Building Insurers’ Guarantee Corporation€¦ · BUILDING INSURERS’ GUARANTEE CORPORATION...

Building Insurers’ Guarantee Corporation

Fair Trading Administration Corporation

Annual Reports for year ended 30 June 2004

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Contents

Letter to Parliament 1

Overview 2

Building Insurers’ Guarantee Corporation 4

Fair Trading Administration Corporation 18

Annual Reporting Compliance 33

Letter to Parliament The Hon. John Della Bosca MLC Special Minister of State Minister for Commerce Minister for Industrial Relations Assistant Treasurer Minister for the Central Coast Parliament House Sydney Dear Mr Della Bosca I am pleased to present in this single volume the annual reports of the: � Fair Trading Administration Corporation � Building Insurers’ Guarantee Corporation for the year ended 30 June 2004. The reports have been prepared for presentation to the Parliament of NSW in accordance with the requirements of the Annual Reports (Statutory Bodies) Act 1984 in fulfilment of the statutory reporting requirements of the Home Building Act 1989.

D.B.O’Connor Commissioner for Fair Trading 29 October 2004

ISSN 1832-1593 Building Insurers’ Guarantee Corporation Fair Trading Administration Corporation

Sydney NSW Australia October 2004

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Overview The Home Building Act 1989 establishes two corporations with home warranty insurance responsibilities. The Fair Trading Administration Corporation (FTAC) was established in 1997 to administer claims on the Government’s then statutory home warranty insurance scheme, which closed to new policies when the private home warranty insurance scheme was introduced on 1 May 1997. The Building Insurers’ Guarantee Corporation (BIGCorp) was set up in June 2001 to administer home building consumer claims on the Government’s HIH rescue package – the Building Insurers’ Guarantee Fund. The functions of both corporations are quite explicitly set out in the legislation. Apart from claims processing within the scope of their respective parts of the Act, neither corporation is intended to have any other role in respect of residential home building in NSW. The corporations do not generate income, nor do they manage the investment of any funds. For claims payment capital they rely exclusively on drawings from NSW Treasury. Both corporations have a finite lifespan. BIGCorp, which was set up in June 2001, may accept claims for seven years from the date of completion of the specific work the subject of the claim or the end of the contract, whichever is later. The cut-off date for any new claims on FTAC was April 2004 - although the Commissioner for Fair Trading has discretion to consider claims for a further three years. Neither corporation exists as a discrete operational entity. Overall responsibility for their functions rests with the Commissioner for Fair Trading - with day-to-day operational management being undertaken by the Home Building Service. The corporations are required to produce an annual report and this responsibility resides with the Commissioner for Fair Trading. In the interests of cost effectiveness and of presenting an overview of claims processing by BIGCorp and FTAC, the obligations of both entities are discharged in this single volume. In 2002 - 2003, the New South Wales Government established the Department of Commerce. The former Department of Fair Trading was renamed as the Office of Fair Trading and was incorporated within that broader agency while retaining its original role and responsibilities to the people of NSW. The Home Building Service, which manages the operations of both corporations is a Division of the Office of Fair Trading. Annual reporting information relevant to the two corporations therefore appears in two forms. ��In this volume - separate financial reports and simple activity reports for both

corporations ��In the 2003-2004 annual report of the Department of Commerce - information on the

management, human resources, business support and financial administration of the Office of Fair Trading.

The annual reporting compliance table at the back of this publication provides a guide to what annual reporting information applies to the corporations and where it is located.

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Access Persons making home warranty insurance claims against either of the schemes managed by the Office of Fair Trading can obtain access via any of the Office’s Fair Trading Centres. These public access offices are located at 23 locations around NSW – including 17 in regional and rural areas. Fair Trading Centres can be contacted by phone on: 13 32 20. The Home Building Service is located at the Office of Fair Trading’s head office at: 1 Fitzwilliam Street Parramatta NSW 2150 Tel: 1300 554 668

Annual Report Production No external costs have been incurred in the writing, preparation or printing of this annual report. Printing of minimal quantities has been accomplished by internal laser printing and photocopying as required. Non-printed copies are available through the Office of Fair Trading website.

Website availability The OFT home page is at: www.fairtrading.nsw.gov.au From the home page go to: Publications/Publications corporate/Annual reports.

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Building Insurers’ Guarantee Corporation

Charter, aims & objectives The Building Insurers’ Guarantee Corporation (BIG Corp) and the Building Insurers’ Guarantee Fund were set up on 30 June 2001 to function as the government’s rescue package for consumers of insured building services who were affected by the financial collapse of the HIH Insurance Group in March 2001. The collapse of HIH created, amongst other things, many serious home warranty difficulties for consumers, builders and developers in New South Wales. Consumers with unfinished or faulty building work found themselves unable to claim against what had become worthless policies. Builders, contractors and developers found themselves without current home warranty insurance coverage. BIG Corp is itself administered by the Office of Fair Trading through the Home Building Service, drawing upon the Policyholders Protection Fund administered by Treasury for its claims payment capital. The legislative framework for the package was introduced through the Insurance (Policyholders Protection) Legislation Amendment Act 2001, commencing on 30 June 2001, as an amendment to the Home Building Act 1989. In particular, the Act established the Building Insurers’ Guarantee Fund – to be administered by the Building Insurers’ Guarantee Corporation. The Fund provides indemnity for home-owners to the same extent that would have applied under home warranty policies issued by the HIH Group. Builders and developers are expressly prevented from claiming on the State indemnity.

Management & structure The Corporation’s activities are managed by the Home Building Service in the Office of Fair Trading.

Claims processing Claims processing is carried out by Strategic Claims Solutions (SCS), a division of Jardine Lloyd Thompson. The firm operates under contract to the Office of Fair Trading to process the ex-HIH and ex-FAI home warranty insurance claims. In 2003-2004, BigCorp paid $491,920 to SCS for processing claims registered during this accounting period. SCS was additionally paid $212,135 for the processing of claims that were received prior to the collapse of HIH.

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Statistics for the 2003 / 04 Financial Year

New claims 528

Claims under assessment 708

Claims paid 327

Value of claims paid $22,985,653

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9

BUILDING INSURERS’ GUARANTEE CORPORATION

STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2004

2003 Notes 2004

$’000 $’000 Revenue from Ordinary Activities

27,474 Grants and Contributions 6 28,05835 Interest Income 611 Other 12

27,510 Total Revenue 28,131 Expenses from Ordinary Activities

Administrative Assistance: 604 Operating Expenses 1(a),7 588

3,691 Other Operating Expenses 7(a) 4,04744,374 Net Insurance Claims and Provisions 7(b) 54,01648,669 Total Expenses (58,651)

(21,159) DEFICIT FOR THE PERIOD FROM ORDINARY ACTIVITIES

(30,520)

- TOTAL REVENUES AND EXPENSES RECOGNISED DIRECTLY IN EQUITY

-

- -

(21,159)

TOTAL CHANGES IN EQUITY OTHER THAN THOSE RESULTING FROM TRANSACTIONS WITH OWNERS AS OWNERS

8 (30,520)

THE ACCOMPANYING NOTES FORM PART OF THESE STATEMENTS

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STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2004

2003 Notes 2004 $’000 ASSETS $'000

Current Assets 72 Cash 2 182 17 Receivables 3 33

89 Total Current Assets 215

Non Current Assets

11,011 Receivables 3 16,699

11,011 Total Non Current Assets 16,699

11,100 TOTAL ASSETS 16,914 LIABILITIES Current Liabilities

375 Payables 4 156 20,000 Provisions - Outstanding Claims 5 25,861

20,375 Total Current Liabilities 26,017

Non Current Liabilities

49,000 Provisions - Outstanding Claims 5 79,692

49,000 Total Non Current Liabilities 79,692

69,375 TOTAL LIABILITIES 105,709

(58,275) NET LIABILITIES (88,795) EQUITY

(58,275) Accumulated Deficiency 8 (88,795)

(58,275) TOTAL EQUITY (88,795)


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STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2004

2003

Notes

2004

$’000 $’000 CASH FLOWS FROM OPERATING ACTIVITIES

(27,516) Operating and Insurance Claim Payments (28,003) 27,474 Grants Received 28,058

54 Interest Received 55

12 NET CASH FROM OPERATING ACTIVITIES

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110

12 NET INCREASE IN CASH 110 60 CASH AS AT 1 JULY 72 72 CASH AT 30 JUNE 2 182


BUILDING INSURERS’ GUARANTEE CORPORATION FOR THE YEAR ENDED 30 JUNE 2004

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Entity

The Building Insurers’ Guarantee Corporation is a Reporting Entity established under the Insurance (Policyholders Protection) Legislation Amendment Act, 2001. The administrative functions for the Corporation are performed by the Office of Fair Trading and costs associated with these functions are paid for on an operational basis in relation to activities performed. Refer Note 7.

(b) Basis of Accounting

The financial statements are a general purpose financial report which has been prepared on a going concern, accrual and historical cost basis in conformity with applicable Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group (UIG) Consensus Views, the Public Finance and Audit Act, 1983, its regulations and Treasurer’s Directions. In the absence of applicable Accounting Standards, the hierarchy of other pronouncements, as outlined in AAS 6 “Accounting Policies” is considered.

(c) Insurance

A full comprehensive range of insurances covering areas such as Workers Compensation, Motor Vehicles, Fidelity Guarantee, Public Liability, and Industrial Special Risk is carried by the Office of Fair Trading with the Treasury Managed Fund. This coverage extends to the operations of the Building Insurers’ Guarantee Corporation. These insurance covers are reviewed periodically to ensure they are adequate.

(d) Provisions A provision for outstanding claims is recognised when the Corporation has a present

obligation, the future sacrifice of economic benefits is probable and the amount of the provision can be measured reliably. When some or all of the economic benefits required to settle the provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is probable that recovery will be received and the amount of the receivable can be measured reliably.

The amount recognised as a provision is the best estimate of the consideration required to

settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. The provision is measured using the cashflows estimated to settle the present obligation.

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

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

��the amount of GST incurred by the agency as a purchaser that is not recoverable

from the Australian Taxation Office is recognised as part of the cost of acquisition of an asset or as part of an item of expense.



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��receivables and payables are stated with the amount of GST included.

(f) Presentation

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

(g) Financial Instruments

Financial Instruments give rise to positions that are a financial asset of either the Building Insurers’ Guarantee Corporation or its counterparty and a financial liability (or equity instrument) of the other party. For the Building Insurers’ Guarantee Corporation these include cash, receivables and payables. The specific accounting policy in respect of each class of such financial instrument is stated hereunder.

Classes of instruments recorded at cost comprise:

. cash . receivables . creditors

All financial instruments including revenue, expenses or other cash flows arising from instruments are recorded on an accrual basis.

(h) Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Corporation and the revenue can be reliably measured. The following specific criteria must also be met before revenue is recognised: (i) Investment Income Interest Revenue is recognised as it accrues. (ii) Grants and Contributions

Grants and contributions from other bodies are recognised as revenue when the Corporation obtains control over the relevant assets or receipts of cash.

(i) Funding Arrangements NSW Treasury provides funding to the Corporation for all approved claim payments. (j) Adoption of Australian Equivalents to International Financial Reporting

Standards

The Building Insurers’ Guarantee Corporation will apply the Australian Equivalents to International Financial Reporting Standards (AIFRS) from the reporting period beginning 1 July 2005.



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The Department of Commerce (which performs the administrative functions for the Corporation) is managing the transition to the new standards by allocating internal resources to analyse the pending Standards and Urgent Issues Group Abstracts to identify key areas regarding policies, procedures, systems and financial impacts affected by the transition.

As a result of this exercise, the agency has taken the following steps to manage the transition to the new standards:

(i) The Department of Commerce’s Executive is oversighting the transition. The

Chief Financial Officer is responsible for the project and reports regularly to the Executive and the Audit Committee.

(ii) The Department of Commerce has assessed the impact of the changes and has identified major requirements of the revised standards.

(iii) The Department of Commerce has set a timetable in line with the Treasury

timetable for the adoption of the standards.

(iv) The revised requirements and implementation plan are also being discussed with the Audit Office to ensure that the Corporation fully complies with the requirements.

NSW Treasury is assisting agencies to manage the transition by developing policies, including mandates of options; presenting training seminars to all agencies; providing a website with up-to-date information to keep agencies informed of any new developments; and establishing an IAS Agency Reference Panel to facilitate a collaborative approach to manage the change.

2. CURRENT ASSETS – CASH

Cash at bank represents the ledger balance of the Corporation’s account with Westpac Banking Corporation. Cash at bank is held within the Treasury Banking System. Interest is earned on daily bank balances at the monthly average NSW Treasury Corporation 11am unofficial cash rate adjusted for a management fee to Treasury. The average rate for the period was 4.25% (30 June 2003: 3.75%).

2004 2003 $’000 $’000 Cash at Bank 182 72 182 72

For the purposes of the Statement of Cash Flows, cash includes money deposited with banks.

Cash assets recognised in the Statement of Financial Position are reconciled to cash at the end of financial year as shown in the Statement of Cash Flows as follows:



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2004 2003 $’000 $’000 Cash (per Statement of Financial Position) 182 72 Closing Cash and Cash Equivalents 182 72 (per Statement of Cash Flows) 3. CURRENT/NON CURRENT ASSETS – RECEIVABLES Current assets Accrued Interest 33 15 Other - 2 33 17 Non current assets Debtors (i) 66,796 44,043 Less: Provision for doubtful debts (ii) (50,097) (33,032) 16,699 11,011

(i) Section 103H of the Insurance (Policyholders Protection) Legislation

Amendment Act, 2001 provides that the Corporation may recover the amounts for claims paid.

(ii) Provision for doubtful debts has been assessed at 75%.

4. CURRENT LIABILITIES – PAYABLES

Other Creditors 156 375 156 375

The liabilities are recognised for amounts due to be paid in the future for goods and services received, whether or not invoiced. Amounts owing to suppliers (which are unsecured) are settled in accordance with the policy set out in Treasurer’s Direction 219.01. 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. Treasurer’s Direction 219.01 allows the Minister to award interest for late payment. There were no claims for late payment interest during the reporting periods.

5. CURRENT/NON CURRENT LIABILITIES –

PROVISIONS

Opening balance 69,000 42,000 Add: Additional provision recognised 59,937 50,058 Less: Claims paid (23,384) (23,058) Carrying amount at end of year 105,553 69,000

Trowbridge Deloitte carried out an Actuarial Review of home warranty claims as at 30 June 2004. The purpose of this review was to ascertain the possible liability of the



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Building Insurer’s Guarantee Corporation. The outstanding claim estimate of $105.6 million, ($69 million 2003) inclusive of claim administration costs with no prudential margin has been discounted by 5.75% (5.5% 2003) per annum. The actuarial review highlighted the considerable uncertainty in the outstanding claim estimates due to the lack of data and the variability of claim costs. As various elements of the liability could be significantly under or over estimated, the ultimate cost could be outside the actuary’s estimate.

6. GRANTS 2004 2003 $’000 $’000 Grants received from Government 28,058 27,474 28,058 27,474

The Corporation was constituted under the Insurance (Policyholders) Protection Act, 2001. Grants are received from the Crown to provide for the payment of claims under the home insurance policies of insolvent insurers, and for the administrative costs of the Corporation.

7. EXPENSES As mentioned in Note 1(a) the Office of Fair Trading has applied an Administrative

Service Charge for the recovery of those expenses it has incurred on behalf of the Building Insurers’ Guarantee Corporation. The amount paid to the Office of Fair Trading for the year ending 30 June 2004 was $588,000 (30 June 2003: $604,000).

(a) Other operating expenses: Auditor’s remuneration – audit of the financial report 12 11 Fees for Service 4,022 3,664 Other 13 16 4,047 3,691 (b) Insurance claims and provisions Claims Paid 23,384 23,058 Less: Claims subject to recovery (22,986) (22,696) Add: Provision for outstanding claims 36,553 27,000 Provision for doubtful debts 17,065 17,012 54,016 44,374



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8. ACCUMULATED FUNDS

Accumulated Deficiency

2004 2003 $’000 $’000 Balance at the beginning of the financial year (58,275) (37,116)

Changes in equity – other than transactions with owners as owners - -

Deficit for the year (30,520) (21,159)

Balance at the end of the financial year (88,795) (58,275) 9. CONTINGENT LIABILITIES

The Corporation is currently involved in 63 (30 June 2003: 36) legal matters where costs may be awarded against it. It is estimated that these costs may total $10,839,000 (30 June 2003: $8,115,000).

10. RECONCILIATION OF CASH FLOWS FROM OPERATING

ACTIVITIES TO OPERATING DEFICIT

OPERATING DEFICIT (30,520) (21,159) Changes in Asset and Liabilities Increase in debtors (5,704) (5,655) Decrease/(Increase) in prepayments - 75 Increase in outstanding claims 36,553 27,000 (Decrease)/Increase in payables (219) (249) Net Cash Provided by Operating Activities 110 12

11. AFTER BALANCE DATE EVENTS The Building Insurers’ Guarantee Corporation is not aware of any circumstances that occurred after balance date which would render particulars included in the financial statements to be misleading.

END OF AUDITED FINANCIAL STATEMENTS

Fair Trading Administration Corporation

Charter, aims & objectives

From 1972, various government-run insurance schemes have been in place in New South Wales to protect consumers from loss where a home builder performed faulty or incomplete work or became insolvent. The introduction of the private home warranty insurance scheme in May 1997 followed on from the integration of the Building Services Corporation (BSC) into the then Department of Fair Trading and the subsequent closure of the last such government-run insurance scheme. However, the government retained responsibility for potential future claims made under the old BSC insurance scheme, administering it through the Fair Trading Administration Corporation (FTAC), which is itself administered by the Office of Fair Trading through the Home Building Service. This administrative authority is derived from transitional provisions in the Home Building Act 1989. The FTAC scheme’s assets have been exhausted and all claims are now being funded from the government’s consolidated funds. Generally, no further new claims are to be accepted from 30 April 2004. However, the Home Building Act 1989 provides for the Commissioner for Fair Trading to exercise discretion to accept claims for an additional three years.

Management & structure

The Corporations’ activities are managed by the Home Building Service in the Office of Fair Trading.

Claims processing The claims paid in 2003-2004 covered losses primarily from work classified as major structural defects in houses and home units.

Statistics for the 2003 / 04 Financial Year

New claims 98

Claims under assessment 152

Claim payments made 340

Value of claims paid $16,881,397

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FAIR TRADING ADMINISTRATION CORPORATION

STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2004

2003 NOTES 2004 $’000 $’000

Revenue from Ordinary Activities

20,500 Grants and Contributions 6 17,400 78 Investment Income 112 10 Other Revenue 85

20,588 Total Revenue 17,597 Expenses from Ordinary Activities

Administrative Assistance: 5,074 Operating Expenses 1(a),7 3,928

427 Other Operating Expenses 7(a) 419 (468) Net Insurance Claims and Provisions 7(b) 19,391

5,033 Total Expenses 23,738

15,555 SURPLUS/(DEFICIT) FOR THE YEAR FROM ORDINARY ACTIVITIES

(6,141)

- TOTAL REVENUES AND EXPENSES RECOGNISED DIRECTLY IN EQUITY

-

- -

15,555

TOTAL CHANGES IN EQUITY OTHER THAN THOSE RESULTING FROM TRANSACTIONS WITH OWNERS AS OWNERS

8

(6,141)


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STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2004

2003 NOTES 2004 $'000 ASSETS $'000

Current Assets 1,232 Cash 2 355 1,291 Receivables 3 48

2,523 Total Current Assets 403

Non Current Assets

1,413 Receivables 4 1,273

1,413 Total Non Current Assets 1,273

3,936 TOTAL ASSETS 1,676 LIABILITIES Current Liabilities

186 Payables 5 1,190 Provisions:

8,438 Outstanding Claims 6 7,900 3,885 Admin Costs- Outstanding Claims 6 3,837

12,509 Total Current Liabilities 12,927

Non Current Liabilities

Provisions: 21,614 Outstanding Claims 6 24,043 8,239 Admin Costs- Outstanding Claims 6 9,273

29,853 Total Non Current Liabilities 33,316

42,362 TOTAL LIABILITIES 46,243

38,426 NET LIABILITIES 44,567

EQUITY

(38,426) Accumulated Deficiency 8 (44,567)

(38,426) TOTAL EQUITY (44,567)


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STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2004

2003

NOTES

2004

$’000 $’000 CASH FLOWS FROM OPERATING ACTIVITIES

(15,844) Operating and Insurance Claim Payments (19,955) (3,275) Insurance Recoveries 1,166 20,500 Grants and Contributions 17,400

(505) License Fees, Premiums and Miscellaneous Income 404 59 Interest Received 108

935

NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES

10

(877)

935 NET INCREASE/(DECREASE) IN CASH (877) 297 CASH AS AT 1 JULY 1,232

1,232 CASH AT 30 JUNE 2 355


FAIR TRADING ADMINISTRATION CORPORATION FOR THE YEAR ENDED 30 JUNE 2004


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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Reporting Entity

The Fair Trading Administration Corporation is a Reporting Entity established under the

Home Building Act, 1989. The administrative functions for the Corporation are performed by the Office of Fair Trading and costs associated with these functions are paid for on an operational basis in relation to activities performed. Refer Note 7.

(b) Basis of Accounting

The financial statements are a general purpose financial report which has been prepared on a going concern, accrual and present value basis in conformity with applicable Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group (UIG) Consensus Views, the Public Finance and Audit Act, 1983, its Regulations and Treasurer’s Directions. In the absence of applicable Accounting Standards, the hierarchy of other pronouncements, as outlined in AAS 6 “Accounting Policies” is considered.

(c) Insurance

A full comprehensive range of insurances covering areas such as Workers Compensation, Motor Vehicles, Fidelity Guarantee, Public Liability, and Industrial Special Risk is carried by the Office of Fair Trading with the Treasury Managed Fund. This coverage extends to the operations of the Fair Trading Administration Corporation. These insurance covers are reviewed periodically to ensure they are adequate.

(d) Provisions A provision for outstanding claims is recognised when the Corporation has a present

obligation, the future sacrifice of economic benefits is probable and the amount of the provision can be measured reliably. When some or all of the economic benefits required to settle the provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is probable that recovery will be received and the amount of the receivable can be measured reliably.

The amount recognised as a provision is the best estimate of the consideration required to

settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. The provision is measured using the cashflows estimated to settle the present obligation.

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

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

��the amount of GST incurred by the agency as a purchaser that is not recoverable

from the Australian Taxation Office is recognised as part of the cost of acquisition of an asset or as part of an item of expense.



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��receivables and payables are stated with the amount of GST included.

(f) Presentation

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

(g) Financial Instruments

Financial Instruments give rise to positions that are a financial asset of either the Fair Trading Administration Corporation or its counterparty and a financial liability (or equity instrument) of another party. For the Fair Trading Administration Corporation these include cash, receivables and payables. The specific accounting policy in respect of each class of such financial instrument is stated hereunder.

Classes of instruments recorded at cost comprise: . cash . receivables . payables

(h) Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Corporation and the revenue can be reliably measured. Interest Revenue is recognised as it accrues.

(i) Adoption of Australian Equivalents to International Financial Reporting

Standards

The Fair Trading Administration Corporation will apply the Australian Equivalents to International Financial Reporting Standards (AIFRS) from the reporting period beginning 1 July 2005.

The Department of Commerce (which performs the administrative functions for the Corporation) is managing the transition to the new standards by allocating internal resources to analyse the pending Standards and Urgent Issues Group Abstracts to identify key areas regarding policies, procedures, systems and financial impacts affected by the transition.

As a result of this exercise, the agency has taken the following steps to manage the transition to the new standards:

(i) The Department of Commerce’s Executive is oversighting the transition. The

Chief Financial Officer is responsible for the project and reports regularly to the Executive and the Audit Committee.



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(ii) The Department of Commerce has assessed the impact of the changes and has

identified major requirements of the revised standards.

(iii) The Department of Commerce has set a timetable in line with the Treasury

timetable for the adoption of the standards.

(iv) The revised requirements and implementation plan are also being discussed with the Audit Office to ensure that the Corporation fully complies with the requirements.

NSW Treasury is assisting agencies to manage the transition by developing policies, including mandates of options; presenting training seminars to all agencies; providing a website with up-to-date information to keep agencies informed of any new developments; and establishing an IAS Agency Reference Panel to facilitate a collaborative approach to manage the change.

2. CURRENT ASSETS – CASH

Cash at bank represents the ledger balance of the Corporation’s account with the Westpac Banking Corporation. Cash at bank is held within the Treasury Banking System. Interest is earned on daily bank balances at the monthly average NSW Treasury Corporation 11am unofficial cash rate adjusted for a management fee to Treasury. The average rate for the period was 4.25% (30 June 2003: 3.75%).

2004 2003 $’000 $’000 Cash at Bank 355 1,232 355 1,232

For the purposes of the Statement of Cash Flows, cash includes money deposited with banks.

Cash assets recognised in the Statement of Financial Position are reconciled to cash at the

end of the financial year as shown in the Statement of Cash Flows as follows: Cash (per Statement of Financial Position) 355 1,232 Closing Cash and Cash Equivalents (per Statement of Cash Flows) 355 1,232



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3. CURRENT ASSETS – RECEIVABLES 2004 2003 $’000 $’000 Claim Recovery Debtors 30,213 35,127 Less: Provision for Doubtful Debts (29,609) (34,425) 604 702 Determination Penalties - 266 Less: Provision for Doubtful Debts - (261) - 5 Master Builders Association (a) - 282 Accrued Income 48 44 Other - 965 48 1,291

(a) Master Builders Association This amount represents the settlement sum arising from a dispute between the former Building Services Corporation and the Master Builders Association (MBA) of New South Wales. Conditions of settlement, reached on 15 February 1993, included payment by the MBA of a settlement sum of $1,500,000 by instalments over eleven years. Payments received to date total $1,500,000 and this matter is now concluded.

4. NON CURRENT ASSETS – RECEIVABLES

2004 2003 $’000 $’000 Claim Recovery Debtors 30,213 35,127 Less: Provision for Doubtful Debts (29,609) (34,424) 604 703 Determination Penalties - 266 Less: Provision for Doubtful Debts - (261) - 5 Other 669 705 1,273 1,413

(a) Claim Recovery Debtors

Section 98 of the Building Service Corporation Act, 1989 provided that the Corporation may recover claims paid under the Corporation’s various insurance schemes. From 1 January 1994, the policy of the Corporation has been to seek recovery of all



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insurance claim payments, exceptions being where the claim did not arise from any fault on behalf of the contractor who carried out the work. Each insurance file is individually reviewed and assessed for recovery prospects at which time a decision is taken to either continue with recovery or alternatively write the debt off as irrecoverable as in the case of bankruptcies, liquidations etc. As at 30 June 2004 the total of claim debts which were subject to recovery action was $30,213,004 (30 June 2003: $35,126,969).

(b) Doubtful Debts for Claim Recovery Debtors Provision for Doubtful Debts has been assessed at 98 percent (30 June 2003: 98%) of Claim Recovery Debtors. This assessment is based on recent experience in relation to claim recoveries.

(c) Credit Risk The credit risk is the carrying amount (net of any provision for doubtful debts). No

interest is earned on trade debtors.

5. CURRENT LIABILITIES – PAYABLES

Amounts owed to the Office of Fair Trading 924 - Payables 266 186 1,190 186

6. CURRENT/NON CURRENT LIABILITIES

- PROVISIONS

Opening balance 42,176 54,065 Add: Additional provision recognised 20,446 1,770 Less: Claims paid (17,569) (13,659) Carrying amount at end of year 45,053 42,176

An Actuarial Review of the Outstanding Claim Liability arising from the Corporation’s

Insurance activities was undertaken by Trowbridge Deloitte Limited as at 30 June 2004. The economic assumptions used by the Actuary in their valuation for 2003/04 are: Discount Rate 5.75% per annum (30 June 2003: 5.0%) Allowance for CPI 2.5% per annum (30 June 2003: 3.0%) Superimposed inflation 5.1% per annum (30 June 2003: 5.0%) On 16 November 1999, the Office of Fair Trading received a “Letter of Comfort” from

NSW Treasury in regard to the Fair Trading Administration Corporation. Treasury has issued a guarantee to fund any shortfall in respect of any payments associated with the Corporation’s Statutory Insurance. The Treasury’s guarantee was called upon during the 2003/2004 financial year with a grant from the Consolidated Fund of $17,400,000 (2002/03: $20,500,000).



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The provisions for outstanding claims liability as at 30 June 2004 also include $5,000,000 (30 June 2003: $5,000,000) which has been set aside to cover the risk exposure to major claims which have arisen from the decision to discontinue with Stop Loss Insurance cover. The former Building Services Corporation made that decision in January 1993 and carries the full risk of insurance written since 1 February 1993.

With the creation of the Fair Trading Administration Corporation on 1 May 1997, the

insurance schemes were privatised and are now underwritten by private insurers. As a result, the Fair Trading Administration Corporation is only responsible for the run-off of claims under the schemes.

7. EXPENSES

As mentioned in Note 1(a) the Office of Fair Trading has applied an Administrative Service Charge for the recovery of those expenses it has incurred on behalf of the Fair Trading Administration Corporation. The amount paid to the Office of Fair Trading for the year ending 30 June 2004 was $3,928,000 (30 June 2003: $5,073,860).

(a) Other operating expenses: 2004 2003 $’000 $’000 Auditor’s Remuneration 36 36 Bank Charges - 8 Fees for Service 383 380 Refund of Insurance Premiums - 3 419 427 (b) Insurance Claims and Provisions Claims Paid 17,569 13,659 Less: Claims Subject to Recovery (10,534) (11,448) Add: Increase/(Decrease) in Provision for

Outstanding Claims 2,877

(11,889) Increase/(Decrease) in Provision for Doubtful

Debts (5,077)

(10,890) Bad Debts 14,556 20,100 19,391 (468) 8. ACCUMULATED FUNDS

Accumulated Deficiency

$’000 $’000 Balance at the beginning of the financial year (38,426) (53,981) Changes in equity – other than transactions with

owners as owners



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Surplus/(Deficit) for the year (6,141) 15,555

Balance at the end of the financial year (44,567) (38,426)



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9. CONTINGENT LIABILITIES

The Corporation currently has approximately cases 28 (30 June 2003: 46) with its four legal service providers and 27 cases currently being handled by the Office of Fair Trading’s Legal Services Division. The providers estimate that the Corporation’s total legal costs are approximately $1,103,000 (30 June 2003: $1,165,000), based on the assumption that the Corporation is unsuccessful and is required to pay both its own costs and those of the Defendant. The Corporation does not proceed with cases unless it is confident of gaining a favourable outcome. Management is of the view that, while it will always have to pay its own fees, it is unlikely to lose all its proceedings.

10. RECONCILIATION OF NET CASH FLOWS FROM OPERATING ACTIVITIES TO OPERATING SURPLUS

2004 2003 $’000 $’000 OPERATING SURPLUS/(DEFICIT) (6,141) 15,555 Changes in Assets and Liabilities: (Increase)/Decrease in debtors 6,460 10,303 Increase/(Decrease) in doubtful debt provision (5,077) (10,889) Increase/(Decrease) in provision for outstanding claims 2,877 (11,889) Increase/(Decrease) in payables 1,004 (2,145) Net Cash Flows Provided by/(Used in) Operating

Activities

(877)

935 11. AFTER BALANCE DATE EVENTS

The Fair Trading Administration Corporation is not aware of any circumstances that occurred after balance date which would render particulars included in the financial statements to be misleading.

END OF AUDITED FINANCIAL STATEMENTS

Annual reporting compliance Key: �� n/a - items not applying due to corporations’ size and nature of operations �� C - relevant OFT items covered in the Department of Commerce Annual Report Requirement BIGCorp FTAC Letter of Submission 1 1 Application for extension of time n/a n/a Charter 4 18 Aims & objectives 4 18 Access 3 3 Management & structure 4 18 Summary review of operations 4 18 Funds granted to non-government community organisations n/a n/a Legal Change n/a n/a Economic or other factors n/a n/a Research & Development n/a n/a Human resources C C Consultants n/a n/a Equal Employment Opportunity C C Disability Plans C C Land Disposal n/a n/a Promotion C C Consumer Response C C Guarantee of Service C C Payment of Accounts C C Time for Payment of Accounts C C Risk management & insurance activities C C Disclosure of Controlled Entities n/a n/a Ethnic affairs priorities statements and any agreement C C NSW Government Action Plan for Women C C Occupational Health and Safety C C Waste C C Budgets 9 23 Financial Statements 6 19 Code of Conduct C C After balance events n/a n/a Report production & availability 3 3 Investment performance n/a n/a Liability management performance 15 29 Exemptions n/a n/a Performance and numbers of executive officers C C Freedom of Information Act C C Implementation of Price Determination n/a n/a Privacy management plan C C Program evaluation results n/a n/a Departures from Subordinate Legislation Act n/a n/a Government Energy management policy C C Electronic service delivery C C Credit card certification C C

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The Building Insurers’ Guarantee Corporation and the Fair Trading Administration Corporation were established to provide an administrative mechanism for processing claims against NSW Government home warranty insurance schemes. Their functions are discharged entirely through the Home Building Service (HBS), which is a division of the NSW Office of Fair Trading. The Office of Fair Trading is in turn a part of the NSW Department of Commerce. Contact: Office of Fair Trading Home Building Service 1 Fitzwilliam Street Parramatta NSW 2150 Tel: 9895 0111 Fax: 9895 0222 You can also obtain information through the Home Building Service direct service line: Tel: 1300 554 668

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