4. Statement of financial position

Statutory charges (receivable or payable) are not financial instruments – examples of statutory charges include GST (receivable from or payable to the ATO), levies, rates and fines. However, the initial recognition and measurement of statutory receivables are treated as if they are financial instruments under AASB 9 Financial Instruments (AASB 9).

Material individual receivables should be separately assessed for impairment. When statutory receivables exhibit similar characteristics that provide information about the possible collectability of the amounts owing to the entity, they shall be grouped together and assessed collectively for impairment.

AASB 136 is relevant for impairment for statutory receivables and applies to administered assets that are not financial instruments. Estimates, averages and shortcuts may be applied under paragraph 23 of AASB 136 for determining fair value less costs of disposal or value in use. This assessment can be made on a portfolio basis where this is appropriate (such as impairment of a large portfolio of statutory receivables).

Where the statutory receivables are material, entities are encouraged to include in their accounting policy, a reference to the fact that impairment assessments are made under AASB 136.

Asset recognition, valuation and depreciation

As permitted by paragraph 35 of AASB 116 Property, Plant and Equipment (AASB 116), either the gross or net approach to disclosing revalued assets may be used for:

• guidance on assets held for sale as defined in AASB 5 Non-current Assets Held for Sale and Discontinued Operations (AASB 5), see RMG-111 Accounting for non-current assets held for sale (RMG-111)
• more information on accounting for PPE, see RMG-113 Accounting for subsequent expenditure on property, plant and equipment (RMG-113).

AASB 116 defines a class of assets as ‘a grouping of assets of a similar nature and use in an entity’s operations’. If an asset of a type listed in subsection 17(2) of the FRR is to be revalued, every other asset in the class in which that asset falls must also be revalued. Types of assets referred to in subsection 17(2) of the FRR are not automatically synonymous with classes. Classes and valuation classes are not necessarily a direct reflection of the groups of assets that are reported in disclosures such as in Note 3.2A: Reconciliation of the opening and closing balances of property, plant and equipment and intangibles of PRIMA forms.

Internally developed software is separable under AASB 138 Intangible Assets (AASB 138) and, if it meets the criteria under paragraphs 21 and 57 of AASB 138, can be recognised as an asset. For more information, see RMG-109 Accounting for internally developed software and cloud accounting arrangements (RMG-109). For information on funding arrangements for assets, see RMG-124 Capital budgeting by Commonwealth entities in the general government sector (RMG-124). 

Expenditure for research and development costs related to intangible assets that is not capitalised is to be disclosed (Tier 1 reporting: paragraph 126 of AASB 138, Tier 2 reporting: paragraph 139 of AASB 1060 General Purpose Financial Statements - Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities (AASB 1060)).

Each non-financial asset held at fair value listed in subsection 17(2) of the FRR or recognised in compliance with paragraph 17(4)(b) of the FRR, other than investment properties, should be assessed each year to ensure that the carrying amount does not differ materially from fair value as at reporting date. Where there is a material difference, then the entire class needs to be revalued (that is, not just the individual assets).

Where valuation is at fair value, AASB 13 Fair Value Measurement (AASB 13) sets out the requirements for measurement. Each entity is responsible for arranging appropriate valuations for assets they control or administer on behalf of the Commonwealth, on a timely basis for inclusion in financial statements.

Subsection 17(2A) of the FRR requires Commonwealth lessees to continue to measure ROU assets at cost (not revalued to fair value) after the initial measurement.

Subsection 17(3) of the FRR allows an entity to measure immaterial other PPE at cost in accordance with paragraph 29 of AASB 116. This then requires those assets to be disclosed as a separate class of non-financial assets (such as minor PPE). In choosing the valuation model for immaterial PPE, consideration needs to be given to the cost of valuations against the benefit of doing so. Entities also need to exercise professional judgement to assess if immaterial PPE at an individual item level remains immaterial for the total class of assets.

A change of valuation of immaterial (or minor) other PPE from fair value to cost is a change in accounting policy under AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors (AASB 108) that requires the entity to return the item to original cost less accumulated depreciation and amortisation (that is, not simply a cessation of revaluation).

PPE: fair value measurement of asset under construction

In order to recognise assets under construction/work in progress (WIP), entities need to satisfy the recognition test under paragraph 7 of AASB 116 (that is, it is probable that the expenditure on WIP will result in future economic benefits). The FRR requires the valuation of PPE using the revaluation model in AASB 116. Where WIP assets are included in a PPE class, WIP is to be measured at fair value.

A number of techniques such as an indexation test can be used to guide an entity in determining if there is likely to be a material difference between carrying amount of WIP and current replacement cost – see Example 1 PPE WIP assets indexation test.

It is generally considered that there is no active market for the sale of partially completed PPE assets. In such circumstances, it is appropriate for the entity to use the cost approach (current replacement cost) under AASB 13.

While the FRR does not mandate WIP to be at fair value (where WIP is not included within the PPE class), entities should still consider whether the carrying value of WIP, adjusted for any impairment loss, would differ materially from its fair value. This is particularly so where the construction period is extended over several years and there is a risk that WIP expenditure includes items unlikely to meet AASB 116 asset recognition requirements (such as discontinued project elements and significant rework).

Accounting for land under roads

Under AASB 1051 Land Under Roads (AASB 1051), land under roads is defined as ‘land under roadways, and road reserves, including land under footpaths, nature strips and median strips’. In accordance with paragraph 15 of AASB 1051, land under roads acquired on or after 1 July 2008 is to be accounted for in accordance with AASB 116. Finance has determined that land under roads acquired before this date will continue to be not recognised.

Roads constructed on land are to be recognised and measured under AASB 116. Land under roads acquired on or after 1 July 2008 shall only be recognised if:

• it is probable that associated future economic benefits will flow to the entity – paragraph Aus49.1 of the Framework for the Preparation and Presentation of Financial Statements (AASB Framework) states that, for NFP entities, assets provide a means for entities to achieve their objectives. Future economic benefits are synonymous with the notion of service potential and can be from the provision of needed services to beneficiaries. While the AASB Framework is silent on the degree of contribution necessary to meet this requirement, the future economic benefits test is assumed to be satisfied where it is probable that the entity will achieve its objectives. Entities need to regularly assess land under roads contribution against their objectives.
• the cost or fair value can be reliably measured – fair value is determined in accordance with AASB 13. The valuation of land under roads is based on its potential rather than as a road, where physically possible, legally permissible and financially feasible – see Example 2. However, in many cases the land under roads cannot have an alternate use because of a range of factors, such as road dimensions, the need for continued road access and planning restrictions on surrounding areas.
• the amount is material – even where the value of land under roads can be determined, it may only be recognised as an asset when material (in accordance with the applicable AAS).

For assistance in determining whether land under roads can be reliably measured, email accountingpolicy@finance.gov.au.

Accounting for service concession arrangements by public sector grantor

AASB 1059 Service Concession Arrangements: Grantors (AASB 1059) sets out the accounting for service concession arrangements that public sector entities may enter into with a private sector operator for the delivery of public services.

Under AASB 1059, a public sector grantor is required to:

• recognise a service concession asset or reclassify an existing asset as a service concession asset
• measure the service concession asset at current replacement cost on initial recognition
• in most cases, recognise a corresponding liability relating to the service concession asset adjusted for any other consideration between the grantor and operator, using either or both the: 
  • financial liability model
  • Grant of a Right to the Operator (GORTO) model.

For the initial measurement of the GORTO liability, AASB 1059 requires a grantor to apply the revaluation model to measure the fair value using the current replacement cost of the service concession asset at the date of initial recognition, adjusted to reflect the remaining concession period relative to the total period of the arrangement. The net difference between the assets and liabilities recognised is reflected as an adjustment to opening retained earnings.

The diagram at paragraph IG10 of AASB 1059 summarises the recognition and measurement requirements for service concession arrangements within the scope of AASB 1059.

AASB 16 Leases does not apply to assets that would be recognised as service concession assets under AASB 1059.

For assistance regarding AASB 1059, email accountingpolicy@finance.gov.au.

Generation of cash inflows

Entities, or parts of entities, other than those whose main purpose is to generate net cash inflows, are not cash-generating units for the purpose of AASB 136.

Non-corporate Commonwealth entity receipts related to income from the sale of goods and services, and retained under section 74 of the PGPA Act, are to be included when determining whether entities are cash-generating units under AASB 136.

Impairment process

NFP entities must refer to paragraph Aus5.1 of AASB 136 for non-cash generating assets held for continuing use of their service capacity – noting that under the revaluation model in AASB 116 and AASB 138, AASB 136 does not apply to assets regularly revalued to fair value.

Indicators of impairment

Impairment indicators that are developed need to be appropriate to the entity’s operations and consider the materiality of the asset/asset class and the internal and external minimum indicators of impairment listed in paragraph 12 of AASB 136.

Where an asset is assessed for impairment, some minimum impairment indicators specified in AASB 136 will be more relevant than others. The consideration of indicators of impairment is to be documented.

Sufficient information and sub-total columns are to be disclosed for the reconciliation of amounts with corresponding line items on the statement of financial position. Notes to the financial statements need to include:

• reconciliation of the opening and closing balances of PPE and intangibles
• reconciliation of the opening and closing balances of investment property.

Heritage and cultural assets

Heritage and cultural assets are buildings, other structures, works of art, artefacts, collectables, historical treasures, nature reserves, national parks, or similar items that are used for their cultural, environmental or historical significance. Heritage and cultural assets will generally be:

• used for public exhibition, education or research, and/or
• protected, cared for, and preserved.

Heritage and cultural items are for the community’s benefit and represent, in part, Australia’s cultural and historic background. These assets are primarily used for purposes relating to their cultural, environmental or historical significance.

However, structures that assist in the display, transport or storage of items (for example, backdrops, hanging apparatus, storage racks or protective cases) are not heritage and cultural items – except where it has heritage or cultural value in its own right, or is an integral part of the heritage and cultural item. For example, an asset that is an integral part of a heritage and cultural asset may include the original frame surrounding a painting, which is classified as a heritage and cultural asset.

Asset recognition criteria and measurement

Not all heritage or cultural items will meet the accounting definition of assets despite having intrinsic heritage value. Only items useful to achieving the entity’s objectives and with a financial value that can be reliably measured are recognised as assets.

Heritage and cultural assets acquired at no cost, or for a nominal cost, are to be initially recognised at fair value, as at the date of acquisition. Entities need to exercise professional judgement in determining whether fair value can be reliably measured for a heritage or cultural asset as at the date of acquisition.

Subsequent to initial recognition, heritage and cultural assets must be measured at fair value in accordance with paragraph 17(2)(c) of the FRR, and AASB 116.

Useful lives

The AAS contemplate indefinite useful lives for some assets and non-depreciation of these. This does not exempt the asset from impairment testing, unless exempt under paragraph AUS 5.1 of AASB 136.

Under paragraph G3 of AASB 116, heritage and cultural assets may be deemed to have an indefinite useful life and, as such, not depreciated where appropriate curatorial and preservation policies are established and implemented. Entities should ensure such policies satisfy the criteria in the Australian Implementation Guidance to AASB 116 and only depreciate these assets where they are determined to have a limited life.

To establish evidence that the policies have been adopted by the entity’s governing body, it is critical to:

• demonstrate clear understanding on what condition an entity is seeking to maintain an asset
• document how the policy is being followed for its condition to be maintained.

Primary use of assets

An example of an item subject to subsection 21(1) of the FRR is buildings of historical interest that are used primarily to provide office accommodation. These are not to be accounted for as heritage and cultural assets.

Curatorial and preservation policies

When disclosing information required by subsection 30(1) of the FRR, entities are not required to disclose sensitive material (such as information about fraud/theft prevention) if contained in the same document as curatorial or preservation policies.

Trust amounts

For trust amounts received as retainable receipts under section 74 of the PGPA Act and credited to a departmental annual appropriation:

• where the trust is not controlled by the entity and is held for the benefit of a person or entity other than the entity itself or the Commonwealth, include a footnote in the special account note to specify that trust money retained under section 74 of the PGPA Act and subsection 27(3) of the PGPA Rule is not included in the special account balance, but is included in the annual appropriations note
• entities should refer to the annual appropriations, special accounts and assets held in trust notes to determine where to report trust amounts.

Trust amounts will be included in the assets held in trust disclosure note and reported separately. These amounts will not be included in the Statement of Comprehensive Income or the Statement of Financial Position where the amounts are not controlled by the entity or held for the benefit of the Commonwealth. Entities should ensure trust arrangements are documented in writing. In addition, entities should seek legal advice to confirm whether amounts retained are actually trust amounts.

For trust amounts credited to a special account, the amount will be included in the special account balance and a footnote is required to specify that such an amount is included.

Reporting and disclosure requirements for entities who held part of the closing balance of a special account on trust are detailed at Appendix B: Disclosure of trust moneys, available under Tools and Templates.

For more guidance on special accounts reporting:

• see RMG-100 Guide to appropriations (RMG-100)
• see CBMS User Reference Material – 09. Reference Material – Guidance: Quick Reference Guides – Special Accounts
• email Special.Appropriations@finance.gov.au.

Trust disclosure

For agreements that constitute a legal trust (including for charitable purposes under trust law), entities are encouraged to obtain legal advice if they are unsure as to whether or not an asset is held in trust.

All trust accounts are to be identified by the type of trust (beneficiary or other third party purpose) and disclosed in the notes to the financial statements.

Special accounts

Entities must report trust assets covered by subsection 31(1) of the FRR that stand to the credit of a special account in the notes to the financial statements for special accounts (see Special accounts).

• Entities are to cross-reference any monetary assets held in trust that are disclosed in their special account note. However, monetary assets held in trust may not necessarily form all of the balance of a special account.
• Trust moneys may be credited to an entity’s special account only where this is permitted by special account crediting clauses. The amount is to be included in the special account balance and disclosed with an appropriate footnote (see Special accounts).

Under section 74 of the PGPA Act, trust moneys may also be received as retainable receipts. These amounts will increase the departmental appropriation and are to be disclosed in the annual appropriation table amounts, with an appropriate footnote.

For both situations, trust amounts will also be included in the assets held in trust disclosure note and reported separately. These amounts will not be included in the Statement of Comprehensive Income and the Statement of Financial Position, as the amounts are not controlled by the entity or held for the benefit of the Commonwealth. Entities should seek legal advice to confirm whether amounts are actually trust amounts. Appendix B, available under Tools and Templates, illustrates reporting and disclosure requirements for trust moneys.

Unidentified receipts

Money found on Australian Government premises and other unidentified receipts are relevant moneys for the purposes of the PGPA Act and are to be accounted for as administered receipts/revenue. As there is no beneficiary or third-party purpose, these receipts must not be treated as assets held in trust. For more information, email receipts@finance.gov.au.

For information on handling found moneys, refer to your entity’s Accountable Authority Instructions, or section 55 of the PGPA Act and RMG-206 Accountable Authority Instructions (RMG-206). 

Consolidated Revenue Fund money outside the Commonwealth

Other Consolidated Revenue Fund (CRF) (section 105 of the PGPA Act and section 29 of the PGPA Rule) money is not trust money. An amount of money is other CRF money if it is in the physical possession or a bank account, of a person other than the Commonwealth and that person is acting on behalf of the Commonwealth in relation to that money.

For more information about other CRF money held by persons outside the Commonwealth, see Financial instruments, and RMG 413 Banking and Management of CRF money (RMG-413).

An essential characteristic of a liability is the existence of a present obligation, being a duty or responsibility for the entity to act or perform in a certain way. A liability is only recognised when the entity has little or no discretion to avoid the sacrifice of future economic benefits. For example:

• A liability for workers’ compensation premium is recognised at the earlier of:
  • the start of the period for which there is a legal obligation to have workers’ compensation insurance, or
  • when the invoice is due to be paid under the terms of the contractual arrangement for insurance coverage.
• Employee benefit liability, such as for unpaid salary or superannuation is to be recognised at the earlier of:
  • when service is provided by the employee, or
  • the time of obligation specified in the employment agreement.

Obligations

The existence of an obligation does not mean the identity of the party, to whom the obligation is owed, should be known – this party may be different from the party that will receive the goods and services under the obligation.

While most obligations are legal, others are constructive. A constructive obligation is defined in paragraph 10 of AASB 137 Provisions, Contingent Liabilities and Contingent Assets (AASB 137). A constructive obligation is created, inferred or construed from facts in a particular situation, rather than from an agreement or being imposed by government. For example, a constructive obligation exists where:

• an entity has committed to remove environmental contaminants used in the past for building construction
• the removal of these contaminants is not required under legislation but there is an established practice for performing such work
• the public has a reasonable expectation that the entity will fulfil its commitment.

Finance has additional guidance on theoretical aspects of recognising provisions and how to deal with the calculation or estimation uncertainty in the government sector. It is important that entities also review and apply the relevant legislation and Australian accounting standards – see Guide - Provisions in Government Accounting.
 

Decommissioning, restoration and similar provisions (‘make good’)

For guidance on the accounting and disclosure requirements for initial recognition of make good provisions and subsequent accounting, including the unwinding of the discount and changes made to the provision – see RMG 114 Accounting for decommissioning, restoration and similar provisions to ‘make good’ (RMG-114).

Recognition of grant liabilities

Grant liabilities to state, territory and local governments are only recognised to the extent that grant conditions (such as grant eligibility criteria) were met by the grantee government entity, or those governments have provided required services or facilities under the grant agreement. In such cases, only amounts outstanding in relation to current or previous periods satisfy the definition of liabilities.

Social benefit payments

Social benefits are typically, though not exclusively, provided by Budget funded entities in the form of a regular (for example, fortnightly) cash payment (such as JobSeeker payments, pensions and PPL).

However, there may be circumstances where non-cash benefits are provided and/or the paying entity is not Budget funded (such as the National Disability Insurance Agency, a CCE, provides cash and in-kind benefits to National Disability Insurance Scheme recipients).

A standard requirement of social benefits payments is the use of ongoing eligibility requirements to assess the recipients’ entitlement to the payment – so a recipient will not qualify for the payment if they cease to satisfy the eligibility criteria. Eligibility requirements are usually set in the legislation authorising the payment.

Under paragraph 60 of the AASB Framework, obligations may be legally enforceable or arise from custom, equitable consideration or the desire for good relations. In the case of social benefits, the government incurs a liability at the time it has a legal obligation to make payment (that is, when the recipient meets the eligibility requirements).

Consequently, social benefits payments will not give rise to a constructive obligation under AASB 137 and no liability will be recognised for potential claimants who have not applied for the benefit as the government has no legal obligation until a claim is lodged and the applicant is assessed to have met the eligibility requirements.

Under paragraph Aus 26.1 of AASB 137, the present obligation (and consequently the liability) for social benefits payment is recognised at the point when the entitlement conditions are met for payment during a particular payment period. Paragraph Aus26.1 only automatically applies to entities that are part of the Commonwealth legal entity. However, paragraphs 10 and 11 of AASB 108 require entities to consider accounting standards dealing with similar issues and would reasonably extend the application of paragraph Aus 26.1 to include CCEs.

As the present obligation does not extend beyond the current payment period, payments the government may make in future periods, however probable, are future obligations that do not meet the recognition criteria for liabilities.

The expense for social benefits payments is recognised on the 'due and payable' basis - at the time the cash payment or other benefit is due. At the end of each reporting period a liability is recognised for the outstanding accrual for the payment period (for example, if 30 June fell in the middle of a fortnightly payment period, the liability would be the seven days’ accrual for eligible recipients).

The ‘due and payable’ basis is considered to be the most appropriate under accounting standards, and is consistent with the approach currently taken in accounting for social benefit payments.

Entities should review existing social benefits payments to confirm they are accounted for on a ‘due and payable’ basis. If another accounting treatment has been used, to determine if a change in accounting treatment is required, email accountingpolicy@finance.gov.au.

If an accounting treatment other than the ‘due and payable’ basis is used for an existing payment and this will be changed to the ‘due and payable’ basis, this is normally disclosed as a change in accounting policy (Tier 1 reporting: paragraph 29 of AASB 108, Tier 2 reporting: paragraph 108 of AASB 1060), and applied retrospectively, where practicable, under paragraph 19 of AASB 108.

The most probable change in the accounting policy will be a change in the length or scope of the social benefit liability. 

Fortnightly payments are recognised as an expense when they are made. Any unpaid amounts at year end should be accrued. Where there is any uncertainty over the number of claimants, amount or timing, this can be recorded as a provision.

Enabling legislation normally sets out procedures for dividends. Typically, the board or other governing body recommends a dividend to the minister. The minister has the authority to accept or reject a recommendation. A liability for the dividend is not recognised by the entity until the minister has made a determination.

Sometimes, legislation or government policy provides for a dividend to be paid as an amount or percentage of profit for the year, or profit less specified deductions. In such cases, there is no need for a determination to create a liability. A liability for dividends arises at the reporting date, when the amount is known.

In accordance with paragraph 12 of AASB 110 Events after the Reporting Period, if an entity declares dividends to holders of equity instruments after the reporting date, no liability is to be recognised at the reporting date. For Tier 1 reporting entities only, such dividends are to be disclosed in the notes to the financial statements in accordance with AASB 101 Presentation of Financial Statements.

Employee benefits are all forms of consideration (monetary and non-monetary) given by an entity in exchange for services rendered by employees, or in relation to the termination of employment. 

For guidance on types of employee benefits, see also:

• Employee related expenses and Key management personnel remuneration in 3. Statement of Comprehensive Income, and
• AASB 119 Employee Benefits (AASB 119).
   

Sick leave

Where sick leave (that is, ‘personal/carer's leave’ under the Fair Work Act 2009) is non‑vesting and average sick leave estimated to be taken each year is less than the annual entitlement, there is no requirement to record a provision for sick leave at year end.

Long service leave

The shorthand method for estimating employee LSL provisions was developed by the Australian Government Actuary. The shorthand method:

• incorporates probability factors that reflect the characteristics of small entities –entities with up to 1,000 full-time-equivalent (FTE) employees
• is not suitable for large entities – entities with more than 1,000 FTE employees
• is to be used to calculate the entities' LSL provision as at 30 June.

The shorthand model and its step-by-step guidance can be obtained from the CBMS GovTEAMS page in the Document library or by emailing accountingpolicy@finance.gov.au.

Transfers of funding when employees move

The shorthand model is not to be used for calculating transfers of funding for long service leave entitlements when employees move between Commonwealth entities. Please contact PGPA@finance.gov.au to request a copy of the 2014 guidance on calculating funding to be transferred. Please note that the retirement of the shorthand model is expected for the 2024-25 financial year.

• When calculating funding to be transferred when employees move between Commonwealth entities, please use the “LSL – Shorthand method standard factors”, available from the latest Standard parameters for use in financial statements issued by Finance.

On-costs

Under subsection 24(2) of the FRR, when estimating the provision of accrued leave entitlements the on-costs associated with employer superannuation contributions, annual leave and LSL must be taken into account. The shorthand model already factors in these on-costs.

For the purpose of calculating the provision of employee benefits, apart from the on‑costs allowed for under subsection 24(2) of the FRR, other on-costs such as payroll tax and workers’ compensation insurance are excluded.

Post-employment plans are arrangements where an entity (the employer) provides post-employment benefits for one or more employees (paragraph 8 of AASB 119).

Post-employment plans

Superannuation additional lump sum (ALS) amounts paid by an entity to the CRF in relation to the PSS and CSS are not considered compensation for the KMP remuneration disclosure note. Entities are required to make ALS payments to Finance where significant salary increases for individuals’ impact on the superannuation liability. As an ALS payment is not an individual employee benefit, it should be excluded from the KMP remuneration disclosure note (subsection 25(4A) of the FRR).

Discount rate

Consistent with AASB 119, for-profit entities are required to use the market yield on high quality corporate bonds when discounting employee benefit obligations. NFP entities are required to use the market yields on government bonds to discount employee benefits.

Defined Benefits Plan

Under subsection 25(4) of the FRR and paragraph 173 of AASB 1060, certain entities like the Department of Finance, the Department of Defence, the Attorney-General’s Department and the Commonwealth Superannuation Corporation that manage the superannuation scheme assets on behalf of the Commonwealth are required to make additional note disclosures in relation to defined benefit plan, specifically on actual return on plan assets.

Definitions and measurement

For Tier 1 reporting, AASB 7 Financial Instruments: Disclosures (AASB 7) applies to recognised and unrecognised financial instruments:

• recognised financial instruments include financial assets and financial liabilities that are within the scope of AASB 9
• unrecognised financial instruments include some financial instruments that, although out of scope of AASB 9, are within scope of AASB 7 (for example, credit risk disclosure requirements in paragraphs 35A – 35N of AASB 7, apply to those rights specified in AASB 15 Revenue from Contracts with Customers (AASB 15), and paragraph 5A of AASB 7).

Under AASB 7, Tier 1 reporting disclosures are to be made by the ‘class’ of financial instrument. ‘Classes’ are smaller units than categories (for example, the loans and receivables category of financial instruments contain classes such as cash at bank and trade receivables). When financial instruments must be disclosed by class, entities need to ensure they have appropriate classes for the disclosure requirements of AASB 7.

For Tier 2 reporting, the corresponding disclosure requirements in AASB 1060 apply to all financial instruments within the scope of AASB 9 but do not include unrecognised financial instruments. Under paragraph 113 of AASB 1060, Tier 2 reporting disclosures are to be made by the categories of financial assets and financial liabilities.

Appropriations receivable and statutory charges (receivable or payable) are not financial instruments (for example, statutory charges are GST receivable from, or payable to, the ATO, however amounts payable to, or receivable from, other entities need to be disclosed inclusive of GST).

Financial guarantee contracts as defined in AASB 9 do not include performance guarantees. For guidance on fair value measurement considerations for the recognition and measurement of financial instruments, see AASB 13 and Chapter 5 of AASB 9.

Trust amounts and statutory credits received in special accounts are to be excluded from the financial instrument disclosure table – see Special accounts.

Initial measurement

AASB 9 advises that, except in some circumstances, the fair value of a financial instrument is normally the transaction price (for example, a loan issued on favourable terms – in this case a valuation technique is employed to determine fair value).

Under AASB 13, a valuation technique must use prevailing market data for identical or comparable/similar financial instruments issued in the market. Similar financial instruments have substantially the same terms in regard to denominated currency, term, type of interest rate (fixed or floating) and other relevant factors.

Appendix B5.1.2A of AASB 9 allows different treatment where fair value is based on:

• a quoted price in an active market for an identical asset or liability, or
• a valuation technique that uses only data from observable markets.

In the above circumstances, the difference between fair value and transaction price is recognised as a gain or loss at initial recognition. In all other cases the difference between fair value at initial recognition and transaction price is deferred and only subsequently recognised as a gain or loss to the extent that it arises from a change in a factor that market participants would take into account when pricing the asset.

Upon examination of available market data, if there is not sufficient data to determine a prevailing market interest rate, or acceptable interest rate range for financial instruments issued, then fair value is the transaction price.

If a prevailing interest rate or range is determined, and the financial instrument is issued at a rate below this rate, a valuation technique will result in a value less than the transaction price – it is likely the difference would be recognised as an expense, unless upfront compensation is received for the discount.

Subsequent measurement, classification and concessional loans

For:

• subsequent measurement – requirements of subsequent measurement of financial assets and liabilities are provided in paragraph 5.2.1 to 5.3.2 of AASB 9
• disclosure – for Tier 1 reporting, disclosure requirements of AASB 13 apply to financial instruments where AASB 7 requires or permits fair value disclosures. For Tier 2 reporting, see AASB 1060.
• the classification of financial instruments – the classification, or designation, of financial instruments for an entity has the effect of designating those instruments in the Australian Government CFS.
• concessional loans – for guidance, see RMG-115 Accounting for concessional loans (RMG-115).

Analysis of market risk sensitivity

For Tier 1 reporting, AASB 7 requires disclosures of market risk sensitivity analysis and permits the analysis to be disclosed as either:

• a separate sensitivity analysis for each type of market risk the entity is exposed to, based on changes in the risk variable considered ‘reasonably possible’, or
• analysis taking account of interdependencies between market risk variables, if it is used to manage the entity’s financial risks.

Entities are encouraged to adopt the disclosures in PRIMA forms as part of their market risk sensitivity analysis. Where the sensitivity analysis disclosed is unrepresentative of the risk inherent in a financial instrument, the entity is required to disclose that fact and the reason for this belief.

Market risk sensitivity – standardised rates

Interest rate (IR) and foreign exchange (FX) sensitivity analyses have been prepared on a ‘reasonably possible’ change basis. A ‘reasonably possible’ change of IR or FX has been estimated using both statistical and non-statistical analyses.
 

The statistical analysis for the IR sensitivity analysis rate (IRSA rate):

• until the 2019-20 reporting period, was based on the interbank cash rates issued by the Reserve Bank of Australia as the underlying dataset
• from 2020-21, 10-year Australian Government bond yields will be used in analysing the IRSA rate due to changes in the economic environment.

The statistical analysis for the FX sensitivity analysis rate (FXSA rate) is based on main currencies movement for the last 5 years with information revised and adjusted for reasonableness under the current economic circumstances. The main currencies that the Commonwealth has exposure to in relation to financial instruments include the USD (United States Dollar) and EUR (Euro).

Market risk sensitivity – alternative rates

Entities are to use the rates indicated in Standard Parameters for use in Financial Statements unless otherwise agreed with Finance (see subsection 16(8) of the FRR).

Entities that hold financial instruments for which they consider the underlying risk profiles to be substantially different from assumptions used in this RMG need to contact Finance to discuss the use of alternative rates. System limitations do not provide suitable grounds for use of an alternative rate.

Other CRF money held by persons outside the Commonwealth

Other CRF money, as described by section 105 of the PGPA Act, forms part of the CRF but is held and managed by an entity other than the Commonwealth.

As a result, other CRF money is not reported as cash held in financial statements and is to be managed in accordance with an arrangement (under section 23 of the PGPA Act), which is compliant with the requirement of section 29 of the PGPA Rule.

For more information, see RMG-303 Other CRF money or email PGPA.

Under paragraph 8 and 9 of AASB Interpretation 1031 Accounting for the Goods and Services Tax (GST) (AASB Interpretation 1031) receivables and payables should be inclusive of GST in the statement of financial position.

Commitments may be inclusive or exclusive of GST but entities must disclose the GST treatment applied. However, as commitments are potential receivables or payables, for consistency with AASB Interpretation 1031, entities are encouraged to treat commitments as inclusive of GST.