1.74 The term 'base date' is derived from contracting practices. It is used in procurement contracts where the contract value is subject to price escalation clauses. The price escalation clauses specify how the amount payable under the contract will be varied in accordance with specified rates or indices that reflect movements in nominal167 prices. A number of significant Defence capital equipment acquisition contracts are generally written on a variable price basis reflecting their long-term nature and risk allocation. Such contracts include a base date, being the date agreed as the basis of the fixed contract price (usually a date specified in the tender documents to ensure comparability of responses), and agreed conditions under which this price can be varied (usually conditions concerning contract price adjustment for foreign exchange variation and indices to calculate contract price adjustment for movement in the cost to the contractor of labour and materials). Not all contracts operating with DMO use the base date construct, some are 'firm' priced or others such as contracts entered into via a Foreign Military Sales (FMS) arrangement use a "Then Year Dollar" construct, similar in nature to out-turning. In these cases future inflation is factored into the contract at the initial contract acceptance date.
1.75 When the base date dollar reporting concept was proposed for the 2007-08 MPR program, the intention was to provide a measure of project cost performance that could be compared to initial Government approval. While the intent was understood, the outcomes have been variable based on the practical challenges of applying a contracting practice in a budgeting context. For this reason, the DMO's preferred method is first to report project costs at their actual values (historical cost), which is consistent with all commercial and public sector reporting conventions and requirements, and then to compare this to the initial project approval value adjusted for agreed and funded price movements and foreign exchange adjustments. This is the way that DMO manages its budget, including project budgets, and is consistent with budget management practices within Defence and across the Commonwealth. To distinguish it from 'base date dollar' reporting, the DMO project financial management is described in this report as 'out-turned budget management' and its key features are described in paragraphs 1.79 to 1.81.
1.76 In this, the fourth MPR, the Auditor-General has again qualified the DMO's report on the basis that certain 'base date' figures against contract expenditure have not been disclosed in the Project Data Summary Sheet (PDSS). This qualification relates solely to the inability to disclose all 'base date' information and does not indicate or infer any deficiencies in the adequacy of the DMO's management of project expenditure, which is required on a historical cost basis, or any non-compliance with Australian accounting requirements.
1.77 The Defence Materiel Accounting Policy Manual provides a reference for the accounting policies applicable to financial transactions in the DMO. These accounting policies recognise the requirements of Australian Accounting Standards, Australian Government legislation, and the Finance Minister's Orders for Financial Reporting, issued by the Minister for Finance and Deregulation. The DMO's compliance with accounting policies is confirmed by the ANAO again providing an unmodified audit report against the DMO's financial statements in 2010-11.
1.78 As indicated in previous MPRs, at the project level, the DMO does not manage financial and performance reporting in base date dollars. Hence, DMO reports performance to our stakeholders in accumulated actual dollars. Project budgets are updated to reflect the agreed and endorsed future budgetary funding price provisions. This ensures that, over the life of a project, available funding is commensurate with the basis upon which the Defence funding was approved by Government. Attempts to artificially manipulate actual historical cost expenditure for the purpose of comparing to an original approval date is not consistent with DMO or Defence reporting conventions and produces financial information which can not be verified against the DMO's financial management framework and supporting systems.
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167 nominal prices include the effects of inflation whereas 'real' prices exclude inflation