Department of Sustainability, Environment, Water, Population and Communities

Following initial recognition at cost, property plant and equipment assets are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations were conducted with sufficient frequency to ensure that the carrying amounts of assets did not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depended upon the volatility of movements in market values for the relevant assets.
Revaluation adjustments were made on a class basis. Any revaluation increment was credited to equity under the heading of asset revaluation reserve except to the extent that it reversed a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets were recognised directly in the surplus/deficit except to the extent that they reversed a previous revaluation increment for that class.

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

Depreciation

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.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

	2013	2012
Buildings on freehold land	3 to 50 years	3 to 50 years
Leasehold improvements	Lease term	Lease term
Property, plant and equipment	2 to 50 years	2 to 50 years

The Department has items of property, plant and equipment, that are heritage and cultural assets, that have limited useful lives and are depreciated.

Impairment

All assets were assessed for impairment at 30 June 2013. 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 to sell 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 or disposal.

18. 
    Intangibles
    

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

Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of the Department’s software are 3 to 17 years (2012: 3 to 17 years).

All software assets were assessed for indications of impairment as at 30 June 2013.

19. 
    Inventories
    

Inventories held for sale are valued at the lower of cost and net realisable value.

Inventories held for distribution are 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:

1. 
   raw materials and stores – purchase cost on a first-in-first-out basis;
   
2. 
   fuel – weighted average cost; and
   
3. 
   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.

20. 
    Provision for Restoration Obligations
    

A provision for restoration obligations (make good) is recognised if, as a result of a past event, the Department has a present obligation (legal or constructive) that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. Make good provisions are measured at the best estimate of the expenditure required to settle the present obligation at the reporting date, including the risks and uncertainties specific to the liabilities. Refer to Note 9B for further information.

Make good provisions are discounted to present value when the time value of money is material. Increases in present value are recognised as borrowing costs.

Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

Provision for Restoration Obligations - Antarctic Solid Waste Disposal Sites

Australia is a signatory to the Antarctic Treaty 1961, and Australia’s environmental responsibilities under the treaty are contained in Annex III of the Madrid Protocol. The Madrid Protocol requires past and present waste disposal sites in Antarctica be cleaned up by the generators of such wastes. Australia is required to clean up the past and present solid waste disposal sites it has generated in Antarctica. The provision for the restitution of Antarctic Solid Waste Disposal Sites is the estimated future costs of this obligation and is derived from an expert valuation which provides a “best estimate” in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Australia stopped disposing of its station solid waste in Antarctica in the mid 1980’s, and since then all waste has either been returned to Australia for disposal or incinerated on station. A process of gradual removal is in effect.

Provision for Restoration Obligations – Antarctic and Sub-Antarctic Regions

This provision represents the estimated future costs of making good buildings and infrastructure at Australia’s Antarctic and sub-Antarctic Stations, within Australian Territories. This provision represents the estimated future costs of decommissioning, dismantling, and expatriation to Australia of all buildings, infrastructure and associated materials and the cost of site rehabilitation. This provision is in accordance with AASB 116 Property, Plant and Equipment, which requires that the cost of an item of property, plant and equipment include an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired (or constructed) or as a consequence of having used the item during a particular period. This requirement in AASB 116 then requires a corresponding offsetting liability in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

Buildings and infrastructure are decommissioned and replaced on an ongoing basis, infrequently, and the majority of costs will be incurred during any major Antarctic station rebuilding program. The provision is derived from an expert valuation and a costing model which provides a “best estimate” in accordance with AASB 137.

The estimated values for the Antarctic Solid Waste Disposal Sites, the Antarctic and Sub-Antarctic related restoration obligations and related assets have been arrived at on a reasonableness basis. These values have been calculated using a discounted cash flow methodology and therefore the value of the provisions can vary from year to year due to changes in the underlying estimated restoration costs, the assumed restoration methodologies, estimated indexation factors, discount rates at reporting date, and estimated cash flow timings. The estimate has been calculated on the assumption that each asset will be removed individually. Removal of multiple assets simultaneously may materially increase or decrease total costs depending on circumstances giving rise to their removal. The reported values as at 30 June 2013 are:

1. 
   Restoration Obligation - Antarctic Solid Waste Disposal Sites $63,685,000
   
2. 
   Restoration Obligation - Antarctic and Sub-Antarctic Stations $336,536,000
   

Provision for Restoration Obligations – Other Localities

This provision represents the estimated costs of making good leasehold premises occupied by the Department at the John Gorton Building, Barton ACT, the Temperate Marine Conservation Branch in Kingston Tasmania and the Jabiru Field Station NT. The provision is derived from an expert valuation which provides a “best estimate” in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

21. 
    Taxation
    

The Department is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Revenues, expenses and assets are recognised net of GST except:

1. 
   where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
   
2. 
   for receivables and payables.
   

22. 
    Going Concern
    

The Department is part of the legal entity that is the Australian Government, which is ultimately responsible for all the Department’s debts. In 2012-13, the Department’s total liabilities exceeded its total assets. This is primarily due to provisions for restoration obligations (make good) relating to Antarctica and sub-Antarctic Macquarie Island. The funding associated with the provisions will be provided at the time that the restoration work is undertaken. The existence of total liabilities in excess of total assets of the Department as reported in the balance sheet did not make the Department insolvent and has no bearing on whether the Department's debts will be met.

Australian Government Agencies have no separate legal personality but are part of the Australian Government and are ‘wound up’ only when the government decides that all their functions are to be performed by another entity or entities, or are not to be performed at all. This situation does not of itself mean that the Department is not a going concern.

23. 
    Constitutional and Other Legal Requirements
    

The Australian Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth (2012) 288 ALR 410, as they contribute to the larger body of law relevant to the development of Commonwealth programs.  In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.

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 below, administered items are accounted for on the same basis and using the same policies as for departmental items, including the application of Australian Accounting Standards. Administered Cash Transfers to and from the Official Public Account Revenue collected by the Department for use by the Government rather than the Department is administered revenue. Collections are transferred to the Official Public Account (OPA) maintained by the Department of Finance and Deregulation. Conversely, cash is drawn from the OPA to make payments under Parliamentary appropriation on behalf of Government. These transfers to and from the OPA are adjustments to the administered cash held by the Department on behalf of the Government and reported as such in the schedule of administered cash flows and in the administered reconciliation schedule. Revenue All administered revenues are revenues relating to ordinary activities performed by the Department on behalf of the Australian Government. As such, administered appropriations are not revenues of the Department that oversees distribution or expenditure of the funds as directed. Revenue is primarily generated from Carbon Charges, excise duties and licence fees prescribed by the Ozone Protection and Synthetic Greenhouse Gas Management Act 1989 and associated legislation. The levies imposed on importers, manufacturers and exporters of synthetic greenhouse gases (SGG), SGG equipment or ozone depleting substance (ODS) equipment are determined by the type and quantity of those gases imported, manufactured or exported. Quarterly reports are required to be submitted before the 15^th day after the end of the quarter. Revenue in respect of these items is recognised on submission of the licence application or submission of the licencee report, when the quantity of the synthetic greenhouse gases imported, or manufactured is able to be reliably measured. (Refer to Notes 19A, 19B and 19D). Revenue also includes contributions from State and Territory governments in connection with the performance of the Water Efficiency Labelling and Standards (WELS) Regulator. The Regulator administers the WELS scheme and enforces the WELS standard that sets out the criteria for rating the water efficiency and performance of each WELS product type. Receivables for goods and services, which have 30 day terms, are recognised at the nominal amounts due less any impairment allowance account. Collectability of debts is reviewed at end of the reporting period. Allowances are made when collectability of the debt is no longer probable. Loans and Receivables Where loans and receivables are not subject to concessional treatment, they are carried at amortised cost using the effective interest method. Gains and losses due to impairment, derecognition and amortisation are recognised through profit or loss. Administered Investments Administered investments in subsidiaries, joint ventures and associates are not consolidated because their consolidation is relevant only at the Whole of Government level. Administered investments other than those held for sale are classified as available-for-sale and are measured at their fair value as at 30 June 2013. Fair value has been taken to be the Australian Government's proportional interest in the net assets of the entities as at end of reporting period. These entities include the Director of National Parks and the Sydney Harbour Federation Trust. The Director of National Parks is reliant on funding from the Government to establish and manage protected areas. The custodial obligations of the Sydney Harbour Federation Trust are consistent with those of a not-for profit entity, and whilst the Sydney Harbour Federation Trust generates non-government cash inflows the net assets valuation technique has been applied as it results in a more consistent, relevant and reliable measure of value. In accordance with Division 87 of the FMOs, the net assets valuation technique has been used to determine the fair value of the Australian Government's proportional interest in these entities as at 30 June 2013 (Refer to Note 20D). Jointly Controlled Assets The Australian Government is a venturer in jointly controlled assets held in the River Murray Operations (RMO) and Living Murray Initiative (LMI) joint ventures. The Australian Government has control over its share of future economic benefits through its 20% share of the jointly controlled assets (Refer to Note 21E). In respect of its interest in these jointly controlled assets, the Australian Government recognises in its financial statements its share of the jointly controlled assets, classified according to the nature of the assets, its share of any liabilities incurred in respect of the joint venture and any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture. Clauses 3.2 and 3.3 of the “Asset Agreement for RMO Assets” state that the RMO assets are controlled jointly by the asset controlling governments for the purposes of the Murray-Darling Basin (MDB) Agreement. The asset controlling governments agree that through the MDB Agreement, they have established an unincorporated joint venture exercising joint control of assets by mutual agreement. Clauses 6.3 and 6.4 of the “Further Agreement on Addressing Water Overallocation and Achieving Environmental Objectives in the Murray-Darling Basin – Control and Management of Living Murray Assets” state that the Living Murray assets are controlled jointly by the Living Murray governments for the purposes of the Living Murray Initiative. The Living Murray governments agree that through the Living Murray Initiative, they have established an unincorporated joint venture exercising joint control of the Living Murray assets by mutual agreement. Grants and Subsidies The Department administers a number of grant and subsidy schemes on behalf of the Government. Grant and subsidy liabilities are recognised to the extent that (i) the services required to be performed by the grantee have been performed or (ii) the grant eligibility criteria have been satisfied, but payments due have not been made. A commitment is recorded when the Government enters into an agreement to make these grants but services have not been performed or criteria satisfied. Payments to CAC Act Bodies Payments to CAC Act bodies from amounts appropriated for that purpose are classified as administered expenses, equity injections or loans of the relevant portfolio department. The appropriation to the Department is disclosed in Table A of the appropriations note (Note 28). National Halon Bank In accordance with the Government’s National Halon Management Strategy, the Government operates the National Halon Bank. Halons are fire-fighting agents whose ozone depleting potential is ten times greater than that of chlorofluorocarbons. Under State and Territory legislation, the continued use of halon in non-essential equipment has been banned. The National Halon Bank stores decommissioned halon for destruction or reclamation, and to meet Australia’s essential use needs until the year 2030 or until an alternative is found for all current uses. There are four categories of Halon holdings: Strategic reserve; Clean halon; and Other halon still in cylinders; and Waste halon (for destruction) The halon stored in the National Halon Bank is a resource controlled by the Government and from which economic benefits are expected to flow to the Government. The current holdings of halon are recognised as inventory. Water Entitlements The Department acquires water entitlements to achieve the Government’s environmental policy objectives. Commonwealth water entitlements are held for non commercial, long term environmental purposes, beyond the shorter term weather and accounting cycles, the benefits of which are not being captured for accounting purposes. As its water entitlement holdings continue to increase so does the strategic importance of demonstrating a robust valuation assessment. Under the Federal Financial Relations (FFR) Framework, National Partnership payments are processed centrally by the Commonwealth Treasury and paid directly to each state treasury. State treasuries are responsible for distributing the funding within their jurisdiction. In the Commonwealth, the Treasurer is accountable for the appropriations, estimates and payments under the framework. For National Partnership agreements, the primary responsibility for policy is with the relevant portfolio minister. DSEWPaC receives water entitlements ‘free of charge’ in accordance with the terms and conditions of payments made by the Treasury under the National Partnership on Water for the Future (Refer to Note 19H). Under the Sustainable Rural Water Use and Infrastructure Program (SRWUIP), there are a number of projects which improve the efficiency of irrigation infrastructure and generate savings in the use of water. As part of the SRWUIP funding arrangement, the Australian Government will take a share of that water saving in the form of a water entitlement for use in delivering the Government’s environmental watering objectives (Refer to Table B of Note 21C). Water acquired as a result of water savings arising from projects funded to improve the efficiency of water use are accounted for in accordance with the relevant Australian Accounting Standards. The Department’s holdings of water entitlements are classified as indefinite life intangible assets and are therefore subject to annual impairment testing in accordance with AASB 138 Intangible Assets (AASB 138), AASB 136 Impairment of Assets (AASB 136) and the 2012-13 Finance Minister’s Orders (FMOs). Water entitlements are classified as indefinite life intangible assets as there is no foreseeable limit to the period over which the assets are expected to generate future economic benefits. Under AASB 136, the impairment test is carried out by comparing the carrying amount (per the Department’s asset register) to the recoverable amount of the water entitlements. The recoverable amount of the water entitlements is the higher of fair value less costs to sell and value in use. The recoverable amount calculation is performed at the lowest practical level, taking into account the quality and availability of data. The Department’s valuation methodology calculates the fair value of the water entitlements based on the best information available to reflect the amount that an entity could obtain from the disposal of the water entitlements in an arm’s length transaction between knowledgeable, willing parties. This approach is consistent with AASB 136. The Department has developed a model to assess whether there has been a significant decrease in price or whether there has been a prolonged decline in the value of the entitlement, using the median price of water entitlements extracted from State water registries. If either of these conditions is met an impairment loss is recorded. Having reviewed water entitlement price movements, the Department has determined that a decline in excess of 10 percent or a 9 months prolonged decline in the value of the entitlement is an appropriate benchmark for this market. In addition to generating a fair value consistent with AASB 136 as outlined above, the methodology calculates value in use or depreciated replacement cost for the water entitlements. In other words, the methodology satisfies the requirements of each of the recoverable amount calculation methods given by AASB 136. Based on the results of the 2012-13 impairment testing, an additional impairment of $330.576m was identified on water entitlements. A further impairment of $13.389m was identified on water entitlements held in the Living Murray Initiative joint venture. Refer to Note 18E Write-Down and Impairment of Assets and Note 21C Intangibles for more details. Constitutional and Other Legal Requirements The Australian Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth (2012) 288 ALR 410, as they contribute to the larger body of law relevant to the development of Commonwealth programs.  In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.