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Financial instruments

D1 : Financial instruments

Policy and measurement

A financial instrument is a contract between entities that gives rise to a financial asset of one entity and a financial liability or equity instrument of the other entity. Generally, financial instruments are recognised and derecognised on 'trade date' which is the date that the risks and rewards of ownership are transferred to the 'buyer'. Finance classifies its financial instruments in the following categories:

  • Loans and receivable assets: includes cash and cash equivalents which are readily convertible to cash, trade receivables, loans and other receivables with fixed or determinable payments that are not quoted in an active market.
  • Held-to-maturity investments: non-derivative financial assets with fixed or determinable payments and fixed maturities that an entity has a positive intention and ability to hold to maturity.
  • Available-for-sale financial assets: non-derivative financial assets that are either designated in this category or are not classified in any other category.
  • Financial assets/liabilities FVPL: assets and liabilities held for trading, or portions of an identified portfolio of financial instruments that are managed together and have a recent actual pattern of short term profit taking. Derivatives are classified as held for trading unless they are designated as hedges.
  • Financial liabilities held at amortised cost: includes suppliers and other payables with a fixed or determinable amount to be paid that are not quoted in an active market.

All financial assets and liabilities are initially recognised at fair value (usually transaction price). For financial instruments not at FVPL, transaction costs are also added to the initial value.

Measurement

Type of financial instrument

Impairment (assessed annually)

At fair value, with all movements captured in the surplus/(deficit).

  Loans and receivables (short term).
  Financial assets/liabilities at FVPL including any interest paid or earned.

N/A

At amortised cost using effective interest method, any valuation movement is recognised in the surplus/(deficit).

  Loans and receivables (long term).
  Held-to-maturity investments.
  Financial liabilities measured at amortised cost (supplier and other payables).
  Interest and foreign exchange gains/losses on available for sale financial assets.

Impairment loss is measured as the difference between the carrying amount and the present value of discounted estimated future cash flows. Any asset impairment is shown as a reduction in the value of the asset by way of an allowance account, with the loss being recorded in the surplus/(deficit).

At fair value, with any valuation movement taken to equity (reserves).

  Available-for-sale financial assets, with the exception of interest and foreign exchange movements.

Any difference between the cost less principal repayments and amortisation, and the current fair value less any previous impairment loss, is transferred from equity to the surplus/(deficit).

In the following note disclosure, Departmental and Administered items are included together for presentation purposes only and these balances should not be compared.

D1.1 Categories of financial instruments

Departmental

Administered

30 June

30 June

30 June

30 June

2018

2017

2018

2017

Note ref

$'000

$'000

$'000

$'000

Financial Assets

Loans and receivables

Cash and cash equivalents

OPA balance

H2

-

-

1,730,174

936,797

Special account cash held by Finance

F3.1

15,244

9,162

-

-

Operating cash balance

1,580

1,618

858

1,159

Special account cash held in OPA

F3.1

755,470

739,018

-

-

Trade receivables

4,064

74,299

1,826

721

Investment funds - loans and receivables

C2.2

-

-

7,979,610

6,501,484

State and Territory Government loans

-

-

133,121

139,752

Accrued revenue

5,889

11,770

9,583

2,213

Total loans and receivables

782,247

835,867

9,855,172

7,582,126

Held-to-maturity investments

Government securities

-

-

-

1,472

Total held-to-maturity investments

-

-

-

1,472

Available-for-sale financial assets

Commonwealth corporate entities

-

-

904,868

573,417

Total available-for-sale financial assets

-

-

904,868

573,417

Financial assets designated at FVPL

Investment funds - financial assets at FVPL

C2.2

-

-

21,844,193

16,190,822

Total financial assets designated at FVPL

-

-

21,844,193

16,190,822

Total financial assets

782,247

835,867

32,604,233

24,347,837

Financial Liabilities

Financial liabilities measured at amortised cost

Trade creditors and accruals

36,241

49,771

12,141

12,418

Investment funds - financial liabilities

C2.2

-

-

91,032

99,915

Finance leases

3,736

6,475

-

-

Total financial liabilities measured at amortised cost

39,977

56,246

103,173

112,333

Financial liabilities designated at FVPL

Investment funds - derivative liabilities

C2.2

-

-

157,327

13,405

Total financial liabilities designated at FVPL

-

-

157,327

13,405

Total financial liabilities

39,977

56,246

260,500

125,738

Key judgements and estimates

Loans to state and territory governments

Concessional loan balances receivable from states and territories are measured at amortised cost and no security is held for these. Repayments are based on a reducing balance method. The amortised cost differs from fair value which has been disclosed under Note D1.2.

Investments in Commonwealth corporate entities (CCEs)

CCEs are wholly owned by the Commonwealth and managed by Finance on behalf of the Commonwealth. CCEs are not controlled by Finance and have been reported as investments and measured at fair value.

The following are details of Finance’s CCEs:

  • CSC is a trustee and administrator of Commonwealth superannuation schemes. The value of CSC has been measured using the net assets (NET) reported in its financial statements. A change in the net assets would result in an equal change in reported fair value.
  • Australian Naval Infrastructure (ANI) Pty Ltd has begun the redevelopment of the Osborne South Shipyard and is in the process of establishing its long term leasing/access arrangements for the critical infrastructure in its ownership. The value of ANI has been measured using the net assets (NET) reported in its financial statements. A change in the net assets would result in an equal change in reported fair value.
  • ASC Pty Ltd (ASC) provides ongoing capability for the through life support of the Collins class submarine and is the shipbuilder for the Air Warfare Destroyer and Offshore Patrol Vessel programs. ASC has been measured using reporting date value of the future cash flows of the company sourced from the 2018-23 Corporate Plan and an extended forecast model out to 2027 based on information in the ASC internal valuation.
  • On 29 June 2018, the Government announced plans for the construction of anti-submarine warfare frigates (Future Frigate program – Hunter Class frigates). The frigates will be built by ASC Shipbuilding, which is currently wholly owned by the Commonwealth (through ASC Pty Ltd) and will become a subsidiary of BAE Systems during the construction phase. Details in relation to the transfer of ASC Shipbuilding to BAE Systems are currently being determined. Cash flows in relation to ASC Shipbuilding have been excluded from the valuation.
  • ASC’s cash flows have been discounted using the weighted average cost of capital (WACC). The WACC is calculated based on a number of inputs derived from either professional judgement or observable historical market data of comparable entities. The impact of WACC changes is included as part of Market Risk analysis in Note D2.1.

D1.2 Fair value information by financial asset class

The following table sets out the fair value, valuation techniques and inputs used for Administered financial instruments. The techniques used to value financial instruments have not changed during the year.

Financial instruments have been valued using inputs under the following fair value hierarchy:

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

  Level 2: observable inputs that are derived from prices in active markets.

  Level 3: inputs that are not observable and involve significant judgement.

Fair value measurements at the end of the reporting period

Administered

30 June

30 June

Level

Inputs used

Valuation technique

2018

2017

$'000

$'000

Financial assets

State and Territory Government loans

2

N/A

Income approach

215,893

231,180

Investments in CCEs

3

NET

Cost approach

597,405

318,616

Investments in CCEs

3

WACC

Income approach

307,463

254,801

Investment funds - financial assets at FVPL

Investment funds- other investments

1

N/A

Market approach

1,248,694

553,207

Investment funds- interest bearing securities

2

PI1

Market approach

18,129,857

14,195,737

Investment funds- derivative assets

2

N/A

Market approach

32,971

117,607

Investment funds - other investments

2

N/A

Market approach

-

2,875

Investment funds- interest bearing securities

3

Earnings multiple

Market approach

154,124

-

Investment funds- other investments

3

NET

Market approach

2,274,729

1,321,396

Total financial assets

22,961,136

16,995,419

Financial liabilities

Investment funds - derivative liabilities

2

N/A

Market approach

157,327

13,405

Total financial liabilities

157,327

13,405

1Price Index (PI) values based on observable market data relating to prices, industry accepted pricing models and broker/dealer quotes

Movements of recurring level 3 financial assets

Administered

30 June

30 June

2018

2017

$'000

$'000

Opening balance of investments in CCEs

573,417

400,454

Equity injections

279,500

95,000

Total gains/(losses) recognised in other comprehensive income

51,951

77,963

Closing balance of investments in CCEs

904,868

573,417

Opening balance of investment funds - financial assets at FVPL

1,321,396

697,575

Purchase

1,274,101

656,697

Sales

(206,253)

(30,379)

Total gains/(losses) recognised in net cost of services

44,172

(2,128)

Transfers into level 3

(4,563)

(369)

Closing balance of investment funds - financial assets at FVPL

2,428,853

1,321,396

D1.3 Net gains or losses on financial assets

Departmental

Administered

30 June

30 June

30 June

30 June

2018

2017

2018

2017

Note ref

$'000

$'000

$'000

$'000

Loans and receivables

Interest revenue earned on:

OPA deposits

-

-

15,215

14,877

Housing agreements

-

-

4,500

5,515

State and Territory Government loans

-

-

10,079

9,707

Other interest revenue

3

8

-

-

Impairment of financial assets

(66)

(4)

(1)

(13)

Net gains/(losses) on loans and receivables

(63)

4

29,793

30,086

Held-to-maturity investments

Interest revenue earned on Government Securities

-

-

47

94

Net gain/(losses) on held-to-maturity investments

-

-

47

94

Available-for-sale financial assets

Dividends

-

-

16,100

19,700

Investment funds - dividends

C2.1

-

-

36,716

13,228

Gain/(loss) recognised in equity

D1.2

-

-

51,951

77,963

Gains from sale of financial assets

Sale proceeds

-

-

-

1

Net gains/(losses) from available-for-sale financial assets

-

-

104,767

110,892

Financial assets designated as FVPL

Investment funds - foreign exchange losses

C2.1

-

-

(225,700)

(6,925)

Investment funds - interest on term deposits

C2.1

-

-

140,885

91,566

Investment funds - gains on financial investments

C2.1

-

-

763,532

439,306

Net gains/(losses) on financial assets designated as FVPL

-

-

678,717

523,947

Net gains/(losses) on financial assets

(63)

4

813,324

665,019

Policy and measurement

Foreign exchange gains/losses

All foreign currency transactions during the period are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency items at reporting date are translated at the exchange rate existing at reporting date. Exchange differences are recognised in the surplus/(deficit) in the period in which they arise.