Defence's Income Statement
The purpose of the Income Statement is to measure Defence's operating result for the financial year by showing all income received and expenses incurred. The operating result helps inform whether Defence is operating at a sustainable level in the short term.
Defence recorded an operating loss of $144.5m (expenses exceeded revenues) in 2005–06. This was $193.1m higher than forecast in the Additional Estimates, which was based on a surplus of $48.6m. The loss was primarily technical in nature, reflecting the continued financial statement remediation work combined with changes in the accounting treatment of some services provided by the Defence Materiel Organisation (DMO). This resulted in an increase in assets written down due to stocktaking and impairment testing activities, combined with increased depreciation expenses, offset by lower than expected suppliers expense as Defence capitalised certain activities undertaken by the DMO. All other variations which are mainly cash-based in nature substantially offset each other.
Table 1.3 provides details and explanation of the variations follow.
Explanation of Variations
The variation in Defence's overall operating performance of $193.1m comprised a $242.6m increase in income and a $435.7m increase in expenses.
Income (+$242.6m)
Income received was $242.6m more than the estimate of $17,006.8m. The main elements were:
- Revenue from Government (–$69.2m)—The variation was due to the hand back of funds to the Government under no win/no loss arrangements for a communications project (–$31.0m), Defence Housing Authority (DHA) competitive neutrality funding (–$12.0m), and a carry forward of logistics funding to 2006–07 (–$26.2m). The Minister for Finance and Administration agreed before the end of the financial year to reduce the appropriation to reflect these changes.
- Goods and services (+$173.0m)—this increase
was due to a number of factors, including:
- the reclassification of revenue from the DMO for Military employees from other revenue (+$160.6m);
- higher than anticipated revenue from the DMO in relation to services provided by the Vice Chief of the Defence Force Group and the Defence Science and Technology Organisation (+$34.0m);
- Lower than expected revenue from foreign governments, including for fuel sales (–$9.6m); and
- Lower revenue for military employee recoveries from the DMO due to unanticipated military vacancies (–$12.0m).
- Other revenue (–$160.8m)—the other revenue was lower than expected due primarily to reclassification of revenue from the DMO for Military employees to Goods and Services.
- Assets now recognised (+$286.3m)—this variance was primarily due to continued stock-taking activities undertaken during the year that identified specialist military equipment repairable items that have exceeded the capitalisation threshold.
- Other gains (+$13.3m)—Defence did not budget to receive any other gains, but Defence received $6.2m of resources free of charge, including $4.8m from the Australian National Audit office and $1.4m from the DMO. This combined with a $7.1m actuarial gain due to a reduction in the liability against certain common law claims which might emerge in the Voyager/Melbourne cases.
Expenses (+$435.7m)
Expenses were $435.7m higher than budget. The main elements were:
- Employee (–$72.9m)—Lower than planned
employee expenses of $72.9m comprising:
- Military employee expenses (–$25.7m)—The variation is explained in Chapter 4.
- Civilian employee expenses (–$47.2m)—The variation is explained in Chapter 4.
- Supplier (–$290.8m)—suppliers expenses
were lower than anticipated due to variances in three main areas:
DMO related transactions, Suppliers expenses not with DMO, and Inventory
Consumption. Reasons for these variations are as follows:
- DMO expenses (–$291.7m)—During
2005–06 Defence expected to
incur $2,727.0m, worth of expenses related to its relationship
with the DMO. In the event, actual expenses incurred totalled
$2,435.3m. The variance of $291.7m was due primarily to:
- the capitalisation of the acquisition service fee associated with the major capital equipment program (–$182.5m); and
- the decision to replace rather than repair some repairable items as maintenance of these items had become increasingly uneconomical (–$130.3m).
- Non-DMO related (–$67.3m)—the reduction
in expenditure relates to:
- the hand back of funds for a classified communications project (–$31.0m);
- the carry forward of logistics sustainment funding to 2006–07 (–26.2m); and
- a range of other minor variances, including reduced expenditure on Operations in Iraq, where lower strategic lift costs were achieved through more efficient contracting arrangements (–$10.1m).
- Inventory consumption (+$68.2m)—the increase is due mainly to increases in fuel consumption and fuel price increases experienced throughout the financial year.
- DMO expenses (–$291.7m)—During
2005–06 Defence expected to
incur $2,727.0m, worth of expenses related to its relationship
with the DMO. In the event, actual expenses incurred totalled
$2,435.3m. The variance of $291.7m was due primarily to:
- Grants (–$1.2m)—the lower than anticipated expenditure on grants was a result of timing issues, including $0.9m which was paid to Frontline in June 2005, and $0.3m for the Livingstone Shire Council.
- Depreciation and amortisation (+$122.3m) —the
increase in depreciation expense is due to:
- the revaluation activities associated with the Defence estate;
- the transfer back to Defence from DMO of commercial vehicles, resulting in an increased depreciation expense on Defence's books;
- higher than anticipated expenditure on the major Capital Facilities program; and
- the associated depreciation flow on from the capitalisation of the acquisition service fee and the decision to replace rather than repair some repairable items.
- Finance costs (+$39.1m)—the variation is due primarily to costs associated with discounting restoration and decontamination provisions, employee liabilities and receivables as required under AIFRS.
- Write down and impairment of assets (+$652.4m)—The
higher than planned expenses were due to:
- write down of inventory after stock takes and adjustments made to bring inventory to its current replacement cost as required by AIFRS (+$276.0m);
- buildings and infrastructure AUC write-offs including after a review by independent valuers (+$216.2m);
- increased SME write downs including from AUC impairment reviews (+$151.1m); and
- a range of other write-downs, including of financial assets, intangibles and heritage and cultural assets (+$9.1m).
- Net foreign exchange loss (+$0.8m)—net variation due to the timing difference between when invoices for transactions in foreign currencies are entered in the financial system for payment and the date they are paid.
- Net losses from sale of assets (+$3.0m) —Defence did not budget for a loss or gain on the sale of assets. The small loss of sale results from the proceeds from the sale of assets being lower than the book value of the assets being sold.
- Other expenses (–$16.9m)—other expenses were lower than expected due to timing delays in one-off, lump sum compensation payments together with other minor expenses.