Guidelines for Financial Statements of Australian Government Undertakings

Prepared by the Australian Audit Office.

On 16 May 1983 the Australian Minister for Finance issued a document titled: Guidelines for the Form and Standard of Financial Statements of Commonwealth Undertakings. These Guidelines provide common objectives for financial statements of Australian Government undertakings and identify accounting practices to be followed in their preparation.

Although a number of Australian Government undertakings were already producing financial statements equal in standard to the best standards of the private sector, there was a need to achieve greater uniformity in the observance of the principles of disclosure and accountability which pertain to public sector bodies created by the legislature. The purpose of the Guidelines was to clarify these special requirements and to impose uniformity of approach among the many undertakings concerned.

Over-riding concerns of the Minister for Finance in issuing these Guidelines were that the financial statements of Australian Government undertakings should present a true and fair view of the situation or events they purport to describe and that they should meet the information needs of Parliament and other users. To achieve this end the Guidelines require, principally:

conformity with specified disclosure requirements;
use of full accrual accounting except where the information conveyed to readers would not be materially different if it was prepared on a cash basis;
preparation of financial statements in a form specified by the Minister for Finance;
observance of specific accounting standards; and
certificates by responsible officers stating whether, in their opinion, the financial statements are fairly presented.

Developing the Guidelines

The enabling legislation of many Australian Government undertakings requires them to keep proper accounts in accordance with accounting principles generally applied in commercial practice. In the late 1970s the Australian Audit Office (AAO) has initiated a policy of encouraging Australian Government undertakings to prepare their financial statement to Australian accounting standards issued jointly by the Institute of Chartered Accountants in Australia and the Australian Society of Accountants. The AAO also advised those bodies who are required to keep accounts in accordance with commercial practice that 'commercial practice' would be interpreted to mean the principles basic to the requirements of existing Australian companies legislation.

The AAO also identified examples where inconsistencies existed between the statutory requirements of these undertakings and the forms of financial statements which they had adopted. Since the Minister for Finance is responsible for approving the formats of financial statements of these undertakings, these inconsistencies and related problems were discussed with the Department of Finance.

A joint working party of officers from the Department of Finance and the AAO was subsequently established to develop a viable set of practical guidelines for the form and content of financial statements of Australian Government undertakings. The working party carried out its task by:

identifying the information needs of users of such financial statements;
formulating a set of basic objectives for such statements;
developing general disclosure requirements applicable to all bodies;
categorising relevant reporting bodies into appropriate groups; and
identifying specific professional accounting standards and other authoritative pronouncements which could be associated with each group.

The working party did not extend its examination to novel or controversial issues in contemporary accounting such as current cost accounting or the value added statement. Instead it concentrated on specifying requirements which would permit statements to be prepared to the level of disclosure and accountability expected of public sector bodies and to the highest conventional standards.

The working party's report and draft guidelines were circulated among Parliamentary committees, central government departments and undertakings, academics and the professional accounting bodies. Following consideration of the views expressed by the Parliamentary committees and other respondents, the draft guidelines received the Auditor-General's support and were approved by the Minister for Finance.

The Guidelines

The value of the Guidelines rests in their design and purpose in adapting appropriate private sector accounting standards to a public sector environment, and in providing a catalyst for improving the quality and uniformity of reporting of Australian Government undertakings. However, the Guidelines do not specify a detailed accounting framework, instead they are designed to provide a framework for developing a reporting standard which will satisfy the information needs of Parliament and other users.

The key features of the Guidelines are briefly outlined in the following paragraphs.

Basic objectives for financial statements

The purposes to be met by financial statements and the priorities to be observed must be known when designing financial statements and the accounting systems which service them. Specific objectives for financial statements of government undertakings have been founded on broad precepts regarding the value and role of financial reports. Briefly, these precepts are:

the primary function of an accounting system is to accumulate and communicate financial information;
accounting systems supply information to managers for decision making and to other users for appraisal and accountability purposes; and
the value of financial information is directly related to the timeliness of its publication.

Thus, the principle objective outlined in the Guidelines is that the statements should provide essential financial information which is useful or relevant to the needs of users. In providing this information the statements should permit the reader to establish as a matter of fact the:

revenue earnings and costs of operations of an undertaking over the reporting period and preceding period;
net resources currently devoted to its activities;
solvency of the undertaking; and
change in the level of net resources since the previous reporting date and the manner in which that change came about.

Categories of undertakings

The Guidelines list Australian Government undertakings in two broad categories:

companies and undertakings required by enabling legislation or determination to keep accounts in accordance with commercial practice (business undertakings); and
other bodies (non-business undertakings).

The first category consists of those undertakings whose financial resources are obtained principally from the sale of goods and services. The initial acquisition of fixed assets may have been financed by debt or equity capital provided by the government-but this is seen as an advance to be recovered by subsequent productive use of assets. The second category comprises those undertakings whose financial resources are allocated from the government's annual budget.

Quality requirement

All financial statements of government undertakings must provide a true and fair view of the situation or events they purport to describe. Part of this requirement is the need for the financial statements to be both factual and relevant.

Thus, the Guidelines require financial statements to be historical records which show the financial positions of undertakings at a point in time and the manner in which this has changed since previously reported upon. They also require conformity with the "Relevance" criteria set out in Australian Accounting Standard AAS6 which requires that financial statements are:

Material - being concerned with information which is sufficiently significant to affect economic evaluations or decisions (criteria are defined in AAS5);
Consistent - so that accounting policies followed are consistent from one period to another;
Prudent - recognising the uncertainties surrounding measurements involved in the accounting process; and
Concerned with Substance Over Form-representing financial reality.

General disclosure requirement

The Guidelines require all financial statements to be prepared on an accrual basis except where the information conveyed to readers would not be materially different if it was prepared on cash basis. However, preparing financial statements on an accrual basis for undertakings financed principally from the budget could be potentially misleading regarding the cost of operations and the government's capital investment. This would largely result from reporting expenses which would not be funded, for example, provisions for depreciation and long service leave and other expenses incurred but unpaid.

To discard accrual accounting altogether for the budget-financed undertakings would involve abandoning the basic objectives of reporting for all government undertakings. Thus, to avoid reporting potentially misleading information by these bodies the Guidelines provide for their financial statements to have a distinctive title and format. This involves renaming the 'Income and Expenditure Statement' as a 'Statement of Activity', and rearranging the format of that statement so that major 'non-cash' expenses are separated from those for which funds have been provided. Other specific financial statements to be provided by non-business undertakings include a Statement of Assets and Liabilities and a Statement of Sources and Application of Funds.

For business undertakings required to keep accounts in accordance with commercial practice the Guidelines require the statements to include a Balance Sheet, a Profit and Loss Statement and a Statement of Source and Application of Funds

Other requirements regarding general disclosure in financial statements are based closeiy on Australian companies legislation. These requirements include

rounding of amounts to nearest $ 1, and for large undertakings to the nearest $ 1,000;
disclosure of comparative figures for the preceding period; and
disclosure of specified items of revenues, expenses, transfers to or from reserves, assets, liabilities, capital expenditure contracted for, lease and hire expenditure contracted for, and contingent liabilities.

The extent of information to be disclosed exceeds that required of companies by the companies legislation.

Valuing assets

The requirements relating to valuing assets closely follow the provisions of the companies legislation. These include:

identifying and writing off all known bad debts;
writing down other current assets which are unlikely to realise the value shown in the accounting records;
valuing non-current assets at current replacement cost if this cost is lower than their book value;
valuing investments which are quoted on any stock exchange (Australian or other) at the officially quoted market "buyer" price net of the prevailing transfer costs or commissions: and
disclosing the basis of valuing each class of non-monetary asset.

Valuing and presenting liabilities

The amounts of liabilities shown in the financial statements shall be the nominal amount of all liabilities inclusive of interest accrued but unpaid as at the end of the financial year. Also any liability or contingent liability secured by a charge on assets must be distinguished from other unsecured liabilities or contingent liabilities. Full details of charges must be disclosed.

Reserves and provisions

The term "Reserve" cannot be used to describe any amount written off or retained by way of providing for depreciation, renewal or diminution in value of assets or retained by way of providing for any known liability, or any amount set aside to counter the effect of undue fluctuations in charges for taxation.

When a "provision" is made for amortising or depreciating an asset, the gross amount of the asset, the accumulated amount of the provision and the written down amount of the asset should be disclosed.

Resources provided free of charge

Many government bodies, particularly those of a cultural or community nature, have the use of donated or other 'free' assets. 'Free' is taken to include assets subject to charges which do not reflect the substantial economic value of support received. The Guidelines require disclosure of such assets in order that the total resources used by these bodies are known to users. Disclosure requirements include:

for resources loaned free of charge, details of actual or estimated amounts of any direct expenditure undertaken for the direct benefit of the entity and the written down value of assets provided in support. This information is required in the accounts of the recipient and/or donor and can be either by way of note or supplementary statement; and
for resources gifted to an undertaking ownership should be reflected in the financial statements at an assessed realisable value.

Except where other criteria may need to apply to provide a 'true and fair view', these disclosure requirements apply where the current value of assets provided free of charge equals or exceeds 5% of the written down value of assets owned by the reporting organisation. They apply also where the amount of expenditure undertaken in direct support of an undertaking equals or exceeds 5% of the total expenses incurred by the undertaking in its own right.

Observing specific accounting standards.

The Guidelines specify accounting standards to be followed in preparing financial statements. All undertakings are required to comply with the majority of current Australian accounting standards. Non-business undertakings are not required to comply with standards that have little or no relevance to their activities.

Future accounting standards as developed by the professional accounting bodies will be examined for relevance to Government undertakings and, if considered relevant in part or as a whole, will be included in the Guidelines as requirement for observance.

International Accounting Standards and a selection of AICPA Statements of Position and Industry Audit Guides are also cited as non-mandatory guides on particular aspects of accounting techniques not covered by Australian standards.

Implementing the Guidelines

The guidelines are effective for accounting periods ending after 1 July 1983. In reviewing their usefulness a principal concern will be with the nature and extent of change necessary to implement them. These changes will in some cases involve major alterations to accounting practices ranging from conversion from cash to accrual accounting, to the introduction of depreciation charges in accounts presently prepared on a 'modified' accrual basis. On the other hand, in many cases only minor changes involving simple re-arrangements of financial statements will be required.

The introduction of the Statement of Sources and Application of Funds will affect nearly all undertakings. Where accounts are already prepared on an accrual "basis sufficient data should be available to prepare this statement with minimum additional effort. However, for those bodies not using accrual accounting, preparing this statement will become an issue secondary to the general requirement that statements be prepared on a full accrual basis.

Implementing the guidelines will be gradual and the improvement of data collection systems to meet new requirements may take a number of years.

Conclusion

These guidelines require a high standard of disclosure by government undertakings. Indeed, the standard of disclosure will generally be higher than that required by either the companies legislation or Stock Exchange regulations for private sector companies.

The Guidelines are largely based on generally accepted commercial accounting practice and draw heavily on private sector accounting standards. The intention is to further develop the Guidelines as private sector accounting standards evolve and changes take place in the financial character of Australian Government undertakings.

The Audit Office will, in its audits of the accounts of undertakings, seek compliance with the requirements of the Guidelines. Qualified reports are likely to be made in respect of undertakings which have failed to comply in any material way unless they have received an exemption from the Department of Finance.