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Certification

Independent Auditor's Report

Auditor-General for Australia
Australian National Audit Office

GPO Box 707 CANBERRA ACT 2601
19 National Circuit BARTON ACT
Phone (02) 6203 7300 Fax (02) 6203 7777

To the Minister for Communications, Cyber Safety and the Arts

Opinion

In my opinion, the financial statements of the Department of Communications and the Arts (‘the Entity’) for the year ended 30 June 2019:

​​a) comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and

(b) present fairly the financial position of the Entity as at 30 June 2019 and its financial performance and cash flows for the year then ended.

The financial statements of the Entity, which I have audited, comprise the following statements as at 30 June 2019 and for the year then ended:

  • Statement by the Accountable Authority and Chief Finance Officer;
  • Statement of Comprehensive Income;
  • Statement of Financial Position;
  • Statement of Changes in Equity;
  • Cash Flow Statement;
  • Administered Schedule of Comprehensive Income;
  • Administered Schedule of Assets and Liabilities;
  • Administered Reconciliation Schedule;
  • Administered Cash Flow Statement; and
  • Notes to the financial statements, comprising a Summary of Significant Accounting Policies and other explanatory information.

Basis for opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Entity in accordance with the relevant ethical requirements for financial statement audits conducted by me. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) to the extent that they are not in conflict with the Auditor-General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key audit matters

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the current period. These matters were addressed in the context of my audit of the financial statements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.

Key audit matter

Valuation of Administered Loans

Refer to Note 4.1B ‘Trade and Other Receivables’ and Note 7.3 ‘Administered – Financial Instruments’

The Entity administers a loan to NBN Co Limited which as at 30 June 2019 was valued at $13 053 million.

I focused on this area given the significance of the balance to the Entity and the need for considerable judgements to be made in assessing whether there is any impairment of NBN’s loan balance.

The NBN loan is assessed for impairment based on an expected credit loss model underpinned by assumptions which require significant judgements about the recoverability of the loan. The significant judgements are based on expected cash flow forecasts and refinancing plans, indicative credit ratings, and probabilities of default events occurring, noting the absence of market comparisons. Changes in assumptions can result in material impacts on the expected credit loss and, accordingly, valuation of the loan.

How the audit addressed the matter

To address the key audit matter I have:

  • assessed the reasonableness of the Entity’s method for identifying forward looking credit loss indicators, and the technique used to estimate credit loss;
  • considered the competence and objectivity of management’s expert, and evaluated the reasonableness of the rationale and application of the expected credit loss model;
  • assessed the reasonableness of key assumptions by comparing them to specific entity or industry benchmarks with appropriate adjustment for the loan arrangements and evaluated the model's sensitivity to key inputs; and
  • tested the calculation logic and arithmetic accuracy of the model.

Key audit matter

Valuation of Administered Investments – NBN Co Limited

Refer to Note 4.1 C ‘Other Investments’ and Note 7.5A ‘Fair Value Measurements’

The Entity has measured the fair value of its Investment in NBN Co Limited to be $8 682 million as at 30 June 2019.

The valuation of the Investment in NBN Co Limited is a key audit matter due to the significance of the balance and the significant judgement applied by the Entity in determining and applying the appropriate valuation approach, which is depreciated replacement cost.

Determining the fair value of NBN Co Limited is complex and requires significant professional judgement on determining the fair value of network assets within property, plant and equipment (PP&E) that are reported on a cost basis in NBN Co Limited’s financial statements. The fair value calculation for network assets requires the Entity to make judgements about stage of completion, technological and economic obsolescence assessments and cash flow forecasts.

How the audit addressed the matter

To address the key audit matter I have:

  • assessed the appropriateness of the valuation approach used by the Entity to value NBN Co Limited against similar industry practice and Australian Accounting Standards;
  • assessed the Entity’s calculation of fair value of NBN Co Limited’s PP&E considering the appropriateness of key assumptions and inputs used including stage of completion, technological and economic obsolescence assessments and cash flow forecasts;
  • considered the sensitivity of the valuation by varying certain inputs in the Entity’s fair value calculations including NBN Co Limited’s economic obsolescence assessment and cash flow forecasts to other outcomes that I considered reasonably possible.

Key audit matter

Valuation of Administered Investments – Australian Postal Corporation

Refer to Note 4.1C ‘Other Investments’ and Note 7.5A ‘Fair Value Measurements’

The Entity has estimated the fair value of its Investment in the Australian Postal Corporation to be $2 225 million as at 30 June 2019.

The valuation of the Australian Postal Corporation, using a discounted cash flow model, is a key audit matter because the valuation model is dependent on assumptions that require significant management judgement about the discount rate, terminal value, growth rate and probabilities of future cash flows which are not based on observable market information.

How the audit addressed the matter

To address the key audit matter I have:

  • assessed the appropriateness of the Entity’s valuation method, assumptions and inputs used in the valuation model, including the cash flow forecasts and discount rate. This included:
    • consideration of the valuation methodology used against similar industry practice and Australian Accounting Standards;
    • testing the reasonableness of assumptions underpinning net cash flows, in the valuation model against estimates and publications produced by the Australian Postal Corporation;
    • assessed the Entity’s comparison of key inputs used in the valuation model against market information related to the valuation of listed companies with comparable operations; and
  • considered the sensitivity of the valuation by adjusting the discount rate, terminal value growth rate, probabilities attached to future scenarios to other outcomes that I considered reasonably possible.

Accountable Authority’s responsibility for the financial statements

As the Accountable Authority of the Entity, the Secretary is responsible under the Public Governance, Performance and Accountability Act 2013 (the Act) for the preparation and fair presentation of annual financial statements that comply with Australian Accounting Standards – Reduced Disclosure Requirements and the rules made under the Act. The Secretary is also responsible for such internal control as the Secretary determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Secretary is responsible for assessing the ability of the Entity to continue as a going concern, taking into account whether the Entity’s operations will cease as a result of an administrative restructure or for any other reason. The Secretary is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the assessment indicates that it is not appropriate.

Auditor’s responsibilities for the audit of the financial statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

  • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
  • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control;
  • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
  • conclude on the appropriateness of the Accountable Authority’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future
    events or conditions may cause the Entity to cease to continue as a going concern; and
  • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the Accountable Authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

From the matters communicated with the Accountable Authority, I determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. I describe these matters in my auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, I determine that a matter should not be communicated in my report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Australian National Audit Office

Grant Heir
Auditor-General

Canberra
19 September 2019

Statement by the Accountable Authority and Chief Financial Officer

In our opinion, the attached financial statements for the year ended 30 June 2019 comply with subsection 42(2) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and are based on properly maintained financial records as per subsection 41(2) of the PGPA Act.

In our opinion, at the date of this statement, there are reasonable grounds to believe that the Department of Communications and the Arts will be able to pay its debts as and when they fall due.

Signed

Mike Mrdak AO
Secretary
18 September 2019

Sarah Vandenbroek
Chief Financial Officer
18 September 2019