Annual Report 2018-19

This section includes additional material disclosures required by accounting standards or otherwise, for the understanding of this financial report.

9.1. Other economic flows included in net result 9.2. Change in accounting policies 9.3. Responsible persons 9.4. Remuneration of executives 9.5. Related parties 9.6. Australian Accounting Standards issued that are not yet effective 9.7. Events after reporting date 9.8. Remuneration of auditors 9.9. Glossary of terms

 

9.1. Other economic flows included in net result

Other economic flows measure the change in volume or value of asset or liability that do not result from transactions. Other gains/(losses) from other economic flows include the gains or losses from:

Disposal of non-financial assets

Any gain or loss on the disposal of non-financial assets is recognised at the date of disposal and is determined after deducting from the proceeds the carrying value of the asset at that time.

Other gains and losses from other economic flows

Other gains and losses from other economic flows include the transfer of amounts from reserves and/or accumulated surplus to net result due to disposal, derecognition, or reclassification and the revaluation of the present value of leave liabilities due to changes in bond interest rates.

9.2 Change in accounting policies

The commission has elected to apply the limited exemption in AASB 9 paragraph 7.2.15 relating to transition for classification and measurement and impairment, and accordingly has not restated comparative periods in the year of initial application. As a result:

• any adjustments to carrying amounts of financial assets or liabilities are recognised at beginning of the current reporting period with difference recognised in opening retained earnings; and
• financial assets and provision for impairment have not been reclassified and/or restated in the comparative period.

AASB 9 introduces a major change to hedge accounting. However, it is the commission’s policy not to apply hedge accounting.

This note explains the impact of the adoption of AASB 9 Financial Instruments on the commission’s financial statements.

9.2.1 Change to classification and measurement

On initial application of AASB 9 on 1 July 2018, the commission’s management has assessed for all financial assets based on the commission’s business models for managing the assets. The following is the change in the classification of the commission’s financial assets:

(a) Contractual receivables previously classified as other loans and receivables under AASB 139 are now reclassified as financial assets at amortised cost under AASB 9. There was no difference between the previous carrying amount and the revised carrying amount at 1 July 2018 to be recognised in opening retained earnings.

The accounting for financial liabilities remains largely the same as it was under AASB 139, except for the treatment of gains or losses arising from the commission’s own credit risk relating to liabilities designated at fair value through net result. Such movements are presented in other comprehensive income with no subsequent recycle through profit or loss.

9.2.2 Changes to the impairment of financial assets

Under AASB 9, all loans and receivables as well as other debt instruments not carried at fair value through net result are subject to AASB 9’s new expected credit loss (ECL) impairment model, which replaces AASB 139’s incurred loss approach.

For other loans and receivables, the commission applies the AASB 9 simplified approach to measure expected credit losses based on the change in the ECLs over the life of the asset. Applying the ECL model does not result in recognition of additional loss allowance (previous loss allowance was nil).

9.3. Responsible persons

The persons who held the positions of Minister and Accountable Officer in the commission (from 1 July 2018 to 30 June 2019 unless otherwise stated) were:

Responsible Minister	The Hon. Robin Scott, MP, Assistant Treasurer
Accountable Officer	Dr John Hamill, Chief Executive Officer

Tim Pallas MP acted for the Assistant Treasurer in the absence of the Hon. Robin Scott MP.

Total remuneration received or receivable by the Accountable Officer in connection with the management of the commission during the reporting period was in the range: $300,000 – $309,999 ($300,000 – $309,999 in 2017–18).

Amounts relating to ministers are reported in the annual statements of the Department of Parliamentary Services.

9.4. Remuneration of executives

The number of executive officers, other than ministers and accountable officers, and their total remuneration during the reporting period are shown in the table below. Total annualised employee equivalents provide a measure of full time equivalent executive officers over the reporting period.

Remuneration comprises employee benefits in all forms of consideration paid, payable or provided by the entity, or on behalf of the entity, in exchange for services rendered, and is disclosed in the following categories:

Short-term employee benefits include amounts such as wages, salaries, annual leave or sick leave that are usually paid or payable on a regular basis, as well as non-monetary benefits such as allowances and free or subsidised goods or services.

Post-employment benefits include pensions and other retirement benefits paid or payable on a discrete basis when employment has ceased.

Other long-term benefits include long service leave, other long-service benefit or deferred compensation.

Termination benefits include termination of employment payments, such as severance packages.

	Total remuneration
Remuneration of executive officers	2019	2018
	$	$
Short-term employee benefits	871,843	1,526,613
Post-employment benefits	94,961	166,166
Other long-term benefits	47,882	47,754
Termination benefits	214,735	77,146
Total remuneration	1,229,422	1,817,679
Total number of executives	7	8
Total annualised employee equivalents(a)	4.42	7.7

Notes:

(a) Annualised employee equivalent is based on the time fraction worked over the reporting period.

9.5. Related parties

The commission is a wholly owned and controlled entity of the State of Victoria. Related parties of the commission include:

• All key management personnel and their close family members;
• All cabinet ministers and their close family members; and
• All departments and public sector entities that are controlled and consolidated into the whole of state consolidated financial statements.

All related party transactions have been entered into on an arm’s length basis.

Significant transactions with government-related entities

Significant transactions entered into by the commission during 2018–19 are disclosed in relevant notes as detailed below:

• The commission received grant funding from DTF which is disclosed in Note 2; and
• The Commission on behalf of the Victorian Government collected licence fees from Victorian water businesses $2,481,353 ($4,004,503 in 2017–18) This is included as part of the total administered income balance disclosed in Note 4.

Key Management Personnel

Key management personnel (KMP) of the commission include the Portfolio Minister, the Hon. Robin Scott MP, and the commissioners and Chief Executive Officer, which includes:

• Acting Chairperson (1 June 2019 to 30 June 2019) and Commissioner (1 July 2018 to 31 May 2019), Kate Symons;
• Chairperson (1 July 2018 to 31 May 2019), Dr Ron Ben-David;
• Commissioner (9 April 2019 to 30 June 2019), Simon Corden;
• Commissioner (1 July 2018 to 29 March 2019), Richard Clarke and
• Chief Executive Officer, Dr John Hamill

The compensation detailed below excludes the salary and benefit the Portfolio Minister receives. The Minister’s remuneration and allowance, set by the Parliamentary Salaries and Superannuation Act 1968, are reported within the Department of Parliamentary Services’ Financial Report.

Compensation of KMPs	2019	2018
	$	$
Short-term employee benefits	855,774	905,992
Post-employment benefits	70,888	63,761
Other long-term benefits	12,381	22,044
Termination benefits
Total	939,043	991,797

9.6. Australian Accounting Standards issued that are not yet effective

The following AASs become effective for reporting periods commencing after 1 July 2019:

AASB 16 Leases

AASB 15 Revenue from Contracts with Customers

AASB 1058 Income of Not-for-profit Entities

Leases

AASB 16 Leases replaces AASB 117 Leases, AASB Interpretation 4 Determining whether an Arrangement contains a Lease, AASB Interpretation 115 Operating Leases-Incentives and AASB Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases on the balance sheet by recording a Right-Of-Use (RoU) asset and a lease liability except for leases that are shorter than 12 months and leases where the underlying asset is of low value (deemed to be below $10,000).

AASB 16 also requires the lessees to separately recognise the interest expense on the lease liability and the depreciation expense on the RoU asset, and remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The amount of the remeasurement of the lease liability will generally be recognised as an adjustment to the RoU asset.

Lessor accounting under AASB 16 is substantially unchanged from AASB 117. Lessors will continue to classify all leases using the same classification principle as in AASB 117 and distinguish between two types of leases: operating and finance leases.

The effective date is for annual reporting periods beginning on or after 1 January 2019. The commission intends to adopt AASB 16 in the 2019–20 financial year when it becomes effective.

The commission will apply the standard using a modified retrospective approach with the cumulative effect of initial application recognised as an adjustment to the opening balance of accumulated surplus at 1 July 2019, with no restatement of comparative information.

The commission has performed a detailed impact assessment of AASB 16 and the potential impact in the initial year of application has been estimated as follows:

• increase in RoU ($3,840,609),
• increase in related depreciation ($822,666),
• increase in lease liability ($4,014,750),
• increase in related interest ($148,915) calculated using effective interest method, and
• decrease in rental expense ($797,440).

Various practical expedients are available on adoption to account for leases previously classified by a lessee as operating leases under AASB 117. The commission will elect to use the exemptions for all short-term leases (lease term less than 12 months) and low value leases (deemed to be below $10,000)

Grants

AASB 15, AASB 1058 and the related guidance will come into effect for not-for-profit entities for annual reporting periods beginning on or after 1 January 2019. The commission intends to adopt these standards in 2019–20 financial year when it becomes effective.

The commission will apply the standard using a modified retrospective approach with the cumulative effect of initial application recognised as an adjustment to the opening balance of accumulated surplus at 1 July 2019, with no restatement of comparative information.

The commission has performed a detailed impact assessment of AASB 15 and AASB 1058 and there is no potential impact for each major class of revenue and income in the initial year of application.

9.7.  Events after reporting date

There were no subsequent events that had the potential to significantly effect the ongoing operations and financial activities of the commission.

9.8.  Remuneration of auditors

The fee for the audit of the 2018–19 annual financial statements by the Victorian Auditor-General’s Office amounts to $17,500 ($17,000 in 2017–18). No other services are being provided by the Victorian Auditor-General’s Office.

9.9.  Glossary of terms

Administered item

Administered item generally refers to a Commission lacking the capacity to benefit from that item in the pursuit of the commission’s objectives and to deny or regulate the access of others to that benefit.

Annualised employee equivalent

Annualised employee equivalent is based on paid working hours of 38 ordinary hours per week over 52 weeks for a reporting period.

Capital asset charge

A charge levied on the written-down value of controlled non-current physical assets in the commission’s balance sheet which aims to: attribute to the opportunity cost of capital used in service delivery; and provide incentives to the commission to identify and dispose of underutilised or surplus assets in a timely manner.

Commitments

Commitments include those operating, capital and other outsourcing commitments arising from non-cancellable contractual or statutory sources.

Comprehensive result

The net result of all items of income and expense recognised for the period. It is the aggregate of operating result and other comprehensive income.

Controlled item

Controlled item generally refers to the capacity of a Commission to benefit from that item in the pursuit of the commission’s objectives and to deny or regulate the access of others to that benefit.

Depreciation

Depreciation is an expense that arises from the consumption through wear or time of a produced physical or intangible asset. This expense is classified as a transaction and so reduces the net result from transactions.

Employee benefits expenses

Employee benefits expenses include all costs related to employment including wages and salaries, fringe benefits tax, leave entitlements, redundancy payments and superannuation contributions.

Financial asset

A financial asset is any asset that is:

1. cash;
2. an equity instrument of another entity;
3. a contractual right:

• to receive cash or another financial asset from another entity; or
• to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or

4. a contract that will or may be settled in the entity’s own equity instruments and is:

• a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

Financial instrument

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets or liabilities that are not contractual (such as statutory receivables or payables that arise as a result of statutory requirements imposed by governments) are not financial instruments.

Financial liability

A financial liability is any liability that is:

1. a contractual obligation:

• to deliver cash or another financial asset to another entity; or
• to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or

2. a contract that will or may be settled in the entity’s own equity instruments and is:

• a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
• a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.

Financial statements

A complete set of financial statements comprises:

1. a comprehensive operating statement for the period;
2. a balance sheet as at the end of the period;
3. a statement of changes in equity for the period;
4. a cash flow statement for the period;
5. notes, comprising a summary of significant accounting policies and other explanatory information;
6. comparative information in respect of the preceding period as specified in paragraph 38 of AASB 101 Presentation of Financial Statements; and
7. a balance sheet as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraph 41 of AASB 101.

Grants

Transactions in which one unit provides goods, services, assets (or extinguishes a liability) or labour to another unit without receiving approximately equal value in return. Grants can either be operating or capital in nature. While grants to governments may result in the provision of some goods or services to the transferor, they do not give the transferor a claim to receive directly benefits of approximately equal value. Receipt and sacrifice of approximately equal value may occur, but only by coincidence. For example, governments are not obliged to provide commensurate benefits, in the form of goods or services, to particular taxpayers in return for their taxes. For this reason, grants are referred to by the AASB as involuntary transfers and are termed non-reciprocal transfers.

Grants can be paid as general purpose grants which refer to grants that are not subject to conditions regarding their use. Alternatively, they may be paid as specific purpose grants which are paid for a particular purpose and/or have conditions attached regarding their use.

Interest expense

Costs incurred in connection with the borrowing of funds. Interest expense includes interest on bank overdrafts and short term and long term borrowings, amortisation of discounts or premiums relating to borrowings, interest component of finance leases repayments, and the increase in financial liabilities and non-employee provisions due to the unwinding of discounts to reflect the passage of time.

Net result

Net result is a measure of financial performance of the operations for the period. It is the net result of items of income, gains and expenses (including losses) recognised for the period, excluding those that are classified as ‘other economic flows – other comprehensive income’.

Net result from transactions

Net result from transactions or net operating balance is a key fiscal aggregate and is revenue from transactions minus expenses from transactions. It is a summary measure of the ongoing sustainability of operations. It excludes gains and losses resulting from changes in price levels and other changes in the volume of assets. It is the component of the change in net worth that is due to transactions and can be attributed directly to government policies.

Non-financial assets

Non-financial assets are all assets that are not ‘financial assets’.

Other economic flows included in net result

Other economic flows included in net result are changes in the volume or value of an asset or liability that do not result from transactions. They include gains and losses from disposal, revaluation and impairment of non-current physical and intangible assets; actuarial gains and losses arising from defined benefit superannuation plans and fair value changes of financial instruments. In simple terms, they are changes arising from market re-measurements.

Other economic flows – other comprehensive income

Other economic flows – other comprehensive income comprises items (including reclassification adjustments) that are not recognised in net result. The components of ‘other economic flows – other comprehensive income’ include changes in physical asset revaluation surplus.

Payables

Includes short and long term trade debt and accounts payable, grants and interest payable.

Receivables

Includes short and long term trade credit and accounts receivable, grants, taxes and interest receivable.

Supplies and services

Supplies and services generally represent cost of goods sold and the day to day running costs, including maintenance costs, incurred in the normal operations of the entity.

Transactions

Transactions are those economic flows that are considered to arise as a result of policy decisions, usually an interaction between two entities by mutual agreement. They also include flows within an entity such as depreciation where the owner is simultaneously acting as the owner of the depreciating asset and as the consumer of the service provided by the asset. Taxation is regarded as mutually agreed interactions between the government and taxpayers. Transactions can be in kind (e.g. assets provided/given free of charge or for nominal consideration) or where the final consideration is cash. In simple terms, transactions arise from the policy decisions of the government.