Annual Report 2003-04

Financial Overview

Defence's Financial Position

The Statement of Financial Position sets out Defence's assets, liabilities and equity as at 30 June 2004. Also known as the balance sheet, its purpose is to provide a snapshot of the long-term sustainability of the organisation. Defence had net assets of $46.6 billion as at 30 June 2004, which was $1.5 billion higher than the projected result. Table 1.6 provides details.

Notes

1. The variation is between actual result as disclosed in the 2003-04 audited financial statements and the projected result as disclosed in Defence's Portfolio Budget Statements 2004-05.
2. Appropriation Receivable represents undrawn appropriations from the Commonwealth as at 30 June 2004.

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Explanation of Major Variations

The variation in Defence's net asset position of +$1,479m resulted from an increase in assets of $1,516m and a minor increase in liabilities of $37m.

Total Assets (+$1,516m)

Assets were $1,516m higher than the projected result, mainly due to:

• Financial Assets (-$8m) - Defence's financial assets comprise its cash position, the appropriation receivable and other receivables. Overall, financial assets were $8m lower than the projected result primarily due to:
  • the cash balance being $138m higher than projected. This was largely the result of the 1 July 2004 payday monies being drawn down by Defence on 30 June 2004, and being paid out on 1 July 2004 (+$150m);
  • the appropriation receivable being $103m lower than forecast. This was the result of Defence drawing on the receivable for the payday on 1 July 2004 (-$150m) and the settlement payment to Kockums (-$25m), offset by the recognition of an Appropriation from Government for initiatives approved by Government for implementation in 2003-04 which will be reimbursed in 2004-05 (+$65m); and
  • lower other receivables (-$43m), mainly due to a reduction in Advances and Loans as a result of the changed accounting treatment of funds held in the United States under Foreign Military Sales arrangements (-$59m).
• Land and Buildings (+$930m) - The land and building balance was $930m higher than the projected result due mainly to a number of factors, including:
  • revaluation of land and buildings through a significant revaluation process by Corporate Services and Infrastructure Group (+$746m);
  • the delay in the 2003-04 property sales program (+$118m);
  • assets identified following site audits and other remediation activities (including sites at Exmouth, Western Australia and Mulwala, New South Wales)(+$75m);
  • adjustment to accumulated depreciation to correct errors in the migration of assets from the Defence Financial Management Information System to the new financial system, the Resource and Output Management and Accounting Network (+$63m);
  • reclassification of assets (including Weston Creek, Australian Capital Territory) from operating leases to finance leases (+$36m); and
  • transfer of assets, including at George's Heights and Chowder Bay to the Sydney Harbour Foreshore Trust (-$98m).
• Specialist Military Equipment (-$383m) - After allowing for the non-requirement to proceed with the anticipated adjustment to accumulated depreciation (+$550m), the remaining variation (-$933m) comprised:
  • the reclassification of assets acquired as part of capital projects from Assets Under Construction to inventory, upon roll-out (-$456m);
  • the reclassification of certain specialist military equipment assets into other plant and equipment and other classes of assets, including the Defence equipment aboard the Optus C1 satellite (-$255m);
  • write-down of assets under construction through project-initiated reviews including 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 helicopter and night vision goggles (-$163m);
  • 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);
  • other net variation in capital payments and roll-out of assets under construction (-$37m);
  • the recognition for the first time of maritime range assets (+$40m); and
  • the deposit payments for the additional two airborne early warning and control aircraft (+$170m).
• Infrastructure, Plant and Equipment (+$253m) - The movements were predominantly due to:
  • the reclassification of certain specialist military equipment assets into this asset class (+$255m);
  • net variations relating to purchase of information technology assets and reclassification of operating leases as finance leases (+$145m);
  • adjustment to accumulated depreciation to correct errors in the migration of assets from the Defence Financial Management Information System to the new financial system, the Resource and Output Management and Accounting Network (-$20m);
  • 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);
  • the reclassification of certain equipment items into software (-$66m); and
  • a net revaluation increase and higher than anticipated depreciation expense were largely offsetting in nature.
• Intangibles (+$168m) - This variation mainly comprises:
  • additional purchases made during the year, including the settlement relating to submarine intellectual property rights, the capitalisation of the PMKeyS Enhancement, employee self-service developments and associated software licensing (+$102m); and
  • the reclassification of certain equipment assets to software (+$66m).
• Inventory (+$578m) - The increase in inventory holdings of $578m comprises:
  • the reclassification of assets acquired as part of capital projects from assets under construction to inventory, upon roll-out (+$456m);
  • 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 version 4 (+$158m);
  • an overstatement of the original inventory consumption estimate (+$86m);
  • additional inventory purchases as Defence progressively reduces backlogs in this area (+$78m);
  • an increase in inventory disposals (-$28m);
  • the flow through of improvements in the pricing of explosive ordnance (-$74m); and
  • a large scale review of Defence's inventory holdings by the Defence Materiel Organisation which led to $99m of inventory being recognised as obsolete (-$99m).

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Total Liabilities (+$37m)

Liabilities were $37m higher than planned due to:

• Leases (+$37m) - Leases were higher due to the reclassification of operating to finance leases in respect of the IBM Enterprise Licence Agreement (+$31m) and the lease of the Weston Creek Australian Defence College site (+$31m). This was offset by a buy-out of a number of Defence Housing Authority annuity properties (-$34m).
• Employees (+$149m) - The increase in employee liabilities is due to a number of factors, including:
  • an adjustment to military compensation as per actuarial advice (+$120m);
  • higher than anticipated leave provisions (+$108m);
  • an understatement of the original estimate for compensation expense (+$96m);
  • the effect of future pay rises contained in the Defence Employees Certified Agreement on civilian leave liabilities (+$30m);
  • the recognition in 2003-04 of the 2004-05 redundancy costs related to the transition to the new Defence Integrated Distribution System (+$23m); and
  • not proceeding as planned with the transfer of the 3 per cent productivity liability of the Defence Force Retirement and Death Benefit Scheme from the administered budget to the departmental budget (-$220m).
• Supplier Payables (-$183m) - The decrease was largely due to the non-recurrence of several large major capital equipment-related payables from June 2003 (including one for the additional early warning and control project), combined with an improvement in Defence's claim payment performance from 83 per cent to 89 per cent.
• Other Payables (+$34m) - This increase relates primarily to a growth in the provision created by Defence for its share of the common law liability associated with asbestos-related diseases (+$60m). This was offset by the settlement of a fringe benefits tax refund owed to the Department of Finance and Administration (-$22m).

Trends in Defence Assets and Liabilities

Chart 1.1 shows the actual movement of major categories of assets since 2000-01. Over this period assets have increased by $3.8 billion from $48.2 billion to $52.0 billion.

Chart 1.1 Historical Trends in Defence's Assets

Chart 1.2 shows the actual movement of major categories of liability since 2000-01. Over this period liabilities have increased by $1.7 billion from $4.0 billion to $5.7 billion.

Chart 1.2 Historical Trends in Defence's Liabilities

Defence's net worth has increased over the period since 2000-01 by $2.1 billion from $44.2 billion to $46.3 billion as follows:

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