1.1: Objectives of the Corporation

The Clean Energy Finance Corporation (CEFC or the Corporation) was established on 3 August 2012 under the Clean Energy Finance Corporation Act 2012 (Cth) (‘the CEFC Act’) and is classified as a corporate Commonwealth entity. It is a not-for-profit Australian Government controlled entity with medium to long-term portfolio benchmark return targets (before operating expenses).

Working with co-financiers, its object is to facilitate increased flows of finance into the clean energy sector, by:

1. Applying commercial rigour, invest, directly and indirectly, in solely or mainly Australian-based clean energy technologies and projects, which can be any one or more of the following:
   • Renewable energy technologies and projects, which include hybrid technologies that integrate renewable energy technologies and technologies (including enabling technologies) that are related to renewable energy technologies;
   • Energy efficiency technologies and projects, including technologies that are related to energy conservation technologies or demand management technologies (including enabling technologies); and
   • Low emissions technologies and projects.
2. Liaising with relevant persons and bodies, including the Australian Renewable Energy Agency (‘ARENA’), the Clean Energy Regulator, other Commonwealth agencies and State and Territory governments, for the purposes of facilitating its investment function;
3. Working with industry, banks and other financiers, and project proponents, to accelerate Australia’s transformation towards a more competitive economy in a carbon constrained world, by acting as a catalyst to increase investment in the clean energy sector; and
4. Doing anything incidental or conducive to the performance of the above functions.

Effective 17 December 2018, the Corporation was issued with the Clean Energy Finance Corporation Investment Mandate Direction 2018 (‘Investment Mandate 2018’), and prior to that date the Corporation operated under the Clean Energy Finance Corporation Investment Mandate Direction 2016 (No. 2) (‘Investment Mandate 2016 (No. 2)’) issued on 10 January 2017. Among other things, the Investment Mandate 2018 requires the Corporation to:

• Make available up to:

• $1 billion of investment finance over 10 years for a Reef Funding Program in support of The Reef 2050 Plan.
• $1 billion of investment finance over 10 years for a Sustainable Cities Investment Program.
• $200 million for debt and equity investment through the Clean Energy Innovation Fund.

• Include in its investment activities a focus on technologies and financial products as part of the development of a market for firming intermittent sources of renewable energy generation, as well as supporting emerging and innovative clean energy technologies. In supporting clean energy technologies, the Corporation is strongly encouraged to prioritise investments that support reliability and security of electricity supply.
• Take into consideration the potential effect on reliability and security of supply when evaluating renewable energy generation investment proposals, and if commercially feasible, consider investment in proposals that support reliability or security of supply.

1.2: Basis of Preparation of the Financial Statements

The consolidated financial statements of the Clean Energy Finance Corporation (the parent) and its subsidiaries (collectively, the Group) are general purpose financial statements and are required by:

1. section 42 of the PGPA Act; and
2. section 74 of the CEFC Act.

The consolidated financial statements have been prepared in accordance with:

1. the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (‘FRR’); and
2. Australian Accounting Standards (‘AAS’) and Interpretations – Reduced Disclosure Requirements (‘RDR’) issued by the Australian Accounting Standards Board (‘AASB’) that apply for the reporting period, with more extensive disclosures for Financial Instruments.

The consolidated financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain financial assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The accounting policies adopted in the preparation of these Financial Statements are consistent with the prior year’s Financial Statements except for the changes in accounting policies required following the adoption of new Accounting Standards effective from 1 July 2018, discussed further under New Accounting Standards below.

The consolidated financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Further disclosures about the parent company and its subsidiaries can be found at Note 7.

1.3: Events after the Reporting Period

There have been no significant events subsequent to balance date.

1.4: Taxation

The Corporation is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). The Corporation’s wholly owned subsidiaries, CEFC Investments Pty Limited and Clean Energy Investment Management Pty Ltd, are not exempt from income tax; however, they have accumulated income tax losses at 30 June 2019, and there is no certainty as to whether any benefit from those losses would ever be realised as they have incurred losses for the year ended 30 June 2019.

Revenues, expenses and assets are recognised net of GST except:

1. where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
2. for receivables and payables.

The net amount of GST payable to the Australian Taxation Office is included as part of the payables or commitments.

The financial statements have been prepared on the basis that the Corporation is generally not entitled to input tax credits for GST included in the price of goods and services acquired because financial supplies, such as loans, are input taxed.

1.5: New Accounting Standards

Adoption of New Australian Accounting Standard Requirements

No accounting standard has been adopted earlier than the application date as stated in the standard.

The new/revised/amending standards and/or interpretations applicable to the current reporting period include AASB 9 Financial Instruments.

AASB 9 Financial Instruments

AASB 9 replaced AASB 139 effective 1 July 2018 and includes revised classification and measurement criteria, a single forward-looking ‘expected loss’ impairment model, and a substantially reformed approach to hedge accounting.

a) Classification and Measurement

AASB 9 classifies financial assets into one of three categories, namely:

• Amortised Cost;
• Fair Value through Other Comprehensive Income (FVOCI); or
• Fair Value through Profit or Loss (FVTPL).

The two principal tests applied in determining which category a loan falls into are:

• The Business Model test; and
• The Cash Flows test.

The Business Model test considers whether or not an asset is held in a business model where the objective is to hold financial assets in order to collect contractual cash flows.

The Cash Flows test considers whether or not the future cash flows from an asset are solely payments of principal and interest on the principal amount outstanding.

These tests have been applied for each of the Group’s financial assets. Note 6.2A to these financial statements provides an overview of the classification of the Corporation’s financial instruments and financial liabilities together with a summary of the reclassifications required on adoption of this standard effective 1 July 2018.

The impact of the reclassifications on the Consolidated Statement of Financial Position is summarised in the following table:

The ongoing revaluation of assets classified as FVTPL has increased earnings volatility following the adoption of AASB 9.

b) Provision for Impairment

AASB 9 replaced the “incurred loss” model of AASB 139 with an “expected loss” model and its impairment provision requirements apply to financial assets measured at Amortised Cost and loans measured at FVOCI.

AASB 9 introduced a three-stage approach to impairment provisioning as follows:

• Stage 1 – the recognition of 12-month expected credit losses (ECL), that is the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date, if credit risk has not increased significantly since initial recognition;
• Stage 2 – lifetime expected credit losses for financial instruments for which credit risk has increased significantly since initial recognition; and
• Stage 3 – lifetime expected credit losses for financial instruments which are credit impaired.

The expected credit loss must also consider forward looking information to recognise impairment allowances earlier in the lifecycle of an investment.

At Stage 1, ECL is measured as the product of the 12-month Probability of Default (PD), the Loss Given Default (LGD) and Exposure at Default (EAD), adjusted for forward-looking information. At Stage 2, ECL is measured as the product of lifetime PD, LGD and EAD, adjusted for forward-looking information. At Stage 3 ECL is measured as the difference between the contractual and expected future cash flows from the individual exposure, discounted using the effective interest rate for that exposure.

The AASB 9 impairment provision is based on the weighted average of the calculated provision under a range of scenarios, whereas the AASB 139 impairment provision was calculated with reference to a single scenario.

The development of forward looking scenarios requires that:

• Risks to the portfolio are understood and can be measured;
• The portfolio is segmented appropriately to enable specific forward settings to be applied;
• Multiple scenarios are developed and probability weighted; and
• Quantitative and qualitative approaches are used, including expert judgement.

CEFC’s total impairment provision under AASB 9 is $59.7 million at 30 June 2019 ($36.7 million as at 1 July 2018) compared to the AASB 139 impairment provisions against loans of $7.0 million and irrevocable commitments of $3.2 million reported at 30 June 2018.

Adoption of the AASB 9 impairment methodology has increased earnings volatility, principally due to the impact of individual loans moving into or out of provisioning Stage 2 given the relatively small number of loans in CEFC’s Amortised Cost portfolio. Cash flows and any cash losses that may arise on underperforming loans are unaffected by the adoption of AASB 9.

c) Hedge Accounting

The Group has only entered into one hedging arrangement, which was previously deemed a highly effective hedge under AASB 139. This has been assessed and continues to be an effective hedge relationship, so the adoption of AASB 9 hedge accounting provisions has not had a material impact on the Group’s financial statements.

d) Prior period comparatives

As permitted by AASB 9, the Group has not restated its comparative financial statements and has recorded a transition adjustment to the opening balance sheet as at 1 July 2018 for the impact of the adoption of AASB 9’s classification and measurement, impairment and hedge accounting requirements.

Future Australian Accounting Standard Requirements

The following new standards that may have a material effect on the Group’s future financial statements were issued by the AASB prior to the signing of the statement by the Accountable Authority, Chief Executive and Chief Financial Officers:

All other new/revised/amending standards and/or interpretations that were issued prior to the sign-off date and are applicable to future reporting periods are not expected to have a future material impact on the Group’s financial statements.

AASB 15 Revenue from Contracts with Customers

AASB 15 superseded the current revenue recognition guidance including AASB 118 ‘Revenue,’ AASB 111 ‘Construction Contracts’ and the related Interpretations for financial years beginning on or after 1 January 2019 for Not-for-Profit Entities.

AASB 15 specifies the accounting treatment for revenue arising from contracts with customers, except for contracts within the scope of other accounting standards such as:

1. leases (AASB 16);
2. insurance contracts (AASB 4); and
3. financial instruments and other contractual rights or obligations within the scope of AASB 9 ‘Financial Instruments’, AASB 10 ‘Consolidated Financial Statements’, AASB 11 ‘Joint Arrangements’, AASB 127 ‘Separate Financial Statements’ and AASB 128 ‘Investments in Associates and Joint Ventures’.

As the Group’s revenue is largely derived from its investments in financial instruments, adoption of AASB 15 will not have a material impact on the Corporation’s revenue recognition.

AASB 16 Leases

AASB 16 effectively does away with the distinction between an operating lease and a finance lease as lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The Group operates from leased premises and the application of AASB 16 will increase Fixed Assets and create a new Liability, on the Statement of Financial Position, and reduce Operating Expenses and increase Finance Charges on the Statement of Comprehensive Income.

Based on the operating leases that the Group has entered into as of the date of this report, when AASB 16 comes into effect on 1 July 2019, we expect to disclose a right-to-use asset of $3.9 million and an increase in the lease liability of $3.9 million. The maximum net impact to the income statement in a given year is expected to be approximately $0.3 million.

AASB 1058 Income of Not-for-Profit Entities

AASB 1058 clarifies and simplifies the income recognition requirements that apply to not-for-profit (NFP) entities, in conjunction with AASB 15 ’Revenue from Contracts with Customers’.

As the Group’s revenue is largely derived from its investments in financial instruments, adoption of AASB 1058 will not have a material impact on the Corporation’s revenue recognition.