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 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 AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

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

19A

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

19B

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 Australian Government 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

19B

Principal associated with forward foreign exchange contracts is recognised on a net basis using the cost method. These contracts comprise exchange of principal only.

In February 2004 all foreign currency derivative exposure was eliminated from the debt portfolio. Up to that time, forward foreign exchange contracts were used to ensure an orderly rundown in exposure against a pre-determined schedule, and not to the maturity profile of the existing foreign currency portfolio. These forward foreign exchange contracts were executed with the Reserve Bank of Australia.

Investments

19C

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 Australian Government’s debt.

Accrued revenues

19D

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 Government securities

20A

Commonwealth Government securities are measured on an amortised cost basis. Premiums and discounts in relation to such borrowings are amortised over the life of the borrowing.

In managing all operational aspects of debt management on behalf of the Australian Government, the AOFM issues and administers various borrowing instruments including Treasury bonds, Treasury Indexed bonds and Treasury notes. The AOFM also administers the redemption of Commonwealth Government securities on allocation to the States and Territories.

Cross currency swap principal

20B

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 net debt portfolio. In February 2004 all foreign currency derivative exposure was eliminated from the debt portfolio.

Interest coupons payable

20D

Interest expense on coupons is recognised on a proportional basis.

Interest coupons are payable on Commonwealth Government securities, interest rate swaps and other loans.

Capital accretion on Treasury Indexed bonds

20D

The principal value of Treasury (Capital) Indexed bonds appreciates over time with the rate of inflation. Capital accretion is recognised as an expense as it accrues.

Treasury (Capital) Indexed bonds.

2004
$’000

2003
$’000

(i) Interest rate swap contracts — notional principal amounts

For the purposes of managing interest rate risk associated with the 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

2,700,000

3,300,000

In one to five years

19,343,000

14,468,000

In more than five years

9,875,000

9,850,000

Total

31,918,000

27,618,000

The market value of interest rate swap contracts at year end is

248,954

1,347,473

(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 provided below. There are no open foreign currency derivative exposures as at 30 June 2004.

Total carrying amount

Gross amount (cost)

2004
$’000

2003
$’000

2004
$’000

2003
$’000

Financial assets

Forward foreign exchange contract principal

-

80,746

-

1,023,443

Cross currency swap principal

-

-

-

5,170,847

Interest receivable – swaps^(a)

-

61,459

-

110,355

Total

-

142,205

-

6,304,645

Financial liabilities

Forward foreign exchange

contract principal

-

-

-

942,697

Cross currency swap principal

-

567,386

-

5,738,233

Interest payable – swaps^(a)

-

-

-

48,896

Total

-

567,386

6,729,826

Net

-

(425,181)

-

(425,181)

As at 30 June 2004 the AOFM is exposed to foreign exchange risk due to contractual obligations on foreign currency loans only.

The foreign currency derivative exposure in the debt portfolio was fully unwound in February 2004. 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 net debt portfolio.

The following currency exposures existed for principal values as at 30 June:

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 the end of the financial year. Loans to State and Territory governments not evidenced by the issuance of securities are valued at amortised cost, as fair value cannot be reliably determined.

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 the end of the financial year.

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 Australian Government’s foreign currency denominated debt is largely illiquid, the valuation approach is based upon deposit and swap rates in each relevant foreign currency.

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 23(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 Australian Government as indicated at Note 23(b).