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1999
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
EXPLANATORY MEMORANDUM
(Circulated by the authority of the Minister for Finance and
Administration,
the Hon John J Fahey, MP)
ISBN: 0642 38908X
FINANCIAL MANAGEMENT LEGISLATION AMENDMENT BILL 1999
GENERAL OUTLINE
The purpose of the Bill is to align the legislative framework provided by the Financial Management and Accountability Act 1997 with the accrual financial framework that will commence on 1 July 1999.
The move to an integrated accrual budgeting, resource management and financial reporting framework was recommended by the Joint Committee of Public Accounts (in its Reports 338 and 341 of November 1995) and by the National Commission of Audit (in its report of June 1996). A key finding of the latter was that:
A full accrual accounting framework is an essential complement to the structural and cultural change the Government is seeking by way of a more competitive, efficient and effective public sector. It is also essential if the accountability requirements of the Parliament and the taxpayer, and the Government’s commitment to a Charter of Budget Honesty, are to be met.
The primary change made by the Act is to repeal the provisions dealing with ‘fund accounting’ while retaining the essential features of the funds - the ability to hypothecate money for specified purposes - through provisions to establish ‘Special Accounts’ within the Consolidated Revenue Fund (CRF).
The accrual framework provides a more relevant basis for decision making than the cash-based fund accounting arrangements. It changes the management focus from one primarily on cash flows and fund balances to one which focuses on all resource flows and assets and liabilities.
The new arrangements will enable the use of non-lapsing accrual appropriations and will not require the transfer of moneys to a fund outside the CRF to meet accrued costs as payments become due. This means that moneys appropriated for accrued expenses (included in the price of outputs) can remain in the CRF until they are required to be spent in future years.
Requirements for debiting and crediting all cash transactions to a fund account in a central ledger will be removed. In future, transactions of agencies will be processed and recorded in their own accounting systems. The amendments will therefore facilitate the move to devolved accounting and banking arrangements for agencies, consistent with more business like approaches used in the private sector.
The Finance Minister will be required to prepare monthly financial statements on a basis which will facilitate comparison with the accrual based budget estimates. This will replace the present monthly reporting requirement linked to cash based budgeting arrangements.
A brief explanation of fund accounting and why it is not appropriate in a modern accrual financial framework is given below.
Fund accounting is a form of cash accounting that aims to set aside separate pools of money for designated purposes. To apply accrual principles to a system of fund accounting requires, in effect, a dual set of accounts, one dealing with the cash transactions by fund, the other dealing with the accrual revenues, expenses, assets and liabilities.
The repealed provisions required the Finance Minister to manage and report on the four funds, ensuring that no fund was overdrawn. To achieve this the Minister or the Minister’s delegate had to monitor the cash balances of each fund on a daily basis, and arrange for any of the funds suffering temporary shortfalls to borrow from funds in surplus (and for the money to be repaid in due course). The focus tended to be on managing fund balances rather than the underlying resource flows, changes in assets and liabilities and outputs and outcomes to which the resources were directed.
Fund accounting is a blunt tool for managing the finances of a large and complex organisation. It is also inadequate as a vehicle for management of an organisation to discharge its accountability to stakeholders.
Continuation of fund accounting would add to administrative and system costs, and impede, rather than assist, a modern accrual financial framework, which is essential for strategic decision making purposes.
Under an accrual financial framework the Government will budget, manage and report on all of the Commonwealth’s revenues and expenses (including those that have accrued), its assets and liabilities and its cash flows. At a macro level, this information will show over time whether the Commonwealth is operating at a sustainable level, how its financial position is changing and how it is financing its operations.
Based on these principles, the appropriation bills will appropriate money for achieving particular ‘outcomes’ and the appropriations for departmental operations will be based on the full price of ‘outputs’ (goods and services provided) which contribute to achieving those outcomes.
FINANCIAL IMPLICATIONS
The bill provides legislative changes to facilitate the introduction of an accrual based financial framework. It will eliminate obsolete accounting processes and facilitate the introduction of modern, businesslike approaches. This is expected to translate into more efficient and effective use of the Commonwealth’s resources.
TERMS USED IN EXPLANATORY NOTES
accrual accounting is 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;
appropriation means an authority under the FMA Act or any other law to draw money from the CRF, whether or not the law concerned uses the word ‘appropriation’ or ‘appropriated’;
CAF means the Commercial Activities Fund established by section 21 of the FMA Act (previously part of the Trust Fund established by the Audit Act 1901);
CRF means the Consolidated Revenue Fund established by section 81 of the Constitution;
FMA Act means the Financial Management and Accountability Act 1997;
fund accounting means setting aside separate pools of money for designated purposes;
LCIR Act means the Loan Consolidation and Investment Reserve Act 1955;
LF means the Loan Fund established by section 19 of the FMA Act (previously established by the Audit Act 1901);
Official Public Account means the central bank account maintained by the Finance Minister;
RMF means the Reserved Money Fund established by section 20 of the FMA Act (previously part of the Trust Fund established by the Audit Act 1901);
Special Account means an account (established by the Finance Minister under the FMA Act, or by another Act) used to record moneys received for a designated purpose and expenditure of those moneys;
NOTES ON CLAUSES
1. Clause 1 provides for the short title of the Act to be the Financial Management Legislation Amendment Act 1999, reflecting that it amends the Financial Management and Accountability Act 1997 and other Acts which adopt the same principles.
2. Provision is made for the Act to commence on 1 July 1999 to coincide with commencement of the Government’s accrual financial framework. This will involve presenting the Commonwealth budget and appropriation bills on an accrual basis and reporting monthly against the budget on the same basis.
3. If Royal Assent is received later than 1 May 1999, the period for making regulations, determinations etc for conversion to the new system would be reduced if the Act commenced on 1 July and subsection (2) allows for proclamation of a later commencement date, if needed, to do this.
4. Should the Act not commence on 1 July 1999 or a later day fixed by Proclamation, it will commence automatically after a period of 6 months has elapsed from the date of Royal Assent. Commencement would then be on the first day of the third quarter after the quarter in which it receives Royal Assent. For example, if the Act received Royal Assent on 15 July 1999 and a commencement date had not been fixed by Proclamation, the Act would commence automatically on 1 April 2000.
5. The definitions are inserted to facilitate the transitional arrangements in section 5.
6. The Schedule referred to contains the substantive amendments to the Financial Management and Accountability Act 1997 and the repeal of the Loan Consolidation and Investment Reserve Act 1955.
7. The purpose of clause 5 is to convert components of the RMF and CAF to ‘Special Accounts’ within the CRF and preserve the rights and obligations attached to the old components after conversion. The purpose of each old component will become the purpose of the corresponding Special Account.
8. The balance of each component of the abolished RMF and CAF is required by sub-clause (3)(b) to be credited to the corresponding Special Account in the CRF and, under subclause (6), transactions permitted under the previous arrangements will be posted to that account as if there had been no change. For example, if property had been acquired before the commencing time from money from the old reserve, then the proceeds of disposal of the property after the commencing time would be required to be credited to the new Special Account.
9. The renaming of components under subclause (5) is intended to reflect the fact that they are no longer part of a separate fund (represented by money set aside from the CRF) but are simply ledger accounts recording a right to draw money from the Consolidated Revenue Fund (which is appropriated for the purpose by sections 20(4) and 21(1)).
10. This transitional provision has the effect of deeming references to the abolished Loan Fund, made in instruments or appropriations, to be references to the CRF. In future, transactions of the LF will be accounted for in the CRF.
11. The purpose of clause 7 is to modify the effect of references to the CRF in other Acts, so they are consistent with the concept that the CRF is ‘self-executing’ i.e. that money raised or received by the Executive Government automatically forms part of the CRF, without the need to credit a ledger account designated CRF or make a payment into a bank account so designated.
12. Initially, it may not be practicable for the Finance Minister to prepare the financial statement required by section 54 of the FMA Act on a monthly basis (e.g. if some agencies are not able, for systems reasons, to provide information in the form required by the Minister within the required timeframe). The transitional provision will allow the Minister to prepare quarterly reports, if necessary, while systems and processes are being refined, for up to 12 months. It does not preclude preparation of monthly reports earlier than 12 months after commencement of the Act.
13. While quarterly (and monthly) reports will reflect changes since the previous report they will include information that is cumulative from the beginning of each financial year. Therefore, if the Act commences later than 1 July 1999, the reports will include some transactions that occurred before commencement date. For example, if the Act commenced on 1 January 2000, the first quarterly report would be for the period ended 31 March 2000. The Operating Statement and Cash Flow Statement would each cover the period 1 July 1999 to 31 March 2000 and the Balance Sheet would be as at 31 March 2000.
14. Subsection (1) is a standard form of regulation making power. The main purpose of this provision is to provide the Finance Minister some flexibility to deal with matters of a transitional or saving nature arising from amendments made by the Amendment Act.
15. The readers guide aims to give a general overview of the matters covered by the FMA Act. It also gives some information about the way the Act is organised. The amendments update the guide to reflect amendments made to the Act.
Appropriation
16. The replacement of ‘Fund’ with ‘CRF’ reflects the merging of four funds into a single CRF.
Commercial Activities Fund
17. The definition is repealed because the Commercial Activities Fund will cease to exist with the repeal of Division 1 of Part 4.
Consolidated Revenue Fund
18. The amended definition will permit references to the Consolidated Revenue Fund to be abbreviated as ‘CRF’.
Drawn Money
19. Drawn money is defined by reference to section 17. This section will be repealed to reflect that the CRF is ‘self executing’ under section 81 of the Constitution. Regulations relating to accounting for public money may be issued under section 65 of the FMA Act.
Fund
20. The definition is repealed because it refers to the three abolished funds. Previous references to ‘fund’ in the Act are replaced by references to the ‘CRF’ or are not required.
Loan Fund
21. The definition is repealed because the Loan Fund will cease to exist with the repeal of Division 1 of Part 4.
Reserved Money Fund
22. The definition is repealed because the Reserved Money Fund will cease to exist with the repeal of Division 1 of Part 4.
Received Money
23. Received money is defined by reference to section 17. This section will be repealed to reflect that the CRF is ‘self executing’ under section 81 of the Constitution. Regulations relating to accounting for public money may be issued under section 65 of the FMA Act.
Special Account
24. ‘Special Accounts’ will, with the repeal of Division 1 of Part 4, replace components of the Reserved Money Fund and Commercial Activities Fund. They provide a mechanism for recording moneys set aside (hypothecated) for a particular purpose (e.g. a levy collected from an industry and applied in making grants for the development of that industry).
25. Previously, such moneys were first credited to the CRF then set aside in a separate fund. Under the new simplified arrangements the money will remain in the CRF until it is spent.
26. Special Accounts, as was the case with components of the RMF or CAF, may be established by the Finance Minister under section 20 or by another Act.
27. The note has been updated to be consistent with the ‘self executing’ nature of the CRF under the Constitution. Section 6 has effect only for the purposes of the FMA Act. It does not require notional payments to be treated as real for the purposes of other legislation. However, other legislation may separately adopt the principles in section 6 (e.g. the Appropriation Acts).
Division 1—Fund accounting
28. The division is repealed, reflecting the primary purpose of the Act, which is to abolish fund accounting.
29. Fund accounting is based on the notion that financial management and accountability can be supported by a simple system that requires the setting aside of moneys into funds designated for particular purposes. Such accounting is not relevant to financial management in a modern business-like environment and, if continued, would prevent the efficient and effective operation of the accrual framework that will operate from 1 July 1999.
30. Fund accounting was introduced by the Audit Act 1901 and modified by the FMA Act. The current amendments will have the effect of merging the Loan Fund, Reserved Money Fund and Commercial Activities Fund with the CRF. This will eliminate the need to maintain a multiple fund accounting system, including the unnecessary daily transferring of moneys back and forth between the funds to keep them in positive balance.
31. The CRF is established by section 81 of the Constitution, which states:
81. All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.
32. The effect of section 81 is to cause the CRF to be ‘self executing’. That is, whether or not any particular moneys form part of the CRF does not depend on whether or not the Commonwealth has credited those moneys to a fund which is designated as the CRF either by paying it into a designated bank account or by keeping a specific ledger described as the ‘Consolidated Revenue Fund’.
33. Reflecting the self executing nature of the CRF, Division 1 of Part 4 will be repealed, thereby removing specific requirements for debiting and crediting the fund.
Division 1—Accounts and records in relation to public money
34. This section replaces the repealed section 24, relating to keeping proper accounts and records by the Finance Minister. The new provision requires accounts and records to be kept in relation to the receipt and expenditure of public money rather than the transactions of the funds (reflecting the abolition of fund accounting.
35. Under the devolved accounting and banking arrangements that will operate from 1 July 1999, cash transactions will be processed and recorded by individual agencies instead of the central system previously maintained by the Finance Minister. Hence, the note highlights the fact that the Finance Minister will need to require agencies to keep proper accounts and records on his behalf (by issuing Finance Minister’s Orders).
Division 1A—Special Accounts
36. The meaning of Special Account is explained under section 5 – definition of Special Account.
37. Section 20 gives the Finance Minister power to make determinations establishing or abolishing Special Accounts and governing their operation. Subsection (4) provides a standing appropriation of the CRF to enable payments up to the balance for the time being of the Special Account for specified purposes included in the determination. This provision replaces similar arrangements that operated in relation to the RMF and CAF under sections 20 and 21.
38. Section 21 allows amounts to be paid out of the CRF and debited to a Special Account established by another Act. Subsection (1) provides a standing appropriation of the CRF to enable payments up to the balance for the time being of the Special Account for the purposes of the Special Account. This provision replaces similar arrangements that operated in relation to the RMF under subsection 20(7).
39. Section 22 serves the same purpose as the repealed section 22, but refers to determinations relating to Special Accounts (which replace components of the Reserved Money Fund and Commercial Activities Fund).
40. This section is repealed as crediting and debiting the CRF will not be required in the Act. Under accrual accounting standards, which are mandatory for agencies, gross amounts of set-offs will still be required to be reported in the financial statements.
41. This section is repealed and replaced by section 19 relating to accounts and records in relation to public money. See explanation under section 19.
42. This section is repealed as the Act will no longer refer to crediting and debiting the CRF.
43. This section is amended by omitting references to debiting from a fund, reflecting the abolition of fund accounting. Instead, the provision will refer to debiting an amount against an appropriation. This is necessary to determine the balance that can be drawn under each appropriation for the purposes of section 83 of the Constitution.
44. Section 27 contains the operating requirements for administering drawing rights, whereas section 26, in effect, makes it an offence not to comply with those requirements. The concepts in the two sections and the reasons for their amendment are therefore the same.
45. While the amended requirements for administering drawing rights appear similar to the previous requirements (except for the removal of references to the funds), the business processes which they support are different and reflect the devolving of responsibilities under the new financial framework.
46. Previously, an agency official would require a drawing right to request a DOFA official to debit an amount from a fund against an appropriation. The DOFA official would require a drawing right to actually make the payment and debit the fund against the appropriation. This reflects the fact that DOFA operated a central bank account, payment system and ledger on behalf of all agencies.
47. In future, agency officials will require drawing rights to make payments, out of their own bank accounts, and debit appropriation accounts in their own records. A DOFA official will only require drawing rights to make ‘notional’ payments from the central bank account (the Official Public Account) to agency accounts, according to draw-down schedules agreed between the agencies and DOFA. A standing drawing right may be issued to an agency official for receipts credited to an annotated appropriation (see section 31).
48. It will work a little differently for Commonwealth authorities.
49. Previously Departments of State would initiate the payment of money to Commonwealth authorities in their portfolios. Hence, an agency official would require a drawing right to request a DOFA official to debit an amount from a fund against an appropriation for a Commonwealth authority.
50. In future, DOFA will automatically make payments from the Official Public Account to authority bank accounts, according to draw-down schedules agreed between authorities and DOFA (as for agencies). However, Commonwealth authorities are separate legal entities and final expenditure of the CRF will take place when DOFA makes payments to the authorities. A DOFA official will therefore require a drawing right to make a ‘real’ payment and debit an appropriation account for the authority in DOFA’s records.
51. This section is amended to reflect the merging of funds into a single CRF and the removal of statutory requirements for debiting and crediting the CRF.
52. This section is repealed because accrual appropriations will not lapse automatically at the end of the financial year. Instead, they will remain valid until fully drawn down.
53. This section is amended to reflect the merging of funds into a single CRF and the removal of statutory requirements for debiting and crediting the CRF. Under accrual appropriations amounts re-credited to appropriations will be available after the end of the financial year; whereas, under previous arrangements such amounts ceased to be available once the appropriation lapsed.
54. The definition of ‘item’ in subsection (5) is repealed because the appropriation bills will, in future, refer to ‘outcomes’.
55. This section is amended to reflect the merging of funds into a single CRF.
56. This section has been amended to reflect the merging of funds into a single CRF and removal of statutory classifications of public money which affected the scope of the CRF (the section previously included a reference to ‘drawn money’).
57. The investment power given to the Treasurer in subsection (2) is for the purpose of managing the public debt of the Commonwealth. It replaces investment powers provided in the repealed Loan Consolidation and Investment Reserve Act 1955. Under that Act, moneys of the Reserve, which largely consisted of amounts appropriated from the CRF, were able to be invested by the Treasurer. Investments were permitted in securities of, or guaranteed by, the Commonwealth, pending their application in repurchasing or redeeming securities representing portion of the public debt of the Commonwealth.
58. The new investment powers of the Treasurer will be wider than those given to him under the LCIR Act, both in relation to money that can be invested and the range of authorised investment categories. In particular, this would extend the money he could invest from LCIR balances to any public money. More particularly:
• The Treasurer will obtain the same basic investment powers as those given to the Minister for Finance and Administration under section 39 of the FMA Act (to invest any public money in government or government guaranteed securities, bank deposits and investments prescribed in regulations). However, these powers can only be exercised for the purpose of managing the public debt of the Commonwealth.
• An additional category of investments will be available to the Treasurer under paragraph (10)(b)(iv) - debt instruments issued or guaranteed by foreign governments or financial institutions whose members consist of foreign countries. This power also can only be exercised for the purpose of managing the public debt of the Commonwealth.
59. Under subsection (5), upon realisation of an investment of money debited from a Special Account, the whole proceeds must be credited to that Special Account. Previously, such amounts were only allowed to be credited to the Loan Fund, Reserved Money Fund or Commercial Activities Fund up to the amount debited (including amounts debited for expenses). The previous restriction reduced the incentive to maximise returns on investments.
60. This amendment clarifies responsibilities where a delegation from the Finance Minister to a Chief Executive has been sub-delegated.
61. This section repeals the requirement for a monthly statement of transactions of the funds. With the commencement of an accrual financial framework on 1 July 1999 and the abolition of fund accounting, the provision is no longer appropriate.
62. The new section 54 will allow the Finance Minister to prepare monthly financial statements on an accrual basis. It is less prescriptive as to the form and content of the statements, giving flexibility for them to evolve over time.
63. For administrative flexibility, the new section allows delegation to any official, in the same way as existing section 62.
64. The appendix is repealed, reflecting the abolition of fund accounting.
65. The repealed Loan Consolidation and Investment Reserve Act 1955 operated within the abolished Reserved Money Fund.
66.