Fair Trading Administration Corporation€¦ · Fair Trading Administration Corporation Charter,...

Building Insurers’ Guarantee Corporation & Fair Trading Administration Corporation Annual Report 2004 - 2005

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

Claims processing The claims paid in 2004-2005 covered losses primarily from work classified as major structural defects in houses and home units.

Statistics for the 2004-20 05 Financial Year

New claims 39

Current claims being managed 130

Claim payments made 88

Value of claims paid $7,489,692.96


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FAIR TRADING ADMINISTRATION CORPORATION

STATEMENT OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 JUNE 2005

2004 NOTES 2005 $’000 $’000

Revenue from Ordinary Activities

17,400 Grants and Contributions 6 12,100 112 Investment Income 79 85 Other Revenue 89

17,597 Total Revenue 12,268 Expenses from Ordinary Activities

Administrative Assistance: 3,928 Operating Expenses 1(a),7 2,401

419 Other Operating Expenses 7(a) 990 19,391 Net Insurance Claims and Provisions 7(b) 810 23,738 Total Expenses 4,201

(6,141) SURPLUS/(DEFICIT) FOR THE YEAR FROM ORDINARY ACTIVITIES

8,067

- TOTAL REVENUES AND EXPENSES RECOGNISED DIRECTLY IN EQUITY

-

- -

(6,141)

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

8

8,067

THE ACCOMPANYING NOTES FORM PART OF THESE STATEMENTS

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STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2005

2004 NOTES 2005 $'000 ASSETS $'000

Current Assets 355 Cash 2 507 48 Receivables 3 39

403 Total Current Assets 546

Non Current Assets

1,273 Receivables 4 1,259

1,273 Total Non Current Assets 1,259

1,676 TOTAL ASSETS 1,805 LIABILITIES Current Liabilities

1,190 Payables 5 498 Provisions:

7,900 Outstanding Claims 6 7,565 3,837 Admin Costs- Outstanding Claims 6 2,520

12,927 Total Current Liabilities 10,583

Non Current Liabilities

Provisions: 24,043 Outstanding Claims 6 20,320 9,273 Admin Costs- Outstanding Claims 6 7,402

33,316 Total Non Current Liabilities 27,722

46,243 TOTAL LIABILITIES 38,305

44,567 NET LIABILITIES 36,500

EQUITY

(44,567) Accumulated Deficiency 8 (36,500)

(44,567) TOTAL EQUITY (36,500)


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STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2005

2004

NOTES

2005

$’000 $’000 CASH FLOWS FROM OPERATING ACTIVITIES

(19,955) Operating and Insurance Claim Payments (10,396) 1,166 Insurance Recoveries (1,704)

17,400 Grants and Contributions 12,100 404 License Fees, Premiums and Miscellaneous Income 64 108 Interest Received 88

(877)

NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES

10

152

(877) NET INCREASE/(DECREASE) IN CASH 152 1,232 CASH AS AT 1 JULY 355

355 CASH AT 30 JUNE 2 507


25 FAIR TRADING ADMINISTRATION CORPORATION

FOR THE YEAR ENDED 30 JUNE 2005

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

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 Corporation, 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.

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 (AEIFRS) from the reporting period beginning 1 July 2005.




The Corporation is managing the transition to the new standards by allocating internal resources to analyse the standards and develop strategies to adopt the standards from 2005/06 financial year. To date, the Corporation has identified all major areas that will be impacted by the revised standards and has provided financial returns incorporating revised figures under the new standards to NSW Treasury. After appropriate review the Corporation has determined that there are no key areas where changes in accounting policies are likely to impact the financial report. The Corporation does not anticipate any material impacts on its cash flows. The Corporation’s accounting policies may also be affected by a proposed standard to harmonise accounting standards with Government Finance Statistics (GFS). However, the impact is uncertain because it depends on when this standard is finalised and whether it can be adopted in 2005/06.

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 5.25% (30 June 2004: 4.25%).

2005 2004 $’000 $’000 Cash at Bank 507 355 507 355

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) 507 355 Closing Cash and Cash Equivalents (per Statement of Cash Flows) 507 355




3. CURRENT ASSETS – RECEIVABLES 2005 2004 $’000 $’000 Accrued Income 39 48 Other - - 39 48 4. NON CURRENT ASSETS – RECEIVABLES

Claim Recovery Debtors 32,360 30,213 Less: Provision for Doubtful Debts (31,713) (29,609) 647 604 Other 612 669 1,259 1,273

(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 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 2005 the total of claim debts which were subject to recovery action was $32,360,524 (30 June 2004: $30,213,004).

(b) Doubtful Debts for Claim Recovery Debtors Provision for Doubtful Debts has been assessed at 98 percent (30 June 2004: 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

2005$’000

2004$’000

Amounts owed to the Office of Fair Trading 456 924 Payables 42 266 498 1,190

6. CURRENT/NON CURRENT LIABILITIES

- PROVISIONS

Opening balance 45,053 42,176 Add: Additional provision recognised 1,297 20,446 Less: Claims paid (8,543) (17,569) Carrying amount at end of year 37,807 45,053

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

Insurance activities was undertaken by Finity Consulting Pty Limited as at 30 June 2005. The economic assumptions used by the Actuary in their valuation for 2004/05 are: Discount Rate 5.25% per annum (30 June 2004: 5.75%) Allowance for CPI 2.5% per annum (30 June 2004: 2.5%) Superimposed inflation 5.1% per annum (30 June 2004: 5.1%) 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 2004/2005 financial year with a grant from the Consolidated Fund of $12,100,000 (2003/04: $17,400,000).

The provisions for outstanding claims liability as at 30 June 2005 also include $5,000,000 (30 June 2004: $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 due to the Office of Fair Trading for the year ending 30 June 2005 was $2,401,000 (30 June 2004: $3,928,000).

(a) Other operating expenses: 2005 2004 $’000 $’000 Auditor’s Remuneration 25 36 Fees for Service 964 383 Other 1 - 990 419 (b) Insurance Claims and Provisions Claims Paid 8,543 17,569 Less: Claims Subject to Recovery (7,566) (10,534) Add: Increase/(Decrease) in Provision for

Outstanding Claims

(7,246)

2,877 Increase/(Decrease) in Provision for Doubtful

Debts

2,105

(5,077) Bad Debts 4,974 14,556 810 19,391 8. ACCUMULATED FUNDS

Accumulated Deficiency

$’000 $’000 Balance at the beginning of the financial year (44,567) (38,426) Changes in equity – other than transactions with

owners as owners Surplus/(Deficit) for the year 8,067 (6,141)

Balance at the end of the financial year

(36,500)

(44,567)




9. CONTINGENT LIABILITIES

The Corporation currently has approximately cases 19 (30 June 2004: 28) with its four legal service providers and 6 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 $1,160,000 (30 June 2004: $1,103,000), 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

2005 2004 $’000 $’000 OPERATING SURPLUS/(DEFICIT) 8,067 (6,141) Changes in Assets and Liabilities: (Increase)/Decrease in receivables (2,082) 6,460 Increase/(Decrease) in doubtful debt provision 2,105 (5,077) Increase/(Decrease) in provision for outstanding claims (7,246) 2,877 Increase/(Decrease) in payables (692) 1,004 Net Cash Flows Provided by/(Used in) Operating

Activities

152

(877) 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


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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 22 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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