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Financial Overview

Operating Performance

The purpose of the Statement of Financial Performance is to measure and report the result of Defence's activities over the financial year period. It also highlights whether Defence is operating at a sustainable level in the short-term.

When the 2004-05 Budget was published, Defence adjusted its 2003-04 projected operating position from a surplus of $128m to a loss of $810m. The increase in operating expenses of $937m was primarily due to the following large non-cash transactions that were considered necessary at the time, namely:

  • a net increase in Depreciation Expense designed to correct accumulated depreciation associated with the migration of assets from the Defence Financial Management Information System to the new financial system, the Resource and Output Management and Accounting Network (+$265m), comprising an increase in Specialist Military Equipment (+$550m) and a reduction in Other Plant and Equipment (-$285m);
  • the proposed transfer of the 3 per cent Defence Force Retirement and Death Benefits superannuation productivity scheme from the Administered to the Departmental accounts (+$220m); and
  • two one-off accrual adjustments to correct annual leave and long service leave provisions (+$73m) and the current year leave on-costs calculation (+$75m).

Subsequently, the Minister for Finance and Administration approved a reduced loss of $484m following agreement between Defence and the Department of Finance and Administration that the proposed transfer of the Defence Force Retirement and Death Benefits scheme from the Administered to Departmental accounts was unnecessary, and after allowing for the recognition of accrued appropriation revenue of $65.8m for initiatives approved by the Government for implementation in 2003-04, but with reimbursement in 2004-05.

In the event, Defence achieved an operating loss of $532m in 2003-04, which was within $48m of the Minister for Finance and Administration's approved loss. The result represented an improvement (or reduction in the loss) of $278m compared with the projected result for 2003-04, which is used for comparative purposes. Table 1.5 provides details.

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Table 1.5 Statement of Financial Performance
  2003-04
  Budget Estimate
$'000
Revised Estimate
$'000
Projected Result
$'000
Actual Result
$'000
Variation(1)
$'000
REVENUE    
Revenues from ordinary activities    
Revenue from Government(2) 14,398,319 14,579,557 14,569,666 14,639,217 69,551
Sales of Goods and Services 239,014 243,085 243,085 252,883 9,798
Interest - - - 143 143
Revenue from Sale of Assets - 306,384 306,384 185,159 -121,225
Net Foreign Exchange Gains - - - 16,552 16,552
Assets Now Recognised 278,000 278,000 278,000 579,828 301,828
Other Revenue 41,931 87,706 87,706 156,211 68,505
Revenue from ordinary expenses 14,957,264 15,494,732 15,484,841 15,829,993 345,152
EXPENSE    
Expenses from ordinary activities
(excluding borrowing cost expense)
   
Employees 6,575,305 6,544,605 6,932,305 6,827,421 -104,884
Suppliers 4,979,608 5,278,452 5,552,967 5,302,088 -250,879
Grants 1,874 1,874 1,874 7,183 5,309
Depreciation and Amortisation 2,826,637 2,826,654 3,091,654 2,799,405 -292,429
Value of Assets Sold - 306,384 306,384 163,575 -142,809
Write-down of Assets 378,000 378,000 378,000 1,152,818 774,818
Other Expenses - - - 75,158 75,158
Expenses from ordinary activities
(excluding borrowing cost expense)
14,761,424 15,335,969 16,263,184 16,327,649 64,464
Borrowing Cost expense 31,920 31,263 31,263 34,148 2,885
Net accumulated result 163,920 127,500 -809,606 -531,804 277,802

Notes

  1. The variation is between actual result as disclosed in the 2003-04 audited financial statements and the projected result as disclosed in the Portfolio Budget Statements 2004-05.
  2. Revenue from Government includes resources received free of charge ($3.06m in 2003-04).

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Explanation of Major Variations

The improvement in Defence's overall operating performance of $278m was composed of an increase in revenue of $345m, an increase in expenses of $64m and an increase in borrowing costs of $3m.

Revenue (+$345m)

The higher level of revenue resulted from an increase in appropriations revenue from Government (+$70m), a reduction in revenues from sale of assets (-$121m), foreign exchange gains (+$17m), assets and inventories now recognised (+$302m), and other revenues (+$69m). These variations are explained below.

  • Revenue from Government (+$70m) - This increase was due primarily to the recognition of accrued appropriation revenue of $65.8m in 2003-04 for initiatives approved by Government in the 2004-05 Budget for which cash was required in 2003-04 but will be reimbursed in 2004-05. These initiatives include:
    • the reimbursement by the Government of property disposal costs incurred by Defence in 2002-03 (+$31.8m);
    • land and sales tax associated with Defence Housing Authority competitive neutrality (+$20m);
    • Defence Procurement Review Implementation costs associated with the establishment of the Defence Materiel Organisation as a prescribed agency (+$5.3m);
    • the Point Nepean Community Grant (+$5m); and
    • additional contribution to the Papua New Guinea Defence Reform program (+$3.7m).
  • Sale of Goods and Services (+$10m) - Higher than anticipated sales due to:
    • sale of equipment to other government agencies (+$7m); and
    • increased fuel sales to foreign governments (+$3m).
  • Revenue from Sale of Assets (-$121m) - The result was lower than projected largely due to:
    • delays in the property sales program as a result of Government decisions, the need to refer works at Randwick, New South Wales, to the Public Works Committee, and variations in project scheduling for various reasons including the lead time required to consider local and State Government priority sale proposals (-$118m);
    • an overestimate of the expected proceeds from other property, plant and equipment (-$34m);
    • lower than anticipated receipts from a program of sales of F/A-18 Hornet aircraft radar equipment to the United States Navy (-$13m); and
    • the revenue received from the sale of housing for which Defence owes an annuity to the Defence Housing Authority (+$44m).
  • Net Foreign Exchange Gains (+$17m) - Net variations due to the timing difference between invoices for transactions in foreign currencies entering the system and being paid.
  • Assets and Inventories Now Recognised (+$302m) - This increase primarily comprises:
    • the reconciliation of the Resource and Output Management and Accounting Network Fixed Asset Register to the Standard Defence Supply System - Defence's inventory management system - following the introduction of Standard Defence Supply System version 4 (+$158m);
    • the reclassification of certain fixed assets in Standard Defence Supply System as inventory (+$78m);
    • the recognition for the first time of maritime ranges assets (eg. sonar equipment) (+$40m), and assets identified following site audits and other remediation activities (including sites at Exmouth, Western Australia and Mulwala, New South Wales) (+$75m); and
    • reclassification of a prior year adjustment to other revenue in respect of AIR 5400 (air-to-air missiles for the F/A-18 Hornet aircraft) (-$49m).
  • Other Revenue (+$69m) - This increase was due to a number of factors including:
    • the reclassification of a prior year adjustment from assets now recognised in respect of AIR 5400 (air-to-air missiles for the F/A-18 Hornet aircraft) (+$49m);
    • the receipt of liquidated damages, including for the Hornet Upgrade, Armed Reconnaissance Helicopter, Lead-In-Fighter and High Frequency Modernisation projects used to fund a program of rectification works caused by delays in these projects (+$12m); and
    • the changes in accounting treatment of revenue collected under garrison support contracts, which is no longer offset against expenses (+$8m).

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Expenses (+$64m)

Lower employee (-$105m), suppliers (-$251m), depreciation (-$292m) and value of assets sold (-$143m) expenses were largely offset by higher write-downs of assets and inventory (+$775m) and other expenses (+$75m) to produce an overall increase of $64m. These variations are explained below.

  • Employee Expenses (-$105m) - The change is a result of two major factors:
    • a decision not to proceed with the proposed transfer of the Defence Force Retirement and Death Benefits superannuation productivity scheme from the Administered to the Departmental accounts (-$220m). After detailed discussions with the Australian National Audit Office (ANAO) and the Department of Finance and Administration, this transfer did not occur;
    • higher long-term incapacity payments, medical payments and establishment costs for claims identified by the Actuary Review of compensation expense (+$120m); and
    • a number of further variations which were offsetting in nature and are explained in detail at pp. 264-66 in Chapter 5 (People).
  • Supplier Expenses (-$251m) - The variation in supplier expenses is made up of a reduced level of inventory consumption (-$127m) and a lower level of expenses in other suppliers (-$123m). The reduced level of inventory consumption was due to:
    • an overstatement of the inventory consumption estimate (-$86m); and
    • the flow through of improvements in the pricing of explosive ordnance (-$40m).
    The variation in other suppliers of -$123m was due to:
    • redirection of funding to inventory purchases as Defence progressively reduces backlogs in this area (-$93m);
    • the rephasing of funding for Operation Catalyst (-$14.6m) and Operation Anode (-$12.8m) into 2004-05 and future years (-$27m);
    • rephasing of some information systems and business improvement projects to 2004-05 to reflect changed schedules for these projects (-$12m);
    • lower levels of expenses incurred on Defence's recruitment contract due to improvement in separation rates (-$11m);
    • reduced level of expenses by the Intelligence and Security Group to offset higher civilian employee expenses in that Group (-$8m);
    • the changed method of accounting for revenue collected under garrison support contracts which are no longer offset against expenses (+$8m); and
    • the payment to the University of New South Wales for Australian Defence Force Academy staff superannuation liabilities (+$20m).
  • Grants (+$5m) - The higher than anticipated expenditure on grants was as a result of:
    • the Point Nepean community grant (+$5m);
    • the Mornington Peninsula land grant (+$1m); and
    • the reclassification of a grant from Defence Science and Technology Organisation as supplier expenses (-$1m).
  • Depreciation and Amortisation (-$292m) - The variation in depreciation and amortisation is mainly made up of the following components:
    • the non-requirement to proceed with the anticipated adjustment in specialist military equipment relating to the migration of assets from the Defence Financial Management Information System to the Resource and Output Management and Accounting Network (-$550m);
    • greater than anticipated adjustment (-$297m in lieu of -$285m) in other property, plant and equipment required to correct an error in the migration of assets from the Defence Financial Management Information System to the Resource and Output Management and Accounting Network (-$43m);
    • the reclassification of some operating leases into finance leases (+$24m);
    • an understatement of the depreciation estimate (+$46m);
    • a review of the useful life on the repairable items on a number of platforms, including F-111 aircraft, Fremantle-class patrol boats and Leopard Tanks (+$58m);
    • revaluation of buildings and infrastructure (+$68m); and
    • net movements from asset revaluations, assets under construction roll-out, assets first recognised and property sale delays (+$105m).
  • Value of Assets Sold (-$143m) - The result was lower than projected largely due to:
    • the delay in the property sales program due to Government decisions, the need to refer works at Randwick, New South Wales, to the Public Works Committee, and variations in project scheduling for various reasons including the lead time required to consider local and State Government priority sale proposals (-$139m). This variation includes a $21m difference between the revenue received and the market valuation of the relevant properties;
    • an overestimation of the expected proceeds for other property, plant and equipment (-$34m);
    • lower than anticipated receipts from a program of sales of F/A-18 Hornet aircraft radar equipment to the United States Navy (-$13m); and
    • the value of housing annuity assets sold for Defence by the Defence Housing Authority (+$44m).
  • Write-down of Assets and Inventory (+$775m) - The variation comprises write-downs of the value of assets (+$574m) and write-downs of inventory (+$201m). The increase in the write-down of assets results mainly from:
    • write-down of specialist military equipment, including assets under construction, following project-initiated reviews of, among other things, LAND 75 - Battlefield Command System, SEA 1114 - Submarines and JP 2070 - Lightweight Torpedos (+$174m);
    • asset disposals, including F/A-18 Hornet aircraft radars, Black Hawk helicopters and night vision goggles (+$163m);
    • the transfer of assets, including from George's Heights and Chowder Bay to the Sydney Harbour Foreshore Trust (+$98m);
    • the reclassification of certain fixed assets in the Standard Defence Supply System as inventory (+$78m); and
    • an adjustment to account for the change from $1,000 to $2,000 in the asset threshold for administrative assets, and the removal of grouping of these assets (+$61m).
    Additional write-downs of inventory (+$201m) resulted mainly from:

    • a large scale review of Defence's inventory holdings by the Defence Materiel Organisation which led to $99m of inventory being recognised as obsolete;
    • the flow through of improvements in the pricing of explosive ordnance (+$74m), of which $40m of written-down inventory was subsequently consumed; and
    • an increase in inventory disposals (+$28m).
  • Other Expenses (+$75m) - Defence did not budget for, or forecast, any other expenses. In the event, $75m in other expenses were incurred during 2003-04, including:
    • an increase in the provision for Defence's share of the Commonwealth's common law liability for asbestos-related diseases (+$60m);
    • corrections arising from the reconciliation of Defence Housing Authority annuity balances (+$11m); and
    • resolution of past errors in accounting for the transfer of expense and revenue items between departmental and special public monies accounts. Items transferred after 30 June 2003 have been accounted for correctly (+$4m).

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