Australian government budget balance numbers

Description
The purpose of this paper is to analyse the nature and comparability of budget balance
(surplus/deficit) numbers headlined by the Australian Commonwealth Government and the
governments of the six Australian States and the two Australian Territories. It does this in the context
of the transition to Australian accounting standard AASB 1049 Whole of Government and General
Government Sector Financial Reporting.

Accounting Research Journal
Australian government budget balance numbers: The hybrid nature of public
sector accrual accounting
Graeme Wines Helen Scarborough
Article information:
To cite this document:
Graeme Wines Helen Scarborough , (2015),"Australian government budget balance numbers",
Accounting Research J ournal, Vol. 28 Iss 2 pp. 120 - 142
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http://dx.doi.org/10.1108/ARJ -01-2014-0001
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Australian government budget
balance numbers
The hybrid nature of public sector accrual
accounting
Graeme Wines and Helen Scarborough
School of Accounting, Economics and Finance, Deakin University,
Warrnambool, Australia
Abstract
Purpose – The purpose of this paper is to analyse the nature and comparability of budget balance
(surplus/defcit) numbers headlined by the Australian Commonwealth Government and the
governments of the six Australian States and the two Australian Territories. It does this in the context
of the transition to Australian accounting standard AASB 1049 Whole of Government and General
Government Sector Financial Reporting.
Design/methodology/approach – A case study research method is adopted, based on a content/
documentary analysis of the headline budget balance numbers in the general government sector budget
statements of each of the nine governments for the eight fnancial years from 2004-2005 to 2011-2012.
Findings – Findings indicate some variation in the measurement bases adopted and a number of
departures fromthe measurement bases prescribed in the reporting frameworks, including AASB1049.
Findings also reveal that none of the nine governments have headlined a full accrual based budget
balance number since the implementation of AASB 1049 in 2008.
Research limitations/implications – While the study focuses on the Australian general
government sector environment, it has signifcant implications in highlighting the ambiguity in the
government budget balance numbers presented and the monitoring and information asymmetry
problems that can arise. Research fndings have wider relevance internationally in highlighting issues
arising with the public sector adoption of accrual accounting.
Practical implications – The paper highlights the manner in which governments have been
selective in the manner in which they present important budget aggregates. This has important
practical and social implications, as the budget balance number is one of the most important measures
used to evaluate a government’s fscal management and responsibility.
Originality/value – The paper represents the frst detailed examination of aspects of the effect of the
transition to AASB 1049.
Keywords AASB 1049, Budget balance numbers, General government sector,
Government budget reporting, Surplus/defcit
Paper type Research paper
The authors wish to acknowledge the valuable comments of Prof Paul Collier and seminar
participants at Deakin University (School of Accounting, Economics and Finance), Griffth
University (Department of Accounting, Finance and Economics) and RMITUniversity (School of
Accounting). The paper has also benefted from suggestions of participants at the 2012 Annual
Conference of the Accounting and Finance Association of Australia and NewZealand (AFAANZ).
The authors especially thank The Institute of Chartered Accountants in Australia (ICAA) for
funding for the research project.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1030-9616.htm
ARJ
28,2
120
Received8 January2014
Revised27 February2014
Accepted7 May2014
Accounting Research Journal
Vol. 28 No. 2, 2015
pp. 120-142
©Emerald Group Publishing Limited
1030-9616
DOI 10.1108/ARJ-01-2014-0001
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1. Introduction
The aim in this paper is to investigate the budget balance (surplus/defcit) numbers
headlined by the nine Australian Commonwealth (Federal), State and Territory
governments over the eight budget years from 2004-2005 to 2011-2012[1]. The research
period spans the introduction of Australian Standard AASB1049 Whole of Government
and General Government Sector Financial Reporting (Australian Accounting Standards
Board, 2009b).
AASB 1049 was issued with the aim of harmonising the two major alternative
frameworks for Australian government reporting; the Government Finance Statistics
(GFS) uniform framework and GAAP (generally accepted accounting principles) as
specifed in Australian Accounting Standards. Various writers recognised the problems
and potential for confusion arising from the presence of the two alternative accounting
and budget systems and the possibility for governments to select between, and modify,
alternative bottom line numbers[2]. Accordingly, the aim of the present study is to
examine the nature and comparability of budget balance numbers emphasised by the
relevant governments in their budgets. Given that alternate measures for budget
balance numbers are available under relevant standards and frameworks, the study
seeks to address the following general research question:
RQ1. To what extent are the budget balance numbers headlined by the nine Australian
Governments comparable andcalculatedinaccordance withthe relevant rules?
The paper addresses a gap in the literature by providing contemporary empirical
evidence on the selection and presentation of budget (accounting) numbers in a public
sector setting where an accrual-based accounting system has been implemented.
Government budgets and budget transparency can be examined froman agency theory
perspective (Hood, 2001; Benito and Bastida, 2009). Voters, taxpayers and the general
public (the electorate) can be considered as principals for whom politicians and the
government act as agents (Hood, 2001). Within this view, government budgets are
central in fulflling a monitoring function and in reducing information asymmetry
between the principals and agents.
It has been recognised that there are gaps in our understanding of the implications of
decisions to transformaccounting, reporting and fnancial management processes from
cash to an accrual footing (Carlin, 2005). This study addresses one aspect of that gap
from an agency theory perspective.
The paper proceeds as follows. A theoretical background to government fnancial
and budget reporting is provided in the following section, followed by a discussion of
budget balance numbers and government fnancial reporting frameworks in Australia.
The study’s research questions and method are then outlined, followed by a
presentation and discussion of research fndings. A summary and conclusions section
completes the paper.
2. Theoretical background to government fnancial and budget reporting
Government budgets have, historically, been regarded by many as the most important
statement by a government each year while, at the same time, being subject to
considerable “mystique” (Higgins and Borthwick, 1990). Government budget papers
have been considered to be “the most authoritative, timely, widely distributed and
reported statements of each government’s fnancial results and plans” (Allan, 1993,
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p. 77). As evidenced by the considerable media coverage they generate, this continues to
be the case today.
One theoretical approach that can be applied to the issue of budget transparency is
that of principal-agent (agency) theory (Hood, 2001; Benito and Bastida, 2009). From an
agency theory perspective, the “electorate” (voters, taxpayers and the general public)
can be considered as the principals[3], for whom politicians and the government act as
agents (Hood, 2001). In modern democracies, the distance between the electorate and the
elected agents gives rise to the same kinds of principal-agent problems as are
encountered in the private sector (Bergman and Lane, 1990). In fact, it has been argued
that principal-agent problems in the public sector may be even more severe than those in
the private sector. This is because, given the ambiguities of political life and uncertainty
about the state of the environment, the implicit political contract tends to be
underspecifed (March and Olsen, 1989; Bergman and Lane, 1990).
One of the major aims of agency theory is to “fnd the most satisfactory way of
negotiating, specifying and monitoring contracts so as to minimise the likelihood of
violations resulting from opportunism on the part of the agent” (Boston et al., 1996,
p. 30). All contractual arrangements between the state and the governed contain
important elements of agency (Ross, 1973, p. 134). While contracts are usually thought of
as formal and explicit legally binding ones, they can also be implicit, obligational or
relational contracts that are relatively open-ended and incomplete in form(Boston et al.,
1996). Boston (1995, p. 11) refers to these contracts as being in the nature of “mutual
undertakings”.
Budget reporting combines aspects of both formal and informal contracting with
respect to the monitoring of government behaviour. Governments are required to
comply with legislation and various general reporting guidelines in preparing budgets.
However, the specifc accounting requirements may not necessarily be tightly specifed
and, as will be illustrated in this paper, may allow considerable scope for fexibility and
alternative presentations in government budget papers.
The management of many principal-agent relationships is complicated by
incomplete information, asymmetrical information and various uncertainties (Boston
et al., 1996). A particular diffculty is that information about an agent’s actions is not
only imperfect but skewed in favour of the agent, yielding adverse selection and moral
hazard problems that must somehow be managed (Moe, 1984). In the budget setting, an
individual government has access to information that the electorate, as principal, does
not. Given political processes, governments have an incentive to exploit this situation to
their advantage, particularly given the diffculty of observing their behaviour. This is
particularly the case for government budget surplus/defcit numbers. Terms such as
creative accounting, accounting devices, fscal illusion and fscal gimmickry have been
used when referring to strategies designed to infuence reported government budget
balance numbers, with these strategies aimed at putting the best possible gloss on the
accounts (Easterley, 1999; Koen and van den Noord, 2005; Irwin, 2012). In terms of
agency theory, such strategies have monitoring and asymmetrical information
implications.
A central tenet of agency theory is that the design of an effcient incentive structure
also requires the development of monitoring systems and mechanisms for inducing
agents to reveal as much of their privately held information as possible (Moe, 1984). In
the context of government accountability, the preparation and publication of clear and
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understandable budgets is central to this accountability and monitoring function.
Higher levels of disclosure and transparency can lessen information asymmetry and the
principal-agent problem (Benito and Bastida, 2009). But it must be recognised that
budget rules are political rules that are made and enforced by political leaders (Schick,
2003; Benito and Bastida, 2009). Hence, as noted above, the accounting provisions
related to the specifc calculation of a government’s budget balance number may not be
tightly specifed and may allowfor a considerable degree of latitude. This can affect the
monitoring of politicians by the electorate.
3. Budget balance numbers and government fnancial reporting
frameworks in Australia
Governments have implemented signifcant reforms within the Australian public sector
over the past two to three decades (Guthrie, 1998; Carlin and Guthrie, 2003). These
reforms, referred to generally under the heading New Public Management or NPM
(Hood, 1991), aimto drive more “effcient”, “effective” and “accountable” public services
(Guthrie et al., 2003). The NPMreforms have incorporated accounting and management
technologies drawing on private sector performance criteria and practices and
market-based activities (Carlin and Guthrie, 2003; Lapsley, 2009; Lapsley et al., 2009;
Wanna, 2010a, 2010b).
From the early 1990s, a demand arose for performance to be reported in terms of
accrual-, rather than cash-based, fnancial information (Guthrie, 1998). However, the
presence of the two alternative GFS and GAAP accounting and budget systems in
Australia caused problems and potential for confusion. At the direction of the
Australian Financial Reporting Council (FRC, 2002), the Australian Accounting
Standards Board (AASB), therefore, sought to harmonise the two frameworks, and
accounting standard AASB1049 (AASB, 2006, 2007, 2009b) was issued to fulfl this aim.
These frameworks and developments, and the alternate bases for the calculation of
government budget balance numbers, are discussed in the following sub-sections.
3.1 GFS framework
Adopted by the Australian Bureau of Statistics (ABS), the GFS framework is based on
the international equivalent developed by the International Monetary Fund (IMF, 2001)
and on the United Nations Systemof National Accounts (United Nations, 1993). The GFS
framework provides for the recording of data on an accruals basis, but with
supplementary data recorded on a cash basis (ABS, 2003, 2005)[4].
The statistical concepts underlying the GFS framework are designed to enable the
preparation of uniform economic statistics for all IMF member countries (ABS, 2005,
p. 5). The term “government fnance statistics” refers to “statistics that measure the
fnancial activities of government and refect the impact of those activities on other
sectors of the economy” (ABS, 2005, p. 1). While, in developing the GFS framework, the
ABS worked closely with the accounting standard setting authorities, it was conceded
that “differences between accounting and statistical concepts are inevitable because
they serve different purposes” (ABS, 2005, p. 5).
An operating (income) statement prepared in accordance with the GFS framework
presents details of revenue and expense transactions and the net acquisition of
non-fnancial assets for an accounting period. Two major alternative budget balance
(surplus/defcit) measures can be drawn from the statement. It must be emphasised,
123
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though, that the GFS operating statement is based on transactions only (ABS, 2005,
para. 2.119). The frst section of the operating statement comprises revenues less
expenses arising from transactions, this resulting in the net operating balance. The
revenues and expenses are calculated on an accruals basis, with depreciation included
as an expense (ABS, 2005, para. 2.61). The GFS net operating balance represents the
“change in net worth due to transactions” (ABS, 2005, para. 2.113). It is noteworthy that,
being a transaction-based measure of performance, the GFS net operating balance does
not represent a full accrual accounting measure of net income[5].
The second section of the GFS operating statement deducts the net acquisition of
non-fnancial assets fromthe net operating balance. Depreciation expense is added back
to avoid double counting, with this results in the net lending/borrowing balance. This
balance is also referred to as the fscal balance (Commonwealth Treasury, 2011b, pp. 1-5).
Also prepared pursuant to the GFS framework is a cash fow statement (ABS, 2005,
para. 2.122). The GFS cash fow statement presents cash fows dissected between
operating, investment and fnancing activities, with cash fows from investment
activities further dissected according to whether they are investments in non-fnancial
assets, fnancial assets for policy purposes or fnancial assets for liquidity management
purposes. The cash-based measure of the budget balance is calculated as the net cash
fows from operating activities plus net cash fows from the acquisition and disposal of
non-fnancial assets.
3.2 GAAP and Australian Accounting Standards pre-AASB 1049
In parallel with the GFS framework, the Australian accounting profession developed a
number of public sector accounting standards. AAS 31 Financial Reporting by
Governments, requiring the use of a full accrual basis of accounting, was the standard
applicable to Australian government sector reporting (Public Sector Accounting
Standards Board, 1998).
Refecting a full accrual accounting basis, the budget balance (operating surplus/
defcit, or operating result) calculated pursuant to AAS 31 exhibited important
differences to the GFS transactions-based net operating balance. Major differences
related to accounting for asset writedowns (treated as operating expenses under AAS 31
but negative equity revaluations pursuant to the GFS framework), other gains and
losses on assets (not included as revenues or expenses under GFS), bad and doubtful
debts (not recognised under the GFS framework) and the acquisition of defence weapons
platforms (capitalised and depreciated under AAS 31 but expensed at the time of
acquisition pursuant to the GFS framework)[6].
Material variation between the budgeted GFS net operating balance and the AAS 31
budget balance resulted from the above accounting policy differences. For example, the
Commonwealth Government’s 2004-2005 budgeted GFS net operating balance
amounted to a surplus of $1 496 million, while AAS 31 accounting treatments resulted in
a budget defcit of $355 million (Wines and Scarborough, 2006).
3.3 GFS/GAAP convergence and AASB 1049
In addition to Australia’s adoption of international fnancial reporting standards from1
January 2005 for private sector reporting entities, the Australian Financial Reporting
Council (FRC) also adopted a parallel convergence strategy for public sector fnancial
reporting (FRC, 2002). Exposure draft ED 142 Financial Reporting of General
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Government Sectors by Governments (AASB, 2005) was released in July 2005. This was
subsequently issued as accounting standard AASB 1049 in September 2006 to apply to
annual reporting periods beginning on or after 1 July 2008 (AASB, 2006). The standard
was revised and reissued as AASB1049 Whole of Government and General Government
Sector Financial Reporting in September 2007 (AASB, 2007) and then again in August
2009 (AASB, 2009b).
Financial statements prepared in accordance with AASB 1049 continue to present
three budget balance numbers that are consistent with the GFS framework:
(1) the net operating balance (that is, the net result from transactions);
(2) the net lending/borrowing (fscal) balance; and
(3) the cash surplus/defcit[7].
Also calculated pursuant to AASB 1049 is a budget balance number that represents a
fnal accrual accounting surplus/defcit measure that is equivalent to the net proft
number produced by private sector entities in accordance with Australian Accounting
Standards. This is referred to as the Operating Result. As noted earlier, the difference
between the net operating balance and operating result is that the latter includes various
non-transaction other economic fows, consistent with full accrual accounting principles.
Examples of these other economic fows include impairment losses, fair value
adjustments and other asset writedowns, foreign exchange gains and losses,
superannuation fund gains and losses and expenses recognised via accrual provisions.
To illustrate these calculations, Table I presents a summary of the alternative budget
balance numbers taken from the 2011-2012 budgeted fnancial statements of the
Australian Commonwealth Government and the Victorian and Queensland State
Governments. The table indicates derivation of the following four major alternative
budget balance numbers:
(1) net operating balance (from transactions);
(2) operating result;
(3) net lending/borrowing (fscal) balance; and
(4) cash surplus/defcit.
As shown in Panel Bof Table I, there is considerable variation in the four budget balance
measures for each government.
4. Research questions
Acommonality of Australian Government budgets is that they tend to focus on a single
budget balance number that is headlined in the relevant treasurer’s budget speech and/
or in the budget papers. The term headline budget balance is used in this paper to
indicate the budget defcit or surplus number that is given prominence in the budget
papers, including the treasurer’s budget speech, as the overall budget balance number.
The headline budget balance is, in turn, the surplus or defcit number given prominence
in the media’s coverage of an individual government’s budget, and is therefore also the
measure of the government’s surplus or defcit that the general public (the electorate)
becomes most aware of. It is an example of an accounting-based number being
presented in a political environment.
125
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Examples of headline budget balance announcements in annual budgets for the
2011-2012 year of the nine Australian Governments are as follows:
(1) […] a forecast General Government Sector Headline Net Operating Defcit of
$36.9 million in 2011-2012 (Australian Capital Territory Department of
Treasury, 2011, p. 7).
(2) […] the defcit for 2011-2012 becomes $22.6 billion (Commonwealth Treasury,
2011a, p. 9).
(3) A key fscal strategy of the 2011-2012 Budget is to re-establish and maintain
sustainable operating surpluses (Government of South Australia, 2011, p. 4).
(4) […] I amproud to announce a $442 million surplus in the 2011-2012 state budget
(Government of Western Australia, 2011, p. 1).
(5) An operating defcit of $718 million is therefore expected in 2011-2012 (New
South Wales Treasury, 2011, p. 5).
Table I.
Summary of 2011-
2012 general
government sector
budget balance
numbers for the
Australian
Commonwealth,
Victoria and
Queensland
C/W $
million
VIC $
million
QLD $
million
Panel A: calculation of alternate budget balance numbers
Accrual measures of surplus/defcit
Revenue 3,49,961 47,439 43,007
Less expenses (including depreciation) (3,65,817) (47,299) (47,065)
Net operating balance (from transactions) (15,857) 140 (4,058)
Other economic fows included in operating result (1,667) (76) (97)
Operating result* (17,524) 64 (4,155)
Net operating balance (as above) (15,857) 140 (4,058)
Less net acquisition of non-fnancial assets
Purchase of non-fnancial assets 10,561 4,119 7,180
less sales of non-fnancial assets (1,361) (302) (226)
less depreciation (5,636) (2,345) (2,872)
plus change in inventories 578 (13) 39
plus other movements in non-fnancial assets 263 1,250 213
Total net acquisition of non-fnancial assets (4,405) (2,709) (4,334)
Net lending/borrowing (fscal) balance 20,262) (2,569) (8,392)
Cash measure of surplus/defcit
Cash receipts from operating activities 3,41,029 47,522 45,668
Cash payments for operating activities (3,51,474) (45,040) (46,629)
Net cash fows from operating activities (10,445) 2,482 (961)
Cash fows from investments in non-fnancial assets (9,242) 3,816) (6,954)
Cash surplus/(defcit) (19,687) (1,334) (7,915)
Panel B: summary of budget balance numbers
Net operating balance (from transactions) (15,857) 140 (4,058)
Operating result* (17,524) 64 (4,155)
Net lending/borrowing (fscal) balance (20,262) (2,569) (8,392)
Cash surplus/(defcit) (19,687) (1,334) (7,915)
Note: *Operating result ? full accrual-based surplus/defcit based on Australian Accounting
Standards
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(6) The resulting effect is an […] estimated cash defcit of $387 million for 2011-2012
(Northern Territory Treasury, 2011, p. 4).
(7) In 2011-2012, a General Government Net Operating Balance defcit of $113.8
million and a Fiscal Balance defcit of $358.5 million are budgeted (Parliament of
Tasmania, 2011, p. 1.1).
(8) […] the operating balance […] is forecast to be $4.06 billion for 2011-2012
(Queensland Government, 2011, p. 3).
(9) […] average surpluses of $164 million over the forward estimates (Victorian
Department of Treasury and Finance, 2011, p. 3).
How comparable are the above budget balance numbers? When it comes to budget
reporting, and as the above quotes illustrate, a seemingly straightforward concept such as a
government’s defcit or surplus “hides a minefeld of ambiguities, questions of usage, and
conficting defnitional issues” (Blejer and Cheasty, 1991, p. 1675). Any meaningful
understanding of, and comparison between, the above budget announcements requires
knowledge of the specifc bases used to derive the budget balance numbers.
The study’s general research question was stated earlier as:
RQ1. To what extent are the budget balance numbers headlined by the nine
Australian Governments comparable and calculated in accordance with the
relevant rules?
Four specifc research questions are developed in the balance of this section to
investigate this general research question.
In the presence of the GFS and GAAP frameworks, Wines and Scarborough (2006)
documented an inconsistency in headline budget balance numbers in Australian
Commonwealth, State and Territory Government budgets across the 2004-2005 and
2005-2006 fnancial years. As AASB 1049 was introduced after that time to harmonise
the two frameworks, the introduction of a single standard would be expected to reduce
the variation in headline budget balance numbers across the study’s research period
(that is, pre- and post-introduction of AASB 1,049). The study’s frst specifc research
question is therefore stated as:
RQ2. Has the variation in the basis for headline budget balance numbers across the
nine Australian Governments reduced over the study’s research period?
The study’s RQ2 is based on the view that variation in headline budget balance numbers
should have decline over the study’s research period. In addition, it might be expected that,
with the existence of a single AASB accounting standard, a single basis for the headline
budget balance number over the nine Australian Governments would have emerged by the
fnal year of the study’s research period. Accordingly, the study’s RQ2 is stated as:
RQ3. Does a common basis for headline budget balance numbers exist across the
nine Australian Governments in their 2011-2012 budgets?
In suggesting a common basis for headline budget balance numbers by the fnal year of
the study’s research period, the question arises as to what that basis might be. Given the
move to a full accrual accounting system and the promulgation of AASB 1049, it would
be expected that the budget balance number headlined by the nine Australian
Governments wouldbe a total (net) accrual accountingbasedsurplus/defcit number. As
127
Australian
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explained earlier, Operating Result represents the total (net) AASB 1049 full accrual
accounting surplus/defcit measure. The study’s RQ3 is therefore stated as:
RQ4. Is Operating Result, representing the total (net) full accrual accounting based
surplus/defcit number, the basis for headline budget balance numbers across
the nine Australian Governments in their 2011-2012 budgets?
Wines and Scarborough (2006) documented the adoption by some of the nine Australian
Governments of a basis for the headline budget balance number that departed fromone
of the bases specifed in the GFS and GAAP frameworks applicable at the time. For
example, the Tasmanian Government in its 2005-2006 budget headlined an “underlying
fscal surplus” of 44.5 million (Parliament of Tasmania, 2005). This was calculated by
adding back $50 million of “Special Capital Investment Funds Expenditure” to the net
lending/borrowing (fscal) defcit of $5.5 million. Hence, a far more favourable budget
balance number was portrayed (Wines and Scarborough, 2006). It would be expected
that, given the existence of AASB 1049 as a formal, single accounting standard issued
under the authority of the Australian standard setting body, governments would be less
likely to present budget balance numbers that depart from those specifed within the
standard. Accordingly, the study’s RQ4 is stated as:
RQ5. Do any of the nine Australian Governments use a basis for their 2011-2012 headline
budget balance number that departs fromone of the AASB1049 measures?
5. Research method
The paper’s case study research method is based on an examination of the budget
balance numbers headlined in the general government sector budgets of the nine
Commonwealth, State and Territory governments in Australia[8] over the eight annual
budgets for the fnancial years 2004-2005 to 2011-2012. The research data were collected
fromthe annual budget statements/papers of each of the governments over the research
period, and the research method is based on a content/documentary analysis of the
headline budget balance numbers in those budget statements.
Given that AASB 1049 became operable for annual reporting periods beginning on or
after 1 July 2008 (AASB, 2006), the research period spans the years before and after the
implementation of AASB 1049. The research period therefore enables observation of the
periodof transitionfromthe previous GFSandGAAP(AAS31) frameworks to AASB1049.
By examining an extended (eight year) period following the move to accrual
accounting, the study’s research method allows both a cross-sectional examination of
the budget reporting across the nine governments and a longitudinal examination over
a period of time in which an important public sector accounting pronouncement was
developed and promulgated.
6. Research fndings
A frequency distribution of the bases for the headline budget balances across the eight
fnancial years from 2004-2005 to 2011-2012 is presented in Table II. The bases for the
headline budget balances for each of the nine governments in the frst and fnal years of
the research period (2004-2005 and 2011-2012) are presented in Table III.
Panel A of Table II presents a frequency distribution of the number of Australian
Governments adopting each of the alternate bases for their headline budget balance
number, and Panel B summarises the number of alternate headline budget balance
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Table II.
Bases for headline
budget balances
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measures adopted in each fnancial year. For example, in their 2004-2005 budgets, Panel
Areveals that two governments adopted a cash basis for their headline budget balance,
two the AAS 31 measure, three the net lending/borrowing (fscal) balance and two the
net operating balance. Hence, and as shown in Panel B, four different measurement
bases for headline budget balances were adopted across the nine governments in their
2004-2005 budgets.
In their budgets for the 2005-2006 fnancial year, Panel B of Table II shows that fve
different measures were used across the nine governments for their headline budget
balances. This represented the highest number of alternate measures adopted for the
headline surplus/defcit measure across the nine governments in a single year of the
eight-year research period. However, Panel A of the table shows that there is a single
measure, the net operating balance (from transactions), that has been adopted by a
majority of the governments for the 2005-2006 fnancial year. Five governments had
adopted the net operating balance for their headline budget balance[9], with each of the
other four governments adopting an alternate measure.
The Table II fgures for the 2006-2007 government budgets reveal a continuation of
the trend toward the adoption of the net operating balance as the basis for the headline
surplus/defcit number, with six governments adopting that measure[10]. Three
governments, though, each used an alternate measure for their headline surplus/defcit
number in their 2006-2007 budgets.
Across the research period, the lowest number of alternate bases for the headline
budget balance occurred in the 2007-2008 and 2008-2009 budget years. These years also
sawcontinuation of the trend towards use of the net operating balance, with seven of the
nine governments now adopting that measure as the basis for their headline surplus/
defcit number[11]. The two governments not adopting the net operating balance as
their headlined measure in their 2007-2008 and 2008-2009 budgets were the Northern
Territory (adopting the cash basis) and the Commonwealth Government (adopting an
“adjusted” underlying cash basis). Hence, despite the move in the Australian general
government sector to accrual accounting, these two governments continued to headline
cash based budget balance numbers.
Table III.
Bases for headline
budget balances:
2004-2005 and 2011-
2012
Government
Basis for calculation of Headline budget balance
2004-2005 2011-2012
Commonwealth Cash “Adjusted” underlying cash
States
New South Wales Net lending/borrowing Net operating balance
Queensland Net operating balance Net operating balance
South Australia Net lending/borrowing Net operating balance
Tasmania Net lending/borrowing Net operating balance
Victoria AAS 31 (GAAP) Net operating balance
Western Australia Net operating balance Net operating balance
Territories
ACT AAS 31 “Adjusted” net operating balance
Northern Territory Cash Cash
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The “adjusted” underlying cash basis headlined by the Commonwealth Government
requires explanation. This basis, summarised in Table IVfor the 2009-2010 to 2011-2012
budget years, deducts earnings from the Commonwealth Future Fund from the cash
based surplus/defcit number calculated in accordance with Australian Accounting
Standards. The Commonwealth’s Future Fund was established in 2006 to “make
provision for unfunded superannuation liabilities that will become payable during the
period when an ageing population is likely to place pressure on the Australian
Government’s fnances” (Future Fund, 2006, p. 3). The net assets of the Future Fund at
30 June 2011 amounted to $75.3 billion (Future Fund, 2011).
The Commonwealth Government has reported this “underlying” cash balance,
excluding Future Fund earnings, from the 2005-2006 budget year based on the
argument that the fund’s earnings “will be reinvested to meet future superannuation
payments and are therefore not available for current spending” (Commonwealth
Treasury, 2005, pp. 2-9). Further, the then Commonwealth Treasurer stated that:
The underlying cash balance is a fscal aggregate that has been developed for macroeconomic
policy purposes. It is not a statistical or accounting concept[12].
Whatever the government’s argument, the fact remains that, as with any other
investment or asset within the general government sector, the Future Fund is part of the
sector. The assets and liabilities of the Future Fund are included in the Commonwealth’s
general government sector balance sheet, and, in fact, the Future Fund investments are
not even held in a separate entity[13]. Moreover, deduction of the Future Fund earnings
from the cash surplus/defcit in presenting the headline measure implicitly recognises
that those earnings were, in the frst place, a component of the general government
sector’s total earnings. Hence, deduction of Future Fund earnings in deriving the
underlying cash balance represents a case of the Commonwealth Government
headlining a budget balance that is not calculated in conformity with the bases
presented in AASB 1049. Further, the fgures presented in Table IV indicate that this
adjustment represents a material variation, for example, it results in a 14.9 per cent
variation in the 2011-2012 defcit fgure.
Table II shows that there were four alternate bases for the headline budget balance in
government budgets for the three fnancial years 2009-2010, 2010-2011 and 2011-2012. This
increase in the number of alternate measures from 2008 to 2009 occurred due to the
Australian Capital Territory (ACT) changing from a net operating balance to an
“UnderlyingNet OperatingBalance” (UNOB) for its headline measure. This UNOBnumber,
summarised in Table V for the 2009-2010 to 2011-2012 budget years, results by deducting
the “net impact of stimulus initiatives” from the net operating balance. This measure
represents a departure from AASB 1049 and, signifcantly, was not adopted by the other
States and the Territories whose budget were similarly affected by the Commonwealth
Governments stimulus spending in the wake of the global fnancial crisis at the time.
Table IV.
Basis for
Commonwealth’s
headline budget
balance
Budget balance 2009-2010 $ million 2010-2011 $ million 2011-2012 $ million
Cash surplus/(Defcit) (54,661) (45,995) (19,687)
Less future fund earnings (2,932) (3,374) (2,931)
Underlying cash surplus/(Defcit) (57,593) (49,369) (22,618)
Difference (%) 5.4 7.4 14.9
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But to add further confusion to the ACT’s budget balance numbers, and as depicted in
Table V, a further adjusted net operating balance number, the “Headline Net Operating
Balance” (HNOB) was introducedinthe 2011-2012 budget. The basis for the HNOBis the
net operating balance plus “expected long-term gains on superannuation investments”.
By adding expected long-term gains amounting to $78.7 million to the net operating
balance defcit of $115.6 million, the amount of the HNOB defcit was reduced to $36.9
million. Again, as for calculation of the UNOB, this adjustment was not made by any
other government in Australia.
7. Discussion
Discussion of the research fndings is presented in this section. Discussion focuses frst on
fndings inrelationto eachof the specifc researchquestions, followedbygeneral observations.
7.1 Has there been a reduction in variation in the basis for headline budget balance
numbers?
Findings showthere has been a trend towards adoption of the net operating balance as the
headline budget balance measure by a majority of the governments. Six of the nine
governments, the six States, adopted this measure in the latter three fnancial years of the
studyperiod. However, the three remaininggovernments adopteddifferent headline budget
balance measures, resulting in four different measures across the nine governments in the
latter three years of the research period. This was the same number of alternate bases as
existed pre-AASB 1049 in the frst year of the research period, 2004-2005.
While there has been a trend by the six States to headline the net operating balance,
the three other governments (the Commonwealth and the two Territories) headlined
budget balance numbers prepared on inconsistent bases. Over the entire eight years of
the research period, there has been no reduction in the variation in bases for headline
budget balance numbers in terms of the number of alternate bases adopted, and this
research question is therefore answered in the negative.
7.2 Is there a common basis for 2011-2012 headline budget balance numbers?
There has been some trend, as noted above, towards commonality with the six States
adopting a common (net operating balance) basis. However, in their budgets for the three
latest years of the study’s research period, two governments (the Commonwealth and the
Northern Territory) headlined cash-based, rather than accruals-based, defcit numbers, and
two governments (the Commonwealth and the Australian Capital Territory) headlined
budget balance numbers that represent a departure fromone of the AASB 1049 bases.
Table V.
Bases for the
Australian capital
territory’s headline
budget balances
Budget balance 2009-10 $ million 2010-11 $ million 2011-12 $ million
Net operating balance (NOB) (82.2) (83.9) (115.6)
Plus Expected long-term capital gains on
superannuation investments 78.7
Headline net operating balance (HNOB) (36.9)
Less Net impact of stimulus initiatives (165.1) (88.8) (16.0)
Underlying net operating balance
(UNOB) (247.3) (172.7) (52.9)
Difference between NOB and UNOB (%) 200.9 105.8 54.2
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Accordingly, this research question is answered in the negative. Despite the
introduction of AASB 1049, a common basis for the 2011-2012 headline budget balance
number of the nine governments has not emerged. A common basis in the 2011-2012
year exists only across the six States.
7.3 Is “Operating result” the basis for 2011-2012 headline budget balance numbers?
This research question suggested that operating result, representing the total (net) accrual
accounting-based surplus/defcit number, would be the basis for headline budget balance
numbers across the nine Australian Governments in their 2011-2012 budgets. However, on
the contrary, research fndings indicate that none of the nine governments in Australia
headlined operating result in their budget, indicating that not one of these governments
headlined a budget balance number representing a full accrual accounting measure.
7.4 Do any of the 2011-2012 headline budget balance numbers depart from one of the
AASB 1049 measures?
As explained earlier, two governments (the Commonwealth and the ACT) adopted bases
for their 2011-2012 budget balance number that departed from one of the AASB 1049
measures. The Commonwealth adopted an “adjusted underlying” cash basis for its
headline budget balance, where Future Fund earnings were deducted from the cash
surplus/defcit. The ACTadopted an “adjusted” UNOBbasis in the three budgets for the
2009-2010 to 2011-2012 periods involving adjustments for the net impact of stimulus
initiatives. Further, in its 2011-2012 budget, the ACT Government introduced a further
adjusted budget balance number, the HNOB. This involved a further adjustment adding
back expected long-term capital gains on superannuation investments.
7.5 General observations
Study fndings indicate the adoption of varying measurement bases and some lack of
inter-government comparability in headline budget balance numbers across the
Australian general government sector. Despite the rhetoric that full accrual accounting
has been adopted across the general government sector in Australia, none of the nine
governments adopted operating result as their headline budget balance measure in the
latest year of the research period, 2011-2012, nor indeed in any year since
the introduction of AASB 1,049. The net operating balance measure headlined by
the majority of the nine Australian Governments, the six State Governments, is not a full
accrual accounting based measure but one based only on transactions. Further, two
governments headlined cash based measures in their budgets.
The selection by governments between alternative budget balance numbers has
parallels in the private sector. The reporting of non-statutory (non-GAAP) proft
numbers by Australian public companies is becoming increasingly common.
Companies are increasingly announcing and disclosing, often on an inconsistent and
selective basis, additional non-statutory proft numbers using titles such as adjusted,
underlying, normalised, core, economic and cash earnings/proft (Ernst and Young, 2007;
Finsia and AICD, 2008, 2009; King, 2009; KPMG Australia, 2010a, 2010b, 2011)[14].
While companies argue that the non-statutory performance measures provide more
relevant and understandable information, the lack of mandatory guidance has resulted
in considerable variation in the quality of the reported fgures and inconsistencies in
how the measures are calculated, both between companies and between reporting
133
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periods (Finsia and AICD, 2009; KPMG Australia, 2010b; Australian Securities and
Investments Commission, 2011).
But there is a further dimension with respect to the headlining of budget balances by
governments in Australia. A single basis exists for the statutory proft number for a
public company in the private sector[15]. However, there are a number of alternative
accrual and cash based measures within the government reporting framework from
which governments can select. And, as starkly illustrated by the example of the
Australian Capital Territory, governments are also free to make further adjustments to
those measures. Hence, this study illustrates the greater scope for fexibility available in
fnancial reporting and in the accounting numbers emphasised in the Australian
Government sector in comparison to that in the private sector.
The question arises as to the possible explanation for the budget balance numbers
chosen to be headlined by the nine Australian Governments. In the case of private sector
entities, prior research fnds that non-GAAP (non-statutory) numbers presented, in
comparison to statutory numbers, tend to:
• show better performance;
• avoid the reporting of a loss; and
• beat strategic earnings benchmarks, such as analyst forecasts or the previous
year’s result[16].
What can be concluded from the budget balance numbers headlined by Australian
Governments?
With the move to accrual accounting and the promulgation of AASB 1049, a
commonality is that the surplus/defcit measures headlined by the nine Australian
Governments comprise, or represent adjustments to, the net operating balance or the
cash budget balance bases. The headline measures adopted by the nine governments,
therefore, represent budget balance numbers based only on transactions. They exclude
the effect of accrual accounting entries for other economic fows that would be included
in the fnal accrual-based defcit/surplus number, being operating result. Examples of
these other economic fows include impairment losses, fair value adjustments and other
asset writedowns, foreign exchange gains and losses, superannuation fund gains and
losses, and expenses recognised via accrual provisions. Importantly, these other
economic fows are often, by their very nature, particularly material and unexpected.
There are two aspects to the headlining by the nine governments of budget balance
numbers based only on transactions. First, that approach generally allows the
headlining of the most favourable fgure (i.e. the highest surplus or lowest defcit
number). For example, an examination of Table I shows that, for the Queensland and
Victorian State Governments, the net operating balance headlined by thempresents the
most favourable fgure of the four alternatives.
Second, and probably more importantly, there is an associated beneft when the
original budget balance number is compared with the actual fnal outcome at a later
point in time. By headlining a budget balance number that excludes other economic
fows, potentially large and unexpected items are more likely to be ignored or given less
emphasis in any subsequent comparison of actual outcomes with the original budget.
Moreover, a surplus/defcit measure based only on transactions will be less subject to
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fuctuation than one based on full accrual accounting, enabling a smoother long-term
trend to be portrayed.
Afurther observationis that the headline budget balance numbers of the nine Australian
Governments, in being based on transactions only and excluding other economic fows, are
consistent withthe GFSsystemrather thanwithfull accrual accounting. Indocumentingthe
move from the earlier cash based version of GFS to public sector accrual accounting in the
Australian State of New South Wales, Christensen and Parker (2010) referred to the
competitionbetweenpublic sector economists andaccountants. Our researchfndings point
to the hybridnature of accrual accountingas it has developedinthe AustralianGovernment
sector inresponse tothese types of infuences. Evenwithattempts toharmonise the previous
GFS and GAAP frameworks, our study points to the continuation of the GFS transactions
basedmethodologywhenit comes toAustraliangeneral government sector headline budget
balance numbers.
This fnding can be highlighted in the context of those of Kober et al. (2013). They
surveyed the perceptions of public sector stakeholders on the appropriate accounting
treatment and presentation of various fnancial items pursuant to AASB1049. Findings
indicated a mixed preference for GFS and GAAP accounting treatments across a
number of different areas and a clear preference for GFS presentation methods. Also,
prior researchers have stressed the view that the accounting information required in a
public sector context is different to that in the private sector (Barton, 1999; Newberry,
2001; Ellwood and Newberry, 2006), and have advocated the continued usefulness of
GFS information for the public sector (Challen, 2004; Barton, 2005). Thus, the GFS
concepts continue to be prevalent and AASB 1049 allows for them to be fexibly
integrated into the harmonised rules.
The GFS basis, as noted earlier, was developed by the IMF to enable international
statistical comparisons for economic purposes. This emphasises that, in the Australian
Government sector, the nature of the adoption of accrual accounting continues to refect
previous economic infuences. The budget balances being headlined are consistent with
the transactions-based framework favoured by economic bodies such as the IMF and, in
Australia, the ABS. The study, therefore, illustrates the manner in which economic
concepts can continue to have persistent effects despite the promulgation of a specifc
authoritative accounting pronouncement such as AASB 1049.
From an agency perspective, study fndings suggest problems in terms of the
electorate and general public (principals) using budget information to monitor the
politicians (agents), and suggests concerns arising due to information asymmetry.
Findings related to the nine Australian Commonwealth, State and Territory
Governments can be summarised as follows:
• the different governments adopt varying bases for their headline budget balance
number;
• individual governments canchange the basis for presentationof their headline budget
balance number over time;
• the headline budget balance numbers of the nine AustralianGovernments are cashor
accrual transaction based numbers, and therefore, exclude many potentially large,
unexpected and fuctuating items; and
• governments canheadline a budget balance number that represents a departure from
the measures presented in the relevant accounting standard, AASB 1049.
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Monitoring and information asymmetry problems manifest themselves not due to the
unavailability of full budget information but, rather, due to the manner in which the
information is conveyed and presented. The headlining of alternate budget balance
numbers results in the potential for the public to be infuenced in their perceptions
regarding fscal management and fscal responsibility. These are key aspects in
analysing the performance of the agents (politicians/governments). Uncertainty in
assessing an agent’s performance reduces the quality of the contract between the
principal and the agent, with the potential for deterioration in accountability
(Eisenhardt, 1989; Kasdin, 2010; Benito and Bastida, 2009).
Study fndings indicate that analysis of government budget balance numbers in
Australia would be extremely diffcult for those without detailed accounting knowledge.
This allows politicians to potentially conceal a full picture. Even for those with suffcient
accounting knowledge, and for media reporters who report on government budgets, full
understanding of budget numbers can only be ascertained by delving into the minutiae
of the disclosures that are spread throughout the voluminous budget papers. This again
emphasises the diffculty of fully understanding the budget balance number headlined
by an individual government in an individual year. Understanding the full detail would
be beyond the comprehension of the average voter, hence highlighting the ability of the
politicians, who make the rules, to be selective in the budget information they highlight.
From a principal-agent perspective, this again illustrates monitoring and information
asymmetry problems.
Guthrie (1998, p. 14) alluded to the political impacts and ramifcations of government
budget statements and budget balance numbers with the following statement:
Terms such as “budget surplus” or “budget defcit” are potent political symbols. Politicians
claimsuccess if they have “reined in” a defcit or “returned” a surplus, or “balanced” a budget.
However, fndings of this study suggest considerable diffculty, in an agency context, of
the electorate monitoring politicians in respect of government budget balance numbers
despite the political importance of such fgures.
Study fndings suggest considerable scope for further research. The study has
investigated the adoption and use of accounting numbers within a public sector economic
and political setting. Further research could examine the fnal fnancial statements in which
fnal budget outcomes of the governments are presented, andcouldparticularlyexamine the
nature of the comparisons to original budget that are made in those fnal fnancial
statements. Further research could also investigate the political dynamics behind the
headline budget balance numbers adopted by the various governments. This could be
examined in association with various signifcant events, such as government elections.
While this study examined the Australian situation, further research could examine the
issue in other countries where accrual accounting has been adopted. The topic could also be
examined from various theoretical viewpoints, especially that of “impressions
management”. The manner in which the media reports government budget balance
numbers also represents a fruitful area for future research.
8. Summary and conclusions
An important aspect of government budgets is the transparency of government
reporting and the presentation of the overall budget surplus or defcit number. A
commonality of all government budgets is that they tend to focus on a single budget
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balance number that is headlined, and given prominence, in the relevant budget speech
and/or budget papers. An apparently basic concept such as a government defcit or
surplus, though, is subject to considerable ambiguity, questions of usage and conficting
defnitions and measurement bases.
The study makes a theoretical contribution in highlighting the ambiguity in the
government budget balance numbers presented and the monitoring and information
asymmetry problems that can arise. Research fndings indicate that different governments,
in implementing the same standardised accrual accounting rules, can adopt varying bases
for their headline budget balance numbers, including bases that depart from the relevant
accounting standard, and can change the basis for presentation of their headline budget
balance number over time. Findings also showthat the headline budget balance numbers of
the nine Australian Governments are more consistent with the GFS system than with full
accrual accounting, highlightingthe hybridnature of accrual accountingas it has developed
in the Australian Government sector. Attempts to harmonise the previous GFS and GAAP
frameworks in Australia indicate the competition between public sector economists and
accountants and the infuence of guidelines developed by bodies such as the International
Monetary Fund and the United Nations.
Findings point to the scope for governments to be selective in the manner in which
they calculate and present important budget aggregates. Confusion and
misunderstanding can therefore arise, and politicians can exploit the lack of clarity. This
is a signifcant issue as the budget balance number is one of the most important
measures, if not the most important one, used to evaluate a government’s fscal
management and responsibility. The monitoring and information asymmetry problems
that arise result in the potential for the public, as principals, being infuenced in their
perceptions regarding a government’s fscal management, thereby affecting analysis of
the performance of politicians as agents for the electorate and the public more generally.
The study adds a further dimension to our understanding of government budgets and
public sector accounting. The study illustrates the manner in which economic and political
infuences can continue to have persistent effects despite the promulgation of a specifc
authoritative accounting pronouncement such as AASB 1049. Also, while examining the
Australian Government sector, research fndings have wider relevance internationally in
highlighting issues arising with the public sector adoption of accrual accounting.
Notes
1. These nine governments are the Australian Commonwealth (Federal) government; the six States
of New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia;
and the two Territories, being the Australian Capital Territory and the Northern Territory.
2. See, for example, Robinson (2002), Barton (2007, 2009), Jensen and Wanna (2003), Wines and
Scarborough (2006), Hawke and Wanna (2010) and Kober et al. (2010).
3. Bergman and Lane (1990, p. 339) identify the electorate as the principal of the political body of
a democracy. Boston (1995, p. 10) explains that voters can be seen as principals who purchase
various services from their agents, namely MPs and Parliament.
4. When originally introduced, the GFS adopted a cash- rather than accruals-based approach
(Allan, 1993; ABS, 2003, p. 5).
5. For example, accrual-based income and expense items, such as doubtful debts provisions,
asset write-downs and impairment losses, foreign exchange gains and losses and
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superannuation fund gains and losses, are not included in the calculation of the GFS net
operating balance.
6. See ABS (2005, chapter 7) for elaboration on the accounting policy differences between AAS
31 and the GFS framework. Also note that recent amendments to the GFS framework have
resulted in defence weapons platforms now being treated in the same way for GFS and
Australian accounting standard purposes (ABS, 2011, p. 2). For a general discussion of
differences between accounting and statistical bases of fnancial reporting in the public sector
and recommendations for convergence, see International Public Sector Accounting Standards
Board (2005).
7. In fact, the defnitions for these three budget balance numbers in AASB 1049 indicate that
they are directly based on the ABS defnitions (AASB, 2009b, Appendix A).
8. These nine represent all the governments in Australia that are subject to AASB 1049.
9. These governments were the States of New South Wales, Queensland, South Australia,
Victoria and Western Australia.
10. This was caused by the Australian Capital Territory changing fromthe AAS 31 basis in their
2005-2006 budget to the net operating balance for 2006-2007.
11. This resulted from Tasmania moving to headline the net operating balance.
12. Personal correspondence with former Commonwealth Treasurer The Hon Peter Costello MP,
14 July 2006.
13. The Future Fund was established pursuant to the Future Fund Act 2006 (Commonwealth of
Australia, 2006). While the body administering the Fund, the Future Fund Board of
Guardians, is a separate legal entity (body corporate) pursuant to the Act (s. 37), the Future
Fund itself is not. The Fund consists of the Future Fund Special Account (the Fund Account)
and the investments of the Fund (s. 11).
14. Major adjustments in deriving non-statutory proft numbers tend to be for signifcant one-off
transactions and events and for expenses recording downward adjustments to asset values.
Examples include adjustments for foreign exchange losses, initial public offering costs,
merger, acquisition and restructuring costs, special provisions, lawsuits, intangibles
impairment and defned benefts superannuation expense (Finsia and AICD, 2008, 2009;
KPMG Australia, 2010a, 2010b, 2011).
15. Although there is, nevertheless, some degree of fexibility in accounting policy choice within
accounting standards.
16. See Bhattacharya et al. (2003, 2004), Lougee and Marquardt (2004), Bowen et al. (2005),
Marques (2006), Black and Christensen (2009), and KPMG Australia (2010a, 2010b, 2011).
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Challen, D. and Jeffrey, C. (2003), “Harmonisation of government fnance statistics and generally
accepted accounting principles”, Australian Accounting Review, Vol. 13 No. 2, pp. 48-53.
Corresponding author
Graeme Wines can be contacted at: [email protected]
For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
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doc_927727302.pdf