Financial report

Independent Auditor's Report and Statement by Acting Auditor-General of New South Wales

Statement of comprehensive income for the year ended 30 June 2016

  Notes Actual 2016
$'000
Budget 2016
$'000
Actual 2015
$'000

Expenses excluding losses

Operating expenses
– employee related 2(a) 34,556 33,424 32,619
– other operating expenses 2(b) 9,558 8,777 10,848
Depreciation and amortisation 2(c) 1,543 1,761 1,727
Finance costs 2(d) 13 19 19
Other expenses 2(e) 108 141 54
TOTAL EXPENSES EXCLUDING LOSSES 45,778 44,122 45,267

Revenue

Sale of goods and services 3(a) 44,409 44,540 42,567
Investment revenue 3(b) 175 150 148
Other revenue 3(c) 394 206 306
TOTAL REVENUE 44,978 44,896 43,021
 
Loss on disposal 4
NET RESULT (800) 774 (2,246)
Other comprehensive income
Items that will not be reclassified to net result:
Superannuation actuarial loss on liabilities 5 (18,531) (9,241)
Superannuation actual return on Fund assets less interest income 5 57 5,079
Total remeasurement in other comprehensive income 5 (18,474) (4,162)
TOTAL COMPREHENSIVE INCOME (19,274) 774 (6,408)

The accompanying notes form part of these financial statements.

Statement of financial position as at 30 June 2016

  Notes Actual 2016
$'000
Budget 2016
$'000
Actual 2015
$'000

Assets

Current assets
Cash and cash equivalents 6 11,000 6,321 8,871
Receivables 7 4,671 5,447 4,885
Other financial assets 8 575 871
Other 11 6,570 7,933 6,083
Total current assets 22,816 19,701 20,710
Non-current assets
Property, plant and equipment 9
– plant and equipment 309 948 504
– leasehold improvements 2 135 428
Total property, plant and equipment 311 1,083 932
Intangible assets 10 3,307 5,760 3,849
Other 11 571 357 529
Total non-current assets 4,189 7,200 5,310
Total assets 27,005 26,901 26,020

Liabilities

Current liabilities
Payables 12 1,445 2,336 2,380
Provisions 13 9,683 9,487 8,789
Other 14 3 37 37
Total current liabilities 11,131 11,860 11,206
Non-current liabilities
Provisions 13 61,844 35,922 41,507
Other 14 40 3
Total non-current liabilities 61,844 35,962 41,510
Total liabilities 72,975 47,822 52,716
Net liabilities (45,970) (20,921) (26,696)

Equity

Accumulated funds (45,970) (20,921) (26,696)
Total equity (45,970) (20,921) (26,696)

The accompanying notes form part of these financial statements.

Statement of changes in equity for the year ended 30 June 2016

  Notes Accumulated Funds
$'000
Balance at 1 July 2015 (26,696)
Net result for the year (800)
Other comprehensive income: 5
– Superannuation actuarial loss and return on Fund assets (18,474)
Total comprehensive income for the year (19,274)
Balance at 30 June 2016 (45,970)
 
Balance at 1 July 2014 (20,288)
Net result for the year (2,246)
Other comprehensive income:
– Superannuation actuarial gain and return on Fund assets 5 (4,162)
Total comprehensive income for the year (6,408)
Balance at 30 June 2015 (26,696)

The accompanying notes form part of these financial statements.

Statement of cash flows for the year ended 30 June 2016

  Notes Actual 2016
$'000
Budget 2016
$'000
Actual 2015
$'000

Cash flows from operating activities

Payments
Employee related (33,105) (33,424) (30,046)
Other (16,380) (8,937) (19,454)
Total payments (49,485) (42,361) (49,500)
Receipts
Sale of goods and services 46,790 44,540 47,357
Interest received 160 150 164
Other 5,044 206 4,807
Total receipts 51,994 44,896 52,328
Net cash flows from operating activities 20 2,509 2,535 2,828

Cash flows from investing activities

Purchases of property, plant and equipment (32) (540) (647)
Intangible assets (348) (1,700) (259)
Net cash flows from investing activities (380) (2,240) (906)

Net increase in cash

2,129 295 1,922
Opening cash and cash equivalents 8,871 6,026 6,949
Closing cash and cash equivalents 6 11,000 6,321 8,871

The accompanying notes form part of these financial statements.

Notes to and forming part of the financial statements for the year ended 30 June 2016

1. Summary of Significant Accounting Policies

(a) Reporting entity

The Audit Office of New South Wales (the 'Audit Office') is a NSW government entity. The Audit Office is a not-for-profit entity (as profit is not its principal objective). Its financial report is consolidated as part of the NSW Total State Sector Accounts.

These financial statements for the year ended 30 June 2016 have been authorised for issue by the Auditor-General on 7 September 2016.

(b) Basis of preparation

The Audit Office's financial statements are general purpose financial statements which have been prepared on an accruals basis and in accordance with:

  • applicable Australian Accounting Standards (which include Australian Accounting Interpretations)
  • the requirements of the Public Finance and Audit Act 1983 and Public Finance and Audit Regulation 2015 and
  • the Financial Reporting Directions published in the Financial Reporting Code for NSW General Government Sector Entities or issued by the Treasurer.

Going Concern

The Audit Office incurred a deficit of $800,000 (2015: $2,246,000) and a net liability position is reported as a result of the recognition of the actuarial valuation losses on the defined benefit superannuation schemes. The liability is a long-term non-current liability. A triennial review was undertaken at 30 June 2015, where the economic assumptions and significant risks were reviewed. The valuation resulted to an increase of $20.277m of long-term liability for the Audit Office. The Audit Office had not been required to make employer contributions for a number of years to these schemes and does not foresee any contributions in the near future. The solvency ratio (short-term) of the Audit Office increased to 2.1 (2015: 1.8) and the cash balance is at a sustainable level with positive actual cash flows from operating activities. The assumption that the Audit Office is a going concern is justified.

Property, plant and equipment are measured at fair value. Other financial statement items are prepared in accordance with the historical cost convention except where specified otherwise.

Judgements, key assumptions and estimations management has made are disclosed in the relevant notes to the financial statements.

All amounts are rounded to the nearest one thousand dollars and expressed in Australian currency.

(c) Statement of compliance

The financial statements and notes comply with Australian Accounting Standards, which include Australian Accounting Interpretations.

(d) Insurance

Insurance activities are conducted through the NSW Treasury Managed Fund Scheme of self insurance for Government entities. The expense (premium) is determined by the Fund Manager based on past claim experience.

(e) Accounting for the Goods and Services Tax (GST)

Income, expenses and assets are recognised net of the amount of GST except for:

  • the amount of GST incurred as a purchaser that is not recoverable from the Australian Taxation Office (ATO), which is recognised as part of the cost of acquisition of an asset or as part of an item of expense
  • receivables and payables are stated with the amount of GST included.

Cash flows are included in the statement of cash flows on a gross basis. However, the GST components of cash flows arising from investing activities which are recoverable from, or payable to the ATO are classified as operating cash flows.

(f) Income recognition

Income is measured at the fair value of the consideration or contribution received or receivable. Additional comments regarding the accounting policies for the recognition of income are discussed below.

(i) Rendering of services – audit fees

Revenue from rendering of service is recognized by reference to the stage of completion of audit assignments at the reporting date. The revenue is recognised when:

a) the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and

b) the probable economic benefits associated with the transaction will flow to the Audit Office.

The stage of completion of audit assignments at the reporting date is determined by reference to the proportion that costs incurred to date bear to the estimated total costs of the transaction.

(ii) Investment revenue

Interest revenue is recognised using the effective interest method as set out in AASB 139 Financial Instruments: Recognition and Measurement.

(g) Assets

(i) Acquisition of assets

Assets acquired are initially recognised at cost. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire the asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the requirements of other Australian Accounting Standards.

Assets acquired at no cost, or for nominal consideration, are initially recognised at their fair value at the date of acquisition.

Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at measurement date.

Where payment for an asset is deferred beyond normal credit terms, its cost is the cash price equivalent, i.e. the deferred payment amount is effectively discounted at an asset-specific rate.

(ii) Capitalisation thresholds

Property, plant and equipment and intangible assets individually costing $1,000 and above or forming part of a network costing more than $1,000 are capitalised.

(iii) Revaluation of property, plant and equipment

Physical non-current assets are valued in accordance with the 'Valuation of Physical Non-Current Assets at Fair Value' Policy and Guidelines Paper (TPP 14-01). This policy adopts fair value in accordance with AASB 13 Fair Value Measurement and AASB 116 Property, Plant and Equipment.

Property, plant and equipment is measured at the highest and best use by market participants that is physically possible, legally permissible and financially feasible. The highest and best use must be available at a period that is not remote and take into account the characteristics of the asset being measured. In most cases, after taking into account these considerations, the highest and best use is the existing use.

Fair value of property, plant and equipment is based on market participant's perspective, using valuation techniques (market approach, cost approach, income approach) that maximise relevant observable inputs and minimise unobservable inputs.

Under AASB 13 Fair Value Measurement, non-specialised assets with short useful lives measured using depreciated historical cost as an approximation of fair value do not require fair value hierarchy disclosures. Our plant and equipment are measured by this method and it has been assessed that any difference between fair value and depreciated historical cost is unlikely to be material.

(iv) Impairment of property, plant and equipment

As a not-for-profit entity with no cash generating units, impairment under AASB 136 Impairment of Assets is unlikely to arise. AASB 136 modifies the recoverable amount test to the higher of fair value less costs to sell and depreciated replacement cost. This means, that where an asset is already measured at fair value, impairment can only arise if selling costs are material. Selling costs are regarded as immaterial.

(v) Depreciation of property, plant and equipment

Depreciation is provided for on a straight-line basis for all depreciable assets to write off their depreciable amount as it is consumed over its useful life as follows:

  • computer equipment – three years
  • office equipment – five years
  • furniture and fittings – ten years
  • leasehold improvements – over the term of the lease.
(vi) Restoration costs

The estimated cost of restoration for leasehold improvements is included in this asset to the extent it is recognised as a liability.

(vii) Maintenance

Day-to-day servicing costs or maintenance of assets are charged as expenses as incurred. Where they relate to the replacement of a part or component of an asset, the costs are capitalised and depreciated.

(viii) Leased assets

A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of the leased assets, and operating leases where the lessor does not transfer substantially all the risks and benefits. Operating lease payments for office accommodation and motor vehicles are recognised as expenses on a straight-line basis over the period of the lease term.

(ix) Intangible assets

Intangible assets are recognised only if it is probable that future economic benefits will flow to the Audit Office and the cost of the asset can be measured reliably. Intangible assets are measured initially at cost. Where an asset is acquired at no or nominal cost, the cost is its fair value at the date of acquisition.

All research costs are expensed. Development costs are only capitalised when certain criteria are met.

The useful lives of intangible assets are assessed to be finite.

Intangible assets are subsequently measured at fair value only if there is an active market. As there is no active market for our intangible assets, the assets are carried at cost less any accumulated amortisation.

All intangible assets are amortised using the straight-line method over a period of three to ten years, as follows:

  • audit methodology software – ten years
  • management information systems (MIS) software – five years
  • other software licences – three to five years.

Intangible assets are tested for impairment where an indicator of impairment exists. If the recoverable amount is less than its carrying amount, the carrying amount is reduced to recoverable amount and the reduction is recognised as an impairment loss.

(x) Receivables

Receivables are recognised at fair value based on the original invoice amount. The receivables are due for settlement within fourteen days from the date of issue of the invoice, hence are not amortised or discounted as the effect of discounting is immaterial.

(xi) Other financial assets

Work in progress (WIP) represents staff time measured at standard charge rates and other expenses directly chargeable to the client, which were unbilled to the client at balance date.

WIP is assessed for impairment annually and is not carried at an amount in excess of its recoverable amount.

(xii) Impairment of financial assets

All financial assets, most notably, receivables, are reviewed on an ongoing basis. An allowance for impairment is established when there is objective evidence that the amounts due will not be collected. The amount of the allowance is the difference between the receivable's carrying amount and the present value of estimated future cash flows, discounted at the effective rate.

The amount of the impairment loss is recognised in the net result for the year. Any reversals of impairment losses are through the net result for the year, where there is objective evidence of recovery.

(xiii) Derecognition of financial assets and financial liabilities

A financial asset is derecognised when the contractual rights to the cash flows from the financial assets expire or if all the risks and rewards have substantially been transferred.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expires.

(xiv) Other assets

Other assets are recognised on a historical cost basis.

The 'Crown Acceptance of Long Service Leave Liability' is recognised as an asset, which is offset by the liability.

(h) Liabilities

(i) Payables

The Audit Office carries liabilities for trade creditors and other payables, which are initially recognised at fair value, usually based on the transaction cost or face value. These payables are subsequently measured at an amortised cost using the effective interest rate method. Trade payables with no stated interest rate are measured at the original invoice amount where the effect of the discounting is immaterial.

(ii) Employee benefits and related on-costs provisions

(a) Salaries and wages, annual leave, sick leave and on-costs

Liabilities for salaries and wages, including non-monetary benefits, annual leave and sick leave are measured on an undiscounted basis. Where annual leave is not expected to be settled within 12 months, it is accounted for as a long-term benefit at the present value in accordance with AASB 119 Employee Benefits.

Unused non-vested sick leave entitlement does not give rise to a liability as it is considered that sick leave taken in the future will not be greater than the benefits accrued in the future.

(b) Long service leave

The Crown Finance Entity takes on the Audit Office's liability for long service leave. The liability is accounted for and then offset by showing a corresponding asset as 'Crown Acceptance of Long Service Leave Liability'. It is a statutory asset/liability and not considered as a financial asset/liability within the scope of AASB 7 Financial Instruments: Disclosures.

A long service leave liability is recognised as a long-term employee benefit and measured for all employees with five or more years of service. The present value method based on remuneration rates approved to be payable post 30 June, is used to measure the liability. The on-cost factors specified in NSW Treasury Circular 15/09 are applied when calculating the liability.

(c) Superannuation

The superannuation expense for the financial year is determined by using the formulae specified in the Treasurer's Directions. The expense for certain superannuation schemes (i.e. First State Super) is calculated as a percentage of the employees' salary. For other superannuation schemes (i.e. State Superannuation Scheme and State Authorities Superannuation Scheme), the expense is calculated as a multiple of the employees' superannuation contribution.

The superannuation schemes for the Audit Office are:

  • the State Superannuation Scheme (SSS)
  • the State Authorities Superannuation Scheme (SASS)
  • the State Authorities Non-Contributory Superannuation Scheme (SANCS – Basic Benefits Scheme)
  • the First State Super Scheme (FSS) and other schemes to receive Superannuation Guarantee Contributions (SGC).

The first three schemes are multi-employer defined benefit schemes. At least a component of the final benefit is derived from a multiple of member salary and years of membership. Members receive lump sum or pension benefits on retirement, death, disablement and withdrawal. The Pooled Fund holds in trust the investments of these closed NSW public sector superannuation schemes.

The schemes in the Pooled Fund are established and governed by the following NSW legislation: Superannuation Act 1916, State Authorities Superannuation Act 1987, Police Regulation (Superannuation) Act 1906, State Authorities Non-Contributory Superannuation Scheme Act 1987, and their associated regulations.

The schemes in the Pooled Fund are exempt public sector superannuation schemes under the Commonwealth Superannuation Industry (Supervision) Act 1993 (SIS). The SIS Legislation treats exempt public sector superannuation funds as complying funds for concessional taxation and superannuation guarantee purposes.

Under a Heads of Government agreement, the New South Wales Government undertakes to ensure that the Pooled Fund will conform with the principles of the Commonwealth’s retirement incomes policy relating to preservation, vesting and reporting to members and that members’ benefits are adequately protected.

The New South Wales Government prudentially monitors and audits the Pooled Fund and the Trustee Board activities in a manner consistent with the prudential controls of the SIS legislation. These provisions are in addition to other legislative obligations on the Trustee Board and internal processes that monitor the Trustee Board’s adherence to the principles of the Commonwealth’s retirement incomes policy.

An actuarial investigation of the Pooled Fund is performed every three years. The last actuarial investigation was performed at 30 June 2015. The next actuarial investigation will be performed at 30 June 2018.

Other entities' responsibilities for the governance of the fund

The Fund's Trustee is responsible for the governance of the Fund. The Trustee has a legal obligation to act solely in the best interests of fund beneficiaries. The Trustee has the following roles:

  • Administration of the fund and payment to the beneficiaries from fund assets when required in accordance with the fund rules;
  • Management and investment of the fund assets; and
  • Compliance with other applicable regulations.

Risks

There are a number of risks to which the Fund exposes the Audit Office. The more significant risks relating to the defined benefits are:

  • Investment risk – The risk that investment returns will be lower than assumed and the Audit Office will need to increase contributions to offset this shortfall.
  • Longevity risk – The risk that pensioners live longer than assumed, increasing future pensions.
  • Pension indexation risk – The risk that pensions will increase at a rate greater than assumed, increasing future pensions.
  • Salary growth risk – The risk that wages or salaries (on which future benefit amounts for active members will be based) will rise more rapidly than assumed, increasing defined benefit amounts and thereby requiring additional employer contributions.
  • Legislative risk – The risk is that legislative changes could be made which increase the cost of providing the defined benefits.

The defined benefit fund assets are invested with independent fund managers and have a diversified asset mix. The Fund has no significant concentration of investment risk or liquidity risk.

Significant events

There were no fund amendments, curtailments or settlements during the year.

Asset-Liability matching strategies

The Trustee monitors its asset-liability risk continuously in setting its investment strategy. It also monitors cashflows to manage liquidity requirements. No explicit asset-liability matching strategy is used by the Trustee.

Funding arrangements

Funding arrangements are reviewed at least every three years following the release of the triennial actuarial review and was last reviewed following completion of the triennial review as at 30 June 2015. Contribution rates are set after discussions between the Audit Office, SAS Trustee Corporation (STC) and NSW Treasury.

Funding positions are reviewed annually and funding arrangements may be adjusted as required after each annual review.

AASB 119 requires detailed narrative information regarding the key actuarial assumptions underlying the reported superannuation figures. Note 5 details the disclosures provided by the Schemes Administrator's actuary.

Actuarial gains and losses are recognised immediately in other comprehensive income in the year in which they occur. 

The Audit Office has no ongoing liability for First State Superannuation (FSS) and the other SGC schemes because they are accumulation schemes.

d) Consequential on-costs

Consequential costs to employment are recognised as liabilities and expenses where the employment benefits to which they relate have been recognised. This includes outstanding amounts of payroll tax, workers' compensation insurance premiums, fringe benefits tax and superannuation.

(iii) Other provisions

The provisions are recognised when there are legal or constructive obligations as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

Provisions for the restoration costs of our leasehold improvements asset are recognised.

(i) Equity and reserves

Accumulated funds:

The accumulated funds include all current and prior period retained funds.

(j) Budgeted amounts

The budgeted amounts are drawn from the original budgeted financial statements presented to Parliament. Other amendments made to the budget are not reflected in the budgeted amounts. Major variances between the original budgeted amounts and the actual amounts disclosed in the primary financial statements are explained in Note 19.

(k) Comparative information

Where necessary, the comparatives are reclassified and re-positioned to be consistent with current year disclosures except when an Australian Accounting Standard permits or requires otherwise.

(l) Changes in accounting policies

(i) New Australian Accounting Standards issued but not yet effective

At the reporting date, a number of accounting standards and interpretations adopted by the AASB had been issued but not yet operative and have not been early adopted by the Audit Office. The initial application of these standards will have no material impact on our financial results. The standards are operative for annual reporting periods ending after 30 June 2016.

(ii) Recognition of audit related expenses

From 1 July 2015 we changed our accounting policy to recognise audit travel related expenses, as an operating expense. Previously these expenses were charged directly to Work in Progress and recognised as revenue when invoiced to clients. Our Pricing Model includes travel expenses in our hourly charge rate and these are no longer separately recorded as WIP. As a result audit related travel increased the expenses of the Audit Office but were offset by increased revenue.

From 1 July 2015 we changed our accounting policy to cease offsetting audit related consultants and audit related fees for services rendered against the revenue received, to now recognise them as operating expenses and their recovery as revenue.There has been no impact to the operating result as this is a change in presentation only.

 

2. Expenses excluding losses 2016
$'000
2015
$'000
(a) Employee related expenses
Salaries and wages (including annual leave) 25,502 24,909
Superannuation – defined benefits plans (Note 5) 1,803 1,733
Superannuation – defined contribution plans 2,365 2,369
Long service leave 687 653
Workers' compensation insurance 59 73
Payroll tax and fringe benefits tax 1,709 1,650
Redundancy 248 767
Temporary employees 2,183 465
34,556 32,619

Employee related expense of $179,000 (2015: $75,000) has been capitalised to fixed and intangible asset accounts and are excluded from the above.


(b) Other operating expenses include the following:
2016
$'000
2015
$'000
Auditor's remuneration
– audit of the financial statements 38 37
Operating lease rental expense
– minimum lease payments 1,664 1,609
Maintenance* 644 570
Insurance 38 42
Consultants 302 361
Other contractors 3,903 4,838
Staff development and training (excluding salaries) 685 868
Fees for services rendered 754 920
Other operating expenses 1,530 1,603
9,558 10,848
Fees for services rendered of $nil (2015: $139,000) have been capitalised to fixed and intangible asset accounts and are excluded from the above.

*Reconciliation – total maintenance
Maintenance expense – contracted labour and other (non-employee related), as above 644 570
Employee related maintenance expense included in Note 2(a)
Total maintenance expenses included in Note 2(a) + 2(b) 644 570

(c) Depreciation and amortisation expense 2016
$'000
2015
$'000
Depreciation
– leasehold improvements 426 425
– plant and equipment 227 352
653 777
Amortisation
– intangible assets 890 950
Total depreciation and amortisation expense 1,543 1,727
(d) Finance costs
Unwinding of the discount rate for the make-good of premises 13 19
(e) Other expenses
Legal 108 54

3. Revenue 2015
$'000
2014
$'000
(a) Sale of goods and services
Rendering of services – audit fees 44,409 42,567
(b) Investment revenue
Interest received 175 148
(c) Other revenue
Recoupment of salaries and oncosts 388 286
Other 6 20
394 306

4. Loss on disposal $'000 $'000
Plant and equipment

5. Superannuation

The defined benefit schemes from 30 June 2015 have remained at an unfunded liability position, a net movement of $20,277,000 (2015: $5,895,000). Employer contributions to all funds have been suspended since 1 December 2005.

The following information has been prepared by the Scheme actuary.

Reconciliation of the Net Defined Benefit Liability 2016
$'000
2015
$'000
Net Defined Benefit Liability at start of year 40,232 34,337
Expenses:
Current service cost 584 507
Net interest on the net defined benefit liability 1,219 1,226
Superannuation expense in profit and loss* 1,803 1,733
Other comprehensive income:
Actual return on Fund assets less Interest income (57) (5,079)
Actuarial losses arising from changes in demographic assumptions 3,224 65
Actuarial losses arising from changes in financial assumptions 16,554 8,699
Actuarial (gains)/losses arising from liability experience (1,247) 477
Amount recognised in other comprehensive income 18,474 4,162
Net Defined Benefit Liability at end of year 60,509 40,232
Reconciliation of the Fair Value of Fund Assets
Fair value of Fund assets at beginning of the year 67,587 64,011
Interest income 1,990 2,212
Actual return on Fund assets less Interest income 57 5,079
Employer contributions
Contributions by participants 229 273
Benefits paid (4,534) (4,368)
Taxes, premiums and expenses paid 180 380
Transfers in
Contributions to accumulation section
Settlements
Exchange rate changes
Fair value of Fund assets at end of the year 65,509 67,587
Reconciliation of the Defined Benefit Obligation
Present value of defined benefit obligations at beginning of the year 107,819 98,348
Current service cost 584 507
Interest cost 3,209 3,438
Contributions by participants 229 273
Actuarial losses arising from changes in demographic assumptions 3,224 65
Actuarial losses arising from changes in financial assumptions 16,554 8,699
Actuarial (gains)/losses arising from liability experience (1,247) 477
Benefits paid (4,534) (4,368)
Taxes, premiums and expenses paid 180 380
Transfers in/out due to business contributions and disposals
Contributions to accumulation section
Past service cost
Settlements
Exchange rate changes
Present value of defined benefit obligations at end of the year 126,018 107,819

Fair value of Fund assets

All Pooled Fund assets are invested by SAS Trustee Corporation (STC) at arm's length through independent fund managers. Assets are not separately invested for each entity and it is not possible or appropriate to disaggregate and attribute fund assets to individual entities. As such, the disclosures below relate to total assets of the Pooled Fund.

As at 30 June 2016

Asset category Quoted prices in active markets for identical assets
Level 1
$'000
Significant observable inputs
Level 2
$'000
Unobservable inputs
Level 3
$'000
Total
$'000
Percentage invested in each asset class
Short-Term Securities 2,044,454 5,960 2,050,414 5.4%
Australian Fixed Interest 2,724 2,717,865 2,720,589 7.1%
International Fixed Interest (1,358) 835,731 834,373 2.2%
Australian Equities 9,171,767 549,087 24 9,720,878 25.4%
International Equities 9,026,207 2,078,766 988,694 12,093,667 31.7%
Property 1,113,253 618,946 1,918,068 3,650,267 9.6%
Alternatives 470,130 3,122,185 3,523,634 7,115,949 18.6%
TOTAL* 21,827,177 9,928,540 6,430,420 38,186,137 100.0%


* Additional to the assets disclosed above, at 30 June 2016 the Pooled Fund has provisions for receivables/(payables) estimated to be around $2.83 billion. This gives total estimated assets of $41.01 billion.
Level 1 – quoted prices in active markets for identical assets or liabilities. The assets in this level are listed shares; listed unit trusts.
Level 2 – inputs other than quoted prices observable for the asset or liability either directly or indirectly. The assets in this level are cash; notes; government, semi-government and corporate bonds; unlisted trusts where quoted prices are available in active markets for identical assets or liabilities.
Level 3 – inputs for the asset or liability that are not based on observable market data. The assets in this level are unlisted property; unlisted shares; unlisted infrastructure; distressed debt; hedge funds.
 

Derivatives, including futures and options, can be used by investment managers. However, each manager's investment mandate clearly states that derivatives may only be used to facilitate efficient cashflow management or to hedge the portfolio against market movements and cannot be used for speculative purposes or gearing of the investment portfolio. As such managers make limited use of derivatives.

 

Fair value of entity's own financial instruments

The disclosures below relate to total assets of the Pooled Fund.

The fair value of the Pooled Fund assets as at 30 June 2016 include $189.6 million in NSW government bonds.

Of the direct properties owned by the Pooled Fund:

  • SAS Trustee Corporation occupies part of a property 100% owned by the Pooled Fund with a fair value of $222 million (30 June 2015: $159 million).
  • Health Administration Corporation occupies part of a property 50% owned by the Pooled Fund with a fair value of $243 million (30 June 2015: $204 million).

Significant Actuarial Assumptions at the Reporting Date

As at 30 June 2016 30 June 2015
Discount rate 1.99% pa 3.03% pa
Salary increase rate (excluding promotional increases) 2.50% pa 2016/2017 to 2018/2019;
3.50% pa 2019/2020 and 2020/2021;
3.00% pa 2021/2022 to 2025/2026;
3.50% pa thereafter
2.50% pa 2015/2016 to 2018/19;
3.50% pa 2019/2020;
3.00% pa 2021/2022 to 2024/2025;
3.50% pa thereafter
Rate of CPI increase 1.50% 2015/2016;
1.75% 2016/2017;
2.25% 2017/2018;
2.50% pa thereafter
2.50% 2015/2016;
2.75% 2016/2017 & 2017/2018;
2.50% pa thereafter
Pensioner mortality The pensioner mortality assumptions
are as per the 2015 Actuarial
Investigation of the Pooled Fund.
These assumptions are disclosed
in the actuarial investigation report
available from the trustee's website.
The report shows the pension mortality
rates for each age.
The pensioner mortality assumptions
are as per the 2012 Actuarial
Investigation of the Pooled Fund.
These assumptions are disclosed
in the actuarial investigation report
available from the trustee's website.
The report shows the pension mortality
rates for each age.

Sensitivity analysis

The Audit Office's total defined benefit obligation as at 30 June 2016 under several scenarios is presented below. The total defined benefit obligation disclosed is inclusive of the contribution tax provision which is calculated based on the asset level at 30 June 2016.

Scenarios A to F relate to sensitivity of the total defined benefit obligation to economic assumptions, and scenarios G and H relate to sensitivity to demographic assumptions.

  Base case Scenario A
-1.0%
discount rate
Scenario B
+1.0%
discount rate
Discount rate 1.99% 0.99% 2.99%
Rate of CPI increase as above as above as above
Salary inflation rate as above as above as above
Defined benefit obligation (A$'000) 126,018 148,742 107,929

  Base case Scenario C
+0.5% rate of
CPI increase
Scenario D
-0.5% rate of
CPI increase
Discount rate as above as above as above
Rate of CPI increase as above above rates plus
0.5% pa
above rates less
0.5% pa
Salary inflation rate as above as above as above
Defined benefit obligation (A$'000) 126,018 136,040 116,966

  Base case Scenario E
+0.5% salary
increase rate
Scenario F
-0.5% salary
increase rate
Discount rate as above as above as above
Rate of CPI increase as above as above as above
Salary inflation rate as above above rates plus
0.5% pa
above rates less
0.5% pa
Defined benefit obligation (A$'000) 126,018 126,664 125,395

  Base case Scenario
G Higher
Mortality*
Scenario
H Lower
Mortality**
Defined benefit obligation (A$'000) 126,018 124,539 128,448

* Assumes the long-term pensioner mortality improvement factors for years post 2021 also apply for years 2016 to 2021.

** Assumes the short-term pensioner mortality improvement factors for years 2016-2021 also apply for years after 2021.

The defined benefit obligation has been recalculated by changing the assumptions as outlined above, whilst retaining all other assumptions.

 

Surplus/deficit

The following is a summary of the 30 June 2016 financial position of the Fund calculated in accordance with AAS 25 'Financial Reporting by Superannuation Plans':

  2016
$'000
2015
$'000
Accrued benefits* 60,766 57,199
Net market value of Fund assets (65,510) (67,587)
Net surplus (4,744) (10,388)

* There is no allowance for a contribution tax provision with the Accrued Benefits figure for AAS 25. Allowance for contributions tax is made when setting the contribution rates.

Contribution recommendations

Recommended contribution rates for the Audit Office are:

  SASS multiple of member contributions

SANCS
% member salary
SSS multiple of member contributions
NIL NIL NIL

Economic assumptions

The economic assumptions adopted for the 30 June 2015 actuarial investigation of the Pooled Fund are:

Weighted average assumptions 30 June 2016 30 June 2015
Expected rate of return on Fund assets backing current pension liabilities 7.8% pa 8.3% pa
Expected rate of return on Fund assets backing other liabilities 6.8% pa 7.3% pa
Expected salary increase rate (excluding promotional salary increases) 3.0% to 30 June
2019 then 3.5%
pa thereafter
2.7% pa to 30
June 2018, then
4.0% pa thereafter
Expected rate of CPI increase 2.5% pa 2.5% pa

Expected contributions

  SASS SANCS SSS
Financial year to 30 June 2017
Expected employer contributions

Maturity profile of defined benefit obligation

The weighted average duration of the defined benefit obligation is 15.2 years.

6. Current assets – cash and cash equivalents 2016
$'000
2015
$'000
Cash at bank and on hand 11,000 8,871
For the purposes of the statement of cash flows, cash and cash equivalents include cash at bank and cash on hand.

Cash and cash equivalent assets recognised in the statement of financial position are reconciled at the end of the financial year to the statement of cash flows as follows:

Cash and cash equivalents (per statement of financial position) 11,000 8,871
Closing cash and cash equivalents (per statement of cash flows) 11,000 8,871

Refer Note 21 for details regarding credit risk, liquidity risk and market risk arising from financial instruments

7. Current assets – receivables 2016
$'000
2015
$'000
Sale of goods and services 4,111 4,368
Less: Allowance for impairment (16)
Prepayments 323 311
Accrued income 18
Interest receivable 86 71
GST receivable from ATO 149 135
4,671 4,885

Details regarding credit risk, liquidity risk and market risk, including financial assets that are either past due or impaired, are disclosed in Note 21.

8. Other financial assets 2016
$'000
2015
$'000
Work in progress 575 871

Details regarding credit risk, liquidity risk and market risk, including financial assets that are either past due or impaired, are disclosed in Note 21.

 

9. Non-current assets - property, plant and equipment

2016: Plant and
Equipment
$'000
Leased Assets
(Leasehold
Improvements)
$'000
TOTAL
$'000
At 1 July 2015 – fair value
Gross carrying amount 2,200 3,107 5,307
Accumulated depreciation (1,696) (2,679) (4,375)
Net carrying amount 504 428 932
At 30 June 2016 – fair value
Gross carrying amount 2,053 3,107 5,160
Accumulated depreciation (1,744) (3,105) (4,849)
Net carrying amount 309 2 311

Reconciliation

A reconciliation of the carrying amount of each class of property, plant and equipment at the beginning and end of the current reporting period is set out below:

Year ended 30 June 2016      
Net carrying amount at start of year 504 428 932
Additions 32 32
Disposals (179) 179
Depreciation expense (227) (426) (653)
Write-back of depreciation on disposal 179 179
Net carrying amount at end of year 309 2 311

2015:      
At 1 July 2014 – fair value
Gross carrying amount 2,063 3,096 5,159
Accumulated depreciation (1,344) (2,254) (3,598)
Net carrying amount 719 842 1,561
At 30 June 2015 – fair value
Gross carrying amount 2,200 3,107 5,307
Accumulated depreciation (1,696) (2,679) (4,375)
Net carrying amount 504 428 932

Reconciliation

A reconciliation of the carrying amount of each class of property, plant and equipment at the beginning and end of the prior reporting period is set out below:

Year ended 30 June 2015      
Net carrying amount at start of year 719 842 1,561
Additions 137 11 148
Depreciation expense (352) (425) (777)
Net carrying amount at end of year 504 428 932

 

10. Intangible assets

2016: Systems
Software
$'000
Intangible
Assets Under
Development
$'000
TOTAL
$'000
At 1 July 2015
Cost (gross carrying amount) 5,489 241 5,730
Accumulated amortisation (1,881) (1,881)
Net carrying amount 3,608 241 3,849
At 30 June 2016
Cost (gross carrying amount) 6,078 6,078
Accumulated amortisation (2,771) (2,771)
Net carrying amount 3,307 3,307

The Human Capital Management System became operational during the year and has been included under Systems Software.

Reconciliation

A reconciliation of the carrying amount of each class of intangible assets at the beginning and end of the current reporting period is set out below:

Year ended 30 June 2016      
Net carrying amount at start of year 3,608 241 3,849
Transfer from systems development to software 241 (241)
Additions 348 348
Amortisation (recognised in 'depreciation and amortisation') (890) (890)
Net carrying amount at end of year 3,307 3,307

2015:      
At 1 July 2014
Cost (gross carrying amount) 4,362 1,890 6,252
Accumulated amortisation (1,712) (1,712)
Net carrying amount 2,650 1,890 4,540
At 30 June 2015
Cost (gross carrying amount) 5,489 241 5,730
Accumulated amortisation (1,881) (1,881)
Net carrying amount 3,608 241 3,849

Reconciliation

A reconciliation of the carrying amount of each class of intangible assets at the beginning and end of the prior reporting period is set out below:

Year ended 30 June 2015      
Net carrying amount at start of year 2,650 1,890 4,540
Transfer from systems development to software 1,890 (1,890)
Additions 18 241 259
Retirements/Disposals (781) (781)
Amortisation (recognised in 'depreciation and amortisation') (950) (950)
Write-back of amortisation on disposal 781 781
Net carrying amount at end of year 3,608 241 3,849

11. Current/non-current assets – other 2016
$'000
2015
$'000
Crown acceptance of long service leave liability – current 6,570 6,083
Crown acceptance of long service leave liability – non-current 571 529
7,141 6,612

12. Current liabilities – payables    
Accrued salaries, wages and on-costs 876
Creditors and accruals 821 943
Payroll tax 191 121
GST payable to ATO 443 440
1,445 2,380

Details regarding credit risk, liquidity risk and market risk, including a maturity analysis of the above payables, are disclosed in Note 21.

 

13. Current/non-current liabilities - provisions

Employee benefits and related on-costs    
Annual leave 2,090 1,784
Long service leave 7,141 6,612
Superannuation (Note 5) 60,509 40,232
Related on-costs 1,084 978
Employee benefits provision 70,824 49,606
Accrued salaries, wages and on-costs (Note 12) 876
Aggregated employee benefits and related on-costs 70,824 50,482
Provisions
Current
– employee benefits provision 9,683 8,789
Non-current
– employee benefits provision 61,141 40,817
Other provisions – leasehold improvements – restoration costs 703 690
Non-current 61,844 41,507
TOTAL PROVISIONS 71,527 50,296

a) Employee benefits and related on-costs

Annual leave

The liability at 30 June 2016 was $2,090,000 (2015: $1,784,000). This is based on leave entitlements at 30 June using remuneration rates to be payable post 30 June.

Of this liability, the value expected to be paid within twelve months is $1,415,000 (2015: $1,181,000) and $675,000 (2015: $603,000) after twelve months. This calculation of leave for the next twelve months is the minimum required to be taken to achieve the target of a maximum of 30 days at 30 June 2017.

Leave paid and entitlement for the year are as follows: 2016
$'000
2015
$'000
Balance at beginning of the financial year 1,784 2,145
Less: Value of leave paid during the year (2,165) (2,520)
(381) (375)
Add: Value of increased entitlement during the year 2,471 2,159
Balance at the end of the financial year 2,090 1,784

The amount of annual leave as disclosed above is increased by on-costs in the determination of the total provision.

Long service leave

The total liability at 30 June 2016 was $7,141,000 (2015: $6,612,000) shown as current $6,570,000 (2015: $6,083,000) and non-current $571,000 (2015: $529,000). This liability comprises:

Short term – expected to be settled within 12 months 252 198
Long term – not expected to be settled within 12 months 6,889 6,414
7,141 6,612

Contributions of $734,000 (2015: $762,000) were made to the Crown Finance Entity pool account during this financial year. Reimbursements from the Crown Finance Entity because of payments to staff, or transfers of entitlements to other agencies, were $988,000 (2015: $1,789,000).

The amount of long service leave as disclosed above is increased by on-costs in the determination of the total provision.

(b) Other provisions

Restoration costs

The costs of restoration for the leasehold improvements at 1 Margaret Street are recognised as a provision in accordance with AASB 137 – Provisions, Contingent Liabilities and Contingent Assets. The provision for the costs of restoration is reviewed to cover three financial years. The latest valuation was conducted in this current financial year with the assistance of Government Property Authority.

Movements in provision during the financial year are set out below:

  2016
$'000
2015
$'000
Carrying amount at the beginning of financial year 690 671
Unwinding/change in the discount rate 13 19
Carrying amount at end of financial year 703 690

14. Current/non-current liabilities – other 2016
$'000
2015
$'000
Current – other
Rental incentive 3 37
Non-current – other 3 37
Rental incentive – other 3
3 40

15. Commitments for expenditure

(a) Capital commitments

Aggregate capital expenditure for the acquisition of intangible assets contracted for at balance date and not provided for:

  2016
$'000
2015
$'000
Not later than one year 72
Total (including GST) 72

(b) Operating lease commitments

Future non-cancellable operating lease rentals not provided for and payable:

  2016
$'000
2015
$'000
Not later than one year 1,783 1,957
Later than one year and not later than five years 3,870 131
Total (including GST) 5,653 2,088

Commitments exist for leased accommodation, purchase orders and motor vehicles under operating leases.

These commitments include GST of $520,000 (2015: $190,000). A contingent asset exists for the calculated GST, being an input tax credit recoverable from the ATO after these payments.

 

16. Contingent assets and contingent liabilities

At the reporting date, aside from those mentioned in Note 15, the Audit Office was not aware of any other contingent assets or contingent liabilities.

17. Auditor's remuneration

In April 2014, the Governor appointed Mr Lester Wills, a partner of Nexia Court & Co, to audit our accounts for a period of three years, commencing in the 2013–14 financial year. Nexia Court & Co does not provide any other services to the Audit Office. Refer to Note 2(b).

18. Audit and Risk Committee

The Audit Office has three independent members on the Audit and Risk Committee. Mr Brian Suttor was appointed as Chair on 28 November 2008 and is paid $12,552 per year. His appointment as chairperson has been extended for a final four year term. Mr Greg Fletcher was appointed as a member on 4 December 2009 and is paid $6,275 per year. His appointment as an independent member has been extended for a final four year term. Ms Dianne Hill was appointed as an independent member on 29 August 2013. Her term is for four years and is paid $6,275 per year.

 

19. Budget Review

Net Result

The actual net result was unfavourable to the budgeted net result by $1,574,000. The major variations to budgets are:

Total Revenue was $82,000 favourable to budget, mainly from other revenue. The increase in other revenue is due to the higher recoupment of salaries for seconded staff to other agencies and an external organisation.

Total Expenses were $1,656,000 unfavourable to budget, primarily due to higher employee related expenses. The employee related expenses were $1,132,000 higher than budget because of the superannuation expense on defined benefit schemes, which was not budgeted for as this is outside of the Audit Office's normal operation.

Assets and liabilities

Net Liabilities: The actual negative equity of $45,970,000 was primarily due to the actuarial valuation of the defined benefit superannuation schemes, which resulted in an unfunded liability of $60,509,000 that is significantly greater than the valuation of $42,232,000 for 2014-15. The Net Liabilities were higher than budget by $25,049,000. The major factors are:

Total Assets were favourable to budget by $104,000 mainly due to higher cash balance but is offset by lower investment in plant & equipment and intangible assets.

Total Liabilities were higher than budget by $25,153,000 mainly due to the impact of the actuarial valuation for the defined benefit superannuation schemes. The budgeted provision was based on the result of prior year because any change in the valuation could not be ascertained at the time of budget submission.

Cash flows

The actual cash movement was $4,679,000 favourable to budget. This is mainly due to reduced capital expenditure and lower receivables and payables.

20. Reconciliation of Cash Flows from Operating Activities to Net Result

Reconciliation of cash flows from operating activities to the net result as reported in the
statement of comprehensive income
2016
$'000
2015
$'000
Net cash from operating activities 2,509 2,828
Depreciation and amortisation (1,543) (1,727)
Finance costs (13) (19)
Decrease/(Increase) in provisions (2,707) (615)
(Increase)/Decrease in prepayments and other assets 19 (2,169)
Decrease/(Increase) in creditors 935 (544)
Net result (800) (2,246)

21. Financial instruments

The Audit Office's principal financial instruments and the main risks associated are outlined below. These financial instruments arise directly from operations. The Audit Office does not enter into or trade financial instruments for speculative purposes.

Quantitative and qualitative disclosures together with our objectives, policies and processes for measuring and managing risk are included throughout this financial report.

The Office Executive has overall responsibility for the establishment and oversight of risk management and reviews and agreed policies for managing each of these risks. Risk management policies are established to identify and analyse risks, to set risk controls and to monitor the risks faced by the Audit Office. Compliance with policies is reviewed by the Audit and Risk Committee on a continuous basis.

(a) Financial instrument categories

Financial assets Note Category Carrying Amount
2016
$'000
Carrying Amount
2015
$'000
Class:
Cash and cash equivalents 6 N/A 11,000 8,871
Receivables* Receivables 4,199 4,439
Work in progress 8 Other financial assets 575 871
Financial liabilities
Class:
Payables** Financial liabilities measured at
amortised cost
821 1,819

* Excludes statutory receivables and prepayments (i.e. not within scope of AASB 7).
** Excludes statutory payables and unearned revenue (i.e. not within scope of AASB 7).

(b) Credit risk

Credit risk is the risk of financial loss arising from another party to a contract or financial obligation. The Audit Office’s maximum exposure to credit risk is represented by the carrying amounts of the financial assets (net of any allowance for impairment).

Credit risk arises from the financial assets held, which are cash, receivables and work in progress. The Audit Office does not hold collateral and has not granted any financial guarantees.

Cash

Cash comprises cash on hand and bank balances within the NSW Treasury Banking System. Interest rate as determined by NSW Treasury is earned on daily bank balances and paid twice yearly.

Receivables – trade debtors

All trade debtors are recognised as amounts receivable at balance date. Debtors are reviewed on an ongoing basis and their status is reported to the Office Executive on a regular basis. Procedures as established in the Treasurer's Directions are followed to recover outstanding amounts, including letters of demand. Debts which are known to be uncollectible are written off. An allowance for impairment is raised when there is objective evidence that we are not able to collect all amounts due. No interest is earned on our receivables. Invoices are made on 14 day terms.

The Audit Office is not materially exposed to concentrations of credit risk to a single debtor or group of debtors. Most of the debtors are government agencies whose credit ratings are considered less risky. There are no debtors whose terms have been renegotiated.

The following table outlines financial assets that are past due or impaired, which are in the receivables category in the statement of financial position.

  Total
$'000
Past due but not
impaired*
$'000
Considered
impaired*
$'000
2016
< 3 months overdue 622 622
3 months – 6 months overdue 17 17
> 6 months overdue 16 16
655 639 16
2015
< 3 months overdue 1,247 1,247
3 months – 6 months overdue 126 126
> 6 months overdue
1,373 1,373

* The ageing analysis excludes statutory receivables, as these are not within the scope of AASB 7 and excludes receivables that are not past due and not impaired. Therefore, the 'total' will not reconcile to the receivables total recognised in the statement of financial position.

Work in progress (WIP)

WIP is recognised as an amount receivable not billed at the balance date. WIP is reviewed and monitored by the Directors responsible for the audit assignments and the Office Executive monthly. A provision for unrecoverable amounts is raised when there is objective evidence that the WIP may not be recoverable.

(c) Liquidity risk

Liquidity risk is the risk that the Audit Office will be unable to meet its payment obligations when they fall due. The risk is continuously managed through monitoring future cash flows to ensure adequate holding of liquid assets.

During the current and prior year, there were no defaults of loans payable. No assets have been pledged as collateral. An exposure to liquidity risk is deemed insignificant based on prior period's data and current assessment of risk.

The liabilities are recognised for amounts due to be paid in the future for goods or services received, whether or not invoiced. Amounts owing to suppliers (which are unsecured) are settled in accordance with the policy set out in NSW TC 11/12. For small business suppliers, where terms are not specified, payment is made not later than 30 days from date of receipt of a correctly rendered invoice. For other suppliers, if trade terms are not specified, payment is made no later than the end of the month following the month in which an invoice or a statement is received. For small business suppliers, where payment is not made within the specified time period, simple interest must be paid unless an existing contract specifies otherwise. For payments to other suppliers, the Audit Office may pay the supplier simple interest. The rate of interest applicable during the year was 10.28% (2015: 10.15%).

The table below summarises the maturity profile of the Audit Office's financial liabilities, together with the interest rate exposure.

    Interest Rate Exposure Maturity Dates
Nominal
Amount
Fixed Interest
Rate
Variable
Interest Rate
Non-Interest
Bearing
< 1 year 1–5 yrs > 5 yrs
$'000 $'000 $'000
2016
Payables 821 821 821
821 821 821
2015
Payables 1,819 1,819 1,819
1,819 1,819 1,819

The amounts disclosed are the contractual undiscounted cash flows, therefore, the amounts disclosed above will not reconcile to the statement of financial position.

(d) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Audit Office has no exposure to foreign currency risk and does not enter into commodity contracts.

Interest rate risk – sensitivity analysis

The sensitivity analysis is performed based on risk exposures in existence at the balance sheet date to show how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. This is determined after taking into account the economic environment in which the Audit Office operates and the time frame for the assessment (i.e. until the end of the next annual reporting period).

At reporting date, if interest rates had been 100 basis points higher and all other variables were held constant, the profit and equity would have increased by $110,000 (2015: $89,000).

(e) Credit facility

The Audit Office has no current standing credit facility. The Audit Office's cash position has been consistently adequate to meet its liquidity requirements.

(f) Fair value measurement

Financial instruments as shown in Note 21(a) are recognised in the statement of financial position at amortised cost, which approximates the fair value because of the short-term nature of these financial instruments.

22. Events after the Reporting Period

There were no events subsequent to reporting date that require disclosure.

End of audited financial statements