D : Operating Resources
This section provides further information about major assets and liabilities held or administered by Finance, significant estimates and judgements made and the management of risk in relation to these items.
D1 : Financial instruments
Policy and measurement
A financial instrument is a contract between entities that gives rise to a financial asset of one entity and a financial liability or equity instrument of the other entity. Generally, financial instruments are recognised and derecognised on 'trade date' which is the date that the risks and rewards of ownership are transferred to the 'buyer'. Finance classifies its financial instruments in the following categories:
- Loans and receivable assets: includes cash and cash equivalents which are readily convertible to cash, trade receivables, loans and other receivables with fixed or determinable payments that are not quoted in an active market.
- Held-to-maturity investments: non-derivative financial assets with fixed or determinable payments and fixed maturities that an entity has a positive intention and ability to hold to maturity.
- Available-for-sale financial assets: non-derivative financial assets that are either designated in this category or are not classified in any other category.
- Financial assets/liabilities at FVPL: assets and liabilities held for trading, or portions of an identified portfolio of financial instruments that are managed together and have a recent actual pattern of short term profit taking. Derivatives are classified as held for trading unless they are designated as hedges.
- Financial liabilities held at amortised cost: includes suppliers and other payables with a fixed or determinable amount to be paid that are not quoted in an active market.
All financial assets and liabilities are initially recognised at fair value (usually transaction price). For financial instruments not at FVPL, transaction costs are also added to the initial value.
| Measurement | Type of financial instrument | Impairment (assessed annually) |
|
At fair value, with all movements captured in the surplus/(deficit). |
|
N/A |
|
At amortised cost using effective interest method, any valuation movement is recognised in the surplus/(deficit). |
|
Impairment loss is measured as the difference between the carrying amount and the present value of discounted estimated future cash flows. Any asset impairment is shown as a reduction in the value of the asset by way of an allowance account, with the loss being recorded in the surplus/(deficit). |
|
At fair value, with any valuation movement taken to equity (reserves). |
|
Any difference between the cost less principal repayments and amortisation, and the current fair value less any previous impairment loss, is transferred from equity to the surplus/(deficit). |
In the following note disclosure, Departmental and Administered items are included together for presentation purposes only and these balances should not be compared.
D1.1 Categories of financial instruments
| Departmental | Administered | ||||
| 30 June | 30 June | 30 June | 30 June | ||
| 2017 | 2016 | 2017 | 2016 | ||
| Note ref | $'000 | $'000 | $'000 | $'000 | |
| Financial Assets | |||||
| Loans and receivables | |||||
| Cash and cash equivalents | H2 | ||||
| OPA balance | H2 | - | - | 936,797 | 1,058,038 |
| Special Account cash held by Finance | F3.1 | 9,162 | 2,088 | - | - |
| Operating cash balance | 1,618 | 1,233 | 1,159 | 1,496 | |
| Special Account cash held in OPA | F3.1 | 739,018 | 643,912 | - | - |
| Trade receivables | 74,299 | 69,969 | 721 | 1,390 | |
| Investment funds - loans and receivables | C2.2 | - | - | 6,501,484 | 4,259,529 |
| State and Territory Government loans | - | - | 139,752 | 145,959 | |
| Accrued revenue | 11,770 | 20,344 | 2,213 | 1,533 | |
| Total loans and receivables | 835,867 | 737,546 | 7,582,126 | 5,467,945 | |
| Held-to-maturity investments | |||||
| Government securities | - | - | 1,472 | 1,472 | |
| Total held-to-maturity investments | - | - | 1,472 | 1,472 | |
| Available-for-sale financial assets | |||||
| Commonwealth corporate entities | - | - | 573,417 | 400,454 | |
| Total available-for-sale financial assets | - | - | 573,417 | 400,454 | |
| Financial assets designated at FVPL | |||||
| Investment funds - financial assets at FVPL | C2.2 | - | - | 16,190,822 | 12,494,544 |
| Total financial assets designated at FVPL | - | - | 16,190,822 | 12,494,544 | |
| Total financial assets | 835,867 | 737,546 | 24,347,837 | 18,364,415 | |
| Financial Liabilities | |||||
| Financial liabilities measured at amortised cost | |||||
| Trade creditors and accruals | 49,771 | 53,029 | 12,418 | 15,585 | |
| Investment funds - financial liabilities | C2.2 | - | - | 99,915 | 21,859 |
| Finance leases | 6,475 | 10,102 | - | - | |
| Total financial liabilities measured at amortised cost | 56,246 | 63,131 | 112,333 | 37,444 | |
| Financial liabilities designated at FVPL | |||||
| Investment funds - derivative liabilities | C2.2 | - | - | 13,405 | 26,314 |
| Total financial liabilities designated at FVPL | - | - | 13,405 | 26,314 | |
| Total financial liabilities | 56,246 | 63,131 | 125,738 | 63,758 | |
Key judgements and estimates
Loans to state and territory governments
Concessional loan balances receivable from states and territories are measured at amortised cost and no security is held for these. Repayments are based on a reducing balance method. The amortised cost differs from fair value which has been disclosed under Note D1.2.
Investments in Commonwealth corporate entities (CCEs)
CCEs are 100% owned by the Commonwealth and managed by Finance on behalf of the Commonwealth. However, as the CCEs are not controlled by Finance the CCEs have been reported as investments and measured at fair value.
The following are details of all CCEs managed by Finance:
- CSC is a trustee and administrator of Commonwealth superannuation schemes. The value of CSC has been measured using the net assets (NET) reported in its audited accounts and internal management accounts. A change in the net assets would result in an equal change in reported fair value. Further information about CSC is included in Note C3.2.
- On 26 March 2017, the ASC Group was restructured, with the critical infrastructure assets consolidated into Australian Naval Infrastructure (ANI) Pty Ltd and 100 per cent of the shareholding of ANI transferred to the Commonwealth. The value of ANI has been measured using the net assets (NET) reported in the ANI 30 June 2017 balance sheet. A change in the net assets would result in an equal change in reported fair value.
- ASC Pty Ltd (ASC) provides ongoing capability for the through life support of the Collins class submarine and shipbuilder for the Air Warfare Destroyers. ASC has been measured using reporting date value of the future cash flows of the company sourced from the 2017-22 Corporate Plan and an extended forecast model out to 2027 based on information in the ASC internal valuation. This forecasting also takes into account the separation of ANI. These cash flows have been discounted using the weighted average cost of capital (WACC). The WACC is calculated based on a number of inputs derived from either professional judgement or observable historical market data of comparable entities. The impact of WACC changes is included as part of Market Risk analysis in Note D2.1.
D1.2 Fair value information by financial asset class
The following table sets out the fair value, valuation techniques and inputs used for Administered financial instruments. The techniques used to value financial instruments have not changed during the year. Financial instruments have been valued using inputs under the following fair value hierarchy:
- Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that Finance can access at measurement date.
- Level 2: observable inputs that are derived from prices in active markets.
- Level 3: inputs that are not observable and involve significant judgement.
Fair value measurements at the end of the reporting period
| Administered | |||||
| 30 June | 30 June | ||||
| 2017 | 2016 | ||||
| Level | Inputs used | Valuation technique | $'000 | $'000 | |
| Financial assets | |||||
| State and Territory Government loans | 2 | N/A | Income Approach | 231,180 | 244,520 |
| Investments in CCEs | 3 | NET | Cost Approach | 318,616 | 38,181 |
| Investments in CCEs | 3 | WACC | Income Approach | 254,801 | 362,273 |
| Investment funds - financial assets at FVPL | |||||
| Investment funds- other investments | 1 | N/A | Market approach | 553,207 | 120,380 |
| Investment funds- interest bearing securities | 2 | PI1 | Market approach | 14,195,737 | 11,580,840 |
| Investment funds- derivative assets | 2 | N/A | Market approach | 117,607 | 94,869 |
| Investment funds- other investments | 2 | N/A | Market approach | 2,875 | 880 |
| Investment funds- other investments | 3 | NET | Market approach | 1,321,396 | 697,575 |
| Total financial assets | 16,995,419 | 13,139,518 | |||
| Financial liabilities | |||||
| Investment funds - derivative liabilities | 2 | N/A | Market approach | 13,405 | 26,314 |
| Total financial liabilities | 13,405 | 26,314 | |||
1Price Index (PI) values based on observable market data relating to prices, industry accepted pricing models and broker/dealer quotes
Movements of recurring level 3 financial assets
| Administered | ||
| 30 June | 30 June | |
| 2017 | 2016 | |
| $'000 | $'000 | |
| Opening balance of investments in CCEs | 400,454 | 378,108 |
| Equity injections | 95,000 | - |
| Total gains/(losses) recognised in other comprehensive income | 77,963 | 22,346 |
| Closing balance of investments in CCEs | 573,417 | 400,454 |
| Opening balance of investment funds - financial assets at FVPL | ||
| 697,575 | - | |
| Purchase | 656,697 | 693,734 |
| Sales | (30,379) | (6,219) |
| Total gains/(losses) recognised in net cost of services | (2,128) | 10,060 |
| Transfers into level 3 | (369) | - |
| Closing balance of investment funds - financial assets at FVPL | 1,321,396 | 697,575 |
D1.3 Net gains or losses on financial assets
| Departmental | Administered | ||||
| 30 June | 30 June | 30 June | 30 June | ||
| 2017 | 2016 | 2017 | 2016 | ||
| Note ref | $'000 | $'000 | $'000 | $'000 | |
| Loans and receivables | |||||
| Interest revenue earned on: | |||||
| OPA deposits | - | - | 14,877 | 21,307 | |
| Housing agreements | - | - | 5,515 | 5,582 | |
| State and Territory Government loans | - | - | 9,707 | 10,245 | |
| Other interest revenue | 8 | 6 | - | - | |
| Impairment of financial assets | (4) | (826) | (13) | (2) | |
| Net gains/(losses) on loans and receivables | 4 | (820) | 30,086 | 37,132 | |
| Held-to-maturity investments | |||||
| Interest revenue earned on Government Securities | - | - | 94 | 120 | |
| Net gain/(losses) on held-to-maturity investments | - | - | 94 | 120 | |
| Available-for-sale financial assets | |||||
| Dividends | - | - | 19,700 | 16,100 | |
| Investment funds - dividends | C2.1 | - | - | 13,228 | 6,147 |
| Gain/(loss) recognised in equity | - | - | 77,963 | 22,347 | |
| Gains from sale of financial assets | |||||
| Sale proceeds | - | - | 1 | - | |
| Carrying value of asset sold | - | - | - | - | |
| Previous revaluation gains recognised in equity | - | - | - | - | |
| Net gains/(losses) from available-for-sale financial assets | - | - | 110,892 | 44,594 | |
| Financial assets designated as FVPL | |||||
| Investment funds - foreign exchange losses | C2.1 | - | - | (6,925) | (106,288) |
| Investment funds - interest on term deposits | C2.1 | - | - | 91,566 | 98,946 |
| Investment funds - gains on financial investments | C2.1 | - | - | 439,306 | 383,368 |
| Net gains/(losses) on financial assets designated as FVPL | - | - | 523,947 | 376,026 | |
| Net gains/(losses) on financial assets | 4 | (820) | 665,019 | 457,872 | |
Policy and measurement
Foreign exchange gains/losses
All foreign currency transactions during the period are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency items at reporting date are translated at the exchange rate existing at reporting date. Exchange differences are recognised in the surplus/(deficit) in the period in which they arise.
