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      • Annual Report 2006-07 Part 4 - Financial Statements

Annual Report 2006-07 Part 4 - Financial Statements

Independent Auditor's Report

Statement by the Chief Executive Officer and Chief Finance Officer

In our opinion, the attached financial statements for the year ended 30 June 2007 have been prepared based on properly maintained financial records and give a true and fair view of the matters required by the Finance Minister's Orders made under the Financial Management and Accountability Act 1997, as amended.

Financial Statements

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Note 1: Summary of Significant Accounting Policies

1.1 Objectives of the Attorney-General's Department

The Attorney-General's Department (the Department) is an Australian Public Service organisation. The objective of the Department is to serve the people of Australia by providing essential expert support to the Government in the maintenance and improvement of Australia’s system of law and justice.

"The Department is the central policy and coordinating element of the Attorney-General’s portfolio, for which the Attorney-General and the Minister for Justice and Customs are responsible."

The Department is structured to meet two outcomes and eleven outputs as follows:

Outcome 1: An equitable and accessible system of federal civil justice

Outcome 2: Coordinated federal criminal justice, security and emergency management activity, for a safer Australia

The activities of the Department 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.

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 Preparation of the Financial Report

The financial statements are required by section 49 of the Financial Management and Accountability Act 1997 and are a general purpose financial report.

The financial statements and notes have been prepared in accordance with:

• Finance Minister’s Orders (or FMOs) for reporting periods ending on or after 1 July 2006, and
• Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period including Interpretations issued by the AASB that apply for the reporting period.

The financial report has been prepared on an accrual basis and is in accordance with historical cost convention, except for certain assets which are at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial report is presented in Australian dollars and values are rounded to the nearest thousand dollars unless disclosure of the full amount is specifically required.

Unless an alternative treatment is specifically required by an accounting standard or the FMOs, assets and liabilities are recognised in the Balance Sheet when and only when it is probable that future economic benefits will flow to the Department 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 that are unrealised are reported in the Schedule of Commitments and the Schedule of Contingencies (other than unquantifiable or remote contingencies, which are reported at Note 12).

Unless alternative treatment is specifically required by an accounting standard, revenues and expenses are recognised in the Income Statement when and only when the flow, consumption or loss of economic benefits has occurred and can be reliably measured.

1.3 Significant Accounting Judgements and Estimates

In the process of applying the accounting policies listed in this note, the Department has made the following judgements that have the most significant impact on the amounts recorded in the financial statements:

• The fair value of land and buildings has been taken to be the market value of similar properties as determined by an independent valuer. In some instances, the Department's buildings are purpose built and may in fact realise more or less in the market
• the fair value of the Department’s Property Plant and Equipment is documented at Note 1.20, and
• an actuarial assessment was made of the liability in relation to judges’ pensions (personal benefits in the Schedule of Administered Items) in accordance with AASB 119.

No accounting assumptions or estimates have been identified that have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.

1.4 Statement of Compliance

Australian Accounting Standards require a statement of compliance with International Financial Reporting Standards (IFRSs) to be made where the financial report complies with these standards. Some Australian equivalents to IFRSs and other Australian Accounting Standards contain requirements specific to not-for-profit entities that are inconsistent with IFRS requirements. The Department is a not for profit entity and has applied these requirements, so while this financial report complies with Australian Accounting Standards including Australian Equivalents to International Financial Reporting Standards (AEIFRSs) it cannot make this statement.

Adoption of new Australian Accounting Standard requirements

The Department is required to disclose Australian Accounting Standards and Interpretations which have been issued but are not yet effective that have been early adopted by the Department. The following requirements have not resulted in a change to the Department's accounting policies or have affected the amounts reported in the current or prior periods or are estimated to have a financial affect in future reporting periods:

• 2007-05 - Amendments to Australian Accounting Standard – Inventories Held for Distribution by Not-for-Profit Entities [AASB 102].

Other effective requirement changes

The following amendments, revised standards or interpretations have become effective but have had no financial impact or do not apply to the operations of the Department.

Amendments:

• 2005-1 Amendments to Australian Accounting Standards [AASBs 1, 101, 124]
• 2005-4 Amendments to Australian Accounting Standards [AASB 139, 132, 1, 1023, 1038]
• 2005-5 Amendments to Australian Accounting Standards [AASB 1, 139]
• 2005-6 Amendments to Australian Accounting Standards [AASB 3]
• 2005-9 Amendments to Australian Accounting Standards [AASB 4, 1023, 139, 132]
• 2006-1 Amendments to Australian Accounting Standards [AASB 121]
• 2006-3 Amendments to Australian Accounting Standards [AASB 1045]

Interpretations:

• UIG 4 Determining whether an Arrangement contains a Lease
• UIG 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds• UIG 7 Applying the Restatement Approach under AASB 129 Financial Reporting in Hyperinflationary Economies• UIG 8 Scope of AASB 2• UIG 9 Reassessment of Embedded Derivatives"

UIG 4 and UIG 9 might have impacts in future periods, subject to existing contracts being renegotiated.

Future Australian Accounting Standard requirements

The following new standards, amendments to standards or interpretations have been issued by the Australian Accounting Standards Board but are effective for future reporting periods. It is estimated that the impact of adopting these pronouncements when effective will have no material financial impact on future reporting periods.

Financial instrument disclosure

AASB 7 Financial Instruments: Disclosures is effective for reporting periods beginning on or after 1 January 2007 (the 2007-08 financial year) and amends the disclosure requirements for financial instruments. In general AASB 7 requires greater disclosure than that presently. Associated with the introduction of AASB 7 a number of accounting standards were amended to reference the new standard or remove the present disclosure requirements through 2005-10 Amendments to Australian Accounting Standards [AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 & AASB 1038]. These changes have no financial impact but will effect the disclosure presented in future financial reports.

Other

The following standards and interpretations have been issued but are not applicable to the operations of the Department:• AASB 1049 Financial Reporting of General Government Sectors by Governments• UIG 10 Interim Financial Reporting and Impairment

1.5 Changes in Accounting Policy and correction of errors

The Department has reviewed its accounting policy for the treatment of various items within the financial statements and has made the following changes to improve the relevance and reliability of the financial report:

Liabilities

The Department revised the items disclosed within Payables and identified items in Suppliers payables that were better placed in Other payables. Suppliers payables were reduced and Other payables increased by $50,000.

Expenses

The Department reviewed its method of calculating the breakup of supplier expenses to give a more accurate representation of expenditure. The overall effect on suppliers expenditure is nil.

Administered Items - Other Expenses

The amount of $3,328,000 in other expenses in the Schedule of Administered Items in the Department's 2005-06 financial statements has been excluded in the prior year column in the Schedule of Administered Items in the 2006-07 financial statements.

The expense relates to the Department of Finance and Administration and the Department of Employment and Workplace Relations for special appropriations administered by the Department on behalf of these agencies. However, special appropriations administered on behalf of other agencies by the Department continue to be reported in Note 25 Table E.

Administered Items - Payables

The Department reviewed its method of calculating the breakup of liabilities to give a more accurate representation of its liabilities. Note 20A: Suppliers reduced by $3,839,260 and Note 20C: Grants and subsidies increased by $3,839,260.

Administered Items - Administered Investments

In 2006 the Department included a $607,233 investment in the Criminology Research Council (CRC). This investment was calculated on the net assets of the Criminology Research Council. The CRC is an administered entity and the Department does not control those items. The Department has therefore removed its investment in the CRC from these financial statements.

Commitments

The amount reported in the commitments included items that were finance leases. These items have been removed from the Schedule of Commitments as they are included in the liabilities of the Department.

Equity and Accumulated Depreciation

An adjustment was made to the opening accumulated depreciation for leasehold improvements. This error of $4,628 has been corrected in both Note 6 and in the Statement of Changes in Equity.

1.6 Revenue

Revenue from Government

Amounts appropriated for departmental outputs appropriations for the year (adjusted for any formal additions and reductions) are recognised as revenue, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.

Appropriations receivable are recognised at their nominal amounts.

Other Types of Revenue

Revenue from the sale of goods is recognised when:

• The risks and rewards of ownership have been transferred to the buyer
• The seller retains no managerial involvement nor effective control over the goods
• The revenue and transaction costs incurred can be reliably measured, and
• It is probable that the economic benefits associated with the transaction will flow to the Department.

Revenue from rendering of services is recognised by reference to the stage of completion of contracts at the reporting date. The revenue is recognised when:

• The amount of revenue, stage of completion and transaction costs incurred can be reliably measured, and
• The probable economic benefits with the transaction will flow to the Department.

The stage of completion of contracts at the reporting date is determined by reference to the proportion that costs incurred to date bear to the estimated total costs of the transaction. Receivables for goods and services, which have 30 day terms, 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 no longer probable. Interest revenue is recognised using the effective interest method as set out in AASB 139 Financial Instruments: Recognition and Measurement.

1.7 Gains

Other Resources Received Free of Charge

Resources received free of charge are recognised as gains 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 as gains at their fair value when the asset qualifies for recognition, unless received from another government agency or authority as a consequence of a restructuring of administrative arrangements (refer to Note 1.8).

Sale of Assets

Gains from disposal of non-current assets are recognised when control of the asset has passed to the buyer.

1.8 Transactions with the Government as Owner

Equity injections

Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) are recognised directly in Contributed Equity in that year.

Restructuring of Administrative Arrangements

Net assets received from or relinquished to another government agency or authority under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.

Other distributions to owners

The FMOs require that distributions to owners be debited to Contributed Equity unless in the nature of a dividend.

1.9 Employee Benefits

Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.

Liabilities for ‘short-term employee benefits’ (as defined in AASB 119) and termination benefits due within twelve months of balance date are 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 at 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 2007. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. The Department recognises a provision for termination when it has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

Staff of the Department are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) or the PSS accumulation plan (PSSap). From 1 July 2005, new employees are only eligible to join the PSSap scheme.

The CSS and PSS are defined benefit schemes for the Australian Government. The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. The PSSap is a defined contribution scheme.

The Department makes employer contributions to the Employee Superannuation Scheme at rates determined by an actuary to be sufficient to meet the cost to the Government of the superannuation entitlements of the Department’s employees. The Department accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised as at 30 June represents outstanding contributions for the final fortnight of the year.

1.10 Leases

A distinction is made between finance leases and operating leases. Finance leases effectively transfer from the lessor to the lessee substantially all the risks and rewards incidental to ownership of leased non-current assets. An operating lease is a lease that is not a finance lease. In operating leases, the lessor effectively retains substantially all such risks and benefits.

Where a non-current asset is acquired by means of a finance lease, the asset is capitalised at either the fair value of the lease property or, if lower, the present value of minimum lease payments at the inception of the contract and a liability is 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.

1.11 Borrowing Costs

All borrowing costs are expensed as incurred.

1.12 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.

1.13 Financial Risk Management

The Department's activities expose it to normal commercial financial risk. As a result of the nature of the Department's business and internal and Australian Government policies dealing with the management of financial risk, the Department's exposure to market, credit, liquidity and cash flow and fair value interest rate risk is considered to be low.

1.14 Derecognition of Financial Assets and Liabilities

Financial assets are derecognised when the contractual rights to the cash flows from the financial assets expire or the asset is transferred to another Entity. In the case of a transfer to another Entity, it is necessary that the risks and rewards of ownership are also transferred.

Financial liabilities are derecognised when the obligation under the contract is discharged, cancelled or expires.

1.15 Impairment of Financial Assets

Financial assets are assessed for impairment at each balance date.

Financial Assets held at Cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value because it cannot be reliably measured, or a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the impairment loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate for similar assets.

Available for Sale Financial Assets

If there is objective evidence that an impairment loss on an available for sale financial asset has been incurred, the amount of the difference between its cost, less principal repayments and amortisation, and its current fair value, less any impairment loss previously recognised in expenses, is transferred from equity to the Income Statement.

1.16 Interest Bearing Loans and Borrowings

Government loans are carried at the balance yet to be repaid. Interest is expensed as it accrues.

1.17 Supplier and other payables

Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

1.18 Contingent Liabilities and Contingent Assets

Contingent Liabilities and Contingent Assets are not recognised in the Balance Sheet but are reported in the relevant schedules and notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an existing liability or asset in respect of which settlement is not probable or the amount cannot be reliably measured. Remote contingencies are part of this disclosure. Contingent assets are reported when settlement is probable, and contingent liabilities are recognised when settlement is greater than remote.

1.19 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. Financial assets are initially measured at their fair value plus transaction costs where appropriate.

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 of 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 agency’s accounts immediately prior to the restructuring.

1.20 Property, Plant and Equipment

Asset Recognition Threshold

Purchases of property, plant and equipment are recognised initially at cost in the Balance Sheet, 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).

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to ‘makegood’ provisions in property leases taken up by the Department where there exists an obligation to restore the property to its original condition. These costs are included in the value of leasehold improvements with a corresponding provision for the ‘makegood’ taken up.

Revaluations

Fair values for each class of asset are determined as shown below:

Following initial recognition at cost, property plant and equipment are carried at fair value less accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depends upon the volatility of movements in market values for the relevant assets.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reverses a previous revaluation decrement of the same asset class that was previously recognised through surplus and deficit. Revaluation decrements for a class of assets are recognised directly through surplus and deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset restated to the revalued amount.

Depreciation

Depreciable property, 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. The library assets which have been recognised as heritage assets are not depreciated, all other library acquisitions are expensed in the year of acquisition.

Depreciation rates (useful lives), residual values 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 price only when assets are revalued.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

Impairment

All assets were assessed for impairment at 30 June 2007. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the Department were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

There have been no indicators of impairment identified during the 2006-07 financial year.

1.21 Intangibles

The Department's intangibles comprise internally developed software and purchased software for internal use. These assets are carried at cost.

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of the Department's software is 3 to 5 years (2005-06: 3 to 5 years).

1.22 Inventories

Inventories held for sale are valued at the lower of cost and net realisable value.

Inventories held for distribution are measured at cost.

1.23 Taxation

The Department is exempt from all forms of taxation except fringe benefits tax (FBT) 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.

1.24 Reporting of Administered Activities

Administered 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 of Australian Accounting Standards.

Administered Cash Transfers to and from the Official Public Account

Revenue 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 and Administration. 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 21. Thus the Schedule of Administered Items largely reflects the Government’s transactions, through the Department, with parties outside the Government.

Revenue

All administered revenues are revenues relating to the course of ordinary activities performed by the Department on behalf of the Government.

Administered revenue is recognised at its nominal amount due less any provision for bad or doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.

Competitive Neutrality

The Australian Government Solicitor (AGS) is a portfolio related entity and operates on a for profit basis. As an agency within the Australian Government it is not subject to taxation other than GST and FBT. However, under Competitive Neutrality arrangements, the AGS is required to make payroll tax, income tax, stamp duty and practicing certificates equivalent payments to the Government.

Administered Investments

Administered investments in controlled entities are not consolidated because their consolidation is relevant only at the whole of Government level.

Administered investments other than those held for sale are measured at their fair value as at 30 June 2007. Fair value has been taken to be the net assets of the entities as at balance date. For the comparative period. administered investments were measured on the cost basis, adjusted for any subsequent capital injections or withdrawals and for any impairment losses.

Administered investments were assessed for impairment at 30 June 2007. No indicators of impairment were noted.

Personal Benefits

Personal Benefits are measured at the present value of the estimated future cash outflows to be made in respect of service provided up to the reporting date. The current year figure is calculated with reference to AASB 119.

Grants and Subsidies

The 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.

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Note 2: Events after the Balance Sheet Date

On 23 February 2006 the Attorney-General announced new administrative arrangements for the Office of Film and Literature Classification (OFLC). Under the new arrangements the OFLC ceased to be a prescribed agency under the FMA Act from 1 July 2007. The functions and resources of the OFLC have been integrated into the Department from this date as part of the Classification, Legal Services and Native Title Division in Outcome 1.

The Australian Commission for Law Enforcement integrity (ACLEI) commenced operations on 30 December 2006. ACLEI’s operations are being supported by the Department until it is fully established independently of the Department’s infrastructure. The balance of funding appropriated to the Department for ACLEI will be transferred to ACLEI when it is fully established independently of the Department during 2007-08. The primary asset to be transferred to ACLEI is an appropriation receivable of $3,869,210.