Appendix D:  External reporting standards
and budget concepts
External reporting standards
The Commonwealth Charter of Budget Honesty Act 1998 requires that the Mid‑Year Economic and Fiscal Outlook (MYEFO) be based on external reporting standards. In accordance with the Charter, the major external standards used in the MYEFO are the Australian Bureau of Statistics (ABS) accrual Government Finance Statistics (GFS) framework and Australian accounting standards, including Australian Accounting Standard No. 31 Financial Reporting by Governments (AAS31). The Charter also requires that departures from applicable external reporting standards be identified.
The major fiscal aggregates (including the fiscal and underlying cash balances) are based on the accrual GFS framework. The next section of this Appendix provides an overview of the operation of the GFS framework and a discussion of the GFS financial statements, including the major fiscal aggregates. It also includes a very brief overview of AAS31 and some information on reconciling between the two standards.
Accrual GFS framework
The GFS reporting framework is a specialised statistical system designed to support economic analysis of the public sector. It allows comprehensive assessments to be made of the economic impact of government and is consistent with international statistical standards (the System of National Accounts 1993 (SNA93) and the final draft accrual version of the IMF’s A Manual on Government Finance Statistics). Additional information on the Australian accrual GFS framework is available in the ABS publication Information Paper: Accruals‑based Government Finance Statistics, 2000 (Cat. No. 5517.0).
Nature of the GFS framework
The accrual GFS framework is based on an integrated recording of flows and stocks. Flows reflect the creation, transformation, exchange, transfer or extinction of economic value. They involve changes in the volume, composition or value of a unit’s assets, liabilities and net worth. Stocks refer to a unit’s holdings of assets, liabilities and net worth at a point in time.
Two types of flows are distinguished:  transactions and other economic flows.
•	Transactions represent flows that come about as a result of mutually agreed interactions between units or within a single unit. Despite their compulsory nature, taxes are transactions that are deemed to occur by mutual agreement between the government and the taxpayer.
•	Other economic flows represent changes to stocks that do not result from a transaction. Other economic flows arise from changes to stocks caused by price movements (revaluations), including interest and exchange rate movements, and phenomena such as discoveries, depletion and destruction.
The GFS conceptual framework is divided into a number of separate statements, each of which is designed to draw out analytical aggregates or balances of particular economic significance. Taken together, these aggregates provide for a thorough understanding of the financial position of the public sector entities. The GFS statements reported in the MYEFO are the operating statement, balance sheet and cash flow statement. A discussion of each of these statements follows.
GFS operating statement
The operating statement presents details of transactions in GFS revenues, GFS expenses and the net acquisition of non‑financial assets (net capital investment) for an accounting period.
GFS revenues are broadly defined as transactions that increase net worth (effectively inflows) and GFS expenses as transactions that decrease net worth (effectively outflows) — net worth is defined in the balance sheet section below.
GFS revenues less GFS expenses gives the GFS net operating balance. Conceptually, the net operating balance measures government saving plus capital transfers.
The net acquisition of non‑financial assets (net capital investment) measures the change in non‑financial assets owned by the government. As such, it measures the net effect of purchases, sales and consumption (for example, depreciation of fixed assets and use of inventory) of non‑financial assets during an accounting period.
Net acquisition of non‑financial assets equals gross fixed capital formation, less depreciation, plus changes (investment) in inventories, plus other transactions in non‑financial assets. Each of these items is briefly expanded upon below:
•	Gross fixed capital formation comprises purchases less sales of fixed assets (such as buildings).
•	Depreciation measures consumption of fixed assets, such as through physical deterioration or normal obsolescence, as they are used in production.
•	Changes in inventories measures investment in new inventory stocks less use of current inventories.
•	Other transactions in non‑financial assets mainly comprises (for the Commonwealth general government sector) changes in the value of work‑in‑progress and software assets and transactions in non‑reproducible, intangible assets (such as telecommunications spectrum).
Fiscal balance
The fiscal balance (or GFS net lending/borrowing) is the net operating balance minus net capital investment. 
The fiscal balance measures, in accrual terms, the gap between government savings plus net capital transfers and investment in non‑financial assets. As such, it approximates the contribution of the Commonwealth general government sector to the balance on the current account in the balance of payments.
A fiscal balance surplus indicates that the Commonwealth is placing financial resources at the disposal of other sectors (that is, the Commonwealth is lending to other sectors). A fiscal balance deficit indicates that the Commonwealth is utilising the financial resources of other sectors. Thus, fiscal balance can be viewed as a global indicator of the financial impact of Commonwealth government operations on the rest of the economy.
Balance sheet
The balance sheet shows stocks of assets, liabilities and GFS net worth. Net debt is also reported in the balance sheet.
Assets represent instruments or entities over which ownership rights are enforced by a unit, from which economic benefits may be derived by holding them, or using them, over a period of time. Liabilities represent obligations to provide economic value to other institutional units.
The net worth of the general government sector is defined as assets less liabilities. For the public financial corporations and public non‑financial corporations sectors, the formula becomes assets less liabilities less shares and other contributed capital. Net worth is an economic measure of wealth. It reflects the contribution of the Commonwealth to the wealth of Australia.
Net debt is defined as the sum of selected financial liabilities (deposits held; advances received; government securities; loans; and other borrowing) minus the sum of selected financial assets (cash and deposits; advances paid; and investments, loans and placements). Net debt is a common measure of the strength of a government’s financial position.
Cash flow statement
The cash flow statement identifies how cash is generated and applied in a single accounting period. ‘Cash’ means cash on hand (notes and coins held and deposits held at call with a bank or other financial institution) and cash equivalents (highly liquid investments that are readily convertible to cash on hand at the investor’s option and overdrafts considered integral to the cash management function).
The cash flow statement reflects a cash basis of recording (rather than an accrual basis) where the information has been derived indirectly from underlying accrual transactions and movements in balances. This, in effect, means that transactions are captured when cash is received or when cash payments are made. Cash transactions are specifically identified because cash management is considered an integral function of accrual budgeting.
Underlying cash balance
The underlying cash balance (GFS surplus/deficit) is the cash counterpart of the fiscal balance. For the general government sector it is calculated as shown below.
Net cash flows from operating activities
plus
Net cash flows from investments in non‑financial assets
less
Acquisitions of assets acquired under finance leases and similar arrangements
equals
Underlying cash balance
The underlying cash balance is a broad indicator of the Commonwealth’s cash flow requirements. An underlying cash surplus reflects the extent to which cash is available to the Commonwealth to either increase its financial assets or decrease its liabilities (assuming no revaluations and other changes occur). An underlying cash deficit is a measure of the extent to which the Commonwealth requires cash, either by running down its financial assets or by drawing on the cash reserves of other sectors.
Headline cash balance
The headline cash balance is calculated by adding ‘cash flows from investments in financial assets for policy purposes’ to the underlying cash balance.
Cash flows from investments in financial assets for policy purposes include equity transactions (such as privatisations of government businesses) and net advances (major examples for the Commonwealth relate to cash flows from loans to the States, loans to students under the Higher Education Contribution Scheme (HECS), and contributions to international organisations that increase the Commonwealth’s financial assets).
Sectoral classifications
GFS data are presented by institutional sector, distinguishing between the general government sector, the public non‑financial corporations (PNFC) sector and the public financial corporations (PFC) sector.
Budget reporting focuses on the general government sector. This sector provides public services that are mainly non‑market 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. This sector comprises all government departments, offices and some other bodies.
The PNFC sector comprises bodies that provide goods and services that are mainly market, non‑regulatory and non‑financial in nature, financed predominantly through sales to the consumers of these goods and services. In general, PNFCs are legally distinguishable from the governments that own them. A list of major Commonwealth PNFCs is in Box 1 below.
Box 1:  List of major Commonwealth public non‑financial corporations
at October 2001	
Airservices Australia 	Albury‑Wodonga Development Corporation	
Australian Dairy Corporation	Australian Government Solicitor	
Australian Hearing Services	Australian Postal Commission	
Australian Rail Track Corporation	Australian Submarine Corporation	
Employment National	Snowy Mountains Hydro‑Electric Authority	
National Rail Corporation Limited	Telstra Corporation Limited	
Sydney Airports Corporation Limited		

Together the general government sector and the PNFC sector comprise the non‑financial public sector.
The GFS coverage of the public sector also includes PFCs. PFCs are bodies engaged in financial intermediation services or auxiliary financial services. They are able to incur financial liabilities on their own account. This sector includes the Reserve Bank of Australia.
The total public sector comprises all sectors of government — general government, the PNFC sector and the PFC sector.
Australian Accounting Standard No. 31 (AAS31) reporting framework
Australian Accounting Standard No. 31 Financial Reporting by Governments (AAS31) requires governments to prepare accrual‑based general purpose financial reports, including in relation to the assets they control and any liabilities incurred, their revenues and expenses, and cash flows. Reporting under this framework is intended to provide a consolidated overview of the financial performance and position of government, including in the area of financing and investing activities.
There are three main general purpose statements that must be prepared in accordance with the AAS31 framework. These are:
•	a statement of revenue and expenses;
•	a balance sheet; and
•	a statement of cash flows.
In addition to these general purpose statements, the standard requires notes to the financial statements to be prepared which report disaggregated information in relation to the financial performance and financial position of the government. The notes should also include other information seen as relevant to users. 
While AAS31 provides a general framework for accrual budgeting and financial reporting by governments, compliance with all other applicable accounting standards is required. Exceptions to this rule are explicitly stated in AAS31. 
A full set of AAS31 financial statements and accompanying notes prepared for the general government sector can be found in Appendix B.
Reconciliation of GFS and AAS31 aggregates
There is a general consistency of treatment between GFS and accounting standards. The GFS and AAS31 definitions of the scope of the public sector agree in almost all cases, with AAS31 recommending the same segmentation of the public sector into general government, public non‑financial corporations and public financial corporations sectors.
Transactions are generally treated in a similar manner by GFS and accounting standards; however, where GFS is a framework designed to facilitate macro‑economic analysis, AAS31 is designed as a standard for general purpose financial reporting. The different objectives of the two systems lead to some variation in the treatment of certain items.
In particular, revaluations of assets and liabilities are classified differently under the AAS31 and GFS standards. Major revaluations include: writedowns of bad and doubtful debts (excluding those that are mutually agreed); changes in the valuation of superannuation liabilities; and foreign exchange gains and losses.
Under AAS31 reporting, valuation changes may affect revenues or expenses. However, under GFS, reporting revaluations are not considered to be transactions (that is, they are considered to be other economic flows) and accordingly do not form part of revenues or expenses. Therefore, most revaluations are not taken into account in the calculation of the GFS net operating balance or fiscal balance.
Some of the major differences between the GFS and AAS31 treatments of transactions are outlined in Table D1. Further information on the differences between the two systems is provided in the ABS publication Information Paper: Accruals‑based Government Finance Statistics, 2000 (Cat. No. 5517.0).

Table D1:  Selected differences between AAS31 and GFS reporting standards
Issue	AAS31 Treatment	GFS Treatment	
Asset writedowns	Treated as part of operating expenses.	Treated as revaluations, except for mutually agreed writedowns, and therefore removed from expenses.	
Gains and losses on assets	Treated as part of operating revenues/expenses.	Treated as revaluations and therefore removed from revenues/expenses.	
Provisions for bad and doubtful debts	Treated as part of operating expenses and included in the balance sheet as an offset to assets.	Act of creating provisions is not considered an economic event and is therefore not considered an expense or included in the balance sheet. 
*	Commonwealth does not comply 	with this requirement (see Part III, 	Attachment A).	
Interest flows related to swaps and other financial derivatives	Treated as operating revenues and expenses.	Treated as financing transactions and so not included in revenues and expenses.	
Acquisition of defence weapons platforms 	Treated as capital expenditure. Defence weapons platforms appear as an asset on the balance sheet. Depreciation expense on assets is recorded in the operating statement.	Treated as an expense. Defence weapons platforms do not appear as an asset on the balance sheet and no depreciation is recorded in the operating statement.	
Commonwealth general government sector investments in public corporations	Investments in public corporations are valued at historic cost in the balance sheet.	Investments in public corporations are valued at current market value. For publicly listed corporations, the share price is used to calculate market value. For non‑listed corporations, the current value of net assets is used.	
Public debt net interest	Premiums and discounts on the repurchase of debt are included in public debt net interest expenses at the time of repurchase, regardless of whether the stock is cancelled at that time. Issue premiums and discounts are amortised over the life of the stock.	Repurchase premiums and discounts are treated as economic revaluations at the time the debt is repurchased (provided it is valued at historical cost). The GFS cash flow statement includes repurchase premiums or discounts in the year that the repurchased stock is cancelled or matures.	
Finance leases	Treats finance leases as if an asset were purchased from borrowings. That is, the lease payment is split into an interest component (which is shown as an operating expense) and a principal component.
The asset and the liability are recorded on the balance sheet.
However, this convention does not apply to the cash flow statement, which does not record the acquisition of the asset or the liability.	As per the accounting standard, except that the GFS cash flow statement includes the acquisition of the asset as a supplementary item for the calculation of the surplus/deficit (underlying cash balance).	

Table D2 reconciles GFS revenue and expenses with their AAS31 counterparts.
Table D2:  Reconciliation of GFS and AAS31 revenue and expenses

Table D3 reconciles the accounting operating result to the GFS net operating balance and the fiscal balance (GFS net lending).
The reconciliation can be divided into two parts. The first part shows classification differences between the AAS31 operating result before extraordinary items and the GFS net operating balance (these classification differences are simply the sum of those shown in Table D2 above).
The second part of the reconciliation shows the adjustment for net capital investment required to derive the fiscal balance from the GFS net operating balance.
Table D3:  Reconciliation of AAS31 net operating result and fiscal balance

(a)	The fiscal balance and net operating balance estimates for 2001–02 in this table are $150 million greater than the 2001–02 fiscal balance and net operating balance estimates elsewhere in the MYEFO. This represents GST revenue accrued in 2001-02 but not yet paid to the States (as GST is paid to the States on a cash basis). Under the State tax treatment applied elsewhere in this document, GST revenue accrued is offset by an equivalent amount payable to the States. Further information is provided in Attachment A to Part I of the Final Budget Outcome 2000–01.