Introduction

This section analyses the Group’s assets used to conduct its operations and the operating liabilities incurred as a result. Employee-related information is disclosed in Note 5.

3.1: Financial Assets

Accounting Policy for Financial Assets

Classification

Following the adoption of AASB 9, the Group classifies its Financial Assets into the following categories:

1. Amortised Cost;
2. Fair value through profit or loss (‘FVTPL’); and
3. Fair value through other comprehensive income (‘FVOCI’).

The classification depends on the nature and purpose of the financial asset and is determined at the time of initial recognition. The two principal tests applied in determining which of the above categories a financial asset 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 cashflows from an asset are solely payments of principal and interest on the principal amount outstanding.

Financial assets that meet both the Business Model and the Cash Flows test are classified as Amortised Cost. The Group has classified financial assets which do not meet these tests as FVTPL. The Group does not currently have any financial assets recognised at fair value through other comprehensive income.

Recognition and measurement

Financial assets at amortised cost are initially recognised at their fair value after taking into account any concessionality. After initial recognition, they are measured at amortised cost using the effective interest method less any impairment recorded. Interest is recognised by applying the effective interest rate.

Financial assets at FVTPL are carried at fair value with any gains or losses resulting from a change in fair value recorded as a gain/(loss) in the Statement of Income.

Purchases of Financial Assets are accounted for at settlement date.

The Group may use derivative financial instruments to manage exposures to interest rate and foreign exchange risk. These include foreign exchange contracts, interest rate and cross-currency swaps, futures contracts and forward rate agreements. Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently remeasured to their fair value at each reporting date. Derivatives are carried as assets when their fair value is positive (in the money) and as liabilities when their fair value is negative (out of the money). Any gains and losses arising from changes in the fair value of derivatives, except those that qualify for hedge accounting, are recorded in the Statement of Comprehensive Income.

Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e. removed from the Group’s statement of financial position) when:

• The rights to receive cash flows from the asset have expired; or
• The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either:

1. the Group has transferred substantially all the risks and rewards of the asset, or
2. the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Gains or losses on the disposal of a financial asset are recorded in the Statement of Comprehensive Income.

Impairment of financial assets held at amortised cost

Following the adoption of AASB 9, the Group has 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.

Refer to Note 2.1D for further information on the impairment provisioning stages.

Judgements and Estimates

The Group is required to ascertain the extent to which its loans and other debt securities held at amortised cost are likely to be recoverable. Given the risk position that may be assumed by the Group in its various loans (e.g. senior debt, unsecured debt, subordinated or mezzanine debt, longer terms, policy risk in relation to the Renewable Energy Target, electricity price volatility, etc) it is considered possible that the Group will not fully recover 100% of the principal relating to all the loans it makes, although the Group has not identified any individual loans that are not expected to be recoverable at the reporting date (2018: nil).

At the end of each reporting period the Group assesses whether there is objective evidence that a financial asset or group of financial assets is in default and impaired and, therefore, falls under Stage 3 of the AASB 9 impairment provisioning methodology. A financial asset or a group of financial assets is impaired (and impairment charges are recognised) if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:

1. significant financial difficulty of the issuer or obligor;
2. a breach of contract, such as a default or delinquency in interest or principal payments;
3. the Group, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the Group would not otherwise consider;
4. it becoming probable that the borrower will enter bankruptcy or other financial reorganisation;
5. the disappearance of an active market for that financial asset because of financial difficulties; or
6. observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including:

• adverse changes in the payment status of borrowers in the group; or
• national or local economic conditions that correlate with defaults on the assets in the group.

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss on loans and receivables has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced either directly or through the use of an allowance account. The expected credit loss (ECL) of assets at provisioning Stage 3 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.

If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. These assets are classified as being in either:

• 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; or
• Stage 2 – lifetime expected credit losses for financial instruments for which credit risk has increased significantly since initial recognition.

For loans 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.

For loans at Stage 2, ECL is measured as the product of lifetime PD, LGD and EAD, adjusted for forward looking information.

Loans that are in Stage 3 and, therefore, individually assessed for impairment are not included in a collective assessment of impairment.

The statistically calculated impairment provision for each financial asset is determined with reference to the EAD net of any concessionality balance at the period end. Prior to the adoption of AASB 9, the statistically calculated impairment provision for each financial asset was reduced by the concessionality booked against that asset.

The expected credit loss also considers forward looking information to recognise impairment allowances earlier in the lifecycle of an investment and, based on simulations applying the AASB 9 methodology to the Group’s portfolio during the latter part of the financial year, the volatility of impairment provisions is expected to increase; although cash flows and cash losses would remain unchanged.

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.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The Group has further stratified its Amortised Cost portfolio into Corporate Loans and Project Finance and into Electricity, Financial Services, Infrastructure, Property and Other sectors for impairment provisioning purposes.

The Group has identified the following as forward looking macro-economic risk indicators for different segments within its Amortised Cost loan portfolio:

• Electricity prices
• Foreign Exchange rate
• Interest rates
• GDP growth rate
• Property prices

The Group’s impairment provisioning model uses four scenarios, with a probability assigned to each of them, in calculating the impairment provision, namely: Base Case, Upside Scenario, Downside Scenario and an Electricity price collapse scenario. The impairment provision adopted is based on the weighted average of the provisions calculated under each of these scenarios.

In addition to the statistically modelled output, two Management adjustment overlays have been applied. These are a model overlay and a sector-specific risk overlay. The purpose of these overlays is to compensate for the unique risks of the Group’s portfolio as well as specific model and data limitations. The sector specific risk overlay relates to financial risks specific to electricity generation projects (such as changes to Marginal Loss Factors in the 2018–19 financial year that seem to have not been anticipated by the industry) that impact multiple loans but have not resulted in a SICR for any specific loan and was calculated with reference to a number of modelled scenarios. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. When a loan or a part of a loan is uncollectable, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the charge for loan impairment in the statement of comprehensive income. If, in a subsequent period, the amount of the impairment charge decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment charge is reversed by adjusting the provision account. The amount of the reversal is recognised in the statement of comprehensive income.

3.1A: Cash and cash equivalents

Accounting Policy

Cash is recognised at its nominal amount as this is considered fair value. Cash and cash equivalents includes:

1. cash on hand; and
2. demand deposits in bank accounts with an original maturity of three months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

For the purposes of the cash flow statement, cash and cash equivalents include cash on hand and at bank, and demand deposits in bank accounts with an original maturity of three months or less, to maintain liquidity.

While cash and cash equivalents are also subject to the impairment requirements of AASB 9, the identified impairment loss was immaterial.

3.1B: Trade and other receivables

3.1C: Loans and advances

Maturity analysis loans and advances, net of concessionality:

Concentration of risk

The largest single exposure in the loan portfolio at 30 June 2019 was for an amount of $196.7 million (2018: $196.3 million). The following table shows the diversification of investments in the loan portfolio at 30 June:

The following table shows the diversification of investments within the loan portfolio at 30 June by credit quality. Since the loans made by the Group are (in the main) to entities that will not have a formal credit rating, the Corporation has developed a Shadow Credit Ratings (‘SCR’) system. These are internal risk indicators used by the Group to assess the default risks of its debt instruments. The SCR assesses the probability of seeing the counterparty default under its obligations. The SCR is determined by a risk matrix based on internal risk assessments of the counterparty involved, the business risk it faces and the financial risk it has as a result of the debt it carries (including all new debt proposed in the investment opportunity).

Risk factors are discussed further in Note 6.2.

Impairment allowance

Reconciliation of the impairment allowance:

The Group did not have any amounts past due but not impaired and no loans in provisioning Stage 3 at 30 June 2019 or 30 June 2018.

Changes from Stage 1 to Stage 2 relate to project finance loans that are identified as having a SICR due to circumstances arising during the current year.

Changes from Stage 2 to Stage 1 relate to loans that had been identified as having a SICR at 1 July 2018 being cured during the current financial year.

3.1D: Other debt securities

Maturity analysis of debt securities:

Concentration of risk – Other debt securities

Other debt securities are primarily investments in bank and corporate bonds. During the financial year, the Group recorded an impairment charge of $0.049 million (2018: $Nil) in respect of its holding of other debt securities.

The largest single exposure in the other debt securities at 30 June 2019 was for an amount of $110.2 million. (2018: $102.7 million).

The following table shows the diversification of other debt securities at 30 June:

The following table shows the diversification of Other debt securities at 30 June 2019 by SCR:

Risk factors are discussed further in Note 6.2.

Impairment allowance – Other debt securities

All Other debt securities are in impairment provisioning Stage 1 (12 months ECL).

3.1E: Equities and units in trusts

All equities and units in trusts are held at FVTPL in 2019.

Concentration of risk and impairment – Equities and units in trusts

Equity investments are amounts held by way of shares in publicly-listed entities, units in unincorporated unit trust structures or direct holdings in unlisted companies where the Group is not deemed to have significant influence.

The largest single exposure in the equities and units in trusts portfolio at 30 June 2019 was for an amount of $120.6 million (2018: $133.8 million).

The following table shows the diversification of equities and units in trusts at 30 June:

The Group does not assign a SCR to investments in equities and units in trusts.

3.1F: Equity accounted investments

The Group has not made any loans to Associates and Joint Ventures at 30 June 2019 (2018: $Nil). The Group had previously procured a bank guarantee on behalf of Ross River Solar Farm which expired during the year ended 30 June 2019 (2018: $12.5 million) The Group has no other contingent liabilities in relation to investments in Associates and Joint Ventures at 30 June 2019 (2018: $Nil).

At 30 June 2019 the Group had committed to invest up to a further $389 million (2018: $282 million) in the above equity accounted investments.

Accounting Policy

Investments in Associates

The Group’s investments in its associates are accounted for using the equity method.

Under the equity method, investments in the associates are carried in the Group’s statement of financial position at cost as adjusted for post-acquisition changes in the Group’s share of net assets of the associates. Goodwill relating to an associate is included in the carrying amount of the investment. After the application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the net investment in associates.

Jointly Controlled Entities

Interests in jointly controlled entities in which the entity is a venturer (and so has joint control) are accounted for using the equity method.

3.1G: Assets held for sale

Accounting Policy

When the Group has commenced steps to dispose of a financial or non-financial asset it is reclassified as held for sale.

3.2: Non-Financial Assets

3.2A: Reconciliation of the opening and closing balances of property, plant and equipment and computer software

Reconciliation of the opening and closing balances of property, plant and equipment and computer software for 2019

No indicators of impairment were found for property, plant and equipment or computer software.

No property, plant or equipment or computer software are expected to be disposed of within the next 12 months.

Accounting Policy

Asset Recognition Threshold

Purchases of property, plant and equipment are recognised initially at cost in the statement of financial position, except for purchases costing less than $2,000, which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to ‘make good’ provisions in property leases taken up by the Group where an obligation exists to restore premises to original condition. These costs are included in the value of the Group’s leasehold improvements with a corresponding provision for the ‘make good’ recognised.

The Group’s computer software comprises purchased software for internal use. These assets are carried at cost less accumulated amortisation and any accumulated impairment losses.

Revaluations

Following initial recognition at cost, property, plant and equipment are carried at fair value. The valuation is based on internal assessment by Management to ensure that the carrying amounts of the assets do not differ materially from their fair values. As at 30 June 2019, the carrying amount of property, plant and equipment approximates their fair value.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of ‘asset revaluation reserve’ except to the extent that it reversed a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset restated to the revalued amount.

Depreciation and Amortisation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the Group using, in all cases, the straight-line method of depreciation.

Depreciation and amortisation rates applying to each class of depreciable asset are based on the following useful lives:

Property, plant and equipment

• Office equipment 3 to 5 years
• Leasehold improvements 5 years (or the remaining lease period if shorter)
• Furniture and fittings 5 years (or the remaining lease period if shorter)
• Computer equipment 2 to 3 years
• Computer software: straight-line basis over anticipated useful lives (typically 2 to 3 years)

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

An item of software is derecognised when the license expires or when no further future economic benefits are expected from its use or disposal.

3.3: Payables and Deferred Revenue

3.3A: Suppliers

3.3B: Deferred revenue

3.3C: Other payables

Accounting Policy

Initial Recognition and Measurement

Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or other financial liabilities. Financial liabilities are recognised upon ‘trade date’.

Financial Liabilities at FVTPL

Financial liabilities at fair value through profit or loss are initially measured at fair value. Subsequent fair value adjustments are recognised in the statement of comprehensive income. The net gain or loss recognised in the statement of comprehensive income incorporates any interest paid on the financial liability.

Other Financial Liabilities

Other financial liabilities, including borrowings and trade creditors/accruals, are initially measured at fair value, net of transaction costs. These liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

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

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of comprehensive income.

3.3D: Derivative financial liabilities

Accounting Policy

Derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognised in Other Comprehensive Income and later reclassified to profit or loss when the hedge item affects profit or loss.

3.4: Other Provisions