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Department of Defence Annual Report 2019-20

Notes to and Forming Part of the Financial Statements

Overview

Department of Defence

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

For the period ended 30 June 2020

OVERVIEW

Objectives of Defence

The Department of Defence is an Australian Government controlled entity. It is a not-for-profit entity. The objective of Defence is

to defend Australia and its national interests through the conduct of operations and to protect and advance Australia's strategic

interests.

The Basis of Preparation

The financial statements including notes are required by section 42 of the Public Governance, Performance and Accountability Act

2013 (PGPA Act) and are general purpose financial statements.

The financial statements have been prepared in accordance with:

Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR); and

Australian Accounting Standards and Interpretations - Reduced Disclosure Requirements issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and are in accordance with the historical cost convention, except

for certain assets at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the

financial position.

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

otherwise specified.

Where necessary, comparatives have been reclassified and repositioned for consistency with current period disclosures.

New Accounting Standards

All new accounting standards and interpretations that were issued prior to the sign-off date and are applicable to the current

reporting period are disclosed below.

Standard/ Interpretation

Nature of change in accounting policy, transitional provisions, and adjustment to financial statements

AASB 15, AASB 2016-8 and AASB 1058 became effective 1 July 2019.

AASB 15 Revenue from

AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue

Contracts with

is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue,

Customers / AASB

AASB 111 Construction Contracts and Interpretation 13 Customer Loyalty Programmes. The core

2016-8 Amendments to

principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or

Australian Accounting

services to customers in an amount that reflects the consideration to which the entity expects to be

Standards – Australian

entitled in exchange for those goods or services.

Implementation

Guidance for Not-for-

AASB 1058 is relevant in circumstances where AASB 15 does not apply. AASB 1058 replaces most

Profit Entities and AASB

of the not-for-profit (NFP) provisions of AASB 1004 Contributions and applies to transactions where the

1058 Income of Not-For-

consideration to acquire an asset is significantly less than fair value principally to enable the entity to

Profit Entities

further its objectives, and where volunteer services are received.

The details of the changes in accounting policies, transitional provisions and adjustments are disclosed

below and in the relevant notes to the financial statements.

AASB 16 became effective on 1 July 2019.

This new standard has replaced AASB 117 Leases, Interpretation 4 Determining whether an

Arrangement contains a Lease, Interpretation 115 Operating Leases—Incentives and Interpretation 127

Evaluating the Substance of Transactions Involving the Legal Form of a Lease.

AASB 16 Leases

AASB 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities

for all leases, together with options to exclude leases where the lease term is 12 months or less, or

where the underlying asset is of low value. AASB 16 substantially carries forward the lessor accounting

in AASB 117, with the distinction between operating leases and finance leases being retained. The

details of the changes in accounting policies, transitional provisions and adjustments are disclosed

below and in the relevant notes to the financial statements.

Application of AASB 15 Revenue from Contracts with Customers / AASB 1058 Income of Not-For-Profit Entities

Defence adopted AASB 15 and AASB 1058 using the modified retrospective approach, under which the cumulative effect of initial

application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented for 2019 is not

restated, that is, it is presented as previously reported under the various applicable AASBs and related interpretations.

Department of Defence

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

For the period ended 30 June 2020

New Accounting Standards (continued)

Under the new income recognition model Defence shall first determine whether an enforceable agreement exists and whether the

promises to transfer goods or services to the customer are ‘sufficiently specific’. If an enforceable agreement exists and the

promises are ‘sufficiently specific’ (to a transaction or part of a transaction), Defence applies the general AASB 15 principles to

determine the appropriate revenue recognition. If these criteria are not met, Defence shall consider whether AASB 1058 applies.

In relation to AASB 15, Defence elected to apply the new standard to all new and uncompleted contracts from the date of initial

application. Defence is required to aggregate the effect of all of the contract modifications that occur before the date of initial

application.

In terms of AASB 1058, Defence is required to recognise volunteer services at fair value if those services would have been

purchased if not provided voluntarily, and the fair value of those services can be measured reliably.

The impact on transition and of the adoption of AASB 15 and AASB 1058 in the current reporting period is not material to Defence

Application of AASB 16 Leases

Defence adopted AASB 16 using the modified retrospective approach, under which the cumulative effect of initial application is

recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented for 2019 is not restated,

that is, it is presented as previously reported under AASB 117 and related interpretations.

Defence elected to apply the practical expedient to not reassess whether a contract is, or contains a lease at the date of initial

application. Contracts entered into before the transition date that were not identified as leases under AASB 117 were not reassessed.

The definition of a lease under AASB 16 was applied only to contracts entered into or changed on or after 1 July 2019.

AASB 16 provides for certain optional practical expedients, including those related to the initial adoption of the standard. Defence

applied the following practical expedients when applying AASB 16 to leases previously classified as operating leases under

AASB 117:

Apply a single discount rate to a portfolio of leases with reasonably similar characteristics;

Exclude initial direct costs from the measurement of right-of-use assets at the date of initial application;

Reliance on previous assessments on whether leases are onerous as opposed to preparing an impairment review under AASB 136 Impairment of assets as at the date of initial application; and

Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term remaining as of the date of initial application.

As a lessee, Defence previously classified leases as operating or finance leases based on its assessment of whether the lease

transferred substantially all of the risks and rewards of ownership. Under AASB 16, Defence recognises right-of-use assets and

lease liabilities for most leases. However, Defence has elected not to recognise right-of-use assets and lease liabilities for some

leases of low value assets based on the value of the underlying asset (less than $10,000) when new or for short-term leases with

a lease term of 12 months or less.

On adoption of AASB 16, Defence recognised right-of-use assets and lease liabilities in relation to leases of office space, motor

vehicles and other plant and equipment, which had previously been classified as operating leases.

The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Government’s

incremental borrowing rate as at 1 July 2019 (as Defence does not borrow money in its own right) unless the lease contract

contained an explicit interest rate. The incremental borrowing rate is calculated using a weighted average return on a portfolio

of government bonds which best match the expected cash payments under the lease. The weighted-average rate applied across

the lease portfolio was 1.46%.

The right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued

lease payments for all leases.

Department of Defence

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

For the period ended 30 June 2020

New Accounting Standards (continued)

Impact on transition

On transition to AASB 16, Defence recognised additional right-of-use assets and additional lease liabilities, recognising the

difference in retained earnings. The impact on transition is summarised below:

1 July 2019

$000's

Right-of-use assets - property, plant and equipment

1,425,719

Sub-Lease receivables

206,985

Lease liabilities

(1,577,523)

Lease prepayments previously recognised at 30 June 2019 ¹

55,181

¹ This represent amounts previously recorded as operating lease prepayments as at 30 June 2019 (Note 3.2C).

The following table reconciles the Departmental lease commitments disclosed in Defence's 30 June 2019 annual financial

statements to the amount of lease liabilities recognised on 1 July 2019:

1 July 2019

$000's

Minimum operating lease commitment at 30 June 2019

6,467,486

Less leases not yet commenced at 1 July 2019

(55,266)

Less: short-term and low value leases not recognised under AASB 16

(142,787)

Less commitments relating to variable leases at 1 July 2019 ¹

(4,823,960)

Plus: amounts previously not recorded as operating lease commitments

51,382

Plus: effect of extension options reasonable certain to be exercised

261,673

Undiscounted lease payments

1,758,528

Less: effect of discounting using the incremental borrowing rate as at the date of initial application

(181,005)

Lease liabilities recognised at 1 July 2019

1,577,523

¹ This represents amounts previously recorded as operating commitments under contracts for the provision of accommodation for

Defence service members. The contractual arrangements in place involve variability in payments and therefore these balances

have not been included within lease liabilities under AASB 16.

Taxation

Defence is exempt from all forms of taxation except Fringe Benefits Tax (FBT), the Goods and Services Tax (GST) and certain

excise and customs duties.

Reporting of Administered activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the administered schedules and related

notes.

Except where otherwise stated, administered items are accounted for on the same basis and using the same policies as for

departmental items, including the application of Australian Accounting Standards.

Breach of Section 83 of the Constitution

Section 83 of the Constitution provides that no amount may be paid out of the Consolidated Revenue Fund except under an

appropriation made by law. Payments made which are not supported by appropriation are not consistent with section 83 of the

Constitution.

Defence has identified a potential issue within two Defence home loan schemes, Defence Force (Home Loans Assistance) Act

1990 and the Defence Home Ownership Assistance Scheme Act 2008, where overpayments have been made resulting in

potential breaches of section 83. It should be noted that both schemes have provisions that allow for the recovery of an overpayment

(see s31 of the 1990 Act and s 66-70 of the 2008 Act). The legislation does not currently authorise the appropriation of funds

in relation to overpayments. It is unlikely that this matter will be addressed by legislative amendment in the near future. Defence will

continue to report on potential section 83 breaches for those schemes.

In 2019-20, Defence identified 4 overpayments totalling $315 in relation to the Defence Force (Home Loans Assistance) Act 1990.

Defence undertook recovery action and as at 30 June 2020, $315 had been recovered.

In 2019-20, Defence identified 219 overpayments totalling $182,635 in relation to the Defence Home Ownership Assistance Scheme

Act 2008. Defence undertook recovery action and as at 30 June 2020, $149,553 had been recovered.

These overpayments represent potential breaches of section 83 and have been derived by analysing data on recovery of

overpayments and other identified risk areas for 2019-20. Business processes are in place to ensure that identified

overpayments are recovered.

Department of Defence

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

For the period ended 30 June 2020

Estimation Uncertainty as a result of COVID-19

Departmental

As part of preparing the 2019-20 financial statements, Defence has considered the impacts of COVID-19 on all provisions and

estimations made within the financial statements. Key assumptions impacted by COVID-19 include inflation rates used in

decommissioning, decontamination, restoration and other provisions, and salary growth rates used in employee provisions. Rates

used reflect the current economic climate and do not have a material impact on the recorded provisions. Consequently, Defence

considers there is no material uncertainty within the resultant provisions reported as at 30 June 2020.

Defence have considered the impact of COVID-19 on fair valuation activities that have been undertaken with respect to Defence's

non-financial assets (which includes general assets and specialist military equipment). Valuation activities undertaken over

Defence's general assets (excluding specialist military equipment) have incorporated the impacts of COVID-19 into final valuations.

Specifically, the valuations of these assets have been reported on the basis that the valuation is current at the date of the valuation

only. The value assessed may change significantly over a relatively short period of time, however the valuers have confirmed that

this does not mean valuations cannot be relied upon. Rather, that in the current extraordinary circumstances, less certainty should

be attached to valuations that would otherwise be the case.

The fair value of specialist military equipment (SME) is subject to movements in relevant producer price indices of the country of

manufacture for each Defence platform. Given the current economic climate, there is some uncertainty regarding the movement in

these indices, and the impact on the valuation of SME assets. Despite the uncertainty, Defence considers that indices materially

reflect the current economic conditions as at 30 June 2020, and therefore there is no material uncertainty with the reported SME

balances at 30 June 2020.

While not relating to estimates or assumptions used in the preparation of the financial statements, Defence also notes that inventory

stocktaking procedures were impacted by COVID-19. During 2019-20, Defence was required to perform alternate procedures to

ensure no material uncertainty was present within the reported inventory balances. At 30 June 2020, Defence has determined that

appropriate coverage was achieved and that balances are free from material misstatement.

Administered

The only balance subject to assumptions impacted by COVID-19 is the valuation of Administered employee provisions, which

includes salary growth rate, demographic experience and discount rate assumptions. Defence in conjunction with the Australian

Government Actuary have considered and accounted for these impacts in the development of the Military Superannuation Provisions

in light of known salary, demographic and CPI expectations.

Additionally, within Note 4.5, Defence has disclosed the fair value of superannuation plan assets. Given the uncertainties surrounding

financial markets due to the COVID-19 pandemic, there is increased uncertainty surrounding the underlying valuation of Australian and

overseas equities, and property and infrastructure. While this does not mean that the valuations cannot be relied upon, less certainty

should be attached to valuations than would otherwise be the case.

Events After the Reporting Period

Departmental

Defence have revisited the capitalisation thresholds for a number of asset classes. These changes will be effective from 1 July

2020 and have an estimated opening balance impact in the range of $300-$400 million. The annual impact of the revised thresholds

are estimated to result in an annual increase in expenses (or reduction of capitalisation of assets) of $25-$50 million. The final

assessment of the impact and the relevant disclosures will form part of the 30 June 2021 financial statements.

Administered

On 24 August 2020, PGPA Act Determination (DHA Borrowings Special Account 2020) established a new special account to provide

an appropriation mechanism to facilitate lending activities between the Commonwealth and Defence Housing Australia (DHA) under

section 36 of the Defence Housing Australia Act 1987. This special account will be administered by the Department of Finance with

a commencement date of 1 October 2020. Consequently, the DHA loans totalling $509.6 million, as detailed in Note 4.1B, will no

longer be administered by Department of Defence from 1 October 2020.

Note 1.1A Employee benefits

Department of Defence
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
For the period ended 30 June 2020

FINANCIAL PERFORMANCE
This section analyses the financial performance of Defence for the year ended 30 June 2020

1.1: Expenses
	2020	2019
	$'000	$'000
1.1A: Employee benefits
Australian Public Service (APS) employee benefits
Wages and salaries	1,419,957	1,343,518
Superannuation:
Defined contribution plans	142,368	123,778
Defined benefit plans	128,771	135,691
Leave and other entitlements	204,589	228,043
Fringe benefits tax	29,816	6,705
Separation and redundancies	13,354	24,446
Other allowances	34,477	37,981
Health expenses	4,251	4,138
Other employee expenses	1,470	1,145
Total APS employee benefits	1,979,053	1,905,445

Australian Defence Force (ADF) employee benefits
Wages and salaries	5,408,705	5,155,545
Superannuation:
Defined contribution plans	192,222	131,790
Defined benefit plans	1,499,365	1,568,355
Housing ¹	895,228	915,220
Leave and other entitlements	704,386	633,586
Fringe benefits tax	536,506	481,228
Overseas allowances	142,876	164,932
Separation and redundancies	12,393	13,970
Other allowances	350,183	356,662
Health expenses	473,902	476,369
Other employee expenses	147,308	118,892
Total ADF employee benefits	10,363,074	10,016,549

Total employee benefits	12,342,127	11,921,994

¹ Housing expenses include lease payments made to Defence Housing Australia (DHA) for the provision of housing for ADF members with families. Due to their nature, and relating to employment agreement between Defence and the ADF members, these payments are classified as employee expenses. Residences leased from DHA are subleased by Defence to ADF members for a nominal charge. Lease expenses are paid by Defence to DHA and recognised as part of ADF housing expenses.

For the current financial period, sublease expenses were $483.9m (2018-19: $534.1m).

Accounting Policy

Defence’s workforce comprises APS (i.e. civilians) and ADF (i.e. military) personnel. Employee benefits for each workforce component are based on the relevant employment agreements and legislation. Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.

Liabilities for wages and salaries (including non-monetary benefits), annual leave and other entitlements expected to be wholly settled within 12 months of the reporting date are measured at their nominal amounts.

All other employee benefit liabilities (including long service leave) are measured at the present value of the estimated future cash outflows to be made in respect of services provided by employees up to the reporting date.


1.1A: Employee benefits (continued)

(a) Leave
The liability for employee benefits includes provisions for annual leave and long service leave. No provision has been made for
sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of Defence is
estimated to be less than the annual entitlement for sick leave. The leave liabilities are calculated on the basis of employees'
remuneration, including Defence’s employer superannuation contribution, at the estimated rates that will be applied at the time
that leave is taken, to the extent that leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave has been determined by reference to the work of the Australian Government Actuary in the
current year. The estimate of the present value of the liability takes into account attrition rates and pay increases through
promotion and inflation.

(b) Separation and Redundancy
Provision is made for separation and redundancy benefit payments. Defence recognises a provision for termination when it
has a detailed formal plan for the terminations and has informed those employees affected that the terminations will be
carried out.

(c) Superannuation – APS Employees
Permanently appointed APS employees of Defence are members of the Commonwealth Superannuation Scheme (CSS),
the Public Sector Superannuation Scheme (PSS), the PSS Accumulation Plan (PSSap) and other superannuation schemes
held outside the Commonwealth.

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 by the Department of Finance as an administered item.

Defence makes employer contributions to the employee superannuation schemes at rates determined by an actuary to be
sufficient to meet the current cost to the Government of the superannuation entitlements of Defence’s employees. Defence
accounts for these contributions as if they were contributions to defined contribution plans in accordance with AASB 119.

The liability for superannuation recognised in the departmental statements as at 30 June represents outstanding contributions
yet to be paid.

(d) Superannuation – ADF Members
Permanently appointed ADF employees of Defence are members of the Defence Force Retirement and Death Benefits
Scheme (DFRDB), the Military Superannuation Benefits Scheme (MSBS) and Australian Defence Force Superannuation
(ADF Super), which includes the ADF Cover.

DFRDB and MSBS are defined benefit superannuation plans for ADF members. Defence makes employer contributions to the
employee superannuation schemes at rates determined by an actuary to be sufficient to meet the current cost to the
Government of the superannuation entitlements of Defence’s employees. Defence accounts for these contributions in its
departmental statements as if they were contributions to defined contribution plans in accordance with AASB 119.

ADF Super is a defined contribution scheme. The members of ADF Super are entitled to an insurance cover for death and
invalidity benefits under the provisions of the ADF Cover scheme, which is a defined benefit type plan.

The liability for superannuation recognised in the departmental statements as at 30 June represents outstanding contributions
yet to be paid. The liabilities for DFRDB, MSBS, ADF Cover defined benefit is recognised and reported by the Department of
Defence as an administered item.

(e) Paid Parental Leave
Defence provides payments to employees under the Government Paid Parental Scheme. The receipts received are offset by
the payments made to the employees and any balance outstanding at the end of the year is recognised as a liability.

Accounting Judgements and Estimates
As required by AASB 119 Employee Benefits, the estimate of future cash outflows takes into account estimated attrition,
probability factors, future salary rates and ancillary costs. Liabilities for short-term employee benefits not expected to be paid
within 12 months of the end of reporting period are measured at the one year Commonwealth government bond rate of 0.24
per cent (2018-19: 1.04 per cent). Liabilities for long term employee benefits are discounted using the 10 year Commonwealth
government bond rate of 0.87 per cent (2018-19:1.32 per cent).


1.1A: Employee benefits (continued)

Accounting Judgements and Estimates (continued)
When assessing the application of AASB16 to the lease payments made to DHA, Defence considers it is necessary to read the
Defence Services Agreement (DSA), the Defence Housing Australia Act 1987 (DHA Act) and the Defence Housing Australia
Residence Agreement (DRA) as a whole to understand the commercial arrangements between DHA, Defence and the ADF
member. The arrangement between DHA and Defence contains a lease for each individual property, with the term of the lease
being greater than 12 months. The amount paid as consideration for each lease is based on usage and considered variable
as Defence pays these amounts if and when a property is occupied by an ADF member, and therefore not based on an index
or rate. Accordingly, the right-of-use asset and lease liability under AASB 16 Leases has a zero value and payments are
expensed through the Statement of Comprehensive Income.

Other key Judgements that support the DSA meeting the definition of a lease under AASB16 are:

The DSA provides Defence the right to control the properties because it directs when the properties are to be used, including the allocations policy and when properties must be vacated. The ADF members only have a right to occupy a DHA property as a result of their employment with Defence and, if the employment is terminated the entitlement under the DRA ends;
Defence does not act as an agent for DHA by collecting rental contributions from ADF members. Defence’s obligation to pay rent under the DSA is independent othe member’s contribution under the DRA; and
Defence Residences leased from DHA are subleased by Defence to ADF members for a nominal charge which is set based upon their personal and employment conditions rather than the market rate. This sublease can be terminated by Defence or the ADF member with 28 days notice and no penalties incurred.

Note 1.1B Suppliers expenses

	2020	2019
	$'000	$'000
1.1B: Suppliers expenses
Goods and services supplied or rendered
Inventory consumption	951,523	918,821
Sustainment (including repair and overhaul)	5,526,858	5,069,487
Garrison support and mess operations	363,181	327,574
Travel	227,110	268,488
Freight, storage and removal	532,884	503,329
Training	481,122	512,626
Communications and information technology	1,678,261	1,526,758
Professional services/technical advice	530,055	415,870
Estate upkeep	1,655,200	1,376,676
Research and development	390,433	289,067
Utilities	405,810	374,942
Purchase of minor assets	250,168	180,863
Project management costs	449,023	267,247
Administration	660,955	655,683
Other	1,338,567	1,026,312
Total goods and services supplied or rendered	15,441,150	13,713,743

Goods and services supplied or rendered are made up of:
Goods supplied	1,833,630	1,789,711
Services rendered	13,607,520	11,924,032
Total goods and services supplied or rendered	15,441,150	13,713,743

Other supplier expenses
Operating lease rentals ¹	-	299,737
Short-term leases	8,965	-
Low value leases	11,233	-
Variable lease payments	47,071	-
Workers compensation premiums	19,346	19,847
Total other supplier expenses	86,615	319,584
Total supplier expenses	15,527,765	14,033,327

¹ Defence has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117.

The above lease disclosures should be read in conjunction with the accompanying notes 1.1D, 1.2B, 3.2 and 3.4.

Accounting Policy

Defence has elected not to recognise right-of-use assets and lease liabilities for short-term leases of assets that have a lease term of 12 months or less and leases of low-value assets (less than $10,000). Defence recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

Note 1.1C Grants

	2020	2019
	$'000	$'000
1.1C: Grants
State and Territory Governments	1,217	4,400
Non-profit organisations	46,270	33,043
Overseas	117,196	111,933
Total grants	164,683	149,376

Accounting Policy

Contributions by Defence to other government entities, private sector organisations and individuals which have been identified as a grant are recognised as an expense where grant conditions (such as eligibility criteria) were met.

Note 1.1D Finance Costs

	2020	2019
	$'000	$'000
1.1D: Finance costs
Interest on lease liabilties ¹	115,385	101,628
Unwinding of discount - restoration, decontamination and decommissioning	9,896	9,639
Bank interest	357	5
Total finance costs	125,638	111,272

¹ Defence has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117. T

he above lease disclosures should be read in conjunction with the accompanying notes 1.1B, 1.2B, 3.2 and 3.4.

Accounting Policy

All borrowing costs are expensed as incurred.

Note 1.1E Write-down and impairment of assets

	2020	2019
	$'000	$'000
1.1E: Write-down and impairment of assets
Write-down and impairment of property, plant and equipment¹	304,422	562,341
Write-down and impairment of intangible assets¹	25,609	17,445
Write-down and impairment of inventory¹	375,929	671,183
Total write-down and impairment of assets	705,960	1,250,969

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

Accounting Policy

The relevant account policy for write-down and impairment of assets is detailed in Note 3.2A Reconciliation of the opening and closing balances of property, plant and equipment, and intangibles.

Note 1.1F Foreign exchange

	2020	2019
	$'000	$'000
1.1F: Foreign exchange
Foreign exchange gains
Non-speculative	98,834	41,371
Foreign exchange losses
Non-speculative	(142,755)	(78,036)
Total net (loss)/gain foreign exchange	(43,921)	(36,665)

Accounting Policy

Transactions denominated in a foreign currency are converted at the exchange rate on the date of transaction. Foreign currency receivables and payables are translated at the exchange rate at the balance sheet date.

Non-financial items that are measured at cost in a foreign currency are translated using the spot exchange rate at the date of the initial transaction. Non-financial items that are measured at fair value in a foreign currency are translated using the spot exchange rates at the date when the fair value was determined.

All exchange gains and losses are reported in the Statement of Comprehensive Income.

Note 1.1G Other expenses

	2020	2019
	$'000	$'000
1.1G: Other expenses
Act of grace payments	367	1,235
Tactical Payment Scheme payments	2	9
Defective Administration Scheme payments	3,909	5,289
Restoration, decontamination and decommissioning costs	205,372	146,861
Other	13,637	87,806
Total other expenses	223,287	241,200

Note 1.2A Revenue from contracts with customers

Own-Source Revenue	2020	2019
	$'000	$'000
1.2A: Revenue from contracts with customers
Provision of goods
Rations and quarters - cost recovery	69,189	62,738
Provision of fuel - cost recovery	29,382	17,150
Other (including sale of obsolete and surplus inventory)	18,737	29,411
Total provision of goods	117,308	109,299

Rendering of services

Logistics support recovery	35,115	32,291
Other recoveries	51,713	42,399
Other governments/agencies ¹	69,506	72,901
Other	49,093	53,593
Total rendering of services¹	205,427	201,184

Total revenue from contracts with customers¹	322,735	310,483

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

Note 1.2B Rental Income

	2020	2019
1.2B: Rental income	$'000	$'000
Operating leases:
Group rental scheme¹	203,844	205,277
Other¹	47,438	30,438
*Total rental income²*	251,282	235,715

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

² Defence has applied AASB 16 using the modified retrospective approach and therefore the comparative information continues to be reported under AASB 117.

Defence earns rental income under property leases to third party service providers at Defence operating locations or in circumstances where asset capacity is excess to short term operational requirements. Commercial arrangements are in place where lessees agree to maintain the value and/or condition of the property or other leased assets. Lease contracts also have termination clauses that can be exercised if required with notice periods that reflect the potential operational need for the underlying asset.

Accounting Policy

Revenue from the provision of goods is recognised when all of the following criteria has been met:

the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;
Defence can identify each party’s rights regarding the goods or services to be transferred;
Defence can identify the payment terms for the goods or services to be transferred;
the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
it is probable that Defence will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, Defence shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which Defence will be entitled may be less than the price stated in the contract if the consideration is variable because Defence may offer the customer a price concession.
revenue from the sale of goods is recognised when the risks and rewards of ownership have been transferred to the buyer and Defence 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 the services performed to date as a percentage of total services to be performed.

Notwithstanding the above, if a contract that would otherwise be within the scope of AASB 15, does not meet the criteria above as it is unenforceable or not sufficiently specific, Defence will instead consider the requirements of AASB 1058 in accounting for such contracts.

								2020
								$'000
Maturity analysis of operating lease income receivables:
Within one year								46,079
One to two years								27,560
Two to three years								27,778
Three to four years								28,044
Four to five years								28,393
More than five years								94,723
Total undiscounted lease payments receivable								252,577

The above lease disclosures should be read in conjunction with the accompanying notes 1.1B, 1.1D, 3.2 and 3.4.

Note 1.2C Other Revenue

	2020	2019
	$'000	$'000
1.2C: Other revenue
Excise refunds	636	563
Settlement of damages	15,300	589
Foreign military sales refunds	7,563	2,959
Interest revenue¹	12,849	11,862
Other refunds	25,515	4,410
Other minor revenues	511	291
Resources received free of charge:
Remuneration of auditors	3,675	3,800
Assets received free of charge	5	-
Other resources received free of charge	-	87
Total other revenue	66,054	24,561

¹ Interest revenue includes $2.729 million in relation to sub-lease receivables.

								2020
								$'000

Maturity analysis of finance lease receivables:
Within one year								13,677
One to two years								14,107
Two to three years								14,139
Three to four years								13,259
Four to five years								13,328
More than five years								152,412
Total undiscounted lease payments receivable								220,922
Unearned finance income								(23,708)
Net investment in leases								197,214

Accounting Policy

Resources received free of charge for goods and services are recognised as revenue when and only when a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense. Fair value is determined based on actual full cost if the resources were to be purchased. Resources received free of charge are recorded as either revenue or gains depending on their nature. Contributions of assets at no cost or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition (with the exception of assets valued at cost), unless received from another Government agency as a consequence of a restructuring of administrative arrangements. Fair value is assessed by asset class as described in 3.2A(f).

Note 1.2D Reversal of previous asset write-downs and impairment


		2020	2019
		$'000	$'000
1.2D: Reversals of previous asset write-downs and impairment
Land and buildings ¹		948	15,550
Specialist military equipment ¹		223,926	160,809
Infrastructure ¹		5,807	12,285
Plant and equipment ¹		16,577	18,274
Heritage and cultural assets		210	125
Software and intangibles		-	759
Total property, plant and equipment and intangibles	3.2A	247,468	207,802

Receivables		5,669	2,976
Inventory		127,226	305,705
Total reversal of previous asset write-downs and impairment		380,363	516,483

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

Note 1.2E Other gains

	2020	2019
	$'000	$'000
1.2E: Other gains
Reversal/write back of provisions	100,277	179,038
Other gains - ASMTI Contribution	132,701	176,238
Total other gains	232,978	355,276

Accounting Policy

Reversal/write back of provisions relate to the movements in provisions based on changes in estimates.

Other gains relate to the Australia Singapore Military Training Initiative (ASMTI) agreement. Under the agreement, the Republic of Singapore makes a contribution to Defence which will be used towards the cost of development of military training facilities. Once developed, these facilities will be used by the Defence forces of Australia and Singapore for the conduct of exercises and other training activities.

Note 1.2F Revenue from Government

	2020	2019
	$'000	$'000
1.2F: Revenue from Government
Appropriations:
Departmental appropriations	34,290,209	32,525,834
*Total revenue from Government*	34,290,209	32,525,834

Accounting Policy

Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as revenue when Defence 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.

Defence draws down appropriations on a just-in-time basis. The undrawn appropriations as at 30 June 2020 are reflected as a receivable and are available to be drawn down to meet future obligations. Appropriations receivable are recognised at their nominal amounts.

Note 2.1A Employee benefits

2.1: Administered - Expenses
	2020	2019
	$'000	$'000
2.1A: Employee benefits
Superannuation:
Defined benefit plans
Net service cost	6,230,300	4,299,300
Net interest cost	3,488,100	4,017,600
Retention benefits	99,566	91,702
Total employee benefits	9,817,966	8,408,602

Note 2.1B Subsidies

	2020	2019
	$'000	$'000
2.1B: Subsidies
Related parties:
Defence Home Owner Scheme	207	337
Defence Home Ownership Assistance Scheme	110,441	119,988
Total subsidies	110,648	120,325

Note 2.1C Impairment loss allowance on financial instruments

		2020	2019
		$'000	$'000
2.1C: Impairment loss allowance on financial instruments
Impairment on trade and other receivables	7.3B	-	2
Total impairment on financial instruments		-	2

Note 2.2A Fees and fines

2.2: Administered - Income	2020	2019
	$'000	$'000
Non-Taxation Revenue

2.2A: Fees and fines
License fees	17,384	16,968
Total fees and fines	17,384	16,968

Accounting Policy

All administered revenues relate to activities performed by Defence 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. Administered revenues mainly comprise military superannuation contributions, payments received from the United Nations and foreign governments, bank interest, dividends, loan interest and State Tax Equivalent payments received from Defence Housing Australia and licence fees received under the Defence Home Ownership Assistance Scheme.

Licence fees are charged to home loan providers under the Defence Home Ownership Assistance Scheme (DHOAS), who are required to remit a portion of home loan revenue to the Australian Government. Licence fee revenue is recognised when amounts have been received from customers by the home loan providers.

Note 2.2B Interest

	2020	2019
	$'000	$'000
2.2B: Interest
Loans to Defence Housing Australia	20,809	24,506
Total interest	20,809	24,506

Accounting Policy

Interest revenue is recognised using the effective interest method.

Note 2.2C Dividends

	2020	2019
	$'000	$'000
2.2C: Dividends
Australian Government entities - Defence Housing Australia	25,604	24,545
Total dividends	25,604	24,545

Note 2.2D Military superannuation contributions

	2020	2019
	$'000	$'000
2.2D: Military superannuation contributions
Military superannuation contributions	1,351,453	1,388,079
Total military superannuation contributions	1,351,453	1,388,079

Note 2.2E Other revenue

	2020	2019
	$'000	$'000
2.2E: Other revenue
Competitive neutrality revenue - Defence Housing Australia	41,124	40,552
Other	13,685	16,345
Total other revenue	54,809	56,897

Competitive neutrality revenue relates to State Tax Equivalent payments made by Defence Housing Australia (DHA) under the Australian Government's Competitive Neutrality Policy. The amounts paid include payroll tax, land tax and stamp duty and have been calculated by DHA as being payable under the relevant Acts had they applied

Note 2.2F Foreign exchange gains

	2020	2019
	$'000	$'000
2.2F: Foreign exchange gains
Non-speculative	103	300
Total foreign exchange gains	103	300

Note 3.1A Cash and cash equivalents

3.1: Financial Assets	2020	2019
	$'000	$'000

3.1A: Cash and cash equivalents
Cash on hand	3,780	4,408
Cash at bank - at call¹	423,638	282,553
Total cash and cash equivalents	427,418	286,961

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

Accounting Policy

Cash and cash equivalents includes notes and coins held, any deposits in bank accounts held at call with a bank, and cash held in special accounts. Cash is measured at its nominal amount. Cash and cash equivalents denominated in a foreign currency is converted at the exchange rate at the balance date.

Note 3.1B Trade and other receivables

		2020	2019
		$'000	$'000

3.1B: Trade and other receivables
Goods and services receivables
Goods and services		51,388	48,047
Total goods and services receivables		51,388	48,047

Appropriations receivable
For existing programs		249,000	255,893
Total appropriations receivable	5.1A	249,000	255,893

Other receivables
GST receivable from the Australian Taxation Office		229,965	250,481
Accrued revenue		16,614	16,304
Other ²		383,719	289,613
Sub-Lease receivables		197,214	-
Total other receivables		827,512	556,398
Total trade and other receivables (gross)		1,127,900	860,338

Less impairment allowance
Goods and services		(7,457)	(10,703)
Total impairment allowance		(7,457)	(10,703)
Total trade and other receivables (net)		1,120,443	849,635

Credit terms for goods and services were within 1-30 days (2018-19: 1-30 days).

² The balance contains no win no loss receivables totalling $273.0 million (2018-19: $188.8 million).

Accounting Policy

Trade receivables and other receivables are recognised initially at fair value and subsequently measured at amortised cost, less any loss allowance.

The receivables for goods and services are generally receivable within 30 days. The collectability is assessed periodically with allowances made for doubtful debts when there is evidence that Defence will not be able to collect the debt.

In accordance with AASB 9, impairment of trade receivables is assessed under an 'expected credit loss' (ECL) model. This impairment model applies to financial assets measured at amortised cost, contract assets and debt instruments measured at fair value through other comprehensive income.

Trade and other receivable assets at amortised cost are assessed for impairment at the end of each reporting period. The simplified approach has been adopted in measuring the impairment loss allowance at an amount equal to lifetime ECL.

Note 3.2A Reconciliation of opening and closing balances of PPE&I

3.2: Non-Financial Assets

3.2A: Reconciliation of the opening and closing balances of property, plant and equipment, and intangibles (2019-2020)
Item	Land¹	Buildings¹	Specialist Military Equipment¹	Infra- structure¹	Plant and Equipment¹	Heritage and Cultural Assets^1,2	Computer Software - Purchased¹	Computer Software - Internally Generated	Other Intangibles Purchased	Other Intangibles Internally Generated	Total¹
	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000
As at 1 July 2019
Gross Book value	5,909,374	14,170,930	69,218,413	6,696,559	1,602,894	501,934	1,014,317	814,062	292,801	149,431	100,370,715
Accumulated depreciation/amortisation and impairment	-	(607,458)	(2,670,624)	(352,674)	(266,564)	(27,897)	(733,829)	(349,754)	(276,995)	(39,251)	(5,325,046)
Net book value 1 July 2019	5,909,374	13,563,472	66,547,789	6,343,885	1,336,330	474,037	280,488	464,308	15,806	110,180	95,045,669
Recognition of right-of-use asset on initial application of AASB 16	-	1,160,268	-	-	265,451	-	-	-	-	-	1,425,719
Adjusted net book value 1 July 2019	5,909,374	14,723,740	66,547,789	6,343,885	1,601,781	474,037	280,488	464,308	15,806	110,180	96,471,388
Additions:
By purchase	64,558	837,137	8,758,677	680,359	316,066	-	148,050	-	45,723	-	10,850,570
Internally developed	-	-	-	-	-	-	-	9,716	-	-	9,716
Right-of-use assets	-	39,778	-	-	72,547	-	-	-	-	-	112,325
Revaluations/impairments recognised in other comprehensive income ³	(462,251)	(307,291)	990,461	(183,183)	43,366	24,734	-	-	-	-	105,836
Revaluations/impairments recognised in other comprehensive income
for right-of-use assets ³
Reclassification	16,226	(19,677)	(27,188)	4,887	15,870	341	(6,388)	16,682	(996)	243	-
Depreciation/amortisation expense	-	(612,072)	(4,583,457)	(375,898)	(179,071)	(24,237)	(40,625)	(96,680)	(1,583)	(20,031)	(5,933,654)
Depreciation/amortisation expense on right-of-use assets ⁵	-	(219,065)	(31,476)	(3,609)	(70,360)	-	-	-	-	-	(324,510)
Revaluations/write-downs and impairment recognised in net cost of
services ^3,4	(625)	(29,724)	(217,193)	(19,425)	(36,477)	(978)	(25,346)	-	(263)	-	(330,031)
Other movements
Reversal of previous asset write-downs and impairment	-	948	223,926	5,807	16,577	210	-	-	-	-	247,468
Transfers in/(out)	-	10,719	283,556	-	-	-	-	-	-	-	294,275
Transfers (to)/from Assets Held for Sale	100,207	590	(165,707)	102	362	-	-	-	-	-	(64,446)
Disposals:
Other disposals	(83,490)	(3,948)	(25,533)	-	(10,211)	-	-	-	-	-	(123,182)
Net book value 30 June 2020	5,543,999	14,421,135	71,753,855	6,452,925	1,770,450	474,107	356,179	394,026	58,687	90,392	101,315,755
Net book value as at 30 June 2020
represented by:
Gross book value	5,543,999	15,437,779	73,817,222	6,851,764	2,052,124	495,429	1,093,730	830,649	124,828	149,674	106,397,198
Accumulated depreciation/amortisation and impairment	-	(1,016,644)	(2,063,367)	(398,839)	(281,674)	(21,322)	(737,551)	(436,623)	(66,141)	(59,282)	(5,081,443)
Closing net book value at 30 June 2020	5,543,999	14,421,135	71,753,855	6,452,925	1,770,450	474,107	356,179	394,026	58,687	90,392	101,315,755
Carrying amount of right-of-use assets as at 30 June 2020⁵	61,809	1,956,909	288,469	95,398	455,092	-	-	-	-	-	2,857,677

¹ Opening balances have been restated. Refer to Note 8.4 for further details.

² Where land, buildings, infrastructure and plant and equipment meet the definition of a heritage and cultural item, they have been disclosed in the heritage and cultural assets class.

³ All revaluations were conducted in accordance with the revaluation policy stated at Note 3.2A(f).

⁴ Indicators of impairment identified in the current period relate to assets deemed to be obsolete or no longer functioning as intended.

⁵Includes right-of-use assets identified in 2019-20 during the initial application of AASB 16, in addition to leased assets that were already included in the closing balance as at 30 June 2019.

3.2A: Reconciliation of the opening and closing balances of property, plant and equipment, and intangibles (continued)


	2020	2019
	$'000	$'000
Commitments payable relating to property, plant and equipment and intangibles
Land and buildings ¹	1,032,939	1,163,467
Specialist military equipment ²	24,416,438	22,860,201
Infrastructure, plant and equipment ³	1,010,185	377,857
Intangibles ⁴	60,141	56,981
Total capital commitments	26,519,703	24,458,506

¹ Outstanding contractual payments for buildings under construction.

² Outstanding contractual payments for specialist military equipment under construction.

³ Infrastructure, plant and equipment capital commitments include outstanding contractual payments relating to the Major Capital Facilities (MCF) program.

⁴ Intangible commitments include contractual payments for software licence agreements.

Accounting Policy

(a) Individual Asset Recognition Threshold

Purchases of property, plant and equipment including land, buildings and infrastructure are recognised initially at cost where they meet the individual asset recognition threshold. Individual items are capitalised where the individual value is equal to or exceeds $5,000 for buildings, infrastructure and heritage and cultural assets; $2,000 for other plant and equipment; and nil for specialist military equipment and land.

(b) Componentisation

Major assets, such as specialist military equipment, are componentised if it is likely that the components will have useful lives that differ significantly from other parts of the asset. The useful lives of components may be determined with reference to the individual component or the related primary asset.

(c) Decontamination, Restoration and Decommissioning Costs

Where a legal or constructive obligation arises on acquisition to restore a Defence asset back to its original condition, or dismantle an asset at the end of its useful life, the net present value of estimated restoration and/or decommissioning costs are capitalised and added to the cost of the underlying asset and depreciated over the asset’s useful life.

(d) Reversal of Previous Asset Write-Downs

These are amounts relating to assets which have been previously written down or expensed in prior periods. In the current year, these items have been either reversed as a write down or capitalised for the first time due to either exceeding the capitalisation threshold or through identification during stock takes. They may include identification of heritage and cultural assets not previously recognised as assets.

(e) Assets under construction

Assets under construction (AUC) include expenditure to date on major military capability and facilities projects. AUC projects are valued at current replacement cost and are reviewed annually for indicators of impairment. Prior to rollout into service, the accumulated AUC balance is reviewed to ensure accurate capitalisation.

(f) Subsequent valuations

All property, plant and equipment, excluding ROU assets, is measured and disclosed at fair value (or an amount not materially different from fair value), less subsequent accumulated depreciation and accumulated impairment losses.

The basis for determining fair value is by reference to the highest and best use that is physically possible, legally permissible and financially feasible. Where an active and liquid market exists, fair value is determined by reference to market values, noting the highest and best use criteria and any specific factors that have been noted by the valuer.

Specialist military equipment is valued internally by the Department of Defence. Valuation techniques include reference to comparable assets, recently purchased assets, recent market data available, and indexation based on the country of manufacture. Valuation for land, buildings, infrastructure, other plant and equipment and heritage and cultural assets are performed by independent external valuers using inputs such as sales prices of comparable assets, replacement cost, expected useful life and adjustments for obsolescence.

Following initial recognition at cost, valuations for land, buildings, infrastructure and specialist military equipment are conducted every year; other plant and equipment are revalued annually on a sample basis and heritage and cultural assets are revalued over a five year period.

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 reverses a previous revaluation decrement of the same 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 is restated to the revalued amount.

(g) Depreciation

Property, plant and equipment items having limited useful lives are systematically depreciated over their estimated useful lives on a straight-line basis. Depreciation rates (useful lives) are determined upon acquisition and are reviewed at each subsequent reporting date, and necessary adjustments are made in the current, or current and future reporting periods, as appropriate. Residual values are reviewed periodically and at least at each reporting date when assets are revalued.

The following are minimum and maximum useful lives for the different asset classes. These are not necessarily indicative of typical useful lives for these asset classes.

		2019-20	2018-19
	Buildings	1 to 100 years	1 to 100 years
	Infrastructure	3 to 99 years	3 to 99 years
	Specialist military equipment	2 to 52 years	1 to 50 years
	Other plant and equipment	2 to 76 years	2 to 76 years
	Heritage and cultural	10 to Indefinite	10 to Indefinite

The depreciation rates for ROU assets are based on the commencement date of the lease to the earlier of the end of the
useful life of the ROU asset or the end of the lease term.

Accounting Policy (continued)

(h) Heritage and Cultural Assets

Heritage and cultural items include:

artefacts and memorabilia that are or may be of national historical or cultural significance. While many of these items represent military achievements, including paintings, memorabilia and other military items, others are associated with developments in science and exploration such as museum pieces, decommissioned aircraft and military equipment, or with significant personal achievements, such as medals, badges, uniforms and other regalia.
buildings of historical or cultural significance. These buildings may be used for office accommodation, residences, chapels, storage and gymnasiums but are primarily held for heritage and cultural purposes.

Artefacts and memorabilia are stored and managed by Service Museums (Navy, Army and Air Force). Each Service maintains their own documented processes and procedures for the storage, documentation, restoration and preservation of various artefacts depending on their type and sensitivity.

Conservation and preservation policies include the storage of these items under appropriate conditions including, exposure to minimal UV light, stable humidity and temperatures and maintaining a dust and pest free environment as well as cataloguing and maintenance. In addition, conservation programs within Service Museums aim to identify items requiring restoration.

Heritage and cultural estate assets are amortised on a straight-line basis over their anticipated useful lives. Heritage and cultural assets are stored, managed, displayed, repaired and restored in ways that will maintain their cultural or heritage value over time. Where conservation, restoration and preservation activities demonstrate that an asset will be maintained for an indefinite period, these items are considered to have indefinite useful lives and therefore, are not subject to depreciation.

Heritage buildings are managed by Defence Environmental Management. All Defence heritage buildings are included in the Defence Heritage Register and managed using the Defence Heritage Toolkit. This Toolkit sets out the strategies and policies for managing heritage buildings across the Defence estate as well as ensuring all disposals, acquisitions and development activities to these sites look at heritage issues and assess possible risks to any values and mitigation strategies via Heritage Impact Assessments. The Toolkit has been established in accordance with the Environment Protection and Biodiversity Conservation Act 1999. Further information on heritage management across the Defence estate can be obtained from the following site: http://www.defence.gov.au/estatemanagement/governance/Policy/ Environment/Heritage/default.asp.

(i) Intangible Assets

Defence’s intangibles comprise externally acquired and internally developed computer software for internal use and other externally acquired and internally developed intangibles. Intangibles with gross values greater than $150,000 are capitalised when they meet the recognition criteria in AASB 138. All intangibles are amortised on a straight–line basis over their anticipated useful lives. The useful lives of Defence software are 2 to 24 years (2018-19: 2 to 24 years) and the useful lives of Defence's other intangibles are 4 to 35 years (2018-19: 4 to 35 years). All intangible assets are assessed annually for indications of impairment. All Defence intangible assets are currently stated at cost less any subsequent accumulated amortisation and accumulated impairment losses. Acquired intellectual property may form part of the acquisition of particular tangible assets. Where the acquired intellectual property is inseparable from the underlying tangible asset it is reflected in the value of the tangible asset in the statement of financial position. Defence reviews the useful life of intangible assets annually based on the service potential of the assets. All Defence intangible assets have finite useful lives and are amortised over their anticipated useful lives. Where there is an indication that the service potential of an intangible asset is impaired, the recoverable amount of that asset is determined based on the remaining service potential. Where the recoverable amount is lower than the carrying amount, the asset is written down to its recoverable amount.

(j) Acquisition of Assets

Assets are initially recorded at cost on acquisition which includes the fair value of assets exchanged 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 revenues 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 at the amounts at which they were recognised in the transferor agency’s accounts immediately prior to the restructuring.

(k) Impairment of Assets

Defence applies its impairment testing to the smallest identifiable group of assets that is useful to Defence in achieving its objectives and whose utility/usefulness is largely independent of the utility provided to Defence by other assets or groups of assets. All relevant assets were assessed for impairment during the year. 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 to sell 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 Defence was deprived of the asset, its value in use is taken to be its depreciated replacement cost.

(l) Derecognition of Assets

Assets are derecognised upon disposal or when no further economic benefits or capability are expected from their use or disposal.

(m) Lease Right of Use (ROU) Assets

Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability initial direct costs incurred when entering into the lease less any lease incentives received. These assets are accounted for

by Commonwealth lessees as separate asset classes to corresponding assets owned outright, but included in the same column as where the corresponding underlying assets would be presented if they were owned.

On initial adoption of AASB 16 Defence has adjusted the ROU assets at the date of initial application by the amount of any provision for onerous leases recognised immediately before the date of initial application. Following initial application, an impairment review is undertaken for any right of use lease asset that shows indicators of impairment and an impairment loss is recognised against any right of use lease asset that is impaired. Lease ROU assets continue to be measured at cost after initial recognition in Defence, General Government Sector and Whole of Government financial statements.

Significant Accounting Judgements and Estimates

Defence assesses non-financial assets for impairment by monitoring impairment indicators specific to an asset’s use in the Defence context. Where these indicators signify that an asset is impaired, management has made an estimate of the recoverable amount, or the estimated cost of repair to bring the asset back to service, to determine any impairment loss.

Significant judgements applied in assessing assets for indicators of impairment include an assessment of each Defence platform's rate of effort against estimated planned performance over each financial period.

With the exception of intangible assets, Defence's non-financial assets are measured at fair value using revaluation techniques that require significant judgements and estimates to be made. These include judgements and estimates in relation to reference to comparable assets, recently purchased assets, recent market data available and indexation based on the country of manufacture. Furthermore, valuation for land, buildings, infrastructure, other plant and equipment and heritage and cultural assets are performed by independent external valuers using inputs such as sales prices of comparable assets, replacement cost, expected useful life and adjustments for obsolescence.

Note 3.2B Inventories

	2020	2019
	$'000	$'000
3.2B: Inventories
Inventories - General ¹	2,335,148	2,307,519
Inventories - Explosive ordnance	4,966,641	4,645,842
Inventories - Fuel	67,696	83,266
Total inventories	7,369,485	7,036,627

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

No items of inventory were recognised at fair value less cost to sell.

The reversal of previous inventory write downs is attributable to price and quantity adjustments in the current financial year.

Accounting Policy

Defence holds inventory for its own use and does not ordinarily hold inventory for sale. Sales of inventory relate to minor fuel sales to foreign governments. Inventory held for use is valued at cost adjusted where applicable for loss of service potential. Defence considers that loss of operating capacity due to obsolescence is the most appropriate basis for loss of service potential of its inventories.

Costs incurred in bringing each item of inventory (primarily explosive ordnance and general stores inventory) to its present location and condition that are capable of being allocated on a reasonable basis are assigned to inventory. The costs of inventories are assigned by using the weighted average cost formula.

Inventories acquired at no cost or nominal considerations are measured at current replacement cost at the date of acquisition. The amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as an expense in the period.

Significant Accounting Judgements and Estimates

Significant estimates and assumptions made in relation to inventory include:

For all identified obsolete inventories, it is assumed that the service potential is nil; and
The recognised obsolete inventories are valued using the average of all relevant district weighted average costs rather than the actual cost of the holding.

Note 3.2C Prepayments

	2020	2019
	$'000	$'000
3.2C: Prepayments
Capital prepayments	906,094	1,737,196
Non-capital prepayments	919,848	760,158
Total prepayments	1,825,942	2,497,354

Accounting Policy

Non-current assets are classified as held for sale if the carrying amount is to be recovered principally through a sale transaction rather than through continuing use. Classification as held for sale occurs when the asset is available for immediate sale in its present condition, and the sale is highly probable. On classification as held for sale, the asset is measured at the lower of its carrying amount and fair value less costs to sell. Any write down to fair value less costs to sell is recognised as an impairment loss. Assets which have been classified as held for sale are no longer subject to depreciation or amortisation.

Note 3.2D Assets held for sale

	2020	2019
	$'000	$'000
3.2D: Assets held for sale
Land	46,148	146,946
Specialist military equipment	169,635	3,928
Other infrastructure, plant and equipment	39	502
Inventories	-	-
Total assets held for sale	215,822	151,376

Accounting Policy

Note 3.3A Supplier payables

	2020	2019
	$'000	$'000

3.3: Payables

3.3A: Suppliers payables
Trade creditors and accruals	2,719,992	2,511,261
Total suppliers payables	2,719,992	2,511,261

Settlement is usually made within 20 days.

Note 3.3B Employee payables

	2020	2019
	$'000	$'000
3.3B: Employee payables
Australian Public Service (APS) employee payables
Salaries and wages	21,829	9,006
Superannuation	4,159	2,024
Australian Defence Force (ADF) employee payables
Salaries and wages	89,887	55,890
Superannuation	30,102	20,202
Total employee payables	145,977	87,122

Note 3.3C Other payables

	2020	2019
	$'000	$'000
3.3C: Other payables
Statutory payable	275,969	215,459
Other ¹	282,957	354,950
Total other payables	558,926	570,409

¹ Prior period balances have been restated. Refer to Note 8.4 for further details.

Note 3.4A Leases

	2020	2019
	$'000	$'000
3.4A: Leases
Lease Liabilities ¹	2,884,524	1,485,329
Total leases	2,884,524	1,485,329

¹ Defence has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117.

Total cash outflow for leases for the year ended 30 June 2020 was $445.3 million.

Accounting Policy

Refer overview section for accounting policy on leases.

Note 3.5A Employee provisions

3.5: Provisions	2020	2019
	$'000	$'000

3.5A: Employee provisions
Australian Public Service (APS) employee provisions
Leave	744,390	689,103
*Total APS employee provisions*	744,390	689,103

Australian Defence Force (ADF) employee provisions
Leave	2,644,741	2,347,109
Other provisions	23,464	5,042
*Total ADF employee provisions*	2,668,205	2,352,151

*Total employee provisions*	3,412,595	3,041,254

Employee provisions are expected to be settled in:
No more than 12 months	1,040,035	889,141
More than 12 months	2,372,560	2,152,113
*Total employee provisions*	3,412,595	3,041,254

Accounting Policy

The relevant accounting policy for employee provisions is detailed in Note 1.1A Employee Benefits.

Significant Accounting Judgements and Estimates

Provisions for annual leave and long service leave are estimates based on expert actuarial assumptions on the likely tenure of existing staff, patterns of leave claims and payouts, future salary movements and future discount rates.

Note 3.5B Restoration, decontamination and decommissioning provisions

	2020	2019
	$'000	$'000
3.5B: Restoration, decontamination and decommissioning provisions
Provisions for restoration and decommissioning	720,981	668,107
Provision for decontamination	693,053	635,464
Total restoration, decontamination and decommissioning provisions	1,414,034	1,303,571

Accounting Policy

Where a legal or constructive obligation arises on acquisition to restore an asset back to its original condition, or dismantle an asset at the end of its useful life, the net present value of estimated restoration and/or decommissioning costs are capitalised and added to the cost of the underlying asset and depreciated over the asset’s useful life. At the same time, a corresponding provision is recognised for these costs. The carrying amount of the provision is adjusted to reflect the passage of time and any incremental costs are recognised as finance costs.

Where a legal or constructive obligation arises as a result of operations of Defence (i.e. use of the asset) the cost of restoration is recognised as an expense in the period in which the obligation arises. One of the following past events would give rise to a constructive obligation: · a public announcement or statement by Government or Defence that a site would be restored;

the existence of an established pattern of past practice of restoring sites of a particular nature or type; or
a specific policy adopted by Government with regard to restoration of sites of a particular nature or type.

The entity currently has 147 (2018-19: 151) agreements for the leasing of premises which have provisions requiring the entity to restore the premises to their original condition at the conclusion of the lease. The entity has made a provision to reflect the present value of this obligation.

Significant Accounting Judgments and Estimates

Provisions for specialist military equipment decommissioning are based on Defence's estimates of future obligations relating to the underlying assets. These are management's best estimates based on actual decommissioning costs incurred for similar assets and are reviewed annually. Provisions for land decontamination and site restoration are supported by external valuations. Estimated provisions are adjusted to future value by applying a five year average of forecast consumer price index and discounting back to present value using the long term government bond rate.

Refer to Note 3.5D for a reconciliation of this balance.

Note 3.5C Other provisions

	2020	2019
	$'000	$'000

3.5C: Other provisions
Other provisions	332,561	432,341
Total other provisions	332,561	432,341

Refer to Note 3.5D for a reconciliation of this balance.

Note 3.5D Reconciliation of provision balances

3.5D: Reconciliation of provision balances
Movement in relation to 2020	Restoration and
	decommissioning	Decontamination	Other
	provisions	provisions	provisions
	$'000	$'000	$'000
Carrying amount 1 July 2019	668,107	635,464	432,341
Additional provisions made	39,008	204,037	-
Amounts used	(21,690)	(109,678)	(24,984)
Amounts reversed	(4,416)	(38,781)	(26,757)
Unwinding of discount rate	7,885	2,011	-
Parameter changes	32,087	-	(48,039)
Closing balance 30 June 2020	720,981	693,053	332,561

Note 4.1A Cash and cash equivalents

4.1: Administered - Financial Assets
	2020	2019
	$'000	$'000
4.1A: Cash and cash equivalents
Cash held in the OPA - Special Accounts	146,014	114,576
Total cash and cash equivalents	146,014	114,576

The closing balance of cash in special accounts does not include amounts held in trust of $1.73m (2018-19: $1.69m). See
Note 5.2 Special Accounts and Note 8.1 Assets Held in Trust for more information.

Note 4.1B Trade and other receivables

	2020	2019
	$'000	$'000
4.1B: Trade and other receivables
Goods and services:
In connection with - external parties	30,545	9,109
Total goods and services receivable	30,545	9,109

Other receivables:
Dividends	25,604	24,545
Loans receivable - Defence Housing Australia	509,580	509,580
Competitive neutrality - Defence Housing Australia	5,643	5,106
Total other receivables	540,827	539,231
Total trade and other receivables (gross)	571,372	548,340

Less impairment allowance:
Goods and services	(380)	(428)
Total impairment allowance	(380)	(428)
Total trade and other receivables (net)	570,992	547,912

Loans to Defence Housing Australia as at 30 June 2020 have remaining terms of up to 6 years. No security is provided. Principal is required to be repaid in full at maturity, however in practice the principal is normally rolled over in a new loan agreement. Interest rates are fixed. Weighted average interest rate is 3.63%. Interest payments are due every quarter or when the loan matures.

Credit terms for goods and services were within 1-30 days (2018-19: 1-30 days).

Accounting Policy

Loans and Receivables

Where loans and receivables are not subject to concessional treatment, they are carried at amortised cost using the effective interest method. Gains and losses due to impairment, derecognition and amortisation are recognised as income or expense.

Note 4.1C Equity accounted investments

	2020	2019
	$'000	$'000
4.1C: Equity accounted investments
Other investments shares (or equity in) - Defence Housing Australia	2,630,545	2,809,339
Other investments - Small portfolio entities	80,959	79,686
Total investments accounted for using the equity method	2,711,504	2,889,025

Accounting policy

Defence reports the Australian Government’s capital investment in Defence Housing Australia (DHA).

The investment is classified as 'fair value through other comprehensive income' and is measured at fair value using the net assets valuation approach in accordance with the Financial Reporting Rule (FRR). The investment was assessed for impairment at year end and no indicators of impairment were noted.

The Australian Government holds a 100% interest in DHA which is a Government Business Enterprise. The principal activity of DHA is to deliver adequate and suitable housing and housing related services that meet Defence's operational needs.

The following Commonwealth entities and companies are small portfolio bodies within the Defence Portfolio of which the Australian Government holds a 100% interest:

Australian Strategic Policy Institute Limited; · Army and Air Force Canteen Service (Frontline Defence Services);
Australian Military Forces Relief Trust Fund (Army Relief Trust Fund); · Royal Australian Air Force Veterans’ Residences Trust Fund;
Royal Australian Air Force Welfare Trust Fund; · Royal Australian Navy Central Canteens Board;
Royal Australian Navy Relief Trust Fund;
AAF Company; and
RAAF Welfare Recreational Company.

The Australian Strategic Policy Institute Limited is a Commonwealth company that provides policy-relevant research and analysis to inform Government decisions and public understanding of strategic and defence issues.

The remaining bodies were established through either their own enabling legislation or constitution to provide oversight on the investment in these bodies on behalf of the beneficiaries.

These investments are classified as 'fair value through other comprehensive income' and are measured using the net assets valuation approach in accordance with the FRR.

Note 4.2A Other non-financial assets

4.2: Administered - Non-Financial Assets	2020	2019
	$'000	$'000

4.2A: Other non-financial assets
Prepayments - retention benefits	250,157	249,655
Total other non-financial assets	250,157	249,655

Accounting policy

Certain categories of ADF personnel, who are members of the Military Superannuation Benefits Scheme (MSBS) and have had 15 years of service, receive retention benefits as an incentive for continued service. Retention benefit payments are initially recorded as prepayments and amortised over the expected period of service.

Note 4.3A Other payables

4.3: Administered - Payables	2020	2019
	$'000	$'000

4.3A: Other payables
Other payables	8,560	7,052
Special accounts liability	146,014	114,576
Total other payables	154,574	121,628

Note 4.4 Administered - Provisions

4.4 Administered - Provisions

Overview of Schemes

Permanently appointed ADF employees of Defence are members of the Defence Forces Retirement Benefits Scheme (DFRB), the Defence Force Retirement and Death Benefits Scheme (DFRDB), the Military Superannuation and Benefits Scheme (MSBS) or the Australian Defence Force Superannuation (ADF Super)1. DFRB and DFRDB are fully unfunded defined benefit plans while MSBS is a partially funded defined benefit plan. DFRB, DFRDB and MSBS are closed to new members. All new members of the ADF are now eligible to enter ADF Super which is a defined contribution plan fully funded by employer contributions of 16.4% of member's full earnings. All new ADF members are entitled to an insurance cover for death and invalidity benefits under the provisions of the ADF Cover arrangement. ADF Cover is a fully unfunded scheme with all costs met by the Australian Government. It is a defined benefit plan.

Defence makes employer contributions for DFRB, DFRDB and MSBS based on an agreed employer contribution rate. The employer contributions assist the Government in meeting the cost of the superannuation entitlements under these defined benefit plans. Defence accounts for these employer contributions as contributions to defined contribution plans in accordance with AASB 119 in its departmental financial statements.

Defence, on behalf of the Australian Government, is responsible for administering the four defined benefit plans relating to DFRB, DFRDB, MSBS and ADF Cover. Defence recognises an administered liability for the present value of the Australian Government's expected future payments arising from the four defined benefit plans. These liabilities are based on an annual actuarial assessment performed by the Australian Government Actuary (AGA). Defence also has the responsibility to record the Australian Government's transactions in relation to the four defined benefit plans.

Accounting Policy and Measurement

In addition to the annual actuarial assessment, the AGA also completes a full review of the unfunded liabilities for the four defined benefit plans every three years and issues a Long Term Cost Report (LTCR). The demographic assumptions underlying the annual actuarial assessment are updated every three years as part of the LTCR. The economic assumptions underlying the actuarial assessment are updated annually. The most recent LTCR was issued for the 30 June 2017 financial year and forms the basis for the demographic assumptions applied in calculation of the net defined benefit liability (unfunded) for DFRB, DFRDB, MSBS and ADF Cover as at 30 June 2020.

Actuarial gains or losses arising from the annual actuarial assessment are recognised in Other Comprehensive Income in equity in the year in which they occur. Current and past service cost and interest on the net defined benefit liability are recognised in the line item 'employee benefits expense' in the Administered Schedule of Comprehensive Income. The return on fair value of plan assets excluding the amount included in interest income is recognised in equity. The net defined benefit liability is calculated annually as the present value of future obligations less the fair value of plan assets. The net defined benefit liability recognised in the Administered Schedule of Assets and Liabilities under the line item 'employee provisions' represents the actual deficit or surplus in Defence's four defined benefit plans.

¹ Individuals eligible for ADF Super can choose to join a superannuation scheme of their choice to receive employer contributions.

Note 4.4A Employee Provisions

Amounts recognised in the Schedule of Assets and Liabilities	2020	2019
	$'000	$'000
4.4A: Employee provisions
Superannuation - DFRB	460,300	513,900
Superannuation - DFRDB	51,559,000	55,023,000
Superannuation - MSBS	134,511,000	125,745,000
Insurance cover - ADFC	1,620,900	736,300
Total employee provisions	188,151,200	182,018,200

Employee provisions are expected to be settled in:
No more than 12 months	2,737,000	2,558,000
More than 12 months	185,414,200	179,460,200
Total employee provisions	188,151,200	182,018,200

Note 4.5 Administered - Defined Benefits Plan

4.5: Administered - Defined Benefit Plans

Scheme Information

Funding Arrangements
The funding arrangements for the various schemes and the ADF Cover arrangement are as follows:

Scheme	Funding
DFRB	The scheme has no active members and therefore no employer contributions are made into the scheme. Benefits are
	paid from consolidated revenue on an emerging cost (or pay as you go) basis, which results in contributions from
	consolidated revenue made into the scheme equalling the benefits paid out from the scheme.
DFRDB	Unfunded as employer contributions and member contributions made to assist the Government in meeting the costs of
	the scheme are not held by the scheme, but paid directly into consolidated revenue. DFRDB's members contribute 5.5
	per cent of the highest incremental salary for rank plus service allowance, which is paid into consolidated revenue.
	Benefits are paid from consolidated revenue on an emerging cost (or pay as you go) basis, which results in
	contributions made into the scheme equalling the benefits paid out from the scheme. Employer contributions also
	include the 3 per cent productivity contributions. Member contributions paid are included within the service cost.
MSBS	Partially funded as member contributions and some employer contributions are paid into the scheme, that is the MSB
	Fund, while the remaining employer contributions are paid directly into consolidated revenue. Employer productivity
	contributions of 3 per cent of superannuation salary, member contributions, usually of 5 per cent of superannuation
	salary, employee salary sacrifice contributions and Superannuation Guarantee top up payments are paid into the MSB
	Fund. The balance of superannuation benefits payable, after allowing for any funded part of the benefit, under the
	Military Superannuation and Benefits Act 1991, are paid from consolidated revenue on an emerging (or pay as you go)
	basis.
ADF Cover	Unfunded. No employer contributions are made in relation to ADF Cover as this arrangement is only providing death
	and invalidity benefits as these arise for employees that are eligible to be members of the ADF Super defined
	contribution plan. Benefits are paid from consolidated revenue on an emerging cost (or pay as you go) basis, which
	results in contributions made into the scheme equalling the benefits paid out from the scheme.

Benefits Paid
The nature of the benefits provided under the schemes are as follows:

Scheme	Benefits Paid
DFRB	All remaining DFRB members are in receipt of indexed lifetime pensions.
DFRDB	Length of service is the primary factor that determines benefit entitlement. Members who retire from the Australian
	Defence Force after twenty years of effective service (or after fifteen years of service at retirement age for rank) are
	entitled to an indexed lifetime pension ¹ based on a percentage of their annual pay on retirement, some of which can be
	commuted to a lump sum. Members are entitled to a productivity benefit based on contributions of 3 per cent of pay
	increased with interest, which is paid as a lump sum in addition to the defined benefits. Most members are
	currently in receipt of a lifetime pension.
MSBS	Benefits payable comprise a lump sum of accumulated member contributions and an employer financed defined benefit.
	The employer financed defined benefit is calculated on the basis of the member's final average salary, length of
	contributory service and includes the 3 per cent of salary productivity component. Benefits arising from member's
	contributions are determined by the value of contributions and investment returns. The employer financed defined
	benefits payable may be taken as a lump sum or as an indexed lifetime pension ¹ or as a combination of lump sum and
	pension. MSBS also has an ancillary accumulation section which can accept other employer contributions and
	member contributions for the provision of fully funded accumulation lump sum benefits.

	An Invalidity benefit may also be payable, which depends on the level of invalidity suffered. Invalidity benefit type A
	pensions (60%-100% incapacity) are larger and have a higher cost compared to the invalidity benefit types B (30%-59%
	incapacity) and C (less than 30% incapacity).
ADF Cover	ADF Cover provides death and invalidity benefits for ADF personnel eligible to join the ADF Super accumulation
	scheme. A lump sum payment is payable upon the death of a member whilst in service based on prospective future
	service to age sixty and salary at death. A surviving spouse can opt to receive a pension in lieu of the lump sum death
	benefit. On an invalidity exit, the invalidity benefit type A is calculated based on a lifetime pension ¹ of (60 - member's
	age at invalidity exit) x 2.2% x superannuation salary at exit plus a temporary top up pension payable to age 60 of
	completed years of service at exit x 2.2% x superannuation salary at exit. For Invalidity B benefits, a percentage of 1.1%
	is used to calculate benefits, while no benefits are payable for invalidity type C. Invalidity types for ADF Cover are
	determined using the same incapacity rates that apply for MSBS as outlined above.

¹ These pensions have an attaching lifetime reversionary pension payable to a surviving spouse following the death of the member.

Regulatory Framework
The applicable regulatory framework for each scheme and arrangement is as follows:

Scheme	Enabling Act	Period open for	Requirement
		new members
DFRB	Defence Forces Retirement Benefits Act 1948	From July 1948 to 30 September 1972	Exempt from Superannuation Industry (Supervision) Act 1993

DFRDB	Defence Force Retirement and Death Benefits	From 1 October 1972 to 30 September 1991	Exempt from Superannuation Industry (Supervision) Act 1993
	Act 1973 and the Defence Force Act 1903
MSBS	Military Superannuation and Benefits Act 1991	From 1 October 1991 to 30 June 2016	Compliance with Superannuation Industry (Supervision) Act 1993

ADF Cover	Australian Defence Force Cover Act 2015	From 1 July 2016	Exempt from Superannuation Industry (Supervision) Act 1993

Governance of the defined benefit schemes
Commonwealth Superannuation Corporation (CSC) was established under the Governance of Australian Government
Superannuation Schemes Act 2011 and is responsible for:

Providing administration services for each scheme;
Management and investment of scheme assets;
Compliance with superannuation taxation and other applicable laws; and
Compliance with relevant legislation including the Governance of Australian Government Superannuation Schemes Act 2011.

CSC is supported by a custodian and other specialist providers. CSC is legally separate from Defence.

Risks
The scheme specific risks, as detailed below, apply to all four schemes and arrangements, unless specified otherwise.

Risk	Exposure
Interest	The present value of the scheme liability (referred to as the defined benefit obligation) is calculated using a discount
Rate Risk	rate determined by reference to the government bond rate consistent with the term of the liability for each scheme. This
	rate has no regard to the actual return on any assets of the scheme. A decrease in the bond rate will increase the
	defined benefit obligation.
Longevity	The present value of the defined benefit obligation is calculated by reference to the best estimate of the mortality of
Risk	scheme participants and their spouses both during and after their employment. An increase in the life expectancy of the
	scheme participants and their spouses will increase the defined benefit obligation.
Salary Risk	The present value of the defined benefit obligation is calculated by reference to the future salaries of scheme
	participants. An increase in the salary (in excess of that assumed) of the participants prior to retirement will increase
	the defined benefit obligation. This risk does not apply to the DFRB and has minimal application to ADF Cover.
Pension	The present value of the defined benefit obligation is calculated by reference to the level of future pension indexation.
Increase	For MSBS and ADF Cover pensioners, and DFRB and DFRDB pensioners under age 55, the pensions are linked to
Risk	increases in the Consumer Price Index (CPI). For DFRB pensioners and DFRDB pensioners aged 55 or
	more, pension increases are calculated as the greater of CPI and Pensioner and Beneficiary Living Cost Index and
	benchmarked against a Male Total Average Weekly Earnings index. Higher than assumed pension increases will
	increase the defined benefit obligation.
Invalidity	Benefits are in the form of an indexed pension payable for life and the benefit formula is based on service to retirement
Exit Risk	age and level of invalidity suffered by the member. A temporary top up pension to age 60 is also payable for ADF Cover
	members. An increase in invalidity exits will increase the defined benefit obligation for MSBS and ADF Cover schemes
	only. This risk is not relevant for the DFRB and has minimal application to the DFRDB due to the absence of active
	members in these schemes.
Pension	This risk is relevant for the MSBS scheme only. For MSBS, retiring members and surviving spouses of members who
Take-up	die in service have the option to receive the employer benefit as a part or full pension, compared to the alternative lump
Risk	sum. When an individual opts to receive a pension on retirement, the actuarial value of the pension is greater than the
	value of the lump sum benefit foregone. Higher pension take up rates will increase the defined benefit obligation.

4.5: Administered - Defined Benefit Plans (continued)

Assumptions

The economic assumptions outlined below are significant factors affecting the estimate of the scheme liability. However, the relationship between these assumptions is significant. Changes of equal magnitude in the absolute levels of each of the rates can have a major effect on nominal cash flows but may have only a minor effect on the liability and service cost.

For the defined benefit obligation, a range of other assumptions have also been made regarding rates of retirement, death (for active, preserved and pension members), mortality improvements, invalidity, resignation, retrenchment, retention and take up rates of pensions in the schemes. Assumptions have also been made for the ages of spouses and the proportion of members married at the time of their death.

Membership data for DFRB, DFRDB, MSBS and ADF Cover as at 30 June 2019 was used to calculate liabilities in the AASB 119 update. These liabilities were then projected forward to 30 June 2020, allowing for assumptions in accordance with the 2017 LTCR. The liabilities were then adjusted for aggregate experience over the year. In particular, actual experience relating to invalidity exits, pension increase rates, general salary increase rates, benefit payments, salaries per payroll data and the MSBS invested fund was incorporated.

Principal actuarial assumptions for the various schemes are as follows:

The demographic assumptions utilised for the 30 June 2020 actuarial estimate of DFRB, DFRDB, MSBS and ADF Cover are based on the assumptions used in the 30 June 2017 LTCR.

	2020	2019
DFRB
Discount rate at 30 June	1.0%	1.4%
Expected pension increase rate ¹	4.0%	4.0%
Expected salary increase rate ²	-	-

¹ Pension increase rate is determined using the short term pension increases for the first four years from 2020-21 to 2023-24 (1.7%) before reverting to the long term pension increases (4.0%) using the Age Pension methodology.

² Salary growth rate is nil as members are all pensioners.

DFRDB
Discount rate at 30 June	1.7%	1.9%
Expected salary increase rate ³	4.0%	4.0%
Expected pension increase rate (aged 55 or more) ⁴	4.0%	4.0%
Expected pension increase rate (aged less than 55) ⁵	2.5%	2.5%

³ Separate promotional salary scales are used to allow for promotional salary increase. For the first four years from 2020-21 to 2023-24, assumed salary growth is 2.0% per annum before reverting to 4.0% from the 2024-25 financial year.

⁴ For members aged 55 or more, pension increase rate is based on the Age Pension methodology.

⁵ Pension increase rate is determined using the short term pension increases for the first four years from 2020-21 to 2023-24 (1.7%) before reverting to the long term pension increases (2.5%) based on CPI.

4.5: Administered - Defined Benefit Plans (continued)

	2020	2019
MSBS
Discount rate at 30 June (active members and pensioners)	1.7%	1.9%
Expected rate of return on plan assets	1.7%	1.9%
Expected salary increase rate ¹	4.0%	4.0%
Expected pension increase rate ²	2.5%	2.5%
Invalidity exits - new ³ (approximate)	1,000 p.a.	1,000 p.a.
Invalidity exits - retrospective ³	150 p.a.	150 p.a.
Pension take-up rate for direct retirements (officers/other ranks) ⁴	100%/90%	100%/90%
Pension take-up rate for current preserved members (officers/other ranks) ⁴	85%/65%	85%/65%
Pension take-up rate for current serving members projected to exit with a preserved
benefit and retire some time later (officers/other ranks) ³	90%/80%	90%/80%

¹ Separate promotional salary scales are used to allow for promotional salary increase. For the first four years from 2020-21 to 2023-24, assumed salary growth is 2.0% per annum before reverting to 4.0% from the 2024-25 financial year.

² Pension increase rate is determined using the short term pension increases for the first four years from 2020-21 to 2023-24 (1.7%) before reverting to the long term pension increases (2.5%) based on CPI.

³ In the 2017 LTCR, approximately 1,000 ongoing new invalidity pensions were assumed for 2017-18. In addition, new retrospective invalidity pension commencements have also been included as an assumption, as there is a growing awareness of the ability to make a claim for a possible retrospective invalidity pension. The number of new retrospective invalidity pensions assumed are: 150 for 2017-18 and 2018-19; 110 for 2019-20; 80 for 2020-21;50 for 2021-22; and 20 for 2022-23.

⁴ The pension take-up rates for members that exit directly from service are much higher compared to those who exited service, became preserved members and then retired some time later.

ADF Cover
Discount rate at 30 June	1.7%	1.9%
Expected pension increase rate ⁵	2.5%	2.5%
Invalidity exits - new ⁶	324	232

⁶ This represents the number of claims that are expected to emerge in respect of incidents that take place each year, based on the same age dependent rates as those used for MSBS and the number of members in ADF Cover as at 30 June 2020. This represents approximately 1.75% of the current membership base of about 18,500.

Maturity Profile
The maturity profiles of the defined benefit obligation under the schemes are as follows:

Scheme	Maturity profile of defined benefit obligation
DFRB	The interest rate and probability weighted mean term of the liabilities is 10.7 years.
DFRDB	The interest rate and probability weighted mean term of the liabilities is 18.6 years.
MSBS	The interest rate and probability weighted mean term of the liabilities is 31.2 years.
ADF Cover	The interest rate and probability weighted mean term of the liabilities is 34.3 years.

Expected Contributions
The expected contributions which are the expected amount of benefit payments under the schemes are as follows:

Scheme	Expected contributions
DFRB	The expected employer contribution for 2020-21 is $35m (2019-20 actual: $38.4m).
DFRDB	The expected contribution (including 3% productivity contributions) for 2020-21 is $1,640m (2019-20 actual: $1,626m).
	Note that member contributions paid to consolidated revenue would be an offset to this.
MSBS	The expected contribution for 2020-21 is $1,195m (2019-20 actual: $1,106m). This includes expected employer contributions to meet unfunded benefit payments and funding via the MSBS Fund
ADF Cover	The expected contribution for 2020-21 is $22m (2019-20 actual: $12.5m).

4.5: Administered - Defined Benefit Plans (continued)

Sensitivity analysis for significant actuarial assumptions
The impact of a change in the defined benefit obligation reported as at 30 June 2020 under several scenarios is presented below.

		Impact on defined benefit obligation
	Change in	Increase in	Decrease in
	assumption¹	assumption	assumption
		$m	$m
DFRB
Reported	$460.3m
Discount rate	+/- 0.5%	(23.1)	25.2
Pension increase rate	+/- 0.5%	23.9	(22.2)
DFRDB
Reported	$51,559m
Discount rate	+/- 0.5%	(4,399)	5,044
Salary and Age Pension methodology	+/- 0.5%	3,803	(3,399)
CPI increase rate (aged under 55)	+/- 0.5%	924	(908)
MSBS
Reported	$144,784m
Discount rate	+/- 0.5%	(19,000)	23,000
Salary increase rate	+/- 0.5%	3,000	(3,000)
CPI increase rate	+/- 0.5%	18,000	(16,000)
Invalidity exits - new	+/- 40%	2,000	(3,000)
Pension take-up rate	+/-10%	5,000	(7,000)
ADF Cover
Reported	$1,620.9m
Discount rate	+/- 0.5%	(248.0)	294.0
Pension increase rate	+/- 0.5%	294.0	(248.0)
Invalidity exits	+/- 40%	272.0	(272.0)

¹ Change in assumption reflects additive adjustments, except for invalidity exits, which reflect a multiplicative adjustment. The sensitivity analysis is based on the change in a particular assumption, keeping all other assumptions constant. The sensitivity analysis may not be representative of an actual change in the defined benefit obligation as it is unlikely that changes in assumptions would occur in isolation from one another.

The factors used to conduct the sensitivity analysis are based on an expectation of a realistic and potential movement in the defined benefit obligation, based on historical experience. The underlying results of the sensitivity factors used are deemed to be materially accurate as they are in line with historical experience and management's understanding of the underlying defined benefit obligation. There has been no change from previous periods in the methods and assumptions used to prepare the sensitivity analysis for economic assumptions. For demographic assumptions, the methods and assumptions used to undertake the sensitivity analysis are based on the 2017 LTCR.

Sensitivity analysis of economic assumptions of +0.5% and -0.5% for all four schemes is generally based on the methodology used for estimating the reported liability, except where noted below. These economic assumptions include the discount rate, pension increase rate (based on CPI or Salary and Age Pension methodology), CPI increase rate, and salary increase rate.

For ADF Cover, the sensitivity analysis for the discount rate of -0.5% is based on the experience of MSBS. The extrapolation is modelled based on the impact that a lower discount rate had on the MSBS reported liability, compared to the impact of a higher discount rate. This has been applied to extrapolate the -0.5% movement in the discount rate for ADF Cover.

The -0.5% sensitivity assumption used for the DFRB pension increase rate; DFRDB Salary and Age Pension methodology; and

DFRDB CPI increase rate are modelled by extrapolation from the +0.5% calculation, assuming that the additive percentage increase in liability due to a higher +0.5% assumption will apply as a percentage decrease due to a lower -0.5% assumption.

Sensitivity analysis of the invalidity exits assumption for MSBS is based on the sensitivity analysis included in the 2017 LTCR and only focuses on new invalidity pensions. Given the uncertainty in invalidity exits, the sensitivity analysis in the 2017 LTCR allows for the ongoing level of invalidity exits to be 40 per cent higher than the assumed rate of 1,000 p.a for new invalidity pensions. This sensitivity analysis effectively assumes that there would be around 1,400 new invalidity pensions p.a. commencing each year. A sensitivity analysis has not been performed in relation to new retrospective invalidity pensions as these typically represent only about 10 per cent on average of the total invalidity pensions commencing annually over the 2018-19 to 2022-23 financial years.

Sensitivity analysis of the pension take-up rate assumption for MSBS is based on the sensitivity analysis included in the 2017 LTCR which shows the impact of a 100 per cent pension take-up rate. The factor of 100 per cent provides a theoretical upper bound on the cost impact from this process as the actuarial value of the pension is much greater than the value of the lump sum benefit from the member's perspective. In practice, there will be individuals who will prefer the lump sum over the alternative pension. Sensitivity analysis of pension increase rate (based on CPI) and invalidity exits for ADF Cover are based on the assumptions used for the MSBS sensitivity analysis, using the ADF Cover member data.

4.5: Administered - Defined Benefit Plans (continued)

The actuarial estimate of the net defined benefit liability for DFRB, DFRDB, MSBS, ADF Cover and in aggregate is presented below. The net defined benefit liability equals the present value of the future defined benefit obligation less the fair value of defined benefit plan assets. The most recent actuarial estimates were calculated by the AGA as at 30 June 2020. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the Projected Unit Credit Method.

The reconciliations included below show movements in the net defined benefit liability, the present value of the defined benefit obligation and the fair value of the defined benefit plan assets. The disclosures below are in line with requirements of AASB 119.

	2020	2020	2020	2020	2020
	$'000	$'000	$'000	$'000	$'000
	DFRB	DFRDB	MSBS	ADF Cover	Total
The amounts recognised in the Administered Schedule of Assets and Liabilities are as follows:
Present value of funded obligations	-	-	10,273,000	-	10,273,000
Fair Value of plan assets	-	-	(10,273,000)	-	(10,273,000)
Present value of unfunded obligations	460,300	51,559,000	134,511,000	1,620,900	188,151,200
Net liability recorded:	460,300	51,559,000	134,511,000	1,620,900	188,151,200

The amount recognised in the Administered Schedule of Comprehensive Income are as follows:
Current service cost	-	124,000	5,444,000	662,300	6,230,300
Interest on obligation	6,900	1,031,000	2,626,000	20,200	3,684,100
Expected return on plan assets	-	-	(196,000)	-	(196,000)
Total expense recognised:	6,900	1,155,000	7,874,000	682,500	9,718,400

Actuarial losses/(gains) on liabilities recognised	(22,100)	(2,993,000)	1,709,000	214,600	(1,091,500)
Expected return on plan assets	-	-	196,000	-	196,000
Actual return on plan assets (interest income)	-	-	93,000	-	93,000
Actuarial (gains)/losses on plan assets recognised	-	-	289,000	-	289,000
Other Comprehensive Income recorded:	(22,100)	(2,993,000)	1,998,000	214,600	(802,500)

	2019	2019	2019	2019	2019
	$'000	$'000	$'000	$'000	$'000
	DFRB	DFRDB	MSBS	ADF Cover	Total
The amounts recognised in the Administered Schedule of Assets and Liabilities are as follows:
Present value of funded obligations	-	-	10,263,000	-	10,263,000
Fair Value of plan assets	-	-	(10,263,000)	-	(10,263,000)
Present value of unfunded obligations	513,900	55,023,000	125,745,000	736,300	182,018,200
Net liability recorded:	513,900	55,023,000	125,745,000	736,300	182,018,200

The amount recognised in the Administered Schedule of Comprehensive Income are as follows:
Current service cost	-	114,000	3,881,000	304,300	4,299,300
Interest on obligation	12,600	1,364,000	2,921,000	12,000	4,309,600
Expected return on plan assets	-	-	(292,000)	-	(292,000)
Total expense recognised:	12,600	1,478,000	6,510,000	316,300	8,316,900

Actuarial losses/(gains) on liabilities recognised	56,300	8,946,000	37,277,000	189,000	46,468,300
Expected return on plan assets	-	-	292,000	-	292,000
Actual return on plan assets (interest income)	-	-	(737,000)	-	(737,000)
Actuarial (gains)/losses on plan assets recognised	-	-	(445,000)	-	(445,000)
Other Comprehensive Income recorded:	56,300	8,946,000	36,832,000	189,000	46,023,300

4.5: Administered - Defined Benefit Plans (continued)
	2020	2020	2020	2020	2020
	$'000	$'000	$'000	$'000	$'000
	DFRB	DFRDB	MSBS	ADF Cover	Total
Reconciliation of the net defined benefit liability
Opening value at 1 July	513,900	55,023,000	125,745,000	736,300	182,018,200
Current Service cost	-	124,000	5,444,000	662,300	6,230,300
Interest cost	6,900	1,031,000	2,626,000	20,200	3,684,100
Expected return on plan assets (interest income)	-	-	(196,000)	-	(196,000)
Losses/(gains) on curtailments and settlements	-	-	-	-	-
Total expense	6,900	1,155,000	7,874,000	682,500	9,718,400
Actuarial losses/(gains) in plan assets recognised	-	-	289,000	-	289,000
Actuarial losses /(gains) in liabilities arising from:
Changes in liability experience	(6,500)	(874,000)	(239,000)	157,000	(962,500)
Changes in financial assumptions	(15,600)	(2,119,000)	1,948,000	57,600	(129,000)
Changes in demographic assumptions*	-	-	-	-	-
Contributions	(38,400)	(1,626,000)	(1,106,000)	(12,500)	(2,782,900)
Net defined benefit liability as at 30 June	460,300	51,559,000	134,511,000	1,620,900	188,151,200

Reconciliation of the present value of the defined benefit obligation
Opening present value at 1 July	513,900	55,023,000	136,008,000	736,300	192,281,200
Current Service cost	-	124,000	5,444,000	662,300	6,230,300
Interest cost	6,900	1,031,000	2,626,000	20,200	3,684,100
Losses/(gains) on curtailments and settlements	-	-	-	-	-
Funded contributions by plan participants	-	-	280,000	-	280,000
Actuarial losses /(gains) in liabilities arising from:
Changes in liability experience	(6,500)	(874,000)	(239,000)	157,000	(962,500)
Changes in financial assumptions	(15,600)	(2,119,000)	1,948,000	57,600	(129,000)
Changes in demographic assumptions*	-	-	-	-	-
Benefits paid	(38,400)	(1,626,000)	(1,283,000)	(12,500)	(2,959,900)
Defined benefit obligation as at 30 June	460,300	51,559,000	144,784,000	1,620,900	198,424,200

* The demographic assumptions used for the 30 June 2020 actuarial estimate are based on the 30 June 2017 LTCR.

Reconciliation of the fair value of plan assets
Opening fair value at 1 July	-	-	10,263,000	-	10,263,000
Expected return on plan assets (interest income)	-	-	196,000	-	196,000
Experience actuarial gains/(losses)	-	-	(289,000)	-	(289,000)
Contributions	38,400	1,626,000	1,106,000	12,500	2,782,900
Funded contributions by plan participants	-	-	280,000	-	280,000
Benefits paid	(38,400)	(1,626,000)	(1,283,000)	(12,500)	(2,959,900)
Fair value of plan assets at 30 June	-	-	10,273,000	-	10,273,000

The major categories of plan assets at the end of the reporting period for each category, as follows:
Australian equities	-	-	2,362,790	-	2,362,790
Overseas equities	-	-	2,362,790	-	2,362,790
Property and infrastructure	-	-	1,232,760	-	1,232,760
Private equity	-	-	719,110	-	719,110
Cash, debt instruments	-	-	2,157,330	-	2,157,330
Other liabilities	-	-	1,438,220	-	1,438,220
Subtotal	-	-	10,273,000	-	10,273,000

The actual return on plan assets was a loss of $93m (2018-19: gain of $737m). The fair value of scheme assets relates to investments in the CSC Pooled Superannuation Trust. These are disclosed as level 2 in the fair value hierarchy, where the net market value is derived from observable inputs (other than quoted prices) such as prices or derived from prices.

4.5: Administered - Defined Benefit Plans (continued)

	2019	2019	2019	2019	2019
	$'000	$'000	$'000	$'000	$'000
	DFRB	DFRDB	MSBS	ADF Cover	Total
Reconciliation of the net defined benefit liability
Opening value at 1 July	485,600	46,228,000	83,344,000	236,600	130,294,200
Current Service cost	-	114,000	3,881,000	304,300	4,299,300
Interest cost	12,600	1,364,000	2,921,000	12,000	4,309,600
Expected return on plan assets (interest income)	-	-	(292,000)	-	(292,000)
Losses/(gains) on curtailments and settlements	-	-	-	-	-
Total expense	12,600	1,478,000	6,510,000	316,300	8,316,900
Actuarial losses/(gains) in plan assets recognised	-	-	(445,000)	-	(445,000)
Actuarial losses /(gains) in liabilities arising from:
Changes in liability experience	(6,100)	(730,000)	134,000	(28,000)	(630,100)
Changes in financial assumptions	62,400	9,676,000	37,143,000	217,000	47,098,400
Changes in demographic assumptions*	-	-	-	-	-
Contributions	(40,600)	(1,629,000)	(941,000)	(5,600)	(2,616,200)
Net defined benefit liability as at 30 June	513,900	55,023,000	125,745,000	736,300	182,018,200

Reconciliation of the present value of the defined benefit obligation
Opening present value at 1 July	485,600	46,228,000	92,659,000	236,600	139,609,200
Current Service cost	-	114,000	3,881,000	304,300	4,299,300
Interest cost	12,600	1,364,000	2,921,000	12,000	4,309,600
Losses/(gains) on curtailments and settlements	-	-	-	-	-
Funded contributions by plan participants	-	-	273,000	-	273,000
Actuarial losses /(gains) in liabilities arising from:
Changes in liability experience	(6,100)	(730,000)	134,000	(28,000)	(630,100)
Changes in financial assumptions	62,400	9,676,000	37,143,000	217,000	47,098,400
Changes in demographic assumptions*	-	-	-	-	-
Benefits paid	(40,600)	(1,629,000)	(1,003,000)	(5,600)	(2,678,200)
Defined benefit obligation as at 30 June	513,900	55,023,000	136,008,000	736,300	192,281,200

* The demographic assumptions used for the 30 June 2019 actuarial estimate are based on the 30 June 2017 LTCR.

Reconciliation of the fair value of plan assets
Opening fair value at 1 July	-	-	9,315,000	-	9,315,000
Expected return on plan assets (interest income)	-	-	292,000	-	292,000
Experience actuarial gains/(losses)	-	-	445,000	-	445,000
Contributions	40,600	1,629,000	941,000	5,600	2,616,200
Funded contributions by plan participants	-	-	273,000	-	273,000
Benefits paid	(40,600)	(1,629,000)	(1,003,000)	(5,600)	(2,678,200)
Fair value of plan assets at 30 June	-	-	10,263,000	-	10,263,000

The major categories of plan assets at the end of the reporting period for each category, as follows:
Australian equities	-	-	2,463,120	-	2,463,120
Overseas equities	-	-	2,463,120	-	2,463,120
Property and infrastructure	-	-	1,231,560	-	1,231,560
Private equity	-	-	718,410	-	718,410
Cash, debt instruments	-	-	1,642,080	-	1,642,080
Other liabilities	-	-	1,744,710	-	1,744,710
Subtotal	-	-	10,263,000	-	10,263,000

The actual return on plan assets was $737m. The fair value of scheme assets relates to investments in the CSC Pooled Superannuation Trust. These are disclosed as level 2 in the fair value hierarchy, where the net market value is derived from observable inputs (other than quoted prices) such as prices or derived from prices.

Note 5.1A Annual Appropriatons


FUNDING
This section identifies Defence's funding structure.


5.1: Appropriations

5.1A: Annual appropriations ('Recoverable GST exclusive')

Annual Appropriations for 2019-20
				Appropriation
				applied in 2020
	Annual	Adjustments to	Total	(Current and
	Appropriation¹	appropriation²	Appropriation	prior years)	Variance³
	$'000	$'000	$'000	$'000	$'000
DEPARTMENTAL
Ordinary annual services	34,348,197	1,394,851	35,743,048	(35,417,543)	325,505
Capital budget	-	-	-	-	-
Other services
Equity injection	4,040,461	-	4,040,461	(4,015,029)	25,432
Total departmental	38,388,658	1,394,851	39,783,509	(39,432,572)	350,937

5.1: Appropriations (continued)

5.1A: Annual appropriations ('Recoverable GST exclusive') (continued)

Notes:

1. Details of quarantined appropriations are as follows:		$’000

Amounts withheld under section 51 determinations

2017-18 Appropriation Act 2		369,788
2017-18 Appropriation Act 3		22,521
2017-18 Appropriation Act 5		194,202
2018-19 Appropriation Act 1		50,562
2018-19 Appropriation Act 3		215,614
2019-20 Appropriation Act 3		13,249
2019-20 Appropriation Act 4		25,432
Total Quarantined		891,368


2. Adjustment to appropriations relate to PGPA Section 74 receipts.


3. Reasons for material variance:
	Ordinary	Equity
	Annual
	Service
	$’000	$’000
Unspent departmental annual appropriations 2019-20	389,458	-
Prior year appropriation drawn down	(41,715)	-
Net GST payments made not yet recovered	(35,487)	-
2019-20 Appropriation Act 3 withheld under Section 51	13,249	-
2019-20 Appropriation Act 4 withheld under Section 51	-	25,432
Total	325,505	25,432

5.1: Appropriations (continued)

5.1A: Annual appropriations ('Recoverable GST exclusive') (continued)

Annual Appropriations for 2018-19
				Appropriation
				applied in 2019
	Annual	Adjustments to	Total	(Current and
	Appropriation¹	appropriation^2,4,5	Appropriation	prior years)^5,6	Variance³
	$'000	$'000	$'000	$'000	$'000
DEPARTMENTAL
Ordinary annual services	32,688,310	1,469,771	34,158,081	(33,631,910)	526,171
Capital Budget	-	-	-	-	-
Other services
Equity injection	3,343,482	-	3,343,482	(3,963,482)	(620,000)
Total departmental	36,031,792	1,469,771	37,501,563	(37,595,392)	(93,829)

5.1: Appropriations (continued)

5.1A: Annual appropriations ('Recoverable GST exclusive') (continued)

Notes:

1. Details of quarantined appropriations are as follows:

$’000

Quarantined appropriations

2016-17 Appropriation Act 1

Amounts withheld under section 51 determinations

2016-17 Appropriation Act 1

9,725

2016-17 Appropriation Act 2

636,623

2017-18 Appropriation Act 2

369,788

2017-18 Appropriation Act 3

22,521

2017-18 Appropriation Act 5

194,202

2018-19 Appropriation Act 1

50,562

Total Quarantined

1,283,456

2. Adjustment to appropriations relate to PGPA Section 74 receipts.

3. Reasons for material variance:

Ordinary

Equity

Annual

Service

$’000

Unspent departmental annual appropriations 2018-19

433,222

Net GST payments made not yet recovered

42,387

Prior year appropriation released under Section 51

(620,000)

2018-19 Appropriation Act 1 withheld under Section 51

50,562

Total

526,171

(620,000)

4. Trust moneys have been received in the current period as retainable receipts and credited to a Departmental appropriation.

These are recognised as Assets Held in Trust within note 8.1. $1.52m held in trust for the Young Endeavour Youth Program

Public Fund (Trust) is excluded from the below appropriation receivable balances (2018-19 Appropriation Act 1), as these

amounts are not controlled by the Department or held for the benefit of the Commonwealth.

5. It has been identified in 2019-20 that notional receipts recorded by the Department in relation to rental contributions

recovered from employees were not recorded as s74 receipts in 2018-19. As these represent retainable receipts of Defence,

both 'Adjustments to Appropriation' and 'Appropriation Applied in 2019' have been restated by $205.279 million. This has no

impact on the available Appropriation or reported Appropriation receivable in 2018-19.

6. It has been identified in 2019-20 that amounts drawn down from Departmental Appropriations which were unspent at

30 June 2020 ($175.893 million) were included in the amount disclosed as Appropriation applied in 2018-19. As these

amounts were not actually spent by the Department, 'Appropriation Applied in 2019' and 'unspent departmental annual

appropriations' have been restated by $175.9 million. This has no impact on the available Appropriation or reported

Appropriation receivable in 2018-19.

Reconciliation to appropriation receivable:

Notes

$'000

2016-17 Appropriation Act 1

2018-19 Appropriation Act 1

11,222

2018-19 Appropriation Act 3

244,584

3.1B

255,893

Note 5.1B Unspent annual appropriations


5.1B: Unspent annual appropriations ('Recoverable GST exclusive')
Authority	2020	2019
	$'000	$'000
DEPARTMENTAL
Operating
Act 1 2019-20 ¹	531,418	-
Act 1 2018-19 ²	50,562	392,655 ³
Act 1 2016-17 ⁴	-	9,812 ⁵
Act 3 2019-20 ⁶	158,249	-
Act 3 2018-19 ²	215,614	244,584
Act 3 2017-18 ²	22,521	22,521
Act 5 2017-18 ²	194,202	194,202 ⁵
Total Operating	1,172,566	863,774 ^3,5

Equity
Act 4 2019-20 ²	25,432	-
Act 2 2017-18 ²	369,788	369,788
Act 2 2016-17 ⁴	-	636,623
Total Equity	395,220	1,006,411
Total	1,567,786	1,870,185

Total unspent annual appropriations⁷	1,567,786	1,870,185

¹ Includes unspent amounts held within cash and cash equivalents of $427.418m.

² Unspent annual appropriations have been formally reduced by the Department of Finance.

³ Prior year unspent appropriations have been adjusted to include amounts held within cash and cash equivalents of $286.961m which were not disclosed against an Appropriation Act in the prior period. The amount reported as cash and

cash equivalents has also been adjusted as a result of restatement, refer to Note 8.4 for further details.

⁴ Appropriation Acts have been repealed in the current period.

⁵ Prior year unspent appropriations have been adjusted to account for GST receipts that have been recovered by the Department subsequent to the end of the relevant financial period but which should have been attributed to the Act to which they relate.

⁶ Unspent annual appropriations have been partially reduced by the Department of Finance. Of the $158.249m of unspent

appropriations, $13.249m has been formally reduced by the Department of Finance.

⁷ The unspent annual appropriations are $1,567.786m, allocated as follows:

a) $891.368m has been formally extinguished by Department of Finance; and

b) $676.418m of unspent annual appropriations (including cash and cash equivalents) available to the Department.

Note 5.1C Special appropriations

5.1: Appropriations (continued)

5.1C: Special appropriations ('Recoverable GST exclusive')
				Appropriation Applied
				2020	2019
Authority	Nature	Type	Purpose	$'000	$'000
Defence Force Retirement Benefits Act 1948, Administered (a)	Administered	Unlimited Amount	To provide Retirement Benefits for Members of the Defence Force
			who enlisted before 1 October 1972, and for other purposes.	38,375	40,648
Defence Force Retirement and Death Benefits Act 1973, Administered (a)	Administered	Unlimited Amount	To make provision for and in relation to a Scheme for Retirement and
			Death Benefits for Members of the Defence Force who enlisted
			before 1 October 1991.	1,608,370	1,601,998
Military Superannuation and Benefits Act 1991, Administered (a)	Administered	Unlimited Amount	To make provision for and in relation to an occupational
			superannuation scheme for, and the payment of other benefits to
			members of the Defence Force, and for related purposes.	1,112,392	911,698
Military Superannuation and Benefits Act 1991, Administered	Administered	Unlimited Amount	To make provision for and in relation to retention benefits for ADF
			personnel.
				100,026	102,396
Defence Force (Home Loans Assistance) Act 1990, Administered	Administered	Limited Amount	To provide for the payment of home loan subsidies in respect of
			certain members of the Defence Force and certain other persons, and
			for related purposes.	207	331
Defence Home Ownership Assistance Scheme Act 2008, Administered	Administered	Unlimited Amount	To provide financial assistance to members of the Defence Force and
			certain other persons, for the purchase, maintenance and development
			of their homes, and for related purposes.	108,933	121,905
Australian Defence Force Cover Act 2015, Administere (a)	Administered	Unlimited Amount	To make provision for benefits for incapacity or death suffered by
			certain members of the Australian Defence Force, and for related
			purposes.	12,508	5,610
Public Governance, Performance and Accountability Act 2013, Administered	Administered	Unlimited Amount	To make provision for and in relation to funds that have been received by the Commonwealth or Commonwealth entities that are required or permitted to be repaid where there is no other appropriation for the repayment.

				-	55
Total				2,980,811	2,784,641

(a) Commonwealth Superannuation Corporation draw funds from the CRF on behalf of Defence.

Note:

Defence is responsible for the following additional Special Appropriations. No payments have been made from these Special Appropriations for this financial year.

Defence Forces Retirement Benefits (Pension Increases) Act 1961
Defence Forces Retirement Benefits (Pension Increases) Act 1967
Defence Forces Retirement Benefits (Pension Increases) Act 1971
Defence Forces Retirement Benefits (Pension Increases) Act 1973
Defence Force Retirement and Death Benefits (Pension Increases) Act 1974
Defence Force Retirement and Death Benefits (Pension Increases) Act 1976
War Gratuity Act 1945

Note 5.2 Special Accounts

5.2: Special Accounts

	Defence Endowments,		Service for Other
	Bequests and Other		Entities And Trust		Young Endeavour
	Trust Moneys Special		Moneys Defence		Youth Program		Defence Endowments		Fedorczenko Legacy
	Account ^1,6		Special Account ^2,6		Special Account ^3,6		Special Account ⁴		Special Account ^5,6
	2020	2019	2020	2019	2020	2019	2020	2019	2020	2019
	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000
Balance brought forward from previous period	-	-	115,240	111,519	-	1,578	51	50	167	164
Total increases	324,817	-	1,852	267,964	-	52	-	1	-	3
Available for payments	324,817	-	117,092	379,483	-	1,630	51	51	167	167

Decreases:
Departmental
Total Departmental	-	-	-	-	-	-	-	-	-	-
Administered
Total Administered	(171,732)	-	(117,092)	(264,243)	-	(1,630)	(51)	-	(167)	-
Total Decreases	(171,732)	-	(117,092)	(264,243)	-	(1,630)	(51)	-	(167)	-
Total Balance to be carried forward to next period	153,085	-	-	115,240	-	-	-	51	-	167
Balance represented by:
Cash held in entity bank accounts	-	-	-	-	-	-	-	-	-	-
Cash held in the Official Public Account	153,085	-	-	115,240	-	-	-	51	-	167

¹ Appropriation: Public Governance, Performance and Accountability (PGPA) Act 2013 section 78.

Establishing Instrument: PGPA Act Determination (Defence Endowments, Bequests and Other Trust Moneys Special Account 2019).
Purpose: This account was created to:

(a) disburse amounts held on trust or otherwise for the benefit of persons other than the Commonwealth;

(b) carry out activities consistent with the Fedorczenko Trust;

(c) undertake activities approved by the Young Endeavour Youth Program Board of Management, or the Commonwealth, in relation to the STS Young Endeavour;

(d) to disburse an amount in connection with services performed for or on behalf of any entities or bodies other than non-corporate Commonwealth entities;

(e) to disburse an amount in connection with services performed for, on behalf of, or together with, another government, or in connection with an agreement between the Commonwealth and another government;

(f) to credit an amount to the ASD account; (g) to repay an amount where a court order, Act or other law requires or permits the repayment of an amount received;

(h) to carry out activities that ae incidental to one or more of the purposes of the special account, including costs of administering the special account;

(i) to reduce the balance of the special account (and, therefore, the available appropriation for the special account) without making a real or notional payment.

This special account was established on 15 July 2019 and replaces Defence's existing special accounts which were repealed under section 78(3) of the PGPA Act. The opening balance is equal to the sum of the amounts standing to the credit of Defence's existing special accounts immediately prior to 15 July 2019.
Special account is disclosed on a recoverable GST exclusive basis.
This account is non-interest bearing.

² Appropriation: Public Governance, Performance and Accountability Act 2013 section 78.

Establishing Instrument: Financial Management and Accountability Determination 2009/15.
Purpose: This account was created to disburse amounts held on trust or otherwise for the benefit of persons other than the Commonwealth.
Special account is disclosed on a recoverable GST exclusive basis.
This account is non-interest bearing.
This account was repealed on 15 July 2019 through the PGPA Act Determination (Defence Endowments, Bequests and Other Trust Moneys Special Account 2019) in accordance with section 78(3) of the PGPA Act.

³ Appropriation: Public Governance, Performance and Accountability Act 2013 section 78.

Establishing Instrument: Financial Management and Accountability Determination 2009/02.
Purpose: For the receipt and payment of money in connection with the operations and activities of the STS Young Endeavour, as specified by the Young Endeavour Program Board of Management or by the Commonwealth.
Special account is disclosed on a recoverable GST exclusive basis.
This account is interest bearing. · This account sunset on 1 April 2019. The Minister for Finance and the Public Service authorised the transfer of the balance to 2018-19 Appropriation Act 1 in accordance with item 9 in subsection 27 (2) of the Public Governance, Performance and Accountability Rule 2014. This amount was subsequently transferred to the Defence Endowments, Bequests and Other Trust Moneys Special Account upon its establishment.

⁴.Appropriation: Public Governance, Performance and Accountability Act 2013 section 78. · Establishing Instrument: Financial Management and Accountability Determination 2009/11.

Purpose: For expenditure in accordance with the terms provided for in the endowments.
Special account is disclosed on a recoverable GST exclusive basis.
This account is interest bearing.
This account was repealed on 15 July 2019 through the PGPA Act Determination (Defence Endowments, Bequests and Other Trust Moneys Special Account 2019) in accordance with section 78(3) of the PGPA Act.

⁵ Appropriation: Public Governance, Performance and Accountability Act 2013 section 78.

Establishing Instrument: Financial Management and Accountability Determination 2009/13.
Purpose: For expenditure in relation to the defence of Australia of the residual of the estate of the late Petro Fedorczenko.
Special account is disclosed on a recoverable GST exclusive basis. · This account is interest bearing.
This account was repealed on 15 July 2019 through the PGPA Act Determination (Defence Endowments, Bequests and Other Trust Moneys Special Account 2019) in accordance with section 78(3) of the PGPA Act.

⁶ Moneys held in trust:

This Special Account contains monetary assets held in trust. Further details are disclosed in Note 8.1 Assets Held in Trust.

Note 6.1 Key Management Personnel Remuneration

PEOPLE AND RELATIONSHIPS
This section describes our relationship with key people.

6.1: Key Management Personnel Remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the
activities of Defence, directly or indirectly. The key management personnel of Defence are considered to be the:

i) Minister for Defence;
ii) Minister for Defence Industry;
iii) Minister for Veterans and Defence Personnel;
iv) Assistant Defence Minister;
v) Secretary, Department of Defence;
vi) Chief of the Defence Force;
vii) Vice Chief of the Defence Force;
viii) Associate Secretary, Department of Defence;
ix) Chief of Navy;
x) Chief of Army;
xi) Chief of Air Force;
xii) Chief of Joint Operations;
xiii) Chief of Joint Capabilities;
xiv) Chief Finance Officer;
xv) Deputy Secretary Strategic Policy and Intelligence;
xvi) Deputy Secretary Capability Acquisition and Sustainment;
xvii) Chief Information Officer;
xviii) Chief Defence Scientist;
xix) Deputy Secretary Estate and Infrastructure;
xx) Deputy Secretary Defence People;
xxi) Deputy Secretary National Naval Shipbuilding and Infrastructure; and
xxii) Commander Defence COVID-19 Task Force

Key management personnel remuneration is reported in the table below.
	2020	2019
	$	$

Short-term employee benefits	8,901,855	8,312,966
Post-employment benefits	1,713,509	1,639,908
Long-term benefits	195,860	144,356
Total key management personnel remuneration expenses¹	10,811,224	10,097,230

¹ The above key management personnel remuneration excludes the remuneration and other benefits of the Minister for Defence, Assistant Minister of Defence, Minister for Defence Industry and Minister for Veterans and Defence Personnel. The remuneration and other benefits of these Ministers are not paid by the Department of Defence. Consequently, the total number of key management personnel that are disclosed within the remuneration expense balance is 21 (2018-19: 26). This includes instances where multiple individuals have fulfilled the same role within the period.

Note 6.2 Related Party Disclosures

6.2: Related Party Disclosures

Related party relationships:
Defence is an Australian Government controlled entity. Related parties to this entity are:
i) Key Management Personnel (as detailed in Note 6.1);
ii) Spouse or domestic partners (also known as de facto partner) of a KMP;
iii) Children or dependents of a KMP or their spouse or domestic partner;
iv) Entities, individually or jointly, controlled by the above individuals;
v) Cabinet Ministers; and
vi) 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.

No transactions with related parties occurred during the financial year (2018-19: Nil).

Significant transactions with related parties can include:
i) the payments of grants or loans;
ii) purchases of goods and services;
iii) asset purchases, sales transfers or leases;
iv) debts forgiven; and
v) guarantees.

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

Defence from time to time may gift items such as historical military pieces to other related parties.

Note 7.1A Contingent liabilities and assets

7.1: Contingent Liabilities and Assets

7.1A: Contingent liabilities and assets
	Claims for damages / costs		Total
	2020	2019	2020	2019
	$'000	$'000	$'000	$'000
Contingent Assets
Balance from previous period	1,500	2,200	1,500	2,200
New	-	1,500	-	1,500
Re-measurement	(1,500)	(2,200)	(1,500)	(2,200)
Assets realised	-	-	-	-
Rights expired	-	-	-	-
Total contingent assets	-	1,500	-	1,500
Contingent Liabilities
Balance from previous period	67,460	53,777	67,460	53,777
New	55,900	63,220	55,900	63,220
Re-measurement	154,563	4,768	154,563	4,768
Liabilities realised	(212,523)	(28)	(212,523)	(28)
Obligations expired	-	(54,277)	-	(54,277)
Total Contingent liabilities	65,400	67,460	65,400	67,460
Net contingent assets (liabilities)	(65,400)	(65,960)	(65,400)	(65,960)

Quantifiable Contingencies

Contingent Assets: At 30 June 2020, there are no instances (2018-19: 1) of non-remote, quantifiable contingent assets in respect of claims by the Department (2018-19: $1.5m).

Contingent Liabilities: At 30 June 2020, there are 6 (2018-19: 9) instances of non-remote, quantifiable contingent liabilities in respect of claims on the Department valued at $65.4m (2018-19: $67.5m). The estimated figure is determined by conducting an objective analysis of the probable amount payable for all the matters managed by firms engaged by Defence through the Attorney General's Legal Services Multi Use List and those being handled in-house by Defence Legal Division. However, the exact amount payable under those claims is uncertain. The Department is defending the claims or is trying to resolve them by recourse to alternative dispute resolution measures.

Unquantifiable Contingencies

Contingent Assets: At 30 June 2020 Defence had no instances (2018-19: 2) of unquantifiable non-remote contingent assets.

Contingent Liabilities: At 30 June 2020 Defence had 1 (2018-19: 1) instance of unquantifiable non-remote contingent liabilities.

Land decontamination, site restoration and decommissioning of Defence assets: Defence has made a financial provision for the future estimates involved in land decontamination, site restoration and decommissioning of Defence assets where a legal or constructive obligation has arisen. For those decontamination, restoration and decommissioning activities for which there is no legal or constructive obligation, the potential costs have not been assessed and are unquantifiable. Where there is a possible legal or constructive obligation, but the potential cost could not be quantified, the obligations have been assessed as unquantifiable contingencies. It was not possible to estimate the amounts of any eventual payments or receipts that may have eventuated in relation to these claims.

Costs associated with the Royal Commission into Institutional Responses to Child Sexual Abuse have not been assessed and are considered unquantifiable at this time. It is currently not possible to estimate the amounts of any payments that may eventuate in relation to any such claims.

Quantifiable Remote Contingencies

Remote Contingent Assets: At 30 June 2020 Defence had 1 (2018-19: 2) instances of quantifiable remote contingent assets valued at $0.7m (2018-19: $0.7m).

Remote Contingent Liabilities: At 30 June 2020 Defence had 152 (2018-19: 171) instances of quantifiable remote contingent liabilities valued at $4,501m (2018-19: $5,312m). This balance relates to an Indemnity Register, which Defence maintains and records all potential quantifiable and unquantifiable contingent liabilities arising from Defence’s legal and contractual obligations.

Unquantifiable Remote Contingencies

Contingent Assets: At 30 June 2020 Defence had 3 instances of unquantifiable remote contingent assets (2018-19: nil).

Contingent Liabilities: At 30 June 2020 Defence had 1,326 instances of unquantifiable remote contingent liabilities (2018-19: 1,377).

Accounting Policy

Contingent liabilities and contingent assets are not recognised in the statement of financial position but are disclosed in the relevant notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an existing liability or asset in respect of which settlement is not probable or 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.

Note 7.2A Categories of financial instruments


7.2: Financial Instruments


	Notes	2020	2019
		$'000	$'000
7.2A: Categories of financial instruments
Financial assets at amortised cost
Cash and cash equivalents	3.1A	427,418	286,961
Loans and receivables:
Trade and other receivables		641,478	343,261
Total financial assets at amortised cost		1,068,896	630,222
Carrying amount of financial assets		1,068,896	630,222

Financial Liabilities
Financial liabilities measured at amortised cost:
Suppliers	3.3A	2,719,992	2,511,261
Other payables		341,512	354,879
Leases	3.4A	2,884,524	1,485,329
Total financial liabilities measured at amortised cost		5,946,028	4,351,469
Carrying amount of financial liabilities		5,946,028	4,351,469

As Defence is a government appropriated entity, its total financial assets are primarily funded through appropriations which
are utilised to meet the department's liabilities as and when they fall due. The department's liabilities are considered as part
of the yearly appropriation process. As the department will continue to be funded on an appropriation basis, this will enable the
department to meet its liabilities as and when they fall due. Consequently, no liquidity issues are present as at 30 June 2020.

Accounting Policy

Financial Assets Defence 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 Defence's business model for managing the financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when Defence 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 trade date.

(a) Financial Assets at Amortised Cost

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

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

Amortised cost is determined using the effective interest method.

(b) Effective Interest Method

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

Income is recognised on an effective interest rate basis except for financial assets that are recognised at fair value through profit or loss.

(c) 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 risk has not increased.

Financial assets held at amortised cost - if there is objective evidence that an impairment loss has been incurred for loans and receivables or held to maturity investments held at amortised cost, the amount of loss is measured using the simplified approach of the expected credit loss model at an amount equal to lifetime expected credit losses. The carrying amount is reduced by way of an allowance account. The loss is recognised in the Statement of Comprehensive Income.

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.

(a) 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.

(b) Financial Liabilities at Amortised Cost

Financial liabilities at amortised cost, 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.

Defence's supplier and other payables are generally payable within the short term and are recognised at the amount of cash or cash equivalents required to settle the liability. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

Financial Risk Management

Under relevant legislation and Australian Government policy, Defence is restricted from entering into borrowings, some investments and entering into derivative transactions to offset risk exposure. As such, Defence’s exposure to risk is primarily related to credit risk on trade receivables and foreign currency risk in relation to payments to overseas suppliers of goods and services received. However, this exposure is minimal in terms of the operations of Defence as Defence is subject to a no win/no loss funding arrangement for foreign exchange gains and losses.

Defence is also exposed to some contract price escalation risk. This risk exposure is due to the difference in the basis on which Defence is funded for price escalations from government to the price escalation clauses embedded within the contracts. The risk of increased cost is managed by Defence to ensure exposure to the Australian Government is minimised.

Derecognition of Financial Assets and Liabilities

Financial assets are derecognised when the contractual rights to the cash flows from the financial assets expire or the assets with the associated risks and rewards are transferred to another entity. Financial liabilities are derecognised when the obligation under the contract is discharged, cancelled or has expired.

Note 7.2B Net gains or losses on financial assets

	2020	2019
	$'000	$'000
7.2B: Net gains or losses on financial assets
Financial assets at amortised cost
Exchange gain	994	3,083
Impairment reversal/(loss)	2,963	(2,103)
Net gain on financial assets at amortised cost	3,957	980
Net gain on financial assets	3,957	980

The net interest income from financial assets not at fair value through net cost of services is nil (2018-19: nil).

Note 7.2C Net gainsor losses on financial liabilities

	2020	2019
	$'000	$'000
7.2C: Net gains or losses on financial liabilities
Financial liabilities measured at amortised cost
Exchange (loss)	(44,915)	(39,748)
Interest expense	(115,742)	(101,633)
Net (loss) on financial liabilities measured at amortised cost	(160,657)	(141,381)
Net (loss) on financial liabilities	(160,657)	(141,381)

The net interest expense from financial liabilities not at fair value through net cost of services is nil (2018-19: nil).

Note 7.3A Categories of financial intruments

Notes

2020

2019

$'000

7.3A: Categories of financial instruments

Financial assets at amortised cost

Cash and cash equivalents

4.1A

146,014

114,576

Loans and receivables:

Trade and other receivables

4.1B

570,992

547,912

Total financial assets at amortised cost

717,006

662,488

Financial assets at fair value through other comprehensive income

(investments in equity instruments)

Investment - Defence Housing Australia

4.1C

2,630,545

2,809,339

Investment - Small Portfolio bodies

4.1C

80,959

79,686

Total financial assets at fair value through other comprehensive income

(investments in equity instruments)

2,711,504

2,889,025

Carrying amount of financial assets

3,428,510

3,551,513

Financial Liabilities

Financial liabilities measured at amortised cost:

Other payables

4.3A

8,560

7,052

Special accounts

4.3A

146,014

114,576

Total financial liabilities measured at amortised cost

154,574

121,628

Carrying amount of financial liabilities

154,574

121,628

Note 7.3B Net gains or losses on financial assets

2020

2019

$'000

$'000

7.3B: Net gains or losses on financial assets

Financial assets at amortised cost

Interest revenue

2.2B

20,809

24,506

Impairment

(2)

Exchange gains/(loss)

2.2F

103

300

Net gains on financial assets at amortised cost

20,912

24,804

Investments in equity instruments at fair value through other comprehensive

income (designated)

Dividend revenue

4.1B

25,604

24,545

Net gains on investments in equity instruments at fair value through other

comprehensive income (designated)

25,604

24,545

Net gain on financial assets

46,516

49,349

The net interest income from financial assets not at fair value through net cost of service is nil (2018-19: nil).

Note 7.3C Net gains or losses on financial liabilities

7.3C: Net gains or losses on financial liabilities

There was no net gain/(loss) from financial liabilities.

Note 7.4 Fair Value Measurements

7.4: Fair Value Measurements

The following disclosures provide 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 the fair value are detailed below: ·

Level 1: Quote prices (unadjusted) in the active market for identical assets or liabilities that the entity 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 an asset or liability.

Accounting Policy

In estimating the fair value of an asset or a liability, Defence uses market-observable data to the extent it is available. For level 2 and 3 inputs, Defence engages third party qualified valuers and internal experts to establish the appropriate valuation techniques and inputs to the models to ensure the valuations are in line with AASB 13. The Asset Accounting branch reviews all reports received from third party valuers and internal experts to ensure unobservable inputs used align with Defence's own assumptions and understanding of the market. This review includes investigation of significant fluctuations in the fair value of the assets and liabilities and that the report includes sufficient information to ensure compliance with AASB 13.

Defence deems transfers between levels of fair value hierarchy to have occurred when there has been a change to the inputs to the fair value measurement (for instance from observable to unobservable and vice versa) and the significance that the changed input has in determining the fair value measurement.

Note 7.4A Fair Value Measurements

		Fair value measurements at the end of the reporting period


		2020	2019
		$'000	$'000
7.4A: Fair Value Measurements
Non-financial assets - Recurring fair value
Land	3.2A	5,543,999	5,909,374
Buildings	3.2A	14,421,135	13,563,472
Specialist military equipment	3.2A	71,753,855	66,547,789
Infrastructure	3.2A	6,452,925	6,343,885
Plant and equipment	3.2A	1,770,450	1,336,330
Heritage and cultural	3.2A	474,107	474,037
Assets held for sale²	3.2D	215,822	151,376
Total Non-financial assets - Recurring fair value		100,632,293	94,326,263

Assets not measured at fair value in the statement of financial position¹
Financial assets
Cash and cash equivalents	3.1A	427,418	286,961
Trade and other receivables	3.1B	1,120,443	849,635

Non-financial assets
Inventories	3.2B	7,369,485	7,036,627
Intangibles	3.2A	899,284	870,782
Prepayments	3.2C	1,825,942	2,497,354
Total assets not measured at fair value in the statement of financial position		11,642,572	11,541,359

¹ These items carrying amounts equate to their approximate fair values.

² Assets held for sale are measured at fair value in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations.

		2020	2019
		$'000	$'000
7.4: Fair Value Measurements (continued)
Liabilities not measured at fair value in the statement of financial position¹
Payables
Suppliers	3.3A	2,719,992	2,511,261
Other payables and personal benefits	3.3B, 3.3C	704,903	657,531

Interest bearing liabilities
Finance lease payables	3.4A	2,884,524	1,485,329

Provisions
Employee provisions	3.5A	3,412,595	3,041,254
Restoration, decontamination and decommissioning	3.5B	1,414,034	1,303,571
Other provisions	3.5C	332,561	432,341

Total liabilities not measured at fair value in the statement of financial position		11,468,609	9,431,287

¹ These items carrying amounts equate to their approximate fair values.

Note 7.5 Administered - Fair Value Measurements

Accounting Policy

The following tables provide an analysis of the assets and liabilities that are measured at fair value. The remaining assets and liabilities disclosed in the statement of financial position do not apply the fair value hierarchy.

The different levels of the fair value are detailed below:

Level 1: Quote prices (unadjusted) in the active market for identical assets or liabilities that the entity 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 an asset or liability.

Administered investments are valued using the net assets valuation approach.

Note 7.5A Administered Fair value measurements

		Fair value measurements at the end of the reporting period


		2020	2019
		$'000	$'000
7.5A: Administered Fair value measurements
Financial assets
Administered Investment	4.1C	2,711,504	2,889,025
Total Financial Assets		2,711,504	2,889,025

Assets not measured at fair value in the statement of financial position¹
Cash and cash equivalents	4.1A	146,014	114,576
Trade and other receivables	4.1B	570,992	547,912
Prepayments	4.2A	250,157	249,655
Total assets not measured at fair value in the statement of financial position		967,163	912,143

Liabilities not measured at fair value in the statement of financial position¹
Other payables	4.3A	154,574	121,628
Employee provisions	4.4A	188,151,200	182,018,200
Total liabilities not measured at fair value in the statement of financial position		188,305,774	182,139,828

¹ These items carrying amounts equate to their approximate fair values.

Note 8.1 Assets Held in Trust

OTHER INFORMATION


8.1: Assets Held in Trust
	2020	2019
	$'000	$'000
Young Endeavour Youth Program Public Fund (Trust)
As at 30 June 2020, monetary assets held in trust were also disclosed in Note 5.2 Special Accounts in the table titled
"Defence Endowments, Bequests and Other Trust Moneys Special Account".


As at 30 June 2019, monetary assets held in trust were also disclosed in Note 5.1A Appropriations. This is due to these
amounts being credited to Departmental appropriations as a result of the sunsetting of the Young Endeavour Youth
Program Special Account on 1 April 2019.

Purpose of trust arrangement:
To create a capital fund for the purpose of furthering youth development initiatives to make specific acquisitions and to
support the Young Endeavour Youth Scheme through sail training for young Australians.

The fund is listed as a deductible gift recipient.

Total amount held at the beginning of the reporting period	1,523	1,495
Other receipts	42	34
*Total credits*	1,565	1,529
Payment made to suppliers	(2)	(6)
*Total debits*	(2)	(6)
Total amount held at the end of the reporting period	1,563	1,523



Peter Mitchell Trust Fund (Trust)
As at 30 June 2020, monetary assets held in trust were also disclosed in Note 5.2 Special Accounts in the table titled
"Defence Endowments, Bequests and Other Trust Moneys Special Account".


As at 30 June 2019, monetary assets held in trust were also disclosed in Note 5.2 Special Accounts in the table titled
"Services for Other Entities and Trust Monies".

Purpose of trust arrangement:
To disburse amounts held on trust or otherwise for the benefit of a person other than the Commonwealth.

Total amount held at the beginning of the reporting period	1	6
Other receipts	9	3
Total credits	10	9
Payment made to suppliers	(7)	(8)
Total debits	(7)	(8)
Total amount held at the end of the reporting period	3	1



Fedorczenko Legacy Fund Special Account (Trust)
As at 30 June 2020, monetary assets held in trust were also disclosed in Note 5.2 Special Accounts in the table titled
"Defence Endowments, Bequests and Other Trust Moneys Special Account".


As at 30 June 2019, monetary assets held in trust were also disclosed in Note 5.2 Special Accounts in the table titled
"Fedorczenko Legacy Special Account".

Purpose of trust arrangement:
For expenditure in relation to the defence of Australia of the residual of the estate of the late Petro Fedorczenko.

Total amount held at the beginning of the reporting period	167	164
Other receipts	2	3
Total credits	169	167
Payment made to suppliers	(4)	-
Total debits	(4)	-
Total amount held at the end of the reporting period	165	167

Note 8.2 Restructuring

8.2 Restructuring

In July 2017, the Government agreed with the recommendations of the Independent Intelligence Review, that the Australian Signals Directorate (ASD) become a separate statutory agency from the Department of Defence. Following the passage of the enabling legislation through the Parliament on 28 March 2018, the change to ASD's status to become a statutory agency occurred on 1 July 2018.

Functions Relinquished									Gaining entity
Collect foreign signals intelligence									ASD
Communicate foreign signals intelligence									ASD
Support military operations									ASD
Cooperate with and assist the national security community's performance of its functions									ASD

Note 8.2A Departmental Resutructuring

8.2A Departmental Restructuring
	2020	2019
FUNCTIONS RELINQUISHED	$'000	ASD $'000
Assets Relinquished
Trade and other receivables	-	296
Land and buildings	-	61
Infrastructure	-	1,586
Plant and equipment	-	199,886
Heritage and cultural assets	-	244
Intangibles	-	30,352
Prepayments	-	30,586
Total assets relinquished	-	263,011

Liabilities Relinquished
Employee provisions	-	60,803
Total liabilities relinquished	-	60,803
Net assets relinquished	-	202,208

Note 8.3A Aggregate Assets and Liabilities

8.3: Aggregate Assets and Liabilities

8.3A: Aggregate Assets and Liabilities
	2020	2019
	$'000	$'000
Assets expected to be recovered in
No more than 12 months	4,322,696	4,590,152
More than 12 months	107,952,169	101,277,470
Total assets	112,274,865	105,867,622

Liabilities expected to be settled in
No more than 12 months	4,943,300	4,945,101
More than 12 months	6,525,309	4,486,186
Total liabilities	11,468,609	9,431,287

Note 8.3B Administered - Aggregate Assets and Liabilities

	2020	2019
	$'000	$'000
8.3B: Administered - Aggregate Assets and Liabilities

Assets expected to be recovered in
No more than 12 months	352,564	311,517
More than 12 months	3,326,103	3,489,651
Total assets	3,678,667	3,801,168

Liabilities expected to be settled in
No more than 12 months	2,891,574	2,679,628
More than 12 months	185,414,200	179,460,200
Total liabilities	188,305,774	182,139,828

Note 8.4A Restatement of Prior Period Errors


8.4: Restatement of Prior Period Errors

8.4A Restatement of Prior Period Errors

In the 2019-20 financial period, Defence has identified a number of errors relating to balances reported in prior financial periods
resulting in the restatement of comparatives within the 2019-20 financial statements. The impact of the restatement was to:

i. reduce the reported 2018-19 surplus by $242.9 million (restated 2018-19 surplus of $115.2 million);
ii. reduce the reported 2018-19 net asset value by $210.2 million (restated 2018-19 net assets of $96,436.3 million); and
iii. reduce the reported opening retained surpluses of 2018-19 by $32.7 million.

	2018-19 Original Balance	2018-19 Restated Balance	Increase/ (Decrease)
STATEMENT OF COMPREHENSIVE INCOME	$'000	$'000	$'000
Expenses
Write-down and impairment of assets¹	860,259	1,250,969	390,710
Own-Source Income
Revenue from contracts with customers²	539,654	310,483	(229,171)
Rental Income²	6,544	235,715	229,171
Gains
Reversals of previous asset write-downs and impairment¹	368,665	516,483	147,818

Surplus attributable to the Australian Government	358,059	115,167	(242,892)

STATEMENT OF FINANCIAL POSITION
Financial assets
Cash and cash equivalents³	76,179	286,961	210,782
Non-financial assets
Land and buildings¹	19,454,331	19,472,846	18,515
Specialist military equipment¹	66,559,643	66,547,789	(11,854)
Infrastructure¹	6,342,088	6,343,885	1,797
Plant and equipment¹	1,393,661	1,336,330	(57,331)
Heritage and cultural assets¹	473,307	474,037	730
Intangibles¹	890,442	870,782	(19,660)
Inventories¹	7,178,986	7,036,627	(142,359)
Payables
Other payables³	359,627	570,409	210,782

NET ASSETS	96,646,497	96,436,335	(210,162)

Equity
Retained surpluses¹	36,987,405	36,777,243	(210,162)

CASH FLOW STATEMENT
Cash received
Other³	66,418	395,692	329,274
Cash used
Other³	(71,554)	(228,872)	(157,318)

Net increase/(decrease) in cash held	1,315	173,271	171,956


Increases/(decreases) to balances are reflected as positive/(negative) amounts above, irrespective of the nature of the balance.

¹ In the 2019-20 financial period, asset review activities have identified significant write-downs and impairment of assets that should have been recorded in prior financial periods:

a) $390.7 million of write-down and impairment of asset expenses have been restated in 2018-19 comparatives, relating to land and buildings, specialist military equipment, infrastructure, plant and equipment, intangibles and general inventories. These were identified through asset remediation activities undertaken in 2019-20, representing only 0.4% of the 2018-19 closing balance of non-financial assets.

b) $147.8 million of reversals of previous asset write-downs have been restated in 2018-19 comparatives, relating to land and buildings, specialist military equipment, infrastructure, and plant and equipment. These were identified through asset remediation activities undertaken in 2019-20, representing only 0.1% of the 2018-19 closing balance of non-financial assets.

c) A net impact of $32.7 million of write-downs and impairment of asset expenses, and reversals of previous asset write-downs relating to financial periods prior to 2018-19, have been restated in 2018-19 comparatives for retained surpluses. This restatement relates to the cumulative impact of restatements to land and buildings, specialist military equipment, infrastructure, plant and equipment, heritage and cultural assets, intangibles and inventories relating to financial periods prior to 2018-19.

² Group rental scheme income which represent contributions made by Defence service members for residences sub-leased by Defence were classified as revenue from customer contracts in 2018-19. In the current financial period, upon further guidance and review by Defence, it has been determined that this represents rental income and has subsequently been reclassified. Given the size of the reclassification, prior period comparatives have been restated to reflect this change ($205.3 million), however there is no change to the 2018-19 or 2019-20 reported surplus. Additionally, $23.9 million of revenue recorded in the prior period has been reclassified from rendering of services to Other rental income. This relates to amounts received from ASD specifically in relation to ASD's ongoing use of buildings owned by Defence that was previously recorded as revenue from contracts with customers. This has no impact on the 2018-19 or 2019-20 reported surplus.

³ Defence has entered into a number of arrangements to perform activities on behalf of foreign governments under which funding is received in advance of expenditure being incurred. In 2018-19, funding received was reported as assets held in relation to activities performed on behalf of foreign governments, and subsequently not reported within Defence's statement of financial position. In 2019-20, it has been determined the funding received represents both cash and cash equivalents of Defence, in addition to amounts payable, as the funding received is only to be utilised for specific purposes. The restatement of comparatives in the current period ($210.8 million) also includes a restatement of comparatives within the cash flow statement to recognise additional other cash received, other cash used and opening cash ($38.8 million) to reflect the cash flows associated with the restated cash balance.

Refer to Note 8.4B for the quantum of the adjustment for each financial statement line item impacted.

Note 8.4B Reconciliation of Adjustments to 2018-19 Financial Statements


8.4: Restatement of Prior Period Errors (continued)

8.4B: Reconciliation of Adjustments (Adj) to 2018-19 Financial Statements
	Adj 1a	Adj 1b	Adj 1c	Adj 2	Adj 3	Total Adjustments
	$'000s	$'000s	$'000s	$'000s	$'000s	$'000s

STATEMENT OF COMPREHENSIVE INCOME
Expenses
Write-down and impairment of assets	390,710	-	-	-	-	390,710
Own-Source Income
Revenue from contracts with customers	-	-	-	(229,171)	-	(229,171)
Rental Income	-	-	-	229,171	-	229,171
Gains
Reversals of previous asset write-downs
and impairment	-	147,818	-	-	-	147,818

Increase/(Decrease) in surplus attributable
to the Australian Government	(390,710)	147,818	-	-	-	(242,892)

STATEMENT OF FINANCIAL POSITION
Financial assets
Cash and cash equivalents	-	-	-	-	210,782	210,782
Non-financial assets
Land and buildings	(8,952)	4,354	23,113	-	-	18,515
Specialist military equipment	(282,946)	127,573	143,519	-	-	(11,854)
Infrastructure	(6,924)	11,925	(3,204)	-	-	1,797
Plant and equipment	(11,010)	3,966	(50,287)	-	-	(57,331)
Heritage and cultural assets	-	-	730	-	-	730
Intangibles	(15,488)	-	(4,172)	-	-	(19,660)
Inventories	(65,390)	-	(76,969)	-	-	(142,359)
Payables
Other payables	-	-	-	-	210,782	210,782

NET ASSETS	(390,710)	147,818	32,730	-	-	(210,162)

Equity
Retained surpluses	(390,710)	147,818	32,730	-	-	(210,162)

CASH FLOW STATEMENT
Cash received
Other	-	-	-	-	329,274	329,274
Cash used
Other	-	-	-	-	(157,318)	(157,318)

Net increase/(decrease) in cash held	-	-	-	-	171,956	171,956


Increases/(decreases) to balances are reflected as positive/(negative) amounts above, irrespective of the nature of the balance.

Visit

https://www.transparency.gov.au/annual-reports/department-defence/reporting-year/2019-20-144