Document Index Budget Paper 1 Budget Statement 1

Appendix A: Fiscal Policy under Accrual Budgeting

• Accrual Accounting Standards
• Fiscal Balance
  • Deriving the Fiscal Balance
• Differences Between Cash and Accruals
  • Superannuation
  • Public Debt Interest (PDI)
  • Taxation Revenue
  • Capital

The Government has adopted an accrual budgeting framework for public sector budgeting and reporting. The 1999-2000 Budget is the first Commonwealth budget to use an accrual framework. This move is an important step in the Government's financial management reform programme to develop more business-like reporting in the public sector. It will ensure that agency reporting accounts for the full cost of service delivery and incorporates a `whole-of-government' approach. The main advantage of accrual measures (as opposed to cash) is that they provide a more comprehensive indication of the total activity of Government and the longer-term effects of current policy. Cash measures do, however, have some advantages for tracking expenditures in a fiscal year and helping to identify the short-term effect of fiscal policy on the economy.

ACCRUAL ACCOUNTING STANDARDS

There are two accrual standards against which the Government has reported against in this Budget:

• The ABS's accrual Government Finance Statistics (GFS) standard (refer to Statement 9).
  
  The ABS is moving to compile the GFS on an accrual basis. The proposed accrual presentation will consist of four statements. An operating statement will describe flows and will feature three new summary measures (net lending, the increase in net worth and the net operating result). A full balance sheet will describe the financial stocks and value of physical assets. In addition, there will be a reconciliation statement of stocks and flows, and a cash flow statement.
  
  In the proposed GFS system, the classification of some transactions will differ from the accrual treatment under accounting standards.

• Australian Accounting Standard (AAS 31), Financial Reporting by Government (refer to Statement 4).
  
  AAS 31 requires governments to prepare accrual-based general purpose financial reports, including the assets they control, any liabilities incurred, and their revenues and expenses.
  
  Under AAS 31, governments must prepare an operating statement (also known as the statement of revenue and expense, or the profit and loss statement), a statement of financial position (or balance sheet) and a statement of cash flows.

FISCAL BALANCE

The fiscal balance (GFS net lending) is the accrual equivalent of the underlying cash balance. Like its cash equivalent, the fiscal balance measures the Government's net lending and hence direct contribution to the current account deficit.

As noted in Parts I and III, the Government's fiscal strategy will be maintained under accruals with the focus of fiscal policy moving to the fiscal balance.

Focusing on the fiscal balance (rather than the operating result) ensures consistency with the Australian National Accounts concepts of net lending.

The fiscal balance measures the extent to which the Government is adding to or drawing down on the private savings pool. The Government's fiscal strategy is to ensure that, on average, over the course of the economic cycle the government sector is not drawing on private sector saving.

Although the fiscal balance is the accrual counterpart of the underlying cash balance the two are likely to diverge in the short term due to differences between when transactions are recorded in cash and accrual terms.

Deriving the Fiscal Balance

Although fiscal balance is an aggregate in the GFS operating statement (refer to Statement 9) it can also be calculated through several adjustments to the accounting standard operating result (see Table 5). These adjustments can be broadly grouped into two categories - revaluations and capital.

Revaluations reflect changes to the value of assets and liabilities. These revaluations do not affect cash measures of budget balance, but are brought to book in the calculation of the accounting standard operating result. They are not, however, included in the measurement of fiscal balance. Revaluations do not affect the fiscal balance as they do not involve a change in the Government's resource position; instead they reflect changes in the value of assets and liabilities resulting from flows that are not transactions - such as changes in prices (eg gains from foreign exchange). For example, an actuarial driven reassessment of the Government's superannuation liability may lead to a more accurate value being recorded in the balance sheet, but this has not changed the Government's current resource position and will not affect the fiscal balance.

The other major difference between the accounting operating result and the fiscal balance is the treatment of capital expenditure. As with cash measures, fiscal balance incorporates capital expenditure (net), not capital use or depreciation, as the fiscal balance is detecting the full investment by government in a particular period. Therefore, depreciation is `added back' to the accounting standard operating result and replaced with capital expenditure - the capital adjustment.

Table 5: Budget Estimates

Note: Items (4) to (9) reflect revaluations. Items (11) to (16) reflect the capital adjustment.

The table below provides accrual estimates of the Government's fiscal position at the 1998-99 MYEFO. These estimates are based on accrual data collected for the 1999-2000 Budget and should therefore be treated as indicative only.

Table 6: 1998-99 MYEFO Estimates

Note: Items (6) to (11) reflect revaluations. Items (13) to (18) reflect the capital adjustment.

DIFFERENCES BETWEEN CASH AND ACCRUALS

Under a cash system, transactions are recorded in the reporting period in which cash changes hands. An accrual system records transactions in the period in which income is earned or expenses incurred, subject to the important caveat that the transactions are able to be reliably measured at that time. Effectively, assets, liabilities, revenues and expenses arising from transactions or other events must be recognised in the financial statements when they have an economic impact on the government, regardless of when the associated cash flows occur.

The major differences between cash budgeting and the accrual framework are outlined below.

Superannuation

Accrual budgeting will record the accruing superannuation expense whether the liability is funded or unfunded. The superannuation expense in the operating statement, in a given year, is equal to the superannuation accruing to current employees, as well as the interest or growth of the outstanding liability. In calculating changes in the stock of unfunded superannuation liabilities, the actuary takes into account the number of salary earners and assumptions relating to wages growth, inflation and the expected rate of return on investment. While this will show the true cost of accruing superannuation liabilities, it does not change the unfunded nature of the liability.

Public Debt Interest (PDI)

Under cash accounting, PDI is recorded as the interest paid during the year. Under an accrual approach, allowance is also made for interest accrued, but not actually paid, during the period.

A further difference between cash and accrual accounting for PDI concerns the treatment of premia and discounts when debt is issued or when it is repurchased. Under the cash framework, an issue premium is recorded as an offset to PDI at the time of debt issue, and an issue discount is recorded as PDI when that debt is cancelled. In the accounting standard framework, however, both issue premia and discounts are amortised over the life of the stock, while in the accrual GFS framework premia and discounts are considered economic revaluations.

Taxation Revenue

The preparation of accrual estimates requires a conceptually consistent and reliable method of recognising when taxation revenue accrues to the Commonwealth.

The Commonwealth could record an accrual of revenue at the time that economic transactions, resulting in a taxation liability, took place. It is very difficult, however, to know when all such transactions take place. As a result, revenue will be recognised as accruing at the time the relevant tax law indicates the existence of a requirement to pay an amount in tax or when a tax liability assessment is raised by the Australian Taxation Office (ATO) or the Australian Customs Service (ACS). That is, revenue is only recognised when the taxpayer makes a self-assessment or the ATO/ACS issues an assessment.

In effect only two changes to current cash estimates are required. These are adjustments for receivables, and for bad and doubtful debts.

The adjustment for receivables recognises revenue for which an assessment has been issued but which has not yet been received and excludes cash received which has already been accounted for in receivables (because it accrued in a previous reporting period).

For example, accrual revenue is recognised at the time an assessment for taxation occurs. New company tax payment arrangements commencing in 2000-01 will involve some companies being assessed for tax under both the existing and new payment arrangements in that year. As announced in A New Tax System, companies will be allowed to defer part of this tax liability to later years to smooth actual tax payments in 2000-01. Companies will therefore be assessed for tax instalments in 2000-01 that will not be paid until some time in the future. Assessments on these deferred amounts are treated as a receivable in 2000-01, resulting in accrual revenue being larger than cash revenue in 2000-01 but lower than cash in the following years.

The adjustment for bad and doubtful debts allows for the fact that some accounts receivable are never paid and are eventually written off. At the end of each financial year tax receivables that are likely to become uncollectable are brought to account and expensed to the year just finishing. In this way expenses are matched to the period in which they were incurred.

Capital

Accrual accounting records capital use (depreciation) in the operating statement, whereas cash accounting records capital expenditure. However, the Government's primary fiscal target - the fiscal balance - will continue to record capital expenditure instead of depreciation. This treatment is necessary because the fiscal balance is intended to measure net lending, or the difference between saving and investment expenditure. Therefore the fiscal balance detects the cash `investment' in a given year, not the capital used. The cash flow statement will outline most capital expenditure in the categories `purchase of property, plant and equipment, and intangibles' and `proceeds from sale of property, plant and equipment, and intangibles'.