Note 1 Summary of Significant Accounting Policies

1.1 Objectives of the department

The department’s objective is sound and well coordinated government policies, programmes and decision making processes.

The department is structured to meet one outcome.

The department’s activities contributing to this outcome are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, revenue and expenses controlled or incurred by the department in its own right. Administered activities involve the management and oversight by the department on behalf of the government of items controlled or incurred by the government.

The department’s activities are identified under the following Output Groups:

• Output group 1: Economic policy advice and coordination
• Output group 2: Social policy advice and coordination
• Output group 3: International, and national security, policy advice and coordination
• Output group 4: Support services for government operations.

1.2 Basis of accounting

The financial statements are required by section 49 of the Financial Management and Accountability Act 1997 and are a general purpose financial report.

The statements have been prepared in accordance with:

• Finance Minister’s Orders (FMOs), being the Financial Management and Accountability Orders (Financial Statements for reporting periods ending on or after 30 June 2005);
• Australian Accounting Standards and Accounting Interpretations issued by the Australian Accounting Standards Board (AASB); and
• Consensus Views of the Urgent Issues Group.

The statements have also been prepared having regard to the Explanatory Notes to Schedule 1 of the FMOs and Finance Briefs.

The Statements of Financial Performance and Financial Position have been prepared on an accrual basis and are in accordance with historical cost principles except for certain assets, which, as noted, are at valuation. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

Assets and liabilities are recognised in the Statement of Financial Position when and only when it is probable that future economic benefits will flow and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under agreements equally proportionately unperformed are not recognised unless required by an Accounting Standard. Liabilities and assets that are unrecognised are reported in the Schedule of Commitments (2003–04: nil).

Revenues and expenses are recognised in the Statement of Financial Performance when and only when the flow or consumption or loss of economic benefits has occurred and can be reliably measured.

The continued existence of the department in its present form, and with its present outcome programmes, is dependent on government policy and on continuing appropriations by Parliament for the department’s administration and programmes.

Administered revenues, expenses, assets and liabilities and cash flows reported in the Schedule of Administered Items and related notes are accounted for on the same basis and using the same policies as for departmental items, except where otherwise stated at Note 1.23.

1.3 Changes in accounting policy

The accounting policies used in the preparation of these financial statements are consistent with those used in 2003–04.

Property, plant and equipment assets are valued at fair value from 1 July 2002 as explained in Note 1.13. Revaluation increments and decrements arising on adoption of fair values at 1 July 2002 were taken directly to accumulated results in accordance with the transitional provisions of AASB 1041 Revaluation of Non-current Assets.

In 2002–03, the Finance Minister’s Orders introduced an impairment test for agency non-current assets carried at cost and which were not subject to AAS 10 Recoverable Amount of Non-Current Assets . In 2004–05 no software was written down under this policy (2003–04: nil).

In 2004–05, the impairment test provisions of the FMOs have been extended to cover non-current assets. There were no indications of impairment for these assets.

1.4 Revenue

Revenues from government

Amounts appropriated for departmental outputs for the year (less any current year savings and reductions) are recognised as revenue, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.

Savings are amounts offered up in Portfolio Additional Estimates Statements. Reductions are amounts by which appropriations have been legally reduced by the Finance Minister under Appropriation Act No. 3 of 2004–05.

Appropriations receivable are recognised at their nominal amounts.

Resources received free of charge

Services received free of charge are recognised in the Statement of Financial Performance as revenue when and only when a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those services is recognised as an expense.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as revenue at their fair value when the asset qualifies for recognition, unless received from another government agency as a consequence of a restructuring of administrative arrangements. (Refer to Note 1.5).

Other revenue

Revenue from rendering of services is recognised by reference to the stage of completion of contracts or other agreements to provide services. The stage of completion is determined according to the proportion of costs incurred to date.

Receivables for services are recognised at the nominal amounts due less any provision for bad and doubtful debts. Collectibility of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.

Revenue from disposal of non-current assets is recognised when control of the asset has passed to the buyer.

1.5 Transactions with the government as owner

Equity injections

Amounts appropriated which are designated as ‘equity injections’ (less any savings offered up in Portfolio Additional Estimates) are recognised directly in Contributed Equity at 1 July or later date of effect of the appropriation.

Restructuring of Administrative Arrangements

Net assets received from or relinquished to another government agency or authority under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.

Other distributions to owners

The FMOs require that distributions to owners be debited to contributed equity unless in the nature of a dividend.

1.6 Grants

The department applies a uniform policy for all grants. Grant liabilities are recognised to the extent that (i) the services required to be performed by the grantee have been performed or (ii) the grant eligibility criteria have been satisfied, but payments due have not been made. A commitment is recorded when the government enters into an agreement to make these grants but services have not been performed or criteria satisfied. Where grant moneys are paid in advance of performance or eligibility, a prepayment is recognised.

1.7 Employee benefits

Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.

Liabilities for salaries and wages (including non-monetary benefits) and annual leave are measured at their nominal amounts. Other employee benefits expected to be settled within 12 months of the reporting date are also measured at their nominal amounts.

The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

All other employee benefit liabilities are measured as the present value of the estimated future cash outflows to be made in respect of services provided by employees up to the reporting date.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the department is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration, including the department’s employer superannuation contribution rates to the extent that the leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by reference to the work of an actuary as at 30 June 2002. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and redundancy

Provision is made for separation and redundancy benefit payments. The department has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

Staff of the department are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) and other superannuation schemes held outside the Commonwealth. The liability for staff CSS and PSS superannuation benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course.

The department makes employer contributions to the Australian Government at rates determined by an actuary to be sufficient to meet the cost to the government of the superannuation entitlements of the department’s employees.

The liability for superannuation recognised as at 30 June represents outstanding contributions in relation to salaries accrued as at 30 June.

1.8 Leases

A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased non-current assets and operating leases under which the lessor effectively retains substantially all such risks and benefits.

Where a non-current asset is acquired by means of finance lease, the asset is capitalised at the present value of minimum lease payments at the beginning of the lease term and a liability is recognised at the same time and for the same amount. The discount rate used is the interest rate implicit in the lease. Leased assets are amortised over the period of the lease. Lease payments are allocated between the principal component and the interest expense.

Operating lease payments are expensed on a basis which is representative of the pattern of benefits derived from the leased assets.

The department entered into a sale and operating leaseback of certain information technology equipment in July 1999. This transaction was recognised as a finance lease in accordance with Australian Accounting Standard AAS17: Leases for the first time as at 30 June 2001, with the assets being recognised at their fair value at that date. This lease expired during 2004–05.

Lease incentives taking the form of ‘free’ leasehold improvements and rent holidays are recognised as liabilities. These liabilities are reduced by allocating lease payments between rental expense and reduction of the liability.

1.9 Borrowing costs

All borrowing costs are expensed as incurred except to the extent that they are directly attributable to qualifying assets, in which case they are capitalised.

1.10 Cash

Cash means notes and coins held and any deposits held at call with a bank or financial institution. Cash is recognised at its nominal amount.

1.11 Other financial instruments

Trade creditors

Trade creditors and accruals are recognised at their nominal amounts, being the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

Contingent liabilities and contingent assets

Contingent liabilities (assets) are not recognised in the Statement of Financial Position but are discussed in the relevant schedules and notes. They may arise from uncertainty as to the existence of a liability (asset), or represent an existing liability (asset) in respect of which settlement is not probable or the amount cannot be reliably measured. Remote contingencies are part of this disclosure. Where settlement becomes probable, a liability (asset) is recognised. A liability (asset) is recognised when expense (revenue) is confirmed by a future event, settlement becomes probable or reliable measurement is possible.

1.12 Acquisition of assets

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and revenues at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised at the amounts at which they were recognised in the transferor agency’s accounts immediately prior to the restructuring.

1.13 Property, plant and equipment

Asset recognition threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $2,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

Revaluations

Basis

Land, buildings, plant and equipment are carried at valuation. Revaluations undertaken up to 30 June 2002 were done on a deprival basis; revaluations since that date are at fair value. This change in accounting policy is required by Australian Accounting Standard AASB 1041 Revaluation of Non-Current Assets.

As at 30 June 2005, land, buildings, plant and equipment will be reflected at fair value.

Fair values for each class of asset are determined as shown below.

As at 30 June 2005, a revaluation was performed by the Australian Valuation Office on the administered assets previously revalued at 1 July 2002. Results of the valuation showed that there had not been a material change to the fair value amount. The current fair value as at 30 June 2005 therefore remained by the valuation.

Frequency

The FMOs require that all property, plant and equipment assets be measured at up-to-date fair values from 30 June 2005 onwards, with formal valuations to be undertaken at least every five years. The current formal valuation cycle commenced on 1 July 2003 and the next formal valuation is scheduled for 30 June 2007. As previously stated, an update to the 1 July 2002 valuation was performed on administered assets as at 30 June 2005, with no material differences noted.

Conduct

All formal revaluations are conducted by an independent qualified valuer.

Depreciation

Land, being an asset with an unlimited useful life, is not depreciated.

Depreciable property, plant and equipment assets are written off to their estimated residual values over their useful lives to the department using, in all cases, the straight-line method of depreciation. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease.

Depreciation rates (useful lives) and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate. Residual values are re-estimated for a change in price only when assets are revalued.

In general, depreciation rates applying to each class of depreciable asset are based on the following useful lives:

The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed in Note 4D and 13E.

Impairment of non-current assets

Non-current assets carried at up-to-date fair value at the reporting date are not subject to impairment testing.

Non-current assets at cost have been assessed for indications of impairment, where indications of impairment existed, the carrying amount of the asset is compared to the higher of its net selling price and depreciated replacement cost. No impairment write-down was required in 2004–05 (2003–04: nil).

1.14 Intangibles

The department’s intangible assets comprise purchased software for internal use. These assets are carried at cost.

Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of the department’s software are 4 to 5 years (2003–04: 4 to 5 years).

All software assets were assessed for indications of impairment as at 30 June 2005. No impairment write-down was required (2003–04: nil).

1.15 Inventories

During 2004–05, it was deemed no longer appropriate to recognise gifts received by Ministers and departmental staff as inventory not held for resale. The amount was therefore written off through expenses.

1.16 Former Governors-General allowances

The department has administrative responsibility for the payment of former Governors-General allowances. The revised actuarial assessment of the liability in relation to these allowances was made as at 30 June 2005.

1.17 Taxation

The department is exempt from all forms of taxation except fringe benefits tax and the goods and services tax (GST).

Revenues, expenses and assets are recognised net of GST:

• except where the amount of GST incurred is not recoverable from the Australian Taxation Office and
• except for receivables and payables.

1.18 Foreign currency

Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current as at balance date. Associated currency gains and losses are not material.

1.19 Insurance

The department is insured for risks through the government’s insurable risk managed fund, called ‘Comcover’. Workers compensation is insured through the government’s Comcare Australia.

1.20 Comparatives

Comparative figures have been adjusted to conform with changes in presentation in these financial statements where practicable.

1.21 Rounding

Amounts have been rounded to the nearest $1,000 except in relation to the following notes:

• compensation and debt relief in special circumstances
• remuneration of executives
• remuneration of auditors
• appropriations
• special accounts.

1.22 Reporting of administered activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the Schedule of Administered Items and related Notes.

Except where otherwise stated below, administered items are accounted for on the same basis and using the same policies as for departmental items, including the application of Accounting Standards, Accounting Interpretations and UIG Consensus Views.

Administered cash transfers to and from the Official Public Account

Revenue collected by the department for use by the government rather than the department is Administered Revenue. Collections are transferred to the Official Public Account (OPA) maintained by the Department of Finance and Administration. Conversely, cash is drawn from the OPA to make payments under Parliamentary appropriations on behalf of government. These transfers to and from the OPA are adjustments to the administered cash held by the department on behalf of the government and reported as such in the Statement of Cash Flows in the Schedule of Administered Items and in the Reconciliation Table in Note 16. Thus the Schedule of Administered Items largely reflects the government’s transactions, through the department, with parties outside the government.

Revenue

All administered revenues are revenues relating to the core operating activities performed by the department on behalf of the government.

Administered revenue is derived from the media commissions payable to the government for its advertising. Revenue is recognised on receipt of confirmation of placement of advertisements with advertising agencies. It is recognised at its nominal amount due less any provision for bad or doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.