TECHNICAL NOTE 1 IMPACT OF AIFRS ON GFS
IMPACT OF AIFRS ON GFS
1 In 2005 the ABS published an Information Paper entitled Impact of the Implementation of International Financial Reporting Standards on ABS Statistics (cat no 1279.0). This paper outlined the possible impacts on ABS economic statistics arising from the adoption of the Australian equivalents to International Financial Reporting Standards (AIFRS). These standards became operational for financial reporting periods beginning on or after 1 January 2005. Accordingly, all Australian governments were required to implement the standards with respect to financial reports compiled for financial year 2005-06.
2 While the accounting standards underpinning financial reporting changed as above, those underlying government finance statistics (GFS) have remained unchanged. Ideally then, there should not be any impact on the data included in this publication from the change in accounting standards. However, as the GFS data is sourced primarily from the same underlying accounting and budgetary systems that each jurisdiction uses for financial reporting, some impacts have been observed. This article discusses the key areas where impacts have been noted, based on information required to be disclosed under the new standards. It should be noted that the main impacts affect the accrual-based GFS statements, with only very minor impacts on the GFS cashflow statements.
3 In their first AIFRS-based financial report entities (including governments) were required to restate their 2004-05 results on an AIFRS basis, along with reconciliations demonstrating the impact of the conversion to the new standard on their results for that year. These reconciliations can be found in all Australian governments' 2005-06 year-end accounts.
4 ABS used these published reconciliations in attempting to quantify the impact of AIFRS on the GFS time series. Owing to the different ways in which Treasuries restated their 2004-05 results on an AIFRS basis, ABS was not able to collect comparable information from all jurisdictions. However, enough information was available to identify significant impacts in the following two areas:
Post-employment (superannuation) benefits
5 Under AASB 119, entities operating defined benefit superannuation schemes are obliged to recognise the net surplus or deficit of these schemes on their balance sheets, based on the actuarial valuation of the gross liability towards employees less the fair value of any plan assets. Reviews are to be undertaken annually, with future benefits ideally discounted using market yields on government bonds consistent with the expected profile of their superannuation obligations.
- Post employment (superannuation) benefits; and
- Recognition of non-financial assets at fair value.
6 In their consolidated financial statements all Australian governments now use 10-year Commonwealth bond rates, the longest available Commonwealth bond rate, or some average of Commonwealth bond rates to discount their defined benefit superannuation obligations. Previously most jurisdictions used average long-term earnings rates on fund assets to discount their future defined benefit superannuation liabilities. Consequently, the adoption of AASB 119 has resulted in a significant increase in provisions for unfunded superannuation for most jurisdictions. Based on information published by the Commonwealth and the States in 2004-05 accounts, the combined level of unfunded superannuation liabilities for 2004-05 is assessed as $170 billion under AIFRS compared with $152 billion under previous financial reporting standards. The majority of this $18 billion increase relates to State governments.
7 The calculation of the discounted value of defined benefit obligations also depends on a range of demographic and economic assumptions which may be modified whenever an actuarial review is undertaken in the light of the latest experience. Any changes arising from movements in discount rates and demographic or economic assumptions are recognised as revenues or expenses for accounting purposes, but are treated as other economic flows in GFS.
8 Ongoing superannuation expenses to be recognised each year in operating statements reflect the cost of providing future benefits under the plan in respect of service rendered in the current and past periods. This comprises a number of elements including: current service cost, interest cost, expected return on fund assets (to be deducted) and actuarial gains and losses. The measurement of these items has been affected to varying degrees by the adoption of AIFRS.
9 Current service cost (or unfunded superannuation expenses) is reflected in GFS as part of employee expenses. Measurement of this item for financial reporting purposes has been affected by changes in measurement of the actual unfunded liability as well as adoption of a discount rate derived from Commonwealth long-term bond rates. Previous reporting arrangements were somewhat less prescriptive with most jurisdictions using long-term fund earnings rates rather than long-term bond rates for discounting purposes.
10 Interest cost less the expected return on fund assets is recorded in GFS as nominal interest on unfunded superannuation1. For most jurisdictions nominal interest on unfunded superannuation for each defined benefit scheme was previously calculated on the net outstanding liability multiplied by the long-term earnings rate for the related superannuation fund. Under AIFRS the calculation is based on the gross liability multiplied by the discount rate derived from Commonwealth bond rates, less the expected return on fund assets. Consequently, nominal interest flows are affected by both the use of a different discount rate and the use of gross liabilities in the calculation.
11 Actuarial gains and losses are treated as other economic flows and are therefore excluded from the GFS operating statement. However, changes in the recording of these items due to the adoption of AIFRS are reflected in the GFS Statement of Stocks and Flows (see Technical Note 2 on page 52)
12 Based on information published by jurisdictions, the overall effects on current service costs and nominal interest cost have been in opposite directions, with current service costs generally higher and nominal interest costs generally lower. The impact of the adoption of AIFRS on total GFS expenses in 2004-05 for the Commonwealth and State governments arising from superannuation has been an increase of approximately $400 million, equal to 0.12% of total GFS expenses for the general government sector.
Recognition of non-financial assets at 'fair value'
13 Under AASB 116, entities are obliged to reflect their 'property, plant and equipment' on the balance sheet at 'fair value'. Wherever possible, fair values are based on market-based evidence and are determined by professionally qualified valuers. Where market conditions do not exist (generally because of the specialised nature of the asset and/or the fact that the asset is rarely or never sold) 'fair value' may be estimated using some other approach.
14 The concept of 'fair value' can be thought of as the closest possible approximation to market value, given the characteristics of each asset and the market conditions (or lack thereof) surrounding each class of asset. Those items experiencing significant and volatile changes in 'fair value' are to be revalued annually, but other items with insignificant changes to 'fair value' can be revalued less frequently (every three or five years).
15 While the adoption of 'fair value' for 'property, plant and equipment' has had an impact on balance sheet entries, the ABS does not have the data that would be required to remove the discontinuity from the GFS balance sheet time series on a consistent basis across all jurisdictions. However, this change to standards has had no impact on GFS transactions series, such as the operating statement.
16 The principles of 'fair value' underpinning AASB 116 also underpin AASB 139, which deals with measurement of financial assets and liabilities. Since most Australian governments were reporting a significant portion of their financial assets and liabilities at fair value already, the AIFRS-related impact on financial assets and liabilities (other than provisions for unfunded superannuation discussed above) is considered to be minor.
17 The ABS has not been able to collect enough reliable information with which to eliminate the impact of the adoption of AIFRS from the GFS time series. However, it is clear that the main effects on GFS occur on the balance sheet and to other economic flows. The effects on transactions accounts have been relatively small overall. In addition to the changes to superannuation-related items discussed above, some other transactions items have also been affected but to a lesser extent.
18 It should be noted that the international standard for the compilation of the national accounts, the System of National Accounts 1993 (SNA93), is in the final stages of a revision process with SNA93 Rev1 expected to be published in 2008. SNA93 Rev1 will include revised recommendations for the treatment of defined benefit superannuation schemes. It is expected that these recommendations will subsequently be incorporated in the International Monetary Fund's Government Finance Statistics Manual (GFSM2001). Consequently, some further changes may be necessary to the treatment of public sector defined benefit superannuation schemes in both GFS and national accounts statistics when ABS implements these updated international standards. These changes will be announced in relevant publications at an appropriate time.
Footnote: Ideally, in GFS, nominal interest on unfunded superannuation should be calculated by taking account of the actual, rather than the expected, return on fund assets, with the difference between the two deducted from the AIFRS measure of actuarial gains and losses to derive the GFS measure of other economic flows. However, it has not been possible to do this for the 2005-06 estimates.