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Administered Accounts

Introduction

Administered items are identified separately from departmental items in the financial statements by shading.

Administered assets, liabilities, revenue and expenses are those items that an entity does not control but over which it has management responsibility on behalf of the government and which are subject to prescriptive rules or conditions established by legislation, or Australian Government policy, in order to achieve Australian Government outcomes. These items include debt issued to finance the government’s fiscal requirements and investments of funds surplus to the government’s immediate financing needs.

Administered schedule of comprehensive income ($m)

for the period ended 30 June 2020

Notes

2020

2019

EXPENSES

Interest expense:

Treasury Bonds

2

15,139

15,560

Treasury Indexed Bonds

3

1,468

1,465

Treasury Notes

136

63

16,743

17,088

Other expenses:

Debt repurchases

399

896

Supplier expenses

32

12

Waiver of Tasmanian Government housing debt

8

144

Total expenses

17,318

17,996

INCOME

Interest revenue:

Loans to State and Territory Governments

94

106

Deposits

170

459

Structured Finance Securities

7

(4)

Total income

260

565

Surplus (deficit) before re‑measurements

(17,058)

(17,431)

RE‑MEASUREMENTS (net market revaluation)

Treasury Bonds

(9,190)

(41,160)

Treasury Indexed Bonds

29

(2,390)

Treasury Notes

(32)

Total re‑measurements

(9,193)

(43,550)

Surplus (deficit)

(26,251)

(60,981)

The above schedule should be read in conjunction with the accompanying notes.

Interest expense and interest revenue are determined using the effective interest method.

‘Debt repurchases’ represent the total proceeds paid from repurchasing debt prior to maturity less the amortised cost carrying value of the debt using the effective interest method. The AOFM conducts these transactions at market rates.

The category ‘Surplus (deficit) before re‑measurements’ records a financial result that is consistent with an accruals (or amortised cost) basis of accounting under the historic cost accounting convention. This is most relevant to the AOFM’s role in managing the debt portfolio, which is predominately issued and held to maturity, and where portfolio restructuring is performed for debt management purposes, rather than for profit making purposes.

The category ‘Re‑measurements’ provides information on the unrealised changes in the market revaluation of the portfolio of administered financial assets and financial liabilities (which are carried at fair value through profit or loss) during the financial year. This is an implicit cost or revenue and relevant for assessing changes in financial risk exposures and changes to the value of transactions managed from year to year. The revaluation effect will net to zero over the life of a financial instrument.

Administered schedule of assets and liabilities ($m)

as at 30 June 2020

Notes

2020

2019

LIABILITIES

Interest bearing liabilities at fair value:

Treasury Bonds

2

673,729

573,557

Treasury Indexed Bonds

3

52,500

49,813

Treasury Notes

4

58,738

2,993

Interest bearing liabilities at amortised cost:

Loan commitments

5

1

Other debt

6

6

Other liabilities:

Securities purchased not delivered

121

Total liabilities

785,095

626,369

FINANCIAL ASSETS

Cash at bank

1

1

Assets at amortised cost:

Term deposits with the RBA

6

69,952

31,112

Structured finance securities

7

1,815

Loans to State and Territory Governments

8

1,492

1,711

Total assets

73,260

32,824

Net assets (liabilities)

(711,835)

(593,545)

The above schedule should be read in conjunction with the accompanying notes.

The Treasurer has issued a direction under the Commonwealth Inscribed Stock Act 1911 permitting the AOFM to borrow up to a limit of $850 billion in face value terms. As at 30 June 2020 the face value on issue was $684 billion. The schedule above reports the carrying value of debt in fair value (synonymous with market value) terms.

Current/non current balances reported ($m)

2020

2019

Current assets

70,084

31,197

Non‑current assets

3,176

1,627

Current liabilities

107,655

38,162

Non‑current liabilities

677,440

588,207

Financial assets and financial liabilities denoted as being measured at amortised cost, are measured at fair value on initial recognition and at amortised cost on subsequent measurement using the effective interest method. Changes in carrying value, including amortisation of premiums or discounts, are recognised in Interest Revenue (for assets) and Interest Expense (for liabilities).

Financial assets and financial liabilities denoted as being measured at fair value, are measured at fair value on initial recognition and at fair value through profit or loss on subsequent measurement. Changes in carrying value are attributed between changes in amortised cost and other changes. Changes in carrying value attributable to amortised cost, including amortisation of premiums or discounts, are recognised in Interest Revenue (for assets) and Interest Expense (for liabilities). Other changes in carrying value (including unrealised changes in valuation due to a change in interest rates) are recognised in Re‑measurements.

The AOFM is not aware of any quantifiable or unquantifiable administered contingencies as of the signing date that may have a significant impact on its operations.

Administered reconciliation schedule ($m)

for the period ended 30 June 2020

Notes

2020

2019

NET ASSETS

Opening value

(593,545)

(528,516)

Adjustment due to the implementation of AASB 9

(4)

Revised opening value

(593,545)

(528,520)

Surplus (deficit)

(26,251)

(60,981)

Transactions with the OPA

Special appropriations (unlimited)

10

1,913,353

548,336

Transfers to OPA

(2,007,091)

(552,380)

Contributed equity — special accounts

10

15,250

Special account balances

10

(13,551)

Net assets

(711,835)

(593,545)

The above schedule should be read in conjunction with the accompanying notes.

Administered schedule of cash flows ($m)

for the period ended 30 June 2020

Notes

2020

2019

NET CASH FROM OPERATING ACTIVITIES

Interest receipts

272

581

GST refunds from ATO

2

1

Interest paid on Treasury Bonds

2

(17,643)

(18,042)

Interest paid on Treasury Indexed Bonds

3

(886)

(2,966)

Interest paid on Treasury Notes

(107)

(62)

Interest paid on other debt instruments

(11)

(9)

Other payments

(34)

(13)

Net cash from operating activities

9

(18,407)

(20,510)

NET CASH FROM INVESTING ACTIVITIES

Capital proceeds from deposits

1,777,516

475,350

Capital proceeds from structured finance securities

26

State and Territory loan repayments

91

98

Acquisition of structured finance securities

(1,726)

Acquisition of deposits

(1,816,366)

(461,350)

Net cash from investing activities

(40,459)

14,098

NET CASH FROM FINANCING ACTIVITIES

Capital proceeds from borrowings

228,637

75,892

Other receipts

54

87

Repayment of borrowings

(77,732)

(65,436)

Other payments

(54)

(87)

Net cash from financing activities

150,905

10,456

TRANSACTIONS WITH OPA

Appropriations — unlimited special

1,913,353

548,336

Appropriations — special accounts

1,727

Receipts to OPA — special accounts

(28)

Receipts to OPA — other

(2,007,091)

(552,380)

Net cash from OPA

(92,039)

(4,044)

Net change in cash held

+ cash held at the beginning of period

1

1

Cash held at the end of the period

1

1

The above schedule should be read in conjunction with the accompanying notes.

Note 1: Financial risk management

The government is exposed to financial risks arising from its portfolio of financial assets and liabilities — interest rate risk, inflation risk, credit risk, liquidity risk and refinancing risk. These risks are managed by the AOFM within a financial risk management framework that comprises directions from the Treasurer and policies and limits approved by the Secretary to the Treasury and overseen by the CEO and senior management of the AOFM.

Timing mismatches between the Australian Government’s receipts and expenditures cause large fluctuations in the volume of short term assets and liabilities managed by the AOFM, and thus in the overall size of its net portfolio, relative to the gross volume of debt outstanding. To provide stability in the management of the longer term component of debt, long term financing and short term financing are managed through separate portfolios, the debt portfolio and the cash management portfolio. In addition, those assets held for policy purposes — loans to State and Territory Governments and structured finance securities — are held in separate portfolios.

Debt portfolio

The debt portfolio is used to meet the Australian Government’s budget financing needs, to support efficient Treasury Bond and Treasury Bond futures markets, and to promote depth and breadth in the investor base. Issuance is the primary mechanism for managing interest rate risk of the debt portfolio. That is, the AOFM manages the cost structure of the debt portfolio through the choice of instruments and bond series in issuing debt. The annual debt issuance strategy is informed by qualitative and quantitative factors to achieve an interest rate profile that appropriately balances cost and cost variability, investor demand and diversification, the refinancing task and financial market efficiency. Since the start of the Covid‑19 pandemic the AOFM’s issuance decisions have been considerably more constrained by market conditions.

Cash management portfolio

The cash management portfolio is used to manage within year timing mismatches between Australian Government receipts and expenditures. The cash management portfolio holds a fluctuating portfolio of short term investments and short term liabilities. The portfolio is managed to achieve an appropriate balance between refinancing risk, liquidity risk and interest rate risk. In line with the weakening of the government’s fiscal position, a significant increase in cash holdings in late 2019‑20 reflected the AOFM’s usual approach of holding sufficient cash portfolio asset reserves to meet at least four weeks of forecast outlays following the dislocation of funding markets in March. The change to the size of these reserves reflects an increase in forecast outlays as a result of the fiscal response to the pandemic.

Interest rate risk

Interest rate risk represents the risk to debt servicing cost outcomes and investment return outcomes, and to the value of debt and financial assets caused by changes in interest rates.

In its ordinary course of business the primary measure used by the AOFM to assess interest rate risk is the accruals basis of accounting under the historic cost accounting convention. Fair value measures of interest rate risk are considered to be secondary.

Financial instruments with a fixed interest rate expose the portfolio to changes in fair value with changes in interest rates, whilst those financial instruments at floating interest rates expose the portfolio to changes in debt servicing costs with changes in interest rates. The extent to which the AOFM can match the repricing profile of financial liabilities with financial assets is limited due to the significant differences in the volumes and the need for assets to be available for cash management or other purposes. The interest rate exposure is predominately to fixed interest instruments.

Interest exposure of assets and liabilities ($m)

2020

2019

Fixed rate exposures

Assets

71,444

32,823

Liabilities

(784,967)

(626,363)

Floating rate or non‑interest bearing exposures

Assets

1,816

1

Liabilities

(128)

(6)

The following sensitivity analysis illustrates the interest rate risk sensitivity of administered financial instruments and the financial impact on profit or loss and equity to financial positions held as at period end.

Sensitivity of 30 June balances to a +9 basis points change (2019: +20) ($m)

2020

2019

Financial Liabilities

Changes in fair value:

Treasury Bonds

4,022

7,485

Treasury Indexed Bonds

428

963

Treasury Notes

15

1

Financial Assets

Changes in interest revenue:

Structured finance securities

2

Sensitivity of 30 June balances to a 9 basis points change (2019: 20) ($m)

2020

2019

Financial Liabilities

Changes in fair value:

Treasury Bonds

(4,059)

(7,651)

Treasury Indexed Bonds

(434)

(995)

Treasury Notes

(15)

(1)

Financial Assets

Changes in interest revenue:

Structured finance securities

(2)

In undertaking the sensitivity analysis a parallel shift in interest rates (real and nominal) is applied to instruments with all other variables held constant.

For fixed rate instruments, a shift in market interest rates on 30 June balances only has an effect on those instruments carried at fair value, by altering their fair value carrying amount as at 30 June. Fixed rate instruments carried at fair value include Treasury Bonds and Treasury Indexed Bonds.

For floating rate instruments, the impact on interest revenue or interest expense represents an annualised estimate calculated as if the positions as at the period end were outstanding for the entire year.

A sensitivity of 9 basis points (20 basis points for 2019) has been used for domestic interest rates as per standard parameters mandated by the Department of Finance.

Inflation risk

Treasury Indexed Bonds have their principal value indexed against the all Groups Australian Consumer Price Index (CPI). Interest is paid at a fixed rate on the accreted principal value. Accordingly, these debt instruments expose the government to inflation risk on interest payments and on the value of principal payable on maturity. There is a six month lag between the calculation period for the CPI and its impact on the value of interest and principal.

Treasury Indexed Bonds lines index value for next interest payment as at 30 June 2020

First issued

2020

2019

2018

2017

21 Nov 18 — 1.00%

Apr‑14

108.65

106.61

20 Aug 20 — 4.00%

Oct‑96

176.55

173.05

170.40

167.19

21 Feb 22 — 1.25%

Feb‑12

116.97

114.63

112.87

110.75

20 Sep 25 — 3.00%

Sep‑09

125.97

123.47

121.57

119.29

21 Nov 27 — 0.75%

Aug‑17

105.60

103.50

101.91

20 Sep 30 — 2.50%

Sep‑10

122.89

120.45

118.60

116.37

21 Aug 35 — 2.00%

Sep‑13

113.90

111.63

109.92

107.86

21 Aug 40 — 1.25%

Aug‑15

109.29

107.12

105.48

103.49

21 Feb 50 — 1.00%

Sep‑18

103.60

101.55

Credit risk

Credit risk is the risk of non‑performance (including partial performance) by a counterparty to a financial contract, leading to a financial loss for the creditor.

The AOFM’s investment activity is comprised of term deposits acquired for cash management purposes and structured (securitisation) finance securities to support the purposes of the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF).

Investments acquired for cash management purposes are made in accordance with legislative requirements, delegations and directions from the Treasurer and policies and limits established by the Secretary to the Treasury. For 2019‑20 and 2018‑19, investments in term deposits with the RBA were the only eligible investments the AOFM was permitted to acquire under the authority of section 58 of the Public Governance, Performance and Authority Act 2013. Investments with the RBA are considered to carry zero credit risk.

The AOFM invests in debt securities issued by way of capital market securitisation offerings under the authority of either section 12 of the Australian Business Securitisation Fund Act 2019 or section 12 of the Structured Finance Support (Coronavirus Economic Response Package) Act 2020.

Securitisation is a process in which assets with an income stream are pooled and converted into tranches of debt securities, with each tranche having different risk and return characteristics. In the case of the ABSF investments the underlying assets are secured and unsecured loans to small and medium enterprises. In the case of the SFSF investments the underlying assets may be residential loans, commercial loans, car loans and leases, credit card liabilities and buy‑now‑pay‑later liabilities.

The prediction of the performance of a pool of assets through a structured product is difficult given that creditworthiness is heavily reliant on the specific characteristics of each pool and economic conditions. A deep history of performance data may not be available, and new entrants to this market may have little or no performance history. Furthermore, the structured (securitisation) finance securities in which the AOFM may invest may not be publicly rated by a credit rating agency.

In circumstances in which the AOFM is proposing to acquire a structured finance security that is not publicly rated, it will engage an advisor to undertake pre‑trade loan pool analysis and credit risk assessment.

Post‑trade performance monitoring of each security acquired is also conducted, including defaults, prepayment rates, losses, profitability and level of credit enhancement. The actual historical performance of loan pools may guide revisions of expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide an estimate as to expected future credit losses (either for the next 12 months or full life to maturity, depending on the circumstances).

When performance falls and credit risk increases significantly, certain contractual provisions may be triggered to protect the AOFM’s investments. Accordingly, a revision to expected future performance will take these matters into account.

Debt securities acquired through the ABSF and the SFSF must be made in accordance with the relevant Act, Rules, Directions and Investment Policy.

The maximum exposure to the credit risk of structured (securitisation) finance securities acquired by the AOFM through the ABSF and the SFSF is the principal outstanding plus the total amount of undrawn commitments remaining over the life of the respective facilities. However, the likely amount of loss arising from undrawn commitments may be less than the total amount committed as the commitments are contingent on maintenance of specific credit standards.

The table below shows the credit exposure to structured (securitisation) finance facilities as at 30 June 2020:

Credit exposure to structured (securitisation) finance facilities as at 30 June 2020 ($m)

Fund

Current
exposure

Undrawn
commitments

Total credit
committed

Australian Business Securitisation Fund

Public term transactions (a)

Private warehouse transactions (b)

15

235

250

Sub‑total

15

235

250

Structured Finance Support Fund

Public term transactions (a)

1,219

1,219

Private warehouse transactions (b)

594

341

935

Sub‑total

1,813

341

2,154

Total

1,828

576

2,404

(a) Debt securities (backed by underlying collateral) issued by way of public offer by special purpose vehicles for the purposes of funding their lending activities.

(b) Temporary lines of credit (backed by underlying collateral) provided to special purpose vehicles for the purposes of funding their lending activities.

Under Commonwealth‑State financing arrangements between 1945 and 1989, the Australian Government made concessional loans (not evidenced by the issuance of debt securities) to State and Northern Territory Governments for specific purposes. As at 30 June 2020, the principal outstanding on these loans was $1,646 million.

Composition of loans to state and territory governments as at 30 June 2020:

In relation to those loans administered by the AOFM, as at 30 June 2020 no housing loans were outstanding by Victoria, Tasmania or the ACT to the Australian Government. The maximum exposure to credit risk is the principal value of loans outstanding.

Credit exposure to state and territory governments by credit rating ($m)

Principal value

2020

2019

Aaa / AAA

754

803

Aa1 / AA+

749

787

Aa2 / AA

305

Aa3 / AA‑

143

Total

1,646

1,895

Where a counterparty has a split rating between the rating agencies (Standard and Poor’s and Moody’s), the AOFM’s exposure is allocated to the lower credit rating.

To protect the Australian Government’s financial position with respect to securities lending arrangements (which allows market participants to borrow Treasury Bonds and Treasury Indexed Bonds not readily available from other sources), the market value of the collateral securities taken from counterparties is greater than the market value of the securities lent. There is a right to seek additional collateral if there is a decline in the relative value of these securities.

Liquidity risk and refinancing risk

Refinancing risk is the risk that when maturing debt needs to be funded by debt issuance, it may have to be refinanced at a higher cost or market conditions may prevent sufficient funds from being raised in an orderly manner. The AOFM seeks to control refinancing risk by issuing across a wide range of maturities that comprise the yield curve. This creates a range of short‑dated and mid‑to‑long dated exposures that balance cost and refinancing patterns. In formulating its debt issuance strategy the AOFM considers the volume of debt in any one bond line and the maturity structure of its debt (including the number of bond lines and the maturity gaps between lines).

The AOFM monitors market conditions in order to form a view on refinancing risk due to issuance at a particular point in time. In addition, as a means of reducing refinancing risk in future years and to improve market efficiency, since 2016 the AOFM has conducted regular buy backs of Treasury Bonds that no longer form part of the ASX three‑year futures contract. As these buy‑back operations are required to be funded by new issuance the AOFM has ceased these operations indefinitely in response to the pandemic.

The AOFM manages liquidity risk by maintaining sufficient cash and short‑term investments and by maintaining access to the Treasury Notes market so as to ensure that the government can meet its financial obligations as and when they fall due. The AOFM manages the daily volume of cash in the OPA by monitoring the projected daily transactions of major spending and revenue agencies, undertaking investment of funds that are surplus to immediate cash requirements, and by issuing Treasury Notes. The cash flows into and out of the OPA are highly variable and subject to forecast risk, as are the size and timing of cash management activities. The AOFM also has access to an overdraft facility with the RBA. The overdraft facility is not to be used in normal day to day operations but only to cover temporary, unexpected shortfalls of cash and it has a limit of $10 billion (increased on 27 April 2020 from the previous limit of $1 billion) in the absence of Ministerial approval. The AOFM monitors the daily balance in the OPA, holdings of short‑term assets, and short‑term and long‑term debt issuance activities.

The following table discloses the undiscounted value of the contractual maturities of financial liabilities as at the reporting date, including estimated future interest payments. Interest payments and the principal value on redemption of Treasury Indexed Bonds are based on capital values as at period end.

Future undiscounted cash outflows of liabilities as at 30 June 2020 ($m)

Treasury Bonds

Treasury Indexed
Bonds

Treasury Notes & Other

Total

Principal payments:

within 1 year

43,545

3,639

58,798

105,982

1 to 5 years

183,160

8,001

191,161

5 to 10 years

238,700

14,950

253,650

10 to 15 years

80,750

6,381

87,131

15 years+

41,000

12,648

53,648

Total Principal

587,155

45,619

58,798

691,572

Interest payments:

within 1 year

18,232

806

79

19,117

1 to 5 years

55,810

2,755

58,565

5 to 10 years

36,885

1,886

38,771

10 to 15 years

10,460

956

11,416

15 years+

7,960

873

8,833

Total Interest

129,347

7,276

79

136,702

Future undiscounted cash outflows of liabilities as at 30 June 2019 ($m)

Treasury Bonds

Treasury Indexed
Bonds

Treasury Notes & Other

Total

Principal payments:

within 1 year

34,294

2,994

37,288

1 to 5 years

163,006

10,949

173,955

5 to 10 years

198,799

14,136

212,935

10 to 15 years

61,100

5,773

66,873

15 years+

45,050

12,020

57,070

Total Principal

502,249

42,878

2,994

548,121

Interest payments:

within 1 year

17,365

870

12

18,247

1 to 5 years

53,819

2,737

56,556

5 to 10 years

36,916

2,067

38,983

10 to 15 years

10,627

1,049

11,676

15 years+

8,740

1,007

9,747

Total Interest

127,467

7,730

12

135,209

Fair value reported

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at period end. This is the quoted market price if one is available.

AASB 13 requires assets and liabilities measured at fair value to be disclosed according to their position in a fair value hierarchy. This hierarchy has three levels: Level 1 is based on quoted prices in active markets for identical instruments; Level 2 is based on quoted prices or other observable market data not included in Level 1; Level 3 is based on significant inputs to valuation other than observable market data.

Fair value hierarchy 2020 ($m)

Carried at fair value

Carried at amortised cost

Level 1

Level 2

Level 3

Liabilities

(784,967)

(128)

Assets

73,259

Fair value hierarchy 2019 ($m)

Carried at fair value

Carried at amortised cost

Level 1

Level 2

Level 3

Liabilities

(626,363)

(6)

Assets

32,823

Note 2: Treasury Bonds

Treasury Bonds are denominated in Australian dollars and pay a fixed coupon semi‑annually in arrears. Treasury Bonds are redeemable at face value on maturity. There are no options available to either the Australian Government or the holders of the securities to exchange or convert Treasury Bonds. There are also no options to either party for early redemption. The AOFM issues Treasury Bonds primarily through a competitive auction process to registered bidders. In circumstances where a ‘high‑volume’ transaction is seen as advantageous syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Bonds primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Bonds to be carried at fair value through profit or loss under AASB 9.

The fair value of Treasury Bonds is determined by reference to observable market rates for these instruments.

Key aggregates

Interest expense ($m)

2020

2019

Interest paid / payable

17,645

17,781

Amortisation of net premiums

(2,506)

(2,221)

Interest expense

15,139

15,560

Whilst the interest expense on the Treasury Bond portfolio has risen over time due to higher borrowing levels, the accrual cost in yield terms has fallen as a consequence of the lower interest rate environment.

Carrying values — administered liabilities ($m)

2020

2019

Face value

587,155

502,249

Accrued interest

3,239

3,237

Unamortised net premiums

15,326

9,252

Market value adjustment

68,009

58,819

Carrying value

673,729

573,557

As at 30 June 2020 the weighted average market yield on Treasury Bonds was 0.63 per cent (30 June 2019: 1.19 per cent). As at 30 June 2020 the weighted average (nominal) issuance yield on Treasury Bonds was 2.53 per cent (30 June 2019: 3.01 per cent).

Changes in principal value (face value) for the period ($m)

2020

2019

Issuance

128,200

55,000

Debt repurchased

(9,000)

(23,099)

Maturities

(34,294)

(22,836)

Change in principal value

84,906

9,065

Of the debt repurchased in 2019‑20, no Treasury Bonds were otherwise maturing in 2019‑20 (2018‑19: $6.3 billion).

Interest paid — schedule of cash flows ($m)

2020

2019

Coupons paid

18,088

18,176

Interest received on issuance

(518)

(365)

Interest paid on repurchase

73

231

Interest paid

17,643

18,042

Note 3: Treasury Indexed Bonds

Treasury Indexed Bonds are denominated in Australian dollars and are capital indexed with the principal value of the bond adjusted by reference to movements in the CPI (based on a six month lag).

Interest payments are made quarterly in arrears, at a fixed rate, on the adjusted capital value. At maturity, investors receive the adjusted capital value of the security.

The AOFM issues Treasury Indexed Bonds primarily through a competitive auction process to registered bidders. In circumstances where a ‘high‑volume’ transaction is seen as advantageous syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Indexed Bonds primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Indexed Bonds to be carried at fair value through profit or loss under AASB 9.

The fair value of Treasury Indexed Bonds is determined by reference to observable market rates for these instruments.

Capital accretion is recognised in Interest Expense over time with each quarterly release of the CPI.

As future inflation rates are uncertain and it is not appropriate for the AOFM to express a view on the inflation outlook, an estimate of the adjusted capital value on maturity of each series of Treasury Indexed Bonds is not disclosed in the financial statements.

Key aggregates

Interest expense ($m)

2020

2019

Interest paid / payable

890

930

Capital accretion and amortisation of net premiums

578

535

Interest expense

1,468

1,465

Carrying values — administered liabilities ($m)

2020

2019

Principal (adjusted capital value):

Face value

38,387

36,737

Capital accretion (to next coupon)

7,232

6,141

45,619

42,878

Accrued interest

66

63

Unamortised net premiums

1,163

1,191

Market value adjustment

5,652

5,681

Carrying value

52,500

49,813

As at 30 June 2020, the weighted average market (real) yield on Treasury Indexed Bonds was ‑0.10 per cent (30 June 2019: 0.00 per cent).

As at 30 June 2020, the weighted average (real) issuance yield on Treasury Indexed Bonds was 1.35 per cent (30 June 2019: 1.42 per cent).

Changes in principal value for the period ($m)

2020

2019

Changes in face value due to:

Issuance

1,650

5,900

Debt repurchased

..

(4,548)

Maturities

(862)

Changes in capital accretion due to:

Issuance

198

252

Debt repurchased

..

(2,318)

Maturities

(78)

Accretion for the period

893

665

Change in principal value

2,741

(989)

Interest paid — schedule of cash flows ($m)

2020

2019

Coupons paid

889

935

Interest received on issuance

(3)

(6)

Interest paid on repurchase

..

20

Accretion since issuance (on redemption)

..

2,017

Interest paid

886

2,966

Note 4: Treasury Notes

Treasury Notes are short term discount instruments, denominated in Australian dollars and repayable at face value on maturity.

The increase in Treasury Notes outstanding reflects the AOFM needing to have relied on these short‑term borrowings through April to June to supplement Treasury Bond issuance to meet the sharp change in fiscal circumstances as a result of the pandemic. At some future point the AOFM will refinance Treasury Notes through Treasury Bond issuance. Until then maturing Treasury Notes will be financed with new Treasury Note issuance.

Accounting policy

The AOFM monitors the cost and risk on Treasury Notes primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Notes to be carried at fair value through profit or loss under AASB 9.

The fair value of Treasury Notes is determined by reference to observable market rates for these instruments.

Key aggregates

Carrying values — administered liabilities ($m)

2020

2019

Face value

58,750

3,000

Unexpired interest discount

(44)

(7)

Market value adjustment

32

Carrying value

58,738

2,993

Changes in principal value (face value) for the period ($m)

2020

2019

Issuance

89,936

13,500

Matured

(34,186)

(13,000)

Change in principal value

55,750

500

Note 5: Loan commitments liabilities

In fulfilling its role in administering the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF), the AOFM’s investments include entering into agreements on behalf of the Commonwealth of Australia with warehouse financing facilities to provide funding (through the acquisition of debt securities via securitisation offerings) up to an agreed commitment level for a defined period of time, subject to the continued satisfaction of warranties, representations and conditions precedent. Terms and conditions vary, however, they typically provide an option for a financing facility to borrow at a fixed margin to a floating market interest rate benchmark based on prevailing market conditions when the financing agreement is struck. These are known as loan commitments (being a present obligation to provide credit under specified terms and conditions). The Australian Business Securitisation Fund Investment Mandate Directions 2019 and the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020 contemplate the prospect of providing financing facilities at rates of return below the current market rate to fulfil the policy objectives.

Accounting policy

Loan commitments are to be measured at fair value on initial striking of the financing agreement. Where the AOFM enters into an agreement with a financing facility to provide funding at below market interest rates, a liability (and a day‑1 loss expense) is recognised at the commitment date estimating the financial effect of the concession.

The financial effects of providing below‑market financing where the borrower has flexibility as to the timing and amount to borrow over the expected life of the agreement is difficult to assess. It requires significant judgement as to the borrower’s expected use of the facility over its expected term. The AOFM applies its judgement to faithfully represent the financial effects of providing such facilities at below market despite the risk of measurement error.

In circumstances where a commitment liability is recognised, it is reversed and allocated (or amortised) to interest revenue over the expected term of the financing facility using the effective interest rate at the time the loan commitment agreement is struck. The AOFM does not re‑balance the commitment liability periodically to reflect the actual pattern of usage.

Where the AOFM enters into an agreement with a warehouse financing facility to provide funding at‑market, the commitment is recorded off‑balance sheet (i.e. a loan commitment liability is not raised).

In addition, AASB 9 requires reporting entities to make an allowance for expected credit losses on all loan commitments. The allowance represents the discounted present value of the difference between contractual cash flows due over the expected life of an asset and the expected cash flows (including timing differences). However, AASB 9 requires the carrying value of loan commitments to be the higher of:

  • the allowance for expected credit losses; and
  • the unamortised balance of the loan commitment liability.

The AOFM applies this test at the debt security level.

On initial striking of a financing agreement, the AOFM recognises a 12‑month expected credit loss (ECL) for expected loan commitment draw‑downs over the next 12 months, where this provision exceeds the carrying value of the committed liability for the facility (where relevant). Periodically, actual historical performance of each facility is used to revise expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide a revised estimate as to the expected future credit losses. Where relevant, and subject to the carrying value test discussed above, the impairment provision on loan commitments is revised accordingly. Where credit risk has increased significantly since striking of a financing facility agreement, the expected credit loss allowance must be made on the basis of expected commitment draw‑downs over the full life.

The process of calculating the forward looking loss allowance for both the 12‑month ECL and lifetime ECL categories requires the use of significant estimates and judgements of the probability of default, loss given default, exposure at default and economic conditions.

Debt securities acquired by the AOFM through the ABSF and the SFSF are reported at Note 7.

Key aggregates

arrying values — Loan commitments liabilities ($m)

2020

2019

Australian Business Securitisation Fund

Loan commitments liabilities

Expected credit loss provision

..

Sub‑total

..

Structured Finance Support Fund

Loan commitments liabilities

1

Expected credit loss provision

..

Sub‑total

1

TOTAL

Loan commitments liabilities

1

Expected credit loss provision

..

Total

1

Note 6: Term deposits with the RBA

Term deposits with the RBA are Australian dollar denominated investments placed for a fixed term of less than six months at an agreed fixed interest rate, with interest calculated on a simple interest basis. Term deposit investments are made under the authority of section 58 of the Public Governance, Performance and Accountability Act 2013.

Accounting policy

The AOFM’s business model is to hold term deposits primarily to collect the contractual cash flows, as such term deposits are carried at amortised cost.

Key aggregates

Carrying values — administered assets ($m)

2020

2019

Face value

69,950

31,100

Accrued interest

2

12

Carrying value

69,952

31,112

Changes in principal value (face value) for the period ($m)

2020

2019

New term deposits

1,816,366

461,350

Matured term deposits

(1,777,516)

(475,350)

Change in principal value

38,850

(14,000)

Note 7: Investments in structured finance securities

Investments acquired by the AOFM through the Australian Business Securitisation Fund and the Structured Finance Support Fund represent debt securities in structured finance vehicles, and are either public term securitisations or private warehouse financing facilities. The contractual cash flows received on these debt securities represent payments of principal and interest on that outstanding principal consistent with a basic lending arrangement.

Accounting policy

The AOFM recognises these investments at fair value on initial recognition. The AOFM’s business model is to hold these investments primarily to collect the contractual cash flows, and as such they are carried at amortised cost on subsequent measurement using the effective interest method.

Periodically, actual historical performance of each investment is used to revise expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide a revised estimate as to the expected future credit losses. Where relevant, the impairment provision is revised accordingly.

Impairments on these investments are required to be measured on an expected credit loss (ECL) basis under AASB 9. The process of calculating the forward looking loss allowance for both the 12‑month ECL and lifetime ECL categories requires the use of significant estimates and judgements of the probability of default, loss given default, exposure at default and economic conditions.

Key aggregates

Interest revenue ($m)

2020

2019

Interest received / receivable

2

Amortisation of discounts

2

Concessional loan discounts

(6)

Impairment provision expenses

(2)

Interest revenue

(4)

Carrying values — administered assets ($m)

2020

2019

Australian Business Securitisation Fund

Face value

15

Unamortised net discounts

Accrued Interest

..

Expected credit loss provision

Sub‑total

15

Structured Finance Securities Fund

Face value

1,813

Unamortised net discounts

(13)

Accrued Interest

2

Expected credit loss provision

(2)

Sub‑total

1,800

Total Carrying Value

1,815

Expected to be received (a):

Within one year

53

In one to five years

1,601

In more than five years

161

Carrying value by expected recovery

1,815

Ageing:

Not overdue

1,815

Overdue

Carrying value by ageing

1,815

(a) The maturity profile is based on the weighted average life of each investment and disregarding estimated principal repayments (the timing and quantum of which are uncertain) prior to that time.

The table below sets out the loss allowances recognised by the AOFM.

Loss allowances recognised on SFSF ($m)

Loss allowances on SFSF investments

12 month expected credit losses (a)

Lifetime expected credit losses (b)

Total expected credit losses allowance

Opening balance — 1 July 2019

New investments acquired

2

2

Changes in provision during the year

Write‑offs

Transfers: 12 months/lifetime

Closing balance — 30 June 2020

2

2

(a) A 12 month forward looking expected credit loss provision is required for those debt securities that have not experienced a significant increase in credit risk since initial recognition. If the credit risk of an exposure has not increased significantly since initial recognition, the investment will remain in this category. If credit risk has increased significantly, the investment will be transferred to the lifetime expected losses category.

(b) A lifetime forward looking expected credit loss provision is required for those debt securities that have experienced a significant increase in credit risk (whether or not objective evidence of impairment has occurred) since initial recognition. Where objective evidence of impairment has occurred a lifetime credit loss provision is also required to be recognised on such investments.

Note 8: Loans to State and Territory Governments

Loans to State and Territory Governments predominantly comprise concessional housing advances and specific purpose capital advances made between 1945 and 1989 under Commonwealth — State financing arrangements. These loans are structured with annual repayments which incorporate principal and interest.

Accounting policy

Loans to State and Territory Governments are measured at fair value on initial recognition and at amortised cost on subsequent measurement using the effective interest method. An expected credit loss provision is not made on these loans.

Key aggregates

Carrying values — administered assets ($m)

2020

2019

Face value

1,646

1,895

Unamortised net discounts

(154)

(184)

Accrued interest

Carrying value

1,492

1,711

Expected to be received:

Within one year

78

84

In one to five years

324

351

In more than five years

1,090

1,276

Carrying value by expected recovery

1,492

1,711

Ageing:

Not overdue

1,492

1,711

Overdue

Carrying value by ageing

1,492

1,711

On 12 September 2019, the Finance Minister waived the Tasmanian Government’s housing loan debt pursuant to section 63 of the Public Governance, Performance and Accountability Act 2013. The principal value of the debt waived was $157.6million, which gave rise to an accounting loss of $143.7 million.

The fair value of these loans was $2,156 million as at 30 June 2020 (2018‑19: $2,423 million). In estimating fair value data from Treasury Bonds is used.

Note 9: Cash flow reconciliation

The following table reconciles the surplus (deficit) reported in the Schedule of Comprehensive Income to net cash flows from operating activities reported in the Schedule of Cash Flows.

Reconciliation of net cash from operating activities ($m)

2020

2019

Surplus (deficit) as per Schedule of Comprehensive Income

(26,251)

(60,981)

Adjustments for non‑cash items:

Amortisation and capital accretion of debt instruments

(1,928)

(1,686)

Concessional loans

(6)

(17)

Re‑measurements

9,193

43,550

Adjustments for cash items:

Capital accretion costs on redemption of debt

(2,017)

Debt repurchase

399

896

Waiver of housing loans

144

Accrual adjustments:

Interest accruals on debt

33

(279)

Interest accruals on assets

9

24

Net cash from operating activities

(18,407)

(20,510)

Note 10: Appropriations

Administered special appropriations — unlimited ($’000)

2020

2019

Commonwealth Inscribed Stock Act 1911

s13AA — payment of principal and interest on money raised by Stock issued under the Act and payments on depository interests in Stock issued under the Act

87,522,536

55,983,173

s13A — payment of costs and expenses incurred in relation to issuing and managing debt and depository interests

33,569

12,742

s13B — payment of costs and expenses incurred in repurchasing debt prior to maturity

9,430,970

30,989,895

Financial Agreement Act 1994

s5 — debt redemption assistance and payment of interest to bond holders on behalf of the State and Northern Territory Governments on public debt under the Act (a)

8

8

Public Governance, Performance and Accountability
Act 2013

s58(7) — investments made in the name of the Commonwealth of Australia

1,816,365,550

461,350,000

Total

1,913,352,633

548,335,818

(a) The 2019‑20 amount includes $840 paid into the Debt Retirement Reserve Trust Account (2018‑19: $1,156).

The following details administered special appropriations that are available but were not used by the AOFM during 2019‑20 and 2018‑19 (where relevant):

  • Australian National Railways Commission Sale Act 1997, sec 67AW — Purpose: payment of principal and interest on former debts of the National Railways Commission.
  • Loans Redemption and Conversion Act 1921, sec 5 — Purpose: payment of principal, interest and costs of converting loans made in accordance with the Act.
  • Loans Securities Act 1919, sec 4 — Purpose: payment of principal and interest on money raised by stock issued under the Act.
  • Loans Securities Act 1919, sec 5B — Purpose: payment of money under a swap or other financial arrangement and any expenditure in connection with the negotiation, management or service of, or a repayment under, any such agreement.
  • Loans Securities Act 1919, sec 5BA — Purpose: payment of money to enter into securities lending arrangements.
  • Moomba‑Sydney Pipeline System Sale Act 1994, sec 19 — Purpose: payment of principal and interest on former debts of the Pipeline Authority.
  • Public Governance, Performance and Accountability Act 2013, sec 74A — Purpose: payments of recoverable GST.
  • Treasury Bills Act 1914, sec 6 — Purpose: payment of principal and interest on money raised by issuance of Treasury Bills.

The following table details the investments (in face value terms) made in the name of the Commonwealth under the authority of section 58 of the Public Governance, Performance and Accountability Act 2013.

PGPA Act investments — in face value ($’000)

2020

2019

Opening balance

31,100,000

45,100,000

Acquisitions

1,816,365,550

461,350,000

Redemptions and sales

(1,777,515,550)

(475,350,000)

Closing balance

69,950,000

31,100,000

Special account — Australian Business Securitisation Fund (ABSF) ($’000)

2020

2019

Opening balance

Statutory credit to the special account

250,000

Investments made

(14,686)

Interest received from investments

Balance

235,314

Balance represented by:

Cash — held in the Official Public Account

235,314

Establishing Instrument — the Australian Business Securitisation Fund Act 2019, section 11.

Purpose — to increase the availability, and reduce the cost of credit provided to small and medium enterprises by the Commonwealth investing in debt securities in accordance with the Australian Business Securitisation Fund Act 2019.

The ABSF Special Account received its first funding credit of $250 million on 1 July 2019. A second tranche of funding of $250 million was made on 1 July 2020. Additional funding, each of $500 million, will occur on 1 July 2021, 1 July 2022 and 1 July 2023.

Special account — Structured Finance Support Fund (SFSF) ($’000)

2020

2019

Opening balance

Statutory credit to the special account

15,000,000

Investments made

(1,712,144)

Interest and repayments of principal received from investments

28,159

Balance

13,316,015

Balance represented by:

Cash — held in the Official Public Account

13,316,015

Establishing Instrument — the Structured Finance Support (Coronavirus Economic Response Package) Act 2020, section 11.

Purpose — to ensure continued access by smaller lenders to funding markets to mitigate impacts arising from the economic effect of business restoration during the Covid‑19 pandemic.

The SFSF Special Account received a statutory funding credit of $15 billion on 25 March 2020.

Special account — Debt Retirement Reserve Trust Account (DRRTA) ($’000)

2020

2019

Opening balance

42

40

Commonwealth contributions and interest paid

1

1

State contributions

2

1

Debt repayments made

Balance

45

42

Balance represented by:

Cash — held in the Official Public Account

45

42

Establishing Instrument — the Public Governance, Performance and Accountability Act 2013, section 80.

Purpose — to fund the redemption of the State and Territory debt governed by the Financial Agreement Act 1994. Monies standing to the credit of the DRRTA are applied to repurchase debt of the States and the Northern Territory.

Monies standing to the credit of the Debt Retirement Reserve Trust Account are held on behalf of New South Wales and Victoria. These monies are held for the purposes prescribed by the Financial Agreement Act 1994.

Note 11: Budgetary report to outcome comparison

The AOFM produces budget estimates of Australian Government Securities (AGS) and certain financial assets for the Australian Government Budget which is released in April/May each year for the Budget year (the financial year commencing on the following 1 July) and three forward years.

The projections of debt issuance and asset holdings are a consequence of the expenditure, investment and revenue decisions and assumptions made by the government in producing its Budget. As part of the Budget process, the AOFM receives an estimate of the aggregated annual financing task for the Budget year and forward years from the Treasury. The Headline Cash Surplus/Deficit (which represents net cash flows after operating activities and investing activities for policy purposes; and before investments for liquidity purposes and financing activities) is the closest published aggregate to this financing task. The financing task plus the volume of maturing AGS debt and planned early repurchases of AGS debt (that would otherwise mature in a future year) determines the size of the planned debt issuance program in each year.

The volume of AGS debt that needs to be issued in face value terms to generate the required level of financing will depend on the level of AGS yields (or interest rates) and the chosen maturities and mix of debt to be issued. These decisions are based on the debt management strategy for the period ahead, which in turn takes into account longer‑term portfolio considerations.

An assumption is made about future AGS yields. It is assumed that the AGS yields for different tenors of debt will be the same as the prevailing observed market rates at the time the budget estimates are prepared.

2019-20 Budget

In the 2019‑20 Budget (released in April 2019) the government estimated a Headline Cash Deficit of $4.4 billion for 2019‑20. After AGS maturities and redemptions of $54 billion, operational considerations (such as market conditions, the uncertainty and timing associated with future year funding requirements, the strength of revenue collections relative to forecast and the level of cash holdings to maintain) and financing transactions of other government agencies; the long term debt issuance program for 2019‑20 was set at $61 billion.

At the time of the Mid‑Year Economic and Fiscal Outlook (released in December 2019) the Headline Cash Deficit for 2019‑20 was forecast to improve (by $1.6 billion) to $2.8 billion. The long term debt issuance program was reduced (by $5 billion) to $56 billion after adjustment in the level of cash holdings to be maintained.

On 20 March 2020 the Treasurer announced a deferral to the 2020‑21 Budget until 6 October 2020, to provide more time for the economic impact of the coronavirus to be better understood. The outbreak of the Covid‑19 pandemic and associated policy responses has created a significant deterioration in global economic conditions. This has also impacted the Australian economy and resulted in a significant weakening of the government’s fiscal position, which has led to a pronounced increase in debt issuance to meet funding requirements.

For the year ended 30 June 2020 the AOFM’s short‑term and long‑term gross issuance programs totalled $220 billion.

Administered schedule of comprehensive income ($m)

Outcome

Budget (a)

Variance

2020

2020

2020

EXPENSES

Interest expense

16,743

17,012

(269)

Other expenses

176

25

151

Debt repurchased

399

782

(383)

Total expenses

17,318

17,819

(501)

INCOME

Interest revenue

260

498

(238)

Total income

260

498

(238)

Surplus (deficit) before re‑measurements

(17,058)

(17,321)

263

Re‑measurements

(9,193)

5,040

(14,233)

Total re‑measurements

(9,193)

5,040

(14,233)

Surplus (deficit)

(26,251)

(12,281)

(13,970)

(a) Original Budget released in April 2019. The Budget figures are not audited.

Significant variances in expenses before re-measurements

Interest expense for 2019‑20 was $269 million lower than forecast in the 2019‑20 Budget. This comprises a favourable variance for Treasury Bonds of $109 million, for Treasury Indexed Bonds of $145 million and for Treasury Notes of $15 million. These savings are due to the lower interest rate environment applicable to new borrowings. This more than offsets significant increases in debt issuance in the final quarter of 2019‑20 and a lower Treasury Bond repurchase program (which was ceased indefinitely in March 2020). In addition, in relation to Treasury Indexed Bonds, the lower interest expense is also due to the repurchase of $979 million of the August 2020 series in June 2019, which was not forecast in the 2019‑20 Budget update.

Other expenses are higher by $151 million as compared to Budget primarily due to losses arising from the waiver of $157.6 million of the Tasmanian Government’s housing debt. This was not forecast in the Budget.

Losses arising from the repurchase of debt are lower by $383 million due to lower Treasury Bond repurchases than forecast, being $9 billion as compared to $17.5 billion at Budget.

Significant variances in income before re-measurements

Interest revenue was lower by $238 million as compared to Budget. This was primarily due to lower interest revenue on term deposits of $225 million. Despite a richer cash position in 2019‑20 than forecast, the lower interest rate environment had a commensurate impact on interest earnings.

Significant variances in re-measurements

It is assumed in the Budget that AGS yields for different tenors of debt will be the same as the prevailing observed market rates (at the time when the budget estimates are prepared). Due to this assumption, re‑measurements of the portfolio for changes in market interest rates are not significant in the Budget. However, actual market yields as at 30 June 2020 were significantly lower across the Treasury Bond yield curve as compared to Budget.

There is an inverse relationship between yield and price for bonds.

Administered schedule of assets and liabilities ($m)

Outcome

Budget (a)

Variance

2020

2020

2020

LIABILITIES

Interest bearing liabilities

784,974

619,463

165,511

Other liabilities

121

121

Total liabilities

785,095

619,463

165,632

ASSETS

Cash at bank

1

1

Investments

71,767

30,691

41,076

Loans to State and Territory Governments

1,492

1,628

(136)

Total assets

73,260

32,320

40,940

Net assets

(711,835)

(587,143)

(124,692)

Original Budget released in April 2019. The Budget figures are not audited.

Significant variances in interest bearing liabilities

The significant weakening in the government’s fiscal position due to Covid‑19 led to an increase in short‑term and long‑term net issuance by $128 billion (in face value terms) as compared to Budget. The reduction in market yields has also led to a higher valuation in the debt outstanding.

Significant variances in investments

In line with the weakening in the government’s fiscal position and the high degree of uncertainty from the impact of the pandemic on the Australian economy and capital markets, the AOFM increased its cash holdings significantly in late 2019‑20. The actual balance of term deposits held as at 30 June 2020 was $69,950 million as compared to $30,465 million in the Budget. In addition, actual investment balances include investments in structured finance securities made through the Australian Business Securitisation Fund and the Structured Finance Support Fund. These investments were not factored into Budget forecasts.

Note 12: Securities lending facility

The AOFM has a securities lending facility for Treasury Bonds and Treasury Indexed Bonds, which is operated by the RBA.

The purpose of the facility is to enhance the efficiency of the bond markets by allowing bond market participants to borrow Treasury Bonds and Treasury Indexed Bonds when they are not readily available in those markets. Bonds are lent on an intra‑day or overnight basis.

Transactions undertaken during the period

Number

Face value ($m)

2020

2019

2020

2019

Overnight:

Treasury Bonds

25

8

1,201

236

Treasury Indexed Bonds

138

13

1,451

157

Intra‑day:

Treasury Bonds

3

9

179

636

Treasury Indexed Bonds

9

1

204

30

Total

175

31

3,035

1,059

No transactions were open at the beginning or end of the year.