2012 Consolidated Financial Statements - Notes 34 - 37
Note 34: Commitments
as at 30 June 2012
BY TYPE
Capital commitments
Land and buildings
Infrastructure, plant and equipment
Specialist military equipment
Investments
Other capital commitments
Total capital commitments
Other commitments
Operating leases(c)
Project commitments
Research and development
Goods and services contracts
Grant commitments(b)
Other commitments
Total other commitments
Total commitments
less Commitments receivable
Net commitments
BY MATURITY(a)
Capital
One year or less
From one to five years
Over five years
Operating leases
One year or less
From one to five years
Over five years
Other
One year or less
From one to five years
Over five years
2012
$m
2011
$m
2,118
2,162
9,108
9,677
834
23,899
2,248
2,349
9,567
8,107
689
22,960
17,686
17,620
1,319
1,485
17,689
32,529
44,389
115,097
138,996
1,646
137,350
565
845
16,907
41,768
35,843
113,548
136,508
2,093
134,415
14,387
6,961
1,566
22,914
14,236
6,272
1,442
21,950
2,718
7,975
5,605
16,298
2,562
7,534
4,923
15,019
46,009
43,848
8,281
98,138
137,350
40,288
48,087
9,071
97,446
134,415
Net commitments by maturity
The above schedule should be read in conjunction with the accompanying notes.
(a) The maturity schedules for capital commitments, operating lease commitments and other commitments
are presented net of commitments receivable.
(b) The commitments schedule no longer reports commitments for grants payable to the States and
Territories (for the current and comparative years). The budgeted information for payment of grants to
States and Territories can be found in the Budget Paper 3. The comparative has been reduced by
$350,118 million to remove these payment arrangements.
112
Notes to the financial statements
Note 34: Commitments (continued)
(c) Operating leases comprise
Nature of lease
General description of leasing arrangement
Leases for computer
equipment
Most agencies lease computer equipment and software.
Computer leases are generally for three to five years with an option to renew for
one to two further periods of two to three years each. In some cases there are no
renewal or purchase options available to the agencies.
Leases are effectively non-cancellable.
No contingent rentals exist.
Most agencies lease office accommodation from parties outside the Australian
Government.
Leases for office accommodation generally range from one to 15 years. They
may be extended for up to three to five years from the originally specified expiry
date. In some cases there are no renewal or purchase options available to the
agencies.
Leases are effectively non-cancellable.
In most cases lease payments are subject to increases in accordance with terms
as negotiated under the lease (generally subject to annual increase in
accordance with upwards movements in the consumer price index, a set annual
increase agreed to in the lease or an annual/bi-annual review).
Most agencies lease motor vehicles as part of the senior executive officers
remuneration packages and also for general office use.
Vehicle leases are generally for a minimum period of three months and typically
extend from two to four years. They may be extended for up to three months from
the originally specified expiry date. In some cases there are no renewal or
purchase options available to the agencies.
Leases are effectively non-cancellable.
No contingent rentals exist.
Lease payments are fixed for the term of the lease.
Most agencies lease office equipment.
Office equipment leases are generally for three to five years. In some cases there
are no renewal or purchase options available to the agencies.
Leases are effectively non-cancellable.
No contingent rentals exist.
In some cases there are additional costs based on usage of the equipment.
Lease payments are subject to increases in accordance with terms as negotiated
under the lease.
The transportation leases generally have options for renewal. Future options not
yet exercised are not included as commitments.
Leases are effectively non-cancellable and no contingent rentals exist.
Leases for office
accommodation
Agreements for the
provision of motor
vehicles
Leases for office
equipment
Leases for
transportation and
support facilities for
Antarctic operations
113
2012 Consolidated Financial Statements - Notes 34 - 37
Note 34: Commitments (continued)
Commitments by sector(a)
as at 30 June 2012
General
government
2012
2011
$m
$m
BY TYPE
Capital commitments
Land and buildings
Infrastructure, plant and equipment
Specialist military equipment
Investments
Other capital commitments
Total capital commitments
Other commitments
Operating leases
Project commitments
Research and development
Goods and services contracts
Grant commitments (b)
Other commitments
Total other commitments
Total commitments
less Commitments receivable
Net commitments
BY MATURITY(c)
Capital
One year or less
From one to five years
Over five years
Operating leases
One year or less
From one to five years
Over five years
Public non-financial
corporations
2012
2011
$m
$m
Public financial
corporations
2012
2011
$m
$m
2,099
514
9,108
34,341
834
46,896
2,244
690
9,567
34,213
688
47,402
20
1,661
5
1,686
4
1,664
35
1,703
1
1
11
1
12
16,274
1,626
1,485
15,898
32,529
41,329
109,141
156,037
1,472
154,565
15,830
935
845
15,359
41,768
35,825
110,562
157,964
1,860
156,104
1,140
1,883
3,142
6,165
7,851
25,145
(17,294)
1,785
1,602
143
3,530
5,233
26,672
(21,439)
345
67
412
413
5
408
121
1
61
183
195
7
188
19,036
23,920
2,941
45,897
16,358
24,581
5,433
46,372
1,138
541
5
1,684
1,336
363
2
1,701
1
1
9
3
12
2,487
7,378
4,960
14,825
2,235
6,548
4,350
13,133
190
505
438
1,133
292
909
570
1,771
42
93
207
342
34
78
3
115
Other
One year or less
From one to five years
Over five years
44,541
40,001
(4,966)
(2,904)
35
35
40,622
47,505
(15,891) (17,923)
30
26
8,680
9,093
746
(4,084)
93,843
96,599
(20,111) (24,911)
65
61
Net commitments by maturity
154,565 156,104
(17,294) (21,439)
408
188
The above schedule should be read in conjunction with the accompanying notes.
(a) Transactions between sectors are included in this statement but eliminated in the consolidated
statements to avoid double counting. Accordingly, the sum of the amounts for each line item may exceed
or be less than the equivalent amount in the consolidated statements.
(b) The commitments schedule no longer reports commitments for grants payable to the States and
Territories (for the current and comparative years). The budgeted information for payment of grants to
States and Territories can be found in Budget Paper 3. The comparative has been reduced by
$350,118 million to remove these payment arrangements.
(c) The maturity schedules for capital commitments, operating lease commitments and other commitments
are presented net of commitments receivable.
114
Notes to the financial statements
Note 35: Contingencies
as at 30 June 2012
2012
$m
2011
$m
Quantifiable contingent liabilities
Guarantees(a)
368
420
Indemnities(b)
365
637
Uncalled shares/capital subscriptions(c)
10,198
9,654
Claims for damages/costs
185
117
Other contingencies
4,747
8,276
Total quantifiable contingent liabilities
15,863
19,104
less Quantifiable contingent assets
247
326
Net quantifiable contingencies
15,616
18,778
(a) Guarantees — a guarantee is where one party promises to be responsible for the debt or performance
obligations of another party should that party default in some way.
(b) Indemnities — an indemnity is a legally binding promise whereby a party undertakes to accept the risk of
loss or damage another party may suffer.
(c) Uncalled shares/capital subscriptions include uncalled shares of $10,114 million (2011: $9,601 million) in
the European Bank for Reconstruction and Development, the International Bank for Reconstruction and
Development, the Multilateral Investment Guarantee Agency and the Asian Development Bank.
A. Reconciliation of movement in quantifiable contingent assets
Quantifiable contingent assets
Opening balance as at 1 July
Increases
Re-measurement
Assets crystallised
Expired
As at 30 June
115
2012
$m
2011
$m
326
17
31
(119)
(8)
247
413
85
(42)
(106)
(24)
326
B. Reconciliation of movement in quantifiable contingent liabilities
Opening balance as at 1 July 2011
Increases
Re-measurement
Liabilities crystallised
Obligations expired
As at 30 June 2012
116
Opening balance as at 1 July 2010
Increases
Re-measurement
Liabilities crystallised
Obligations expired
As at 30 June 2011
Guarantees
$m
420
17
18
(87)
368
Guarantees
$m
261
239
(3)
(77)
420
Indemnities
$m
637
286
9
(567)
365
Uncalled
shares
or capital
subscriptions
$m
9,654
544
10,198
Indemnities
$m
614
1
23
(1)
637
Uncalled
shares
or capital
subscriptions
$m
12,114
(2,460)
9,654
Claims for
Other
damages or
costs
$m
117
(10)
56
43
(21)
185
quantifiable
contingencies
$m
8,276
4,462
(81)
(50)
(7,860)
4,747
Claims for
Other
damages or
costs
$m
111
56
3
(8)
(45)
117
quantifiable
contingencies
$m
6,338
2,546
2,963
(3,571)
8,276
Total
$m
19,104
4,755
546
(7)
(8,535)
15,863
Total
$m
19,438
2,842
526
(8)
(3,694)
19,104
Notes to the financial statements
Note 35: Contingencies (continued)
Notes to the financial statements
Note 35: Contingencies (continued)
C. Contingent liabilities excluded on the basis of remoteness
Remote contingent liabilities
Financial Claims Scheme(a)
Guarantees Scheme for Large Deposits and Wholesale Funding(b)
Guarantee of State and Territory Borrowing(c)
Commonwealth Bank of Australia and
Commonwealth Bank of Australia Officers' Super Fund(d)
UN Convention on International Liability for Damage
Caused by Space Objects
Space Activities Act 1998(e)
Other
Total remote contingent liabilities
2012
$m
2011
$m
646,500
91,000
32,000
780,800
118,004
39,500
4,502
4,459
3,000
2,034
779,036
2,000
3,000
5,473
953,236
The above schedule should be read in conjunction with the accompanying notes:
(a)
Financial Claims Scheme
The Australian Government has established a Financial Claims Scheme to provide
depositors of authorised deposit-taking institutions and general insurance
policyholders with timely access to their funds in the event of a financial institution
failure.
The Australian Prudential Regulation Authority (APRA) is responsible for the
administration of the Financial Claims Scheme. Under the Financial Claims Scheme
any payments to eligible depositors or general insurance policyholders will be made
out of APRA’s Financial Claims Scheme Special Account.
The Early Access Facility for Depositors established under the Banking Act 1959
provides a mechanism for making payments to depositors under the Government’s
guarantee of deposits in authorised deposit-taking institutions. The Government
announced that, from 12 October 2008, deposits up to $1 million at eligible authorised
deposit-taking institutions would be eligible for coverage under the Financial Claims
Scheme. This $1 million cap finished on 1 February 2012. From 1 February 2012,
deposits up to $250,000 at eligible authorised deposit-taking institutions would be
eligible for coverage under the Financial Claims Scheme. This $250,000 cap has no
expiry date.
As at 30 June 2012, deposits eligible for coverage under the Financial Claims Scheme
were estimated to be approximately $647 billion.
The Policyholder Compensation Facility established under the Insurance Act 1973
provides a mechanism for making payments to eligible beneficiaries with a valid claim
against a failed general insurer. Amounts available to meet payments and administer
this facility, in the event of activation, are capped at $20.1 billion under the legislation.
Any payments made under the Financial Claims Scheme would be recovered through
the liquidation of the failed institution. If there were a shortfall, a levy would be
117
Notes to the financial statements
applied to industry to recover the difference between the amount expended and the
amount recovered in the liquidation.
(b)
Guarantee of large deposits and wholesale funding in authorised deposit taking
institutions
The Australian Government announced the guarantee of eligible deposits and
wholesale funding for authorised deposit-taking institutions from 12 October 2008
under the Guarantee Scheme for Large Deposits and Wholesale Funding.
On 7 February 2010, the Government announced the closure of the Guarantee Scheme
from 31 March 2010. Since then, Australian authorised deposit-taking institutions have
been prohibited from issuing any new guaranteed wholesale funding or accepting new
guaranteed deposits above $1 million. Existing guaranteed wholesale funding is
guaranteed to maturity. Depositors who covered their balances above $1 million under
the Guarantee Scheme can have those funds covered to maturity for term deposits up
to five years, or until October 2015 for at call deposits.
The expected liability for deposits under the Guarantee Scheme is remote and
unquantifiable. Australia's financial system is considered among the strongest and best
regulated in the world. Authorised deposit-taking institutions are subject to prudential
regulation by APRA in accordance with international standards, which are designed to
ensure that financial institutions have the capacity to meet their financial obligations.
This framework requires institutions to be adequately capitalised and have
appropriate risk management systems in place. Furthermore, Australia’s four major
banks (which hold the majority of government wholesale funding) are among only ten
large banking groups globally rated AA or higher.
Government expenditure would arise under the large deposit guarantee only in the
unlikely event that an institution failed to meet its obligations with respect to a
commitment that was subject to the guarantee and the guarantee was called upon. In
such a case, the Government would likely be able to recover any such expenditure
through a claim on the relevant institution. The impact on the Government’s budget
would depend on the extent of the institution's default and its ability to meet the
Government’s claim.
As at 30 June 2012, total liabilities covered by the Guarantee Scheme were estimated at
$91 billion, including $2.9 billion of large deposits and $88.1 billion of wholesale
funding.
(c)
Guarantee of State and Territory Borrowing
The Australian Government announced on 25 March 2009 that a voluntary and
temporary guarantee would be put in place over state and territory borrowing. The
Guarantee of State and Territory Borrowing commenced on 24 July 2009.
118
Notes to the financial statements
The guarantee closed to new issuances of guaranteed liabilities on 31 December 2010.
Securities covered by the guarantee will continue to be guaranteed until these
securities either mature or are bought back and extinguished by the issuer.
The expected liability under the guarantee is remote and unquantifiable. Government
expenditure would arise under the guarantee only in the unlikely event that a State or
Territory failed to meet its obligations with respect to a commitment that was subject
to the guarantee and the guarantee was called upon. In such a case, the Government
would likely be able to recover any such expenditure through a claim on the relevant
State or Territory at a future date. The impact on the Government’s budget would
depend upon the extent of the default and the State or Territory's ability to meet the
Government’s claim.
As at 30 June 2012, the face value of state and territory borrowings covered by the
guarantee was $32.0 billion.
(d)
Commonwealth Bank of Australia and Commonwealth Bank of Australia
Officers’ Super Fund.
Under the terms of the Commonwealth Bank Sale Act 1995, the Australian Government
has guaranteed various liabilities of the Commonwealth Bank of Australia (CBA), and
the Commonwealth Bank Officers’ Superannuation Corporation (CBOSC). The
guarantee for the CBA relates to both on and off balance sheet liabilities. The guarantee
of the CBOSC covers the due payments of any amount that is payable to or from
Officers’ of the Superannuation Fund (the Fund), by CBOSC or by CBA, in respect of a
person who was a member, retired member or beneficiary of the Fund immediately
before 19 July 1996. The guarantee of the CBA and CBOSC reflected in the above table
is the value at 30 June 2012.
(e)
Space Activities Act 1998.
The Australian Government is liable under the UN Convention on International
Liability for Damage Caused by Space Objects for injury or damage to foreign
nationals arising from space launches from Australia. The Space Activities Act 1998
requires the launch operator to insure against liability up to a prescribed amount, with
the Australian Government bearing any liability above this amount. The Australian
Government also accepts liability for damage suffered by Australian Nationals, to a
maximum value of $3.0 billion above the insured level.
119
Notes to the financial statements
Note 35: Contingencies (continued)
Contingencies by sector(a)(b)
as at 30 June 2012
General
Public non-financial
government
corporations
Public financial
corporations
2012
2011
2012
2011
2012
2011
$m
$m
$m
$m
$m
$m
-
Quantifiable contingent liabilities
Guarantees
51
4
317
416
-
Indemnities
365
637
-
-
-
-
10,144
9,600
-
-
53
54
-
Uncalled shares/capital subscriptions
Claims for damages/costs
Other contingencies
Total quantifiable contingent liabilities
less Quantifiable contingent assets
Net quantifiable contingencies
182
114
4
3
-
4,747
8,276
-
-
-
-
15,489
18,631
321
419
53
54
238
291
8
34
1
1
15,251
18,340
313
385
52
53
835,825
1,001,447
-
-
737
424
3,658
9,519
-
-
629
523
839,483
1,010,966
-
-
1,366
947
Contingencies excluded from the
schedule of contingencies
on the basis of remoteness
Remote contingent liabilities
Guarantees(c)
Other(d)
Total remote contingent liabilities
The above schedule should be read in conjunction with the accompanying notes.
(a) Refer to the Consolidated Contingency disclosures for further details on quantifiable and non-quantifiable
contingencies.
(b) Transactions between sectors are included in this statement but eliminated in the consolidated
statements to avoid double counting. Accordingly, the sum of the amounts for each line item may exceed
or be less than the equivalent amount in the consolidated statements.
(c) The reported remote guarantees for the general government sector include guarantees to the Reserve
Bank of Australia of $58,349 million (2011: $57,727 million), guarantees to the Commonwealth Bank of
Australia and the Commonwealth Bank of Australia Officer’s Super Fund of $4,502 million
(2011: $4,500 million), guarantees for the Financial Claims Scheme of $646,500 million (2011: $780,800
million), guarantees of State and Territory borrowings of $32,000 million (2011: $39,500 million) and the
guarantee of large deposits and wholesale funding in authorised deposit taking institutions of
$91,000 million (2011: $118,004 million).
(d) The reported other remote contingent liabilities include the UN Convention on International Liability for
Space Objects of $0 million (2011: $2,000 million) and the Space Activities Act 1998 of $3,000 million
(2011: $3,000 million).
120
Notes to the financial statements
Non-quantifiable contingent liabilities
Contingent liabilities and contingent assets represent possible costs or gains to the
Australian Government arising from past events, which will be confirmed or otherwise
by the outcome of future events that are not within the Government’s ability to control
or where the cost or gain cannot be reliably measured.
Contingent liabilities include loan guarantees, non-loan guarantees, warranties,
indemnities, uncalled capital and letters of comfort. These possible costs are in
addition to those recognised as liabilities in the Consolidated Financial Statements.
Contingent assets include, for example, claims that the Australian Government is
pursuing through legal processes, where the outcome is uncertain.
Unquantifiable contingencies reported in the 2011-12 Consolidated Financial
Statements for the first time include 1:
• compensation claims arising from the suspension of livestock exports to Indonesia;
• education Services to Minors in Alternative Places of Detention — Liability Limit
South Australia; and
• Optus Financial Guarantee.
The following pages list unquantifiable contingencies by portfolio.
Attorney General’s
Native title agreements — access to geospatial data
The Australian Government has entered into agreements with State and Territory
government bodies and/or their agents to access their geospatial data. The data is
essential to support the National Native Title Tribunal in achieving its outcome. Under
these agreements, the Australian Government provides indemnities against third party
claims arising from errors in the data.
Native title costs
The Australian Government has offered to assist the States and Territories in meeting
native title compensation costs arising under the Native Title Act 1993. The amounts
that might be paid by the Australian Government will be subject to the terms of
financial assistance agreements being negotiated with the States and Territories. No
agreements have been entered into to date. The Australian Government’s liability
cannot be quantified due to uncertainty about the number and effect of compensable
acts, both in the past and in the future, and the value of native title affected by those
1
A number of the new contingent liabilities have previously been reported in the Statement of
Risks included in the Australian Government budget documentation.
121
Notes to the financial statements
acts. Similarly, it is not possible to quantify the liability for compensable acts for which
the Australian Government may be directly liable. The Australian Government has
also offered to assist the States and Territories with the costs of bodies performing
native title functions under state legislation. The extent of this assistance will depend
on the existence of such bodies, the timing of their recognition and the extent of their
use.
Northern and Southern Ocean Patrol and response
The Australian Government has entered into contractual arrangements with Sea Force
for the provision of maritime charter services until June 2014 to facilitate armed patrols
of Australia’s exclusive economic zone in the Southern and Northern Ocean. The
Australian Government has also entered into contractual arrangements with Gardline
Australia Pty Ltd for the provision of maritime charter services to strengthen its
enforcement activities against illegal foreign fishing in Australia’s northern waters and
a further vessel to patrol and respond to incursions in the Ashmore Reef National
Nature Reserve and the Cartier Island Marine Reserve until July 2013.
In relation to these patrols, the Australian Government has indemnified Sea Force and
Gardline Australia Pty Ltd against certain claims arising from the discharge of firearms
or munitions, or where a steaming party is deployed to crew a seized vessel back to an
Australian port.
Broadband, Communications and the Digital Economy
Telstra definitive agreements
NBN Co and Telstra announced on 23 June 2011 that binding Definitive Agreements
have been entered into that would provide access to certain Telstra infrastructure
(comprising ducts, pits, lead-in conduits, rack spaces in exchanges and dark fibre) and
deliver the progressive disconnection of premises from Telstra's copper and HFC
networks (except for certain pay TV services). The Definitive Agreements have been
attributed (by Telstra) an approximate net present value after tax of $9 billion assessed
at June 2010, from the payments to be made over time by NBN Co.
The Australian Government has separately agreed with Telstra a package that includes
increased funding for the universal service obligation (USO), funding for a public
education campaign and for employee retraining and clarification of Telstra's
responsibilities in new developments. Telstra has attributed approximately $2 billion
of post tax net present value at June 2010, to its agreements with the Government.
Customer migration costs
The Australian Government has agreed to pay Telstra certain customer migration costs
associated with the transition of copper based public interest services to the national
broadband network in circumstances where these costs are otherwise unable to be
recovered. This agreement is given on the basis that all parties work together in good
faith in order to minimise any or all such costs. As at 30 June 2012, the conditions
precedent for the agreement have not been satisfied and therefore no costs were paid
or payable under this agreement.
122
Notes to the financial statements
Climate Change and Energy Efficiency
Kyoto Protocol — Emissions target
As a party to the Kyoto Protocol, Australia is required to meet its target level for
emissions over the first Commitment Period, 2008-2012. At this stage the best available
estimates suggests that Australia is on track to meet the 2008-2012 target. Estimates of
the likely net balance and value of these permits will be determined when the final
reconciliation of Australia’s emissions against its commitments is completed in 2015.
Finance and Deregulation (refer also contingencies under ‘Various’)
Superannuation
On 20 April 2007, the High Court of Australia found against the Australian
Government on a claim for negligent misstatement relating to superannuation benefits
for a former employee. There is potential for more claims to arise from other former
temporary employees who upon their retirement can demonstrate negligent
misstatement over their eligibility to join an Australian Government superannuation
scheme.
Health and Ageing
Australian Red Cross Society — indemnities and blood and blood products
liability cover
The existing Deed of Agreement between the Commonwealth and the Australian Red
Cross Society (ARCS) and the National Blood Authority (NBA) in relation to the
operations of the Australian Red Cross Blood Service (ARCBS), includes certain
indemnities and limited liability in favour of ARCS. These cover a defined set of
potential business, product and employee risks and liabilities arising from the
operation of the ARCBS. The indemnities and limitation of liability only operate in the
event of the expiry and non-renewal, or the early termination of the Deed, and only
within a certain scope. They are also subject to appropriate limitations and conditions
including in relation to mitigation, contributory fault, and the process of handling
relevant claims. Under certain conditions the Australian Government, States and
Territories jointly provide indemnity for the ARCBS through a cost-sharing
arrangement in relation to the National Managed Fund claims, both current and
potential, regarding personal injury and loss or damages suffered by a recipient of
certain blood and blood products where other available mitigation or cover is not
available. Under a Memorandum of Understanding between governments and the
ARCBS, the blood and blood products liability cover for the ARCBS remains in force
until all parties agree to terminate the arrangements from an agreed date.
CSL Bioplasma Ltd (formerly CSL Ltd)
Under existing agreements, the Australian Government has indemnified CSL
Bioplasma Ltd for certain existing and potential claims made for personal injury, loss
or damage suffered through therapeutic and diagnostic use of certain products
manufactured by CSL Bioplasma Ltd. The Australian Government has indemnified
CSL Bioplasma Ltd for a specific range of events that occurred during the Plasma
123
Notes to the financial statements
Fractionation Agreement from 1 January 1994 to 31 December 2004, where alternative
cover was not arranged by CSL Bioplasma Ltd.
Medical Indemnity
Eligibility for claim payments under the Incurred But Not Reported (IBNR) Scheme is
dependent on whether the Medical Indemnity Insurer (MII) is deemed to be a
participating Medical Defence Organisation under the Medical Indemnity Act 2002. Two
MIIs are still determined to have unfunded IBNR liabilities, but are not included in the
Scheme and these MIIs should be eligible for claim payments under the IBNR Scheme.
Accordingly, an unquantifiable administered contingency exists to necessitate
payment to these MIIs.
Medical Indemnity Exceptional Claims Scheme
Under the Exceptional Claims Scheme (ECS), the Australian Government will be liable
for the cost of medical indemnity claims that exceed certain thresholds. To be covered
by the ECS, practitioners must have medical indemnity insurance cover to at least a
threshold of $15 million for claims arising from incidents notified between 1 January to
30 June 2003 and $20 million for claims notified from 1 July 2003. At 30 June 2012, the
Australian Government had received no notification of any incidents that would give
rise to claims under this scheme. However, the nature of these claims is such that there
is usually an extended period between the date of the medical incident and notification
to the insurer.
Vaccines
Under certain conditions the Australian Government has provided an indemnity for
the supply of certain vaccines to the suppliers of the vaccines.
The Australian Medical Association
This is an agreement between the Australian Medical Association Ltd (AMA), the
Commonwealth, Australian Private Hospitals Association Ltd, Australian Health
Insurance Association and Beyond Blue Ltd for participation in and support of the
Private Mental Health Alliance. In respect of identified information collected, held or
exchanged by the parties in connection with the National Model for the Collection and
Analysis of a Minimum Data Set with Outcome Measured in Private, Hospital-based
Psychiatric Services, each party has agreed to indemnify each other in respect of any
loss, liability, cost, claim or expense, misuse of confidential information or breach of
the Privacy Act. AMA’s liability to indemnify the other parties will be reduced
proportionally to the extent that any unlawful or negligent act or omission of the other
parties or their employees or agents contributed to the loss or damage.
124
Notes to the financial statements
Immigration and Citizenship
Education Services to Minors in Alternative Places of Detention — Liability Limit
South Australia
The Australian Government has entered into a formal arrangement with the
Government of South Australia by way of an exchange of letters dated
17 December 2010. The letters represent the Government of South Australia’s
agreement to provide a range of services (such as education, health, police and
emergency services) to people in immigration detention in the State of South Australia
in advance of signing a Memorandum of Understanding. This agreement is based on
the understanding that the Commonwealth indemnifies the State, and its servants or
agents engaged in the provision of the services, to the value of $5 million per claim or
event, in relation to any damage or loss incurred by the State, arising out of or
incidental to the provision of the services. This effectively represents an uncapped
liability.
Infrastructure and Transport
Australian Maritime Safety Authority — incident costs
In the normal course of operations, the Australian Government is responsible for the
provision of funds necessary to meet the clean-up costs arising from ship sourced
marine pollution. In all circumstances, the Australian Government, through the
Australian Maritime Safety Authority, would make appropriate efforts to recover the
costs of any such incidents.
Tripartite Deeds relating to the sale of core regulated airports
Tripartite Deeds apply to the 11 Core Regulated Airports (Sydney, Melbourne,
Brisbane, Perth, Gold Coast, Townsville, Adelaide, Bankstown, Launceston, Darwin
and Alice Springs). The Tripartite Deeds between the Australian Government airport
lessees and lessees’ financiers provide for limited step-in rights for the financiers in
circumstances where the Airport Lease is terminated. Assuming the financiers’ step-in
rights are not triggered, the potential liability of the Australian Government can vary
under the Tripartite Deed, depending on whether the Airport Lease is able to be sold
on to a third party or not.
The Australian Government’s potential liability to the lessee’s financiers is limited to
the value received for the affected Airport Lease or the valuation of the airport site.
Where the Australian Government is able to on sell the Airport Lease, secured
financiers have a limited ability to recover their loans from funds obtained by the
Australian Government from on selling the Airport Lease, subject to higher ranking
claims being met first. Where the Airport Lease is not on-sold, the Australian
Government is required to obtain a valuation of the airport site that will determine the
limit for a repayment (or partial repayment) of financiers’ loans, again subject to higher
ranking claims being met. If the Australian Government enters into possession of an
airport site, it would seek to recover its costs from a number of sources, including
125
Notes to the financial statements
airport revenues and the airport lessee Company, in addition to funds obtained from
on selling the Airport Lease.
Resources, Energy and Tourism
Snowy Hydro Limited — water releases
The Australian, New South Wales and Victorian governments have indemnified
Snowy Hydro Ltd for liabilities arising from water releases in the Snowy River below
Jindabyne Dam, where these releases are in accordance with the water licence and
related regulatory arrangements agreed between the three governments. The
indemnity will apply to liabilities for which a claim is notified within 20 years from
28 June 2002.
Liquid Fuel Emergency Act 1984
The Australian Government has responsibility for the Liquid Fuel Emergency Act 1984
(the Act), which is administered by the Minister for Resources, Energy and Tourism. In
addition, State and Territory governments have entered into an inter-governmental
agreement (IGA) which coordinates the use of the powers under the Act in a national
liquid fuel emergency. The IGA contains three areas where the Australian Government
may incur expenses in the unlikely event of a national liquid fuel emergency. These
relate to the direct costs of managing a liquid fuel emergency and include the
possibility for the Australian Government to reimburse the State and Territory
governments for costs arising from their response, and potential compensation to
industry from Australian Government directions under the Act.
Indemnity for Maralinga clean-up
The Australian Government has given 14 unlimited indemnities in relation to the
clean-up of the former British atomic test site at Maralinga.
Gorgon liquefied natural gas and carbon dioxide storage project
The Australian and Western Australian governments have agreed to provide an
indemnity to the Gorgon Joint Venture Partners (GJV) to indemnify the GJV against
independent third-party claims (relating to stored carbon dioxide) under common law
following closure of the carbon dioxide sequestration project, and subject to conditions
equivalent to those set out in the Offshore Petroleum and Greenhouse Gas Storage Act 2006.
It is proposed that the Western Australian Government will indemnify the GJV, and
that the Australian Government will indemnify the Western Australian Government
for 80 per cent of any amount determined to be payable under that indemnity. The
formal agreement between the Australian and Western Australian Governments in
relation to the indemnity is expected to be completed in 2012-13.
Sustainability, Environment, Water, Population and Communities
Murray-Darling Basin Reform — Additional Net Costs
Under the 3 July 2008 Intergovernmental Agreement on Murray-Darling Basin
Reform (Reform IGA), the Australian Government agreed that the Governments of
126
Notes to the financial statements
New South Wales, Victoria, Queensland, South Australia and the Australian Capital
Territory (Basin States) will not bear additional net costs as a consequence of the
reforms agreed between the parties and the implementation of the Water Act 2007. The
Australian Government also agreed to accept responsibility for the States’ shares of
liabilities for such reductions that are attributable to new knowledge, under certain
conditions.
Murray-Darling Basin Reform — Risk Assignment
The Water Act 2007 (the Act) provides a risk assignment mechanism for making
payments to any affected entitlement holders for reductions in water allocations, or
changes in the reliability of water allocations, because of the Murray-Darling Basin
Plan (which is anticipated to be finalised in late 2012). The Commonwealth is taking
steps to ensure that there is no such reduction in water allocations as a result of
reductions in sustainable diversion limits established in the Basin plan. The steps being
taken by the Commonwealth to address this risk include the acquisition of
environmental water entitlements equivalent to the Commonwealth’s share of the
reduction in sustainable diversion limits.
The Australian Government will provide funding of $310 million per annum from
2014-15 to bridge any remaining gap between the level of water returned to the
Murray-Darling Basin under existing Water for the Future initiatives, and the level
required to be returned under the sustainable diversion limits set in the final Basin
Plan. The additional funding will be used to continue buying back water entitlements
each year beyond 2014, subject to the availability of water for purchase from willing
sellers. This funding has been included in the forward estimates.
Treasury
Commitment to the expanded International Monetary Fund (IMF) New
Arrangements to Borrow (NAB)
Australia has made a line of credit available to the IMF under its NAB since 1998. In
line with G-20 Leaders’ commitments, Australia has agreed to join with other countries
to increase its credit line under an expanded NAB. Australia’s contribution in
2011-2012 to the expanded NAB will be by way of an SDR 150.9 million contingent
loan (estimated value AUD $225.1 million) This will help ensure that the IMF has the
resources available to maintain stability and support recovery in the global economy.
The funds would be drawn upon by the IMF only if needed and would be repaid in
full with interest. The principal amount that may be called by the IMF cannot be
determined accurately.
Terrorism insurance — Australian Reinsurance Pool Corporation (ARPC)
The Terrorism Insurance Act 2003 established a scheme for replacement 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 and to
build a fund and purchase reinsurance to help meet future claims. The Australian
127
Notes to the financial statements
Government guarantees to pay any liabilities of the ARPC, but the Treasurer must
declare a reduced payout rate to insured parties if the Australian Government’s
liability would otherwise exceed $10 billion.
Various
Officers’ and directors’ indemnities
From time to time, the Australian Government has provided warranties, undertakings
and indemnities (indemnities) to directors, committee members, advisors officers
and/or staff of organisations for activities undertaken in good faith in assisting the
Commonwealth in relation to asset sales, reviews and other arrangements. Indemnities
(a number of which are considered remote but have been included for completeness)
have been issued in relation to:

the directors of NBN Co Ltd in relation to claims arising out of directors’
involvement in the negotiation and entry by NBN Co into the Financial Heads of
Agreement with Telstra;

the members of the board of Snowy Hydro Ltd for liabilities arising from entering
into agreements to implement corporatisation of the Snowy Mountains
Hydro-Electric Scheme, and from liabilities to Snowy Hydro Ltd at corporatisation.
The indemnity will apply to liabilities arising within five years of corporatisation,
and for which a claim is notified to the Governments within 11 years of the
corporatisation date of 28 June 2002. This indemnity has been provided by the
Commonwealth, together with the co-shareholder governments of New South
Wales and Victoria;

Export Finance and Insurance Corporation (EFIC) board members and senior
management to protect against civil claims and legal expenses for unsuccessful
criminal claims relating to the implementation of EFIC’s alliance/divestment of its
short-term export credit insurance business;

Maritime Industry Finance Company Ltd board members to protect them against
civil claims relating to their employment and conduct as directors;

certain specified members of the review into the Australian Human Pituitary
Hormone Program for the purposes of the review;

certain specified members of the review into the Diagnostics Products Agreement
for the purpose of the review; and

officers of the Australian Nuclear Science and Technology Organisation from
liability that might be incurred from the conduct of activities authorised under the
Australian Nuclear Science and Technology Organisation Act 1987.
128
Notes to the financial statements
In relation to the sale of Australian Government entities, the Australian Government
has indemnified the boards and/or acquirers of certain entities against certain claims
and costs arising from the sales of the entities.
Other guarantees, indemnities and undertakings
A range of guarantees, indemnities and undertakings have been provided by
Australian Government entities in relation to various matters. Some of these
guarantees, indemnities and undertakings are unlimited.
Claims and legal actions
At any time various Australian Government entities are subject to claims and legal
actions that are pending court or other processes.
Property remediation — Defence and other sites
From time to time, the Australian Government may have ownership of properties that
have a potential or possible environmental and associated concern. Where this is the
case, further reviews may be undertaken to determine the extent, nature and estimated
costs of remediation, if required.
Lease arrangements
Various Australian Government entities have entered into finance and/or operating
leases for goods and services. On termination or expiry of the lease term these entities
may have an obligation to acquire assets from the lessor or comply with make good
provisions. In the majority of arrangements, a provision has been recognised on the
balance sheet. In some arrangements, it has not been possible to estimate the amount
of any eventual payment in relation to these obligations.
Non-quantifiable contingent assets
Climate Change and Energy Efficiency
Home Insulation Program
On 19 February 2010, the Government announced the closure of the Home Insulation
Program (HIP). In 2010-11 the Australian Government commenced debt recovery
activities relating to payments made under HIP. The process of inspections and
compliance reviews completed has identified that some installers had claimed for
works that had not been undertaken, or had not been undertaken to the required
standard. Where noncompliance is identified, installers are given the opportunity to
rectify the non-compliance, where it is possible to do so, or to provide further evidence
to prove compliance with Program requirements. Where installers are not able to
demonstrate that their installations substantially comply with the Program Guidelines
and terms and conditions of registration, they are required to repay the amount
received from government for that job.
The Australian Government has issued invoices to a significant number of installers,
which have been recognised as a financial asset in the consolidated financial
129
Notes to the financial statements
statements. As compliance reviews are still being conducted following the receipt of
inspection reports it is likely more instances of non compliance will give rise to
issuance of further debt recovery invoices. However, it is not possible to estimate the
value of future recoveries until the inspection of each household is undertaken.
Green loans
As part of the closure of the Green Loans Program the Australian Government is in the
process of reviewing payments to assessors to identify any instances of overpayments.
The Government has identified a number of instances where systems and processes
surrounding the review and payments of claims could have allowed overpayments to
assessors. There continues to be uncertainty regarding the future occurrence of any
debt recovery activity. The Government is currently undertaking further investigations
to verify those assessors that may have received overpayments.
Adequate information is not currently available to reliably quantifiable any amount
potentially owing from individual assessors.
Finance and Deregulation
ACT/NSW border properties
There are a number of various sized parcels of land that are the residue of larger
holdings that were acquired by the Commonwealth through compulsory acquisition of
NSW lands as part of the creation of the ACT. Due diligence is being carried out to
confirm title ownership (Commonwealth or NSW Government), obtain formal titles
and resolve zoning, boundaries and values for each property.
Innovation, Industry, Science and Research
Wireless local area network
The Commonwealth Scientific and Industrial Research Organisation (CSIRO) is
currently involved in legal proceedings in the US relating to a wireless local area
network (WLAN) patent that it owns and wishes to license broadly. The proceedings
are additional to proceedings settled by CSIRO in 2009 and in March/April 2012. It
involves claims and counterclaims related to patent infringement, patent validity and
related matters. Trial is set for January 2014. If successful, CSIRO expects to receive
significant revenue which would exceed the associated legal cost. At this stage, the
revenue and costs are considered unquantifiable.
Treasury
HIH Claims Support Scheme
As the beneficiary of the HIH Claims Support Trust, the Australian Government is
entitled to the residual balance of the Trust, after the collection of recoveries. Due to
the inherent uncertainty of future recoveries, it is not possible to quantify these
amounts accurately. During 2011-12 the Treasury received distributions from the
Trust, however the amount and timing of future recoveries and subsequent
distributions are unknown.
130
Notes to the financial statements
International Monetary Fund (IMF)
Since 1986, the International Monetary Fund (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 guard against the ultimate failure of debtor members to settle
their overdue principal obligations to the IMF. 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.
Various
Claims and legal action
At any time, various Australian Government entities are pursuing claims and legal
actions that are pending court or other processes.
Non-quantifiable contingent liabilities considered remote
Agriculture, Fisheries and Forestry
Compensation claims arising from suspension of livestock exports to Indonesia
The Australian Government may become liable for the compensation action should
negligence be found in relation to suspending the export of livestock to Indonesia for a
period of 1 month in 2011. A potential class action has been received from clients and
the Government is working to progress the claims.
Compensation claims arising from equine influenza outbreak
The Australian Government may become liable for compensation should it be found
negligent in relation to the outbreak of equine influenza in 2007. At this stage any
potential liability resulting from the equine influenza outbreak cannot be quantified.
Emergency Animal Disease Response Agreement and Emergency Plant Pest
Response Deed
The Australian, State and Territory governments and some peak agricultural industry
bodies are parties to cost sharing agreements that specify how responses to emergency
animal diseases and plant pest and disease outbreaks will be funded. Under the terms
of the agreements, the Commonwealth is typically liable for 50 per cent of total
government funding to respond to a disease or pest outbreak and may also provide
131
Notes to the financial statements
financial assistance to industry by funding its share of the response. Any funding of
industry contributions would subsequently be recovered from the industry, usually by
a levy. Potential costs vary based on circumstances and are dependent on outbreaks of
animal diseases or plant pests or diseases, the extent of outbreaks, frequency and
location.
Research and Development
The Australian Government encourages expenditure on research and development to
increase the competitiveness and sustainability of industries within Australia. Under
several Acts, the Australian Government provides contributions to a number of
nominated entities responsible for undertaking research and development activities in
respect of relevant industries. These contributions are typically made on a matching
basis. Under legislation, entities are eligible for matching contributions that are subject
to annual ‘caps’ based on the total cumulative amount of levies collected, amounts
spent on qualifying research and development and the annual level of the determined
gross value of production. The operation of these annual caps can result in annual
entitlements being limited to less than full cumulative levy collections and/or
cumulative qualifying research and development expenditure. However, unpaid
balances may still be claimable, depending on the level of the caps determined in
future years and are therefore carried forward from year to year.
At 30 June 2012, the Australian Government had a maximum potential liability in
respect of matching payments of approximately $329 million (30 June 2011:
$319 million). However, the Australian Government’s actual future liability is
contingent on a combination of several currently indeterminate independent factors
that are beyond the control of both the Australian Government and the recipient
entities, in particular the future annual levels of levy collections and determined gross
values of production. The likelihood of meeting the eligibility requirements and the
amount of future payments is uncertain. Hence, this liability is considered to be both
contingent and remote.
Broadband, Communications and the digital economy
Optus Financial Guarantee
The Australian Government has provided a guarantee to Optus in respect of NBN Co’s
financial obligations to Optus under the NBN Co-Optus Agreement, which is subject
to satisfying the conditions precedent to the Agreement. That Agreement covers the
period of the NBN roll out in Optus Hybrid Fibre Coaxial areas. As at 30 June 2012, the
conditions precedent in the NBN Co-Optus Agreement had not been satisfied and the
guarantee had therefore, not come into effect. The guarantee will terminate in 2021.
Defence
Guarantees, indemnities and undertakings
The Australian Government, through the Department of Defence and the Defence
Materiel Organisation, carries an extensive range of guarantees, indemnities and
undertakings, normally of a short-term nature, relating to business, training activities
132
Notes to the financial statements
and other arrangements involving contracts, agreements and other Defence activities.
Indemnities issued cover potential losses or damages for which the Australian
Government would not be liable without the indemnity.
Treasury
Foreign currency denominated loans
The Australian Government has indemnified agents of foreign currency denominated
loans issued by the Australian Government outside Australia against any loss, liability,
costs, claims, charges, expenses, actions, or demands due to any misrepresentation by
the Australian Government and any breach of warranties. The Australian Government
is not aware of any event that has occurred that may trigger action under the
indemnities.
Treasury bonds
In the extremely unlikely event of default by a borrower of Treasury bonds under the
securities lending facility, the Australian Office of Financial Management (AOFM)
would be in a position to sell the securities pledged by the borrower to offset the
increased liability to the government. As at 30 June 2012 there were no open
transactions under the AOFM’s securities lending facility.
Various
Claims and legal actions
At any time various Australian Government entities are subject to claims and legal
actions that are pending court or other processes.
Guarantees, indemnities and undertakings
A range of guarantees, indemnities and undertakings have been provided by
Australian Government entities in relation to various matters other than those
described above. Some of these guarantees, indemnities and undertakings, although
remote, are either unquantifiable or uncapped.
Non-quantifiable contingent assets considered remote
Various
Claims and legal action
At any time various Australian Government entities are pursuing claims and legal
actions that are pending court or other processes.
133
Notes to the financial statements
Note 36: Financial instruments
Details of the significant accounting policies, key definitions, and methods adopted,
including criteria for recognition and the basis for measurement in respect of each class
of financial asset and financial liability are disclosed in Note 1.
(a)
Categories of financial instruments.
General
government
2012
$m
2011
$m
2012
$m
2011
$m
17,043
134,378
14,808
134,552
61,354
160,398
55,861
157,566
Held to maturity
Available for sale
Carrying amount of financial assets
Financial liabilities
Financial liabilities at fair value through
profit or loss
2,997
30,127
184,545
2,984
27,604
179,948
3,961
10,397
236,110
3,694
14,003
231,124
271,496
203,519
274,180
206,093
Other financial liabilities
Carrying amount of financial liabilities
23,394
294,890
24,976
228,495
84,322
358,502
83,876
289,969
Financial assets
Loans and receivables
Financial assets at fair value through
profit or loss
(b)
Consolidated
Fair values of financial instruments
The following table provides an analysis of financial instruments held at 30 June 2012
that are measured subsequent to initial recognition at fair value, grouped into Levels 1
to 3 based on the degree to which the fair value is observable.

Level 1 fair value measurements are those derived from quoted prices
(unadjusted) in active markets for identical assets or liabilities;

Level 2 fair value measurements are those derived from inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from prices); and

Level 3 fair value measurements are those derived from valuation techniques that
include inputs for the asset or liability that are not based on observable market
data (unobservable inputs).
134
Notes to the financial statements
Australian Government fair value hierarchy
as at 30 June 2012
Financial assets at fair value
Receivables
Investments
Total
Financial liabilities at fair value
Financial liabilities at fair value
through profit and loss
Net gain/(loss) other financial liabilities
Level 1:
Market
Values
2012
$m
Level 2:
Market
Inputs
2012
$m
Level 3:
Non Market
Inputs
2012
$m
73,340
73,340
1,243
52,612
53,855
21,379
22,228
43,607
22,622
148,180
170,802
248,358
248,358
25,221
25,221
601
601
274,180
274,180
Total
2012
$m
as at 30 June 2011
Financial assets at fair value
Receivables
Investments
Total
Financial liabilities at fair value
Financial liabilities at fair value
through profit and loss
Net gain/(loss) other financial liabilities
Level 1:
Market
Values
2011
$m
Level 2:
Market
Inputs
2011
$m
Level 3:
Non Market
Inputs
2011
$m
65,835
65,835
483
55,567
56,050
17,801
31,882
49,683
18,284
153,284
171,568
185,746
185,746
19,622
19,622
724
724
206,092
206,092
Total
2011
$m
General government sector fair value hierarchy
as at 30 June 2012
Financial assets at fair value
Receivables
Investments
Total
Financial liabilities at fair value
Financial liabilities at fair value
through profit and loss
Net gain/(loss) other financial liabilities
135
Level 1:
Market
Values
2012
$m
Level 2:
Market
Inputs
2012
$m
Level 3:
Non Market
Inputs
2012
$m
38,962
38,962
526
61,780
62,306
20,752
42,491
63,243
21,278
143,233
164,511
248,358
248,358
23,138
23,138
-
271,496
271,496
Total
2012
$m
Notes to the financial statements
as at 30 June 2011
Financial assets at fair value
Receivables
Investments
Total
Financial liabilities at fair value
Financial liabilities at fair value
through profit and loss
Net gain/(loss) other financial liabilities
Level 1:
Market
Values
2011
$m
Level 2:
Market
Inputs
2011
$m
Level 3:
Non Market
Inputs
2011
$m
34,816
34,816
483
59,542
60,025
17,320
49,995
67,315
17,803
144,353
162,156
185,746
185,746
17,745
17,745
27
27
203,518
203,518
The following tables provide a reconciliation of the Level 3 fair value hierarchy.
Reconciliation of Australian Government Level 3 fair value hierarchy
for the year ended 30 June 2012
Receivables
2012
$m
Investments
2012
$m
Total
2012
$m
17,801
4,472
(2,457)
1,543
21
(1)
21,379
31,882
8,711
(4,696)
1,467
(1,571)
(5,470)
30,323
49,683
13,183
(7,153)
3,010
(1,550)
(5,471)
51,702
Financial assets at fair value
Opening balance
Purchases / Payments
Sales / Repayments
Gains and losses recognised in profit or loss
Gains and losses recognised in equity
Transfers in / (out) of level 3
Closing balance
for the year ended 30 June 2011
Receivables
2011
$m
Investments
2011
$m
Total
2011
$m
16,096
3,887
(1,615)
(565)
(2)
17,801
25,098
10,165
(682)
(2,014)
(528)
(157)
31,882
41,194
14,052
(2,297)
(2,579)
(528)
(159)
49,683
Financial assets at fair value
Opening balance
Purchases / Payments
Sales / Repayments
Gains and losses recognised in profit or loss
Gains and losses recognised in equity
Transfers in / (out) of level 3
Closing balance
136
Total
2011
$m
Notes to the financial statements
Reconciliation of general government sector Level 3 fair value hierarchy
for the year ended 30 June 2012
Receivables
2012
$m
Investments
2012
$m
Total
2012
$m
17,320
4,276
(2,387)
1,543
20,752
49,995
8,613
(4,596)
1,466
578
(5,470)
50,586
67,315
12,889
(6,983)
3,009
578
(5,470)
71,338
Financial assets at fair value
Opening balance
Purchases / Payments
Sales / Repayments
Gains and losses recognised in profit or loss
Gains and losses recognised in equity
Transfers in / (out) of level 3
Closing balance
for the year ended 30 June 2011
Receivables
2011
$m
Investments
2011
$m
Total
2011
$m
15,685
3,680
(1,573)
(471)
(1)
17,320
47,005
10,004
(676)
(2,012)
(4,170)
(156)
49,995
62,690
13,684
(2,249)
(2,483)
(4,170)
(157)
67,315
Financial assets at fair value
Opening balance
Purchases / Payments
Sales / Repayments
Gains and losses recognised in profit or loss
Gains and losses recognised in equity
Transfers in / (out) of level 3
Closing balance
Level 3 financial assets
Australian Government Level 3 financial assets at 30 June 2012 included:

unlisted managed investment schemes and collective investment vehicles held by
the Future Fund are re-measured based on the estimated fair value of the net assets
of each scheme or vehicle at the reporting date. In determining fair value, reference
is made to the underlying unit price provided by the Manager (where available),
associated Manager valuation reports and the most recent audited financial
statements of the scheme. Collective investment vehicles held by the Future Fund
were valued at $24,274 million at 30 June 2012 (2011: $21,411 million); and

subscription based membership rights (not control) held by the Australian
Government in accordance with the articles of association for the International
Development Association and the Asian Development Fund are measured at fair
value based on professional valuation advice as to the estimated present value of
the recoverable cash flows foregone. The subscription was valued at $1,271 million
at 30 June 2012 (2011: $991 million).
In addition, certain entities apply models in the valuation of derivative instruments.
At the general government sector level, Level 3 financial assets also included equity
investments in public corporations. Where the public corporation is a government
business enterprise whose principle function is to engage in commercial activities in
137
Notes to the financial statements
the private sector, the investment has been measured at fair value, where fair value is
reliably measurable. Investments in other public corporations have been measured at
the Australian Government’s proportional interest in the net assets of the public
corporation at 30 June. These investments are eliminated at whole of government.
Financial assets at amortised cost which has been calculated using a valuation method
Certain financial assets categorised as ‘loans and receivables’ and measured at
amortised cost were initially measured at fair value using a valuation method as a
quoted price was not observable. These include:

the Australian Government’s investment in the IMF quota is classified as ‘available
for sale’ but is measured at cost as fair value cannot be reliably measured due to its
unique nature. The investment in the IMF quota was valued at $4,798 million at
30 June 2012 (2011: $4,813 million); and

the Guarantee Scheme for Large Deposits and Wholesale Funding and the
Guarantee of State and Territory Borrowing contractual fee receivable represents
the requirement under AASB 139 Financial Instruments: Recognition and
Measurement for the Australian Government to recognise up-front, its entitlements
under the financial guarantee contract to revenue received or receivable from
authorised deposit-taking institutions over the contracted guarantee period.
Conversely, the Australian Government 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). The
contractual fee receivable for the Guarantee Scheme for Large Deposits and
Wholesale Funding and the Guarantee of State and Territory Borrowing was
valued at $1,064 million (2011: $1,826 million) and $266 million (2011: $302 million)
respectively. The corresponding service obligation liability is valued at the same
amounts.
Concessional loans
The fair values of Australian Government and general government sector financial
assets and liabilities approximate their carrying amounts as reported in the
consolidated financial statements, with the exception of the subsequent measurement
of concessional loans categorised as ‘loans and receivables’ under AASB 139 Financial
Instruments: Recognition and Measurement.
On recognition, the fair values for these concessional loans was determined using the
methods described below:
• Advances and loans reported by the Department of Resources, Energy and Tourism
are obtained by reference to market prices that employ observable market
transactions.
• Loans to State and Territory governments, including those reported by the
Australian Office of Financial Management and the Department of Finance and
138
Notes to the financial statements
Deregulation, are recognised at amortised cost. These transactions are not traded
and, especially for those with the longest term to maturity, a direct market
benchmark to underpin fair value measurement does not exist. Data on Treasury
bonds are used in estimating fair value.
Subsequent to recognition, the above loans are carried at amortised cost which may
differ to an updated fair value. Other concessional loans, including student loans
provided under the Higher Education Loans Program and home and business loans
provided by Indigenous Business Australia, have been categorised as ‘held at fair
value through the profit and loss’. As such, the carrying amount of these loans is
updated each reporting period to reflect fair value.
The following table details the nominal value of material concessional loans as well as
the unexpired discount.
Concessional loans
2012
Nominal
value
Unexpired
discount
2011
Nominal
value
Unexpired
discount
$m
$m
$m
$m
HECS / HELP Loans
26,281
(711)
23,134
(2,355)
Other student loans
2,357
(390)
2,391
(346)
State and Territory Governments - AOFM
2,883
(342)
2,981
(363)
768
(248)
716
(234)
Reconstruction and Development
379
(299)
331
(268)
Resources, Energy and Tourism
137
(73)
138
(77)
31
-
44
-
Finance and Deregulation
249
(89)
259
(94)
Health aged care facilities
115
(30)
71
(19)
50
(5)
49
(5)
IBA Home and Business Loans
Australia Indonesia Partnership for
Innovation, Industry, Science and Research
Attorney-General
Regional Australia, Regional Development
and Local Government
Total
139
89
(10)
91
(10)
33,340
(2,197)
30,206
(3,772)
Notes to the financial statements
(c)
Net income, expense and other economic flows from financial assets
General
government
2012
$m
2011
$m
2012
$m
2011
$m
522
1
(184)
(68)
271
495
(6)
(196)
(417)
(124)
1,713
(1)
(191)
(68)
1,453
990
(19)
(199)
(417)
355
3
1,298
(7)
1,033
635
5
(541)
(2)
-
63
41
(7)
363
62
45
5
(541)
(2)
-
Net gain/(loss) available for sale
Held for trading
Interest income (including interest
from swaps)
2,327
97
460
(431)
-
-
666
1,432
Dividends
Net gain/(loss) on disposal
Net foreign exchange gain/(loss)
Write-down and impairment
Net gain/(loss) held for trading
Designated as held at fair value through
profit and loss
Interest income (including interest
from swaps)
1,364
1,364
1,927
1,927
1,364
614
2,644
1,927
(120)
3,239
4,309
4,429
3,915
4,059
Net gain/(loss) on disposal
Net foreign exchange gain/(loss)
Write-down and impairment
Interest expenses
Other gains
Net gain/(loss) held at fair value through
profit and loss
Held to maturity
Interest income
Net gain/(loss) on disposal
Net foreign exchange gain/(loss)
Write-down and impairment
Net gain/(loss) held to maturity
(2,839)
995
(900)
4,076
5,641
(2,702)
7,829
(634)
2,059
10,981
(2,880)
764
(900)
3,219
4,118
(2,726)
2,206
(634)
(419)
2,486
177
177
169
169
185
185
162
162
Loans and receivables
Interest income
Net gain/(loss) on disposal
Net foreign exchange gain/(loss)
Write-down and impairment
Interest expenses
Net gain/(loss) loans and receivables
Available for sale
Interest income
Dividend income
Net gain/(loss) on disposal
Net foreign exchange gain/(loss)
Write-down and impairment
Other gains
Fair value movements taken direct
to equity
140
Consolidated
Notes to the financial statements
(d)
Net income, expense and other economic flows from financial liabilities
General
government
2012
$m
2011
$m
2012
$m
2011
$m
11,429
9,273
11,598
9,324
(21,030)
(9,601)
93
9,366
(21,028)
(9,430)
134
9,458
1,316
10
1,326
756
968
1,724
1,582
10
1,592
994
968
1,962
Held at fair value through profit and loss
Interest expenses (including interest
on swaps)
Net foreign exchange gain/(loss)
Other gains
Net gain/(loss) held at fair value
through profit and loss
Other financial liabilities
Interest expenses
Net foreign exchange gain/(loss)
Net gain/(loss) other financial liabilities
(e)
Consolidated
Financial management objectives and market risk
Market risk represents the risk that the fair value or future cash flows of a financial
instrument will fluctuate due to changes in market prices. Market risk comprises
currency risk, interest rate risk and other price risks. The management of market risk
by Australian Government entities is governed by the FMA Act, CAC Act and, for
some entities such as the RBA, specific legislation.
The CFS are prepared for the total Australian Government public sector, which
comprises all Australian Government controlled entities in the three sectors of
government — the general government sector (GGS), the public non-financial
corporations sector (PNFCs) and the public financial corporations sector (PFCs). The
three sectors of government hold financial instruments for different purposes and with
different market risk exposures. Consequently, the following discussion of financial
management objectives and market risk has been disaggregated by sector. Where
material, the discussion includes a sensitivity analysis for each type of market risk
exposure, showing the effect on the net operating balance and net worth from
reasonably possible changes in market risk at 30 June 2012.
Generally, in applying the sensitivity analysis as at 30 June 2012, a default rate of
15 per cent has been applied for the sensitivity analysis of foreign exchange risk and
140 basis points for the sensitivity analysis of interest rate risk. These standard rates
were considered to be ‘reasonably possible’ fluctuations based on historical research
conducted. However, for certain financial instruments, different sensitivity rates have
been used based on the relevant agencies’ assessment of changes in risk variables that
were considered ‘reasonably possible’ at the reporting date with regard to the nature
of the underlying financial instrument.
141
Notes to the financial statements
GENERAL GOVERNMENT
As detailed in Note 1, the GGS provides public services that are mainly non-market in
nature, and for the collective consumption of the community, or involve the transfer or
redistribution of income. GGS entities hold financial instruments as part of their
operations or for public policy purposes.
Management of interest rate risk in the general government sector
General risk management
Agencies subject to the FMA Act are required to draw down administered and
departmental monies on an ‘as-needed’ basis. As a general principle, FMA Act
agencies cannot invest public monies except as delegated under section 39 of the FMA
Act or authorised by legislation. Companies and authorities subject to the CAC Act are
also restricted in how they can invest monies that are surplus to operational
requirements. As a general principle, surplus money may only be placed on deposit
with a bank or invested directly in securities issued or guaranteed by the
Commonwealth, a State or a Territory, unless an exemption is approved by the Finance
Minister. Financial assets held by the majority of GGS entities are non-interest bearing,
including trade receivables, or have fixed interest and do not fluctuate due to changes
in the market interest rate.
The Treasurer has delegated investment powers to the Australian Office of Financial
Management (AOFM). The AOFM’s functions give it primary responsibility for
ensuring that the Australian Government has sufficient cash to meet its needs. As at
30 June 2012, AOFM had deposited $14.5 billion in term deposits with the RBA on
behalf of the Australian Government (2011: $10.7 billion). As these investments are
internal to the Australian Government reporting entity, they are not reported in the
Consolidated Financial Statements, except at the General Government level.
Investment funds
The Australian Government is meeting its commitment to Australia’s future by
drawing on previous and future surpluses to invest in several funds. As at
30 June 2012, the following significant funds were in operation:
• Future Fund;
• Building Australia Fund (BAF);
• Education Investment Fund (EIF); and
• Health and Hospitals Fund (HHF).
The Future Fund was established by the Future Fund Act 2006 to finance the
Government’s unfunded public sector superannuation liability. The Future Fund
Board of Guardians is responsible for the investment decisions of the Fund under an
142
Notes to the financial statements
Investment Mandate issued by the Australian Government. The Investment Mandate
requires the Board to maximise returns above a benchmark rate whilst taking
acceptable but not excessive risk. The benchmark rate has been set at CPI + 4.5 per cent
to 5.5 per cent per annum over the long term. Section 39 of the FMA Act does not
apply to investments of the fund.
As at 30 June 2012, the Future Fund’s exposure to interest rates consisted of
$11,406 million in floating interest rate securities (2011: $13,929 million) and
$11,439 million in fixed interest rate securities (2011: $7,651 million).
The following table demonstrates the impact on the net operating balance and net
worth of a 140 basis point (2011: 175 basis point) change in Future Fund interest rate
bond yields with all other variables held constant.
Effect on
Interest rate risk
Asset portfolios (including derivatives)
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+140bp
(213)
(213)
n/a
n/a
-140bp
310
310
n/a
n/a
+175bp
n/a
n/a
(67)
(67)
-175bp
n/a
n/a
171
171
Exchange traded interest rate futures are used by the Future Fund’s investment
managers to manage the exposure to interest rates and to ensure it remains within
approved limits. At 30 June 2012, the notional value of open futures contracts and
swaps totalled -$176 million (2011: -$903 million).
The Building Australia Fund (BAF), Education Investment Fund (EIF) and Health and
Hospitals Fund (HHF) were established by the Nation-building Funds Act 2008 on
1 January 2009 and their investments are also managed by the Future Fund Board of
Guardians.
The Funds were established to provide financing sources to meet the Government’s
commitment to Australia’s future by investment in critical areas of infrastructure. The
objective of each Fund is as follows:
• BAF — to make payments in relation to the creation or development of transport,
communications, eligible national broadband network matters, energy and water
infrastructure;
• EIF — to make payments in relation to the creation or development of higher
education infrastructure, vocational education and training infrastructure, eligible
education and research infrastructure; and
143
Notes to the financial statements
• HHF — to make payments in relation to the creation or development of health
infrastructure.
Collectively, the three Funds are known as the Nation-building Funds (NBF).
The Future Fund Board of Guardians is responsible for the investment decisions of the
NBF under Investment Mandates issued by the Australian Government. The
Investment Mandates are to adopt a benchmark return on each Fund of the Australian
three month bank bill swap rate + 0.3 per cent per annum, calculated on a rolling
12 month basis (net of fees). In targeting this benchmark return, the Board should
invest in such a way as to minimise the probability of capital losses over a 12-month
horizon.
As at 30 June 2012, the NBF’s exposure to interest rates consisted of $6,386 million in
floating interest rate securities (2011: $8,590 million) and $7,034 million in fixed interest
rate securities (2011: $9,019 million). The following table demonstrates the impact on
the net operating balance and net worth of a 140 basis point change in NBF interest
rate bond yields with all other variables held constant (2011: 175 basis points).
Effect on
Interest rate risk
Building Australia Fund
Education Investment Fund
Hospital and Health Fund
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+140 bp
42
42
n/a
n/a
-140 bp
(39)
(39)
n/a
n/a
+175 bp
n/a
n/a
69
69
-175 bp
n/a
n/a
(79)
(79)
+140 bp
33
33
n/a
n/a
-140 bp
(25)
(25)
n/a
n/a
+175 bp
n/a
n/a
39
39
-175 bp
n/a
n/a
(44)
(44)
+140 bp
22
22
n/a
n/a
-140 bp
(21)
(21)
n/a
n/a
+175 bp
n/a
n/a
36
36
-175 bp
n/a
n/a
(41)
(41)
The NBF had open positions in exchange traded interest rate futures contracts as at
30 June 2012. The notional value of NBF investments in ‘sell international interest rate
futures contracts’ was -$2,754 million (2011: -$5,495 million).
The GGS also holds certain financial assets and liabilities for public policy purposes.
Debt management
The majority of GGS entities are prohibited from borrowing. The AOFM is responsible
for the borrowing activities of the GGS and for overall debt management.
144
Notes to the financial statements
For many years debt issuance by the Australian Government was undertaken solely
with the objective of maintaining the Treasury bond and Treasury bond futures
markets, as successive budget surpluses removed the need to borrow to fund the
Budget. The forecast Budget outlook changed in the Updated Economic and Fiscal
Outlook published on 3 February 2009 and the objective of issuance changed to funding
the Budget.
As a means of diversifying its funding sources, in September 2009, the Australian
Government resumed issuance of Treasury indexed bonds.
The main types of market risk the Australian Government’s debt portfolio is exposed
to is domestic interest rate risk and domestic inflation risk. Moreover, by generally
issuing/buying and holding to maturity, the market risk most relevant to the debt
portfolio is the risk of fluctuations to future interest cash flows and principal amounts
arising from changes in interest rates and inflation. In market value terms, as at
30 June 2012, the AOFM had issued $269,785 million in Commonwealth Government
securities (2011: $201,770 million).
The following table provides a sensitivity analysis of interest rate risk in relation to the
debt portfolio. Inflation risk is covered under the management of other price risk in
another part of this note.
At 1 July 2012, if domestic interest rates had experienced an immediate 100 basis point
parallel upward (downward) movement across the yield curve, and if that change
were to persist for the 12 months to 30 June 2012, with all other variables held constant,
the effect on the net operating balance and net worth position would be as follows:
Effect on
Interest rate risk
Treasury bonds
Treasury notes
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+100 bp
(157)
(157)
(204)
(204)
-100 bp
174
174
219
219
+100 bp
(109)
(109)
(144)
(144)
-100 bp
109
109
144
144
Until 30 June 2008, the AOFM used interest rate swaps to reduce the accrual cost of its
borrowing by exchanging fixed rate exposure for floating rate exposure. It stopped
doing this because interest rate structures had reduced the potential savings. The
portfolio of interest rate swaps has now been wound down. The cost and risk of the
debt portfolio is now managed through debt issuance and investment activities.
Residential mortgage-backed securities
In September 2008, the Australian Government announced that it would invest up to
$4 billion in residential mortgage-backed securities (RMBS) to support competition in
the Australian residential mortgage market. In October 2008, this initiative was
145
Notes to the financial statements
extended to $8 billion, of which a maximum of $4 billion may be in RMBS issued by
authorised deposit taking institutions. In November 2009, the Australian Government
extended the program by up to an additional $8 billion subject to market conditions.
An additional objective of the extended program was to provide support for lending to
small business through participating lenders agreeing to direct some of the proceeds
received for lending to small business. In December 2010, the Government announced
an extension to the program by up to an additional $4 billion (bringing the program to
$20 billion). On behalf of the Australian Government, the AOFM acquired a total of
$15,303 million of AAA (or equivalent) rated RMBS up to 30 June 2012. The amount
held as at 30 June was $11,201 million (in principal terms).
Interest earned on RMBS comprises a floating interest rate (set against the 1-month
Bank Bill Swap (BBSW) reference rate) plus a fixed margin set at the time each
investment is acquired. The following table demonstrates the impact on the net
operating balance and net worth of a 100 basis point change to the 1-month BBSW rate
with all other variables held constant.
Effect on
Interest rate risk
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
Residential mortgage backed
+100 bp
115
115
131
131
securities
-100 bp
(115)
(115)
(131)
(131)
Concessional loans held for policy purposes
The Australian Government has entered into a number of concessional loan
arrangements for policy purposes. These include student loans provided under the
Higher Education Loan Program ($19,400 million at 30 June 2012, $15,551 million at
30 June 2011) and loans to State and Territory Governments under previous
Commonwealth-State financing arrangements ($2,541 million at 30 June 2012,
$2,619 million at 30 June 2011).
Consistent with the requirements of AASB 139 Financial Instruments: Recognition and
Measurement, these loans are initially valued at fair value applying market interest
rates. Student loans have been designated as ‘held at fair value through the profit and
loss’. Changes in market interest rates will impact on the fair value of these loans but
will have no impact on the future cash flows or principal amounts at maturity. Other
concessional loans have been designated as ‘loans and receivables’ and have no
exposure to interest rate risk.
Investments, multi-lateral grants and contributions payable
AusAID administers material financial assets on behalf of the Australian Government.
The Australian Government is the holder of these financial instruments, with the
issuers being partner foreign governments and multi-lateral aid organisations
including the Asian Development Fund (ADF) and the International Development
146
Notes to the financial statements
Association (IDA). Financial instruments are recognised on a trade date basis. The fair
value of the non-monetary ‘available for sale’ debt instrument at 30 June 2012 was
$1,271 million ($991 million at 30 June 2011).
Grants are made to a number of international, United Nations (UN) and
Commonwealth organisations. The fair value of multilateral grants payable at
30 June 2012 was $478 million ($503 million at 30 June 2011) and multilateral
contributions payable $711 million at 30 June 2012 ($799 million at 30 June 2011).
The following table demonstrates the impact of a 140 basis point interest rate change in
the calculation of the above instruments on the net operating balance and net worth.
The interest rate risk reflects the impact on assets and liabilities of movements, either
alone or in combination, of the following interest rate variables: i) United States dollar
(USD) 30-year Government bond rate; ii) the currency risk, liquidity risk and
sovereign risk premiums (obtained via independent professional advice) as they apply
to the borrowing countries party to the International Development Association and
Asia Development Fund; and, iii) the 10-year Australian government bond rate.
Effect on
Interest rate risk
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
International Development Association
+140 bp
51
51
49
49
and Asia Development Fund
-140 bp
(68)
(68)
(67)
(67)
Management of currency risk in the general government sector
Entities in the GGS are responsible for the management of their foreign exchange risks.
However, it is Australian Government policy that GGS entities do not act to reduce the
foreign exchange risk that they would otherwise face in the course of their business
arrangements. This means that GGS entities are not permitted to undertake any form
of hedging. Rather than allowing GGS entities to enter into individual hedging
arrangements, the Australian Government has taken a decision to self-insure foreign
exchange exposures and not accept the additional costs associated with hedging. This
is based on the view that, as a large organisation, the Commonwealth has a broad
spread of assets and liabilities and a range of revenues and expenses, both
geographically and across classes, which assists in the management of movements in
exchange rates.
The Future Fund undertakes certain transactions denominated in foreign currencies,
hence it is exposed to the effects of exchange rate fluctuations. Exchange rate exposures
are managed utilising forward foreign exchange contracts. The Fund’s exposure in
Australian equivalents to foreign currency risk at 30 June 2012 totalled $54,146 million
(2011: $53,916 million). After adjusting for forward exchange contracts, the Fund’s net
exposure at 30 June 2012 amounted to $22,663 million (2011: $19,622 million). The
147
Notes to the financial statements
Fund’s exposures are in multiple currencies, primarily USD, Euro, Yen and the UK
Pound.
The following table demonstrates the impact on the net operating balance and net
worth of a 15 per cent movement (2011: 15 per cent movement) in the value of the
Australian dollar (AUD) relative to the basket of actual net exposures.
Effect on
Currency risk
Investments
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+15%
3,832
3,832
3,423
3,423
-15%
(3,671)
(3,671)
(3,065)
(3,065)
The Australian Government is also exposed to currency risk from debt denominated in
foreign currency. The Australian Government’s policy is to reduce its foreign currency
denominated debt to zero. Only a small residual amount of such debt remains in the
debt portfolio administered by the AOFM and the AOFM seeks to repurchase this debt
when available on acceptable terms. The exposure to foreign exchange risk on general
government debt is not material.
The Australian Government holds several financial instruments as part of its
membership of the International Monetary Fund (IMF) and its investment in
international financial institutions and multilateral aid organisations. These financial
instruments include the:
• IMF (financial assets), comprising the current value in AUD of Australia’s
subscription to the IMF ($4,798 million at 30 June 2012, $4,813 million at
30 June 2011);
• investment in international financial institutions, including the European Bank for
Reconstruction and Development, the International Bank for Reconstruction and
Development, the International Finance Corporation, the Asian Development Bank
and the Multilateral Investment Guarantee Agency ($650 million at 30 June 2012,
$566 million at 30 June 2011);
• subscription based membership rights (not control) held by the Australian
Government in accordance with the articles of association for the International
Development Association and the Asian Development Fund, which are recognised
at fair value ($1,271 million at 30 June 2012, $991 million at 30 June 2011);
• promissory notes (financial liability) issued to the IMF and international financial
institutions ($3,260 million at 30 June 2012, $3,851 million at 30 June 2011). The
promissory notes are non-interest bearing and relate to the undrawn paid-in capital
subscriptions; and
148
Notes to the financial statements
• the special drawing rights (SDR) allocation liability which reflects the current value
in Australian dollars of the Treasury’s liability to repay to the IMF Australia’s
cumulative allocations of SDRs ($4,570 million at 30 June 2012, $4,585 million at
30 June 2011).
The Australian Government is exposed to foreign currency denominated in USD, EUR
and SDR on the above financial instruments. The following table demonstrates the
impact on the net operating balance and net worth of a 15 per cent (2011: 15 per cent)
movement in the relative value of the AUD relative for financial instruments
associated with the IMF and international financial institutions and a 15 per cent
(2011: 15 per cent) movement for financial instruments associated with multi-lateral
aid organisations.
Effect on
Currency risk
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
(166)
(166)
(129)
(129)
Loans
+ 15%
- 15%
224
224
175
175
International Monetary Fund
+ 15%
(626)
(626)
(628)
(628)
- 15%
847
847
849
849
Management of other price risk in the general government sector
The Australian Government is exposed to equity price risks arising from equity
investments, primarily through Future Fund investments. The equity price risk is the
risk that the value of the equity portfolio will decrease as a result of changes in the
levels of equity indices and the price of individual stocks. The Future Fund holds all of
its equities at fair value through profit or loss.
As at 30 June 2012, the Future Fund’s exposure to equity price risk consisted of
$9,339 million in domestic listed equities and listed managed investment schemes
(2011: $9,729 million) and $18,626 million in international listed equities and listed
management schemes (2011: $20,789 million).
The following table demonstrates the impact on the net operating balance and net
worth of a +/- 20 per cent change in domestic equities and a +/- 15 per cent change in
international equities held by the Future Fund.
149
Notes to the financial statements
Effect on
Other price risk
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
Assets
Australian equities
International equities
+ 20%
2,638
2,638
2,676
2,676
- 20%
(2,593)
(2,593)
(2,676)
(2,676)
+ 15%
4,552
4,552
4,568
4,568
- 15%
(4,412)
(4,412)
(4,315)
(4,315)
The Future Fund’s exposure to other price risks was assessed as being not material.
The Fund had open positions in exchange traded equity futures contracts and equity
option contracts as at 30 June 2012. The exchange traded equity futures, swaps and
options are used to manage market exposures to equity price risk to ensure that asset
allocations remain within the Fund’s approved limits. The notional value of the open
contracts and their fair value are set out below.
Notional
Fair
Notional
Fair
value
market
value
market
Equity price risk
value
value
2012
2012
2011
2011
$m
$m
$m
$m
Buy domestic equity futures contracts
115
-
216
3
Sell domestic equity futures contracts
(5)
-
-
-
Buy international equity futures contracts
68
2
468
13
Sell international equity futures contracts
(339)
(18)
(15)
-
52
(6)
193
(8)
(52)
6
(193)
13
1
-
1
-
(265)
-
-
-
(425)
11
-
-
(2,246)
38
(3,521)
53
176
158
-
-
(2,919)
191
(2,850)
75
Equity swap agreements - pay floating
Equity swap agreements - receive floating
Exchange traded international
volatility index put options
Exchange traded international
equity index put options
Over the counter domestic
equity options
Over the counter international
equity options
Exchange traded warrants
Total
The Australian Government is exposed to cash flow risk on Treasury capital indexed
bonds on issue. These instruments expose the Australian Government to cash flow risk
on interest payments and the value of principal payable on maturity arising from
indexation against the (all groups) Australian consumer price index (CPI). When the
CPI increases, debt servicing costs and the principal payable on maturity will also rise
(subject to a six-month lag).
150
Notes to the financial statements
At 1 July 2012, if the CPI were to experience an immediate 1 per cent
increase/(decrease) and that change were to persist for 12 months to 30 June 2013 with
all other variables held constant, the effect on the net operating balance and net worth
position for the year ended 30 June 2013 would be as follows:
Effect on
CPI sensitivity analysis
Treasury Capital Indexed Bonds
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+1%
(235)
(235)
(205)
(205)
- 1%
234
234
207
207
PUBLIC FINANCIAL CORPORATIONS (PFC)
As detailed in Note 1, the PFC sector comprises the Reserve Bank of Australia (RBA)
and other entities that accept demand, time or savings deposits; or have the authority
to incur liabilities and acquire financial assets in the market on their own account.
The RBA is Australia’s central bank. Its role is set out in the Reserve Bank Act 1959. The
RBA’s main responsibility is monetary policy. In addition to conducting monetary
policy, the RBA also holds Australia’s foreign currency reserves, operates Australia’s
main high-value payments system, provides banking services to the Australian
Government and designs, produces and issues Australia’s banknotes. In undertaking
these functions, the RBA has significant exposures to interest rate and currency risk.
The Export Finance and Insurance Corporation (EFIC) is also involved in lending and
borrowing activities with exposures to interest rate and currency risk.
The principal financial instruments held by other entities in the public financial
corporations sector comprise cash and short-term money market instruments
(including bank bills, negotiable certificates of deposit and commercial paper),
debentures and floating rate notes, global property trusts, domestic equity trusts,
global equity trusts and domestic listed shares. The market risk associated with
reasonably possible movements in interest rates, currency rates and other prices on
financial instruments held by these entities is not material to the Consolidated
Financial Statements. Consequently, the following market risk disclosures are limited
to the market operations of the RBA and EFIC.
Management of interest rate risk in the public financial corporations
sector
The RBA’s balance sheet is exposed to considerable interest rate risk because most of
its assets are financial assets, such as domestic and foreign securities, which have a
fixed income stream. The price of such securities increases when market interest rates
decline, while the price of a security will fall if market rates rise. Interest rate risk
increases with the maturity of a security because the associated income stream is fixed
for a longer period.
151
Notes to the financial statements
The following table demonstrates the effect on profit and net worth of a movement of
+/- 100 basis points in interest rates on the RBA’s financial asset holdings, given the
level, composition and modified duration of the RBA’s foreign currency and AUD
securities as at 30 June.
Effect on
Interest rate risk
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
(467)
(467)
(456)
(456)
Foreign currency securities
+100 bp
-100 bp
467
467
456
456
Australian dollar securities
+100 bp
(171)
(171)
(169)
(169)
-100 bp
171
171
169
169
As EFIC is also involved in lending and borrowing activities, interest rate risks arise.
EFIC uses interest rate swaps, forward rate agreements, cross-currency swaps and
futures as the primary methods of reducing exposure to interest rate movements. As at
30 June 2012, EFIC’s net exposure to interest rates consisted of $184 million in floating
interest rate securities (2011: $390 million) and $254 million in fixed interest rate
securities (2011: $63 million). As at 30 June 2011, a +/- 50 basis point movement in
interest rates was assessed as not having a material impact on the reported balance of
the corporation’s portfolio.
Management of currency risk in the public financial corporations
sector
Foreign exchange risk arises from the RBA’s foreign currency assets, which are held to
support the RBA’s operations in the foreign exchange market. The overall level of
foreign currency exposure is determined by policy considerations and cannot
otherwise be managed to reduce foreign exchange risk. The RBA’s net foreign currency
exposure as at 30 June 2012 was $35.9 billion ($35.8 billion as at 30 June 2011). Within
the overall exposure and to a limited extent, foreign currency risk can be reduced by
holding assets across a diversified portfolio of currencies. The RBA holds foreign
reserves in four currencies — the US dollar (45 per cent of net foreign currency
holdings), the Euro (45 per cent), the Canadian dollar (five per cent) and the Yen
(five per cent) — because the markets for these currencies are typically liquid and
suitable for investing foreign exchange reserves. The RBA also operates in foreign
exchange markets on behalf of its clients, including to assist the Australian
Government in meeting foreign currency obligations.
The RBA also undertakes foreign currency swaps to assist its daily domestic market
operations. These instruments carry no foreign exchange risk since the exchange rates
at which both legs of the transaction are settled are agreed at the time the swap is
undertaken.
152
Notes to the financial statements
The following table demonstrates the sensitivity of the RBA’s profit and net worth to a
movement of +/-10 per cent in the value of the AUD exchange rate as at 30 June.
Effect on
Currency risk
Australian dollar exchange rate
Change in
risk variable
Effect on
Operating
balance
Net worth
Operating
balance
Net
worth
2012
2012
2011
2011
$m
$m
$m
$m
+ 10%
(3,267)
(3,267)
(3,258)
(3,258)
- 10%
3,993
3,993
3,982
3,982
EFIC extends facilities in various currencies, principally in US dollars and euros.
Where the borrowing currency is different from the currency of the assets being
funded, cross-currency swaps, or the foreign exchange markets are used to offset the
exposure (before provisions). EFIC’s exposure in AUD to foreign currency risk at
30 June 2012 totalled $3,297 million on financial assets and $3,318 million on financial
liabilities giving a net exposure of -$21 million (2011: -$14 million).
Management of other price risk in the public financial corporations
sector
The public financial corporations sector does not have material exposures (from a
whole of government perspective) to equity or other price risks.
Public non-financial corporations (PNFC)
As detailed in Note 1, the PNFC sector comprises entities that provide goods and
services that are mainly market, non-regulatory, and non-financial in nature, financed
mainly through sales to consumers of these goods and services.
These entities primarily hold financial instruments as a direct result of operations,
including trade receivables and payables, or to finance operations. Certain entities in
the PNFC sector also enter into derivative transactions, including interest rate swaps,
forward currency contracts and commodity swap contracts. The purpose is to manage
the interest rate, currency and commodity risks arising from the entity’s operations
and sources of finance.
The market risk associated with reasonably possible movements in interest rates,
currency rates and other prices on financial instruments held by PNFC sector entities is
not material to the Consolidated Financial Statements.
153
Notes to the financial statements
(f)
Credit risk
Credit risk in relation to financial assets, is the risk that a third party will not meet its
obligations in accordance with agreed terms. Generally, the Australian Government’s
maximum exposure to credit risk in relation to each class of recognised financial asset
is the carrying amount of those assets as indicated in the consolidated balance sheet.
The following table shows the credit quality of financial receivables reported in the
Consolidated Financial Statements that are not past due or individually determined as
impaired.
Australian Government
Advances and loans
Goods and services receivable
Other receivables
Total
General Government
Advances and loans
Goods and services receivable
Other receivables
Total
2012
Not Past
2011
Not Past
2012
Past
2011
Past
Due Nor
Due Nor
Due or
Due or
Impaired
Impaired
Impaired
Impaired
$m
$m
$m
$m
27,364
22,318
59
56
1,331
1,263
474
375
4,893
5,579
702
769
33,588
29,161
1,235
1,199
2012
Not Past
Due Nor
Impaired
$m
26,760
534
5,093
32,386
2011
Not Past
Due Nor
Impaired
$m
21,833
553
5,113
27,499
2012
Past
Due or
Impaired
$m
58
312
670
1,040
2011
Past
Due or
Impaired
$m
56
225
577
858
The following table shows the ageing of financial receivables that are past due but not
impaired for 2012:
Australian Government
Advances and loans
0 to 30
30 to 60
60 to 90
Over 90
days
days
days
days
$m
$m
$m
$m
Total
$m
30
12
3
14
59
Goods and services receivable
313
39
65
57
474
Other receivables(a)
103
35
10
555
702
Total
446
86
78
626
1,235
0 to 30
30 to 60
60 to 90
Over 90
Total
days
days
days
days
$m
$m
$m
$m
General Government
Advances and loans
Goods and services receivable
Other receivables(a)
Total
$m
30
10
(11)
(8)
20
203
23
34
52
312
71
35
10
555
670
304
67
33
598
1,002
(a) Excludes statutory receivables such as taxes receivable and personal benefits recoverable.
154
Notes to the financial statements
The following table shows the ageing of financial receivables that are past due but not
impaired for 2011:
Australian Government
0 to 30
30 to 60
60 to 90
Over 90
days
days
days
days
$m
$m
$m
$m
27
13
4
12
56
Goods and services receivable
250
44
22
59
375
Other receivables(a)
135
24
26
584
769
Total
411
81
52
654
1,199
0 to 30
30 to 60
60 to 90
Over 90
Total
days
days
days
days
$m
$m
$m
$m
27
13
4
12
56
146
24
17
38
225
61
24
26
465
577
234
62
47
515
858
Advances and loans
General Government
Advances and loans
Goods and services receivable
Other receivables(a)
Total
Total
$m
$m
(a) Excludes statutory receivables such as taxes receivable and personal benefits recoverable.
Australian Government entities have assessed the risk of default on payment and have
allocated the following to an impairment allowance for doubtful debts:
• advances and loans receivable of $32 million at 30 June 2012 (2011: $43 million); and
• goods and services and other receivables (including certain statutory receivables
other than tax) of $2,638 million at 30 June 2012 (2011: $2,435 million).
The majority of Australian Government entities do not have significant exposures to
any concentrations of credit risk. Generally, Australian Government entities’ exposures
are to a large number of customers or highly rated counterparties and their credit risks
are very low. Australian Government entities with material concentrations of credit
risk include:
• the Export Finance and Insurance Corporation’s (EFIC) principal exposure to credit
risk arises from the financing and credit facilities extended to clients. These facilities
are provided by EFIC on both a commercial basis and on the national interest
account. Credit risk exposures on the Commercial Account amounted to
$1,419 million at 30 June 2012 (2011: $961 million) while credit risk exposures on the
national interest account amounted to $693 million (2011: $686 million);
• The AOFM’s financial investments include loans to state and territory
Governments, deposits, discount securities and residential mortgage-backed
securities (RMBS). The credit quality of the RMBS derives from the underlying
quality of the mortgage assets and structural enhancements such as lenders
mortgage insurance, liquidity facilities, and the issue of different classes of
155
Notes to the financial statements
securities. At the time of acquisition, each RMBS issue must meet a range of
eligibility criteria set by the AOFM;
• the Future Fund has a significant exposure to interest bearing securities issued by
domestic banks (including domestic subsidiaries of foreign banks);
• for the RBA, credit risk arises from exposure to the issuers of securities that it holds;
banks with which the RBA deposits funds and counterparties that are yet to settle
transactions. The RBA’s credit exposure is low compared with that of most
commercial financial institutions because it manages such risks within a highly
risk-averse framework; and
• from time to time the Australian Government may have significant exposures to
credit risk in relation to major asset sales.
The majority of Australian Government entities do not hold collateral to manage credit
risk.
Cash invested by the RBA under repurchase agreements is secured by collateral to a
value of between 102 and 110 per cent of the amount invested.
In relation to Indigenous Business Australia’s gross credit risk, collateral valued at
$1,075 million is held against home and business loans (2011: $997 million).
Collateral held may include first ranking mortgage over assets financed by EFIC,
standby documentary credits, third-party guarantees and recourse to companies and
company directors. No collateral has currently been called and held at year end.
(g)
Liquidity risk
Liquidity risk is the risk that the Australian Government will not be able to meet its
obligations as they fall due. The following tables disclose the undiscounted value of
the contractual maturities of financial liabilities as at the end of the financial year,
including estimated future interest payments.
The Australian Government has sufficient access to funds to meet its liabilities as they
fall due. At 30 June 2012, the Australian Government reported $209,898 million in
current assets compared to current liabilities of $84,756 million. Moreover, the
Australian Government is positioned to address liquidity risk through existing
revenue sources, including the power to tax, and its capacity to roll over existing debt.
156
Notes to the financial statements
The following table illustrates the contractual maturities for financial liabilities:
Liquidity risk 2012(a)(b)
Australian Government
Suppliers
Subsidies payable
On
1 Year
1 to 5
More than
Demand
or Less
Years
5 Years
Total
2012
2012
2012
2012
$m
$m
$m
$m
$m
272
6,112
29
29
6,442
2012
-
204
-
-
204
Grants liability
33
2,582
732
199
3,546
Other payables
242
3,268
860
902
5,272
-
-
60
-
60
1,177
1,837
-
-
3,014
Government securities
-
38,814
98,224
131,160
268,198
Loans
3
1,462
2,096
4,340
7,901
Leases
-
193
309
1,049
1,551
178
2,933
113
4,590
7,814
-
-
-
-
-
Australian currency on issue
53,595
-
-
-
53,595
Total Financial Liabilities
55,500
57,405
102,423
142,269
357,597
Total
Overdrafts
Deposits
Other interest bearing liabilities
Provisions
General Government
Suppliers
Subsidies payable
On
1 Year
1 to 5
More than
Demand
or Less
Years
5 Years
2012
2012
2012
2012
$m
$m
$m
$m
$m
168
5,372
27
-
5,567
2012
-
204
-
-
204
Grants liability
33
2,066
732
199
3,030
Other payables
68
1,291
34
41
1,434
-
-
-
-
-
192
-
-
-
192
Government securities
-
38,814
99,801
131,160
269,775
Loans
3
3
203
3,219
3,428
Leases
-
170
227
467
864
10
461
85
4,581
5,137
Provisions
-
-
-
-
-
Australian currency on issue
-
-
-
-
-
474
48,381
101,109
139,667
289,631
Overdrafts
Deposits
Other interest bearing liabilities
Total Financial Liabilities
(a) The amounts disclosed in the tables above are the undiscounted values and may not align to the
amounts disclosed in the balance sheet.
(b) The Future Fund has entered into forward exchange contracts to manage exposure to currency risk.
These contracts are settled on a gross basis with the maturities of inflows and outflows as follows:
157
Notes to the financial statements
Liquidity risk 2011(a)(b)
Australian Government
Suppliers
Subsidies payable
On
1 Year
1 to 5
More than
Demand
or Less
Years
5 Years
Total
2011
2011
2011
2011
$m
$m
$m
$m
$m
242
6,621
20
28
6,911
2011
-
301
-
-
301
Grants liability
30
2,325
987
38
3,380
Other payables
208
2,283
1,013
1,038
4,542
-
-
-
-
-
4,244
650
-
-
4,894
Government securities
-
39,786
110,470
96,742
246,998
Loans
-
972
2,152
4,514
7,638
Leases
-
94
237
443
774
Other interest bearing liabilities
-
2,486
203
4,611
7,300
Provisions
-
-
-
-
-
Australian currency on issue
50,059
-
-
-
50,059
Total Financial Liabilities
54,783
55,518
115,082
107,414
332,797
Total
Overdrafts
Deposits
General Government
Suppliers
Subsidies payable
On
1 Year
1 to 5
More than
Demand
or Less
Years
5 Years
2011
2011
2011
2011
$m
$m
$m
$m
$m
217
5,583
18
8
5,826
2011
-
301
-
-
301
Grants liability
30
2,325
987
38
3,380
Other payables
125
606
11
49
791
-
-
-
-
-
200
-
-
-
200
Government securities
-
39,786
110,927
96,742
247,455
Loans
-
232
670
3,421
4,323
Leases
-
93
236
443
772
Other interest bearing liabilities
-
212
200
4,611
5,023
Provisions
-
-
-
-
-
Australian currency on issue
-
-
-
-
-
572
49,138
113,049
105,312
268,071
Overdrafts
Deposits
Total Financial Liabilities
(a) The amounts disclosed in the tables above are the undiscounted values and may not align to the
amounts disclosed in the balance sheet.
(b) The Future Fund has entered into forward exchange contracts to manage exposure to currency risk.
These contracts are settled on a gross basis with the maturities of inflows and outflows as follows:
158
Notes to the financial statements
Gross settled derivatives
On
1 Year
1 to 5
More than
Demand
or Less
Years
5 Years
Total
2012
2012
2012
2012
2012
(Inflow)
-
(23,848)
(1,828)
-
(25,676)
Outflow
-
24,264
1,836
-
26,100
Total
-
416
8
-
424
On
1 Year
1 to 5
More than
Total
Demand
or Less
Years
5 Years
2011
2011
2011
2011
2011
(Inflow)
-
(9,193)
(4,563)
(3)
(13,759)
Outflow
-
9,397
4,634
3
14,034
Total
-
205
71
0
276
Gross settled derivatives
Note 37: Defined benefit superannuation plans
Within the reporting entity, various Australian Government entities sponsor defined
benefit superannuation plans. Following are the plans that are covered in this note:
• Commonwealth Superannuation Scheme (CSS);
• Public Sector Scheme (PSS);
• Parliamentary Contributory Superannuation Scheme (PCSS);
• Defence Force Retirement and Death Benefits Scheme (DFRDB);
• Military Superannuation Benefits Scheme (MSBS); and
• the following defined benefit superannuation schemes have been disclosed under
the heading ‘Other’. Information on the schemes can be found in the annual report
of the responsible entities.
Scheme title
Responsible entities
AvSuper
Australia Post Superannuation Scheme (APSS)
State Authorities Superannuation Scheme (SASS), State
Superannuation Scheme (SSS), State Authorities Non-contributory
Superannuation Scheme (SASCS)
Australian Submarine Corporation Superannuation Fund (ASCSF)
North American and London, Dublin and New Delhi pension
schemes (NAPS and other)
Reserve Bank of Australia Officers’ Superannuation Fund (OSF)
and UK Pension Scheme (UKPS)
The Judges’ Pension Scheme (JPS), Governor-General Pension
Scheme and Federal Magistrates Death and Invalidity Scheme
(these two are included in NAPS and other in the tables)
Airservices Australia
Australia Post Corporation
Australian Rail Track Corporation
159
Australian Submarine Corporation
Department of Foreign Affairs and
Trade
Reserve Bank of Australia
Department of Finance and
Deregulation