Part 4: Financial Statements – HTML version
Notes to and forming part of the Financial Statements
Note 1: Summary of Significant Accounting Policies
1.1 Objectives of Department of Family and Community Services
The objective of the Department of Family and Community Services is to create a fair and cohesive Australian society by promoting the economic and social well being of all Australians, particularly those in need.
The Department is structured to meet three outcomes:
Outcome 1 - Families are strong
Services and assistance that: contribute to children and young people having the best possible start to life; promote healthy family relationships; allow families to adapt to changing economic and social conditions; and encourage families that nurture individuals and take an active part in their community.
Outcome 2 - Communities are strong
Services and assistance that: encourage communities to be self-reliant and to connect with their members; and promote partnerships between business, communities and governments.
Outcome 3 - Individuals reach their potential
Services and assistance that: facilitate people to participate actively in economic and community life, work to their capacity, access a responsive and sustainable safety net and fully develop their capabilities.
Departmental activities contributing toward these outcomes are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, revenues and expenses controlled or incurred by the Department in its own right. Administered activities involve the management or oversight by the Department, on behalf of the Government, of items controlled or incurred by the Government.
Departmental activities are identified under four headings for Outcome 1.
- Output Group 1.1 Family Assistance
- Output Group 1.2 Youth and Student Support
- Output Group 1.3 Child Support and
- Output Group 1.4 Childcare Support.
Departmental activities are identified under two headings for Outcome 2.
- Output Group 2.1 Housing Support and
- Output Group 2.2 Community Support.
Departmental activities are identified under four headings for Outcome 3.
- Output Group 3.1 Labour Market Assistance
- Output Group 3.2 Support for People with a Disability
- Output Group 3.3 Support for Carers and
- Output Group 3.4 Support for the Aged.
The Department comprises the Child Support Agency, the Social Security Appeals Tribunal and the Department of Family and Community Services.
The continued existence of the Department in its present form, and with its present programs, is dependent on Government policy and on continuing appropriations by Parliament for the Department's administration and programs.
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 (or FMOs, being the Financial Management and Accountability Orders (Financial Statements for reporting periods ending on or after 30 June 2004));
- Australian Accounting Standards and Accounting Interpretations issued by the Australian Accounting Standards Board; and
- Consensus Views of the Urgent Issues Group.
The Statements of Financial Performance and Financial Position have been prepared on an accrual basis and are in accordance with historical cost convention, 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 which are unrecognised are reported in the Schedule of Commitments and the Schedule of Contingencies (other than unquantifiable or remote contingencies, which are reported at Note 14).
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.
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 1.18.
1.3 Changes in Accounting Policy
The accounting policies used in the preparation of these financial statements are consistent with those used in 2002-03, except in respect of the Pension Bonus Scheme. A liability was recognised for the first time in 2003–04 for the Pension Bonus Scheme and is included within Age Pension expenditure figures. The liability includes an estimate for current ($332m) and potential ($222m) registrants of the Scheme and is based on a number of assumptions relating to eligibility requirements of the Scheme.
Property plant and equipment assets are being revalued progressively as explained in Note 1.12. Revaluations up to 30 June 2002 were done on a 'deprival' basis; since that date, revaluations have been done on a fair value basis. Revaluation increments and decrements in each year of transition to fair value that would otherwise be accounted for as revenue or expenses are taken directly to accumulated results in accordance with transitional provisions of AASB 1041 Revaluation of Non-current Assets.
In 2002-03, the Finance Minister's Orders introduced an impairment test for non-current assets which were carried at cost and not subject to AAS10 Recoverable Amount of Non-current Assets. The impairment test provisions of the FMOs have also been extended to cover non-current assets carried at deprival values. During 2003–04 the Department reviewed all fixed assets and no indications of impairment were found for these assets.
1.4 Revenue
Revenues from Government
Amounts appropriated for Departmental outputs appropriations for the year (less any current year savings and reductions) are recognised as revenue, except for certain amounts which relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.
Resources Received Free of Charge
Services received free of charge are recognised 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 resources is recognised as an expense.
Contributions of assets at no cost of acquisition or for nominal consideration are recognised 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 the sale of goods is recognised upon the delivery of goods to customers.
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 that costs incurred to date bear to the estimated total costs of the transaction.
Receivables for goods and services are recognised at the nominal amounts due less any provision for bad and doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collectability of the debt is judged to be less rather than more likely.
Interest revenue is recognised on a time proportionate basis that takes into account the effective yield on the relevant asset.
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' for a year (less any savings offered up in Portfolio Additional Estimates Statements) are recognised directly in Contributed Equity in that year.
Restructuring of Administrative Arrangements
Net assets received from or relinquished to another Commonwealth agency or authority under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.
1.6 Employee Entitlements
Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.
Liabilities for wages and salaries (including non-monetary benefits), annual leave and sick 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. A review of staffing profile was undertaken to ensure that the actuarial review results were still current.
Separation and redundancy
No provision for separation and redundancy has been raised at 30 June 2004 as the Department has made no offers of redundancy to employees at that time.
Superannuation
Staff of the Department are members of the Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme. The liability for their 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 Australian Government of the superannuation entitlements of the Department's employees.
The liability for superannuation recognised as at 30 June represents outstanding contributions for the final fortnight of the year.
1.7 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.
The Department maintains finance leases for certain information technology assets. Where a non-current asset is acquired by means of a finance lease, the asset is capitalised at the present value of minimum lease payments at the beginning of the lease term and a liability 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 net present value of future net outlays in respect of surplus space under non-cancellable lease agreements is expensed in the period in which the space becomes surplus.
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.
1.8 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. The amount capitalised in a reporting period does not exceed the amount of costs incurred in that period.
1.9 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.
1.10 Other Financial Instruments
Government loans are carried at the balance yet to be repaid. Interest is expensed as it accrues unless it is directly attributable to a qualifying asset.
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).
Term Deposits
Term deposits are recognised at cost.
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 its existence is confirmed by a future event, settlement becomes probable or reliable measurement becomes possible.
1.11 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 administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor department's accounts immediately prior to the restructuring.
1.12 Infrastructure (Land, Buildings and Property), Plant and Equipment
Asset Recognition Threshold
Purchases of infrastructure, 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
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. Valuations undertaken in any year are as at 30 June.
Fair and deprival values for each class of asset are determined as shown below.
| Asset class | Fair value measured at: | Deprival value measured at: |
|---|---|---|
| Leasehold improvements | Depreciated replacement cost | Depreciated replacement cost |
| Plant and equipment | Depreciated replacement cost | Depreciated replacement cost |
Under both deprival and fair value, assets which are surplus to requirements are measured at their net realisable value. As at 30 June 2004 there were no assets in this situation (30 June 2003: nil).
The financial effect of this change in policy relates to those assets recognised at fair value for the first time in the current period. The financial effect of the change is given by the difference between the fair values obtained for these assets in the current period and the deprival-based values recognised at the end of the previous period. The financial effect by class is as follows:
| Asset class | Adjustment $'000 | Contra Account |
|---|---|---|
| Leasehold improvements | $7,535 | Revaluation Reserve |
Total financial effect was to increase the carrying amount of Leasehold improvements by $7,535,000 and increase the Asset Revaluation Reserve.
Frequency
Assets in each class acquired after the commencement of a progressive revaluation cycle are not captured by the progressive revaluation then in progress.
The Finance Minister's Orders require that all infrastructure plant and equipment assets be measured at up-to-date fair values from 30 June 2005 onwards. The current year is therefore the last year in which the Department will undertake progressive revaluations.
Conduct
All valuations are conducted by an independent qualified valuer.
Depreciation
Depreciable infrastructure, plant and equipment assets are written-off to their estimated residual values over their estimated 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 prices only when assets are revalued.
Depreciation rates applying to each class of depreciable asset are based on the following useful lives:
| 2003–04 | 2002-03 | |
|---|---|---|
| Purchased software | 2 to 5 years | 2 to 5 years |
| Leasehold improvements | 8 years or lease term | 8 years or lease term |
| Plant and equipment | 3 to 10 years | 3 to 10 years |
The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed in Note 5C.
1.13 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.
The non-current assets carried at cost or deprival value, which are not held to generate net cash inflows, have been assessed for indications of impairment. Where indications of impairment exist, the carrying amount of the asset is compared to the higher of its net selling price and depreciated replacement cost and is written down to that value if greater.
The Department reviewed all fixed assets for impairment for which none were found to be impaired.
1.14 Intangibles
The Department's intangibles comprise internally developed software for internal use. These assets are carried at cost.
All software assets were assessed for indications of impairment as at 30 June 2004. None were found to be impaired.
Software is amortised on a straight-line basis over its anticipated useful life with the exception of the Child Support Business System (CUBA). A review of depreciation methodology was conducted during 2002-03 and this system is now depreciated on the diminishing value basis over a seven year period. The diminishing value method is considered to be a more accurate reflection of the pattern of consumption or loss of service potential embodied in the system.
The useful lives of the Department's software is 5 to 10 years (2002-03: 5 to 10 years).
1.15 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.
1.16 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.
1.17 Insurance
The Department has insured for risks through the Government's insurable risk managed fund, called 'Comcover'. Workers' compensation is insured through the Government's Comcare Australia.
1.18 Reporting of Administered ActivitiesAdministered 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 to the greatest extent possible of Accounting Standards, Accounting Interpretations and UIG Consensus Views. Administered Cash Transfers to and from Official Public AccountRevenue 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. Conversely, cash is drawn from the OPA to make payments under Parliamentary appropriation 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 Administered Reconciliation Table in Note 23. Thus the Schedule of Administered Items largely reflects the Government's transactions, through the Department, with parties outside the Government. Accounting policies, which are relevant to the administered activities of the Department are disclosed below: RevenueAll administered revenues are revenues relating to the core operating activities performed by the Department on behalf of the Commonwealth. LoansLoans are recognised at the balance of principal outstanding. Collectability is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan or part thereof is judged to be less rather than more likely. In rare circumstances, loan repayment may be waived. Interest is credited to revenue as it accrues. Administered InvestmentsAdministered investments in controlled entities are not consolidated because their consolidation is relevant only at the Whole of Government level. Administered investments, other than those required to be equity accounted, are to be recognised on the cost basis, adjusted for any subsequent capital injections or withdrawals and for any impairment losses. Administered ReceivablesAdministered receivables represent debts owed to the Department by past and present customers. Administered receivables exclude amounts expected to be recovered on behalf of other agencies under the Social Security (Administration) Act 1999. All debts known to be irrecoverable are excluded from the value of administered receivables. Irrecoverable debts comprise amounts written off pursuant to section 1236 of the Social Security Act 1991 and amounts waived pursuant to Section 1237 of the Social Security Act 1991. In accordance with Departmental guidelines for the operation of waivers under section 1237 of the Social Security Act 1991, where a debt is not likely to exceed a threshold amount and it is not cost effective for the Commonwealth to recover the debt, the total value of such amounts are waived. The provision for doubtful debts for the Student Financial Supplement Scheme is based upon an actuarial assessment of the scheme conducted by the Australian Government Actuary (AGA) during the 2001-02 financial year. This assessment has been reviewed and remains current for 2003–04. Based on this assessment the provision for doubtful debts is calculated as being 56% of the outstanding debt. The provision for doubtful debts for Personal Benefits has two components, a provision of 5% of all new debt raised in the last two financial years and a provision of 95% of all debts older than twenty-four months. Current recovery rates are used to estimate the current and non current administered receivables. Grants and SubsidiesThe Department administers a number of grant and subsidy schemes on behalf of the Government. Grant and subsidy 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. When grant monies are paid in advance for performance or eligibility, a prepayment is recognised. 1.19 Voluntary Disclosure - AdministeredThe net value of administered personal benefit expenditure made during 2003–04 totalled $61.5 billion (2002-03: $53.8 billion). Payments to customers are determined in accordance with provisions under Social Security Law and other legislation. Payments made under Social Security Law are assessed, determined and paid by officers of Centrelink under delegation from the Department. Payments made by Centrelink appear in the financial statements of the Department, which receives appropriations for the payments. Readers of these Financial Statements should note that the Social Security Administration Act 1999 imposes an obligation on customers to disclose to Centrelink information about financial and personal circumstances that affect entitlement to payment. This is a necessary part of Centrelink's administration, which acknowledges that, at the time certain information is required, only the customer is in a position to provide that information. Unreported changes in circumstances can lead to incorrect payment, even if no deliberate fraud is intended. However, risks associated with relying on voluntary disclosure by customers are mitigated by a comprehensive portfolio risk management plan, underpinned by compliance strategies, which have been built up over many years. The compliance framework has been developed to meet the requirements of social security legislation and is administratively effective. The compliance framework does not rely soley on information provided by customers to determine customers' entitlement. A comprehensive risk management strategy minimises the potential for incorrect payment by subjecting customers to a variety of review processes. If debts are identified, Centrelink seeks to recover them in a lump sum or by instalments. While the risk management strategy is principally directed at minimising debts, the detection of underpayments will also result in an adjustment to the customer's level of entitlement. The risk management strategy focuses on three objectives: prevention, detection and deterrence. It encompasses:
In addition, the Department conducts regular random samples of payment types. These show that the most likely cause of incorrect payment is customers' failure to report employment income. Much of this is subsequently captured through data matching and overall, the residual effect on outlays is estimated to be minimal. While Centrelink acts promptly to address all areas of material risk as they emerge, the Department accepts that a small proportion of non-compliance may go undetected. However, given the above risk management strategy, and the results of the random samples, the Department is satisfied that the incidence of incorrect payment is not material in terms of total payments, and that the financial statements materially reflect the activities of the Department's administered program. |
1.20 Special Accounts
During 2002-03, two special accounts were identified as not having the appropriate Determination to establish these accounts as required by section 20 of the Financial Management and Accountability (FMA) Act 1997. The accounts are the Capital Replacement and Upgrade Account (CRUP) and the Victorian Outside School Hours Care (OSHC) special accounts. During 2003–04, the CRUP account was re-established as a special account whilst the OSHC account ceased receiving contributions and the balance of the account was transferred to the Official Public Account.
The National Youth Affairs Research Scheme special account was reclassified from Departmental to Administered in 2003–04.