Assessment of activities for the purposes of the Jobs and Competiveness Program Supplementary guidance v.3 1. Assurance 1.01 What is the Department seeking assurance of? 1.02 How will the Government treat data for which only limited assurance is provided? 1.03 What auditing and assurance standards apply to the assurance of financial and emissions data compiled for the purposes of the Jobs and Competiveness Program? 1.04 In the absence of relevant accounting standards, how should entities compile financial data in relation to the activity? 1.05 What are the applicable standards to guide assurance providers in relation to materiality? 1.06 How should assurance providers treat emissions uncertainty when considering materiality? 1.07 Should materiality be assessed at the activity, entity or site level? 1.08 What is the role of the assurance provider in assessing whether activity boundaries have been applied correctly? 1.09 What is the role of the assurance provider in assessing the methodologies used to estimate financial information relating to an activity? 2. Reporting 2.01 If my company undertakes multiple instances of an activity, can I submit a single data template to the Government that consolidates all instances? 2.02 My company reports financial data on a basis that is not financial year. Can I submit data for eligibility assessments that still broadly relate to the time period required, but is not financial year data? 2.03 To what extent may transfer pricing and the ATO s tax rulings in this area be relied upon in collecting financial data for JCP eligibility assessments? 2.04 How do I determine what emissions relate to my activity? Can I just include everything at the site? 2.05 How do I treat emissions that are not covered under the carbon pricing mechanism but for which a corresponding NGERS emissions factor exists? 2.06 How do I treat synthetic greenhouse gas emissions, such as HFCs and SF 6? Page 1
2.07 I have not metered electricity use for part of my site. How can I exclude that electricity use? 2.08 The electricity used by my activity is generated or bought in a range of ways which overlaps with my direct emissions, what information do I need to provide? 2.09 What methods are available to calculate the average market price of sales and input costs? Which method should be used when? 2.10 What value added costs should I report? 2.11 How much detail should be disclosed in the basis of preparation report? 3. Activity Definitions 3.01 My basis for allocation is of saleable products. What is included in that? 3.02 How do I know where my activity begins and ends? 4. Statutory Declarations 4.01 What is the purpose behind the statutory declarations which are to be signed? 4.02 What if it is not possible for my Chief Executive Officer to sign the statutory declaration in the time provided? Page 2
1. ASSURANCE 1.01What is the Department seeking assurance of? The Department of Climate Change and Energy Efficiency (the Department) is seeking assurance over data compiled and submitted by entities in accordance with the framework set out in the Guidance Paper, the supplementary guidance issued by the Government, and according to the activity description as defined and issued by the Government. The Department is also seeking assurance that the bases of preparation is fairly disclosed in the supporting documentation submitted with the data template and is in accordance with the activity as defined and issued by the Government. In undertaking assurance engagements, practitioners will need to make judgements about the extent to which they can rely on systems, processes and controls that the reporting entity has in place. Practitioners also need to make their own judgements about the extent to which they are able to rely on data that may have been previously audited for another purpose (e.g. financial data included in previously audited financial statements). 1.02 How will the Government treat data for which only limited assurance is provided? In the Guidance Paper, the Government stated that reasonable assurance should be provided over data submitted by entities for the purpose of the Jobs and Competiveness Program. Where an entity submits data assured to a lesser standard (i.e. limited assurance), the Government may choose to place less weight on such data, delay assessment of an activity, and/or place higher weight on data from international sources when determining the eligibility and allocative baseline for an activity. 1.03 What auditing and assurance standards apply to the assurance of financial and emissions data compiled for the purposes of the Jobs and Competiveness Program? ASAE 3000 is the applicable standard to adhere to for assurance engagements established in relation to the Jobs and Competiveness Program. In relation to financial information (such as revenue, costs, etc) reported under the program, ASAE 3000 should be supplemented with applicable standards issued by the Auditing and Assurance Standards Board dealing with financial information, for example, relevant Australian Auditing Standards (ASAs) such as the general guidance on special purpose audit engagements contained in ASA 800 The Auditor s Report on Special Purpose Audit Engagements. 1.04 In the absence of relevant accounting standards, how should entities compile financial data in relation to the activity? The compilation of financial data relating to an activity should be guided in the first instance by the reporting requirements set out in the Guidance Paper released by the Government. Page 3
Where appropriate, entities should ensure that the data is prepared in accordance with Australian Accounting Standards to the extent that these standards are applicable. To the extent the Department has provided specific guidance on data compilation and reporting, the Department s guidance should be followed. In any event, the specific principles, methodologies and policies used to prepare and present the financial data should be clearly disclosed by entities in the bases of preparation submitted with the data template. 1.05 What are the applicable standards to guide assurance providers in relation to materiality? The most appropriate standard to guide practitioners and assurance providers in relation to materiality is ASA 320. 1.06 How should assurance providers treat emissions uncertainty when considering materiality? When a default emission factor cited under the NGERS (Measurement) Determination is used to estimate emissions for a particular activity, the assurance provider does not need to consider the materiality of the uncertainty inherent in that factor. Where entities have adopted site specific emissions estimation techniques or emissions estimation methodologies that fall outside the NGERS framework, the uncertainty inherent in those techniques or methodologies should be considered by the assurance provider in determining materiality and forming their opinion. When considering approaches used by the reporting entity to compile estimates of fuels consumed or other raw input data relating to the activity, assurance providers will need to make judgements about the extent to which they can rely on systems, meters, and processes the reporting entity has in place. The entity should adequately describe the bases of the compilation of estimates and any limitations in the systems, meters and processes in place. Where such systems and processes used by the entity cannot be reasonably relied upon to provide accurate and unbiased estimates of the quantity of fuels (or other inputs) used within the activity, assurance providers would be expected to consider this in forming their opinion. 1.07 Should materiality be assessed at the activity, entity or site level? Materiality should be assessed at the activity level for each reporting entity. Where an entity undertakes multiple instances of an activity at multiple sites, materiality may be interpreted as applying in relation to the aggregated information the entity has reported in relation to an activity as a whole. Where an entity undertakes multiple activities, materiality must be assessed as applying separately to each activity reported on by the entity. 1.08 What is the role of the assurance provider in assessing whether activity boundaries have been applied correctly? Under the Jobs and Competiveness Program, emissions are to be reported in accordance with the approved activity definition. Each activity definition provides specific guidance on which emissions should be included and excluded. Adherence to the final activity definitions Page 4
published on the Department s website (www.climatechange.gov.au) is a critical element of the Jobs and Competiveness Program. Assurance providers play a key role in assuring that activity boundaries have been complied with when reporting information to the Government. To provide this assurance, assurance providers will need to have a detailed understanding of the relevant activity definition. Assurance providers should make a specific statement in their assurance opinion whether they believe that in all material respects the reporting entity has complied with the activity boundary as published on the Department s website. 1.09 What is the role of the assurance provider in assessing the methodologies used to estimate financial information relating to an activity? The role of the assurance provider is to ensure the reporting entity has reported data in accordance with the activity definition issued by the Government, the basis of preparation disclosed in the application, and the principles and methodologies as outlined in the Guidance Paper, and supplementary guidance issued by the Department. The Department issued guidance on the methodologies available to report financial information in the Guidance Paper (Revised July 2011). The Department has provided further guidance to reporting entities at section 2.09 of this document on these methods and when it is appropriate for proxy methodologies to be used. In the context of assessing the methodologies used by the reporting entity to report financial information relating to an activity, the assurance provider should have regard to two key matters: i. Whether the methodology selected by the reporting entity is appropriate taking into account the guidance issued by the Department. ii. When applying the selected method, that the financial information reported fairly represents the actual revenues or actual costs realised (or realisable) by the reporting entity during the baseline period. The assurance provider s report should contain an opinion on whether the financial information reported is, in all material respects, fairly stated and presented in accordance with the basis of preparation and in accordance with the guidance issued by the Department of Climate Change and Energy Efficiency. Relevant guidance issued by the Department includes the Guidance Paper (revised September 2011) and the supplementary guidance provided in this document and published on the Department s website. 2. REPORTING 2.01 If my company undertakes multiple instances of an activity, can I submit a single data template to the Government that consolidates all instances? Entities must submit a completed data template for each instance of an activity undertaken by an entity. Page 5
Where an entity conducts multiple instances of an activity across multiple sites, in addition to completing the data template for each instance of an activity, the entity may also complete and submit to the Department a consolidated data template that aggregates the information to the activity level for the reporting entity. Assurance providers may then provide assurance over the aggregated information presented at the activity level for the reporting entity. The accompanying document that contains the bases of preparation for the entity may be presented in a single consolidated format. However, this consolidated report must detail the bases of preparation used to prepare information relating to each instance of an activity undertaken by the entity, to the extent that differences exist between the bases of preparation for each instance. Multiple activities may not be consolidated into an aggregated data template or accompanying report. 2.02 My company reports financial data on a basis that is not financial year. Can I submit data for eligibility assessments that still broadly relate to the time period required, but is not financial year data? No. It is important that all data used in JCP eligibility assessments are collated, audited and submitted to the Government on the same basis to enable meaningful comparisons. The Government s policy regarding the JCP emissions-intensity eligibility assessment is that this will be based on financial years, specifically estimates of the weighted average emissions per unit of production in 2006-07 and 2007-08 and estimates of revenue or value added per unit of production in 2004-05, 2005-06, 2006-07, 2007-08 and the first half of 2008-09. This means that both emissions and financial data must be submitted according to financial years. However, the Government also recognises situations in which companies have not historically reported on a financial year basis and that the collection of data that complies with this is necessary. As stated in the Guidance Paper and reiterated in the FAQs concerning the assurance framework, the compilation of financial data relating to an activity should be guided in the first instance by the reporting requirements set out in the Guidance Paper released by the Government. Where appropriate, entities should ensure that the data is prepared in accordance with Australian Accounting Standards to the extent that these standards are applicable. The specific principles, methodologies and policies used to prepare and present the financial data should be clearly disclosed by entities in the bases of preparation submitted with the data template. This advice applies equally to the reasonable and transparent apportionment of financial data, including revenue, value added costs and production, to financial years. 2.03 To what extent may transfer pricing and the ATO s tax rulings in this area be relied upon in collecting financial data for JCP eligibility assessments? The compilation of financial data relating to an activity should be guided, in the first instance, by the reporting requirements set out in the Guidance Paper released by the Government. Where appropriate, entities should ensure that the data is prepared in accordance with Australian Accounting Standards to the extent that these standards are applicable. Page 6
Where these standards are not applicable, recourse may be had to relevant tax rulings issued by the Australian Taxation Office on the treatment of transfer pricing to the extent that the content of these tax rulings do not conflict with the concepts and advice contained in the Guidance Paper and the Government s policy concerning JCP assistance. The specific principles, methodologies and policies used to prepare and present the financial data should be clearly disclosed by entities in the bases of preparation submitted with the data template. 2.04 How do I determine what emissions relate to my activity? Can I just include everything at the site? No. The policy is only to provide assistance in relation to the most emissions-intensive activities in the economy. The policy clearly distinguishes between particular facilities consisting of a series of activities which will have liability under the carbon pricing mechanism and JCP activities for which transitional assistance will be provided. If all the emissions from facilities or sites were used to collect past emissions data, firms and industries which conducted a range of activities at particular sites would receive assistance for conducting activities which were not JCP activities and for which their competitors in disaggregated businesses received no assistance. Additionally, the carbon pricing mechanism will impose increased costs for all types of business in some areas and these are expected to be borne by businesses in the economy. Consistent with this policy, the Guidance Paper discussed including emissions which directly relate to the activity. Each activity definition provides specific guidance on which emissions should be included and excluded. The key emissions and electricity use which should be included are the direct emissions from, and electricity use of, machinery, equipment and processes which are integral to, and essential for, the physical and/or chemical transformation described in the activity definition. These include machinery used to move materials within and as part of the activity, control rooms, laboratories, maintenance workshops, machinery used to create non-electrical energy for use in the activity and onsite processing of waste materials from the activity to comply with Commonwealth, State or Territory obligations. These are generally emissions specific to JCP activities as opposed to emissions from doing things which other businesses in the economy do. For instance, everyone needs accounts and marketing to conduct business successfully, but they are not essential to the carrying out of the physical and chemical transformation which makes up an JCP activity. However, a control room at a plant or an onsite laboratory for quality testing are essential to the successful conduct of the physical or chemical transformations which are JCP activities. JCP activities also have additional legal requirements to treat pollutants from their sites which create emissions. It is also important to exclude pre-processing before the JCP activity begins and additional processing of the output or other by-products. The emissions and boundaries as defined in the JCP activity definitions should be distinguished from other activities which are considered economically essential to the conduct of the JCP activity. There are a range of things which are economic or not economic for businesses to do. The Jobs and Competiveness Program is only concerned with JCP activities themselves and the emissions directly attributable to those activities. Other similar activities conducted alongside JCP activities should be assessed separately for JCP status and their emissions should not be included in the data provided in response to the Guidance Paper. Page 7
2.05 How do I treat emissions that are not covered under the scheme but for which a corresponding NGERS emissions factor exists? While in most cases the emissions entities need to report under NGERS and those that need to be reported for the purposes of the Jobs and Competiveness Program will be the same, there are subtle differences that need to be taken into account in some circumstances. A key parameter of the Jobs and Competiveness Program is that assistance will only be provided for emissions that are covered under the carbon pricing mechanism. Taking this into account, certain sources of emissions which are required to be reported under NGERS but are not covered under the carbon pricing mechanism will need to be excluded from emissions reporting for the purposes of the Jobs and Competiveness Program. For example, while nitrous oxide (N 2 O) and methane (CH 4 ) emissions from the combustion of biomass should be reported under NGERS, these emissions will not attract an emissions liability under the carbon pricing mechanism and thus should not be reported under the Jobs and Competiveness Program. 2.06 How do I treat synthetic greenhouse gas emissions, such as HFCs and SF6? High global warming potential synthetic greenhouse gases (with the exception of perfluorocarbons from aluminum smelting) will not be included in the carbon pricing mechanism but will be subject to an equivalent carbon price using existing import and manufacture levies under the Ozone Protection and Synthetic Greenhouse Gas Management legislation. Levies will be adjusted annually to reflect the prevailing carbon price. Where entities do not have a direct liability for synthetic greenhouse gas emissions under the mechanism, these emissions should not to be reported in their emissions data submitted under the Jobs and Competiveness Program. 2.07 I have not metered electricity use for part of my site. How can I exclude that electricity use? The policy is only to provide assistance in relation to the most emissions-intensive parts of particular activities in the economy. As such, electricity used in secondary activities such as head office, general administration or marketing should not be included as emissions relating to a potential JCP activity. The Government recognises that in both the historic period, and going forward, such electricity will not be metered. As such, a reasonable method, such as pro-rating, to exclude such electricity use should be used by entities submitting data relative to the materiality of the emissions involved. Such information could be gathered from energy ratings of the various buildings or other energy efficiency reports. 2.08 The electricity used by my activity is generated or bought in a range of ways which overlaps with my direct emissions, what information do I need to provide? The Government recognises that where emissions information has previously been collected and reported in relation to facilities with onsite generation, the emissions attributable to that generation were included in the direct emissions of the facility. It is also recognised that emissions relating to electricity generation are often integrated into the conduct of emissionsintensive trade-exposed activities and may not be separately metered inside particular sites. Given the differences in how liability is imposed by the carbon pricing mechanism and how direct emissions and electricity use are being given assistance, it is necessary for the Government to gather additional information about emissions and electricity use to ensure emissions and electricity use have been appropriately accounted for. For these purposes Page 8
electricity is considered to be produced onsite where electrical power is produced by converting another form of energy to electrical power in a generating unit. In particular, entities will need to report in the indirect emissions part of the template: a) The total amount of electricity used by the activity in megawatt hours, where electricity is electrical power as opposed to other forms of energy. This amount includes both bought in electricity from the grid, a separately connected stand alone generator and on-site generation capabilities. The total should only include the electricity used by the activity within the site as opposed to the electricity used by non-jcp activities within the site or exported to the grid. b) The amount of the total which is bought in to the activity. This would ordinarily be the amount of electricity on the meter for the site less electricity attributed to non-jcp activities on the site. It includes electricity bought from a third party generator not under the operational control of the person conducting the principle activity. c) The amount of electricity generated onsite which is exported from the activity to either the grid or another activity on the same site. d) The amount of electricity consumed by the activity which is generated onsite from either waste heat (such as heat or steam created by the activity or already used by the activity) and the combustion of waste gases or other waste products created by the activity or at the same site (such as black liquor or bagasse). For the purposes of the JCP assessment, where these fuels are used to generated electricity on-site, there is no need to reduce the amount of direct emissions attributable to the activity where the emissions are already considered to have been emitted by the activity, such is the case when applying NGERS emission factors. For the avoidance of doubt, the combustion of fuels and other saleable products such as natural gas, coal, naphtha or diesel is not considered to be in this category. e) The amount of electricity consumed by the activity which is generated by cogeneration (i.e. joint production of electricity and steam) and the emissions associated with that electricity in accordance with the methodologies in NGERS (e.g. the efficiency and work potential methods). For the purposes of the JCP assessment, the emissions attributable to the generation of electricity are not included in the direct emissions for the activity. f) The amount of electricity consumed by the activity which is generated onsite or at the same location by other means, principally the direct combustion of a fuel such as natural gas or coal and the emissions associated with that electricity. For the purposes of the JCP assessment the emissions attributable to the generation of this electricity are not included in the direct emissions for the activity. To assist the Government assess this information, entities should provide a short description of how electricity is created and used within their activity and on the sites where their activity is conducted in their basis for preparation of these numbers. Page 9
2.09 What methods are available to calculate the average market price of sales and input costs? Which method should be used when? The Guidance Paper makes available two methods to calculate the average market price of sales of outputs from an activity. These methods apply equally in relation to reporting financial information around revenues and inputs costs, which are required to be reported for the purposes of calculating the value added proxy for an activity. Method 1, based on external sales (or purchases), and Method 2, a proxy method based on observable market prices. The Guidance Paper states that Method 1 is the preferred method as this is based on actual rather than proxy information. However, in recognising that some entities may sell (or purchase) units internally, the Department also made a proxy method available. For both methods, the overriding principle, as set out in the Guidance Paper, is that the data reported by entities should represent the average prices realised (or realisable) by the entity over the baseline period. Method 1 (the use of actual prices) is the default method that should be used to calculate average market prices for an activity wherever external sales or purchases exist. Method 2 is appropriate to use where there are no external sales or purchases, and actual price information is not available. However, if applying Method 2, reporting entities are required to clearly explain in the basis of preparation why method 2 has been used, whether there are any external sales or purchases, and demonstrate why the proxy prices applied fairly reflect the price received by the entity during the baseline period. Where only a proportion of the outputs (or in the case of a value added assessment, the inputs) from an activity are sold (or purchased) externally, actual data relating to this proportion should be reported. In determining which method to apply to the proportion that is sold (or purchased) internally, an assessment must be made as to whether the actual external prices fairly represent the internally transferred proportion. To the extent that these actual prices fairly represent the prices that would be realisable by the entity for the remainder of production transferred internally, these actual prices should be applied to this remaining production. However, where these actual prices would not fairly represent the prices realisable by the entity for the remaining production, the proxy methodology set out in the Guidance Paper (Method 2) may be used. However, when applying Method 2 to the remainder of production quantities, an explanation must be provided in the basis of preparation as to why the actual prices received (or faced) are not representative of the prices that would be realisable by the entity in relation to the remainder of production and why the proxy price used overcomes this. Importantly, when applying a proxy method, reporting entities must ensure that the proxy cost applied is a fair representation of the actual cost faced by the entity during the baseline period. Further guidance on the role of the assurance provider in assessing the methodologies used to estimate revenues and costs can be found in 1.09. 2.10 What value added costs should I report? The Guidance Paper states that input costs to be adjusted for will include only the cost of the major consumable inputs into the activity s production. Activity definitions for activities employing the value added metric will be developed in a way that captures all the major Page 10
consumable input costs relevant to the value added for the activity under the Jobs and Competiveness Program. Value added costs reported by entities should be limited to those specifically listed in the approved activity definition. Entities should not report value added costs that are not listed on the activity definition. When reporting both the quantity and costs of inputs in the reporting template, entities must ensure individual value added costs should not be combined with other costs, but should be disaggregated and listed as separate line items in accordance with input costs listed in the relevant activity definition. 2.11 How much detail should be disclosed in the basis of preparation report? The principle that underlies the basis of preparation is transparent disclosure. The Guidance Paper provides that an entity shall disclose the specific principles, methodologies and policies used to prepare and present its data. The information reported in the basis of preparation is to be sufficient to enable the Department to understand the way in which each of the data elements have been prepared by the reporting entity. In all cases, entities should err on the side of disclosure in preparing the basis of preparation document. While the Department has not provided specific guidance on the format of the basis of preparation document, the following information is provided to guide entities in determining the level of detail to be included: a) Entities should provide an explanation related to each material item listed in the reporting template under the direct emissions and electricity emissions spreadsheets. This explanation should include the methodologies used to compile the data and any key underlying calculations or apportionment methodologies used. b) Where entities use site specific estimation methodologies akin to Methods 2 and 3 under the NGERS (Measurement) Determination to calculate their emissions, entities should provide a detailed explanation of how the methodology has been applied. This explanation should include a description of sampling techniques undertaken in accordance with relevant national or international standards. c) Entities should disclose their rationale for including emissions that may be considered close to or on the boundaries of the activity definition. This should be accompanied by an explanation of apportionment methodology where relevant. d) In relation to financial information, as detailed in section 2.09 of this document, entities should provide explanation around the use of proxy methodologies where applied and why the reported prices or costs fairly represent actual revenues or input costs realised by the entity during the baseline period. 3. ACTIVITY DEFINITIONS 3.01 My basis for allocation is of saleable products. What is included in that? The concept of saleable products is intended to have its ordinary meaning as understood by participants in the relevant market. A product is saleable if it is produced to a level where it would ordinarily be considered by participants in the relevant market to be the output of the Page 11
process to meet the defined specifications and has a commercial value as that output. It may also meet internal standards whereby it can be used by the firm as part of another process conducted by the firm. Saleable outputs do not need to be sold in the particular year, just produced during that year. As such, outputs produced and entered on an inventory would count. Sub-standard products which are discarded or products otherwise recycled back into the activity to produce new outputs (e.g. metal which is re-melted or paper which is re-used in a paper making process) are not considered saleable. Material which is scrapped or lost before it gets packaged as a saleable product should also not be included in the amount of saleable product counted for the basis for allocation. The principles above have been adopted in the definition of what is saleable product in the draft regulations to establish the Jobs and Competiveness Program and interested persons should refer to that definition where appropriate for clarity on what is to be included. 3.02 How do I know where my activity begins and ends? The activity definitions set out a transformation of inputs to outputs and provide additional guidance on which emissions should be included and excluded. Firms should rely on this guidance in determining the beginning and end of an activity. Generally, activities begin after the inputs have been transported to where the core activity is conducted, such as when they arrive at a storage facility located at the site of the JCP activity. Activities generally end once the described output is produced by the transformation. Where outputs are not further processed onsite, there is generally a place of storage before they are transported off-site. Any activities conducted with respect to the output after it is produced are not part of the activity unless they have been specifically included in the activity definition. 4. STATUTORY DECLARATIONS 4.01 What is the purpose behind the statutory declarations which are to be signed? The Guidance Paper outlines that applications should be accompanied by statutory declarations signed by a firm s Chief Executive Officer and relevant line manager for each activity. The relevant line manager who has had responsibility for compiling the response to the Guidance Paper is asked to affirm a number of propositions to ensure that they have used all reasonable endeavours to facilitate the assurance process and avoid any potential errors in the information which is provided by the firm. The Chief Executive Officer is then asked to affirm that they are satisfied that the line manager has in fact done what they have affirmed and that, to the best of their knowledge, the response is accurate. The templates also provide Chief Executive Officers and line managers the ability to express any qualifications they would like to make about their statements. It is assumed that an appropriate briefing by the line manager would be appropriate to enable the Chief Executive Officer to sign the statutory declaration. The statements and qualifications will then be taken into account by the Department in coming to a view on the quality and quantity of the information provided by the firm. Page 12
4.02 What if it is not possible for my Chief Executive Officer to sign the statutory declaration in the time provided? The Government recognises that in some circumstances it may not be possible to obtain a statutory declaration signed by the Chief Executive Officer. For instance, the Chief Executive Officer may be on leave during the relevant period or may not reside in Australia. If this is the case, a statutory declaration should be attested to by another senior member or officer of the firm who is more senior than the relevant line manager compiling the response and has a decision making role in relation to the conduct of relevant potential emissions-intensive tradeexposed activity. For instance, the director of a firm s Australian operations may be an appropriate substitute for the Chief Executive Officer. Page 13