Overview of Commonwealth financial reporting
The Commonwealth financial reporting outputs include:
- financial tables and statements for the Budget Papers (including Mid-Year Economic and Fiscal Outlook)
- monthly financial statements
- estimates updates in the Central Budget Management System (CBMS)
- Final Budget Outcome (FBO)
- Consolidated Financial Statements (CFS).
Finance supports these financial reporting outputs by:
- supporting the Finance Minister to meet the financial reporting requirements in the PGPA Act, Charter of Budget Honesty Act and the Appropriation Acts
- maintaining and enhancing a single, whole-of-government, accounting and reporting framework for Commonwealth entities
- maintaining CBMS
- maintaining and improving monitoring and reporting of the Commonwealth's cash balances.
The sections below describe the following areas in further detail:
- monthly and annual reporting processes
- consistency and use of accounts
- inter-entity transactions
- Government Finance Statistics (GFS)
- functional reporting
- publication standards
- major fiscal aggregates
The monthly financial statements, FBO and CFS are required by legislation and serve a number of purposes.
The monthly financial statements show how actual expenditure is tracking against the monthly profile and full year estimate. The statements:
- are required by the PGPA Act (section 47) to be published by the Minister for Finance in a form consistent with the Budget estimates, as soon as practicable after the end of each month
- show how actual expenditure is tracking against the monthly profile and full year estimate
- enable the delivery of actual results against the Budget and provide an opportunity to utilise the benefits associated with accrual budgeting and reporting by:
- delivering reports on accrual measures such as operating result and financial position as well as the use of cash
- being an integral component in forming the annual Consolidated Financial Statements and
- providing an important budget tracking mechanism for the government
- meet the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS), to which the Commonwealth has subscribed, which requires central governments to publish financial statements on a monthly basis; within one month of the period close; and on a basis consistent with that reported in the annual Budget. Under accrual accounting, the IMF has granted some flexibility in the release of June and July monthly statements to allow for the release of the FBO by the end of September
- are used by the Australian Bureau of Statistics (ABS) for inclusion in the Australian National Accounts.
Final Budget Outcome (FBO)
The FBO provides the outcome for the latest financial year with an emphasis on a GFS presentation of the general government sector. The FBO:
- is required by the Charter of Budget Honesty Act 1998 (section 18) by 30 September each year
- incorporates audit cleared accrual based revenue and expenses, balance sheet and cash flow information (obtained from the annual compilation process for the consolidated financial statements)
- provides the outcome for the latest financial year
- includes the release of the June monthly financial data as that month cannot be released until publication of the financial outcome for the year (July and August monthly financial statements are released following the release of the FBO).
Consolidated Financial Statements (CFS)
- are required by the PGPA Act (section 48)
- must be audited by the Auditor-General
- use the same audit cleared financial data as the FBO (sometimes updated for some entities due to a later release) but provides an accounting presentation.
Entities should report financial information for monthly and annual financial reporting, consistent with their audited financial statements. Limiting the use of 'other' accounts will reduce the need for follow up questions from Finance.
Consistent use of accounts enables:
- current data to be compared to previous data for analytical purposes
- consistency in published data
- the derivation of the consolidated cash flow statement which compares operating statement data to relevant movements in balance sheet aggregates
- monthly data to be used by the ABS in the compilation of the Australian National Accounts.
In addition, reporting at the lowest level of detail in the chart of accounts allows Finance to satisfy ABS data collection requirements, avoiding the need for the ABS to undertake an additional Public Finance survey of Commonwealth entities.
Consolidation of financial information provided by entities depends on identifying transactions to and from related entities in CBMS.
All related entity transactions within the general government sector above a threshold should be reported in CBMS. The threshold for reporting inter-entity transactions is $20 million per CBMS account, per annum. This means that entities should separately identify those related entity balances that are likely to be greater than or equal to $20 million by year end. In addition, if the value of related entity transactions in an account will be less than $20 million for the year but it was reported against a related entity account in the previous year’s annual statements, it should also be reported against a related entity account in CBMS for monthly actuals, monthly estimates and annual estimates.
Related entity superannuation expenses and fringe benefit tax should be separately identified irrespective of the amount involved. This is because these related entity balances are relevant to most entities and, therefore, are material at the general government level.
The following is a list of some of the (larger) related entity transactions which are required for Finance to complete the consolidation process:
- grant revenue / receivable against related entity grant expense / payable
- interest revenue against related entity interest expense
- superannuation premium revenue (ComSuper) against related entity superannuation premiums expense
- workers compensation premium revenue (Comcare) against related entity workers compensation expense
- subsidies received against related entity subsidies paid
- prepayment asset against related entity prepayment liability
- suppliers expense against related entity goods and services revenue
- investment against related entity equity (accumulated reserves).
The GFS reporting framework is an accrual financial measurement and reporting system designed to support economic analysis of the public sector. The GFS focuses on the size of the public sector; its contribution to aggregate demand, investment, and saving and provides for cross-country comparison.
The GFS principles are formalised and promulgated by the IMF in consultation with practitioners. The Heads of Treasury and the ABS oversee Australian practical application.
Although the initial GFS standard (documented in the IMF’s GFS Manual 1986) was cash-based, GFS moved to accrual-based reporting with the current publication of the IMF’s GFS Manual 2001 . The ABS has also published an Australian version of this framework. The Australian Accounting Standards Board’s AASB1049 Whole of Government and General Government Sector Financial Reporting harmonises IMF GFS Manual 2001 and Generally Accepted Accounting Principles and is used to present Australian Government financial reports.
The IMF has commenced a review of the GFS Manual 2001, with a revised GFS Manual expected to be released imminently. Finance has provided comments on the likely areas of change.
Reporting by function is an internationally recognised means of reporting government activities for comparison purposes (which can be mapped to the IMF's Government Finance Statistics Manual 2001). It provides a useful means of understanding government outlays as it allows for the reporting of expenses according to their purpose.
In Australia, the functional classification is based on the ABS fourteen major functions published in the Australian System of Government Finance Statistics: Concept, Sources and Methods 2005 :
- general public services
- public order and safety
- social security and welfare
- housing and community amenities
- recreation and culture
- fuel and energy
- agriculture, forestry and fishing
- mining, manufacturing and construction
- transport and communication
- other economic affairs
- other purposes.
This classification differs slightly to the IMF which recognises ten major functions. The IMF has amalgamated five economic major functions into a single economic affairs major function and established of an environmental protection major function.
Expenses by function are published in the Budget Papers and the FBO, as well as the Commonwealth monthly financial statements. A list of function codes can also be found on the CBMS website.
See description of functions and sub-functions for a description of each function a list of what is included and excluded in each sub-function.
Consolidated analysis commentary in the monthly financial statements is based on a comparison of the current months (YTD) figures to a profile of the most recent published budget estimate.
Finance's analysis on monthly financial statements not only verifies the reasonableness of the information provided, it also facilitates the compilation of variance information / explanations on which the analysis commentary is based.
In order to streamline the reporting, analysis and publication process, entities are asked to provide Finance each month with information about significant variations (i.e. variations between the current months (YTD) and the profile which are greater than $50 million at the account level or $20 million at the program level). In addition, entities are required to notify Finance of any issues affecting entity's monthly financial statements at the time that financial information is submitted to CBMS.
Some examples of explanations can include:
- variations to expenses in income statement:
- grants expenses below profile due to the timing of payments. This is mainly attributed to:
- grants to states where payments are made quarterly
- grants to states where payments do not commence until projects are approved and/or agreements are signed and
- grants to non-profit institutions, where payments do not commence until applications are received and approved.
- depreciation and amortisation is below profile due to capital items have not yet been purchased, therefore depreciation has not been expensed.
- suppliers expenses are below profile due to:
- irregular payments associated with programs and
- delays in establishing new programs.
- grants expenses below profile due to the timing of payments. This is mainly attributed to:
- variations to balance sheet – administered or departmental:
- other non-financial assets – the variance in other non-financial assets to the 30 June closing balance is due to the expensing of prepayments
- suppliers – variance to the 30 June closing balance is due to unanticipated delay in some payments at the end of the month.
- other provisions and payables – variance to the 30 June closing balance is due to the inclusion of an accrual for grants due but not yet paid.
Note: variances in administered expenses need to include the impact on function.
Based on the GFS framework, the major fiscal aggregates presented in Commonwealth financial reports include:
- fiscal balance – is an accrual measure that shows whether the Government has to borrow from financial markets to cover its operating activities
- underlying cash balance – is a cash measure that shows whether the Government has to borrow from financial markets to cover its operating activities
- net debt – a common measure of the strength of the Government’s financial position and comprises selected financial assets and liabilities
- net worth – is equal to assets minus liabilities and is a measure of the strength of the Government’s financial position. It is a broader measure than net debt
- net financial worth – is equal to financial assets minus liabilities and is a measure of the strength of the Government’s financial position but avoids valuation issues with non‑financial assets in measuring net worth
The fiscal balance is an accrual measure that shows whether the Government has to borrow from financial markets to covers its activities.
The purpose of this measure is to meet the central fiscal objective to ensure that the Government, over the economic cycle, is saving enough to cover its own investment needs and not drawing on private sector savings.
Fiscal balance, as shown in the following diagram, is calculated as revenue net of expenses from operations, plus revaluation adjustments (to remove items that do not impact on the fiscal balance), plus capital adjustments . Net investment in non-financial assets worsens fiscal balance as such investment is integral to the operation of government. A deficit indicates that the Australian Government is drawing on resources of other sectors in the economy. The fiscal balance is thus an accrual indicator of the financial impact of the Australian Government’s operations on the rest of the economy.
Notes for fiscal balance:
1 Revaluation adjustmentsreflect changes to the value and volume of balance sheet assets and liabilities that do not arise from economic transactions brought to account in the accounting operating statement. Such items do not generally involve the implementation of Government policy and therefore do not impact fiscal balance – they are referred to as other economic flows.
2 Capital adjustmentsare included in the calculation of the fiscal balance as it involves a net call on financial markets and implementation of Government policy. As fiscal balance is on an accrual basis, prepayments are excluded and non-financial assets sold and fixed assets purchased on credit are included. Capital expenditure is defined as purchases less sales of fixed assets such as equipment and intangible assets such as spectrum. As depreciation is included in net operating balance, it is added back as part of the capital adjustment to avoid any double counting.
The underlying cash balance is a cash measure that shows whether the Government has to borrow from financial markets to covers its activities.
The underlying cash balance, as shown in the following diagram, is calculated as net cash receipts from operations (excluding Future Fund earnings), plus financing adjustments (to remove cash flows more appropriately viewed as financing in GFS), plus net cash flows from capital investment (net cash investment in non-financial assets worsens underlying cash balance as such investment is integral to the operation of Government. A deficit indicates that the Australian Government has to borrow from other sectors or run down its cash reserves. The underlying cash balance is thus a cash indicator of the financial impact of the Australian Government’s operations on the rest of the economy.
Notes for underlying cash balance:
3 In the Financing adjustments calculation, certain cash flows are regarded as financing transactions and therefore their impacts are removed from net cash from operating activities when calculating underlying cash balance figures. Currently these adjustments mainly relate to certain public debt cash flows.
4 Capital adjustmentsare included in the calculation of the underlying cash balance as it involves a net call on financial markets and implementation of Government policy. Underlying cash balance incorporates net cash capital expenditure including any prepayments. Capital expenditure is defined as purchases less sales of fixed assets such as equipment and intangible assets such as spectrum.