This paper examines reporting of physical economic infrastructure assets in the annual reports of Australian public sector entities. Infrastructure can be divided into economic, social and human capital categories. Economic infrastructure, which is examined here, includes physical facilities such as communications, transport networks and power, water and sewerage distribution systems. In financial accounting, infrastructure assets have been defined as “…all non-current assets comprising the public facilities that provide essential services and enhance the productive capacity of the economy. They include roads, bridges, railroads, water supply and sewerage systems, power generation and distribution networks”. Although the nature of economic infrastructure is well understood, the reporting of infrastructure assets in annual reports remains controversial.

Previous research has presented arguments about the best methods of accounting for and reporting on infrastructure asset values. In addition to asset valuation, these authors suggested that other information such as maintenance, physical condition and performance measurement is relevant to stakeholders for decision-making. However, current reporting guidance mainly focuses on asset valuation. Such focus is a result of the adoption of the accrual basis of accounting and the money measurement convention as part of the public sector reform process.

Within public sector infrastructure service industries, such as electricity, water and transport, structural reform through corporatisation and market competition was introduced with the aim of improving the efficiency of service provision in these “natural monopolies”. In parallel with this development, concern arose that corporatisation could weaken annual reporting on the grounds of commercial sensitivity. Disclosure of information about infrastructure assets is important as corporatisation and market competition is often seen as a precursor to private sector involvement in the operation and provision of economic infrastructure services, particularly with the recent growth in public–private partnerships and the consideration of commercial confidentiality in outsourcing. Transparency is critical to maintain public accountability under such dynamic environment. This paper is motivated by a concern to establish whether the relevant infrastructure asset information is disclosed. In particular, it seems likely that entities may not disclose relevant physical infrastructure asset information in their annual reports, if current reporting guidance remains narrowly focused on asset valuation.

Few empirical studies have been conducted into reporting practices relating to infrastructure assets. Lee (1999) surveyed infrastructure asset reporting practices in New South Wales and the perceptions of users of public sector financial reports that provide information about infrastructure assets. User demand for information about maintenance, physical condition and asset management information was established. A gap was discovered between the information users expected and what had actually been reported in the annual reports. While the previous study focused on the state of New South Wales, this paper extends the scope of study to examine the reporting of information about infrastructure assets by federal government, other states and territories.

Given the importance of disclosures of relevant infrastructure information by public sector entities and concerns regarding the transparency of corporatised public sector entities, this paper seeks to address the following research questions:

1. To what extent do public sector entities in Australian infrastructure industries disclose relevant information about infrastructure assets in their annual reports?

2. Is there a difference in the extent to which public sector entities established under Corporations Law (company state owned corporations) and other public sector entities (government departments, statutory authorities and statutory state owned corporations) disclose relevant information about infrastructure assets in their annual reports?

An analysis of these questions should highlight the extent of disclosure of various types of information, and the degree to which reporting guidance and the use of corporate form affects disclosure.

In the following sections, background literature related to the reporting of infrastructure assets by Australian public sector entities is considered. These include (1) an examination of the relevance of infrastructure asset information to users of annual reports; (2) a review of the public sector reform, the resulting structural and reporting changes and public sector reporting guidelines relating to infrastructure assets; and (3) a discussion of the incentives of public sector infrastructure service entities to disclose relevant information where reporting guidelines are limited. The research methods are then described. This is followed by an analysis of the reporting practices of 73 Australian public sector entities. In the final section, conclusions are drawn about the implications of current practices, and future research directions are identified.

The Australian Conceptual Framework for accounting and reporting considers the satisfaction of users’ information needs as being the primary objective of financial reporting and suggests that the provision of information useful to users for decision making also serves as a means to discharge accountability by management. Such objectives apply to both the private and public sectors, and include infrastructure industries. In relation to the reporting of infrastructure assets, a variety of literature has discussed the importance of meeting stakeholders’ information needs and has raised concerns about what types of information about infrastructure should be reported. A large body of such literature prescribing accounting best practice for infrastructure asset reporting emphasises the nature of infrastructure assets and the purpose of reporting as criteria for deciding which information is relevant and should be disclosed.

Historical cost measures have been argued to be irrelevant because of the long productive lives possessed by infrastructure assets, and thus can be a misleading guide in performance measurement. Instead, the use of replacement cost and deprival value has been supported on the ground that infrastructure assets, if disposed of, would be replaced by other similar assets. In addition, deprival value could be applied to government assets regardless of whether they have the ability to generate net cash inflows or delivered services at full cost. In spite of the recommendation by the accounting profession and the government, the estimation of infrastructure asset value has been criticised for not addressing the fundamental infrastructure management issues.

Infrastructure requires ongoing maintenance which is crucial to the quality of infrastructure service delivery. Such information, including maintenance expenditure and deferred maintenance, is considered highly relevant to users. However, there are different opinions about how to account for and report maintenance information. The extent of maintenance work carried out has an impact on the physical condition of infrastructure. The issues of whether entities have implemented asset management plans and have the capacity to provide quality services are also important. These types of non-financial information, including the physical condition of infrastructure, asset planning and management and performance measures, would provide users with relevant future-orientated information.