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7. Managing Uncertainties

This section analyses how the Australian Financial Security Authority manages financial risks within its operating environment.

7.1. Contingent Assets and Liabilities

Note 7.1A: Contingent Assets and Liabilities

Total Claims for damages or costs

2020

$'000

2019

$'000

Contingent assets

Balance from previous period

-

-

New contingent assets recognised

50

-

Total contingent assets

50

-

Contingent liabilities

Balance from previous period

-

-

New contingent liabilities recognised

118

-

Total contingent liabilities

118

-

Net contingent asset / (liabilities)

(68)

-

Quantifiable Contingencies

The Schedule of Contingencies contains a contingent asset of $50,073, related to an Official Receiver bankruptcy matter and $117,645 in contingent liabilities with respect to a potential amount payable to a user of the PPSR register. These are estimates based on information available to AFSA at year end (2019: $Nil).

Unquantifiable Contingencies

AFSA could be liable for legal costs, damages or other court awards against the Official Receiver, Official Trustee or Inspector-General for legal actions initiated with respect to their administration or regulation of the personal insolvency system in Australia, particularly under the Bankruptcy Act 1966. AFSA advances moneys to the Official Trustee to ensure it can pay expenses incurred in performing its trustee duties when there are no funds in bankrupt estates or proceeds of crime matters. If funds eventually come into the estate or matter, then the Official Trustee is reimbursed.

At 30 June 2020, AFSA was involved in legal proceedings with a number of parties involving the administration of and possible claims against forfeited assets under Proceeds of Crime legislation. It is not possible to reliably estimate the total of any eventual amounts that may be received or paid in relation to these claims and subsequent reimbursement of costs to AFSA.

Accounting Policy

Contingent liabilities and contingent assets are not recognised in the Statement of Financial Position but are reported in the notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an existing liability or asset in respect of which the amount cannot be reliably measured. Contingent assets are disclosed when settlement is probable, but not virtually certain, and contingent liabilities are disclosed when settlement is greater than remote.

Quantifiable Administered Contingencies

AFSA had no quantifiable contingencies at 30 June 2020 (2019: Nil).

Unquantifiable Administered Contingencies

AFSA could be liable for legal costs, damages or other court awards against the Official Trustee for legal actions initiated with respect to the Official Trustee’s role under the Bankruptcy Act 1966, Proceeds of Crime Act 1987 and the Proceeds of Crime Act 2002.

At 30 June 2020, AFSA was involved in legal proceedings with a number of parties involving the administration of and possible claims against forfeited proceeds of crime assets. It is not possible to reliably estimate the total of any eventual amounts that may be received or paid in relation to these claims.

7.2. Financial Instruments

Note 7.2A: Categories of Financial Instruments

2020

$'000

2019

$'000

Financial assets at amortised cost

Cash and cash equivalents

4,693

3,025

Receivables - goods and services

4,401

5,116

Total financial assets at amortised cost

9,094

8,141

Total financial assets

9,094

8,141

Financial Liabilities

Financial liabilities measured at amortised cost

Suppliers payable

2,987

6,173

Other payables

1,658

5,055

Total financial liabilities measured at amortised cost

4,645

11,228

Total financial liabilities

4,645

11,228

Accounting Policy

Financial Assets

With the implementation of AASB 9 Financial Instruments for the first time in 2019, AFSA classifies its financial assets in the following categories:

a) financial assets at fair value through profit or loss,

b) financial assets at fair value through other comprehensive income, and

c) financial assets measured at amortised cost.

The classification depends on both AFSA’s business model for managing the financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when AFSA becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash and derecognised when the contractual rights to the cash flows from the financial asset expire or are transferred upon trade date.

Comparatives have not been restated on initial application.

Financial Assets at Amortised Cost

Financial assets included in this category need to meet two criteria:

1. the financial asset is held in order to collect the contractual cash flows, and

2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Amortised cost is determined using the effective interest method.

Effective Interest Method

Income is recognised on an effective interest rate basis for financial assets that are recognised at amortised cost.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period based on expected credit losses, using the general approach which measures the loss allowance based on an amount equal to lifetime expected credit losses where risk has significantly increased, or an amount equal to 12‐month expected credit losses if risk has not increased.

The simplified approach for trade, contract and lease receivables is used. This approach always measures the loss allowance as the amount equal to the lifetime expected credit losses.

A write-off constitutes a derecognition event where the write-off directly reduces the gross carrying amount of the financial asset.

Financial Liabilities

Financial liabilities are classified as either financial liabilities “at fair value through profit or loss” or financial liabilities at amortised cost. Financial liabilities are recognised and derecognised upon “trade date”.

Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (irrespective of having been invoiced).

7.3. Administered - Financial Instruments

Note 7.3A: Categories of Financial Instruments

2020

$'000

2019

$'000

Financial assets at amortised cost

Cash - at bank and on hand

128,201

145,102

Receivables - administered revenues

-

1

Total financial assets at amortised cost

128,201

145,103

Total financial assets

128,201

145,103

Financial Liabilities

Financial liabilities measured at amortised cost

Other payables

366

53

Total financial liabilities measured at amortised cost

366

53

Total financial liabilities

366

53

Note 7.3B: Net Gains on Financial Assets

2020

$'000

2019

$'000

Financial assets at amortised cost

Interest revenue

181

285

Net gains on financial assets at amortised cost

181

285

Net gains on financial assets

181

285

7.4. Fair Value Measurement

The following table provides an analysis of assets that are measured at fair value. The remaining assets and liabilities disclosed in the statement of financial position do not apply the fair value hierarchy.

Accounting Policy

AFSA engaged the service of Jones Lang LaSalle (JLL) to conduct an asset materiality review for all non-financial assets at 30 June 2020. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different to fair value as at the reporting date. A comprehensive valuation was conducted for 30 June 2019 by JLL and is carried out at least once every three years with the next valuation to occur for the reporting period ended 30 June 2022.

Both the market and cost approaches were utilised by JLL to determine the fair value of assets:

Cost approach – reflects the amount that would be required to replace the service capacity of an asset at the reporting date. That is, the cost a market participant would be prepared to pay to acquire or construct a substitute asset of comparable utility. Often the asset being examined will be less attractive than the alternative because of age or obsolescence. Obsolescence incorporates physical deterioration, functional (or technical) obsolescence and economic obsolescence specific to the asset. This approach is referred to as the Current Replacement Cost under AASB 13.

Market approach – provides an indication of value by comparing the subject asset with similar assets for which price information is available. The first step is to consider the prices for transactions of similar assets that have occurred recently in the market. If few recent transactions have occurred, it may also be appropriate to consider the prices of identical or similar assets that are listed or offered for sale provided the relevance of this information is clearly established and critically analysed.

JLL select the most relevant valuation technique based on the nature of the asset being measured and the exit market within which the asset would transact. No individual assets were measured using multiple valuation techniques.

AFSA's policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.

Note 7.4A: Fair Value Measurements

Fair value measurements at the end of the reporting period

2020

$'000

2019

$'000

Non-financial assets2

Leasehold Improvements1

2,104

2,801

Leasehold Improvements1 (Make Good)

463

532

Heritage & Cultural1

16

16

Plant & Equipment1

15,530

11,048

Work in Progress (Leasehold improvements)

392

7

Work in Progress (Plant & Equipment)

115

7,331

1. No non-financial assets were measured at fair value on a non-recurring basis as at 30 June 2020 (2019: Nil).

2. AFSA's assets are held for operational purposes and not held for the purposes of deriving a profit. The current use of all non-financial assets is considered their highest and best use.