... 108
Note 18: Borrowing costs ..................................................................................................... 109
Assets
Note 19: Receivables ............................................................................................................. 110
Note 20: Accrued revenue ................................................................................................... 111
Note 21: Investments — accounted for using the equity method .................................. 111
Note 22: Investments — other ............................................................................................. 111
Note 23: Land and buildings, infrastructure, plant and equipment .............................. 112
Note 24: Intangibles .............................................................................................................. 116
Note 25: Inventories ............................................................................................................. 118
Note 26: Other non-financial assets .................................................................................... 118
75
Liabilities
Note 27: Suppliers liabilities ................................................................................................ 118
Note 28: Grants payable ....................................................................................................... 119
Note 29: Other payables ....................................................................................................... 119
Note 30: Deposits .................................................................................................................. 119
Note 31: Government securities .......................................................................................... 120
Note 32: Loans ....................................................................................................................... 120
Note 33: Leases ...................................................................................................................... 121
Note 34: Other interest bearing liabilities .......................................................................... 121
Note 35: Employee provisions ............................................................................................ 122
Note 36: Other provisions .................................................................................................... 122
Equity
Note 37: Equity ...................................................................................................................... 123
Other Information
Note 38: Financial Instruments ........................................................................................... 125
Note 39: Events occurring after balance date .................................................................... 142
Note 40: Defined benefit superannuation plans ............................................................... 143
Note 41: Special Public Monies held outside the Official Public Account .................... 147
Note 42: Taxes collected on behalf of State and Territory governments ....................... 148
Note 43: Audit expenses ...................................................................................................... 149
Note 44: Employee share schemes...................................................................................... 149
Note 45: List of Commonwealth entities ........................................................................... 157
76
Note 1: Statement of significant accounting policies
1.1
The purpose of this note is to disclose the significant accounting policies applied
in the financial report of the Commonwealth Government of Australia.
Basis of accounting
1.2
The financial report of the Commonwealth Government of Australia is required
by section 55 of the Financial Management and Accountability Act 1997 and the
regulations of that Act. It is a general purpose financial report.
1.3
The report has been prepared on an accrual basis in accordance with applicable
Australian Accounting Standards, including AAS31 'Financial Reporting by
Governments', other authoritative announcements of the Australian Accounting
Standards Board, Consensus Views of the Urgent Issues Group and having
regard to Statements of Accounting Concepts.
The reporting entity
1.4
For the purposes of this financial report, the Commonwealth Government of
Australia (referred to as the Government), means the Executive (consisting
principally of the Ministers and their departments), the legislature (that is, the
Parliament) and the judiciary (that is, the courts). For the purposes of this
financial report, the Commonwealth Government reporting entity (referred to as
the reporting entity) includes Commonwealth Departments of State,
Parliamentary Departments, prescribed agencies, Commonwealth authorities,
Commonwealth companies limited by shares and Commonwealth companies
limited by guarantee in which the Commonwealth Government holds a
controlling interest.
1.5
Where control of an entity is obtained during a financial year, results are
included in the Consolidated Statement of Financial Performance and
Consolidated Statement of Cash Flows from the date on which control
commenced. Where control of an entity ceases during a financial year, results
are included for that part of the year for which control existed.
1.6
For the purposes of this financial report the control of another entity by the
Commonwealth Government is taken to exist where:

the other entity is accountable to the Commonwealth Government; and

the Commonwealth Government has a residual financial interest in the net
assets of that entity.
77
Note 1: Statement of significant accounting policies (continued)
1.7
The existence of control in the context of this consolidated financial report does
not in any way indicate that there is also control over the manner in which
statutory/professional functions are performed by an entity.
1.8
A detailed list of entities controlled by the Commonwealth Government is given
in Note 45.
1.9
Commonwealth universities have not been consolidated in this financial report,
but the value of total net assets has been recognised as an investment. Similarly,
the total value of net assets of entities, in which the Commonwealth holds a
share of the assets but does not significantly influence, have also been
recognised as an investment. Details of those entities are included in Note 45.
Sectors
1.10
The sector classification of Government entities broadly follows that defined by
the Australian Bureau of Statistics (ABS) for the purposes of the Government
Finance Statistics (GFS); this, in turn, is based on international standards issued
by the International Monetary Fund.
General government sector (GGS)
1.11
The general government sector provides public services that are mainly nonmarket in nature, and for the collective consumption of the community, or
involve the transfer or redistribution of income. These services are largely
financed through taxes and other compulsory levies, although user charging
and external funding have increased in recent years.
Public non-financial corporations (PNFC) sector
1.12
The primary function of the PNFC sector is to provide goods and services that
are mainly market, non-regulatory, and non-financial in nature, financed mainly
through sales to the consumers of these goods and services.
78
Note 1: Statement of significant accounting policies (continued)
Public financial corporations (PFC) sector
1.13
The PFC sector comprises entities that have one or more of the following
characteristics as their principal activity. They:

perform central banking functions;

accept demand, time or savings deposits; or

have the authority to incur liabilities and acquire financial assets in the
market on their own account.
Basis of consolidation
1.14
The consolidated financial report of the reporting entity includes the assets and
the liabilities of the Commonwealth Government and its controlled entities at
the end of the financial year and the revenues and expenses of the
Commonwealth Government and its controlled entities during the year.
1.15
The Consolidated Statement of Financial Performance is presented by nature.
An additional schedule has been provided which presents consolidated
revenues and expenses by function. This schedule details expenses broadly
consistent with the Classifications of the Functions of Government used by the
ABS (eg: defence, housing, and education). This additional schedule does not
represent a Statement of Financial Performance in accordance with AAS 1.
1.16
The Consolidated Statement of Financial Performance, Statement of Financial
Position, Statement of Cash Flows, Schedule of Commitments and Schedule of
Contingencies have also been disaggregated by Commonwealth sector. Sectors
and purposes have been determined by applying GFS reporting principles used
by the ABS.
1.17
In the process of reporting the Commonwealth Government of Australia as a
single economic entity, all material transactions and balances between
government controlled entities are eliminated. Where circumstances arise and
their effect is considered material, dissimilar accounting policies are amended to
ensure consistent policies are adopted in this consolidated financial report.
Foreign currency translation
1.18
Transactions are translated to Australian dollars at the rate of exchange
applicable at the date of the transaction.
1.19
Balances and investments are translated at the exchange rates applicable at
balance date.
79
Note 1: Statement of significant accounting policies (continued)
1.20
Foreign exchange holdings contracted for sale beyond 30 June (including those
under swap contracts) have been valued at contract exchange rates.
Change in accounting policy
1.21
Changes in accounting policy have been identified in this note under the
appropriate headings.
Revenue
Appropriation revenue
1.22
From 1 July 1999, the Commonwealth Budget has been prepared under an
accruals framework. Within agencies' financial reports, the full amount of the
appropriation for departmental outputs for the year (less any savings offered up
at Additional Estimates and not subsequently released) is recognised as revenue.
Appropriations for departmental capital items dependent on specified future
events requiring future performance are recognised directly into equity to the
extent they have been received into agencies’ bank accounts or are entitled to be
received by agencies at year end. Appropriations for capital items that are not
dependent on specified future events requiring future performance are
recognised directly into equity at 1 July.
1.23
As these appropriations are all internal to government, they have been
eliminated upon consolidation into this financial report.
1.24
Section 83 of the Constitution provides that no money shall be drawn from the
Treasury of the Commonwealth except under appropriations made by law. All
material agencies adhered to this requirement during 2001-02.
Taxation revenue
1.25
Taxation revenues are recognised when the Government gains control of and
can reliably measure or estimate the future economic benefits that flow from
taxes and other statutory charges. The method of taxation revenue recognition
adopted in this financial report is referred to as the tax liability method (TLM).
Under this method taxation revenue is recognised at the time when tax
payments are due and payable according to taxation law or upon ATO
assessment. More detail on the bases of recognition for each major type of
taxation revenue under this approach is provided in Table A.
80
Note 1: Statement of significant accounting policies (continued)
1.26
An alternate method of taxation revenue recognition is referred to as the
economic transactions method (ETM). Under this method, taxation revenue is
recognised according to the tax liabilities that will arise (in any period) with
respect to the transactions and balances occuring during the reporting period.
Consequently, taxation revenue includes debts raised on client accounts during
the current reporting period that relate to balance dates falling within the
current reporting period as well as an estimate of revenue accrued in relation to
balance dates falling during the current reporting period but where an
assessment, and therefore debt, will not be raised until the following reporting
period. In the application of the ETM, current year revenue is also affected by
variations between prior year estimates and the associated actual transactions
during the current year. This results in upward or downward adjustments as
required.
1.27
The TLM has been adopted in this financial report as it currently provides more
certainty in the recording of revenue and less possibility of material
misstatement, whereas ETM estimates may be subject to significant revisions.
Methods similar to the TLM are also currently being used internationally by
other governments preparing consolidated accrual financial reports.
1.28
If the ETM had instead been adopted in this financial report, the impact upon
the consolidated statement of financial position would be to recognise an
‘accrued tax revenue’ asset of $25,727 million (2001: $21,600 million) whilst the
liability line items ‘provision for tax refunds’ and ‘unearned income’ would be
increased
by
$15,078 million
and
$3,023 million
respectively
(2001: $13,375 million and $3,417 million). As such, consolidated net assets as at
30 June 2002 would be improved by $7,626 million (2001: $4,808 million) under
the ETM, including a current year increase in taxation revenue and operating
result of $2,823 million (The 2000-01 taxation revenue and operating result
would have been reduced by $9,091 million).
81
Note 1: Statement of significant accounting policies (continued)
Table A: Taxation revenue
Type of taxation revenue
Basis of revenue recognition
Income tax from individuals
Comprised of amounts withheld as PAYG from payments of
remuneration and includes income tax instalments due
during the reporting period.
It includes debits raised on client accounts for the tax in
excess of amounts withheld to be paid by taxpayers on
assessment in this reporting period that relates to returns
lodged for prior years of income.
Company tax and superannuation fund
tax
Recognised as amounts of tax payable by companies and
super funds that relate to instalments and final payments for
this and prior reporting periods.
Sales tax and withholding tax
Recognised on defined sales and other relevant activities
occurring during the reporting period.
Fringe benefits tax
Recognised on fringe benefits provided to employees during
the reporting period.
Excise duty
Recognised when certain goods are distributed for home
consumption.
Customs duty
Recognised when imported goods are distributed for home
consumption.
Superannuation contributions tax
Levied on superannuation funds based on contributions
made by employers.
1.29
Consistent with the intent of the Intergovernmental Agreement on
Commonwealth-State Financial Arrangements, Goods and Services Tax (GST) is
collected by the Commonwealth as an agent for the States and Territories, and
appropriated to the States. As such, it is not shown as Commonwealth revenue
in this financial report. For further details on the amounts of GST collected on
behalf of the States and Territories, refer Note 42.
1.30
Up until 30 June 2000, the Commonwealth also collected a number of revenue
replacement taxes as an agent for the States and Territories. While revenue
replacement taxes were abolished on 1 July 2000, the final revenue replacement
liability was collected and paid to the States in 2000-01. Reflecting the
Commonwealth's agency role in the collection of these taxes, they have not been
recognised in this financial report. For further details on the amounts of revenue
replacement taxes collected on behalf of the States and Territories, refer Note 42.
82
Note 1: Statement of significant accounting policies (continued)
1.31
Tax expenditures refer to tax concessions that are designed to provide a benefit
to a specified activity or class of taxpayer. Tax expenditures can be delivered in a
variety of ways: by a tax exemption, tax rebate, tax deduction, reduced tax rate
or by deferring a tax liability. Tax expenditures constitute revenue foregone
rather than an outgoing of the Commonwealth.
1.32
From 1 July 2001, the accounting treatment of the Family Tax Benefit and Private
Health Insurance Rebate has been revised. Under these programmes, recipients
can be compensated in one of two ways; either as a direct payment to the
recipient (or, in the case of the Private Health Insurance Rebate, the recipients
health insurance fund) or through the tax system as a rebate. The compensation
of recipients through a tax rebate is now classified as an expense, rather than as
an offset to revenue, consistent with payments made under these programmes
through other delivery mechanisms. The reclassification of these rebates to an
expense has been made as the programmes provide the same benefit to
recipients, whether through tax rebate or direct benefit, the rebate is calculated
independently of the normal procedure for determining a tax liability and the
amount of the benefit does not depend upon the amount of tax actually paid or a
taxpayer’s marginal rate of taxation. The impact of the change is to increase
2001-02 taxation revenue and personal benefit expenses by $505 million, with no
impact upon the operating result. It is not practicable to restate the 2000-01
financial results, however, the restatement of the 2000-01 balances would not
have impacted the 2000-01 operating result or closing accumulated results.
1.33
The Automotive Competitiveness and Investment Scheme (ACIS) provides
customs duty credits to Australian automotive producers that can be used to
discharge duty on imports of certain automotive products, or sold or transferred
to another party. In the 2001-02 financial report, an expense and associated
liability is recognised when import duty credits are issued to ACIS participants.
Customs duty revenue, representing revenue forgone, is recognised when
import duty credits are redeemed.
1.34
In the 2000-01 financial report, ACIS customs duty revenue, and an associated
receivable, was recognised when customs duty credits were issued on the basis
that the receipt of future economic benefits (through customs revenue) and the
consequent loss of future economic benefits (through redemption of the import
duty credits) were both probable and could be reliably measured at the date
import duty credits are issued. The change in accounting policy has been
effected due to refinements made to the scheme. The impact of the change in
accounting policy is to reduce 2001-02 customs duty revenue by $204 million,
representing the elimination of the closing ACIS receivable recognised at
30 June 2001.
83
Note 1: Statement of significant accounting policies (continued)
1.35
Subject to the above schemes, the cost of tax expenditure schemes cannot be
reliably measured until the underlying tax revenue item, to which the tax
expenditure is applied, becomes due and payable. Therefore, tax expenditures
are not separately identifiable in this financial report. The Commonwealth
Department of the Treasury issues an annual Tax Expenditures Statement
(unaudited), which provides a list of tax expenditures provided by the
Commonwealth to individuals and businesses.
Charges for goods and services
1.36
Revenue from the sale of goods is recognised upon the delivery of goods to
customers or in accordance with the sales contract.
1.37
Revenue from the rendering of a service is recognised by reference to the stage
of completion of contracts or in accordance with agreements to provide services.
The stage of completion is determined according to the proportion that costs
incurred to date bear to the estimated total costs of the transaction.
1.38
From 1 July 2000, installation and connection fee revenues recorded by Telstra
were deferred and recognised over the average estimated customer contract life.
Prior to 2000-01, these fee revenues were recognised on connection of the
service. As a result of the change in accounting policy adopted in 2000-01,
incremental costs directly related to these revenues were also deferred and
amortised over the contract life and commission revenue for printed directories
and revenue for online directories and services were deferred and recognised
once directories are published or over the life of service agreements. The impact
of this change in accounting policy on the 2000-01 results was to decrease sales
revenue by $779 million and cost of sales by $560 million and therefore reduce
2000-01 net results by $219 million.
Interest and dividends
1.39
Interest revenue is recognised on a proportional basis taking into account the
interest rates applicable to the financial assets. Dividend revenue is recognised
when the right to receive a dividend has been established.
Disposal of non-current assets
1.40
Revenue from disposal of non-current assets is recognised when control of the
asset has passed to the buyer.
84
Note 1: Statement of significant accounting policies (continued)
Expenses
Depreciation and amortisation
1.41
Depreciation of non-financial physical assets (excluding inventories) is generally
provided on a straight-line basis at rates based on the expected useful lives of
those assets. Depreciation rate details are provided in paragraph 1.66.
1.42
Amortisation is provided on intangibles, leasehold improvements and on assets
that are subject to finance leases and is calculated on a straight-line basis,
generally over the term of the relevant leases.
Grants
1.43
In this consolidated financial report, grants which fall under
Commonwealth/State funding arrangements are recognised as an expense in
the reporting period in which goods and services are delivered by the grantee to
intended beneficiaries.
1.44
Grant liabilities are recognised to the extent that the services required to be
performed by the grantee have been performed or the grant eligibility criteria
have been satisfied. A commitment is recorded when the Government has a
binding agreement to make the grants but services have not been performed or
criteria satisfied. Where grant monies are paid in advance of performance or
eligibility, prepayment is recognised.
Leases
1.45
A distinction is made between finance leases which effectively transfer from the
lessor to the lessee substantially all the risks and benefits incidental to
ownership of leased non-current assets and operating leases under which the
lessor effectively retains substantially all such risks and benefits.
1.46
Where a non-current asset is acquired by means of a finance lease, the asset is
capitalised at the present value of the minimum lease payments at the inception
of the lease and a liability recognised for the same amount. Leased assets are
amortised over the period of the lease. Lease payments are allocated between
the principle component and the interest expense.
Personal benefits
1.47
Personal benefits are divided into two categories: period-based and pay-day
based.
85
Note 1: Statement of significant accounting policies (continued)
1.48
Period-based personal benefits are paid in arrears following an entitlement
period. Period-based personal benefits owing at the end of the financial year are
included as liabilities.
1.49
Pay-day based personal benefits are not paid in relation to an entitlement
period. Recipients of pay-day based benefits qualify for payment on the date of
payment. Accordingly, no liability is recognised in relation to these benefits.
Assets
Cash
1.50
For the purpose of the Statement of Cash Flows, cash includes: cash at bank and
on hand, short term deposits at call, investments in short term money market
instruments, and which are used in the cash management function on a
day-to-day basis, net of outstanding bank overdrafts.
Gold holdings
1.51
Gold holdings (including gold on loan to other institutions) are valued at market
value at balance date.
Government securities
1.52
The Reserve Bank of Australia values its investments in Government securities
at market value at balance date, except for securities held under repurchase
agreements, which are valued at contract price. The Reserve Bank of Australia
holds foreign government securities and domestic government securities.
Commonwealth domestic government securities are eliminated from this
financial report on consolidation.
International Monetary Fund (IMF) quota
1.53
The IMF quota represents Australia’s membership subscription to the IMF. Each
member is required to pay the IMF the amount of its initial quota and
subsequent increases partly in the members own currency and the remainder in
the form of reserve assets. A member’s quota is not increased until the member
has consented to the increase. The investment is denominated in Special
Drawing Rights and is valued at the Australian dollar equivalent.
Investments — International financial institutions
1.54
The investment represents Australia’s membership in the Asian Development
Bank, the International Bank for Reconstruction and Development, the
International Finance Corporation and the European Bank for Reconstruction
and Development. The investment is recognised at historical cost.
86
Note 1: Statement of significant accounting policies (continued)
Student Supplement Loan Scheme
1.55
Loans advanced to students under the Student Supplement Loan Scheme are
recognised as an asset (receivable) and a liability.
Higher Education Contribution Scheme (HECS)
1.56
Students undertaking tertiary level studies are required to contribute towards
the cost of the courses undertaken. Students may elect to pay up-front or defer
the required payment. Where the payment is deferred, the amount of HECS
payable by students is recorded as an asset and is recovered by the Australian
Taxation Office through the PAYG income tax system when the student's
income reaches a minimum repayment threshold.
Business undertaken on the National Interest Account
1.57
Under Part 5 of the Export Finance Insurance Corporation (EFIC) Act 1991, the
Commonwealth may undertake transactions which the Minister for Trade
considers to be in the national interest. At 30 June 2002, the Commonwealth
reported National Interest receivables of $3,437 million. These receivables
comprise sovereign amounts owed to the Commonwealth relating to export
transactions on the National Interest Account. Repayment periods for these
loans vary. The National Interest receivables includes an amount of
$700.7 million due from Iraq at 30 June 2002 which the Commonwealth has not
attempted to recover to date due to UN resolution 661 of 6 August 1990.
Recoverability of National Interest loans is reviewed annually on a country by
country basis based on an assessment of the likelihood of recovery including
each country’s capacity to pay. Each country has acknowledged their debt to the
Commonwealth. In funding loans made under the National Interest provisions
of the EFIC Act, the Commonwealth, through EFIC, has incurred borrowings of
$2,492 million and derivative financial instrument payables of $213 million at
30 June 2002.
Inventory
Held for sale or resale
1.58
Inventories held for sale or resale are recorded at cost or, when no longer
required, are valued at net realisable value.
Not held for sale or resale
1.59
Inventories not held for sale or resale are valued at historic cost or weighted
average cost. Inventory is considered obsolete or obsolescent based upon current
inventory levels and expectations of contributed capability levels. Where
inventory is no longer required, it is held at net realisable value.
87
Note 1: Statement of significant accounting policies (continued)
1.60
Prior to 2001-02, defence inventory was brought to account at average cost,
replacement cost or at last purchase price as historic cost was not available in all
instances. Accordingly, the financial impact of this change in accounting policy
applied for 2001-02 is not reliably quantifiable.
Non-financial physical assets (excluding inventories)
1.61
Non-financial assets (excluding inventory) are stated at historical cost or
valuation, except as otherwise indicated. The majority of Commonwealth
entities have progressively valued these assets in accordance with the deprival
method of valuation, which then requires valuations progressively on that basis
every three years. Under the transitional provisions of AASB 1041, ‘Revaluation
of Non-Current Assets’, specialist military equipment is now measured on the
cost basis with the revalued amount of this class as at 30 June 2001 deemed to be
its cost going forward. Public access communication assets are also measured at
cost with the revalued amount of this class as at 30 June 2000 deemed to be their
cost going forward.
1.62
Details pertaining to valuations can be found in the audited financial statements
of individual Commonwealth controlled entities, which are tabled in
Parliament. During 2001-02, material revaluations occurred within the following
Commonwealth controlled entities:

Australian Sports Commission

Aboriginal and Torres Strait Islander Commission

Australian Postal Corporation

Commonwealth Scientific and Industrial Research Organisation

Department of Defence

Department of Foreign Affairs and Trade

Defence Housing Authority

Department of Communications, Information technology and the Arts

Department of Environment and Heritage

Department of Finance and Administration

Department of Transport and Regional Services

Joint House Department

National Capital Authority

Reserve Bank of Australia
88
Note 1: Statement of significant accounting policies (continued)
1.63
The majority of the valuations were performed by the Australian Valuation
Office. The valuation basis used for each class of depreciable assets are as
follows:
Land
Market value or replacement cost
Buildings
Market value or replacement cost
Specialist Military Equipment
Cost
Public access communication assets
Cost
Other Infrastructure, Plant & Equipment
Market value or replacement cost
Computer Software
Cost or replacement cost
Other Intangibles
Cost or replacement cost
1.64
Australian Accounting Standard AAS 10 ‘Recoverable Amount of Non-Current
Assets’ requires that the carrying amounts of non-current assets have been
reviewed to determine whether they are in excess of their recoverable amounts.
In assessing recoverable amounts, the relevant cash flows have been discounted
to their present value.
1.65
Certain heritage assets and internally generated software, have not been
recognised at this time, as reliable measurement of these assets is not yet
possible.
1.66
Land, being an asset with an unlimited useful life, is not depreciated. Buildings,
plant and equipment are depreciated on a straight-line basis over the useful life
of the asset, or over the lesser of the lease term and useful life for selected
leasehold improvements. Intangible assets are amortised on a straight-line basis
over its useful life. Depreciation and amortisation rates applying to each class of
depreciable assets are based on the following useful lives:
Buildings(a)
2001-02
2000-01
3-250 years
5-250 years
Specialist Military Equipment
2-54 years
2-50 years
Public access communication assets
3-55 years
3-55 years
1-500 years
2-200 years
Computer Software
1-28 years
1-28 years
Other Intangibles
3-20 years
3-12 years
Other Infrastructure, Plant & Equipment(b)
(a) This depreciation range excludes certain leasehold improvements, which have depreciation rates
of up to 50 per cent.
(b) Other infrastructure, plant and equipment includes collection assets which have been given
useful lives of up to 500 years.
89
Note 1: Statement of significant accounting policies (continued)
Liabilities
Government securities
1.67
Government securities are measured at their nominal value adjusted for the
unamortised portion of the premium or discount on issue.
Australian currency on issue
1.68
Australian currency issued represents a liability of the Reserve Bank of Australia
in favour of the holder. Currency issued for circulation including demonetised
currency is measured at face value. When the Reserve Bank issues currency
notes to the commercial banks, it receives in exchange funds equal to the full
face value of the notes issued.
Superannuation
1.69
The superannuation liability represents the present value of the reporting
entity's unfunded liability to employees for past services as estimated by the
actuaries of the respective superannuation plans. Additional information on
superannuation is included in Notes 35 and 40.
Leave and other entitlements
1.70
The liability for leave and other entitlements includes provision for annual leave
and long service leave. No provision has been made for sick leave as all sick
leave is non-vesting and the average sick leave taken by employees is less than
the annual entitlement for sick leave.
1.71
The liability for annual leave reflects the total annual leave entitlements of all
employees at 30 June 2002 and is recognised at the nominal amount.
1.72
The liability for long service leave is recognised and measured at the present
value of the estimated future cash flows to be made in respect of all employees
at 30 June 2002. In determining the present value of the liability, attrition rates
and pay increases through promotion and inflation have been taken into
account.
90
Note 1: Statement of significant accounting policies (continued)
Workers compensation — outstanding claims
1.73
This consolidated financial report includes as a provision an estimate of
outstanding claims. This estimate, which is based on an assessment by an
independent actuary, includes claims (whether reported or not) where the
related incident occurred on or before the balance date. The actuary’s
assessment has been based on current rates and costs of settlement adjusted for
inflation, imputed investment return and administration expenses and includes
the use of statistical information relating to the development of claims over a
number of years. The liability also includes a prudential margin or safety margin
to cover the uncertainties inherent in the estimates of liability. This prudential
margin has been set at 10.6 per cent of outstanding liabilities.
Provision for outstanding claims
1.74
The calculation of the provision for outstanding claims for public health is based
on estimates of the size of the Australian population and estimated drawing
rates. The calculation has regard to the historical record of payment patterns for
services rendered in each month. The calculation of the provision for
outstanding claims for private health insurance (Medibank Private) is based on
an actuarial assessment taking into account historical patterns of claim incidence
and processing. No discounting is applied to the provision due to the generally
short time period between claim incidence and settlement.
HIH Claims Support Scheme Liability
1.75
HIH Claims Support Limited (HCS) was established as a not-for-profit company
to provide assistance to policyholders suffering financial hardship as a result of
the failure of the HIH Group Companies and the appointment on 15 March 2001
of the Provisional Liquidators of the HIH Group Companies. The HCS Trust
was established in order to perform its obligations under the Commonwealth
Management Agreement dated 6 July 2001. As the Beneficiary of this Trust, the
Commonwealth is entitled to any residual balance of the Trust, after the
collection of recoveries and making of payments to claimants.
An actuarial assessment was conducted by an independent actuary as at
31 March 2002 and the results of the review indicated that the overall cost of the
scheme is estimated to be $597 million. This estimate incorporates an allowance
for future inflation and provides for the estimated costs of both the claim
handling expenses and the scheme management fees, but does not take account
for discounting of future cash flows to the valuation date. The amount of the
liability at 30 June 2002 was $496 million.
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Note 1: Statement of significant accounting policies (continued)
There is inherent uncertainty regarding the measurement of the Commonwealth
liability. One of the key results of the independent actuarial assessment was that
due to the relative immaturity of the Scheme, the result remains highly
uncertain and requires close monitoring and that as the Scheme matures, this
element of the uncertainty should reduce. In addition, at the time of the
assessment a significant portion of the major claim types were yet to be
reviewed by the claims managers or because the HIH claim file could not be
located.
The Commonwealth will therefore continue to assess the estimated liability in
future years. Further assessments will also include quantifying possible
recoveries to be made by HCS, which is acting as the Trustee on behalf of the
Commonwealth in relation to the HIH Claims Support Scheme.
United Medical Practice / Australasian Medical Insurance Ltd (UMP/AMIL)
1.76
Following the decision on 29 April 2002 by the Boards of United Medical
Protection Limited and Australasian Medical Insurance Limited (UMP/AMIL)
to seek the appointment of a provisional liquidator, the Commonwealth
committed to providing an indemnity to the provisional liquidator, the terms of
which were set out in a letter from the Minister for Health and Ageing to
Medical Practitioners, dated 1 May 2002 and in the Prime Minister’s subsequent
press release of 31 May 2002.
There are four components of the Commonwealth commitments assistance
package in relation to UMP/AMIL and other Medical Defence Organisations
(MDOs) — (components (a) to (c) only relate to UMP/AMIL).
The components are:
(a) an indemnity for claims notified before 29 April 2002 that are finalised on or
before 31 December 2002 (refer Contingencies Schedule);
(b) an indemnity for claims notified in the period 29 April 2002 to
31 December 2002 (refer Contingencies Schedule);
(c) an indemnity for claims as a result of incidents that occur between
29 April 2002 and 30 June 2002 (refer Contingencies Schedule); and
(d) the establishment of a scheme to fund currently unfunded incurred but not
reported (IBNRs) liabilities of MDOs.
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Note 1: Statement of significant accounting policies (continued)
The Commonwealth’s commitments under components (a) through to (c) are set
out in a Deed of Indemnity between the Commonwealth and UMP/AMIL and
the provisional liquidator of UMP/AMIL that was approved by the NSW
Supreme Court on 25 July 2002.
An Appropriation Bill (the Medical Indemnity Agreement (Financial Assistance 
Binding Commonwealth Obligations) Bill 2002), was introduced on 26 June 2002, to
cover payments by the Commonwealth in accordance with this Deed.
The cost of any liability of components (a) and (b) of the indemnity for the
period 1 July 2002 to 31 December 2002 will be met by a levy on medical
practitioners. It is noted that a final actuarial assessment of the liabilities under
components (a) and (b) has not been undertaken. The outcome is further
contingent on the UMP / AMIL sale process currently being conducted by the
provisional liquidator (who has received several expressions of interest).
It is expected that for component (c) of the Commonwealth’s assistance package,
there will be a net liability and the Commonwealth had commissioned an
independent actuary to determine the likely exposure. This work was still being
completed at the time of reporting.
In relation to component (d), a figure of $500.8 million has been recognised in
the accounts in respect of IBNR claims, which represent the estimated liability to
UMP/AMIL for claims that result from incidents that have occurred prior to
3 May 2002 but not yet notified to the group. This estimate is inherently
uncertain and the uncertainty is exacerbated by the instability in the number
and risk composition of incidents and claims notified in recent years, and by
uncertainty regarding the effects on claim costs of recent legislative changes and
the VMO initiative in New South Wales.
The estimates is based on the latest information available to the Commonwealth
from a report provided by the provisional liquidator of UMP/AMIL to the NSW
Supreme Court in a report dated 29 August 2002. It represents the upper figure
of a range nominated by the report for the estimated liability.
It should be noted that the estimate may cover some incidents that are not
intended to be covered by the Commonwealth’s proposed IBNR scheme. UMP
is the largest of the six MDOs currently operating in Australia and the IBNRs of
the other MDOs are expected to be immaterial (furthermore there is a lack of
recent or consistent information available on the other MDOs).
It should also be noted that the Government has announced that it will recoup
the Commonwealth’s liability by a levy on medical practitioners in those MDOs
with unfunded IBNRs.
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Note 1: Statement of significant accounting policies (continued)
Special Employee Entitlements Scheme for Ansett employees
1.77
The Special Employee Entitlement Scheme for Ansett Employees was
established by the Federal Government on 9 October 2001 under s22 of the
Air Passenger Ticket Levy (Collection) Act 2001 (the ACT) to provide a safety net
arrangement for staff of the Ansett Group of companies who were terminated
after 12 September 2001 due to their employer’s insolvency.
At 30 June 2002 the Commonwealth has recognised a liability of $313 million,
which reflects an estimate of the employee entitlement claims that remains to be
paid by the Commonwealth under the Scheme. Estimates of other expenses that
may be payable, subject to future events such as outstanding court action in
relation to the scheme have been included in the Schedule of Contingencies.
The liability has not been reduced by any potential recoveries from the
Administration of the Ansett Group that may be applied to the payments under
the Scheme. An estimate of the potential recoveries has been disclosed as a
contingent gain in the Schedule of Contingencies.
The amounts payable by the Commonwealth under the scheme are met through
a special appropriation created under the Act, which is wholly funded by a levy
on air passenger tickets.
Reserves
Asset revaluation
1.78
The asset revaluation reserve includes the net revaluation increments and
decrements arising from the revaluation of non-current assets in accordance
with AAS 1041 'Revaluation of Non-current Assets'.
Foreign currency reserve
1.79
The foreign currency translation reserve records the foreign currency differences
arising from the translation of self-sustaining foreign operations.
Investments reserve
1.80
The investments reserve records the Commonwealth's interest in the net assets
of portfolio agencies and companies, excluding Departments of State, as at
30 June 1997 (subject to subsequent changes in ownership interest). The date of
30 June 1997 represents the deemed acquisition date to facilitate consolidated
financial reporting.
Statutory funds
1.81
The statutory funds reserve comprises amounts set aside out of profits under a
specific Act or Statute.
94
Note 1: Statement of significant accounting policies (continued)
Other reserves
1.82
Other reserves include amounts set aside out of profits for purposes other than
those detailed above, including general reserves.
Financial instruments
1.83
Accounting policies in relation to financial instruments are disclosed in Note 38.
Commitments
1.84
Commitments are obligations or undertakings to make future payments to other
entities that exist at the end of the reporting period and have not been
recognised as liabilities in the Statement of Financial Position.
Contingencies
1.85
In this consolidated financial report contingencies are conditions, situations, or
circumstances that exist at the end of the reporting period, create uncertainty as
to the possible gain or loss to an entity and will be confirmed only on the
occurrence or non-occurrence of one or more uncertain future events.
Asset Sales Programme
1.86
Amounts disclosed in Note 10 include assets sold by the Commonwealth
through its asset sales programme. These assets typically comprise the sale of
Commonwealth controlled entities or significant assets of those entities.
Borrowing costs
1.87
AAS 34, 'Borrowing Costs' requires borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset to
be capitalised as part of the cost of the asset. In this regard, specific borrowing
costs of $133 million incurred in 2001-02 (2000-01: $111 million) are directly
attributable to expenditure on qualifying assets and have been capitalised as
part of the carrying amount of non-financial physical assets (excluding
inventories).
1.88
To the extent that funds have been borrowed generally by the Australian Office
of Financial Management as part of the Commonwealth’s debt management
strategy, these borrowing costs have not been applied to other general
government entities’ qualifying assets. In 2000-01, general borrowing costs of
$126 million were capitalised at a weighted average borrowing cost of
7.58 per cent.
95
Note 1: Statement of significant accounting policies (continued)
Insurance
1.89
Commonwealth entities operating in the general government sector are
members of the Commonwealth's self managed fund for insurable risks,
Comcover. This excludes workers compensation where the risk continues to be
managed by Comcare. Commonwealth entities operating outside the general
government sector that are not members of Comcover adopt their own
insurance strategies, which includes both self-insurance and commercial
insurance coverage.
Rounding
1.90
All amounts in this consolidated financial report have been rounded to the
nearest million dollars.
Current year figures and comparative figures
1.91
Comparative figures have been adjusted to conform to changes in presentation
in these financial statements where required.
Balance dates
1.92
Most entities controlled by the Commonwealth Government have 30 June
balance dates. Where entities have balance dates other than 30 June they are
incorporated into this financial report as at their latest balance date. This
approach has not materially affected the revenues and expenses to 30 June 2002
or the assets and liabilities reported as at 30 June 2002.
96