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Of these three standards, AAS 31 is the standard most relevant to this discussion of relationships between the GFS system and accounting standards. However, the discussion also involves other accounting standards and statements of accounting concepts that are reflected in AAS 31.
7.73. Accounting and statistical reports serve different purposes and differences between the underlying concepts are to be expected. On the other hand, there are many similarities between the purposes and concepts. In developing the GFS system, the ABS has worked closely with accounting bodies in order to develop a mutual understanding of the relationships between accounting and statistical standards. Understanding and documentation of the relationships assists users’ understanding of reports produced from each system and reduces the effort required to compile statistics from accounting systems.
BROAD LINKS BETWEEN THE SYSTEMS
SCOPE AND COVERAGE
7.74. As discussed in chapter 2, in statistical terminology, ‘scope’ denotes the group of units that define the intended boundary of a statistical system. ‘Coverage’ denotes the group of units actually included in a statistical collection. As indicated in the introduction, the scope of both systems (AAS 31 and the GFS system) is described as ‘the public sector’. Before deciding that the scope of the two systems is identical, it is necessary to examine whether AAS 31 defines the public sector in the same way as the GFS system.
7.75. There is a high degree of agreement between the AAS 31 and GFS definitions of the public sector. Both base the definition on the characteristics of units that are defined as comprising the public sector. AAS 31 uses the term ‘entities’ rather than ‘units’ and defines an entity as ‘any legal, administrative, or fiduciary arrangement, organisational structure or other party (including a person) having the capacity to deploy scarce resources in order to achieve objectives’. In the GFS system, the corresponding statistical unit is the legal entity, which is defined as ‘a unit covering all the operations in Australia of an entity that possesses some or all of the rights and obligations of individual persons or corporations or that behaves as such in respect of those matters of concern for economic statistics’. Although the statistical unit and accounting entity concepts are defined differently, the differences are considered unlikely to have any material effect on the comparability of the scope of the public sector defined in each system.
7.76. The characteristics of legal entity units used in the GFS system to define the public sector are based on SNA93, which defines the public sector as comprising government units and units controlled by government units. Government units are defined as ‘unique kinds of legal entities established by political processes which have legislative, judicial or executive authority over other institutional units within a given area’ (SNA93, paragraph 4.104). The SNA describes the main functions of government units as providing goods and services to individuals and the community at large; redistributing income and wealth; and engaging in non-market production, which is production made available free or at prices that do not have a significant influence on the amounts that the producers are willing to supply or purchasers wish to buy.
7.77. Other units are brought into the public sector if they are under the control of government units. SNA93 defines control as the ability to appoint a majority of the board of directors or an equivalent body, so as to be able to determine the policy followed by the unit. However, SNA93 also recognises that there are other arrangements where government control can exist, for example, where the government exerts control by legislative means or by way of contractual arrangements that give it effective power to determine the policy of a unit to which it does not appoint a majority of the board.
7.78. AAS 31 employs the same underlying principle in determining whether a unit is to be included in the public sector. Section 9.1.3 states that ‘where a government has the capacity to dominate the financial and operational policies of another entity so as to enable that other entity to operate with it in pursuing its own objectives, then that government has control over that entity’. Section 9.3.1 expands on this statement (in the context of financial reporting by governments), saying that two factors are indicative of the control of another entity by government:
7.79. Although AAS 31 focuses on control that is exercised by ‘a government’ where SNA93 uses control that is exercised by a ‘government unit’, the definitions of control used in the two systems are very similar. Major inconsistencies between the two systems’ delineation of the public sector are considered unlikely to arise from these slightly different approaches. Given the method of compilation of GFS, any differences that do arise will be identified easily and will be brought to the attention of GFS users.
7.80. One area in which the possibility of differences may exist is in relation to so-called ‘build, own, operate, and transfer’ (BOOT) schemes. The schemes involve a mix of public and private sector involvement in various types of (mainly infrastructure) projects. Currently, no such schemes are included in the GFS system because they are not considered to meet the SNA93 criteria for government control. Although government involvement in the projects may only concern planning and regulation, it can extend to eventual ownership of the infrastructure. A changing mix of private and government ownership or control may occur over the life of a project. The central issue from a GFS perspective is whether there are units involved that are effectively under government ownership and/or control.
7.81. Accounting standards currently do not specifically address accounting for BOOT schemes. Some jurisdictions are incorporating emerging BOOT scheme assets and liabilities in their balance sheets. The ABS will monitor the accounting treatment of the schemes and will review the current omission of the schemes from the GFS system as the accounting treatment becomes clearer.
7.82. As discussed in Chapters 2 and 3, the GFS system does not cover all of the units or all of the flows and stocks of units falling within the defined scope of the public sector. In most cases, estimates are made for the missing units and flows and stocks. AAS 31 applies the accounting concept of 'materiality' of information. Information is material if its omission, misstatement or non-disclosure has the potential to adversely affect decisions made by users of the information. Application of this concept implies that information that is deemed not material may be omitted from AAS 31 reports.
7.83 Differences between AAS 31 and GFS data will arise because of GFS undercoverage and application of the accounting concept of materiality. However, by definition, the errors or omissions arising from these procedures cannot be significant and are unlikely, in combination, to create major differences between data produced from the two systems.
7.84. In AAS 31 the reporting entity is the whole of government, which in GFS terms corresponds to the whole of the public sector for the reporting jurisdiction. However, AAS 31 also provides for what it calls ‘disaggregated information’, which refers to disaggregation of the whole of government reports into reports on ‘each broad sector of activity of the government … The information about assets, liabilities, revenues and expenses must be disclosed without eliminating the effects of transactions between sectors, but by eliminating the effects of transactions between entities within each sector’ (AAS 31, 15.12.1).
7.85. In relation to the delineation of the sectors, the standard says ‘Judgement will need to be applied in identifying the broad sectors of a government’s activities … One basis for identifying the broad sectors about which disaggregated information should be disclosed is the Government Finance Statistics (GFS) Standard adopted by the Australian Bureau of Statistics’ (AAS 31, 15.12.2). In practice, the jurisdictions classify their units as general government, public non-financial corporations or public financial corporations in accordance with GFS standards in order to be able to supply the ABS with sector information required for compilation of government finance statistics. They are therefore able to segment their own financial reports on the GFS institutional sector basis.
7.86. AAS 31 requires that governments prepare a specified set of financial reports comprising an operating statement, a statement of financial position and a statement of cash flows. The operating statement provides information on revenues and expenses, which are defined according to Statement of Accounting Concepts 4 ‘Definition and Recognition of the Elements of Financial Statements’ (SAC 4) as follows:
These definitions of revenues and expenses are much broader than the GFS definitions (see chapter 2) and include flows such as revaluations that are not categorised as transactions and therefore are not classified as revenues and expenses in the GFS system. Accounting standards do not make the distinction that is made in the GFS system between transactions and other economic flows. The AAS 31 operating statement therefore includes some revaluations and other changes in the volume of assets that are excluded from the GFS operating statement. The GFS operating statement and the AAS 31 operating statement both include a balance defined as revenues less expenses, but the GFS operating statement is extended to include the information on net transactions in non-financial assets and the net lending/borrowing balance which are not included in the AAS 31 system.
7.87. The statement of financial position reports the assets and liabilities of a government and corresponds to the GFS balance sheet. The SAC 4 definitions of the main balance sheet components are as follows:
Although the wording of the definitions of assets and liabilities are different from the wording of the corresponding GFS definitions (see chapter 2), there is no clear difference between the meanings of the accounting and GFS definitions. The GFS system does not include the same sort of recognition criteria as the accounting standards. However, to date the ABS has not had cause to question non-recognition of assets or liabilities in any public sector accounts. In the GFS system, equity is treated as a financial claim against the reporting entity and is included with liabilities in the balance sheet. Where possible, it is valued at market value and is generally not measured as a residual.
7.88. The AAS 31 and GFS cash flow statements are identical with the exception that the AAS 31 statement does not include the supplementary information about the surplus/deficit that the GFS statement includes.
7.89. AAS 31 does not require preparation of a statement that corresponds to the GFS statement of stocks and flows. However, it does require elaboration of information in the various statements by means of notes to the accounts. Information required for GFS purposes is often available in the form of notes to the accounts.
7.90. AAS 31 provides illustrative examples of each of the financial statements, which are reproduced (without the notes to the accounts) in tables 7.7.1 - 7.7.3 below.
7.7.1. ILLUSTRATIVE EXAMPLES OF FINANCIAL STATEMENTS INCLUDED IN AAS 31: OPERATING STATEMENT
7.7.2. ILLUSTRATIVE EXAMPLES OF FINANCIAL STATEMENTS INCLUDED IN AAS 31: STATEMENT OF FINANCIAL POSITION
7.7.3. ILLUSTRATIVE EXAMPLES OF FINANCIAL STATEMENTS INCLUDED IN AAS 31: STATEMENT OF CASH FLOWS
7.91. AAS 31 does not specify requirements for standard classification of flows and stocks in the same way as the GFS system. Certain classification requirements are specified but a high degree of flexibility is implied in much of the document. For example, only ‘appropriate classification’ of revenues and expenses is specified. As well, the ‘classification of assets in accordance with their nature or type may be based on their liquidity, marketability, financial risk and/or physical characteristics. Classification of liabilities in accordance with their nature or type may be based on their sources and/or the extent to which they are secured’ (AAS 31, 15.4.2). The classifications included in the illustrative statements in tables 7.7.1 - 7.7.3 are described as examples of appropriate classification.
7.92. Use of GFS classifications is supported in AAS 31 to the following extent: ‘In addition, this Standard does not prohibit further disaggregated financial information being presented in the general purpose financial report of a government. For example, information about the assets, liabilities, revenues and expenses of a government’s programs, determined on the basis of the Government Purpose Classification (GPC) of the Australian Bureau of Statistics, may also be useful to users of the government's general purpose financial reports. Although this Standard encourages the disclosure of disaggregated information using the GFS and/or GPC bases, it does not require the adoption of those bases. This is because the GFS and GPC classifications have been developed for specific purposes which may not always be compatible with the objective of general purpose financial reporting’ (AAS 31, 15.12.2).
7.93. In practice, each Australian government jurisdiction has adopted GFS classification as a standard and is obliged by intergovernmental agreement to provide financial reports on a GFS basis. Thus, the flexibility implicit in AAS 31 with regard to classification does not prevent ABS access to GFS-classified data for the purpose of compiling government finance statistics.
TIME OF RECORDING
7.94. Both AAS 31 and the GFS system require an accrual basis of recording, which is defined in AAS 31 as ‘where assets, liabilities, equity, revenues and expenses are recognised in the reporting periods to which they relate, regardless of when cash is received or paid’. (AAS 31, 3.2.2). This definition is consistent with the GFS definition, but AAS 31 does not elaborate on application of the accrual concept to the extent found in the GFS system and SNA93. Nevertheless, because the ABS is generally not in a position to obtain data initially on any timing basis other than that recorded in the accounts of each jurisdiction, differences between jurisdictions’ AAS 31 reports and GFS will only arise if significant divergences come to the ABS’ notice. One such divergence concerns the recording of interest, which is discussed in the section below relating to differences in the treatment of transactions and other economic flows.
7.95. As discussed in chapter 2 and in previous sections of this chapter, SNA93 and the IMF GFS standard recommend valuation of all economic stocks and flows at market value. In general, accounting standards assume historical cost as a starting point and make various recommendations for the substitution of other valuation bases where considered appropriate. For example, replacement cost or fair value may be used for the valuation of non-current assets as deemed appropriate in the circumstances. Market value is recommended for certain marketed securities and preparation of supplementary reports on ‘current cost accounting’ (CCA) basis is recommended but not mandated.
7.96. In compiling GFS estimates the ABS is dependent on the valuation methods used in the source data. In the case of Commonwealth government debt, valuations have historically been on an historical cost basis. In the 2003-04 Commonwealth budget released on 13 May 2003, the Commonwealth announced a change in the valuation basis of debt to the conceptually preferred market value basis, made possible by the introduction of the new debt valuation systems by the Australian Office of Financial Management. This change was taken back to 1999-2000 and was introduced in the 2001-02 GFS publication released on 27 June 2003. As such, there is a break between 1998-99 and 1999-2000 for the affected balance sheet series, including net debt.
DIFFERENCES IN TREATMENT OF FLOWS AND STOCKS
7.97. A number of differences exist between the accounting and GFS treatments of some economic flows and stocks. These are listed below with brief comments on the cause and effect of each difference.
Absence of transactions/other economic flows distinction in accounting standards
7.98. As noted previously, accounting standards do not make the GFS distinction between transactions and other economic flows. The distinction between transactions and other flows is important for economic analysis because transactions represent changes to stocks which result directly from the economic activities (e.g. production, income generation, consumption, accumulation of wealth) arising from the interaction of institutional units, whereas other economic flows (revaluations and other changes in the volume of assets) represent changes to stocks which result from events that do not involve the interaction of institutional units and are often not directly related to economic activities.
7.99. Two important examples of the effects of the absence of the transactions/other flows distinction in accounting standards concern profits/losses from exchange rate changes and profits/losses on the sale of assets (other than inventories). Both of these flows are treated as revaluations in the GFS system and, as a consequence, do not affect the GFS net operating balance. In the GFS system , profit or loss on the sale of assets is considered to be a revaluation which takes place immediately before the sale of the asset. In accounting reports both would be treated as revenue or expenses and would affect the operating surplus/deficit. However, in both systems, such events have the same effect on net worth.
Non-recognition of internal book transfers in the GFS system
7.100. Certain internal transfers that are recognised as revenues or expenses in accounting standards are not regarded in the GFS system (or SNA93) as economic flows and are therefore not recorded in the system. Allowances for bad or doubtful debts are an important example. These are expensed in AAS 31 but are not recognised in the GFS system. In the GFS system, bad debts are only recognised when written off. Bad debts written off are treated as other changes in the volume of assets if they are written off unilaterally by the creditor or as capital transfers if they are written off by mutual agreement between creditor and debtor.
Revision to accounting estimates
7.101. AAS 1 ‘Statement of Financial Performance’, paragraph 6.1, requires that a revision of an accounting estimate be recognised as a revenue or an expense in the accounting period in which the estimate is revised, if the revision affects that reporting period only, or in the reporting period and future reporting periods, if the revision affects both the current and future reporting periods. Importantly from a GFS perspective, AAS 31 requires that accounting estimates recognised in prior accounting periods must not be revised with retrospective effect on prior financial statements.
7.102. In the GFS system, material revisions affecting prior-period statistics are usually applied to the past data and are not applied as a cumulative amendment to current-period data. In ABS GFS statistics such adjustments are made to past periods if: (i) the information could reasonably have been expected to be known in the past; (ii) is material in at least one of the affected periods; and (iii) can be reliably assigned to the relevant period(s). In all other cases, the adjustment would be recognised as a current period other economic flow. In other words, there is no embargo on amendment of statistics for prior periods as in AAS 1. Where revisions of past data are identified in accounting reports, this different treatment will result in differences between GFS and AAS 31 financial statements for the current period and prior periods affected by the revision.
Unfunded superannuation expenses
7.103. In accounting statements, unfunded superannuation expenses are accrued as the total change in the actuarially determined value of the unfunded liability. In the GFS system and the ASNA, the movement in the unfunded liability includes up to four components that must be recorded separately:
The components of the change in the superannuation liability in the current period other than actuarial revaluations are treated as economic transactions in the current period. Superannuation expenses for employees in the current year and nominal interest expenses on the unfunded liability in the current year are treated as both "expenses" and financial transactions (increase in liabilities), and superannuation benefits paid in the current year are recorded as financial transactions (decrease in liabilities).
The different ABS treatment of accruing unfunded superannuation liabilities affects comparisons of GFS and AAS 31 data for various expenses and the operating balance.
Expenditures on weapons and weapon delivery systems
7.105. As described in chapter 2 the GFS system records (in keeping with SNA93) expenditures on weapons and weapon delivery systems as current expenses, whereas in public sector accounts these expenditures are usually treated as capital expenditures. In SNA93 (and the GFS system), destructive weapons are not treated as capital assets because they are not used repeatedly or continuously in production (although durable, they are single-use goods). By extension, weapons platforms (warships, submarines, military aircraft, tanks, missile carriers and launchers, etc.) with the function of launching such weapons are treated as consumed in the period when they are acquired.
7.106. However, military structures such as airfields, docks, roads, and hospitals (and the equipment associated with them) are treated as capital assets in SNA93 and the GFS system because they are continuously used in production in the same way as similar civilian structures (they are often switched from military use to civilian use and back again). Light weapons and armoured vehicles are also treated as capital assets because they may be used by non-military establishments which undertake internal security or policing activities.
7.107. These different treatments of expenditures on weapons and weapon delivery systems in the GFS system and AAS 31 contribute to differences between the two systems in the balance sheet as well as the operating statement. The AAS 31 value of fixed assets will exceed the GFS value by the capitalised value of weapons and weapon delivery systems. In the operating statement, the AAS 31 value of depreciation will exceed the GFS value by the cost of depreciation on weapons and weapon delivery systems. GFS expenses will exceed AAS 31 expenses by the capitalised cost of weapons and weapon delivery systems acquired in the period.
7.108. In accounting statements, dividend payments are recorded as distributions and do not affect the derivation of the operating surplus/deficit. In the GFS system, dividends paid by public corporations are treated as expenses and as determinants of the GFS net operating balance of the public corporations. This treatment is adopted in order to maintain a correspondence between the GFS net operating balance and ASNA saving concepts. As discussed in paragraph 7.67, subject to measurement differences, the GFS net operating balance is equal to the ASNA concept of net saving plus capital transfers.
7.109. The different treatment in the GFS system of dividend payments affects comparisons of public corporations’ data relating to the GFS net operating balance and the operating surplus/deficit in AAS 31 financial statements.
7.110. In certain circumstances, the GFS system may treat transactions as repayment of equity that would be recorded as dividend payments in accounting statements. In the GFS system, dividends are viewed as payable from saving. Conversely, dividends not arising from saving, such as dividends arising from sale of assets, may be viewed as return of equity to owners. Such instances, which affect dividend receipts by public sector entities as well as dividend payments by public corporations, are rare and are treated on a case by case basis.
7.111. Acquisition of capital assets under finance leases is treated in the GFS system and accounting standards in the same way where the finance lease is recognised as such under AAS 17 ‘Leases’. A capital expenditure is recorded, the asset acquired is added to the balance sheet, as is the lease liability. In subsequent periods, the lease payments are subdivided between an interest component and a component representing repayment of the borrowed principal.
7.112. The ABS is largely guided by accounting standards in the identification of leases as either operating or finance. Although these standards are regarded as being prescriptive and precise, their interpretation by some public sector entities has, on rare occasions, led the ABS to disagree. So-called operating leases that ABS considers as the same in substance as finance leases and as having the same economic effect are treated as finance leases in the GFS system. In such cases, AAS 31 statements will not record the acquired assets and the lease on the balance sheet and will record only the lease payments as expenses. Differences will also result between the amounts of depreciation recorded in the two systems.
7.113. Under certain accounting treatments, interest payments can be capitalised. In the GFS system, all interest payments are recorded as expenses. This difference between accounting standards and the GFS system affects comparisons of data in accounting and GFS operating statements and balance sheets (GFS interest payments will be higher and GFS asset values will be lower by the amounts of capitalised interest).
Equity in quasi-corporations
7.114. The GFS system recognises certain unincorporated entities in the public sector as quasi-corporations if they operate in the same way as corporations (see chapter 2). Quasi-corporations that are classified as public non-financial corporations or financial corporations are, by definition, owned by general government units. In accordance with SNA93, the equity of general government units in such quasi-corporations is defined as equal to the to the total value of the quasi-corporations’ assets less the total value of their liabilities. No such recognition of quasi-corporate equity is made in accounting statements, which record only documented equity (e.g. shares on issue).
7.115. This difference between the GFS system and accounting statements affects only comparisons of data for the GFS institutional components (i.e. general government, public non-financial corporations, public financial corporations) with similarly segmented accounting data. Comparisons of data for the public sector as a whole are not affected because the equity holdings are eliminated in consolidation.
Total net assets/net assets/net worth
7.116. Total net assets is the name applied in AAS 31 to the difference between the value of total assets and the value of total liabilities. Net assets is defined as total net assets less outside shareholders’ interest. Net worth is a balancing item in SNA93 and the GFS system. In SNA93 and the GFS system, net worth is defined as the total value of assets less the total value of liabilities and equity. Although these three concepts are different, they are often confused. For example, the term ‘net worth’ is sometimes erroneously applied to the concept of total net assets or the concept of net assets. Although the concept of net worth is not used in accounting statements, it can usually be derived. Conversely, although the GFS system does not include the concepts of total net assets and net assets, they can be derived.
7.117. For the general government sector (which cannot have equity), net worth, total net assets and net assets are identical. For corporations, the SNA93/GFS concept of net worth is based on the view that all financial claims on the assets of the corporations (including the claims of the owners) should be deducted in determining its contribution to the net worth of the economy as a whole. Thus, even though a corporation is wholly owned by its shareholders collectively, it is seen to have a net worth (which could be positive or negative) in addition to the value of the shareholders’ equity. In the case of quasi-corporations ’net worth is zero, because the value of the owners’ equity is assumed to be equal to its assets less its liabilities’ (SNA93, paragraph 13.83).
RECONCILIATION OF AAS 31 AND GFS BALANCING ITEMS
7.118. In order to quantify the differences between public sector accounting reports and the GFS system, the ABS calculates reconciliations between balancing items that occur in the two systems. These reconciliations are made available to users. Data for various known differences are compiled and used to adjust the GFS net operating balance for the public sector in each jurisdiction to derive the AAS 31 operating surplus/(deficit) for that jurisdiction. However, a precise reconciliation has yet to be made and unresolved differences are recorded in a residual entitled ‘other adjustments’. A similar exercise is performed to reconcile the GFS net worth for each jurisdiction with the AAS 31 measure of net assets for the jurisdiction. The GFS items used in the reconciliations are set out in tables 7.8 and 7.9 below.
7.119. In deriving the AAS 31 operating surplus/(deficit) in table 7.8, provisions for bad and doubtful debts are added to the GFS net operating balance because (as discussed previously) such provisions are not considered to be transactions and are excluded from the GFS system. Bad debts that are written off from provisions and are treated as capital transfers in the GFS system are deducted in the calculation of the net operating balance and have to be added back to conform with the AAS 31 treatment. The GFS system treats gains and losses on assets as other economic flows and they do not enter the derivation of the GFS net operating balance but are included in the AAS 31 operating surplus/(deficit). The GFS system excludes revisions to past accounting estimates in the derivation of the net operating result for the current period, whereas such revisions are included in the derivation of the AAS 31 operating surplus/(deficit). Distributions to owners of public corporations are deducted in the derivation of the GFS net operating result, but are excluded from the derivation of the AAS 31 surplus/(deficit). Capitalised interest is treated as an expense in the GFS system and is deducted in the derivation of the net operating balance and therefore has to be added back in the derivation of the AAS 31 surplus/(deficit). Differences that could contribute to the residual ‘other adjustments’ are listed in the footnote to the table.
7.8. RECONCILIATION BETWEEN GFS NET OPERATING BALANCE AND AAS 31 OPERATING SURPLUS/DEFICIT
(a) Calculated as a residual. May include adjustments for superannuation, coverage differences, defence ‘assets’, and unidentified differences.
7.120. To date it has not been possible to quantify specific differences between GFS net worth and AAS 31 net assets. Accordingly in table 7.9, the differences are all recorded in the residual ‘adjustments’. Differences that could contribute to the item are listed in the footnote to the table.
7.9. RECONCILIATION OF GFS NET WORTH AND AAS 31 NET ASSETS
(a) Calculated as a residual. Includes adjustments for capitalised interest, provision for bad debts, superannuation, equity, defence ‘assets’, coverage, valuation and unidentified differences.