Accounting for machinery of government changes (RMG 118)

Audience

This Resource Management Guide (RMG) applies to all relevant officials, particularly chief financial officers and finance teams, in Commonwealth entities involved in implementing machinery of government (MoG) changes.

For ease of reference and presentation, the RMG uses ‘entities’ to mean Commonwealth entities, as defined by the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

Key points

This RMG provides a point of reference for the accounting requirements that apply to the implementation of MoG changes, with a focus on:

  • assets and liabilities transferring between entities when control of these passes from one entity to the other
  • the timing for the change of responsibility that broadly aligns with the change of control, based on legal requirements that may vary from item to item
  • entity’s need to agree on appropriation amounts to be transferred, in accordance with the PGPA Act, for the transfer to take affect from the date specified in the section 75 legislative instrument.

The scope of this RMG is limited to the accounting implications of a MoG change and excludes other procedural matters arising from changing or abolishing entity functions.

This RMG replaces Accounting for machinery of government changes (RMG 118), dated May 2019.

Resources

This guide is available from the Finance website.

Relevant publications and accounting pronouncements include:

Introduction

  1. A MoG change occurs when the Government decides to change the way Commonwealth responsibilities are managed. MoG changes may result from:
    • a change to the Administrative Arrangement Orders (AAO), which set out the matters dealt with by entities, and the legislation administered by ministers of state
    • a decision of the Prime Minister or Cabinet, regarding the movement of responsibilities and functions between Commonwealth entities (where the change is not a change to the AAO).
  2. MoG changes can involve the movement of functions, appropriations, other resources and people from one entity to another.
  3. Section 75 of the PGPA Act applies if a function of a non‑corporate Commonwealth entity (NCE), is transferred to another NCE, either because the transferring entity is abolished or for any other reason.Under
    • subsection 75(2) of the PGPA Act, the transfer of appropriations between NCEs, are authorised through a determination by the Commonwealth Minister for Finance (Finance Minister).
    • subsection 75(7) of the PGPA Act, such a determination is a legislative instrument, but disallowance under section 42 of the Legislation Act 2003 does not apply to the determination.
  4. The government expects MoG changes to be implemented as quickly as possible, to support government priorities with a focus on achieving the best outcomes for the Australian community across the whole of government.
  5. To implement a MoG change, appropriation amounts to be transferred need to:
    • be agreed between the entities
    • apply from the date specified in the subsection 75(7) instrument.
  6. Assets and liabilities should be accounted for by the entity that has responsibility for them. The timing for the change of responsibility should broadly align with the change of control, based on legal requirements, and this may vary from item to item.
  7. For information and practical guidance on implementing MoG changes and the financial management issues in the first 72 hours, see Machinery of Government (MoG) changes: A guide.

Part 1 – Background

  1. MoG changes follow a government decision to abolish or create an entity, move functions or responsibilities between entities, or move functions into, or out of, the Australian Public Service (APS). A MoG change can lead to the:
    • creation of a new government entity
    • creation of a new portfolio
    • movement of entities between portfolios
    • closure of an existing government entity
    • movement of functions and responsibilities from:
      • one APS entity to another APS entity
      • an APS entity to a non-APS entity, or
      • a non-APS entity to an APS entity.
  1. The Department of the Prime Minister and Cabinet will inform entities of government decisions resulting in MoG changes.

Implementation principles for MoG changes

  1. The principles apply when implementing MoG changes, irrespective of any historical budget decisions, are shown at Table 1.

Table 1: Principles that apply to implementing MoG changes

Taking a
whole-of-government approach:

Constructive and open communication
with staff:

Accountability and compliance with legislation and policy:

  • timely and accurate exchange of information
  • open and honest identification of resource implications
  • good faith negotiations.
  • early advice and assistance to staff
  • consultation — employees have opportunities to contribute to the implementation process within the boundaries of government decisions
  • acting with integrity.
  • ensure adequate records management
  • follow established procedural frameworks, such as the ‘staff follow function’; ‘finances follow function’; and ‘obligations follow function’ while taking account of reforms such as shared services.
  1. Staff and appropriations devoted to a function at the point of the MoG change, transfer to the gaining entity. The gaining entity is to accept the obligations connected with the transferred staff and appropriations.
  2. To continue operations when MoG changes occur, an option for the gaining NCE is to request the losing NCE to continue managing related receipts and payments on its behalf (including on an interim basis). In such cases, the gaining NCE must provide the losing NCE with appropriate delegations and authorisations.

Part 2 – Accounting requirements

  1. Finance makes determinations under section 75 of the PGPA Act to transfer annual appropriation funding and advises entities on governance arrangements, superannuation, accounting and budgeting, reporting, banking, insurance, property management issues and the Central Budget Management System (CBMS).
  2. Financial reporting and accounting disclosure requirements for implementing and reflecting MoG changes are set out in:
  3. For further information:
    • on financial reporting arrangements, 
    • see RMG 125 - Part 7 - Administrative arrangement restructures
    • financial reporting requirements following MoG changes, see RMG 119, or
    • email Accounting Policy.

Part 3 – Timing considerations

  1. The date of effect of a MoG change will be either:
    • the date the change to the AAO was issued
    • the date specified in a decision by the Prime Minister or Cabinet, or
    • is specified in legislation or a legislative instrument – see section 75 determinations.
  2. Under MoG arrangements, functional and administrative responsibility for legislation transfers from the losing entity to the gaining entity on the date of the MoG change. However, this does not necessarily mean that legal responsibilities for associated assets, liabilities, revenues and expenses also transfers to the gaining entity from that same date.
  3. In practice, it is often impossible to arrange for all the necessary transfers to occur on the MoG change date. As a result, the date that the gaining entity becomes responsible for transferred assets, liabilities, revenues and expenses may vary.
  4. The losing and gaining entity often need to agree on the amount of appropriation and the effective transfer dates, including for:
    • the responsibilities created by legislation for any assets, liabilities, revenues and expenses that transfer to the gaining entity on the date of the MoG change
    • staff transferring to the gaining entity under section 72 of the Public Service Act 1999 (PS Act). Even those staff specifically allocated to a function being transferred, will not transfer to the gaining entity until section 72 requirements are met and similar arrangements may apply to entities that employ staff under Acts other than the PS Act
    • any other assets and liabilities that remain in the control of the losing entity until such time as there is agreement to transfer them. In some cases, this may require agreement by external parties
    • other revenues and expenses that remain in the control of the losing entity until such time as there is agreement to transfer them.
  5. Any proposed appropriations included in appropriation Bills at the MoG change date, will not transfer to the gaining entity without a determination by the Finance Minister under section 75 of the PGPA Act. The date of effect is independent of, but may be aligned with, other accounting for MoG changes.

Table 2: Effective date of appropriation transfers

Appropriations that transfer
at the MoG change date:

Appropriations that transfer
from an alternate date:

  • special appropriations in legislation
  • special accounts for which section 80 of the PGPA Act applies
  • revenues and expenses collected or incurred under specific legislation (e.g. levies or fines).
  • special accounts established under section 78 of the PGPA Act
  • other appropriations—these transfer at the effective date of the section 75 instrument (i.e. not necessarily the date that the instrument is signed)
  • employee entitlements and employee expenses—these transfer at the effective date of staff transfers under the PS Act or similar legislation
  • other revenues, expenses, assets and liabilities—these transfer at the date agreed by the gaining and losing entity, subject to obtaining any required third party approvals for passing control between the gaining and losing entity.
  1. Finance should be advised, as soon as possible, of the agreed transfer date of special accounts established under section 78 of the PGPA Act to enable CBMS and the special account register to be updated.
  2. Agreements between the entities on the transfer of other revenues, expenses, assets and liabilities should be documented in a Memorandum of Understanding (MoU).

Responsibility for related assets and liabilities

  1. Entities are required to recognise the transfer value of assets and liabilities in the books of the transferring entity as at the transfer date.
  2. Assets and liabilities transfer between entities when control of these passes from one entity to another, or when effective administrative responsibility transfers for administered items. The transfer date for responsibilities related to assets/liabilities and revenue/expenses should align, for example:
    • employee entitlements should align with the date for assuming responsibility for employee expenses
    • assets should align with the date for recognition of depreciation
    • appropriations should align with the appropriation receivable date.

Application to administered items

  1. Administered items are managed by an entity on behalf of the government, and are not subject to the explicit control of a specified entity. Nevertheless, the PGPA Act and AASB 1004 do not distinguish between administered and departmental items and place responsibility for all items with the entity and the accountable authority that has control. Generally, control is with the losing entity and its accountable authority.
  2. Accordingly, the application of principles to administered items is to be based on the legal requirements for the current holder of custody.

Note: Apply the approach that custody does not change until there is either, a legal mandate to do so, or as agreed between entities.

Practicalities

  1. Implementation of the financial consequences of a MoG change not previously announced, can be considerably simplified if the gaining and losing entities approach it from the following perspective:
    • focus immediate attention to the consequences of items that transfer immediately, (e.g. delegations for special appropriations)
    • establish agreement on a set (future) date, at which all other items will be transferred and document that agreement (i.e. in an MoU)
    • communicate relevant matters to Finance (e.g. about changes in responsibility for special accounts, for access to appropriations through CBMS).
  2. Documentation of the agreement is an important evidentiary step for clarifying accountability, to prevent subsequent misinterpretations, and as supporting evidence for use in the audit process. A documented MoU may also deal with the transfer of other rights and responsibilities, not recorded as assets and liabilities (e.g. obligations under legal agreements or responsibility for intellectual property).

Part 4 – Section 75 determinations

  1. A determination made by the Finance Minister under subsection 75(2) of the PGPA Act will detail amendments to the annual appropriation Acts resulting from a transfer of functions from one entity to another. Each determination will state the commencement date on which the amendments take effect.
  2. Finance makes determinations under section 75 of the PGPA Act to transfer appropriation funding and provides guidance on:
    • governance arrangements
    • superannuation
    • accounting and budgeting
    • reporting
    • banking
    • information and communication technology
    • insurance
    • property management
    • data
    • CBMS reporting.
  3. For practical reasons, it may be administratively easier for reporting purposes if the effective date of a section 75 determination is from an agreed date rather than at the date that it is signed or registered (e.g. at the beginning of a month).
  4. For practical reasons, it may be administratively easier for reporting purposes if the effective date of a section 75 determination is from an agreed date rather than at the date that it is signed or registered (eg at the beginning of a month).

Note: Section 75 of the PGPA Act does not apply to corporate Commonwealth entities (CCEs), Commonwealth companies or special appropriations. For CCEs, different situations apply when transferring functions. For more information, in the first instance, contact Annual Appropriations.

Part 5 – Annual appropriations

  1. Section 75 of the PGPA Act provides for the transfer of annual appropriations between NCEs and sets requirements, including that transfers must not result in:
    • a change in the total amount appropriated in the financial year in which the determination is made, or
    • an increase in the total amount appropriated in relation to previous financial years.
  2. Generally, the principle applied for transferring both annual appropriations and special appropriations is that ‘finances follow function’. Appropriations that are to be moved, are done so on a prioritised basis. Legislative instruments under subsection 75(2) of the PGPA Act are required for urgent transfers. 
  3. To identify the functions and appropriations to be transferred for a MoG change, and how related appropriations can be accessed, it is important to consider the:
    • current year annual appropriations to be transferred, the annual appropriation Acts identifying relevant ‘departmental’ and ‘administered’ appropriations, appropriations for payments to states, territories and local government, new administered outcomes, equity injections and/or administered assets and liabilities
    • prior year annual appropriations to be transferred, including any withheld and/or quarantined amounts
    • special appropriations to be transferred, including:
      • special accounts payments being met by the relevant entity for the new functions
      • the appropriation authority that assists the entity

Departmental appropriations

  1. Departmental appropriations are comprised of:
    • ordinary operating costs (eg salaries, supplier costs, accruing employee entitlements, and operational expenditure excluding depreciation)
    • departmental capital budgets for the replacement of minor assets valued at $10 million or less, as well as costs eligible to be capitalised.
  2. In determining the appropriation amount to be transferred, entities should take account of amount(s) for current-year expenditure incurred by both entities, and any prior-year appropriations retained by the transferring entity, to cover liabilities accrued, and assets consumed, in those years.
  3. Care is required when determining the amount of appropriations to be transferred, particularly for issues related to transfer amounts for asset funding, employee entitlements and appropriations receivable.
  4. A ‘step-by-step’ guide for calculating transfer amounts, in compliance with section 75 of the PGPA Act, is included at Appendix 1.

Other unspent annual appropriations

  1. For administered expenses and specific purpose payments to states and territories, the annual administered operating appropriations are provided for each entity outcome, with respect to a particular financial year. The transfer of unspent balances is subject to the level of appropriations available.
  2. For equity injections and loans, the transfer amount for unspent appropriations, should be determined with regard to the intended use of the appropriation for the transferred function(s).

Part 6 – Discontinued operations

  1. Where a function is being discontinued, the drawdown schedule of the responsible entity should be reduced by the amount that otherwise would have been allocated to a gaining entity.
  2. If an entity 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.

Part 7 – Disclosure requirements

  1. Disclosure is required as per section 26 or the FRR (Restructures of administrative arrangements) and AASB 1004.
  2. For information on appropriations and reporting requirements for outcomes, see RMG 125:
    • Part 8 – Appropriations
    • Part 9 – Other disclosures, section 9.2 Reporting of outcomes. 

Appendix 1 – Calculating the transfer amount

The amount of appropriation retained by the transferring entity must not be less than the amount spent by that entity, in particular to avoid an inadvertent breach of section 83 of the Commonwealth of Australia Constitution Act (The Constitution). Particular care should be taken, for example, where prepayments are significant.

Note: The ‘date of transfer’ for these calculations is the ‘commencement date’ specified in the section 75 determination.

Step 1. Calculate current year departmental appropriation transfer

Calculate the balance of the current year departmental appropriation at the date of transfer by subtracting the expenditure incurred by the transferring entity to the date of transfer from the departmental appropriation for current year outputs.

Current year departmental appropriation at transfer date =

Departmental appropriation for
current year outputs

less

Expenditure incurred
by the transferring entity
to date of transfer

Expenditure to date of transfer

A transferring entity’s financial system may not be capable of accurately measuring the expenditure incurred from 1 July to the date of transfer. If this is the case, expenses can be used as the starting point for calculating the expenditure to date.

(a) If expenditure is not uniform throughout the period the amount is calculated as follows:
 

Total expenses from 1 July
to the date
of transfer

less

Non-cash expenses
(such as depreciation, amortisation, make good expenses)

less

Expenses recoverable from sales under
PGPA Act,
 section 74 agreements

add

Increases
in assets
to date of transfer
(eg asset or investment additions)

add

Reductions
in liabilities
to the date
of transfer

(b) If expenditure has been incurred on an even basis, the following alternative method can be used:

Departmental appropriation × (Days from 1 July to date of transfer/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 entities according to their changed functions. The amount attributable to the gaining entity can be estimated, for example, as follows:

 Amount attributable to the gaining entity =

Balance of appropriation at date of transfer × (No.of staff transferred/Average total no.of staff of transferring entity)

Note: Both entities will need to negotiate and apply an amended or alternate, equitable formula where the staffing ratios in the transferred function vary from the transferring entity’s average, or if the appropriation would be more accurately apportioned if based on capital rather than labour requirements.

Step 2. Calculate cash payments to the prior year appropriation

Calculate the cash payments to the prior year appropriation by subtracting the expenditure incurred by the transferring entity to the date of transfer from the cash payments to the date of transfer.'

Cash payments to the prior year appropriation =

Cash payments to the
date of transfer

 

less

Expenditure incurred by the transferring entity
to date of transfer

Cash payments could relate to prepayments, payments for accrued expenses, or be paid from current year or prior year appropriations.

Step 3. Calculate prior year appropriation transfer

Calculate the prior year appropriation transfer by subtracting the cash payments for the prior year expenses to the date of transfer, at Step 2, from the prior year appropriation receivable.

Prior year appropriation transfer =

Prior year appropriation receivable

 

less

Cash payments for prior year expenses
to the date of transfer

Prior years’ appropriations

The gaining entity will be entitled to unspent prior year appropriations relating to, for example, accrued employee liabilities and unspent asset funding on transferring assets.

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 prior years’ appropriations

As discussed at Step 1, unless a transferring entity’s systems are capable of accurately apportioning the funds, it will be necessary to estimate that amount. For example, entities could use employee numbers transferred to allocate prior years’ appropriation receivable.

Prior years’ appropriation receivable =

Prior years' appropriation receivable x (No.of staff transferred/Average total no.of staff of transferring entity)

Note: Both entities will need to negotiate and apply an amended or alternate, equitable formula where the staffing ratios in the transferred function vary from the transferring entity’s average, or if the appropriation would be more accurately apportioned if based on capital rather than labour requirements.

Step 4. Calculate total appropriation transfer

Calculate the total appropriation transfer by adding the prior year appropriation receivable [at Step 1] to the prior year appropriation to be transferred [at Step 3].

Total appropriation transfer =

Current year appropriation to be transferred [Step 1]

plus

Prior year appropriation to be transferred [Step 3]

Appendix 2 – Abbreviations

 

Abbreviation:

Full title or term

 AASB

Australian Accounting Standards Board

 AAO

Administrative Arrangement Orders (AAO)

APS

Australian Public Service (APS)

CBMS

Central Budget Management System

 CCEs

Corporate Commonwealth entities

Finance Minister

Minister for Finance

FRR

Public Governance, Performance and Accountability (Financial Reporting) Rule 2015

MoG

machinery of government

MoU

Memorandum of understanding

NCE

Non‑corporate Commonwealth entity (NCE)

PGPA Act

Public Governance, Performance and Accountability Act 2013

PS Act

Public Service Act 1999

RMG

Resource management guide


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