Appendix A: A New Budget Accounting Framework
The Australian Government has adopted a new accounting and financial reporting framework for the 2008‑09 Budget. This framework improves transparency and the accountability of government financial reporting.
Background
Under the Charter of Budget Honesty Act 1998 (the Charter) the Australian Government is required to produce financial statements that are based on two external reporting standards: the Australian Bureau of Statistics (ABS) Government Finance Statistics (GFS) and the Australian Accounting Standards (AAS).
The previous Government adopted the ABS GFS (with certain departures) as the basis for its primary budget financial statements, with the AAS statements also produced and presented as a separate statement in Budget Paper No. 1. In addition, financial statements under the Uniform Presentation Framework, agreed to by the Commonwealth and States, were included in each budget publication. This meant that three separate sets of financial statements were prepared and published at each Budget, Mid‑Year Economic and Fiscal Outlook and Final Budget Outcome (FBO). Each of these financial statements measured the same economic activities of the Commonwealth but reported different key financial aggregates.
In 2002, the Financial Reporting Council (the body established by the Australian Government to oversee financial reporting in Australia) directed the Australian Accounting Standards Board (AASB) to harmonise the ABS GFS and AAS frameworks. In October 2007, the AASB issued AASB 1049 Whole of Government and General Government Sector Financial Reporting as the standard to harmonise these two frameworks.
The new accounting standard
AASB 1049 has made significant progress in harmonising ABS GFS and AAS. In particular, where there was previously choice in the treatment of some transactions under AAS, AASB 1049 now prescribes the ABS GFS treatment be adopted provided that the choice is not inconsistent with other Australian accounting standards. Further, government financial information prepared according to AASB 1049 is now more closely aligned with the presentation prescribed under the ABS GFS framework. For example, AASB 1049 has introduced the concept of a 'statement of other economic flows' into the operating statement for changes in economic value during a period resulting from price and volume changes. Most importantly, AASB 1049 recognises the general government sector as a reporting entity outside of the normal requirement to base the reporting entity on the concept of control.
However, the new standard does not fully harmonise the two frameworks. Instead, AASB 1049 prescribes AAS measurement of budget aggregates on the face of the financial statements with reconciliation in the notes to the ABS GFS measurement of budget aggregates. These reconciliation notes are likely to cause confusion since they imply that a single economic concept can have more than one measurement basis. For example, AASB 1049 would require the Government to show a AASB cash surplus in the cash flow statement and an ABS GFS cash surplus in the notes.
There are a number of other areas where the new standard is not well suited to the Australian Government's financial management framework. For example, the AASB 1049 requirement for the general government sector FBO to be released with the whole of government consolidated financial statements (CFS) would reduce the timeliness of government financial reporting. The Charter of Budget Honesty Act 1998 requires that the FBO be released by the end of September, whereas the CFS is not generally released until December after final audit clearance. The Government will continue to engage with the AASB with the aim of addressing these issues.
The Government's accounting policy
The Government has decided that the budget financial statements will continue to be based on ABS GFS, subject to departures where AAS provides a better conceptual treatment for specific items. The ABS GFS is a financial reporting framework specifically designed for economic analysis of the public sector by the International Monetary Fund. Importantly, given the Australian Government's key role as a manager of the macroeconomy, ABS GFS fiscal aggregates are consistent with measurement principles underlying the National Accounts.
The Government's budget accounting policy means that:
- the Government will fully comply with AAS and ABS GFS where each framework is in mutual agreement;
- where there are differences in the frameworks, the Government will only depart from ABS GFS where AAS provides a better conceptual treatment meeting the needs of users of public sector financial reports; and
- departures will be limited to complying with either ABS GFS or AAS. Importantly, this rules out departures from both, such as excluding GST from the Commonwealth financial statements.
The accounting policy has a number of consequences for the presentation of the financial statements that improve transparency. The Government will produce only one set of financial statements, down from the three sets produced in previous budgets. Further, a single accounting policy framework will apply right through all whole of government budget papers, from budget to the consolidated financial statements.
A single set of financial statements will comply with the requirement under the Charter for financial information to be based on both frameworks with all the departures disclosed. In practice, the ABS GFS presentation has largely been retained along with most of the previous departures from ABS GFS. The most significant changes are some new departures in moving from ABS GFS to the AASB 1049 treatment where the latter provides a conceptually superior accounting basis for measuring or presenting information in the financial statements. The Government has also removed a significant departure from both ABS GFS and AAS by recording the GST as a Commonwealth tax. A list of the departures and the reasoning for them is outlined at Note 2 of Statement 10.
Overall, the new accounting policy results in no changes to the underlying cash balance, while net worth improves by $31.6 billion, largely due to adopting the AASB 1049 requirement for defence weapons to be treated as an asset. The most significant departures from ABS GFS are likely to be eliminated as the GFS framework is updated. For example, recent updates to the Systems of National Accounts require defence weapons to be treated as assets. Since ABS GFS depends on the SNA framework, this change is likely to flow through to ABS GFS.
These reforms will allow the community to better hold governments accountable for their budget decisions. A single set of financial statements will reduce confusion among users, while for the first time preparing the audited CFS on the same accounting policy basis as the budget will improve financial accountability. Adopting ABS GFS as the basis for accounting policy will ensure that the financial statements continue to reflect the specific needs of users of public sector financial reports. Avoiding departures from both frameworks and opting for AAS where it is conceptually better will improve the accuracy of the financial statements. Overall, the Government's reforms will significantly simplify the presentation of Australian Government financial reports, while improving the financial information that is available to the Parliament and the general public.
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