Table of Contents. 1. Purpose and Introduction

Transcription

1 Table of Contents ACT Accounting Policy Manual Page 1. Purpose and Introduction Purpose of This Manual Entities Bound by This Manual Relationship to Budget Estimates /07/01 i

2 1. Purpose and Introduction 1.1 Purpose of This Manual The Department of Treasury (Treasury) has prepared this Accounting Manual to assist officers and other interested people to understand the framework governing the ACT's accounting and reporting policies. This Manual establishes the accounting principles necessary under the Government s financial management reform model, which includes outputs based accrual budgeting and reporting, and is consistent with Australian Accounting Standard 29 (AAS 29) Financial Reporting by Government Departments. Any issues arising out of this Manual should be referred to Treasury. A major objective of the Manual is to assist people to understand the financial management obligations and the meaning and usefulness of financial management information. It represents good financial management practice that is designed to enable compliance with the ACT s financial management framework and ensure consistency and comparability of departments financial statements. Departments should comply with this Manual unless it conflicts with the Financial Management Act 1996 (the FMA). Sub-section 27(2) of the FMA requires that the financial statements must comply with generally accepted accounting practice (GAAP). Hence, it is important to note that if in any instance the Manual is in conflict with the GAAP, the latter would have primary authority. GAAP is defined in sub-section 3(1) of the FMA, and primarily includes Australian Accounting Standards (AAS) and Urgent Issues Group (UIG) pronouncements. Mandatory sections of the Manual are indicated by bold lettering, and generally reflect technical accounting treatments (that is, compliance is compulsory). Chapter 11 is mandatory in its entirety. However, if a Department is of the view that in some respect following Chapter 11 will result in noncompliance by the Department with the GAAP or the FMA this should be brought to the attention of Treasury immediately. In such circumstances the relevant requirement of Chapter 11 is not mandatory. Non-mandatory paragraphs are stated in ordinary type face and are designed to explain the context and intention of the mandatory paragraphs in non-technical language. These are to provide guidance for commonsense interpretation and application of the policies and suggestions for good management practices. 03/07/

3 If any officer believes that any policy contained within this Manual inhibits management efficiency or effectiveness for no relevant reason, the officer should discuss the matter within his or her own organisation and then, if necessary, contact Treasury. Other sources of accounting advice (eg. the ACT Auditor General or private sector firms) may not necessarily provide advice within the context of the whole-of-government framework. As inefficiencies arise from individual agencies seeking relatively costly external advice, initial notification and discussion with Treasury is considered essential. 1.2 Entities Bound by This Manual The accounting policies set out in this Manual apply to all departments,territory Authorities and Territory Owned Corporations should comply with the reporting requirements specified in the appropriate legislation. In each case, however, the Manual should be referred to as a guide to the Government s preferred accounting policy treatment. Departments are the focus of this Manual because they have, until recently, reported on a cash basis and this Manual represents a shift within government policy to an accrual basis of accounting and reporting. Commencement Date This Manual supersedes the June 1999 edition and is effective for accounting periods ending on or after 30 June Relationship to Budget Estimates Sub-section 27 (2) of the FMA requires departments to prepare their annual financial statements in a form that facilitates comparison between the financial operations of the department during the year and the estimates of those operations contained in the budget. This makes it necessary for departments to ensure that the accounting treatments required by this Manual be taken into account when framing their budget estimates. 03/07/

4 Table of Contents 2. Accounting Pronouncements/Framework Statements of Accounting Concepts Australian Accounting Standards International Harmonisation AAS 29 Financial Reporting by Government Departments Other Australian Accounting Standards AAS 1 Statement of Financial Performance (Revised standard applies to reporting periods beginning on or after 1 July 2000) AAS 2 Inventories AAS 4 Depreciation AAS 5 Materiality in Financial Statements AAS 6 Accounting Policies AAS 8 Events Occurring After Reporting Date AAS 9 Expenditure Carried Forward to Subsequent Accounting Periods AAS 10 Accounting for the Revaluation of Non-Current Assets AAS 11 Accounting for Construction Contracts AAS 15 Revenue AAS 17 Accounting for Leases AAS 21 Accounting for the Acquisition of Assets (including Business Entities) AAS 24 Consolidated Financial Reports AAS 28 Statement of Cash Flows AAS 30 Accounting for Employee Entitlements AAS 31 Financial Reporting by Governments AAS 32 Specific Disclosures by Financial Institutions AAS 33 Presentation and Disclosure of Financial Instruments i

5 AAS 34 Borrowing Costs AAS 36 Statement of Financial Position (effective for reporting periods beginning on or after 1 July AAS 37 Financial Report Presentation and Disclosure (effective for reporting periods beginning on or after 1 July AAS 12 Accounting for Research and Development Costs AAS 14 Accounting for Investments in Associates AAS 18 Accounting for Goodwill AAS 19 Accounting for Interests in Joint Ventures AAS 20A Accounting for Foreign Currency Translation AAS 25 Set-off and Extinguishment of Debt AAS 35 Self-Generating and Regenerating Assets AAS 3 Accounting for Income Tax (Tax-effect Accounting) AAS 7 Accounting for the Extractive Industries AAS 25 Financial Reporting by Superannuation Plans AAS 26 Financial Reporting of General Insurance Activities ii

6 2. Accounting Pronouncements/Framework ACT Accounting Policy Manual The financial framework for the Government presented in this Manual has been developed such that it is consistent with the Statements of Accounting Concepts (SACs) and the Australian Accounting Standards (AASs) The SACs and AASs have been prepared by the Australian Accounting Standards Board (AASB) and they are issued by AASB on behalf of the Australian Society of Certified Practising Accountants (ASCPA) and the Institute of Chartered Accountants in Australia (ICAA). An outline of the general requirements of the SACs and AASs are summarised below. 2.1 Statements of Accounting Concepts The conceptual framework for financial accounting is summarised in the SACs. There are currently four such statements: SAC 1 Definition of the Reporting Entity (The contents of this Statement as relevant to the Government are addressed more extensively in Chapter 4) SAC 2 Objective of General Purpose Financial Reporting SAC 3 Qualitative Characteristics of Financial Information SAC 4 Definition and Recognition - Elements of Financial Statements The purpose of the SACs is to provide a framework for the development of the Accounting Standards and to provide general guidance on how to treat issues where those matters are not covered by specific Accounting Standards. The ICAA and the ASCPA have removed the mandatory status of the SACs. The accounting framework and reporting guidelines as outlined in this Manual have been largely based on the principles of the SACs. 2-1

7 Policy Financial Statements should be prepared in accordance with the Guidelines contained in this Manual. The requirements of the Manual are consistent with applicable AASs and SACs. An outline of the SACs that have been issued is set out below. For more detailed information users should refer directly to the SACs. SAC 1 Definition of Reporting Entity A reporting entity is defined by SAC 1 as an entity for which it is reasonable to expect the existence of users dependent on general purpose financial reports for the information which will be useful to them for making and evaluating decisions about the allocation of scarce resources. SAC 1 states that, if an entity qualifies as a reporting entity, it should prepare general purpose financial reports in accordance with SACs and AAS. The reporting entity concept and how it relates to the Government is considered in depth in Chapter 4 of this Manual. SAC 2 Objective of General Purpose Financial Reporting SAC 2 states that the purpose of financial reporting is to provide information to users that will help them make decisions about the allocation of resources (eg funds). General purpose financial reports also assist in discharging the accountability responsibility of the management of an organisation. SAC 2 also outlines the type of information useful for such decision making and for discharging the responsibilities of management. It states that such reports should include information to enable assessment of the organisation's performance, financial position and financing and investing, including information about compliance with external legislative requirements. 2-2

8 SAC 3 Qualitative Characteristics of Financial Information The purpose of SAC 3 is to identify those qualitative attributes that financial information should possess if it is to serve the specified objective of General Purpose Financial Reporting as set out in SAC 2. General purpose financial reports should include all financial information which satisfies the concepts of: relevance and reliability for decision making by users; and comparability and understandability for presentation of reports. A reporting entity s financial statements should include all material information as defined by Statement of Accounting Standards AAS 5 Materiality in Financial Statements, discussed in more detail later in this chapter. Financial information should be relevant and reliable, but need not be given if it is not material. The information should be timely and facilitate comparison with financial reports of other organisations. It should also be easy to understand. SAC 4 Definition and Recognition of the Elements of Financial Statements SAC 4 seeks to establish definitions of the elements of Financial Statements and to specify criteria for their recognition in Financial Statements. These elements and the respective definitions are addressed in more detail in Chapter 5 of this Manual. 2.2 Australian Accounting Standards Australian Accounting Standards are minimum requirements with which ACT agencies must comply. Other elements of the regulatory framework, which may require specific accounting treatments for particular ACT agencies, include the Financial Management Act 1996 (the FMA) and Regulations, and Guidelines issued under that Act, and this Manual. 2-3

9 2.2.1 International Harmonisation There are considerable differences among financial accounting and reporting practices throughout the world. In recognition of the benefits of developing a set of international accounting standards, Australia was one of the founders of the International Accounting Standards Committee (IASC). The standards developed by the IASC are assuming increasing importance internationally. Accordingly, the AASB and AARF have identified 1 a number of significant benefits of harmonising Australian Accounting Standards with IASC Standards, including: supplying international capital markets with comparable and better quality information; encouraging international investment; reducing financial reporting costs of multinational companies; and promoting more meaningful comparisons of the performance and financial position of domestic and foreign reporting entities. Although the AASB s long-term objective is to pursue the development of an internationally accepted set of accounting standards which can be adopted in Australia 2, it is currently following an interim objective of ensuring that compliance with Australian Accounting Standards also ensures compliance with International Accounting Standards. An example of the harmonisation process is the substantial revision of AAS 10 Revaluation of Non-Current Assets to more clearly align with IAS 16 Property, Plant and Equipment AAS 29 Financial Reporting by Government Departments The Public Sector Accounting Standards Board originally released Australian Accounting Standard 29 (AAS 29) in December It was reissued in June While this Standard provides a broad reporting framework for departments, the requirements of the Standard will be applied to reflect local administrative arrangements and conditions. The Standard encourages Governments across Australia to adopt a consistent reporting model and to enhance the 1 see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3) 2 Ibid para see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3) 4 Ibid para

10 information base on which management and resource allocation decisions are made. This will enable Whole of Government Financial Statements to be prepared on a similar basis. The Financial Statement Guidelines for Departmental Reporting Entities are presented in Chapter 11 of this Manual. The Standard is mandatory for Government departments only. Statutory authorities are not subject to AAS 29. However, statutory authorities who choose to adopt Chapter 11 of the Manual should fully comply with the Chapter 11 requirements, except where there is a conflict with AAS standards other than AAS 29. Territory Owned Corporations (TOCs) are subject to AASB standards as appropriate. In accordance with AAS 29, each department that is a reporting entity (further discussed in Chapter 4) is required to prepare financial statements as set out in Chapter 11. AAS 29 also requires the general purpose financial reports of departments to comply with all other Australian Accounting Standards (AASs) except for AAS 16 Financial Reporting by Segments and AAS 22 Related Party Disclosures. AAS 29 also contains a number of specific requirements which override the requirements of some of the other accounting standards. For further details, refer to AAS Other Australian Accounting Standards There are presently 38 Australian Accounting Standards that have been issued, two of which have been withdrawn. When Standards are issued or revised and reissued, the AASB sets an application date from which the Standard will become operative. This is in order to allow entities time to prepare for implementing the requirements of the Standard. Refer to individual Standards to check their application date. Further, to ensure consistency in government accounting practices across different jurisdictions in Australia, the PSASB issued AAS 31 Financial Statements by Australian Governments. AAS 31 mandates government accounting at the consolidated or whole of government level, to allow users to view and compare financial performance and financial position across the Australian public sector. 2-5

11 Those Australian Accounting Standards which are likely to be relevant to most Government entities are: AAS 1 AAS 2 AAS 4 AAS 5 AAS 6 AAS 8 AAS 10 AAS 11 AAS 15 AAS 17 AAS 21 AAS 24 AAS 28 AAS 29 AAS 30 AAS 31 AAS 32 AAS 33 AAS 34 AAS 36 AAS 37 AAS 38 Statement of Financial Performance Inventories Depreciation Materiality Accounting Policies Events Occurring After Reporting Date Recoverable Amounts of Non-Current Assets Construction Contracts Revenue Accounting for Leases Accounting for the Acquisition of Assets (including Business Entities) Consolidated Financial Reports Statement of Cash Flows Financial Reporting by Government Departments Accounting for Employee Entitlements Financial Reporting by Governments Specific Disclosures by Financial Institutions Presentation and Disclosure of Financial Instruments Borrowing Costs Statement of Financial Position Financial Report Presentation and Disclosures Revaluation of Non-Current Assets Some of the other Standards will be relevant to a smaller number of Government entities depending on the nature of their activities. These are: AAS 13 Accounting for Research and Development Costs 5 see AASB/AARF Policy Statement 6 International Harmonisation Policy (para 3) 6 Ibid para

12 AAS 14 Accounting for Investments in Associates AAS 18 Accounting for Goodwill AAS 19 Accounting for Interests in Joint Ventures AAS 20A Foreign Currency Translation AAS 23 Set-off and Extinguishment of Debt AAS 35 Self-Generating and Regenerating Assets (issued in August 1998 and applies to reporting periods on or after 30 June 2001 due to amendment by AAS 35A, but may be applied earlier). The following Standards may be of little relevance to departments and Territory Authorities, as they regulate business activity more appropriate to public trading enterprises which are usually subject to the AASB series of Standards and the Corporations Law: AAS 3 Accounting for Income Tax (Tax-effect Accounting) AAS 7 Accounting for Extractive Industries AAS 25 Financial Reporting by Superannuation Plans AAS 26 Financial Reporting of General Insurance Activities The AASs 12, 16, 22 and 27 are not included in the above schedules as they are not applicable or have been withdrawn. Detailed below is a summary of the main purposes of each of those Standards included in the first grouping, ie the Standards likely to be referred to most often. For full details and commentaries, reference should be made to the relevant Standard. 2-7

13 AAS 1 Statement of Financial Performance AAS 1 requires the inclusion of all items of revenue and expense, including adjustments relating to prior reporting periods in the determination of the result for the reporting period. It also requires specific disclosures in the Statement of Financial Performance, particularly of certain items known as extraordinary items. Extraordinary items are items of revenue and expense attributable to transactions or other events outside the ordinary operations of the entity and which are not of a recurring nature. Examples include condemnation or destruction of major property assets, sale or abandonment of business or assets, etc. Departments should confer with the Department of Treasury (Treasury) prior to classifying items as extraordinary. AAS 1 also requires disclosure of: any revenues or expenses from ordinary activities that are of such a size, nature or incidence that its disclosure is relevant in explaining the financial performance of the entity for the reporting period; any adjustments made to equity as required or permitted by another standard or Urgent Issues Group Consensus View; and the disclosure of any material prior year adjustments that are discovered during a subsequent financial year, to be called fundamental errors AAS 2 Inventories Inventories are defined as goods, other property and services: (a) (b) (c) held for sale in the ordinary course of business; or in the process of production, preparation or conversion for such sale; or in the form of materials or supplies to be consumed in the production of goods and services available for sale, but does not include depreciable assets (such as plant and office equipment). 2-8

14 The fundamental principle in the Standard is that inventory is valued at the lower of cost and net realisable value on an item-by-item basis. Cost of inventories and net realisable value are both defined in the Standard. AAS 2 does not apply to: forests, livestock or similar regenerative natural resources; work in progress under long term contracts; and marketable securities. These items are covered under specialised accounting practices or other Standards AAS 4 Depreciation AAS 4 requires physical assets with useful lives which extend over more than one reporting period to be depreciated over their estimated useful lives in recognition of the consumption or loss of future economic benefits embodied in those assets, with the resulting depreciation charges recognised in the Statement of Financial Performance. AAS 4 does not apply to: forests, livestock or similar regenerative natural resources; or investment properties (as defined in the Standard). Detailed coverage of AAS 4 is contained in Chapter 6 of this Manual at Section AAS 5 Materiality in Financial Statements AAS 5 defines the concept of materiality and specifies how it should be applied in the preparation of financial information. The concept of materiality is an overriding concept which governs not only the presentation of financial statements, but also the applicability of accounting standards and practices. Unless explicitly specified otherwise, an Australian Accounting Standard (or any of its individual provisions) needs only to be applied where it will have a material consequence. 2-9

15 Information is considered material if its omission, non-disclosure or misstatement would mislead users of that information when making evaluations or decisions, or result in management or the governing body of the entity failing to discharge their accountability requirements. The concept of materiality can apply to an individual transaction or a group of transactions. It should be noted that specific disclosures in annual Financial Statements required by legislation must be complied with regardless of the amounts involved. AAS 5 contains guidance on selecting appropriate base amounts AAS 6 Accounting Policies Accounting policy is the technical term for a description of the accounting method or treatment applied to a type of transaction in a particular set of Financial Statements (for example, an explanation of how inventories have been valued.) An understanding of an organisation's accounting policies is fundamental to an understanding of its Financial Statements. AAS 6 Accounting Policies requires: all material accounting policies to be disclosed in the initial section of the notes in the financial report; and a note to be included in the statement of accounting policies detailing whether Australian Accounting Standards, Urgent Issues Group Consensus Views, and any other relevant pronouncements have been complied with. The impact of a change in accounting policy can have a material effect on reported results. For this reason, changes in accounting policy are permitted by AAS 6: when necessary to comply with another Australian Accounting Standard, or to improve the overall relevance or reliability of financial information. Where there is a change in accounting policy that has a material effect, the summary of accounting policies or notes to the accounts must disclose: 2-10

16 the nature of the change; the reason for the change; the amount of any adjustment recognised as a revenue or expense in the current reporting period. For policy changes that are not due to the implementation of another standard or UIG Consensus View this amount will be calculated, where practical, as if the revised policy had always been applied; the amount of any adjustment to the opening balance of accumulated funds; and the amount of the adjustment relating to prior accounting periods. Where practical comparative information contained in the financial report is to be restated to show the information that would have been presented had the new accounting standard always been applied. Details of changes in accounting policies implemented in prior years that did not have a material impact at that time, but do have a material impact in the current reporting period must also be disclosed AAS 8 Events Occurring After Reporting Date Events occurring after reporting date can often have a significant impact on an entity's accounts. For this reason, certain events occurring after reporting date must be disclosed and some may even cause the Financial Statements to be adjusted. Post-reporting date events fall into three categories: events which provide additional evidence of a condition existing at the reporting date (such as the settling of a liability for a definite sum) which could only be estimated at reporting date; events which reveal, for the first time, a condition which was in existence at reporting date (eg the receipt of a claim for faulty inventory which was found to be defective before reporting date); and events which happened after reporting date, the effect of which was material to the accounts such as the destruction of major property assets. 2-11

17 Generally the first two categories require an adjustment to the accounts while the third requires disclosure as a note to the accounts. Where events occur after reporting date which do not relate to any conditions existing at reporting date, but those events are material in relation to the Financial Statements, a note to the Financial Statements shall disclose the events and, if possible, their financial effect AAS 9 Expenditure Carried Forward to Subsequent Accounting Periods This standard has been withdrawn and replaced by the principles outlined in Statement of Accounting Concepts SAC 4. However, the following explanation of the matching concept is still relevant. One of the traditional, underlying principles of accounting practice is matching. Costs should be matched with the revenues they generate. Costs in one period are often associated with revenue in the next and the technique of accrual accounting is designed to deal with this. Occasionally, however, costs may relate to benefits which will be derived over a number of future accounting periods, for example the set up costs of a loan. Such costs may be capitalised and amortised over the period of the benefit, for example, the period of the loan. Expenditure should be carried forward at balance date to one or more future accounting periods only when it satisfies the following tests: it is material in amount; it does not relate solely to revenue which has already been brought to account; it can be clearly identified as contributing to revenue earning capability in the future; and it is reasonably expected that future revenue will absorb the expense carried forward; or the expenditure has given rise to an asset which may be reasonably expected to realise at least its book value AAS 10 Recoverable Amount of Non-Current Assets This standard will have limited application within the ACT government, as it does not apply to: 2-12

18 non-current assets of not-for-profit entities where the future economic benefits comprising those assets are not primarily dependent on the asset s ability to generate net cash flows: or non-current assets measured at fair value or net fair value as required or permitted by another Australian Accounting Standard, such as AAS 38 Revaluation of Non-Current Assets AAS 10 requires that a non-current asset be written down to its recoverable amount when its carrying amount is greater that its recoverable amount. The decrement in that carrying amount must be recognised as an expense in net profit or result for the reporting period in which the recoverable amount write off occurs. Detailed policy and procedures relating to the revaluation of non-current assets are contained in Chapter 6 of this Manual AAS 11 Accounting for Construction Contracts AAS 11 sets standards of accounting by a contractor for all construction contracts. Construction contracts covered by the Standard include, but are not limited to, contracts for general building, heavy earthmoving, dredging, demolition, dams, pipelines, tunnels, ships and transport vehicles. A loss on a construction contract, whether the work is completed or yet to be completed shall be recognised as soon as it is foreseeable. The Standard requires detailed separate disclosures of, among other things, the method used to determine contract revenues, the method used to determine stage of completion and amounts due to, and receivable from, customers as an asset and liability respectively. 2-13

19 Recent revisions to AAS 11 (operative after 31 December 1998) include the following requirements: the substance and not the legal form of the transaction or other event must be considered when determining the composition of a construction contract. This means that in appropriate circumstances, a number of contracts should be combined to form a construction contract or a contract that covers the construction of a number of items should be disaggregated; the effect of a change in the estimate of contract revenue and contract costs or the effect of a change in the estimate of the outcome of a construction contract is to be recognised in the period of the change and future periods if the change affects both. The effect of the change cannot be recognised retrospectively via an adjustment through the statement of financial performance or accumulated results; additional disclosures are required, including the method used to determine the stage of completion of contracts in progress and the method used to determine the amount of revenue recognised in the reporting period; and where the outcome of a construction contract cannot be estimated reliably, contract costs must be recognised as expenses when incurred and revenues are recognised to the extent that it is probable that expenses incurred are recoverable. The completed contract method under which contract revenues and contract costs are recognised as revenue and expenses only on completion of the contract is not permitted. It also should be noted that in certain circumstances borrowing costs associated with construction contracts are to be capitalised (see paragraph 4.2 of AAS 34 Borrowing Costs) AAS 15 Revenue AAS 15 prescribes the accounting treatment of revenues arising from various transactions. Revenues must be recognised at fair values. Revenue from the sale of goods or the disposal of assets must only be recognised when: (a) the entity has passed control of the goods or other assets to the buyer; 2-14

20 (b) it is probable that the economic benefits comprising the consideration will flow to the entity; and (c) the amount of the revenue can be reliably measured. For the rendering of services, revenue arising from a contract must be recognised when: (a) the entity controls a right to be compensated for services rendered; (b) it is probable that the economic benefits will flow to the entity; (c) the amount of revenue can be reliably measured; and (d) the stage of completion of the transaction can be reliably measured. Where the outcome of a contract to provide services cannot be reliably measured costs must be recognised as an expense in the period they occur and revenue recognised to the amount of costs only to the extent that it is probable that the costs will be recovered. AAS 15 also requires disclosures of specific categories of revenues. Further guidance on revenue recognition is provided in AAS 29 with specific exceptions to AAS 15 applicable to government departments, such as under restructuring of administrative responsibilities AAS 17 Accounting for Leases For accounting purposes, leases are divided into two types: operating leases; and finance leases. The type of lease is determined by examining the terms of the lease agreement. An operating lease is defined as a lease under which the lessor effectively retains substantially all the risks and benefits of ownership of the leased asset. That is, the lessor behaves as the owner of the asset. These arrangements include conventional hiring arrangements such as short-term car hire and renting furnished property. A finance lease is essentially one which cannot be cancelled and where the lessee either pays for the whole of the asset or has the use of the asset for most of its useful life. Under such arrangements, the lessee is more like the owner of the asset and the lease is a means of financing what is effectively the purchase of the asset, rather than a contract of hire. Under a finance lease, the risks 2-15

21 and benefits normally associated with ownership of an asset fall to the lessee, while legal ownership remains with the lessor. These risks and benefits of ownership include gains and losses in the value of the asset, exposure to obsolescence, idle capacity and uninsured damage. The type of lease determines the appropriate accounting treatment. Finance Lease Finance leases are capitalised as assets of the entity. This technique involves recognising the asset as though it had been purchased using borrowed funds. An asset and corresponding liability are, therefore, shown on the lessee's balance sheet. Each year the debt is reduced by a notional repayment figure and the asset is amortised (similar to depreciation). Amortisation of the asset and notional finance charges on the debt are taken to the Statement of Financial Performance. During the life of the lease, the cash repayments being made to the finance company very often differ from the amounts in the Financial Statements but by the end of the lease they will have equalised. The following are indications that a lease transfers the risks and benefits of ownership: the lease is not cancellable; and ownership is transferred at the end of the lease term; or the lease contains a nominal purchase option; or the lease term is for 75 % or more of the useful life of the leased property; or the present value of minimum lease payments is equal to or greater than 90% of the fair value of the leased property. Where a lessee acquires a non-current asset by means of a finance lease, the minimum lease payments are discounted at the interest rate implicit in the lease. Where the implicit interest rate is not known, an estimate is used. The discounted amount is established as a non-current asset at the beginning of the lease term and amortised over its expected economic life. A corresponding liability is also established and each lease payment is allocated between the principal component and the interest expense. It should be noted that under the FMA, the Treasurer must sign approvals for a finance lease (sections 40 (c) and 42 (a)). 2-16

22 Operating Lease Under an operating lease no asset is shown in the lessee s Financial Statements as the asset is treated as being owned by the lessor, that is, the risks and benefits of ownership remain with the legal owner. No asset, therefore, is capitalised but the minimum payments due under the lease are charged to the Statement of financial performance and reflect the use of the leased property. Generally this means that operating lease expenses are recognised as paid. Disclosure The amount of commitments under both types of leases must be disclosed and analysed according to when the amounts fall due. Commitments should be split into: those payable not later than one year; later than one but not later than two years; later than two but not later than five years; and after five years AAS 21 Accounting for the Acquisition of Assets (including Business Entities) This Standard sets out the accounting treatment that applies to the acquisition of all types of assets. Under the Standard all acquisitions of assets are to be initially accounted for at the cost of acquisition which is the sum of the purchase price plus any costs incidental to the acquisition. The purchase price may take the form of cash, other monetary assets, non-monetary assets, securities issued or liabilities undertaken; or a combination of any of these. Where the price is in the form of cash, other monetary assets or liabilities undertaken, its value is readily determinable. Where the consideration comprises non-monetary assets, including shares or other securities, the value will be determined by reference to the fair value of the assets given at the time of the transaction. Fair value is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller, in an arm's length transaction. The Standard does not deal with the accounting treatment for the receipt of assets involving no cost of acquisition, for instance, donations and assets acquired as a result of a restructuring of 2-17

23 administrative arrangements. These matters are dealt with in AAS 29 and Chapter 6 of this Manual. Departments should note that AAS 29 states that assets acquired at no cost or for nominal consideration, as a consequence of a restructuring of administrative arrangements, need not be recognised at their fair values and may be recognised at the amounts at which the assets were recognised by the transferor department immediately prior to the restructuring of administrative arrangements AAS 24 Consolidated Financial Reports AAS 29 specifically requires that the general purpose financial report of a Government Department shall be prepared in accordance with the requirements of AAS 24. AAS 24 requires the parent entity in an economic entity which is a reporting entity to prepare consolidated financial reports. An economic entity is a group of entities comprising the parent entity and each of the entities it controls. The notion of control rather than ownership is the criterion for identifying the existence of a parent entity/controlled entity relationship and the requirement to prepare consolidated financial reports. Control is defined as the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity. The requirement to prepare one set of consolidated financial reports applies even if: control is temporary; dissimilar activities are conducted by member entities; or the parent entity holds only a minority ownership interest in the controlled entity. AAS 24 contains standards to be applied in the preparation of consolidated financial reports and prescribes the financial and other information to be included and disclosed in those reports. 2-18

24 AAS 28 Statement of Cash Flows A Statement of Cash Flows provides information on the cash inflows, cash outflows and the net change in an entity's cash position. Cash items are cash and/or its equivalents. A cash equivalent 7 must be convertible to cash at the investor s option and subject to insignificant risk of changes in value when converted (examples of cash equivalents are detailed in AAS 28 para ). AAS 28 assists understanding of: how much cash has been generated in operating activities; how much cash has been invested (or divested) from investing activities; and the net cash flows from financing activities. Department cash flow statements, in aggregate, are also useful for understanding the effects of activities on the overall cash financing requirements of the budget sector; and the ability to meet financial commitments as they fall due. Cash inflows from operating activities include output appropriations. Other examples of cash outflows from operating activities also include cash payments relating to employee salaries, rental of premises and other expenses, such as stationery and transport expenses. Investing activities involve the investment and divestment of cash in infrastructure and other noncurrent assets. AAS 28 requires that department financial reports disclose by way of note a reconciliation of cash flows from operating activities to the operating result in the Statement of Financial Performance. The reconciliation of the cash flows from operating activities should be to the net result plus capital injections for operations. 7 Cash Equivalents means highly liquid investments with short periods to maturity which are readily convertible to cash on hand at the investor s option and are subject to an insignificant risk of changes in value, and borrowings which are integral to the cash management function and which are not subject to a term facility (AAS 28 para 14.1). 2-19

25 AAS 30 Accounting for Employee Entitlements Employee entitlements include wages and salaries, annual leave, long service leave and (in certain cases) sick leave. AAS 30 specifically excludes application to superannuation liabilities, although it acknowledges that these are a type of employee entitlement. AAS 30 requires: that employees entitlements to wages and salaries, annual leave, long service leave, sick leave, non-monetary benefits, medical benefits, retirement, termination, retrenchment and redundancy payments be recognised as liabilities in an employer s financial statements where the employer has a present obligation based on services rendered by employees up to the reporting date; wages and salaries, annual leave and sick leave (irrespective of whether they are expected to be settled within twelve months of the reporting date) and other employee entitlement liabilities expected to be settled within twelve months of the reporting date to be measured at their nominal amounts (based on current remuneration rates and undiscounted cash flows); and other (long term) employee entitlement liabilities to be measured at their present value. Calculation of the present value of the employer's liability relating to employee entitlements requires the expected future payments to be discounted at an appropriate discount rate. AAS 30 requires the discount rate to be the Commonwealth Government Guaranteed Securities rate with matching terms to maturity AAS 31 Financial Reporting by Governments The Standard mandates that each of the Commonwealth, State and Territory Governments is a reporting entity and is therefore required to prepare general purpose financial reports. This Standard applies therefore to those general purpose financial reports that need to be prepared by consolidating the financial statements of controlled entities in accordance with Australian Accounting Standard AAS 24 Consolidated Financial Reports. This requirement is based on the view that the general purpose financial reports of governments should provide a comprehensive overview of their financial performance, financial position, and financing and investing activities. It 2-20

26 is on this basis that the Standard requires each government to prepare, at least annually, a general purpose report which includes: a Statement of Financial Position, displaying information about its assets and liabilities as at the reporting date; a Statement of Financial Performance, which reports on its revenues and its expenses for the reporting period; a Statement of Cash Flows, and other information necessary to allow informed assessments of its financial position, financial performance, and financing and investing activities; and appropriate disclosures by way of notes which report disaggregated information relating to the financial performance and financial position showing the government s activities. AAS 31 also requires governments to: adopt the full accrual basis of accounting; recognise as appropriate the assets it controls, including infrastructure, restricted, heritage, and community assets that can be measured reliably, to be recognised as appropriate; and to comply with other Australian Accounting Standards, except: AAS 16 Financial Reporting by Segments and AAS 22 Related Part Disclosures; or where they have been expressly excluded from applying some Australian Accounting Standards that are issued in the future. AAS 31 applies to reporting periods ending on or after 30 June

27 AAS 32 Specific Disclosures by Financial Institutions ACT Accounting Policy Manual The purpose of AAS 32 is to require specific disclosures in the financial report of a financial institution. 8 In particular, the Standard: prescribes limited disclosures for parent-entity financial institutions in some circumstances; allows the net presentation of certain revenues and expenses in the Statement of Financial Performance; clarifies impaired loans as non-accrual loans or restructured loans; prescribes specific disclosures additional to those required by other Accounting Standards, including: particular revenues and expenses analysis of interest revenue and interest expense, including average interest rates; presentation of assets and liabilities in the Statement of Financial Position in order of relative liquidity; particular assets and liabilities; maturity analysis of specified assets and liabilities; concentrations of deposits and borrowings; commitments and contingent liabilities; impaired loans, assets acquired through the enforcement of security and past-due loans; general and specific provisions for impairment; and fiduciary activities 8 a financial institution is defined as an entity (including an economic entity) whose principal activity is to take deposits or borrow, or both take deposits and borrow, with the objective of lending or investing in financial assets other than equity instruments, but excluding those entities which take deposits or borrow principally from other entities in the economic entity, or general insurers, life insurers and superannuation plans, or entities subject to the Banking Act 1959 (as amended). 2-22

28 AAS 33 Presentation and Disclosure of Financial Instruments The main features of AAS 33 include the following: the term financial instrument and associated asset, liability and equity terms are defined (see Glossary). They cover a wide range of items from cash and trade receivables to derivative instruments like interest rate swaps; the issuer of a financial instrument must: classify an instrument as a liability or equity according to its substance on initial recognition (an instrument may have a component of each); account separately for liability and equity components, subject to certain transitional provisions; and not reclassify components unless certain conditions are met; the Standard prescribes disclosure requirements in relation to the following: the terms and conditions of financial instruments and the associated accounting policies adopted; interest rate risk, by class of recognised and unrecognised financial asset and financial liability; credit rate risk, by class of recognised and unrecognised financial asset; net fair value by class of recognised and unrecognised financial asset and financial liability; and financial assets recognised at amounts exceeding net fair value; with regard to derivatives, the objectives of having them, the context in which the objectives were set out and the strategy for meeting the objectives; hedges of anticipated future transactions; and the standard also encourages other disclosures (eg. policies for controlling the risks associated with financial instruments). It should be noted that parent entities are permitted not to comply with disclosure requirements in circumstances where the parent s financial report is presented with the report of the economic entity. It should also be noted that, although the Standard is relatively complex, in most instances, there will be little impact on agencies beyond preparing a note to financial statements using the elements contained in the suggested model provided (refer Chapter 11 Appendix 11-D). 2-23

29 AAS 34 Borrowing Costs The operative date for this Standard is for reporting periods ending on or after 31 December The principal features are: borrowing costs must be expensed in the reporting period incurred except to the extent that they are directly attributable to the acquisition, construction or production of a qualifying asset 9 ; borrowing costs capitalised during a reporting period must not exceed borrowing costs incurred during the period by the entity; the standard also prescribes: the methods for allocating costs between assets; when capitalisation must cease or be suspended; and specific disclosures; the Standard notes that there may be situations where the treatment of borrowing costs differs between entities within an economic entity. An example is where a parent entity may borrow funds which are then granted to a subsidiary to construct a qualifying asset. Only in the economic entity s financial report would the borrowing costs be capitalised; and if not already in place, the accounting policies required by the Standard must be applied from the beginning of the reporting period to which the standard is first applied AAS 36 Statement of Financial Position This standard prescribes the format and classification criteria to be applied in the preparation of statements of financial position. The standard applies to reporting periods ending on or after 30 June The principle features of this standard are: classes of items to be disclosed separately on the face of the statement of financial position are prescribed; current assets and current liabilities are to be presented separately from non-current assets and non-current liabilities unless presenting items on the basis of liquidity provides more relevant information. The latter approach is recommended for financial institutions; 9 a qualifying asset under AAS 34 is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (generally more than 12 months). 2-24

30 for note disclosures, assets are to be classified according to their nature or function, while liabilities and equity items are to be classified according to their nature; and if an entity has a single clearly identifiable operating cycle exceeding twelve months, that period must be used as the basis for identifying current and non-current assets and liabilities AAS 37 Financial Report Presentation and Disclosure This standard prescribes presentation and disclosure requirements to be applied in the preparation of financial reports for accounting periods ending on or after 30 June Required by the standard are: disclosures regarding the entity s operations, audit arrangements, economic dependence, and dividends; and period to period consistency in the presentation and classification of items in financial reports unless there is a significant change in the nature of the entity s operations, a change in presentation required by an applicable accounting standard or Urgent Issues Group Consensus View, or more relevant presentation of classification of items will be achieved AAS 38 Revaluation of Non-Current Assets The purpose of AAS 38 Revaluation of Non-Current Assets is to prescribe the manner in which non-current assets are valued subsequent to their initial recognition. While the standard is operative for reporting periods ending on or after 30 June 2000, it will not be immediately applied to ACT agencies due to transitional provisions. AAS 38 requires that subsequent to the initial recognition of assets, each class of non-current assets must be measured on either the cost or fair value basis. Fair value is defined as the amount for which the asset could be exchanged between knowledgeable willing parties in an arm s length transaction. Where a class of non-current assets is measured on the fair value basis, revaluations must be made with sufficient regularity to ensure that the carrying amount of each asset in the class does not differ materially from fair value Revaluation increments and decrements must be offset against one another within a class of non-current assets, but must not be offset in respect of different classes of non-current assets. When classes of assets are revalued: 2-25