Independent Auditor's report

Statement by the Secretary and Chief Finance Officer

Basis of Preparation of the Financial Statements

The financial statements are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability Act 2013 (PGPA).

The financial statements have been prepared in accordance with the:

• Public Governance, Performance and Accountability Rule 2014;
• PGPA (Financial Reporting) Rule 2015 (FRR); and
• Australian Accounting Standards and Interpretations – Reduced Disclosure Requirements issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and are in accordance with the historical cost convention, except for certain assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Impact of the Machinery of Government change 2019-20

In 2019-20 the structure of the department has changed through the Administrative Arrangements Orders (AAO’s) issued by the Governor-General of the Commonwealth of Australia. The changes that came into effect were:

• The National Drought Map function was relinquished to the National Drought and North Queensland Flood Response and Recovery Agency on 5 December 2019.
• All the functions of the Department of Agriculture were relinquished to the Department of Agriculture, Water and the Environment (formally known as the Department of the Environment and Energy) on 1 February 2020.
• Climate Change and Energy functions of the former Department of the Environment and Energy were relinquished to the Department of Industry, Science, Energy and Resources (formerly known as the Department of Industry, Innovation and Science) on 1 February 2020.

Financial reporting and accounting disclosures have been prepared in accordance with the requirements AASB 1004 Contributions, Section 26 of the FRR and the Public Governance, Performance and Accountability Rule 2014, which details the reporting and disclosure requirements when a restructure occurs.

The department has prepared a single set of financial statements as if the Department of Agriculture (the old entity) was part of the Department of Agriculture, Water and the Environment (the reporting entity) for the entire reporting period, including financial results attributable to the Climate and Energy functions from 1 July 2019 to 31 January 2020 with 2018-19 comparatives reported separately.

Details of assets and liabilities transferred are included at the Restructuring disclosures at Note 8 and Note 27. The appropriation notes have been prepared separately in accordance with legal authority.

New accounting standards

All other new, revised or amended standards and interpretations that were issued prior to the sign-off date and are applicable in the current reporting period and, apart from the information disclosed below, did not have a material impact and are not expected to have a future material effect on the department’s financial statements.

Application of AASB 16 Leases

Impact on transition

On transition to AASB 16, the department recognised additional right-of-use assets and additional lease liabilities, recognising the difference in retained earnings. The impact on transition is summarised below:

The lease liabilities were measured at the present value of the remaining lease payments, discounted using the department’s incremental borrowing rate as at 1 July 2019. The department’s incremental borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The weighted-average rate applied was 1.19%.

Comparative Figures

Certain comparative amounts have been reclassified to conform with the current year’s reporting presentation. There has been no impact on the net operating result or net assets as a result of these adjustments.

In 2019-20 the department corrected prior period errors relating to the disclosure of amounts withheld under section 51 of the PGPA Act. The errors were due to a misinterpretation where the department erroneously reduced unspent appropriation balance disclosures for amounts withheld under section 51 of the PGPA Act. However, as directions to withhold amounts under section 51 of the PGPA Act do not legally adjust appropriations the appropriation balances should not have been reduced. The department has retrospectively restated all amounts to comply with the FRR.

Taxation

The department is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). Revenues, expenses, assets and liabilities are recognised net of GST except where the amount of GST incurred is not recoverable from the Australian Taxation Office and for receivables and payables.

Reporting of Administered activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the administered schedules and related notes. Except where otherwise stated, administered items are accounted for on the same basis and using same policies as for departmental items, including the application of Australian Accounting Standards.

Breach of Section 83 of the Constitution

Section 83 of the Commonwealth of Australia Constitution Act 1900 ("the Constitution") provides that no amount may be paid out of the Consolidated Revenue Fund except under an appropriation by law. In 2019-20, the department identified one special appropriation with statutory conditions for payments which could result in potential breaches of the Constitution.

Total payments of $134.354 million under the Farm Household Support Act 2014 (FHA Act) were made during 2019-20. As at 30 June 2020, $9.156 million worth of overpayments have been recorded as debts, and within this there may be amounts that relate to potential breaches. It should be noted that it is impossible to eliminate the potential for Section 83 breaches for FHA Act payments made by Services Australia on behalf of the department. In the majority of cases, information provided by customers is relied upon to estimate the entitlements paid. This information provided by customers is not always accurate or is subject to circumstances which can result in a breach of Section 83 of the Constitution.

Departmental

There have been no events after the reporting period that had the potential to significantly affect the ongoing structure and financial activities of the department.

Administered

There have been no events after the reporting period that had the potential to significantly affect the ongoing structure and financial activities of the department.

Major events impacting the Australian Government in 2019-20

In 2019-20, Australia has faced significant events that have led to unpredicted impacts on the financial statements of Australian Government entities. The events being, the summer bushfires throughout Australia and the world wide Coronavirus (COVID-19) pandemic, which began to transpire around quarter three of this financial year.

COVID-19 has impacted on the activities of the department over the last quarter of 2019-20, leading to a decline in revenue due to the closure of international borders and enforced restrictions. It is anticipated this decline will continue into the next financial year. The department has assessed an immaterial impact on its ability to collect receivables (including accounts receivable, personal benefits receivable, levy receivables) and the carrying amount of non-financial assets). Additional information is included in the department’s Budget disclosure at Note 19 and Note 35.

Also, due to the severity of these events, the Australian Government announced several stimulus packages including financial assistance to businesses and families of those affected. The financial packages announced by the government that involved the department were in response to the extraordinary impact of the above events and amounted to over $380 million from 2019-20 to 2022-23. Payments for measures commencing in 2019-20 were made in quarter four. Payments will continue into the new financial year where applicable. The 2019-20 significant payments made by the department related to:

• Additional Support for Farm Household Support (FHA) Income Support Recipients [Coronavirus supplement] (additional $550 per fortnight payment) - $19.849 million;
• COVID-19 Response Package - $11.228 million;
• Bushfire Response Package – Bushfire Wildlife Recovery Program - $10.600 million; and
• COVID-19 Economic Stimulus – Stimulus Payments [Payments to Households to support growth] (additional $750 payment) - $5.905 million.

Notes to and forming part of the Financial Statements—index

Overview
Departmental Financial Statements
Note 1: Expenses
Note 2: Income
Note 3: Financial Assets
Note 4: Non-Financial Assets
Note 5: Payables
Note 6: Provisions
Note 7: Aggregate Assets and Liabilities
Note 8: Restructuring
Note 9: Contingent Assets and Liabilities
Note 10: Key Management Personnel Remuneration
Note 11: Related Party Disclosures
Note 12: Financial Instruments
Note 13: Appropriations
Note 14: Appropriations – Department of Agriculture
Note 15: Net Cash Appropriation Arrangements
Note 16: Special Accounts
Note 17: Regulatory Charging Summary
Note 18: Assets Held in Trust
Note 19: Budgetary Reporting
Administered Financial Schedules
Note 20: Administered – Expenses
Note 21: Administered – Income
Note 22: Administered – Financial Assets
Note 23: Administered – Non-Financial Assets
Note 24: Administered – Payables
Note 25: Administered – Provisions
Note 26: Administered – Aggregate Assets and Liabilities
Note 27: Administered – Restructuring
Note 28: Administered – Contingent Assets and Liabilities
Note 29: Administered – Financial Instruments
Note 30: Administered – Fair Value Measurements
Note 31: Administered – Appropriations
Note 32: Administered – Appropriations – Department of Agriculture
Note 33: Administered – Special accounts
Note 34: Administered – Regulatory Charging
Note 35: Administered – Budgetary Reporting

Statement of Comprehensive Income for the period ended 30 June 2020

1. The department has prepared a single set of financial statements as if the Department of Agriculture (the old entity) was part of the Department of Agriculture, Water and the Environment (the reporting entity) for the entire reporting period.
2. Former Department of the Environment and Energy (DoEE).
3. Former Department of Agriculture (DoA).

Statement of Financial Position for the period ended 30 June 2020

1. Right-of-use assets are included in Buildings and Property, Plant and Equipment.
2. Relates to the adoption of AASB 16. The above lease disclosure should be read in conjunction with the accompanying notes: 1B, 1D, 2C and 4.

Statement of Changes in Equity for the period ended 30 June 2020

Accounting policy

Equity Injections

Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) and departmental Capital Budgets (DCBs) are recognised directly in contributed equity in that year.

Industry Reserves

Each cost recovered program holds a separate industry reserve. Programs in surplus are held within the industry reserve balance. Programs in deficit are held against the accumulated deficit of the department.

Cash Flow Statement for the period ended 30 June 2020

1. Total cash outflow for leases for the year ended 30 June 2020 was $97 982 206. It includes Principal payments, interest payments and short term or low value lease payments.

Note 1: Expenses

Accounting policy

Employee Benefits

Accounting policies for employee related expenses are contained in Note 6A.

1. The department has applied AASB 16 using the modified retrospective approach and therefore comparative information has not been restated and continues to be reported under AASB 117. The above lease disclosure should be read in conjunction with the accompanying notes: Statement of Financial Position, 1D, 2C, and 4.

The department has short-term lease commitments of $8 135 853 as at 30 June 2020.

Accounting Policy

Short-term leases and leases of low-value assets

The department has elected not to recognise right-of-use assets and lease liabilities for short-term leases of assets that have a lease term of 12 months or less and leases of low-value assets (less than $10 000). The department recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

1. Relates to the adoption of AASB 16. The above lease disclosure should be read in conjunction with the accompanying notes: Statement of Financial Position, 1B, 2C, and 4.

Accounting policy

Special account administration activities

The activities of the National Environment Protection Council Special Account, the National Heritage Trust of Australia Account, the Ozone Protection and SGG Account, and the Water Efficiency Labelling Scheme Account are included in the department’s administered financial statements.

In accordance with the department’s cash management practices, the department makes some payments initially from the departmental bank account, including for employees, suppliers and grants costs. Such payments are subsequently adjusted to record payments as though they had been paid directly from the special account in accordance with the PGPA Rule. For transparency purposes the department has shown the grossed-up amounts and an offsetting amount for each relevant departmental note. No amounts have been transferred from a special account to a departmental annual appropriation.

In 2019-20, the department paid a total of $36 280 125 (2019: DoEE $30 310 216, DoA $1 658 359) that was later adjusted as payments made from special accounts.

Note 2: Income

1. The department has applied AASB 15 using the modified retrospective approach and therefore comparative information has not been restated and continues to be reported under AASB 118.

Disaggregation of revenue from contracts with customers

Accounting policy

Regulatory Cost Recovery Activities

The department’s main source of revenue from contracts with customers is from the cost recovery of regulatory activities, including biosecurity, food export, plant export and live animal export arrangements. The department uses a combination of regulatory fees and charges depending on the charging legislation which governs the relevant activity.

The department’s charging framework ensures that all user groups contribute to the biosecurity regulatory system. Those user groups that use more regulatory resources contribute more to the regulatory framework, reflecting their higher usage of the system. All regulatory charging undertaken by the department is undertaken in accordance with the relevant charging legislation and is consistent with the requirements set out in the Australian Government Charging Framework. For further information refer to Note 17.

Fees are used to recover the costs of direct intervention and certification activities undertaken for particular importers or regulated entities. The nature of the interventions and certifications is short term and the department recognises revenue at a point in time on completion of services.

Cost recovery charges are imposed when activities are provided to a group of individuals or organisations. This recovers costs not directly linked to a specific individual or organisation but form part of the costs of the overall biosecurity regulatory system. This provides individuals access to the system and permission to undertake import and export activities.

From an accounting standards perspective, the department considers the charges to be akin to licences or permits. Payment by users provides them with permission to access the system. The department has opted to recognise the revenue using the short term recognition exemption applicable to licences as the permissions provided are short term for a financial year or for a specific export or import.

Other services

The department also has other revenue from general contracts that are enforceable through legal or equivalent means and have specific performance obligations that transfer goods or services to a customer. Contracts are considered to be enforceable where there are specific rights specified in the agreement, the parties can reasonably be expected to act on their obligations.

The department provides services to other entities and individuals including undertaking functions or incurring costs on behalf of other Australian Government entities in accordance with Memorandum of Understandings.

Revenue is recognised over time as costs are incurred where the department is entitled to recover the costs or point in time on completion of services depending on the nature of the services being provided

A contract liability for unearned revenue is recorded for obligations under contracts for which payment has been received in advance. Contract liabilities unwind as “revenue from contracts with customers” upon satisfaction of the performance obligations under the terms of the contract. The department reports contract liabilities as unearned income in Note 5B.

Accounting policy

Interest revenue is recognised using the effective interest method.

Operating Leases

The department has sub-leases for commercial and staff rental housings. Most of the sub-leases arrangements are in hold over period and the risk associated with any rights it retains in underlying assets is low.

Maturity Analysis of Operating Lease Income Receivables

1. Relates to the adoption of AASB 16. The above lease disclosure should be read in conjunction with the accompanying notes: Statement of Financial Position, 1B, 1D, and 4.

1. In 2019, the former Department of Agriculture recognised the Mickelham Post Entry Quarantine Facility as a resource received free of charge from the Department of Finance and accounted for the arrangement under AASB 117. As a result of the application of AASB 16 from 1 July 2019, the resource received free of charge is no longer reported.

Accounting policy

Resources Received Free of Charge

Resources received free of charge are recognised as revenue when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense. Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another Government entity as a consequence of a restructuring of administrative arrangements or as contributions by owners.

Gains

Accounting policy

Sale of Assets

Gains from the disposal of assets are recognised when control of the asset has passed to the buyer.

Other Gains

Gains may be realised or unrealised and are recognised on a net basis.

Revenue from Government

Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as Revenue from Government when the department gains control of the appropriation. Appropriations receivable are recognised at their nominal amounts.

Note 3: Financial Assets

During the 2020 financial year, credit terms for goods and services were within 30 days (2019: 30 days).

Accounting policy

Financial Assets

Trade receivables, loans and other receivables that are held for the purpose of collecting the contractual cash flows where the cash flows are solely payments of principal and interest and are not provided at below market rates, are subsequently measured at amortised cost using the effective interest method adjusted for any loss allowance.

Note 4: Non-Financial Assets

Reconciliation of the Opening and Closing Balances of Property, Plant and Equipment and Intangibles

1. These classes of assets are held at fair value.
2. Land, buildings and other property, plant and equipment that met the definition of a heritage and cultural item were disclosed in the heritage and cultural asset class
3. The carrying amount of computer software included $41 340 652 purchased software and $115 904 990 internally developed software.
4. Relates to the adoption of AASB 16. The above lease disclosure should be read in conjunction with the accompanying notes: Statement of Financial Position, 1B, 1D, and 2C.

Disposal of non-financial assets

No significant land, buildings or leasehold items are expected to be sold or disposed of within the next 12 months.

No significant heritage or cultural items are expected to be sold or disposed of within the next 12 months.

No significant property, plant and equipment items are expected to be sold or disposed of within the next 12 months.

No significant software items are expected to be sold or disposed of within the next 12 months.

Contractual commitments for the acquisition of property, plant, equipment and intangible assets

Capital commitments relate to contractual payments for new assets and assets under construction. Commitments are GST inclusive where relevant.

Comparative figures are represented solely by the former Department of the Environment and Energy figures. The former Department of Agriculture disclosed no capital commitments in 2018-19.

The Plant and Equipment capital commitments under 1 year for 2018-19 included $96 million of payments for the new Antarctic Icebreaker RSV Nuyina. The majority of this amount remains a commitment at 30 June 2020 due to delays in commissioning the ship mainly as a result of travel restrictions caused by COVID-19.

Accounting policy

Assets are recorded at cost on acquisition except as stated. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

Asset Recognition Threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position. As a result of the machinery of government change, the asset recognition thresholds were reviewed to determine thresholds that the department will apply from 1 July 2020. During 2019-20 the department continued to apply the respective threshold of the predecessor departments as outlined in the following table:

Purchases under the asset recognition thresholds are expensed in the year of acquisition.

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to restoration provisions in property leases taken up by the department where an obligation exists to restore the property to its original condition. These costs are included in the value of the department’s leasehold improvements with a corresponding provision for the restoration recognised.

The department’s intangible assets comprise internally developed software and purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Lease Right of Use (ROU) Assets

Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability amount, initial direct costs incurred when entering into the lease less any lease incentives received. These assets are accounted for by the department as separate asset classes to corresponding assets owned outright, but included in the same column as where the corresponding underlying assets would be presented if they were owned.

Lease ROU assets continue to be measured at cost after initial recognition.

Revaluations and fair value measurement

All property, plant and equipment assets are measured at fair value.

Following initial recognition at cost, property, plant and equipment (excluding ROU assets) are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values at the reporting date. Independent revaluations for property, plant and equipment are conducted every three years, however further valuations are undertaken dependent upon the volatility of movements in market values for the relevant assets.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reverses a previous revaluation decrement of the same asset class that was previously recognised in the surplus or deficit. Revaluation decrements for a class of assets are recognised in the surplus or deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation at the revaluation date is eliminated against the gross carrying amount of the asset and the asset restated to the revalued amount.

Recurring and non-recurring fair value measurements – valuation processes

An independent professional valuer conducted a detailed external valuation of non-financial assets (excluding intangibles) for the Department of Agriculture at 30 June 2017 and the Department of the Environment and Energy at 30 June 2018.

An independent professional valuer also conducted a materiality assessment over the department’s combined non-financial asset base at 30 June 2020 and the department has relied upon those outcomes to establish carrying amounts.

A full external valuation will be conducted in financial year 2020-21.

Depreciation and amortisation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the department using, in all cases, the straight-line method of depreciation.

Intangible assets are amortised on a straight-line basis over their anticipated useful life.

As for the assessment undertaken on asset capitalisation thresholds, the department also reviewed the useful lives of the asset classes below as a result of the machinery of government change. Depreciation rates applying to each class of depreciable asset are based on the following useful lives for 2020:

The depreciation rates for ROU assets are based on the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term.

Impairment

All non-financial assets were assessed for impairment at 30 June 2020. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the department were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use.

Heritage and Cultural

Heritage and cultural assets include the Antarctic Ice Core Collection. The department maintains preservation policies for the Ice Core Collection.

Inventories

All Inventory is held for distribution and valued at cost, adjusted for any loss of service potential.

Costs incurred in bringing each item of inventory to its present location and condition are assigned as follows:

a) raw materials and stores – purchase cost on a first-in-first-out basis;

b) fuel – weighted average cost; and

c) finished goods and work-in-progress – cost of direct materials and labour plus attributable costs that can be allocated on a reasonable basis.

Inventories acquired at no cost or nominal consideration are initially measured at current replacement cost at the date of acquisition.

Inventory valued at $11 935 628 (2019: $10 545 997) (Note 1B Suppliers) held for distribution has been recognised as an expense.

No items of inventory were recognised at fair value less cost to sell. The majority of inventories are expected to be distributed in the next 12 months.

Note 5: Payables

Settlement is usually made within 20 days (2019: 30 days).

Accounting policy

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. The department recognises a provision for termination when it has developed a detailed formal plan for the terminations, identified the positions affected, assessed expressions of interest from employees and made formal offers. Separation and redundancy is reported as a payable when an agreement has been reached with the relevant employee.

Superannuation

The majority of the department’s staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) or the PSS accumulation plan (PSSap). However, some staff have elected to be members of other private superannuation funds.

The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

The department makes employer contributions to the defined benefits superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Government. The department accounts for the contributions as if they were contributions to defined contribution schemes.

The liability for superannuation recognised at 30 June 2020 represents outstanding contributions.

Note 6: Provisions

Accounting policy

Liabilities for ‘short-term employee benefits’ and termination benefits due within twelve months of the end of the reporting period are measured at their nominal amounts.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will apply at the time the leave is taken, including the department’s employer superannuation contribution rates to the extent that leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by reference to the work of an actuary as at 30 June 2020. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.