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Part 4:
Financial Statements

Audit Report

Statement by the Chief Executive Officer and Chief Finance Officer

Statement of financial performance

Statement of financial position

Statement of cash flows

Schedule of commitments

Schedule of contingencies

Schedule of administered items

Notes to and forming part of the financial statements

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Australian Office of Financial Management

Statement by the Chief Executive Officer and Chief Finance Officer

In our opinion, the attached financial statements for the year ended 30 June 2003 give a true and fair view of the matters required by the Finance Minister’s Orders made under the Financial Management and Accountability Act 1997.

SIGNED B Comley Acting Chief Executive Officer 22 August 2003	SIGNED P Raccosta Chief Finance Officer 22 August 2003

 

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Statement of financial performance for the year ended 30 June 2003

The above statement should be read in conjunction with the accompanying notes.

Statement of financial position as at 30 June 2003

The above statement should be read in conjunction with the accompanying notes.

Statement of cash flows for the year ended 30 June 2003

The above statement should be read in conjunction with the accompanying notes.

Schedule of commitments as at 30 June 2003

The above schedule should be read in conjunction with the accompanying notes.

Note: Commitments are GST inclusive where relevant.

1. Commitments relate to contractual obligations for the implementation of a treasury system for the AOFM.
2. Operating leases included are effectively non-cancellable and comprise:

Nature of lease	General description of leasing arrangement
Lease for office accommodation	the lease term is for 15 years less one day with no option to renew; lease payments are subject to review on each second anniversary of the lease commencement date (22 December 2000).

3. Other commitments relate to contractual obligations for the provision of internal audit services, payroll services, consultancies and service agreements with other Commonwealth bodies.

Schedule of contingencies as at 30 June 2003

	2003 $’000	2002 $’000
The AOFM is not aware of any contingent liabilities or assets as of the signing date which require disclosure in the financial statements.
Net contingent liabilities	-	-

The above schedule should be read in conjunction with the accompanying notes.

Schedule of administered items

The above schedule should be read in conjunction with the accompanying notes.

Schedule of administered items (continued)

The above schedule should be read in conjunction with the accompanying notes.

Schedule of administered items (continued)

The above schedule should be read in conjunction with the accompanying notes.

1. Amounts relate to principal only.
2. Includes redemption of debt issued on behalf of the States.

Schedule of administered items (continued)

The above schedule should be read in conjunction with the accompanying notes.

Note: Commitments are GST inclusive where relevant.

1. Other commitments relate to contractual obligations to fiscal agents, financial wire service providers and for software maintenance fees.

Schedule of administered items (continued)

Administered contingencies as at 30 June 2003	2003 $’000	2002 $’000
The AOFM is not aware of any contingent liabilities or assets as of the signing date which require disclosure in the financial statements.
Net contingent liabilities	-	-
Statement of activities administered on behalf of Government
The administered activities of the AOFM are directed towards managing the Commonwealth’s net debt portfolio at least cost over the medium term, subject to the government’s policies and risk preferences. The major financial activities of the AOFM include the issuance of various borrowing instruments, the strategic formulation and undertaking of portfolio management, including through swap transactions, and the administration of the debt portfolio. Details of the AOFM’s planned activities for 2002-03 can be found in the Treasury Portfolio Budget and Portfolio Additional Estimates Statements for 2002-03, which have been tabled in Parliament.

The above schedule should be read in conjunction with the accompanying notes.

Notes to and forming part of the financial statements for the year ended 30 June 2003

Note	Description
1	Summary of significant accounting policies
2	Operating revenues
3	Operating expenses
4	Financial assets
5	Non-financial assets
6	Provisions
7	Payables
8	Equity
9	Cash flow reconciliation
10	Contingent liabilities and assets
11	Executive remuneration
12	Remuneration of auditors
13	Average staffing level
14	Act of grace payments, waivers and defective administration scheme
15	Financial instruments
16	Revenues administered on behalf of government
17	Expenses administered on behalf of government
18	Assets administered on behalf of government
19	Liabilities administered on behalf of government
20	Administered reconciliation table
21	Administered contingent liabilities and assets
22	Administered financial instruments
23	Appropriations
24	Reporting of outcomes
25	Events occurring after reporting date

Note 1: Summary of significant accounting policies

1.1 Objectives of the AOFM

The Australian Office of Financial Management (AOFM), a ‘prescribed agency’ under the Financial Management and Accountability Act 1997, is responsible for the Commonwealth’s debt management activities.

The AOFM aims to manage the Commonwealth net debt portfolio at least cost over the medium term, subject to the government’s policies and risk preferences.

The AOFM delivers a single output — debt management. Debt management encompasses the execution of instruments including Treasury Bonds, Treasury Indexed Bonds, Treasury Notes and associated derivatives. It also encompasses risk management activities, compliance activities, financial reporting and debt administration.

Debt management activities comply with applicable accounting standards and legislative requirements.

1.2 Basis of accounting

The financial statements are required by section 49 of the Financial Management and Accountability Act 1997, and are a general purpose financial report prepared on a going concern basis.

The statements have been prepared in accordance with:

• Finance Minister’s Orders (FMOs) (being the Financial Management and Accountability (Financial Statements for reporting periods ending on or after 30 June 2003) Orders);
• Australian Accounting Standards and Accounting Interpretations issued by the Australian Accounting Standards Board; and
• the Consensus Views of the Urgent Issues Group (UIG).

The Statements of Financial Performance and Financial Position have been prepared on an accrual basis and are in accordance with the historical cost convention, except for certain assets, which, as noted, are at fair valuation.

Liabilities and assets, which are unrecognised in the Statement of Financial Position are reported in the Schedule of Commitments or the Schedule of Contingencies (other than unquantifiable or remote contingencies which are reported at Notes 10 and 21).

The continued existence of the AOFM in its present form, and with its present programs, is dependent on government policy and on continuing appropriations by Parliament for the AOFM’s administration and programs.

Administered revenues, expenses, assets, liabilities and cash flows reported in Schedule of Administered Items and related Notes are accounted for on the same basis and using the same policies as for Departmental items, except where otherwise stated at Note 1.16.

1.3 Departmental and administered items

Departmental assets, liabilities, revenues and expenses are those items that are controlled by the AOFM including:

• computers, plant and equipment used in providing goods and services;
• liabilities for employee entitlements;
• revenues from user charging etc, where the proceeds are deemed appropriated under section 31 of the Financial Management and Accountability Act 1997; and
• employee expenses and other administrative expenses incurred in delivering outputs.

Administered assets, liabilities, revenues and expenses are those items which are controlled by the government and managed or overseen by the AOFM on behalf of the government. These items include the repayment and repurchase of Commonwealth debt, principal and interest transactions on swaps, grant payments to other governments and interest payments on Commonwealth debt.

The purpose for the separation of administered and departmental items is to enable assessment of the administrative efficiency of the AOFM in providing goods and services.

Administered items are identified separately in the financial statements by shading.

1.4 Changes in accounting policy

The accounting policies used in the preparation of the financial statements are consistent with those used in 2001-02, except in respect of:

• the recognition of equity injections (refer to Note 1.6(a));
• the initial revaluation of property, plant and equipment on a fair value basis (refer to Note 1.11(b)); and
• the measurement, under the historical cost convention, of administered financial assets and liabilities (refer to Note 1.16(f) and Note 16).

1.5 Revenue (Departmental)

The revenues described in this Note are revenues relating to the departmental activities of the AOFM.

(a) Revenues from government — appropriations

The full amount of the appropriation for departmental outputs for the year (less any savings offered up at Additional Estimates) is recognised as revenue.

(b) Resources received free of charge

Services received free of charge are recognised in the Statement of Financial Performance as revenue when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

(c) Other revenue

Revenue from the sale of goods is recognised upon the delivery of goods to customers. Revenue from the rendering of a service is recognised by reference to the stage of completion of contracts or other agreements to provide services.

Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. With the discontinuation of the Agency Banking Incentive Scheme from 1 July 2003, the AOFM will not earn interest revenue on departmental cash balances and deposits for 2003-04 and onwards.

Revenue from disposal of non-current assets is recognised when control of the asset has passed to the buyer.

1.6 Transactions with the government as owner (Departmental)

(a) Equity injections

From 1 July 2002, the FMOs require that appropriations designated as ‘equity injections’ (less any savings offered up at Additional Estimates) be recognised directly in Contributed Equity in the Statement of Financial Position as at 1 July or, if later, the date of effect of the appropriation.

This is a change of accounting policy from 2001-02. In 2001-02, to the extent that an appropriation was dependent on specific future events occurring, the appropriation was not recognised until it was drawn from the Official Public Account.

The financial effect of this change in accounting policy was to increase the AOFM’s departmental net assets by $2,939,000 on 1 July 2002.

(b) Capital use charge

A capital use charge of 11 per cent (2001-02: 11 per cent) is imposed by the Commonwealth on the departmental net assets of the AOFM. The net assets are adjusted to take account of asset gifts and revaluation increments during the financial year. The charge is accounted for as a dividend to government.

The government has decided to discontinue the capital use charge from 1 July 2003.

(c) Other distributions to owners

The FMOs require that distributions to owners be debited to Contributed Equity in the Statement of Financial Position unless the distributions are in the nature of a dividend.

In 2001-02, by agreement with the Department of Finance and Administration, the AOFM returned by way of dividend, surplus output appropriation funding of $1,052,000 to the Official Public Account.

The AOFM did not make a distribution to owners during 2002-03.

1.7 Employee entitlements (Departmental)

(a) Leave

The liability for employee entitlements includes provisions for annual leave and long-service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the AOFM is estimated to be less than the annual entitlement for sick leave.

The liability for annual leave reflects the value of total annual leave entitlements of all employees at 30 June 2003, and is recognised at its nominal amount. The nominal amount is calculated with regard to pay rates applicable at year end.

The liability for long-service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at 30 June 2003. In determining the present value of the liability, the AOFM has commissioned an actuarial assessment by the Australian Government Actuary of the anticipated attrition rates and pay increases through promotion and general wage increases.

(b) Separation and redundancy

Provision is made for separation and redundancy payments in circumstances where the AOFM has formally identified positions as excess to requirements and a reliable estimate of the amount of the payments can be determined.

(c) Superannuation

Staff of the AOFM contribute to the Commonwealth Superannuation Scheme, Public Sector Superannuation Scheme and other employee nominated schemes. Employer contributions (including productivity contributions) to these schemes amounting to $400,718 (2001-02:  $271,098) have been expended in the financial statements.

The AOFM makes employer contributions to the Commonwealth at rates determined by an actuary to be sufficient to meet the cost to the Commonwealth of the superannuation entitlements of its employees. The liability for superannuation benefits payable to an employee upon termination is recognised in the financial statements of the Commonwealth.

A liability has been recognised in the Statement of Financial Position for employer superannuation contributions payable on all accrued recreation and long service leave as at 30 June 2003. In addition, a liability has been recognised as at 30 June 2003 for outstanding superannuation contributions payable in relation to the final fortnight of the year.

1.8 Leases (Departmental)

A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all risks and benefits incidental to ownership of leased non-current assets, and operating leases under which the lessor effectively retains substantially all such risks and benefits.

The AOFM holds operating leases only. Operating lease payments are charged to the Statement of Financial Performance on a basis which is representative of the pattern of benefits derived from the leased assets.

1.9 Cash and investments (Departmental)

Cash includes notes and coins held and any deposits held at call with a bank or financial institution for a term of three months or less.

Deposits held with a bank or financial institution for greater than three months are classified as investments.

1.10 Financial instruments (Departmental)

Accounting policies for financial instruments are stated at Note 15.

1.11 Infrastructure, plant and equipment (Departmental)

(a) Asset recognition threshold on acquisition

Purchases of infrastructure, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $500, which are expensed in the year of acquisition. The asset recognition threshold is applied to each functional asset. That is, items or components that form an integral part of an asset are grouped as a single asset.

(b) Revaluations

Basis

In accordance with Australian Accounting Standard AASB 1041 Revaluation of Non-Current Assets, the AOFM revalues its property, plant and equipment by reference to the ‘fair value’ method of valuation.

Fair value has been determined as depreciated replacement cost for leasehold improvements and market selling price for plant and equipment.

Prior to 1 July 2002, the FMOs required that revaluations be conducted in accordance with the ‘deprival’ method of valuation. Given that all of the AOFM’s property, plant and equipment assets were recorded at historical cost at 30 June 2002, the change in accounting policy has no financial effect.

Frequency

Property, plant and equipment is formally revalued every three years. All property, plant and equipment assets were revalued as at 30 June 2003.

Assets acquired after the commencement of a revaluation are not captured by the revaluation then in progress.

Conduct

All valuations are conducted by an independent qualified valuer.

(c) Recoverable amount test

From 1 July 2002, the FMOs no longer require the application of the recoverable amount test in Australian Accounting Standard AAS 10 Recoverable Amount of Non-Current Assets to the assets of agencies when the primary purpose of the asset is not for generation of net cash inflows.

No property plant and equipment assets have previously been written down to their recoverable amounts. Accordingly the change in accounting policy has no financial effect.

(d) Depreciation and amortisation

The depreciable value of plant and equipment assets is written off over the estimated useful lives of the assets to the AOFM using the straight-line method of depreciation. Leasehold improvements are amortised on a straight-line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease.

Depreciation and amortisation rates (useful lives) and methods are reviewed at each balance date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

The depreciable value of infrastructure, plant and equipment assets is based on a zero residual value.

Depreciation and amortisation expenses have been determined by applying rates to each class of depreciable asset based on the following useful lives:

	2003	2002
Leasehold improvements	10 years	10 years
Computers, plant and equipment	3-5 years	3-5 years
Office equipment	5 years	5 years
Furniture	10 years	10 years

The aggregate amount of depreciation and amortisation allocated for each class of asset during the reporting period is disclosed at Note 3C.

1.12 Computer software (Departmental)

Purchases of computer software are recognised at cost in the Statement of Financial Position except for purchases costing less than $10,000, which are expensed in the year of acquisition.

An item of software represents:

• a software licence granted for greater than 12 months; or
• a developed software application.

Developed software is recognised by capitalising all directly attributable internal and external costs that enhance the software’s functionality and therefore service potential.

Software assets are amortised on a straight-line basis over their anticipated useful lives, being three to five years. Software assets are not subject to revaluation and consequently are carried at cost in the financial statements.

1.13 Taxation

The AOFM is exempt from all forms of taxation except for Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Revenues, expenses and assets are recognised net of GST, except:

• where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
• for receivables and payables.

Receipts and payments in the Statement of Cash Flows are recorded in gross terms.

All supplies provided by the AOFM are input taxed under the GST legislation. In accordance with applicable GST regulations the AOFM is entitled to a reduced input tax credit (equal to 75 per cent of the GST paid) on some purchases such as security transaction services.

1.14 Insurance

The Commonwealth’s insurable risk management fund, ‘Comcover’, commenced operation in the 1998-99 financial year. The AOFM has insured with the fund to meet property, common law and other commercially insurable risks other than workers’ compensation (which is dealt with via continuing arrangements with Comcare Australia).

1.15 Comparative figures

In certain instances, comparative figures have been re-cast as a result of changes in the form, content and disclosure requirements applicable to the AOFM since the previous financial year.

1.16 Reporting of administered activities Administered revenues, expenses, assets, liabilities and cash flows are presented in the Schedule of Administered Items and related Notes. Administered appropriations from the Official Public Account (OPA) or transfers by the AOFM of administered receipts to the OPA are not reported in the administered financial statements. This accounting treatment acknowledges that these transactions are internal to the Administered entity. An exception to the above policy relates to the disclosure of administered cash flows, given that cash transferred between the OPA and AOFM’s administered bank account is necessary for the completeness of the cash flow disclosures. Accounting policies relevant to the administered activities of the AOFM are disclosed below. (a) Revenue All administered revenues are revenues relating the activities performed by the AOFM on behalf of government. Interest revenue is earned on loans to State and Territory governments, term deposit investments and swaps. Interest is credited to revenue as it accrues. Interest revenue on swaps is disclosed on a gross basis in the Schedule of Revenues Administered on Behalf of Government. (b) Grants Under the Financial Agreement Act 1994, the Commonwealth compensates the State and Territory governments: for additional interest costs of replacing maturing Commonwealth debt with borrowings in their own names, or through their authorities, rather than by the Commonwealth borrowing on their behalf; and for reduction in contributions from the Commonwealth resulting from the new arrangements. In addition to the above compensation, the Commonwealth assists the State and Territory governments to redeem maturing debt issued by the Commonwealth on their behalf. Payments made to the State and Territory governments under these arrangements are recognised as expenses as and when they fall due and payable. (c) Borrowing costs All borrowing costs are expensed as incurred except to the extent that they are directly attributable to qualifying assets, in which case they are capitalised. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. The AOFM’s 2002-03 borrowing program did not specifically raise funds for qualifying assets. (d) State and Territory advances Until July 1990, the Commonwealth borrowed on behalf of the State and Territory governments and allocated a portion of the proceeds of its bond raisings to these governments. The States and Territories are responsible for meeting all obligations as to interest and principal on the Commonwealth debt on allocation to them. Debt on allocation to the State and Territory governments, and other advances made under Commonwealth-State financing arrangements not evidenced by the issue of securities, are recognised as loans to State and Territory governments. Loans to State and Territory governments are measured on an amortised cost basis and reduced to the extent to which they are impaired or uncollectable. (e) Administered investments The value of Commonwealth issued securities held as an investment in the Treasurer’s name through the investment power under the Financial Management and Accountability Act 1997 is deducted from the face value of the administered borrowings liability. Any gain or loss on acquiring investments is reported in the Statement of Financial Performance and recognised at the time the investment is made. The net effect of this accounting policy is to report the impact of transactions with external parties only. (f) Administered borrowings — Commonwealth Government securities Effective from 30 June 2003, Commonwealth Government securities are measured on an amortised cost basis using the effective interest method (or market yield at time of issuance). Prior to 30 June 2003, Commonwealth Government securities were measured on an amortised cost basis using the straight-line method. The financial effect of this change in accounting policy is disclosed at Note 16. Where a security is issued at a premium or discount, the premium or discount is recognised at that time and included in the book value of the liability administered on behalf of government. The discount or premium is amortised over the life of the security. For Treasury Capital Indexed Bonds, the principal value appreciates over time with the rate of inflation. As future inflation rates are not certain, an estimate of the Commonwealth’s future redemption cost on maturity is not disclosed in the financial statements. Borrowings are recognised on a gross basis, that is, they include borrowings on behalf of the State and Territory governments. (g) Derivative transactions The AOFM executes interest rate swap transactions on behalf of the Commonwealth to assist with the management of market risk associated with the Commonwealth debt portfolio. The AOFM is managing the orderly run-down of its foreign currency exposure, principally in the nature of cross-currency swaps, by entering into forward foreign exchange contracts with the Reserve Bank of Australia. The principal associated with cross-currency swaps and forward foreign exchange contracts is recognised on a net basis using the cost method. The notional principal associated with interest rate swaps is not recognised as an asset or liability. Swap interest payable and receivable is also recognised on a net basis. The AOFM operates a prudent credit risk management framework. It transacts with high quality counterparties (Aa3/AA- credit rating or higher) and actively undertakes credit mitigation strategies where credit exposure limits are reached. Furthermore, no specific swap debtors have been assessed as being unable to meet contractual obligations due to the Commonwealth as at 30 June 2003. Consequently, the AOFM has not established a provision for uncollectability for amounts due on swap contracts. (h) Foreign currency Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current as at balance date. Exchange gains (both realised and unrealised) arising from foreign currency transactions are reported in the Schedule of Revenues Administered on Behalf of Government. Exchange losses are reported in the Schedule of Expenses Administered on Behalf of Government. (i) Financial instruments Accounting policies for financial instruments are stated at Note 22.

Note 2: Operating revenues

Note 3: Operating expenses

(a) No depreciation or amortisation was allocated to the carrying amounts of other assets.

Note 4: Financial assets

Note 5: Non-financial assets — infrastructure, plant and equipment and intangibles

All revaluations are independent and are conducted in accordance with the revaluation policy stated at Note 1. In 2002-03, the revaluations were conducted by an independent valuer, the Australian Valuation Office.

A revaluation increment of $138,000 for leasehold improvements was made to the asset revaluation reserve. A decrement of $77,000 for computers, plant and equipment was expensed.

Note 6: Provisions

Note 7: Payables

Note 8: Equity

Note 8A: Analysis of equity

Note 9: Cash flow reconciliation

Note 10: Contingent liabilities and assets

Unquantifiable contingencies The AOFM is not aware of any unquantifiable contingencies as of the signing date that require disclosure in the financial statements. Remote contingencies The AOFM has indemnified a number of contractors providing goods and services under contract, for losses incurred by the contractor due to, amongst other things, AOFM’s failure to observe certain terms of contract, or wrongful, unlawful or negligent acts. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

Note 11: Executive remuneration

The number of executives who received or were due to receive total remuneration of $100,000 or more:

	2003	2002
$220,000 to $229,999	1	-
$230,000 to $239,999	-	1
$270,000 to $279,999	1	-
$290,000 to $299,999	-	1
The aggregate amount of total remuneration of executives shown above	$501,859	$533,656
The aggregate amount of separation and redundancy payments during the year to executives shown above	-	-

Remuneration means any money, consideration or benefit including wages, salaries, performance pay, accrued leave entitlements, superannuation contributions, the cost of motor vehicles, housing, commuting and allowances. Remuneration does not include reimbursement of out-of-pocket expenses.

Note 12: Remuneration of auditors

Financial statement audit services are provided free of charge to the AOFM. The fair value of the audit services provided by the Australian National Audit Office was:

	2003 $	2002 $
	174,900	136,400

Auditors’ remuneration is disclosed inclusive of GST.

No other services were provided by the Auditor-General.

Note 13: Average staffing level

The average staffing level for the AOFM during the year was:

	2003	2002
	32	31

Note 14: Act of grace payments, waivers and defective administration scheme

No ‘Act of Grace’ payments were made during the reporting period (Nil for 2001-02).

Three waivers of amounts owing to the Commonwealth were made pursuant to subsection 34(1) of the Financial Management and Accountability Act 1997 during the reporting period totalling $96 ($12 for 2001-02).

No payments were made under the ‘Defective Administration Scheme’ during the reporting period (Nil for 2001-02).

Note 15: Departmental financial instruments

Note 15A: Terms, conditions and accounting policies

Financial instruments	Notes	Accounting policies and methods	Nature of underlying instruments
Financial assets		Financial assets are recognised when control over future economic benefits is established and the amount  of the benefit can be reliably measured.
Cash at bank		Deposits are recognised at their nominal amounts. Interest is credited to revenue as it accrues.	The AOFM maintains an operational bank account with the Reserve Bank of Australia. Monies in the account are swept into the Official Public Account nightly and interest is earned on the daily balance at a fixed annual rate of 2 per cent. Interest is paid quarterly.
Receivables	4A	Receivables are recognised at the nominal amounts due less any provision for bad and doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely.	Receivables primarily comprise amounts due from the Official Public Account for non-lapsing departmental appropriations. Receivables are non-interest bearing.
Investments	4B	Deposits held with financial institutions for terms of greater than 3 months are recognised as ‘investments’ and recorded at their nominal amounts. Interest is credited to revenue as it accrues	The AOFM did not invest surplus funds in fixed term deposits with the Reserve Bank of Australia in 2002-03. The annual interest rate on the term deposit maturing in 2002-03 was 4.9 per cent. Interest is paid on maturity of each deposit.
Financial liabilities		Financial liabilities are recognised when a present obligation to another party is entered into and the amount of the liability can be reliably measured.
Provisions & payables	6B 7A 7B	Creditors and accruals are recognised at their nominal amounts, being the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).	Trade liabilities are normally settled on 30 day terms.

Note 15B: Interest rate risk

The AOFM’s exposure to interest rate risk and the effective weighted average interest rate for each class of financial assets and financial liabilities is set out below:

Note 15C: Net fair values of financial assets and liabilities

Financial assets

The net fair values of cash, non-interest bearing monetary financial assets and short-term investments approximate their carrying amounts.

Financial liabilities

The net fair values for suppliers are approximated by their carrying amounts.

Note 15D: Credit risk exposures

The AOFM’s maximum exposures to credit risk at reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the Statement of Financial Position.

Note 16: Revenues administered on behalf of government

With the implementation of a specialist debt management system, the AOFM has moved to align its accounting framework fully with best practice financial market conventions. The principal changes relate to the measurement, under the historical cost accounting convention of Treasury Bonds and Treasury Capital Indexed Bonds; and specifically: move to measure issuance premiums and discounts by reference to the capital value of proceeds only. Under previous accounting policy, the AOFM measured issue premiums and discounts by reference to the full settlement proceeds (including the accrued coupon on the bond) received on issuance; move to measure issuance premiums and discounts on Treasury Capital Indexed Bonds by reference to the nominal principal value of the bond at the time of issue. Under previous accounting policy, the AOFM measured issue premiums and discounts by reference to the full settlement proceeds (including the capital accretion on the bond) received on issuance; move to measure book value using the effective interest method by applying the market yield at time of issuance to the relevant pricing formula. Under previous accounting policy, the AOFM applied a straight-line interest method; and move to measure accrued interest on an end-of-day basis. Under previous accounting policy, the AOFM measured accrued interest on an intra-day basis. The change in accounting policy, effective from 30 June 2003, has resulted in a one-off reduction in the book value of AOFM administered net liabilities of $469 million. The AOFM’s accounting framework is fully compliant with applicable Australian Accounting Standards, both prior to and following on from these changes.

Note 17: Expenses administered on behalf of government

Note 18: Assets administered on behalf of government

Note 19: Liabilities administered on behalf of government

Note 20: Administered reconciliation table

1. 2001-02 Includes notional monies associated with assumption of former debt of SMHEA.
2. Includes interest receipts earned by the AOFM, banked directly into the Official Public Account, on term deposits made under section 39(2) of the Financial Management Accountability Act 1997.
3. The AOFM’s term deposit investments have been accounted for on the basis that funds placed on term deposit with the Reserve Bank of Australia do not involve surrender of control by the Commonwealth (that is, money does not leave the Consolidated Revenue Fund (CRF)). Given this, exercising the Treasurer’s investment power under section 39(2) of the Financial Management and Accountability Act 1997 does not require the drawing of an appropriation (which would be otherwise available under section 39(9) of the Financial Management and Accountability Act 1997).

Note 21: Administered contingent liabilities and assets

Unquantifiable contingencies The AOFM is not aware of any unquantifiable contingencies as of the signing date that require disclosure in the financial statements. Remote contingencies The Commonwealth has indemnified the underwriters of foreign currency denominated loans issued by the Commonwealth outside Australia against any loss, liability, costs, claims, charges, expenses, actions, or demands due to any misrepresentation by the Commonwealth and any breach of warranties. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

Note 22: Administered financial instruments

(a) Terms, conditions and accounting policies

Financial instruments	Notes	Accounting policies and methods	Nature of underlying instruments
Financial Assets		Financial assets are recognised when control over future economic benefits is established and the amount of the benefit can be reliably measured.
Cash at bank	18A	Deposits are recognised at their nominal amounts.	The AOFM maintains two operational bank accounts with the Reserve Bank of Australia. Interest is not paid on these accounts.
Loans to State and Territory governments	18B	Loans are recognised at the amounts lent. Interest is credited to revenue as it accrues. Collectability of amounts outstanding is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan or part thereof is judged to be less rather than more likely. In rare circumstances, loan repayments may be waived.	Until July 1990, the Commonwealth borrowed on behalf of the State and Territory governments and allocated a portion of the proceeds of its Treasury Bond raisings to those governments to fund the redemption of previous allocations of Commonwealth government securities (CGS). The States and Territories are responsible for meeting all obligations as to interest and principal on the CGS on allocation to them in accordance with the provisions of the Financial Agreement Act 1994. In addition to the CGS, there are outstanding balances of loans raised specifically for the States. State and Territory government loans include advances, not evidenced by the issue of securities, made for housing and specific purpose capital payments.
Forward foreign exchange contract principal	18B	Principal associated with forward foreign exchange contracts is recognised on a net basis using the cost method. These contracts comprise exchange of principal only.	Foreign currency exposure is being unwound from the Commonwealth debt portfolio in line with a schedule that will see the orderly elimination of the exposure over time. Forward foreign exchange contracts are used to ensure that the rundown in exposure is aligned to the schedule, not to the maturity profile of the existing foreign currency portfolio. These forward foreign exchange contracts are executed with the Reserve Bank of Australia.
Investments	18C	Investments are recognised at their nominal amounts. Interest is credited to revenue as it accrues.	Under section 39(2) of the Financial Management and Accountability Act 1997, the AOFM invests public money in authorised investments for the purpose of managing the Commonwealth debt.
Accrued revenues	18D	Interest is credited to revenue as it accrues.	Accrued revenues comprise interest receivable on swaps, term deposits and loans to State and Territory governments.
Financial Liabilities		Financial liabilities are recognised when a present obligation to another party is entered into and the amount of the liability can be reliably measured.
Commonwealth securities	19A	Commonwealth securities are measured on an amortised cost basis. Premiums and discounts in relation to such borrowings are amortised over the life of the borrowing.	The AOFM is responsible for advising the Treasurer on all operational aspects of debt management on behalf of the Commonwealth, including the issue of various borrowing instruments and the administration of the redemption of debt. The AOFM also administers the redemption of Commonwealth government security debt on allocation to the States and Territories.
Cross-currency swap principal	19B	Swap principal associated with cross-currency swaps is recognised on a net basis using the cost method. Interest revenue and expense is recognised as it accrues. Note: the notional principal associated with interest rate swaps is not recognised as assets or liabilities.	As a matter of previous portfolio benchmark policy, the AOFM maintained a United States Dollar exposure, through cross-currency swaps, of between 10 to 15 per cent of the Commonwealth net debt portfolio. The foreign currency exposure is being unwound in line with a schedule agreed between the AOFM, the Treasury and the Reserve Bank of Australia that will see the gradual elimination of the exposure over time.
Interest coupons payable on Commonwealth securities and swaps	19D	Interest expense on coupons is recognised on a proportional basis.	Interest coupons are payable on Commonwealth government securities, swaps and other loans.
Capital accretion on Capital Indexed Bonds	19D	The principal value of Capital Indexed Bonds appreciates over time with the rate of inflation. Capital accretion is recognised as an expense as it accrues.	Capital Indexed Bonds.

(b) Derivatives

				2003 $’000	2002 $’000
(i) Interest rate swap contracts — notional principal amounts
For the purposes of managing market risk associated with the Commonwealth debt portfolio, the AOFM has entered into interest rate contracts under which it is obliged to receive and pay interest at fixed and/or floating interest rates.
Within one year				3,300,000	3,375,000
In one to five years				14,468,000	13,358,000
In more than five years				9,850,000	14,260,000
Total				27,618,000	30,993,000
The market value of interest rate swap contracts at year end is				1,347,473	256,690
(ii) Cross-currency swap contracts and forward foreign exchange contracts Cross-currency swap principal, forward foreign exchange contract principal and interest payable/receivable in relation to cross-currency swaps are disclosed in the financial statements on a net basis. The gross amounts together with their carrying amounts in the financial statements are as follows:

	Total carrying amount		Gross amount (cost)
	2003 $’000	2002 $’000	2003 $’000	2002 $’000
Financial assets
Forward foreign exchange contract principal	80,746	150,478	1,023,443	2,413,853
Cross-currency swap principal	-	-	5,170,847	6,635,284
Interest receivable – swaps(a)	61,459	70,190	110,355	135,616
Total	142,205	220,668	6,304,645	9,184,753
Financial liabilities
Forward foreign exchange contract principal	-	-	942,697	2,263,375
Cross-currency swap principal	567,386	1,900,886	5,738,233	8,536,170
Interest payable – swaps(a)	-	8,792	48,896	74,218
Total	567,386	1,909,678	6,729,826	10,873,763
Net	(425,181)	(1,689,010)	(425,181)	(1,689,010)

1. Amounts exclude interest rate swaps.

(c) Foreign exchange risk

The AOFM is exposed to foreign exchange risk due to contractual obligations in relation to cross-currency swaps, forward foreign exchange contracts and foreign currency loans. The foreign currency exposure in the Commonwealth debt portfolio, principally in the nature of cross-currency swaps, is being unwound in line with a schedule that will see the orderly elimination of the exposure over time. As a matter of previous portfolio benchmark policy, the AOFM maintained a United States Dollar exposure of between 10 to 15 per cent of the Commonwealth net debt portfolio. The following currency exposures existed for principal values as at 30 June:

(d) Interest rate risk

.

1. Amounts exclude swaps.
2. Amounts are represented on a gross basis. This differs from the presentation in the Schedules of Administered Assets and Liabilities Administered on Behalf of Government, where amounts are on a net basis.

(e) Net fair values of administered financial assets and liabilities

Fair value has been determined on the presumption that the AOFM is a going concern and is operating in an active market under normal market conditions, without any intention or need to liquidate, curtail materially the size of its debt portfolio or undertake transactions on adverse terms. Financial assets The net fair values of cash, non-interest bearing monetary financial assets and short-term investments, approximate their carrying amounts. The net fair value of swaps and forward foreign exchange contracts is based on discounted cash flows using market swap rates as at balance date. Loans to State and Territory governments not evidenced by the issuance of securities are valued at book value, which is above their net fair value, as it is intended to hold them to maturity. Financial liabilities The net fair value of swaps and forward foreign exchange contracts is based on discounted cash flows using market swap rates as at balance date. The net fair values for trade creditors are short-term in nature, and are approximated by their carrying amounts. The net fair values of Commonwealth government securities are based on discounted cash flows using a zero coupon curve valuation methodology. The valuation of Australian dollar denominated debt is based on market yields of the most liquid components of the domestic debt portfolio. As the secondary market for the Commonwealth’s foreign currency denominated debt is largely illiquid, the valuation approach is based upon deposit and swap rates in each relevant foreign currency.

(f) Credit risk exposures

The AOFM’s exposure to credit risk at reporting date in relation to each class of recognised financial assets is the aggregate net fair value of those assets as indicated at Note 22(e). There is no credit risk on the notional principal associated with interest rate swaps. Credit risk on interest rate swaps relates to the net fair value of net interest obligations owing to the Commonwealth as indicated at Note 22(b).

Note 23: Appropriations

Note 23A: Cash basis acquittal of appropriations from Acts 1 and 3

Outcome 1 — Enhance the Commonwealth’s capacity to manage its net debt portfolio

Act 2 = Appropriation Act (No.2) 2002-2003.
Act 4 = Appropriation Act (No.4) 2002-2003.

Note 23B: Cash basis acquittal of appropriations from Act 2 and 4

Outcome 1 — enhance the Commonwealth's capacity to manage its net debt portfolio

Note 23C: Cash basis acquittal of special appropriations (unlimited)

1. Legal agreements executed between the Commonwealth and swap counterparties (in the form of 1992 International Swap Dealers Association Master Agreements) provide that where amounts would be otherwise payable in the same currency and in respect of the same transaction by each party to the other, each party’s obligation to make payment shall be automatically satisfied and discharged and shall be replaced by an obligation upon the party by whom the larger aggregate amount would have been payable, to pay the other party the excess of the larger aggregate amount over the smaller aggregate amount (that is, settlement of each transaction on a net basis).

Forward foreign exchange contracts with the RBA are transacted on the basis that where amounts would be otherwise payable in the same currency and on the same date by each party to the other, each party’s obligation to make payment is automatically satisfied and discharged and replaced by an obligation upon the party by whom the larger aggregate amount would have been payable, to pay the other party the excess of the larger aggregate amount over the smaller aggregate amount (that is, settlement of all transactions on a particular day on a net basis).

The amounts disclosed at Note 23C are represented on a net basis in relation to interest payments on swaps and principal payments in relation to forward foreign exchange contracts. The aggregate amounts are as follows:

	2003 $	2002 $
Payments made (expenditure)	9,643,188,916	8,705,952,492

Note 23D: Special accounts (Administered)

Debt Retirement Reserve Trust Account

• Legal Authority — Financial Management and Accountability Act 1997, section 21.
• Purpose — for the payment and receipt of moneys in accordance with the Financial Agreement Act 1994.

Note 24: Reporting of outcomes

Note 24A: Net cost of outcome delivery

Note 24B: Major departmental revenues and expenses by output group

Note 24C: Major classes of administered revenues and expenses by outcome

Note 25: Events occurring after reporting date

There have been no significant events occurring after reporting date that would materially affect these financial statements.