Department of Foreign Affairs and Trade
Notes to and Forming Part of the Financial Statements

Note 1: Summary of Significant Accounting Policies

1.1               Objectives of the Department of Foreign Affairs and Trade

The Department of Foreign Affairs and Trade (DFAT) is an Australian Government controlled entity. It is a not-for-profit, non-corporate Commonwealth entity.

DFAT’s role is to advance the interests of Australia and Australians internationally, providing foreign, trade and investment, development and international security policy advice to the government. DFAT works with other government agencies to ensure that Australia’s pursuit of its global, regional and bilateral interests is coordinated effectively. DFAT’s role involves working to strengthen Australia’s security, enhancing Australia’s prosperity, delivering an effective and high quality aid programme and helping Australian travellers and Australians overseas.

DFAT is structured to meet three outcomes:

• Outcome 1: The advancement of Australia’s international strategic, security and economic interests including through bilateral, regional and multilateral engagement on Australian Government foreign, trade and international development policy priorities,
• Outcome 2: The protection and welfare of Australians abroad and access to secure international travel documentation through timely and responsive travel advice and consular and passport services in Australia and overseas, and
• Outcome 3: A secure Australian Government presence overseas through the provision of security services and information and communications technology infrastructure, and the management of the Commonwealth’s overseas property estate.

From 1 November 2013 the international development function was integrated into DFAT, due to the function being transferred on 18 September 2013, and is now reflected as part of Outcome 1 above. For the purposes of these financial statements the activities of this function were fully consolidated with DFAT from 1 July 2013, and where relevant comparatives for 2013-14 incorporate former AusAID transactions for the period 1 July 2013 to 31 October 2013.

DFAT’s activities that contribute towards these outcomes are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, income and expenses controlled or incurred by DFAT in its own right. Administered activities involve the management or oversight by DFAT, on behalf of the Government, of items controlled or incurred by the Government. DFAT conducts the following administered activities on behalf of the Government:

• Official development assistance,
• Consular and passport services,
• Public information services and public diplomacy,
• International climate change engagement,
• The New Colombo Plan,
• Programmes to promote Australia’s international tourism interests, and
• Payments to international organisations.

The continued existence of DFAT in its present form and with its present outcomes and programs is dependent on Government policy and on continuing funding by Parliament for DFAT’s administration and programs.

1.2               Monitoring of Constitutional and Other Legal Requirements

The Australian Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth [2014] HCA 23, as they contribute to the larger body of law relevant to the development of Commonwealth programs. In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.

Legal advice received by the Department of Finance indicated there could be breaches of Section 83 of the Constitution under certain circumstances in relation to compliance with statutory conditions on payments from special appropriations, including special accounts and payments for long service leave. DFAT has reviewed its processes and controls over payments for these items to minimise the possibility of breaches as a result of these payments. Following an updated risk assessment in 2014-15, DFAT has determined that there is a low risk of the certain circumstances mentioned in the legal advice applying to the department. DFAT is not aware of any specific breaches of Section 83.

1.3               Basis of Preparation of the Financial Report

The financial statements and notes are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

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

a)    the Financial Reporting Rule (FRR) for reporting periods ending on or after 1 July 2014, and

b)   Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and are in accordance with the historical cost convention, except for certain assets and liabilities 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 statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Unless an alternative treatment is specifically required by an accounting standard or the FRR, assets and liabilities are recognised in the Statement of Financial Position when and only when it is probable that future economic benefits will flow to the entity or a future sacrifice of economic benefits will be required and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under executory contracts are not recognised unless required by an accounting standard. Liabilities and assets that are unrecognised are reported in the Schedule of Commitments or the contingencies note.

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

1.4               Significant Accounting Judgements and Estimates

In the process of applying the accounting policies listed in this note, DFAT has made the following judgements that have a 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, DFAT’s buildings are purpose built and may in fact realise more or less in the market.
• The fair value of property, plant and equipment has been taken to be the market value of similar assets or depreciated replacement value as determined by an independent valuer.
• The employee provisions have been determined by reference to advice from the Australian Government Actuary and standard parameters provided by the Department of Finance.

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

1.5               New Australian Accounting Standard Requirements

Adoption of New Australian Accounting Standard Requirements

The following new standards were issued by the AASB prior to the signing of the statement by the Secretary and Chief Financial Officer, were applicable to the current reporting period and had a material effect on DFAT’s financial statements:

When transitional provisions apply, all changes in accounting policy are made in accordance with their respective transitional provisions. All other new, revised and/or amending standards and interpretations that were issued prior to the sign off date and are applicable to the current reporting period did not have a material effect, and are not expected to have a future material effect, on DFAT’s financial statements.

Future Australian Accounting Standard Requirements

The following new, revised and/or amending standards and interpretations were issued by the AASB prior to the signing of the statement by the Secretary and Chief Financial Officer, which are expected to have a material impact on DFAT’s financial statements for future reporting periods:

DFAT’s expected initial application date is when the accounting standard becomes operative at the beginning of DFAT’s reporting period. All other new, revised and/or amending standards and interpretations that were issued prior to the sign off date and are applicable to future reporting periods are not expected to have a future material impact on DFAT’s financial statements.

1.6               Revenue

Revenue from the sale of goods is recognised when:

a)    the risks and rewards of ownership have been transferred to the buyer,

b)   DFAT retains no managerial involvement or effective control over the goods,

c)    the revenue and transaction costs incurred can be reliably measured, and

d)   it is probable that the economic benefits associated with the transaction will flow to DFAT.

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:

a)    the amount of revenue, stage of completion and transaction costs incurred can be reliably measured, and

b)   the probable economic benefits of the transaction will flow to DFAT.

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 impairment allowance account. Collectability of debts is reviewed at the end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

Resources Received Free of Charge

Resources received free of charge are recorded as either revenue or gains depending on their nature. Resources received free of charge are recognised as revenue 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.

Revenue from Government

Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as Revenue from Government when the entity gains control of the appropriation, 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.

1.7               Gains

Resources Received Free of Charge

Resources received free of charge are recorded as either revenue or gains depending on their nature. Resources received free of charge are recognised as gains when, and only when, a fair value can be reliably determined and the goods or services would have been purchased if they had not been donated. Use of these 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 non-corporate or corporate Commonwealth entity as a consequence of restructuring of administrative arrangements (refer to Note 11 Restructuring).

Sale of Assets

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

Foreign Currency Transactions

Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current at the end of the reporting period. Exchange gains and losses are reported in the Statement of Comprehensive Income. DFAT does not enter into hedging arrangements for its foreign currency transactions and all foreign exchange gains or losses are considered non-speculative in nature.

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) and Departmental Capital Budgets (DCBs) are recognised directly in contributed equity in that year.

Restructuring of Administrative Arrangements

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

Other Distributions to Owners

The FRR requires that distributions to owners be debited to contributed equity unless in the nature of a dividend. In 2014-15 other returns of capital consisted of $98,912,175 of prior-year capital appropriation DFAT no longer had access to following the transition to the Public Governance, Performance and Accountability Act 2013 (PGPA Act) from 1 July 2014, and $7,809,000 of capital appropriation quarantined under section 51 of the PGPA Act as identified in Note 29A (2013-14: net sale proceeds of $496,985 and $79,447,000 of appropriation returned from the Overseas Property Office). The difference between the $113,103,000 included in Note 29C and the $98,912,175 included in the Statement of Changes in Equity is due to DFAT recognising previous no-win/no-loss agreements in the year the appropriation was quarantined.

1.9               Employee Benefits

Liabilities for ‘short-term employee benefits’ (as defined in AASB 119 Employee Benefits) and termination benefits expected within twelve months of the end of reporting period 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.

Other long-term employee benefit liabilities are measured as net total of the present value of the defined benefit obligation at the end of the reporting period minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave for Australian-based employees as all sick leave is non-vesting and the average sick leave taken in future years by employees of DFAT is estimated to be less than the annual entitlement for sick leave. In the case of locally engaged staff employed by DFAT at overseas posts, where the entitlement is vested a liability has been recognised.

The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken, including DFAT’s employer superannuation contribution rates and other employment on-costs, 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 with reference to the work of an actuary as at 30 June 2014. The estimate of the present value of the liability takes into account attrition rates, pay increases through promotion and inflation and changes in the government bond rate.

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. DFAT recognises a provision for separation and redundancy when it has developed a detailed formal plan and has informed those employees affected that it will carry out those terminations of employment. In some countries, locally engaged staff employed by DFAT at overseas posts are entitled to separation benefits under local labour laws. DFAT provides for these separation benefits, and they have been classified as an employee benefit.

Superannuation

The majority of Australian-based staff of DFAT are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) or the Public Sector Superannuation accumulation plan (PSSap). The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

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. This liability is reported in the Department of Finance’s administered schedules and notes.

DFAT makes employer contributions to the employee superannuation schemes at rates determined by the Government. For defined benefit scheme employer contributions, rates are determined by an actuary to be sufficient to meet the current cost to the Government of the superannuation entitlements of DFAT’s employees. DFAT accounts for these as if they were contributions to defined contributions plans.

Where required, DFAT makes superannuation contributions for locally engaged staff overseas to comply with local labour laws. Australian-based staff who are engaged on a temporary basis and locally engaged staff overseas who are considered to be Australian residents for taxation purposes have compulsory employer superannuation contributions made on their behalf by DFAT to a complying fund as nominated by them.

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

DFAT has no finance leases. Operating lease payments are expensed on a basis which is representative of the pattern of benefits derived from the leased assets. Lease incentives are recognised as other payables and amortised over the period of the lease on a straight line basis.

1.11             Fair Value Measurement

Note 6: Fair Value Measurements and Note 19: Administered – Fair Value Measurements provide an analysis of departmental and administered assets and liabilities measured at fair value. DFAT deems transfers between levels of the fair value hierarchy to have occurred at the end of the reporting period.

The different levels of the fair value hierarchy are defined below:

a)    Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at measurement date.

b)   Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

c)    Level 3 – Unobservable inputs for the asset or liability.

DFAT engages independent, professional valuers to assist in the valuation of assets and liabilities, who employ valuation techniques including:

a)    Market Approach – Market approach seeks to estimate the current value of an asset with reference to recent market evidence including transactions of comparable assets or liabilities within local markets.

b)   Income Approach – Income approach converts future amounts (cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

c)    Discounted Net Cash Flow Approach – The net cash flows over the appropriate timeframe together with a terminal value for the asset at the end of the forecast period, discounted back to the measurement date, resulting in a net present value for the asset or liability.

d)   Depreciated Replacement Cost – The amount a market participant would be prepared to pay to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

These techniques incorporate a number of valuation inputs to calculate fair value, including:

a)    Annual Market Rental – Market rental transactions of comparable assets, adjusted to reflect differences in price sensitive characteristics.

b)   Adjusted Market Transactions/Sale Price and Income Comparables – Market transactions of comparable assets, adjusted to reflect differences in price sensitive characteristics.

c)    Capitalisation Rate – The return represented by the income produced by an investment, expressed as a percentage.

d)   Replacement Cost of New Assets/Contracted Prices – The amount a market participant would pay to acquire or construct a new or substitute asset of comparable utility.

e)    Consumed Economic Benefits or Obsolescence of Assets – Physical deterioration, functional or technical obsolescence and conditions of the economic environment specific to the asset.

1.12             Borrowing Costs

All borrowing costs are expensed as incurred.

1.13             Cash

Cash is recognised at its nominal amount. Cash and cash equivalents include:

a)    cash on hand,

b)   cash held by outsiders, and

c)    cash in special accounts.

1.14             Financial Assets

DFAT classifies its financial assets in the following categories:

a)    available-for-sale financial assets, and

b)   loans and receivables.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are recognised and derecognised upon trade date.

Effective Interest Method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest rate basis except for financial assets that are recognised at fair value through profit or loss.

Available-for-Sale Financial Assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.

Available-for-sale financial assets are recorded at fair value. Gains and losses arising from changes in fair value are recognised directly in the reserves (equity) with the exception of impairment losses. Interest is calculated using the effective interest method and foreign exchange gains and losses on monetary assets are recognised directly in profit or loss. Where the asset is disposed of or is determined to be impaired, part (or all) of the cumulative gain or loss previously recognised in the reserve is included in profit for the period.

Where a reliable fair value cannot be established for unlisted investments in equity instruments, these instruments are valued at cost.

Loans and Receivables

Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest is recognised by applying the effective interest rate.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period.

Financial assets held at amortised cost – if there is objective evidence that an impairment loss has been incurred for loans and receivables or held-to-maturity investments held at amortised cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. The carrying amount is reduced by way of an allowance account. The loss is recognised in the Statement of Comprehensive Income.

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 Statement of Comprehensive Income.

Financial assets held at cost – if there is objective evidence that an impairment loss has been incurred, 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.

1.15             Financial Liabilities

Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or other financial liabilities. Financial liabilities are recognised and derecognised upon trade date.

Financial Liabilities at Fair Value Through Profit or Loss

Financial liabilities at fair value through profit or loss are initially measured at fair value. Subsequent fair value adjustments are recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.

Other Financial Liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. These liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

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).

1.16             Contingent Liabilities and Contingent Assets

Contingent liabilities and contingent assets are not recognised in the Statement of Financial Position but are reported in the notes. They may arise from uncertainty as to the existence of a liability or asset or represent an asset or liability in respect of which the amount cannot be reliably measured. Contingent assets are reported when settlement is probable but not virtually certain and contingent liabilities are disclosed when the probability of settlement is greater than remote.

1.17             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 income 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’s accounts immediately prior to the restructuring.

1.18             Property, Plant and Equipment

Asset Recognition Threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, 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 that 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 ‘make good’ provisions in property leases taken up by DFAT where there exists an obligation to restore the property to its original condition on termination of the lease. These costs are included in the value of DFAT’s leasehold improvements with a corresponding provision for the ‘make good’ recognised.

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 in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/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.

Assets held overseas are valued in local currencies and translated into Australian dollars at the exchange rates current at balance date.

Depreciation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to DFAT using, in all cases, the straight-line method of depreciation.

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.

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

Impairment

All assets were assessed for impairment at 30 June 2015. Where indications of impairment existed, the asset’s recoverable amount was estimated and an impairment adjustment made if the asset’s recoverable amount was less than its carrying amount.

The recoverable amount of any asset is the higher of its fair value less costs of disposal 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 DFAT were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

1.19             Intangibles

DFAT’s intangibles comprise internally developed and commercially purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses except for purchases costing less than $2,000, which are expensed in the year of acquisition.

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of DFAT’s software is typically 5 to 10 years (2014: 5 to 10 years). All software assets were assessed for indications of impairment as at 30 June 2015.

1.20             Inventories

Inventories held for sale are valued at the lower of cost and net realisable value. Inventories held for distribution are valued at cost, adjusted for any loss of service potential.

Costs incurred in bringing each item of inventory to its present location and condition are assigned as follows:

a)    raw materials and stores – purchase cost on a first-in-first-out basis

b)   finished goods and work-in-progress – cost of direct materials and labour plus attributable costs that can be allocated on a reasonable basis.

Inventories acquired at no cost or nominal consideration are initially measured at current replacement cost at the date of acquisition.

1.21             Taxation

DFAT is exempt from all forms of Australian taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). Overseas, DFAT may be subject to Value Added Tax (VAT) on the purchase of goods and services.

Revenues, expenses, assets and liabilities are recognised net of GST except:

a)    where the amount of GST or VAT incurred is not recoverable from the Australian Taxation Office or overseas taxation authority, and

b)   for receivables and payables.