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Financial Management Legislation Amendment Bill 1999
Bills Digest No. 130 1998-99
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Financial Management Legislation Amendment Bill 1999
Commencement: On 1 July 1999 but only if Royal Assent is obtained by 1 May 1999. If Royal Assent is not granted by 1 May 1999, the legislation will come into effect on a day to be fixed by Proclamation. For operational reasons, and in limited circumstances, the Act may commence later than 6 months after Assent.
The Bill provides for a number of largely uncontentious but significant amendments to the Commonwealth’s accounting machinery.
Amendments to the Financial Amendment and Accountability Act 1997 (FMA Act) are to facilitate the adoption of accrual accounting by all Commonwealth budget-funded Departments and agencies.(1)
Key changes are to the structure and operation of the Consolidated Revenue Fund (CRF).
The accounting framework of the Commonwealth is broadl y defined by the Australian Constitution.
Section 51 provides that the Parliament has power to make laws for, amongst other things, taxation and borrowing money on public credit. Parliament also has the exclusive right to impose customs and excise duties [section 90].
Money collected under the authority of Parliament by the Executive Government must form part of one CRF and may be appropriated (drawn on) for the purposes of the Commonwealth.
No money can, however, be drawn from the Commonwealth Treasury except under an appropriation made by law. Such laws may take the form of general Appropriations Bills (the legislation commonly associated with the Commonwealth Budget) or standing appropriations contained in individual enabling laws or specific enactments.
Public money can only be appropriated on the initiative of the Executive Government [section 56] as a message from the Governor-General to the House of Representatives recommending an appropriation is required.
Since federation, the key features of day to day Commonwealth financial administration have been sections 81 and 83 of the Constitution and the Audit Act 1901 , which, as has been noted frequently, was the fourth piece of legislation enacted by the Commonwealth.
The Audit Act was repealed in 1997 and replaced by three substantive pieces of legislation:
- The Auditor-General Act 1997 which regulates the powers and responsibilities of the Auditor-General and the Australian National Audit Office (ANAO).
- The Commonwealth Companies and Companies Act 1997 (CAC Act) regulating the financial, ethical and reporting requirements of corporate public authorities whose enabling legislation gives them ‘ownership’ of their operating funds and assets. It also extends to companies where the Commonwealth has a direct controlling interest and makes special provision for 100 percent Commonwealth owned companies. Entities covered by the CAC Act include: the Australian Postal Corporation, Australian Broadcasting Authority, National Gallery of Australia, National Library of Australia, Special Broadcasting Service Corporation and the Civil Aviation Safety Authority (CASA).
- The Financial Management and Accountability Act 1997 establishes the regulatory framework for Commonwealth budget dependant instrumentalities which are agents of the Commonwealth. These bodies do not ‘own’ their funds and operate squarely within the framework contemplated by sections 81 and 83 of the Australian Constitution. Budget-dependent agencies include: the Departments of State, the Parliamentary Departments as well as many Statutory Authorities and Commonwealth bodies which manage public money or property on behalf of the Commonwealth.
The Explanatory Memorandum contains a succinctly expressed and useful guide to a number of key terms used in the Bill.
‘Accrual accounting’ is described as a basis of accounting whereby the financial effects of transactions and events are recognised when they occur (and not as cash is received or paid) and included in financial statements for the reporting periods to which they relate.(2)
Thus the fundamental difference between what is usually called ‘cash accounting’ and the accrual method is that cash accounts only record a financial flow at the time that cash is exchanged.
Accrual accounting also shows cash transactions but records a financial flow at the time that economic value is created, transformed, exchanged, transferred or extinguished, whether or not cash is exchanged at the time or sooner or later .
The accrual system thereby seeks to match economic costs incurred during a financial reporting period against the economic benefit accrued in that same period.
An accrual system will generally also seek to measure the full costs of a particular transaction, task or process and do so by using benchmarks or standards. Thus, the cost of preparing this Bills Digest will not only include the cash costs of providing for the author’s salary, paper and printing etc but will also include a range of other items including overheads such as notional or imputed rent on premises occupied by the Parliamentary Library.
Another major feature of accrual accounting is that current and capital transactions are separated as part of the accrual framework.(3)
More detailed descriptions of the differences between the cash and accrual systems are presented in: Accrual Budgeting Project, Fact Sheet: The Central system: from cash to accruals , Department of Finance and Administration (1998) and National Commission of Audit Report (1996). A comparative table from the latter document is extracted here and appears as the Appendix to this Digest.
From the early 1980s Commonwealth Governments have steadily sought to place government administration and the Australian Public Service (APS) on a more business-like footing.
Whilst previous reforms should not be under-valued or ignored, the watershed for modernising and improving Commonwealth financial management and practices was the publication of two White Papers in the early 1980s: Reforming the Australian Public Service (1983) and Budget Reform (1984).
The Financial Management Improvement Program (FMIP) which followed those Reports encompassed a range of reform initiatives that have reshaped the APS and, in the familiar lexicon, refocussed Commonwealth public administration on ‘outcomes’ and ‘efficiency’ rather than on ‘processes’ and ‘effectiveness’.
To quote the then Joint Committee of Public Accounts (JCPA):
The focus of FMIP reforms [was] to:
- permit more strategic ministerial oversight and financial management of the impact of government programs;
- encourage contestability or market competition to influence the way in which goods and services are provided; and
- allow managers greater flexibility in deploying resources at the same time as requiring greater accountability for outcomes in program delivery.
Initiatives such as devolution of responsibility, the running costs arrangements, program management and budgeting, user charges, contracting out and corporate planning all fall within the broad framework of the reform process.
Accrual accounting can be characterised as being one element of the various commercial reforms which have been introduced into the APS.(4)
From 1983-84, statutory authorities were required to report on an accrual basis. Modifications to cash reporting by departments and agencies began in 1988 and were enhanced in stages, involving improved reporting of assets and liabilities, with full accrua l accounting coming into operation as of 1994-95. (5)
In 1996, the National Commission of Audit reported that all government business enterprises and some agencies, principally the (then) Department of Administrative Services, whose core business involved the provision of services to other Commonwealth agencies on a commercial basis, had moved to a full accrual framework.(6)
Incremental but steady progress to accrual accounting did not, however, characterise the performance of budget dependent agencies. By the mid 1990s only five out of 65 of these bodies had made significant progress towards managing on an accrual basis.(7)
Indeed, the first of two JCPA studies in the mid 1990s in fact concluded that the introduction of accrual accounting was not a fundamental part of the public sector financial management reform process.(8)
To quote the JCPA’s (August 1995) Report:
… up until 1990 [the Department of] Finance had stated that there were no immediate plans to introduce accrual accounting methods to Commonwealth Departments.
The common wisdom at the time was that traditional cash-based forms of public sector financial reporting were appropriate and sufficient for budget sector agencies. The major reason for this belief was that such reporting reflects the cash-based nature of parliamentary appropriations and represents a sound means of ensuring that public monies are spent in the manner approved by Parliament.(9)
Increased commercial pressures and the advantages for some managers in adopting accrual accounting l aid the groundwork for further progress. Three significant reports released between 1995-96 provided much of the intellectual and political underpinning for the measures contained in the present Bill.
Joint Committee of Public Accounts, Report No.338 , ‘Accrual Accounting - A Cultural Change’, August 1995
This unanimous report of the JCPA supported the spread of accrual accounting practices in the APS, specifically recommending that:
- The Government should make a statement stressing the value of accrual infor mation as an aid to effective management of public resources and supporting the move to full accrual accounting for Commonwealth agencies.
- All agency heads should:
- commit themselves and their agencies to implementation of accrual management systems and practices; and
- prepare detailed implementation plans to guide the development of accrual management systems and practices in their agencies - including statements of systems redevelopment requirements, staff training etc.
- The Office of Government Information Technology [as it then was] should expedite work on the review of Commonwealth personnel and financial management systems and take account of the need for full accrual accounting functionality in any integrated management system proposed.
- The Government should consider:
- providing supplementary funding to agencies to help them redevelop their financial management systems so as to provide full accrual accounting functionality; and
- making interest free loans available to agencies to help in the transition from cash based accounting systems to accrual based systems.
- The Government should commit itself to the preparation, at least annually, of whole of government reports for the Commonwealth.(10)
Joint Committee of Public Accounts, Report No.341 , ‘Financial Reporting for the Commonwealth: Towards Greater Transparency and Accountability’, November 1995
The report examined potential improvements in Commonwealth financial reporting practices that could flow from the move to accrual accounting in government agencies. The JCPA focussed on the use of ‘whole of government reporting’ to give a picture, not only of the government’s revenue and expenditure, but also its assets, liabilities, and resulting financial position.
The Report discussed:
- what the JCPA considered to be an acceptable timetable for implementing whole of government reporting for the Commonwealth
- the form and content of whole of government reports
- how government business enterprises should be shown in Commonwealth financial reports, and
- how the Commonwealth should account for its portfolio of disparate assets.(11)
Specific recommendations included that:
- The Government should commit itself to the preparation of audited whole of government reports by the beginning of the 1997-98 financial year.
- The Government should ensure that Government Business Enterprises and Public Financial Institutions within the government reporting entity are included on a full consolidation basis in Commonwealth whole of government reports.
- As a matter of priority, the Department of Finance and the ANAO should develop a framework for the recognition and valuation of Commonwealth assets managed by Commonwealth agencies.
- As well as supporting the preparation of annual audited whole of government reports by 1997-98, the Government should commit itself to the preparation of unaudited six monthly whole of government reports by 1999-2000.
- The Government should prepare and introduce into parliament legislation to establish a fiscal reporting framework binding on Commonwealth governments.(12)
National Commission of Audit, Report to Commonwealth Government, June 1996
The National Commission of Audit was established, in accordance with a pre-election commitment, by the Howard Government in March 1996.
The Commission was given a broad brief to report on a gamut of issues affecting Commonwealth finances and its report reflects those wide terms of reference.(13)
[The following summary of the Commission’s findings is largely extracted from Current Issues Brief No.23 of 1995-96 prepared by Denis James of the Information and Research Services.]
Currently, most government departments and agencies operating on the Commonwealth Public Account manage their accounts on a cash basis. The Budget itself is compiled on a cash basis, as are forward estimates of outlays. Reflecting this process, Parliamentary appropriations are also prepared on a cash basis.
However, a cash based accounting system may not give a true picture of the actual annual resource costs incurred by agencies in performing their activities. As such, a cash based system is an imperfect tool for efficient financial management within agencies and makes it difficult for performance and accountability to be scrutinised and benchmarked by Parliament, the community or even by the agencies themselves.
Already, all Commonwealth agencies are required annually to table audited financial statements on an accrual basis, but few have implemented accrual based financial management information systems and practices which would enable them to budget and manage their programs on an accrual basis. Thus accrual reporting was relatively widespread but full accrual accounting was not the norm.(14)
The National Audit Commission recommended that the Government should formally adopt accrual principles as the basis for an integrated budgeting, resource management and financial reporting fra mework, both at the agency level and at the aggregate Commonwealth budget sector level. The Commission also stated that such a framework needed to be in place by December 1997. At the agency level, accrual budgets should form the basis of financial performance targets to be reported upon in their annual reports. In the Commission’s view, such targets should have been ready for implementation with the 1998-99 Budget.
The Commission further recommended that the Commonwealth Budget should be presented in the Budget Papers on an accrual basis as from the 1998-99 Budget. The forward estimates, which form the basis of much Budget policy consideration, were also to include the accrual implications of policy proposals and commitments.
The Budget appropriations included in the Appropriation Bills would represent the cash flow implications of the accrual budgets for each government agency. The Commission noted that the present division of appropriations between Appropriation Bills No 1 and 2, which is designed to facilitate parliamentary consideration of the legislation within the terms of section 53 of the Constitution, is not conducive to good resource management. The Commission therefore recommended that the Government, in consultation with the Parliament ‘as appropriate’, should review the structure and presentation of items contained in the Appropriation Bills. It further recommended that, at the same time as the Appropriation Bills are introduced into Parliament, agencies should provide documentation which clearly establishes the accrual basis for the proposed appropriations.
The Commission recommended that Commonwealth Departments, agencies and statutory authorities should also be required to table audited annual financial statements, on an accrual basis, in the Parliament by 30 September, with their first reports relating to the financial year 1997-98.
While the Department of Finance should be responsible for co-ordinating a strategy for the implementation of a full accrual accounting framework, the Commission felt that chief executive officers and senior managers should be responsible for the accrual resource management reforms in their own agencies, as they will be held responsible for the performance of their agencies which will be highlighted by those reforms.
The National Commission of Audit was required to report on the state of the Commonwealth’s finances, including identification of assets and liabilities and contingent liabilities. The Commission addressed this matter by presenting a set of consolidated financial statements identifying the financial position of the Commonwealth Government as a whole, that is including the general government sector, public trading enterprises (PTEs) and public financial enterprises (PFEs), for 1994-95. The general government sector includes those government departments and agencies which are substantially involved in the provision of non-market services. As such, it encompasses the Commonwealth budget sector, although it also includes a number of agencies, such as the CSIRO, the National Library and the ABC, which operate off-budget.
At a whole of government level, the Commission reported a consolidated deficit of $10.6 billion. This result reflects the fact that the general government sector returned a $12.1 billion deficit, while its GBEs were in surplus. This result is not surprising since in 1994-95, an $11.6 billion deficit (on a cash basis) was recorded by the budget sector. (Had the accounts been prepared for 1995-96, on the basis of current budget estimates, the overall financial outcome would most likely have been somewhat healthier.)
The Commission recommended that whole of government statements should be prepared on a trial basis for 1995-96, although they need not be audited. The statements for 1996-97 should be fully audited and ready for tabling in Parliament by 30 September 1997. In addition to the year end statements, the Commission recommended that the Government should, as from the financial year 1997-98 prepare mid year statements as of 31 December. These need not be formally audited but should be reviewed by the auditor. The tabling of such mid-year consolidated statements would represent one element of the Charter of Budget Honesty.
The Commission also recommended that the primary financial statements should contain a statement of revenues and expenses, a statement of assets and liabilities and a statement of cash flows for the whole of government as well as for the general government, PTE and PFE sectors. The statements should also separately identify the budget sector.
In his first Headland speech in June 1995, the Prime Minister, Mr Howard, committed a Coalition Government to a Charter of Budget Honesty that would encompass both reporting requirements and the statement of clear fiscal policy objectives.
At t he time that the National Commission of Audit reported, the Commonwealth Government was not required to state its fiscal policy nor was it required to set fiscal targets and report against them. Despite this lack of compulsion, past Australian Governments have generally outlined their forecasting framework and the general thrust of their fiscal policy in Statement No. 2 of the Budget documents and in various other major economic statements. However, they have only occasionally publicly set fiscal targets for themselves, one relatively recent example being the ‘trilogy’ pledges of the Hawke Government in 1984.
In order to promote economic and financial transparency, to raise general awareness of the Government’s fiscal intentions and to encourage governments to act responsibly, the Commission recommended that legislation should be introduced requiring governments to clearly state their fiscal strategy and to set out comprehensive fiscal reporting standards. The legislation contemplated would have required governments to set fiscal targets and benchmarks, although these would not be enshrined in legislation.
The Commission envisaged that benchmarks would reflect current fiscal issues. They may specify that a particular level of public saving should be achieved or that a specified debt level should be reached. Such benchmarks were intended to be unambiguous and leave no doubt as to whether they have been achieved or not.
Already the Government reports on the economic and fiscal outlook in Budget Statement No. 2. A brief outlook restatement is also provided in the Government’s mid-year revi ew, which is published in the form of a Press Release. The Commission recommended that:
- the results of the mid-year review should be published in January (if the Budget is released in May) and be expanded to contain information beyond the current budget year;
- a fiscal policy statement outlining the Government’s current fiscal strategy should accompany the presentation of these two reports; and
- a report on the economic and fiscal outlook using the latest update information and incorporating all post-budget policy decisions should be published approximately one week after the calling of every federal election.
The proposed fiscal policy statements were to be the medium through which the government announced its fiscal targets and benchmarks. They were also to provide information on a range of economic indicators, such as the headline budget balance, the underlying budget balance, public debt by sector and so forth. The Commission recommended that such indicators should also be published prior to elections. Fiscal policy statements would identify discretionary measures that are intended to smooth the economic cycle and would contain an explanation of any change in such discretionary settings.
The Government currently issues monthly Statements of Commonwealth Financial Transactions, which provide details of outlays, revenues and balances for the month in question along with cumulative totals for the financial year to date. The Commission proposed that these statements would continue to be produced, although they would eventually be prepared on an accrual basis.
Consolidated reports showing the state of the Commonwealth’s finances would be prepared and published twice a year. Tax expenditures should be treated as closely as possible like program expenditures in these and all other published fiscal reports.
Since the National Commission of Audit reported in June 1996, the Commonwealth has moved to implement many of the changes proposed by the Commission and in the two JCPA reports referred to above.
Amongst the more significant developments are:
Charter of Budget Honesty
Charter of Budget Honesty legislation was first introduced into the Parliament on 11 December 1996 and the Charter of Budget Honesty Act 1998 came into effect on 17 April 1998.
The l egislation picks up a number of the National Commission of Audit recommendations, hence:
- the 1997-98 and 1998-99 Budget Papers provided for more information on the Government’s fiscal agenda and position
- further information has been provided in comprehensive assessments of the Mid-Year Economic and Fiscal Outlook
- the Government is required to publish a pre-election Economic Outlook and Fiscal Outlook report within 10 days of the issue of the writs for the general election.(15)
Whole of Government Reporting
Following the National Commission of Audit study, in 1996-97 a second comprehensive trial of consolidated whole of government financial statements for 1995-96 was conducted.
Guidelines for the Financial Statements for Commonwealth Departments and the Guidelines for the Financial Statements for Commonwealth Authorities were substantially revised during 1996-97, to enhance the quality and effectiveness of financial reporting by Commonwealth Departments and authorities and at the whole of government level.(16)
A 1996-97 scoping study recommended the phased implementation of accrual-based financial framework for the Commonwealth.
In April 1997 the Government accepted the Departmental of Finance’s advice, and decided to implement an accrual-ba sed outcomes and outputs framework for managing resources in the public sector. The first accrual Budget will be in 1999-2000.(17)
Significant Departments and agencies were required to prepare ‘first draft’ accrual budget statements and forward them to the Department of Finance and Administration by December 1998.
In 1997 the Commonwealth’s Management Advisory Board engaged KPMG Manag ement Consulting and Stephen Anderson Pty Limited to conduct a survey to benchmark APS financial management practice against that of other governments and the private sector.
The results of the survey indicated a ‘large gap’ between current Commonwealth practice and ‘best practice’. As noted in the subsequent Management Advisory Board Report, Beyond Bean Counting: Effective financial management in the APS - 1998 & Beyond , (December 1997):
- only 4% of Commonwealth core government agencies use accrual data for internal management reports compared to over 50% in State Government jurisdictions and more than 90% in the private sector
- 80% of Commonwealth line managers consider accrual accounting to be of limited or no value compared to just under 30% of the line management in State Government agencies
- less than 50% of core Commonwealth agencies know their full product/service costs
- less than 15% of core Commonwealth managers consider that they need a business management education background
- less than 10% of finance staff operating in the Commonwealth hold professional accounting qualifications
- 76% of core Commonwealth CEOs and 68% of line managers reported satisfaction with financial information provided to them.(18)
An outline of the new accrual ac counting regime is presented in a number of Department of Finance and Administration publications.(19) In essence the new framework focuses on:
- the resources being consumed and/or administered by agencies on behalf of the Commonwealth
- costs (incorporating a full accrual based measure).
To again quote from the official documentation:
Agencies and authorities will be required to:
- specify and set prices for the outputs they will deliver and describe planned outcomes to which outputs contribute
- specify the performance information required to monitor, manage and account for output delivery and the achievement of actual outcomes
- report on performance accordingly.(20)
The timetable for implementing accrual budgeting is:
1998-99 Trial Accrual Budget for participating agencies after the cash-based Budget has been bought down
- Implementation of the new framework including accrual budgets and estimates, and ‘ uploading ’ of agency monthly accrual financial information to the DOFA central system
- O ngoing review and refinement of outcomes and output structures and associated performance information.
Agencies need to develop their outcome and output specifications including price setting as input to the 1999-2000 B udget process.
Agencies should commence specification as soon as possible to ensure that they have time to clear specifications with key stakeholders.
Fourth quarter 1998
Agencies will begin to input information to the central Accrual Information Manageme nt System (AIMS) as part of the 1999-2000 Budget process.
AIMS is planned to be operational from the fourth quarter 1998.
First Accrual Budget
1 July 1999
Agency accrual-based performance management (including financial) systems should be in p lace by 1 July 1999 at the latest.
Agencies that have been able to install pilot accrual systems in 1998-99 are likely to realise significant benefits.
Commencing July 1999
Agencies to upload accrual monthly financial information to AIMS.
Source: Depart ment of Finance and Administration, ‘Specifying Outcomes and Outputs: accrual budgeting’, 1998, p 11. Note: Within this timetable, agencies will need to develop a strategy to enable their ministers and advisers to understand their agency business in an accrual environment. One of these strategies could be to involve ministers' staff in accrual awareness sessions and training exercises conducted by individual departments.
The CRF is the main working fund for Commonwealth finances, i t is mandated by the Constitution. Section 81 of the Constitution requires that all revenues or moneys raised by the Commonwealth must be credited to the CRF. This requirement is reflected in section 18 of the Financial Management and Accountability Act 1997 .
Section 83 of the Constitution provides that moneys cannot be drawn out of the CRF without Parliamentary approval.(21)
The FMA Act also provides for a number of related funds which establish ‘pools’ of money available to meet specific uses under Ministeria l direction. These legislated Funds are the Loan Fund (section 19), the Reserved Money Fund (section 20) and the Commercial Activities Fund (section 21).(22) In each case, however, money may not be transferred into these funds without first being paid into the CRF. Money is then transferred from the CRF into these funds by means of a standing appropriation provision contained in each of the relevant sections referred to in this paragraph.
The system of accounting is in essence cash based and is not entirely consistent with an accrual accounting regime.
As noted above and in the Explanatory Memorandum,(23) the primary change sought by the Bill is to repeal those provisions dealing with ‘fund accounting’ while retaining the essential features of funds by establishing ‘Special Accounts’ within the CRF.
As noted in the Minister’s Second Reading Speech, the Solicitor-General has advised that the proposed accrual appropriation measures can operate exclusively within the CRF and do not require moneys for accrued costs to be paid into another fund to avoid lapsing. The Government has also advised that the appropriation bills will be amended to reflect these new accounting arrangements.(24)
Clause 5 is a transitional provision. It provides for the replacement and renaming of existing components of Reserved Money Fund and Commercial Activities Funds so as to convert them to Special Accounts within the CRF.
Clauses 6-7 are also transitional provisions and make related changes to instruments to account for the abolition of the Loan Fund and replace certain references to the CRF with references to ‘the Commonwealth’.
Section 54 of the FMA Act presently requires that the Finance Minister must publish monthly a Statement of Commonwealth Financial Transactions. Clause 8 imposes less rigorous reporting requirements under section 54 of the FMA Act in the period immediately after the proposed amendment come into effect. The proposed transitional period of about 9 months does not appear excessive.
Schedule 1 provides for amendments to the FMA Act. These amendments are principally changes to nomenclature and definitions, reflecting the substantive changes discussed above.
Item 17 provides for the repeal of Division 1 of Part 4 of the FMA and the abolition of fund accounting.
Items 20-22 provide for the creation of Special Accounts within the CRF. Such accounts may be established by the Minister for Finance ( proposed section 20 ) or by another Act (item 14 ). ‘Special Accounts’ may be viewed as separate ledgers within a single the CRF.
Item 29 repeals and replaces section 39 of the FMA Act dealing with the Treasurer’s powers to invest public moneys. The powers conferred on the Treasurer are wider than those currently available to him under the Loan Consolidation and Investment Reserve Act 1955 repealed by item 34 of the present Bill.
Proposed subsection 39(2) will permit the Treasurer to ‘invest public money in any authorised investment’ for the purpose of managing Commonwealth debt. The phrase ‘authorised investment’ is defined in proposed subsection 39(10) and appears to extend to any form of investment that may be prescribed by regulation.
Item 31 repeals and replaces section 54 of the FMA Act. The new section 54 will leave the Minister with greater discretion in determining what form the monthly Statement of Financial Transactions will take.
The proposed changes are significant but largely facilitative rather than substantive.
Any protracted delay to passage or rejection of the Bill would cause a numbe r of difficulties for those responsible for implementing the move to full accrual accounting. However, the spread of accrual accounting through the Commonwealth public sector would not be significantly impaired.
Despite the medium to long term benefits, the initial cost of the move to full accrual accounting should not be under-estimated,(25) particularly the differential impact of the changes on smaller Departments and agencies. On a related issue, it may be noted that the Government appears to have rejected the JCPA’s (August 1995) recommendation that supplementary funding be provided to agencies to help them redevelop their financial management systems to facilitate the move to full accrual accounting.(26)
It should also not be assumed that the spread of accrual accounting will remove the need to maintain information on cash flows.(27)
Documentation prepared by the Department of Finance and Administration to raise understanding and awareness of the proposed changes is impressive and has been referred to in the course of this Digest.
It is at least arguable, however, that the full ramifications of the proposed changes are not yet fully comprehended by those who will be affected by them. Anecdotal reports suggest that the implementation timetable may be somewhat ambitious.
Commenting on the adaptive process, the ANAO has observed recently:
Public sector administration has therefore clearly been markedly impacted by market-orientated reforms. Other complementary changes taking place include the introduction of accrual based outcomes and outputs budgets which is planned for 1999-2000 and will help identify the true cost of public sector activities and the results being achieved. However, the introduction of such a significant reform presents a key challenge to agencies in managing the necessary cultural change including ensuring that staff have the necessary skills, and that new electronically based accounting and other management information systems are effectively in place.(28)
1. Commonwealth entities such as Government Business Enterprises and Commonwealth Companies have for many years utilised a system accrual accounting.
2. Financial Management Legislation Amendment Bill 1999, Explanatory Notes , p 3.
3. Refer: National Commission of Audit , Report to the Commonwealth Government, June 1996, esp. pp 211-240.
4. JCPA, Report No.338 , ‘Accrual Accounting A Cultural Change’, August 1995, pp 7-8.
5. Op cit, 215.
7. JCPA, op cit, August 1995, p 45.
8. Ibid, p 8.
9. Ibid, p 8.
10. Ibid, pp xvi-xviii.
11. JCPA, Report No.341 , p xv.
12. JCPA, Report No.341 , pp xvi-xx.
13. Refer Denis James, Parliamentary Research Service, Current Issues Brief No.23 of 1995-96 , ‘More of the Same or a Brave New World? : The National Commission of Audit’, Department of the Parliamentary Library, 25 June 1996.
14. This has remained the position until late 1998 when the pace of change has accelerated considerably.
15. The first pre-election report was issued on 8 September 1998.
16. Department of Finance, Annual Report 1996-97 , p 23.
17. Department of Finance and Administration, Specifying Outcomes and Outputs: accrual budgeting , 1998, p vii.
18. Management Advisory Board, Beyond Bean Counting: Effective Management in the APS - 1998 and Beyond , 1997, pp 3 and 23.
19. Department of Finance and Administration, Specifying Outcomes and Outputs: accrual budgeting , 1998 and the useful kit containing a number of key documents and training material: Department of Finance and Administration, The Structure and the Substance: Financial management and beyond , 1998.
20. Department of Finance and Administration, Specifying Outcomes and Outputs etc , p 1.
21. Northern Suburbs General Cemetery Trust v Commonwealth (1993) 176 CLR 555.
22. All section references are to the FMA Act.
23. p 1.
24. Parliamentary Debates (Hansard), House of Representatives, 10 February 1999, p 2284.
25. JCPA, Report No.338 , ‘Accrual Accounting A Cultural Change’, August 1995, pp 48-51. National Commission of Audit , Report to the Commonwealth Government, June 1996, esp pp 229-232.
26. JCPA, Report No.338, pp 54-59.
27. National Commission of Audit, op cit, p 222.
28. ANAO, The Auditor-General Audit Report No.33 , ‘Audit Activity Report: July to December 1998: Summary of Outcomes’, 1999, p 9.
Table 9.1: Comparison of accrual and cash transactions
Transaction or event
Purchase of services on credit
An expense and a liability would be recognised immediately
No transac tion would be reported until payment is made
The asset sold would be replaced by cash and the difference between its recorded value and sale proceeds would be shown as a gain or loss
The gross sale proceeds, not just the gain or loss on sale, would be shown
Loss or destruction of an asset
A loss equal to the recorded value of the asset would be shown
No event would be shown unless the asset were replaced
Consumption of assets through use
Depreciation equivalent to the service potential consum ed would be shown as an annual expense over the useful life of the asset
No event would be shown until a future year when the asset is replaced and paid for in cash
Acquisition of assets
The acquisition cost (less annual depreciation) would be carried fo rward as an asset only depreciation included in the operating annual surplus or deficit
The full cost would be shown as a capital outlay in the year of acquisition an included in the surplus or deficit
Deferred payment of employee benefits (eg superannuat ion)
An annual expense and an accumulating liability would be shown
No event would be shown until a future year when payment is made
Foreign exchange transactions
Gains and losses on exchange would be shown in the year exchange rates vary
Gross cash trans actions would be shown without indicating any gain or loss
Increase in the value of an asset
A revaluation would increase the value of assets, reserves and future depreciation
No revaluation would be shown
Source: Department of Finance from National Commission of Audit - Report to the Commonwealth Government June 1996
9 March 1999
Bills Digest Service
Information and Research Services
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