FinanceBrief 6 (Revised)
Accounting for the transfer of appropriations under section 32 of the FMA Act
FinanceBriefs are issued by Accounting Policy Branch as guidance on specific accounting and reporting topics. FinanceBriefs do not take precedence over the financial reporting regulatory framework, which encompasses the Finance Minister’s Orders, Australian Accounting Standards and AASB Interpretations.
Purpose of FinanceBrief 6
The purpose of this FinanceBrief is to provide updated guidance to agencies on how to calculate amounts of appropriation to transfer under section 32 of the FMA Act when there is a transfer of function.
This FinanceBrief does not address:
- procedural matters that relate to machinery of government changes; or
- transferring special appropriations including special accounts.
Agencies should consult the Implementing Machinery of Government Changes: A good practice guide published by the Australian Public Service Commission and associated guidance released by the Department of Finance and Deregulation in relation to these matters.
Legislation
Section 32 of the Financial Management and Accountability Act 1997 (FMA Act) applies if a function of an agency is transferred to another agency. As a consequence, the Minister for Finance and Deregulation (Finance Minister) may make a determination to amend the annual Appropriation Acts. Such a determination must be related to the transfer of a function.
Section 32 of the FMA Act does not apply to Commonwealth Authorities and Companies Act 1997 (CAC Act) entities. Where a transfer of function involves a CAC Act entity, alternative authorisation must be arranged to transfer funds. This may include:
- new appropriations for amounts to be transferred at the next opportunity (such as Budget or Additional Estimates);
- changes to the enabling legislation; and
- a ministerial declaration, where an Act of Parliament authorises a Minister to declare that authorisation to spend had been transferred.
Section 31 of the FMA Act is not an appropriate mechanism to effect a transfer of appropriation relating to a transfer of agency function.
Section 32 Determinations
A determination made by the Finance Minister under section 32 of the FMA Act details amendments to the annual Appropriation Acts as a result of a transfer of functions from one agency to another.
Each determination will state the commencement date on which the amendments to the annual Appropriation Acts will commence. For practical reasons, it might be administratively easier for reporting purposes to have a section 32 determination take effect on a particular date, such as the beginning of a month, rather than the date it is signed or registered.
Finance Circular 2010/01 provides advice on how annual appropriations can be transferred between agencies following a transfer of functions arising from machinery of government changes. Attachment A to this circular provides a transfer of appropriations form, which provides for the documenting of proposed amendments to the annual Appropriation Acts.
The calculations outlined in this FinanceBrief are intended to assist agencies in calculating the amount of appropriations to transfer in relation to a transfer of functions between agencies. When agreement is reached on the amounts to be transferred, they should be entered into the transfer of appropriations form for sign-off by each agency Chief Financial Officer.
Agencies should also reference guidance in relation to the costing of departmental activities as documented in EM 2009/65 (Revised): Costing Departmental Expenses for New Policy Proposals (NPPs).
Annual Appropriations
Departmental Output Appropriations
Departmental appropriations are comprised of three components:
- Ordinary operating costs, such as salaries, supplier costs, accruing employee entitlements, and operational expenditure excluding depreciation;
- Departmental Capital Budgets (DCBs) for the replacement of minor assets valued at $10 million or less, as well as costs eligible to be capitalised; and
- Supplementation for work that agencies were directed by government to undertake in a previous year, where agencies first meet the costs of these activities from existing appropriations and the appropriations are then replenished in a later Budget or Additional Estimates round.
In determining the amount of appropriations to be transferred, the following should be taken into account:
- the amount of current year expenditure incurred by the transferring and gaining agencies; and
- the amount of appropriations from previous years retained by the transferring agency to cover liabilities accrued and assets consumed in those years.
The transferring and gaining agencies must exercise particular care on the issues of transferring amounts for asset funding, employee entitlements and appropriations receivable.
The calculations that will be required by agencies affected are set out below. A worked example is attached (Attachment A).
Calculating the amount to be transferred
Step 1: Balance of the current year appropriation
The balance of the current year departmental appropriation at restructure date 1 is calculated as follows:
Departmental Appropriation for current year
less
Expenditure incurred by the transferring agency to date of restructure
Determining the expenditure to date
A transferring agency’s financial system may not be capable of accurately measuring the expenditure incurred from 1 July to restructure date. If this is the case, expenses can used as the starting point for calculating the expenditure to date.
(i) If expenditure is not uniform throughout the period the amount is calculated as follows:
Total expenses from 1 July to the date of restructure
less
Non-cash expenses, for example, depreciation/amortisation/make good expenses
less
Expenses recoverable from sales under section 31 agreements
plus
Increases in assets to date of restructure, for example, asset/investment additions
plus
Reductions in liabilities to date of restructure
(ii) The alternative method, which can be used if expenditure has been incurred on an even basis, is as follows:
Departmental Appropriation x Days from 1 July to date of restructure
365
Apportioning the balance of the appropriation
Once the balance of the current year departmental appropriation is ascertained, it will be necessary to allocate that amount between the transferring and gaining agencies according to their changed functions.
The amount attributable to the gaining agency can be estimated as follows:
Balance of appropriations at date of restructure x Number of staff/consultants transferred
Average total number of staff/consultants of transferor agency to date of restructure
This formula may need to be amended if the staffing/consultancy ratios in the transferred function differs from the average of the transferring agency, or if the appropriation can be based more accurately on requirements other than labour (e.g. the transferred function has a greater/lower use of capital compared to the rest of the transferring agency).
Affected agencies should note that the amount of appropriation retained by the transferring agency must not be less than the amount spent by that agency, otherwise they could be in breach of the Appropriation Act and Constitution. This situation may arise, for example, where prepayments are significant.
Step 2: Previous years’ appropriations
The gaining agency will be entitled to unspent previous year appropriations relating to, for example, accrued employee liabilities and unspent asset funding on assets that are transferred at restructure date.
This may also include an appropriation receivable amount in relation to the provision of additional departmental expenditure in the previous year (i.e. supplementation).
These accrued amounts would have been appropriated for the period from 1 July 1999 (the commencement of the accrual financial framework) to 30 June of the year preceding the year of the restructure.
Apportioning previous years’ appropriations
As noted at Step 1 above, unless a transferring agency’s systems are capable of accurately apportioning the funds, it will be necessary to estimate that amount.
For example, agencies could use employee numbers transferred to allocate prior years’ appropriation receivable.
Prior years’ appropriation receivable x Number of staff transferred
Average total number of staff of transferring agency
Where the staffing ratios in the transferred function vary from the transferring agency’s average or if the appropriation would be more accurately apportioned if based on capital rather than labour requirements, both agencies will need to negotiate and apply an amended/alternate, equitable formula.
Other Types of Annual Appropriation
Administered Expenses - Annual administered operating appropriations are provided for each agency outcome with respect to a particular financial year. The transfer of unspent balances is subject to the level of appropriations available following the end of year reconciliation process (‘section 11’ process).
Specific Purpose Payments to the States and Territories - Annual administered operating appropriations are provided for each agency outcome with respect to a particular financial year. The transfer of unspent balances is subject to the level of appropriations available following the end of year reconciliation process.
Equity injections - The amount of the unspent appropriation to be transferred should be determined having regard to the intended use of the appropriation against the functions transferred.
Loans - The amount of the unspent appropriation to be transferred should be determined having regard to the intended use of the appropriation against the functions transferred.
Prior Years’ Outputs (only applies to the 2009 10 and previous appropriations) - The amount of the unspent appropriation to be transferred should be determined having regard to the intended use of the appropriation against the functions transferred.
Special Appropriations
Section 32 determinations can only transfer annual appropriations. Responsibility for the administration of special appropriations is allocated to Ministers under the Administrative Arrangements Order (AAO).
Departments should seek their Minister’s approval for the allocation of responsibility for the administration of these appropriations to FMA Act agencies within the portfolio. Agencies responsible for administering special appropriations will need to ensure that they are able to comply with their statutory responsibilities.
In general, the calculation of the unspent amount of special appropriation is as follows:
Total yearly special appropriation (limited) or estimate (unlimited)
less
Expenses incurred to date of AAO
Agencies must have regard to the specific provisions of the special appropriation, to ensure that sufficient special appropriation is retained to fund all expenses incurred by the transferring agency under the provisions of the special appropriation.
For further advice on the process of transferring special appropriations, agencies should contact their Agency Advice Unit (AAU), Budget Group, Department of Finance and Deregulation.
Further guidance can be found in Finance Circular 2005/13: Allocation of responsibilities for special appropriations.
Reporting
The reporting requirements for shared outcomes and programs are outlined in section 121 of the Finance Minister’s Orders (FMOs). Appropriation reporting is outlined in Part I of the FMOs.
Discontinued operations
Where a function is to be discontinued, the draw down schedule of the responsible agency should be reduced by the amount that would otherwise have been allocated to a gaining agency.
If an agency has already drawn down any part of moneys attributable to discontinued operations, a liability should be recognised and revenues from government should be reduced accordingly. The liability will be extinguished by making a cash transfer to the Official Public Account.
Contact the relevant AAU for further advice regarding discontinued operations.
Other Guidance
Additional information on restructures can be found in:
- Australian Accounting Standard 1004 Contributions;
- The Finance Minister’s Orders;
- Finance Circular 2005/13: Allocation of responsibilities for special appropriations; and
- Finance Circular 2010/01 Section 32 of the FMA Act - Transfer of Agency Functions.
For further guidance on transferring annual appropriations on change of agency functions, agencies should contact their AAU.
Contacts
For further advice in relation to this FinanceBrief email the Accounting Policy Branch at accountingpolicy@finance.gov.au.
Footnote:
1. For the purpose of this FinanceBrief restructure date means the commencement date specified in the section 32 determination.
Attachment A: Worked Example
Agency A has transferred some of its functions to Agency B. The following financial data was extracted from Agency A’s records in relation to the function transferred:
| $m | |
Current year departmental outputs appropriation |
41.8 |
Prior year departmental appropriations receivable |
11.1 |
Total appropriations available |
52.9 |
Current year expenses (excluding non-cash and accrued expenses) |
16.2 |
Current year asset additions |
2.0 |
| Current year decrease in liabilities | 1.0 |
| Current year cash payments (to date of transfer) | 26.6 |
Calculations – Amount of Appropriation to be Transferred:
Step 1 - Current year appropriation transfer
Current year departmental appropriation |
41.8 |
less Current year expenses |
16.2 |
| less Current year asset additions | 2.0 |
| less Current year decrease in liabilities | 1.0 |
| Amount to be transferred to Agency B | 22.6 |
Step 2 - Calculation of cash payments related to prior year appropriation
Current year cash payments (to transfer date) |
26.6 |
Current year expenses, asset additions and decrease in liabilities |
19.2 |
Cash payments for prior year expenses (to date of transfer) |
7.4 |
Note: cash payments could relate to prepayments/payments for accrued expenses, or be paid from current year or prior year appropriations.
Step 3- Prior year appropriation transfer
Prior year appropriation receivable |
11.1 |
Cash payments for prior year expenses (to date of transfer) |
7.4 |
Amount to be transferred to Agency B |
3.7 |
Step 4 - Total appropriation transfer
Current year appropriation transferred |
22.6 |
Prior year appropriation transferred |
3.7 |
Amount of section 32 determination to transfer Agency A's function(s) to Agency B |
26.3 |
Impact on Financial Statements
Agency A
Agency A’s current year departmental appropriation is reduced by $22.6m for the s32 determination, and it would only recognise $19.2m in appropriation revenue for the function in its financial statements. Appropriation receivable and equity would be reduced by $3.7m to reflect the transfer of prior year appropriation to Agency B.
Agency B
Agency B would record $22.6m in appropriation revenue by year end, with any unspent amounts being recognised in appropriation receivable. Agency B would increase appropriation receivable and equity by $3.7m for the unspent prior year appropriation transferred. Prior year appropriation receivable should not be recognised as revenue, as Agency A would have booked the revenue in prior periods.
Note: The worked example above relates to the transfer of departmental output appropriations. Similar principles would apply to the transfer of administered operating appropriations under a section 32 determination.
Full Publication
FinanceBrief 6 - Adjustment of appropriations on transfer of functions [
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