Financial Viability Assessment Guide: Voluntary Product Stewardship

Contents

I.Introduction and Background ………………………………………………………………………………………… 3

II.Independent Assessor Eligibility Criteria ………………………………………………………………………….4

III.Key Objectives ………………………………………………………………………………………………………………….5

IV.Verification and Review Guidelines …………………………………………………………………………………7

V.Risk Allocation Guidelines ….……………………………………………………………………………………………9

VI.Assessment Guidelines ………………………………………………………………………………………………….13

VII.Glossary ……………………..……………………………………………………………………………………..……………61

I. Introduction and Background

Financial Viability, Capacity and Sustainability – Assessment Guide

The Australian Government Department of Sustainability, Environment, Water, Population and Communities (“the Department” or “SEWPaC”) develops and implements national policy, programs and legislation to protect and conserve Australia's environment and heritage.

Product stewardship is an approach to managing the impacts of different products and materials. It acknowledges that those involved in producing, selling, using and disposing of products have a shared responsibility to ensure that those products or materials are managed in a way that reduces their impact, throughout their lifecycle, on the environment and on human health and safety.

The Product Stewardship Act 2011 came into effect on 8 August 2011. This legislation provides the framework to effectively manage the environmental, health and safety impacts of products, and in particular those impacts associated with the disposal of products. The framework includes voluntary, co-regulatory and mandatory product stewardship. The passage of the legislation delivers on a key commitment by the Australian Government under the National Waste Policy which was agreed in November 2009 and endorsed by the Council of Australian Governments in August 2010.

Voluntary accreditation of schemes encourages product stewardship without the need for specific regulation and provides the community with confidence that accredited schemes have the capability to achieve the desired outcomes. Product stewardship organisations that are accredited under the legislation must meet specific requirements to ensure they carry out their activities in a transparent and accountable manner.

An applicant for accreditation of a voluntary product stewardship arrangement will be required to engage an independent third party to assess and prepare a report on the financial aspects of the arrangement (including its administrator), and to provide the report to the Department with its application. The independent third party (“independent assessor” or “assessor”) will review the applicant’s submission in accordance with the Assessment Guide. The review process will be conducted under conditions of strict confidence.

This document serves as a guide for the assessment and reporting of the financial viability, sustainability and capacity of the proposed arrangement as detailed within the applicant’s submission.

The applicant will be required to provide appropriate authorisations to facilitate the commercial and financial viability assessment, including the provision of financial statements and related documentation. The Department may subsequently seek clarification from, and enter into discussions with, the assessors as to the findings of their assessment.

The Department may subsequently conduct further and more comprehensive assessments at a later stage. Therefore, it should be noted that the applicant’s ability to meet the requirements of this assessment should not necessarily be construed that it meets the final financial viability and capacity requirements for the purposes of this or any other engagement.

II. Independent Assessor Eligibility Criteria

An independent third party (“assessor”) must meet the following minimum criteria in order to be eligible for the purposes of conducting the assessment:

Qualifications and Experience: Assessors must be accounting qualified individuals with a current professional membership to either the Institute of Chartered Accountants in Australia (ICAA) or CPA Australia. Each individual involved in the assessment must have a minimum of five (5) years’ experience in providing financial viability assessment services.
Professional Indemnity and Insurance: The assessor is to hold certificates of currency for both Professional Indemnity Insurance (with a policy limit of liability not less than $20m) and Business Insurance (with a policy limit of liability not less than $20m). By accepting the engagement, the assessor agrees to hold this level of cover for a minimum period of three-years following the date of the assessment report.
Professional Fees: The assessor is to hold a signed engagement letter pertaining to this assessment, with all assessment services being provided on a fixed-fee arrangement. The professional fees charged for this service are to be disclosed within the engagement letter, and must be paid in advance (and in full) prior to the assessor commencing the engagement.
Conflicts of Interest: The assessor and assessment firm will not be eligible to conduct this assessment where other commercial, financial, accounting or advisory services are provided to the applicant and/or a related party of the applicant. By accepting the engagement, the assessor confirms there is no current perceived, potential or actual conflicts-of-interest, and agrees to immediately notify SEWPaC (in writing) of any such conflicts-of-interest that may occur throughout the engagement, and for a period of six-months following the provision of the assessment report.
Confidentiality: The assessor will only be eligible where appropriate operational procedures are maintained to ensure the security of confidential information. By accepting the engagement the assessor agrees to enter into appropriate confidentiality undertakings (as required), and will restrict access to such information to authorised individuals only. The assessor also confirms such information will be maintained in a secure document room and/or locked cabinet as appropriate.
Assessors Declaration: The assessor will not be eligible where there is any known scope limitation or information restriction at the commencement of the engagement. By accepting the engagement, the assessor confirms they have reviewed and are prepared to sign the assessors declaration contained within the “Investigation into the Application for Accreditation as a Voluntary Product Stewardship Arrangement”, and agrees to disclose to the Department whether the applicant provided their full participation and whether there was any restriction or delay in being provided with the information requested throughout the course of the review.

III. Key Objectives

The purpose of this process is to provide an assessment as to whether the application for accreditation of a voluntary arrangement sufficiently demonstrates that the proposed Voluntary Product Stewardship Arrangement (“the arrangement”) will have adequate financial arrangements and funding to achieve the outcomes and requirements of the Product Stewardship Act 2011 (“the Act”), the Product Stewardship (Voluntary Arrangements) Instrument 2012 (“the Instrument”) and the Product Stewardship Regulation 2012 (“the Regulation”).

The Instrument requires that the Minister (or delegate) consider a number of criteria when deciding whether to approve or refuse an arrangement. These include:

Whether or not the arrangement is likely to achieve its stated outcomes; and
Whether or not the arrangement deals adequately with certain matters, which include:
Governance and organisational matters, including procedures for decision-making and dispute resolution;
Financial arrangements and funding to achieve the outcomes of the arrangement;
Assessing the adequacy of the environmental, health and safety policies and practices in relation to the activities undertaken under the arrangement;
The use of the product stewardship logo in relation to the arrangement;
Monitoring and evaluating the performance of the arrangement in achieving the outcomes of the arrangement; and
Procedures relating to membership of the arrangement;
Communicating information to the public about how its services can be accessed; and
Managing risk in relation to the operation of the arrangement.

The outcomes for the arrangement will need to be elaborated in its application. Further information may be found on the department’s website at: http://www.environment.gov.au/settlements/waste/product-stewardship/voluntary-arrangements/index.html.

To assist in this process, the applicant is required to engage an Independent Assessor to review the applicant’s proposed arrangement, and to compile a report which is to include:

(a)A statement of the independent assessor’s opinion as to whether, based on the application and supporting documentation:

the arrangement will have access to sufficient funding to ensure financial viability over time;
the key assumptions underlying the arrangement’s financial projections are reasonable;
the arrangement has in place adequate risk management, contingency planning and adaptive management frameworks;

(b)Key findings in relation to assumptions, uncertainties and risks;

(c)Recommendations in relation to the ongoing financial management of the arrangement; and

(d)Detailed analysis supporting the opinion, findings and recommendations referred to above.

The assessor will be required to form an opinion as to whether or not the information provided in the application sufficiently demonstrates that the arrangement will have adequate financial arrangements and funding to achieve the outcomes and requirements in the Act, the Instrument and the Regulation.

In providing this advice, the assessor will consider the information that has been submitted by the applicant to the assessor directly, as well as other relevant information including other information provided through the application process. The advice will be provided in a report that will include consideration as to whether claims made by the applicant about its financial arrangements are unreasonable or not supported by sufficient evidence to ascertain that they are reasonable; as well as identifying any areas of significant, relevant uncertainty or risk; and providing sound rationale for all conclusions drawn.

IV. Verification and Review Guidelines

The Verification and Review Guidelines should be used as important reference material in undertaking the assessment and appropriately sourcing supporting evidence and references in order to form an opinion as to the assessed level of risk in each respective risk category (refer V. Risk Allocation Guidelines) of the Assessment Report.

In determining whether the applicant meets all the key objectives outlined in Section “III. Key Objectives”, the assessor is required to undertake a process of review and verification in order to substantiate all existing and/or proposed arrangements, assumptions and agreements.

Materiality

Throughout this review, the principle of materiality should be adopted by the assessor. Materiality is defined by Australian Accounting Standards (AABS1031) as:

“information which if omitted, misstated or not disclosed has the potential to adversely affect… decisions …made by users of [information] or the discharge of accountability by the management or governing body of the entity”

Verification and Review Procedures

In undertaking the process of review and verification, the assessor is required to obtain sufficient appropriate supporting evidence and references to be able to draw reasonable conclusions on which to base the assessor's opinion as to the assessed level of risk for each respective risk category. Procedures which may be employed in the assessor’s process of review and verification may include:

Procedure
Inspection / Inspection may consist of examining records or documents, as well as physical examination of assets or operations.
Observation / Observation consists of looking at a process or procedure being performed by others.
Enquiry / Enquiry consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity. This includes external confirmation which would serve as corroborative evidence.
Confirmation / Confirmation, which is a specific type of enquiry, is the process of obtaining a representation of information or of an existing condition directly from a third party.
Recalculation and Re-performance / Recalculation consists of checking the mathematical accuracy of documents or records. While Re-performance involves the independent execution of procedures or controls.
Analytical procedures / Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.

Professional Judgement

The following guidelines are intended to serve as a comprehensive guide to undertaking the assessment, however it should be noted that the nature of each individual review will vary and as such, the assessor is required to apply professional judgement in assessing each individual circumstance. Although the guide is intended to provide a comprehensive source of reference, given that the nature of each assessment is unique and will vary by case, the considerations within these guidelines should in no way be taken as exhaustive.

V. Risk Allocation Guidelines

The Risk Allocation Guidelines should be used as important reference material in appropriately classifying the assessed level of risk for each respective risk category, as well as in formulating the assessors overall opinion as provided in the Executive Summary of the Assessment Report.

In determining whether the applicant meets the key objectives outlined in Section “III. Key Objectives”, the assessor is required to review and assess the level of risk across a range of risk categories outlined in the table below.

Risk Category
Funding and Capital
Applicant Viability
Underlying Assumptions
Arrangement Viability
Adaptability Management Framework
Risk Management and Governance

The assessor will consider a range of factors within each category to determine whether the applicant’s proposed arrangement has demonstrated adequate financial arrangements and funding in order to achieve the outcomes and requirements of the Act, the Regulation and the Instrument.

Risk Classification

The assessor is required to form an opinion as to the Risk Effect, Risk Likelihood and Overall Risk Magnitude of each individual risk category, and these grades should be assigned in accordance with the prescribed risk classification matrices outlined below.

Risk Likelihood and Risk Effect

Following a detailed review of each individual risk category, the assessor is required to form an opinion as to the Risk Likelihood (probability) and the Risk Effect (consequence) of each individual risk category in accordance with the following matrices:

Risk Effect

Description

Severe / No capability, capacity or experience and/or lack of understanding - would result in the applicant not meeting the outcomes and requirements in the Act, the Regulation and the Instrument.
High / Very limited capability, capacity or experience and/or lack of understanding – substantial impact on the arrangement’s ability to meet the outcomes and requirements in the Act, the Regulation and the Instrument.
Medium / Some capability, capacity or experience and/or lack of understanding – material impact on the arrangement’s ability to meet the outcomes and requirements in the Act, the Regulation and the Instrument.
Low / Satisfactory capability, capacity or experience and/or understanding – minimal impact on the arrangement’s ability to meet the outcomes and requirements in the Act, the Regulation and the Instrument.
Insignificant / Good capability, capacity or experience and/or understanding – negligible impact on the arrangement’s ability to meet the outcomes and requirements in the Act, the Regulation and the Instrument.

Risk Likelihood

Description

High / Is expected to occur in the first 12 months of the arrangement
Medium / Likely to occur at some later date
Low / May occur at some later time
Rare / May occur but only in exceptional circumstances
Insignificant / Not likely to occur

Overall Risk Magnitude

In accordance with the classifications assigned for the Risk Effect and Risk Likelihood, the applicant’s Overall Risk Magnitude is to be derived from the following matrix:

Risk Magnitude

Risk Effect

Risk Likelihood

High

Medium

Low

Rare

Insignificant

Severe

/ Very High / Very High / High / High / Medium

High

/ Very High / Very High / High / Medium / Low

Medium

/ High / High / Medium / Low / Very Low

Low

/ Low / Low / Low / Very Low / Insignificant

Insignificant

/ Very Low / Very Low / Very Low / Insignificant / Insignificant

A traffic light reporting system should be employed to visually highlight the assessed Overall Risk Magnitude for each individual risk category in accordance with the following colour scheme:

Overall Risk Magnitude / Colour Scheme
Very High / Red
High / Red
Medium / Orange
Low / Green
Very Low / Green
Insignificant / Green

Presentation in the Assessment Report

The assessed risk derived from the above risk classification and matrices is to be presented at the end of each respective section in a standard table format outlined below:

Assessment of [Risk Category]
Risk Effect / Description
[Assessed Risk Effect classification] / [Risk Effect Description that corresponds to the assessed Risk Effect classification as per the Risk Effect table]
Risk Likelihood / Description
[Assessed Risk Likelihood classification] / [Risk Likelihood Description that corresponds to the assessed Risk Likelihood classification as per the Risk Likelihood table]
Risk Category / Risk Effect / Risk Likelihood / Overall Risk Magnitude
[Risk Category] / [Assessed Risk Effect classification] / [Assessed Risk Likelihood classification] / [Derived Overall Risk Magnitude]
*To be colour coded as per the defined traffic light reporting system

The assessed risk from each respective risk category is then summarised in the Executive Summary of the assessment report by the following table:

Risk Category / Risk Effect / Risk Likelihood / Overall Risk Magnitude
Funding and Capital / [Assessed Risk Effect classification] / [Assessed Risk Likelihood classification] / *To be colour coded as per the defined traffic light reporting system
Applicant Viability / / /
Underlying Assumptions
Arrangement Viability
Adaptive Management Framework
Risk Management and Governance

VI. Assessment Guidelines

Contents

1.Executive Summary

2.Scope of Report

3.Background

4.Funding and Capital......

5.Applicant Viability

6.Underlying Assumptions

7.Arrangement Viability

8.Adaptive management framework

9.Risk Management and Corporate Governance

10. Information Sources and Supporting Documentation

11. Appendices

1. Executive Summary

The assessor is to provide a few short paragraphs summarising the general overview and background of the applicant and the arrangement that they are proposing. Reference should be made to the following key information:

Background of the applicant including establishment date or years in business
Principal trading activities
Entity type and corporate structure
Arrangement the applicant is proposing / brief summary of the proposed business model
Any clear advantages or economies of scale the applicant may possess
Key assumptions that underpin projections

1.1 Key Findings and Considerations The assessor is to summarise the key findings of their assessment highlighting the following factors which are to be determined from their detailed review: