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7. Managing uncertainties

This section analyses how the Treasury manages financial risks within its operating environment.

7.1 Departmental Contingent Assets and Liabilities

Quantifiable Contingencies

Contingent liabilities consist of $122,127 in 2018 (2017: $106,803). This amount represents an estimate of the Treasury’s liability in respect to studies assistance. There were no quantifiable contingent assets in 2018 (2017: $0).

Contingent liabilities and contingent assets

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

7.2 Administered Contingent Assets and Liabilities

Quantifiable administered contingencies

Quantifiable administered contingencies that are not remote are disclosed in the schedule of administered items as quantifiable administered contingencies.

Commitments under expanded IMF New Arrangements to Borrow (NAB)

Australia has made a line of credit available to the International Monetary Fund (IMF) under its New Arrangements to Borrow (NAB) since 1998. This is a contingent loan to help ensure that the IMF has the resources available to maintain stability and support recovery in the global economy. The value of Australia’s NAB credit arrangement stands at approximately Special Drawing Rights (SDR, the IMF’s unit of account) 2.22 billion (approximately A$4.22 billion at 30 June 2018). In November 2017, the NAB was renewed for an additional five year period until November 2022.

The Fund does not publish annual estimates of the amount it expects to call under the NAB facility. However, to be drawn upon, the NAB needs to be activated by the IMF Executive Board. The last NAB activation period was terminated in February 2016 and the IMF is currently relying predominately on its quota resources to fund new lending (although the NAB can be called upon to fund IMF programs that were approved under previous activations). The IMF did not call on Australia’s NAB facility in 2017-18 and, as at the completion of these statements, has not done so in the current year.

IMF Bilateral Loan

In addition to the NAB credit line as part of a broad international effort to increase the resources available to the IMF, Australia has made available a SDR4.61billion (approximately A$8.76 billion at 30 June 2018) contingent bilateral loan to the IMF. The contingent loan is on terms consistent with separate bilateral loan and note purchase agreements between the IMF and all contributing countries. It will be drawn upon by the IMF only if needed to supplement the IMF’s quota and NAB resources and any loans would be repaid in full with interest. The increase in the IMF’s resources will help ensure that it has the capability to address any potential vulnerability facing the global economy. Australia’s bilateral loan agreement with the IMF was renewed in July 2017. The renewed agreement extends Australia’s funding commitment to December 2019, with the possibility of an additional one-year extension with Australia’s consent.

International financial institutions — uncalled capital subscriptions

The Australian Government has held an uncalled capital subscription to the International Bank for Reconstruction and Development (IBRD) since 1947. Australia’s uncalled capital subscription to the IBRD totals US$3.6 billion (estimated value A$4.8 billion as at 30 June 2018).

The Australian Government has also held an uncalled capital subscription to the European Bank for Reconstruction and Development (EBRD) since 1991. Australia’s uncalled capital subscription to the EBRD totals EUR237.5 million (estimated value A$374.4 million as at 30 June 2018).

The Australian Government has further held an uncalled capital subscription to the Asian Development Bank (ADB) since 1966. Australia’s uncalled capital subscription to the ADB totals US$5.8 billion (estimated value A$11.0 billion as at 30 June 2018).

The Australian Government has further held an uncalled capital subscription to the Multilateral Investment Guarantee Agency of US$26.5 million (estimated value A$35.8 million as at 30 June 2018).

The Asian Infrastructure Investment Bank (AIIB) was established on 25 December 2015. The Australian Government has subscribed to shares in the AIIB, which includes an uncalled capital subscription. Australia’s uncalled capital subscription to the AIIB totals US$3.0 billion (estimated value A$4.0 billion as at 30 June 2018).

None of these international financial institutions have ever drawn on Australia’s uncalled capital subscriptions.

Loan to New South Wales for James Hardie Asbestos Injuries Compensation Fund

The Australian Government has agreed to lend up to $160 million to the State Government of New South Wales (NSW) to support the loan facility to top up the James Hardie Asbestos Injuries Compensation Fund. Draw down on the loan is subject to the James Hardie Asbestos Injuries Compensation Fund requiring funds to meet its liabilities and is contingent on NSW meeting a number of conditions under the loan agreement with the Australian Government. The timing and amounts that may be drawn down by NSW cannot be determined accurately. No new loans were provided to the State Government of NSW in respect of the loan facility in 2017-18. (2016-17: nil).

Unquantifiable administered contingencies

Contingent Liabilities

Housing Loans Insurance Corporation (HLIC)

The Australian Government sold HLIC on 12 December 1997 and has assumed all residual contingencies. The contingent liability relates to the HLIC’s contracts of mortgage insurance to the time of sale. Any potential economic outflow cannot not be determined accurately given the complexity of any estimation calculation of the economic outflow would be reliant upon numerous unquantifiable variables. Only at the time of the event, can the amount of economic outflow be determined accurately.

Terrorism insurance — Australian Reinsurance Pool Corporation

The Terrorism Insurance Act 2003 established a scheme for terrorism insurance covering damage to commercial property, including associated business interruption and public liability. The Australian Reinsurance Pool Corporation (ARPC) uses reinsurance premiums paid by insurers to meet its administrative expenses, to maintain a pool of funds and to purchase reinsurance to help meet future claims. The Australian Government guarantees to pay any liabilities of the ARPC, but the Treasurer must declare a reduced payout rate to insured entities if the Government’s liability would otherwise exceed $10 billion.

Natural Disaster Relief and Recovery (NDRRA)

The Australian Government provides funding to States and Territories through the Natural Disaster Relief and Recovery Arrangements (NDRRA) to assist with natural disaster relief and recovery costs. A State or Territory may claim NDRRA funding if a natural disaster occurs and State or Territory relief and recovery expenditure for that event meets the requirements set out in the NDRRA Determination. The NDRRA liability represents the Treasury’s best estimate of payments expected to be made to States and Territories as at balance date. In the event where a natural disaster has occurred but the associated costs cannot be quantified reliably, the event is disclosed as a contingent liability. For a list of natural disasters that are included in the NDRRA contingent liability, refer to Note 5.4 Administered — Other Provisions.

Contingent Assets

HIH Claims Support Scheme (HCSS)

As an insured creditor in the liquidation of the HIH Group, the Australian Government is entitled to payments arising from the HCSS’s position in the Proof of Debt of respective HIH companies. The Treasury has received payments from the HIH Estate during 2017-18; however the timing and amount of future payments are unknown and will depend on the outcome of the estimation process and the completion of the liquidation of the HIH Group.

Burden sharing in the International Monetary Fund remuneration

Since 1986, the IMF has used its burden sharing mechanism to make up for the loss of income from unpaid interest charges on the loans of debtor members and to accumulate precautionary balances in a Special Contingent Account to protect the IMF against losses arising from the failure of a member to repay its overdue principal obligations.

The mechanism works by providing for additions to the rate of charge on IMF loans and deductions to the rate of remuneration for creditor members such as Australia. Resources collected from individual members under the burden sharing mechanism are refundable to them as arrears cases are resolved, or as may be decided by the IMF. Thus, resources collected for unpaid charges are refunded when these charges are eventually settled.

Likewise, precautionary balances held in the Special Contingent Account would be distributed back to members in proportion to their cumulative contributions when there are no overdue charges or principal balances. The IMF could also decide to make an early distribution.

As there is considerable and inherent uncertainty around the timing and amounts of burden sharing to be refunded to Australia this contingent asset cannot be reliably measured and as such is recorded as an unquantifiable contingent asset.

7.3 Administered - Financial Instruments

2018

2017

$’000

$’000

Note 7.3A: Categories of Financial Instruments

Financial Assets

Loans and receivables

IMF related monies owing

507

28

Guarantee Scheme for Large Deposits and

Wholesale Funding contractual fee receivable

-

(119)

Guarantee of State and Territory Borrowing

contractual fee receivable

12,047

26,455

Guarantee of State and Territory Borrowing

fee receivable

553

992

IMF new arrangements to borrow loan

447,234

684,197

Loans to States and Territories

47,855

47,855

Dividends receivable

888,921

1,286,000

Other receivables

6,369

13,847

Total loans and receivables

1,403,486

2,059,255

Available-for-sale financial assets

International financial institutions

1,669,957

1,405,218

Australian Government entities

25,388,893

21,924,826

IMF Quota

12,492,682

11,882,842

Total available-for-sale financial assets

39,551,532

35,212,886

Total financial assets

40,955,018

37,272,141

Financial Liabilities

Financial liabilities measured at amortised cost:

Promissory notes

10,009,796

9,626,864

Grant liabilities

283,816

793,657

IMF SDR allocation liability

5,860,428

5,574,346

Other payables

15,480

5,221

Guarantee of State and Territory Borrowing

contractual guarantee service obligation

12,047

26,455

Total financial liabilities measured at amortised cost

16,181,567

16,026,543

Total financial liabilities

16,181,567

16,026,543

Accounting Policy

Financial Assets

The Treasury classifies its financial instruments as loans and receivables.

The classification depends on the nature and purpose of the financial instrument and is determined at the time of initial recognition. Financial assets are recognised and derecognised upon trade date.

2018

2017

$’000

$’000

Note 7.3B: Net Gains and Losses on Financial Assets

Loans and receivables

Guarantee of State and Territory Borrowing fee

7,303

13,825

Interest revenue

5,777

3,426

Exchange gains/(loss)

23,136

(28,070)

Net gains/(losses) on loans and receivables

36,216

(10,819)

Available-for-sale

Interest Revenue

1,934

28

Exchange gains/(loss)

273,128

(406,259)

Net gains/(losses) on available-for-sale assets

275,062

(406,231)

Net gains/(losses) on financial assets

311,278

(417,050)

2018

2017

$’000

$’000

Note 7.3C: Net Gains and Losses on Financial Liabilities

Financial liabilities measured at amortised cost

IMF Charges

22

15,252

Exchange gains/(loss)

(286,081)

223,155

Net gains/(losses) on financial liabilities measured

(286,081)

223,155

at amortised cost

Net gains/(losses) on financial liabilities

(286,081)

223,155

Note 7.3D: Credit risk

The maximum exposure to credit risk of the Treasury’s administered financial assets is the carrying amount of ‘loans and receivables’ (2018: $1.4 billion and 2017: $2.1 billion) and the carrying amount of ‘available for sale financial assets’ (2018: $39.6 billion and 2017: $35.2 billion).

International financial institutions that the Treasury holds its financial assets with have a minimum of AAA credit ratings. The contractual fee receivable arising from the Guarantee of State and Territory Borrowing relates to state and territory governments. These entities hold a minimum of AA credit ratings. Therefore the Treasury does not consider any of its financial assets to be at risk of default.

Note 7.3D: Liquidity risk

The Treasury’s administered financial liabilities are promissory notes, grant liabilities and the IMF SDR allocation. The contractual guarantee service obligation arising from the guarantee scheme for State and Territory borrowing is not included as there is no liquidity risk associated with this item. It is contingent on the value of the associated contractual fee receivable. The exposure to liquidity risk is based on the notion that the Treasury will encounter difficulty in meeting its obligations associated with administered financial liabilities. This is highly unlikely due to appropriation funding through special appropriations and nonlapsing capital appropriations as well as internal policies and procedures put in place to ensure there are appropriate resources for the Treasury to meet its financial obligations.

The following tables illustrate the maturities for non-derivative financial liabilities:

Maturities for financial liabilities in 2018

On

Within 1

1 to 2

2 to 5

> 5

demand

year

years

years

years

Total

$’000

$’000

$’000

$’000

$’000

$’000

Promissory notes

-

24,359

25,875

-

9,959,562

10,009,796

Grant liabilities

-

283,816

-

-

-

283,816

IMF SDR allocation liabilities

-

-

-

-

5,860,428

5,860,428

Other payables

15,480

-

-

-

-

15,480

Total

15,480

308,175

25,875

-

15,819,990

16,169,520

Maturities for financial liabilities in 2017

On

Within 1

1 to 2

2 to 5

> 5

demand

year

years

years

years

Total

$’000

$’000

$’000

$’000

$’000

$’000

Promissory notes

-

24,359

24,765

25,469

9,552,271

9,626,864

Grant liabilities

-

793,657

-

-

-

793,657

IMF SDR allocation liabilities

-

-

-

-

5,574,346

5,574,346

Other payables

5,221

-

-

-

-

5,221

Total

5,221

818,016

24,765

25,469

15,126,617

16,000,088

Note 7.3E: Market risk

Foreign currency risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Treasury is exposed to foreign exchange currency risk primarily through undertaking certain transactions denominated in foreign currency. The Treasury is exposed to foreign currency denominated in USD, EUR and SDR.

The following table details the effect on profit and equity as at 30 June 2018 from a 9.2 per cent (30 June 2017 from a 10.2 per cent) favourable/unfavourable change in AUD against the Treasury with all other variables held constant. The change in the risk variable has been determined by reference to standard parameters provided by the Department of Finance.

Sensitivity analysis of the risk that the entity is exposed to for 2018

Effect on

Risk variable

Change in risk

Net cost of services

Net assets

variable

2018

2018

Risk Variable

%

$’000

$’000

IFI Investments

Exchange rate

9.2

(140,692)

(140,692)

IFI investments

Exchange rate

(9.2)

169,203

169,203

IMF Remuneration Receivable

Exchange rate

9.2

(43)

(43)

IMF Remuneration Receivable

Exchange rate

(9.2)

51

51

IMF new arrangements to borrow loan

Exchange rate

9.2

(37,679)

(37,679)

IMF new arrangements to borrow loan

Exchange rate

(9.2)

45,314

45,314

IMF Quota

Exchange rate

9.2

(1,052,497)

(1,052,497)

IMF Quota

Exchange rate

(9.2)

1,265,778

1,265,778

Promissory notes

Exchange rate

9.2

5,062

5,062

Promissory notes

Exchange rate

(9.2)

(6,088)

(6,088)

IMF SDR allocation liability

Exchange rate

9.2

493,736

493,736

IMF SDR allocation liability

Exchange rate

(9.2)

(593,788)

(593,788)

IMF Charges Payable

Exchange rate

9.2

768

768

IMF Charges Payable

Exchange rate

(9.2)

(924)

(924)

Sensitivity analysis of the risk that the entity is exposed to for 2017

Effect on

Risk variable

Change in Risk

Net cost of services

Net assets

variable

2017

2017

Risk Variable

%

$’000

$’000

IFI Investments

Exchange rate

10.2

(130,413)

(130,413)

IFI investments

Exchange rate

(10.2)

160,136

160,136

IMF Remuneration Receivable

Exchange rate

10.2

(3)

(3)

IMF Remuneration Receivable

Exchange rate

(10.2)

3

3

IMF new arrangements to borrow loan

Exchange rate

10.2

(63,498)

(63,498)

IMF new arrangements to borrow loan

Exchange rate

(10.2)

77,790

77,790

IMF Quota

Exchange rate

10.2

(1,102,798)

(1,102,798)

IMF Quota

Exchange rate

(10.2)

1,354,144

1,354,144

Promissory notes

Exchange rate

10.2

(5,358)

(5,358)

Promissory notes

Exchange rate

(10.2)

6,579

6,579

IMF SDR allocation liability

Exchange rate

10.2

(517,333)

(517,333)

IMF SDR allocation liability

Exchange rate

(10.2)

635,241

635,241

IMF Charges Payable

Exchange rate

10.2

(485)

(485)

IMF Charges Payable

Exchange rate

(10.2)

595

595

Accounting Policy

Administered financial instruments

AASB 139 Financial Instruments: Recognition and Measurement requires financial instruments to be classified into one of four categories. The financial instruments specific to the Treasury’s administered items are classified in three of the four categories as detailed below.

Loans and receivables (these are nonderivative financial assets with fixed or determinable payments that are not quoted in an active market):

  • IMF related monies receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • Loans to the IMF under the New Arrangements to Borrow (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • the Guarantee Scheme for Large Deposits and Wholesale Funding contractual fee receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • the Guarantee Scheme for State and Territory Borrowing contractual fee receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • Loans to States and Territories (measured initially at fair value and then measured at amortised cost using the effective interest rate method); and
  • Dividends receivable (measured at fair value).

Available-for-sale financial assets:

  • investments in development banks (measured initially at cost or notional cost and then measured at fair value);
  • the IMF quota (measured initially at cost or notional cost and then measured at fair value); and
  • Investments in Government Entities (measured at fair value based on net asset position of the entity at 30 June 2018).

Financial liabilities:

  • the SDR allocation (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • promissory notes (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • IMF related monies payable (measured initially at fair value and then measured at amortised cost using the effective interest rate method); and
  • the Guarantee Scheme for Large Deposits and Wholesale Funding contractual guarantee service obligation (measured initially at fair value and then measured at amortised cost using the effective interest rate method).

Available-for-sale financial assets are those nonderivative financial assets that are designated as available for sale or that are not classified as (a) loans and receivables, (b) heldtomaturity investments or (c) financial assets at fair value through profit or loss.

Although a number of the Treasury’s financial instruments are classified as ‘availableforsale’, the Treasury does not hold these instruments for the purposes of trading. Assets that can be reliably measured at reporting date are valued at fair value, otherwise, at cost.

Promissory notes are financial liabilities that are required to be measured at amortised cost using the effective interest rate method. The contractual terms of the promissory notes are noninterest bearing making the effective interest rate zero. Therefore, the measurement would be the initial value less any repayments plus or minus movements in exchange rates as a result of translation on the balance date.

The Guarantee of State and Territory Borrowing contractual fee receivable represents the requirement under AASB 139 Financial Instruments: Recognition and Measurement for the Treasury to recognise upfront, its entitlements under the financial guarantee contract to revenue received or receivable from authorised deposittaking institutions over the contracted guarantee period. Conversely, the Treasury is required to recognise a corresponding initial liability for its contractual obligation to provide a guarantee service over the period covered by each guarantee contract (analogous to unearned income).

Recognition of these amounts only relates to fee revenue aspects of the financial guarantee contracts. These amounts do not reflect any expected liability under the Guarantee Scheme itself as these are considered remote and unquantifiable. Administered contingent liabilities and assets are disclosed at Note 7.2.

7.4 Fair Value Measurement

Note 7.4A: Fair value measurement

Fair value measurements at the end of the reporting period

2018

2017

$’000

$’000

Non-financial assets1

Property, plant and equipment - AUC2

4,150

-

Property, plant and equipment2

6,153

6,912

Library2

939

939

Land and buildings - AUC2

1,287

427

Land and buildings2

15,388

15,732

Total non-financial assets

27,917

24,010

  1. Treasury’s assets are held for operational purposes and not held for the purposes of deriving a profit. The current use of all non-financial assets is considered their highest and best use.
  2. No non-financial assets were measured at fair value on a non-recurring basis as at 30 June 2018 (2017: nil).

Accounting Policy

Fair value measurements — highest and best use differs from current use for non-financial assets (NFAs)

The Treasury’s assets are held to meet out service obligation not for the purposes of deriving a profit. The current use of all NFAs is considered their highest and best use.

Recurring and non-recurring Level 3 fair value measurements — valuation processes

The Treasury procures the valuation services from an independent valuer of the tangible non-financial asset classes once every three years. Asset carrying amounts are tested for materiality at least once every 12 months. If a particular asset class experiences significant and volatile changes in fair value (i.e. where indicators suggest that the value of the class has changed materially since the previous reporting period), that class is subject to specific valuation in the reporting period, where practicable, regardless of the timing of the last specific valuation. There have been no transfers between level 1 and level 2 of the hierarchy during the year.

An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different from the fair value. Comprehensive valuations are carried out at least once every three years. During 2017-18, Treasury appointed Jones Lang LaSalle (JLL) to undertake a materiality review of all tangible property, plant and equipment assets as at 30 June 2018. JLL has provided written assurance to the Treasury that all tangible property, plant and equipment assets are materially held at fair value in compliance with AASB 13.

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

All Asset Classes - Physical Depreciation and Obsolescence.

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

Library - Replacement cost

The value of the library was determined on the basis of the average cost for items within each collection. The replacement cost has considered purchases over recent years and these have been evaluated for reasonableness against current market prices.

The Treasury’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. There have been no transfers between level 1 and level 2 of the hierarchy during the year.

7.5 Administered - Fair Value Measurement

The following tables provide an analysis of assets and liabilities that are measured at fair value.

The different levels of the fair value hierarchy are defined below.

Level 1: Quoted prices (unadjusted) in active markets 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 the asset or liability.

Note 7.5A: Fair Value Measurements, Valuation Techniques and Inputs Used

Recurring fair value measurements at the end of the reporting period by hierarchy for assets and liabilities in 2018

Fair value measurements at the end of the reporting period using

2018

2017

Category (Level 1, 2 or 3)

Valuation technique(s) and inputs used1,2

$’000

$’000

Financial assets:

Investment in Australian Government

Entities:

25,388,893

21,924,826

3

Net assets

Australian Reinsurance Pool Corporation

425,893

455,826

Reserve Bank of Australia

24,963,000

21,469,000

Investment in International Financial

Institutions:

1,669,957

1,405,218

3

Value of shares held

Asian Development Bank

583,862

555,361

Asian Infrastructure and Investment Bank

599,269

383,879

European Bank for Reconstruction

and Development

98,676

93,016

International Bank for

Reconstruction and Development

315,724

303,370

International Finance Corporation

64,036

61,530

Multilateral Investment Guarantee

Agency

8,390

8,062

Other Investments

12,492,682

11,882,842

3

Value of quota held

IMF quota

12,492,682

11,882,842

Total financial assets

39,551,532

35,212,886

Total fair value measurements

39,551,532

35,212,886

1. No change in valuation techniques occurred during the period.

2. Significant observable inputs only.

Fair value measurements

The highest and best use of Treasury’s investments in Australian Government entities does not differ because the fair value is based on the net asset position of the entity.

The highest and best use of Treasury’s investments in International Financial Institutions does not differ because the fair value is based on the value of shares held in the relevant institution.

Note 7.5B: Level 1 and Level 2 transfers for recurring fair value measurements

No assets were transferred between Level 1 and Level 2.

Note 7.5C: Reconciliation for recurring Level 3 fair value measurements

Recurring Level 3 fair value measurements - reconciliation for assets

Financial assets

Investments

Total

2018

2017

2018

2017

$’000

$’000

$’000

$’000

As at 1 July

35,212,886

37,705,781

35,212,886

37,705,781

Total gains/(losses) recognised in other comprehensive income

3,464,067

(2,170,851)

3,464,067

(2,170,851)

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

IMF Quota foreign exchange gain/(loss)

609,839

(471,293)

609,839

(471,293)

International Financial Institutions foreign exchange gain/(loss)

70,605

(47,895)

70,605

(47,895)

Restructuring1

-

-

-

-

Share Purchases

-

-

Increase in investments in the International Financial Institutions

194,135

197,144

194,135

197,144

IMF general review Quota Payments

-

-

Total as at 30 June

39,551,532

35,212,886

39,551,532

35,212,886

Changes in unrealised gains/(losses) recognised in net cost of services for the year ended 30 June

4,338,646

(2,492,895)

4,338,646

(2,492,895)