1. Departmental Financial Performance

1.1 Expenses

This section analyses the financial performance of the Department of Communications and the Arts for the year ended 2019.

Accounting Policy

Accounting policies for employee related expenses are contained in the People and Relationships section at Note 6.

Leasing commitments

The Department in its capacity as lessee for 2 Phillip Law St, Canberra is subject to a 3.5% fixed annual adjustment with a market rent review in April 2023. The lease term expires on 14 December 2027.

The Department in its capacity as lessee for Level 46, 360 Elizabeth Street, Melbourne is subject to a 4% fixed annual adjustment. The lease term expires on 3 April 2022.

The Department in its capacity as lessee for 23-33 Mary Street Level 6, Sydney is subject to a 3% fixed annual adjustment. The lease term expires on 14 May 2021.

The Department in its capacity as lessee for 222 Young Street, Sydney is subject to a 3% fixed annual adjustment. The lease term expires on 31 December 2023.

The Department in its capacity as lessee for 18-24 Down Street, Collingwood is subject to a 3% fixed annual adjustment with a market rent review in January 2025. The lease term expires on 31 December 2026.

Accounting Policy

Where an asset is acquired by means of a finance lease, the asset is capitalised at the lower of the fair value of the leased property or, if lower, the present value of minimum lease payments at the inception of the contract and a liability is recognised at the same time and for the same amount.

The discount rate used is the interest rate implicit in the lease. Leased assets are amortised over the period of the lease. Lease payments are allocated between the principal component and the interest expense.

Operating lease payments are expensed on a straight-line basis which is representative of the pattern of benefits derived from the leased assets.

1.2 Own-Source Revenue and Gains

Accounting Policy

Revenue from the sale of goods and rendering of services is recognised when:

a) The risks and rewards of ownership have been transferred to the buyer; and

b) The entity retains no managerial involvement or effective control over the goods.

The stage of completion of contracts at the reporting date is determined by reference to:

a) Surveys of work performed;

b) Services performed to date as a percentage of total services to be performed; or

c) The proportion that costs incurred to date bear to the estimated total costs of the transaction.

Receivables for goods and services, which have 30 day terms, are recognised at the nominal amounts due less any impairment allowance. Collectability of debts is reviewed at the end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

Subleasing rental income commitments

The Department in its capacity as lessor sublet two floors at 2 Phillip Law St, Canberra as of 1 July 2017. The lease is subject to a 3.5% fixed annual adjustment, with a market rent review in April 2023. The lease term expires on 14 December 2027.

Accounting Policy

Resources received free of charge

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition.

Accounting Policy

Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as Revenue from Government when the entity gains control of the appropriation, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned. Appropriations receivable are recognised at their nominal amounts.

2. Income and Expenses Administered on Behalf of Government

2.1 Administered – Expenses

This section analyses the activities that the Department of Communications and the Arts does not control but administers on behalf of the Government. Unless otherwise noted, the accounting policies adopted are consistent with those applied for departmental reporting.

Accounting Policy

The entity administers a number of grant and subsidy schemes on behalf of the Government. Grant and subsidy liabilities are recognised to the extent that (i) the services required to be performed by the grantee have been performed or (ii) the grant eligibility criteria have been satisfied, but payments due have not been made. When the Government enters into an agreement to make these grant and subsidy payments but services have not been performed or criteria satisfied, this is considered a commitment.

Accounting Policy

Payments to corporate Commonwealth entities from amounts appropriated for that purpose are classified as administered expenses, equity injections or loans of the relevant portfolio department. The appropriation to the department is disclosed under the Funding section – Appropriations at Note 5.

2.2 Administered – Income

Accounting Policy

All administered revenues are revenues relating to ordinary activities performed by the entity on behalf of the Australian Government. As such, administered appropriations are not revenues of the individual entity that oversees distribution or expenditure of the funds as directed.

Accounting Policy

Rental Income is recognised over the term of the Indefeasible Rights of Use granted by the Commonwealth to external parties for use of the Administered property, plant and equipment.

3. Departmental Financial Position

3.1 Financial Assets

This section analyses the Department of Communications and the Arts assets used to conduct its operations and the operating liabilities incurred as a result. Employee related information is disclosed in the People and Relationships section.

Accounting Policy

Cash is recognised at its nominal amount. Cash and cash equivalents includes:

• Cash on hand;
• Demand deposits in bank accounts with an original maturity of 3 months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value; and
• Cash in special accounts.

Accounting Policy

Financial assets

Trade receivables, loans and other receivables that are held for the purpose of collecting the contractual cash flows where the cash flows are solely payments of principal and interest, that are not provided at below-market interest rates, are subsequently measured at amortised cost using the effective interest method adjusted for any loss allowance.

3.2 Non-Financial Assets

Accounting Policy

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Financial assets are initially measured at their fair value plus transaction costs where appropriate.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

Property, Plant and Equipment

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 that 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 Department where an obligation exists to restore the property to its original condition. These costs are included in the value of the Department’s leasehold improvements with a corresponding provision for the ‘make-good’ recognised.

Revaluations

Fair values for each class of asset are determined as shown below:

Following initial recognition at cost, property, plant and equipment are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depends upon the volatility of movements in market values for the relevant assets.

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.

Assets purchased during the financial year are excluded from asset revaluation as they represent fair value.

Depreciation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the Department using, in all cases, the straight-line method of depreciation. Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

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

Heritage and Cultural

Heritage and cultural items include artworks held by Artbank that are of national, historical or cultural significance. Artbank maintains separate curatorial and preservation policies for heritage and cultural assets: (http://artbank.gov.au/legal/#preservation-policy).

Impairment

All assets were assessed for impairment at 30 June 2019. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the entity were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

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.

Intangibles

The Department’s intangibles comprise software externally purchased and internally developed for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses. Software is amortised on a straight-line basis over its anticipated useful life.

The useful lives of the Department’s software are:

All software assets were assessed for indications of impairment as at 30 June 2019.

3.3 Payables

3.4 Other Provisions

4. Assets and Liabilities Administered on Behalf of Government

4.1 Administered – Financial Assets

This section analyses assets used to conduct operations and the operating liabilities incurred that therefore the Department of Communications and the Arts does not control but administers on behalf of the Government. Unless otherwise noted, the accounting policies adopted are consistent with those applied for departmental reporting.

Accounting Policy

Administered investments in subsidiaries, joint ventures and associates are not consolidated because their consolidation is relevant only at the Whole of Australian Government level.

In accordance with AASB 13 Fair Value Measurement, the following techniques are used to value Administered Investments:

(a) Discounted Cash Flows – this method needs to be considered when an entity invests in another entity that generates significant non-government cash inflows; and

(b) Net Assets – this method needs to be considered when an entity invests in another entity that does not generate significant non-government cash inflows.

A review of all administered investments is performed on an annual basis to ensure the appropriate valuation method is used.

Administered investments, other than those held for sale, are classified as 'financial assets of fair value through other comprehensive income’ and are measured at their fair value as at 30 June 2019. Apart from Australian Postal Corporation, fair value has been taken to be the Australian Government's proportional interest in the net assets of the entities as at the end of reporting period.

Australian Postal Corporation’s fair value estimates are based on a Discounted Cash Flow valuation calculated using cash flow forecasts extracted from the Australia Post Corporate Plan 2019-20 to 2022-23. The forecasts use management estimates to determine volume and price growth rates, and the weighted average cost of capital. Actual results may differ from these estimates under different assumptions and conditions and may materially affect the financial position reported in future periods.

In accordance with AASB 9 Financial Instruments and AASB 13 Fair Value Measurement, the Department has determined that the appropriate valuation method for the investment in NBN Co as at 30 June 2019 is the net assets approach. NBN Co is still in the build phase of construction and its cash flows are predominately from government.

4.2 Administered – Non-Financial Assets

4.3 Administered - Payables

4.4 Administered – Provisions

5. Funding

5.1 Appropriations

This section identifies the Department of Communications and the Arts funding structure.

5.2 Special Accounts

5.3 Regulatory Charging Summary

Regulatory charging activities:

Classification Fees: Before every film, computer game and certain publications can be legally made available to the Australian public by means of sale, exhibition or commercial distribution they must be classified (with limited exceptions). A valid classification application is to be accompanied with the prescribed fee before any classification decision can be made. The Classification (Publications, Films and Computer Games) Act 1995 and the Classification (Publications, Films and Computer Games) Regulations 2005 are the enabling legislation.

Cost Recovery Implementation Statement for the above activity is available at http://www.classification.gov.au/About/Pages/Legislation.aspx.

6. People and Relationships

6.1 Employee Provisions

This section describes a range of employment and post employment benefits provided to our people and our relationships with other key people.

Accounting policy

Liabilities for short-term employee benefits and termination benefits expected within twelve months of the end of reporting period are measured at their nominal amounts.

Other long-term employee benefits are measured as the net total of the present value of the defined benefit obligation at the end of the reporting period minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken, including the entity’s employer superannuation contribution rates to the extent that the leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by using the Department of Finance’s Short Hand Method as at 30 June 2019, as outlined in the Financial Reporting Rule. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. The entity recognises a provision for termination when it has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

The entity's staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap), or other superannuation funds held outside the Australian Government. The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

The entity makes employer contributions to the employees' defined benefit superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Government. The entity accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised as at 30 June represents outstanding contributions.

6.2 Key Management Personnel Remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Department, directly or indirectly. During 2017-18 the Secretary formed the Secretary’s Business Meeting (SBM) with the first meeting held on 24 November 2017. For the 2018-19 financial year, the Department has determined the key management personnel to be permanent members of the SBM, being the Secretary, Deputy Secretaries and Chief Operating Officer and anyone who has acted in one of those positions and attended a SBM during the acting periods.

In the previous year the Department had determined the key management personnel to be the members of the Executive Leadership Team (ELT), comprising the Secretary, Deputy Secretaries, First Assistant Secretaries and the Chief Risk Officer. The total key management personnel remuneration expense for the Executive Leadership Team in 2018 was $4,269,000. However, for comparative purposes the 2018 figures have been re-stated based on the SBM.

Key management personnel remuneration is reported in the table below:

6.3 Related Party Disclosures

Related party relationships:

The Department is an Australian Government controlled entity. Related parties to this Department are Key Management Personnel including the Portfolio Minister and Executive, and other Australian Government entities.

Transactions with related parties:

Given the breadth of Government activities, related parties may transact with the government sector in the same capacity as ordinary citizens. Such transactions include the payment or refund of taxes, receipt of a Medicare rebate or higher education loans. These transactions have not been separately disclosed in this note.

Giving consideration to relationships with related entities, and transactions entered into during the reporting period by the Department, it has been determined that there are no related party transactions to be separately disclosed.

7. Managing Uncertainties

7.1 Contingent Assets and Liabilities

This section analyses how the Department of Communications and the Arts manages financial risks within its operating environment.

7.1A: Departmental Contingent Assets and Liabilities

Quantifiable Contingencies

There are no significant quantifiable contingencies as at 30 June 2019 (2018: nil).

Unquantifiable Contingencies

There are no significant unquantifiable contingencies as at 30 June 2019 (2018: nil).

Significant Remote Contingencies

Operating Leases and Car Parking Licences

The Commonwealth indemnifies third parties against loss in relation to operating leases for accommodation, storage and some car parking. The Commonwealth also indemnifies some third parties against loss in relation to car parking facilities acquired under car parking licence agreements. As at 30 June 2019, no claims have been made.

Westpac Banking Corporation

The Commonwealth indemnifies Westpac Banking Corporation against loss reasonably incurred in relation to Departmental banking functions. In June 2013, the Department entered into a new banking contract with Westpac that provided for an indemnity capped at $50 million per occurrence. The previous contract provided for an indemnity capped at $25 million per occurrence. As at 30 June 2019, no claims have been made (2018: nil).

Accounting Policy

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

Indemnities

The maximum amounts payable under the indemnities given is disclosed above. At the time of completion of the financial statements, there was no reason to believe that the indemnities would be called upon, and no recognition of any liability was therefore required.

7.1B: Administered – Contingent Assets and Liabilities

Quantifiable Administered Contingencies

As at 30 June 2019, the Australian Government did not have any quantifiable contingencies (2018: nil).

Unquantifiable Administered Contingencies

NBN Co Limited (NBN Co) Board Members Insolvency Indemnity

The Australian Government has provided Directors of NBN Co with an indemnity against liability should the Government fail to meet its funding obligations to NBN Co. The liabilities covered by this indemnity would be no greater than those covered by the NBN Co Equity Funding Agreement, with the exception of any legal expenses incurred by individual Directors arising from this indemnity.

Significant Remote Administered Contingencies

Telstra Financial Guarantee

The Australian Government has provided to Telstra Corporation Limited (Telstra) a Guarantee in respect of
NBN Co financial obligations under the Definitive Agreements. The Agreements were amended on 14 December 2014. The Guarantee was not amended at that time and it continues in force in accordance with its terms in respect of the amended Definitive Agreements. The liabilities under the Definitive Agreements between Telstra and NBN Co arise progressively during the roll-out of the National Broadband Network as Telstra’s infrastructure is accessed and Telstra’s customers are disconnected from its copper and Hybrid Fibre Coaxial cable networks. The Australian Government is only liable in the event NBN Co does not pay an amount when due under the Definitive Agreements. As at 30 June 2019, NBN Co had generated liabilities covered by the Guarantee estimated at $9.4 billion. The Guarantee will terminate when NBN Co achieves specified credit ratings for a period of two continuous years and either:

• the company is capitalised by the Commonwealth to the agreed amount; or
• the Communications Minister declares, under the National Broadband Network Companies Act 2011, that, in his or her opinion, the National Broadband Network should be treated as built and fully operational.

Optus Financial Guarantee

The Australian Government has provided a Guarantee in respect of the NBN Co financial obligations to Optus Networks Pty Ltd, Optus Internet Pty Ltd, Optus Vision Media Pty Ltd and SingTel Optus Pty Ltd (collectively, Optus) under the Optus HFC Subscriber Agreement (the Agreement). An amended version of the Agreement came into effect on 22 January 2019. The Guarantee continues to apply to that Agreement. The Agreement extends for the period of the National Broadband Network roll-out in Optus Hybrid Fibre Coaxial areas. The Australian Government is only liable in the event NBN Co does not pay an amount when due under the Optus Agreement. As at 30 June 2019, NBN Co had generated liabilities covered by the Optus Agreement, which are estimated at an amount lower than $197.0 million. There is a low risk that a claim would be made under the Guarantee. The Guarantee will terminate in 2021.

Equity Funding Agreement

The Australian Government has entered into an Equity Funding Agreement with NBN Co to provide $29.5 billion equity funding. Although this Agreement ended on 30 June 2019, the Australian Government retains obligations to meet NBN Co’s costs arising from a termination of the roll-out. As at 30 June 2019, NBN Co’s termination liabilities were estimated at $21.3 billion.

7.2 Financial Instruments

Accounting Policy

Financial assets

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

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

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

c) financial assets measured at amortised cost.

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

Comparatives have not been restated on initial application.

Financial Assets at Amortised Cost

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

1. the financial asset is held in order to collect the contractual cash flows; and
2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Amortised cost is determined using the effective interest method.

Effective Interest Method

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

Financial Assets at Fair Value Through Other Comprehensive Income (FVOCI)

Financial assets measured at fair value through other comprehensive income are held with the objective of both collecting contractual cash flows and selling the financial assets and the cash flows meet the SPPI test.

Any gains or losses as a result of fair value measurement or the recognition of an impairment loss allowance is recognised in other comprehensive income.

Financial Assets at Fair Value Through Profit or Loss (FVTPL)

Financial assets are classified as financial assets at fair value through profit or loss where the financial assets either doesn’t meet the criteria of financial assets held at amortised cost or at FVOCI (i.e. mandatorily held at FVTPL) or may be designated.

Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest earned on the financial asset.

Impairment of Financial Assets

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

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

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

Financial Liabilities

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

Financial liabilities are recognised and derecognised upon ‘trade date’.

Financial Liabilities at Fair Value Through Profit or Loss

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

Financial Liabilities at Amortised Cost

Financial liabilities, including borrowings, 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 interest basis.

Supplier 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).

All payables are expected to be settled within 12 months except where indicated.

7.3 Administered – Financial Instruments

Note 7.3D: Credit Risk

The administered activities of the Department were not exposed to a high level of credit risk as the majority of financial assets are trade receivables, loans to Government controlled and funded entities and investment in Portfolio Agencies. The maximum exposure to credit risk is the risk that arises from potential default of a debtor. The carrying amount of financial assets, net of impairment losses, reported in the Administered Schedule of Assets and Liabilities represents the maximum exposure to credit risk as $13,081 million (2018: $5,580 million).

Grants receivable - Credit risk is managed by undertaking background and credit checks prior to allowing a debtor relationship. In addition, there are policies and procedures that guide debt recovery techniques that are to be applied. The Department has assessed the risk of the default on payment of grants receivable and has allocated $264,000 to an impairment allowance in 2019 (2018: nil). The Department has reviewed the historic impairment provision for grants receivable in accordance with AASB 9 Financial Instruments and has determined that there is no material adjustment on adoption of the new standard.

Loans to Government controlled and funded entities – the loan to NBN Co is monitored between origination and maturity through a series of oversight arrangements that assess the short and long-term financial performance of NBN Co. This considers changes in the borrower’s earnings, expenditure and market position. Our assessment of the security for the loan recognises that NBN Co is a wholly-owned Government Business Enterprise.

Note 7.3E: Liquidity Risk

The Administered financial liabilities are trade creditors and grants payable. The exposure to liquidity risk is based on the notion that the Commonwealth will encounter difficulty in meeting its obligations associated with Administered financial liabilities. This is highly unlikely due to appropriation funding and mechanisms, internal policies and procedures that are currently in place.

All financial liabilities are payable within one year.

Note 7.3F: Market Risk

Currency risk

Other than Administered Investments the Commonwealth holds basic financial instruments that do not expose the Commonwealth to certain market risk. The Department’s Administered activities are not exposed to ‘currency risk’ and ‘other price risk’.

Interest rate risk

‘Interest rate risk’ refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The only interest bearing item in the closing Administered Schedule of Assets and Liabilities is ‘loans receivable’. These items have fixed interest and will, therefore, not fluctuate due to changes in the market interest rate. As the loans to corporate Commonwealth entities are fixed interest only loans there is no inherent interest rate risk.

Other price risk

The Department’s administered activities are not exposed to ‘Other Price Risk’. The Administered investments are not traded on the Australian Stock Exchange. The Department does not hold any other financial instruments that would be exposed to price risk.

7.4 Fair Value Measurement

The following table provides an analysis of assets and liabilities that are measured at fair value. The remaining assets and liabilities disclosed in the Statement of Financial Position do not apply to the fair value hierarchy.

The different levels of fair value hierarchy are defined below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Department can access at measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

Accounting Policy

A desktop materiality review of the artwork was conducted as at 30 June 2019 and the outcomes were relied upon to assess the fair value measurement for this asset class.

The Department engaged the service of Jones Lang LaSalle (JLL) to conduct an asset materiality review of all non-financial assets with the exception of Artbank’s artwork collection (Heritage and Cultural asset class) as at 30 June 2019. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different from the fair value. Comprehensive valuations are carried out at least once every three years with the previous comprehensive valuation conducted as at 30 June 2018. JLL has provided written assurance to the Department that the models developed are in compliance with AASB 13 Fair Value Measurement.

The methods utilised to determine and substantiate the unobservable inputs are derived and evaluated as follows:

Physical Depreciation and Obsolescence - Assets that do not transact with enough frequency or transparency to develop objective opinions of value from observable market evidence have been measured utilising the Depreciated Replacement Cost approach. Under the Depreciated Replacement Cost approach the estimated cost to replace the asset is calculated and then adjusted to take into account the physical depreciation and obsolescence. Physical depreciation and obsolescence has been determined based on professional judgement regarding physical, economic and external obsolescence factors relevant to the asset under consideration. For all Leasehold Improvement assets, the consumed economic benefit/asset obsolescence deduction is determined based on the term of the associated lease.

The Department’s policy is to recognise transfers into and transfers out of fair value hierarchy levels at the end of the reporting period.

7.5 Administered – Fair Value Measurements

The following table provides an analysis of assets and liabilities that are measured at fair value. The remaining assets and liabilities disclosed in the Statement of Financial Position do not apply to the fair value hierarchy.

The different levels of fair value hierarchy are defined below:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Department can access at measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: Unobservable inputs for the asset or liability.

Accounting Policy

Fair values for Regional Backbone Blackspots Program (RBBP) network infrastructure assets under property, plant and equipment are determined based on the depreciated replacement cost method. The method is calculated for each individual part of the asset using a price per unit adjusted for inflation, a quantity of each component and a location factor before being aggregated to form the values for each identified component of the assets. Components include fibre optic cable, Control Environment Vault Shelters and Backbone Point of Interconnect cabinets. There has been no change in the valuation technique for the RBBP network infrastructure assets.

The Department engaged the service of Jones Lang LaSalle (JLL) to conduct an asset materiality review of all non-financial assets (excluding the RBBP) at 30 June 2019, which includes the Administered National Institute of Dramatic Arts Building. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different from the fair value. Comprehensive valuations are carried out at least once every three years. JLL has provided written assurance to the Department that the models developed are in compliance with AASB 13 Fair Value Measurement. If a particular asset class experiences significant or volatile changes in fair value (i.e. where indicators suggest that the value of the class has changed materially since the previous reporting period), that class is subject to specific valuation in the reporting period, where practicable, regardless of the timing of the last specific valuation.

The methods utilised to determine and substantiate the unobservable inputs are derived and evaluated as follows:

Physical Depreciation and Obsolescence - Assets that do not transact with enough frequency or transparency to develop objective opinions of value from observable market evidence have been measured utilising the Depreciated Replacement Cost approach. Under the Depreciated Replacement Cost approach the estimated cost to replace the asset is calculated and then adjusted to take into account the physical depreciation and obsolescence. Physical depreciation and obsolescence has been determined based on professional judgement regarding physical, economic and external obsolescence factors relevant to the asset under consideration. For all Leasehold Improvement assets, the consumed economic benefit / asset obsolescence deduction is determined based on the term of the associated lease.

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

8. Other Information

8.1 Aggregate Assets and Liabilities

8.2 Restructuring

There were no Departmental or Administered restructures for 2019 (2018: nil).

8.3 Budgetary Reports and Explanations of Major Variances

The following tables provide a comparison of the original budget as presented in the 2018-19 Portfolio Budget Statements to the 2018-19 final financial outcome as presented in accordance with Australian Accounting Standards for the Department. The Budget is not audited and does not reflect additional estimates provided in the 2018-19 Portfolio Additional Estimates Statements. Explanations are provided for significant variances between actual results and the original budget, being the Portfolio Budget Statements. Significant variances are those relevant to the performance of the Department and are typically those greater than $5 million (Departmental), $20 million (Administered) and greater than five percent.

8.3B: Departmental Major Budget Variances

Explanations of major variances

¹Supplier expenditure was higher than budgeted due to increases in departmental projects.

²The budget relating to rental income in the Statement of Comprehensive Income and the Cash Flow Statement is included in ‘other revenue’.

³During 2017-18 the Department relocated from Sydney Avenue in Barton to the Nishi Building on Philip Law Street in Acton. The fitout assets in the Nishi Building were originally recognised as ‘property, plant and equipment’ in the budget estimates, the balances will be moved to ‘buildings’ in the next budget update.

⁴The Department’s Information Technology standard operating environment was upgraded during 2018-19 which is reflected in an increase in the ‘intangibles’ balance.

⁵The balance reported as ‘other payables’ mainly reflects the recognition of lease incentives and rental income.

⁶Receipts from government is higher than budgeted due to the inclusion of the PGPA Section 74 receipts transferred to the Official Public Account.

⁷The fitout of the Nishi building required less modification to meet the needs of the Department than expected, resulting in lower than budgeted expenditure on property, plant and equipment.

​8.3D: Administered Major Budget Variances

Explanation of major variances

¹Supplier expenses increased in 2018-19 mainly as a result of the advertising costs relating to the online safety campaign and increased activity under the Public Interest Telecommunications program.

²The lower than budgeted grants expense mainly relates to the Mobile Black Spots Program. Some base stations that were budgeted for completion in 2018-19 will be completed in 2019-20 and the related grant milestones payments will now be made in 2019-20.

³The 2018-19 Budget estimates reflected the planned commencement of the Regional Broadband Scheme in 2018-19. The Budget was updated during the year to reflect the commencement of the program being deferred to 2019-20.

⁴During 2018-19 NBN Co accessed less of the loan funding than anticipated in the Budget estimates resulting in lower interest revenue being recognised and a lower than budgeted loan receivable balance being recorded in the Administered Schedule of Assets and Liabilities.

⁵Dividend revenue reflects the dividend paid to the Government by the Australian Postal Corporation. The Budget estimates for dividend revenue were updated during the year to reflect more recent projections as agreed by Shareholder Ministers.

⁶The Department’s Budget estimates for Administered Investments are generally held constant over the forward years due to the difficulties associated with predicting any changes likely to occur in the values of portfolio entities.

⁷Representing the closing balance of the Public Interest Telecommunications Services and National Cultural Heritage special accounts cash held in the Official Public Account. The variance is mainly driven by actual activities of the programs during the year.