Financial Overview

Operating Performance - 2002-03 (-$632m)

2002-03 Funding

Defence had a $896m operating loss in 2002-03 of which $263.9m was authorised by the Government. The remaining loss relates mainly to technical accounting adjustments which have no impact on the cash balance. Table 1.7 provides details.

Explanation of Major Variations

Revenue (+$1,194m)

The higher level of revenue of $1,194m was due to predominantly:

• a change in the disclosure of sale of assets ($686m). Previously, Defence was required to disclose only the net gain or loss on sale of assets. A change in the Finance Minister's Orders for 2002-03 required Defence to separately disclose the revenue proceeds (and the value of assets sold - see below) from asset sales;
• an increase in assets now recognised of $451m representing the take-up of inventories recorded on the Army's Q Store system, AUTO Q, into the Standard Defence Supply System and additional inventory price adjustments ($203m). A further increase of $248m was a result of the booking of the Standard Defence Supply System to the Resource and Output Management Accounting Network reconciliation and other miscellaneous adjustments;
• a change in the accounting treatment of fuel excise refunds as revenue as opposed to being netted off against expenses, resulted in an increase of $43m; and
• other variations ($14m).

Expenses (+$1,831m)

Expenses were $1,831m higher than planned. The main factors are discussed below.

• Changes in accounting treatments ($962m), including:
  • a change in the Finance Minister's Orders for 2002-03 which required Defence to separately disclose the value of assets sold during the financial year ($641m);
  • an imbalance in the capital/operating mix in the budget estimates which was corrected in 2003-04 but not reflected in the 2002-03 projected result. Accordingly, expenses were higher than planned by $278m; and
  • an accounting policy change in relation to the recognition of fuel excise costs to be recognised as separate expense and revenue amounts ($43m).
• A net increase in non-cash items of approximately $152m, including:
  • an increase in depreciation and amortisation expenses of $186m. The higher level of depreciation expense was due mainly to the different treatments applied at budget and in the actual results associated with disposal of APG-65 radars from the F/A-18 aircraft. The radars were 're-lifed' to the net selling price prior to disposal instead of adjusting the loss through the asset revaluation reserve. This resulted in an increased depreciation expense of $155m; and
  • an overestimate of assets expenses (-$34m).
• Other variations totalling $717m, including:
  • an increase from the projected result of $346m in other expenses. This was due largely to the recognition of Defence's potential liability for compensation claims arising from asbestos exposure identified in a recent whole-of-government actuarial report ($344m).
  • an increase of $94m was a result of recruiting and operational activities and adjustments to superannuation, compensation and fringe benefit expenses. Civilian employee expenses were higher due to higher than planned strength and growth in per capita costs;
  • an increase in inventory consumption relating to high operational tempo and higher consumption rates of general stores items and fuel;
  • costs totaling $41m associated with the property sale program; and
  • other variations of $24m.

Trends in Defence Expenditure

The trend in the major categories of Defence's budget since 1998-99, including the 2002-03 result, is shown in Chart 1.1.

Chart 1.1: Major Categories of Defence Spending (Actual)

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Table 1.7: Operating Performance 2002-03

	2002-03
	Budget Estimate	Revised Estimate	Projected Result	Result	Variation (1)
	$'000	$'000	$'000	$'000	$'000
REVENUE
Revenues from ordinary activities
Revenue from Government(2)	18,235,351	18,337,625	18,230,325	18,232,438	2,113
Sales of goods and services	249,368	244,334	244,334	230,545	-13,789
Interest	20,000	20,000	20,000	19,332	-668
Revenue from sale of assets	-	-	-	685,537	685,537
Net foreign exchange gains	-	-	-	17,101	17,101
Assets now recognised	-	415,000	415,000	866,295	451,295
Other	17,737	41,440	65,982	118,390	52,408
Revenue from ordinary activities	18,522,456	19,058,399	18,975,641	20,169,637	1,193,997
EXPENSE
Expenses from ordinary activities (excluding borrowing cost expense)
Employees	5,874,644	5,922,582	6,100,622	6,194,572	93,950
Suppliers	4,675,891	4,748,896	4,752,018	5,349,874	597,856
Grants	1,370	1,370	1,370	2,544	1,174
Depreciation and amortisation	2,782,814	2,677,814	2,677,814	2,863,416	185,602
Value of assets sold	-	-	-	640,549	640,549
Write down of assets	100,000	620,000	620,000	586,475	-33,525
Other	-	-	-	345,596	345,596
Expenses from ordinary activities (excluding borrowing cost expense)	13,434,719	13,970,662	14,151,824	15,983,026	1,831,202
Borrowing cost expense	31,643	31,643	31,643	26,755	-4,888
Net surplus	5,056,094	5,056,094	4,792,174	4,159,856	-632,318
Capital use charge(3)	5,056,094	5,056,094	5,056,094	5,056,094	-
Net accumulated result (Loss)	-	-	(263,920)	(896,238)	-632,318

Note

1. Variation is between estimated outcome and actual result.
2. Revenues from the Government include resources received free of charge ($2.113m in 2002-03).
3. Defence's capital use charge to the Government was budgeted at $5,056m in 2002-03, representing an 11 per cent return to the Government on its investment in Defence (as represented by Defence's estimated closing net assets balance). The Government decided to discontinue the charge from 1 July 2003. As a result, Defence's 2002-03 capital use charge payments were made in accordance with the level of capital use charge funding appropriated for 2002-03 without further adjustment.

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