Part 4: Financial Statements

Statement by the Chief Executive Officer and Chief Financial Officer

In our opinion, the attached financial statements for the year ended 30 June 2019 comply with subsection 42 (2) of the Public Governance, Performance and Accountability Act 2013, and are prepared from properly maintained financial records as required by subsection 41 (2) of the Public Governance, Performance and Accountability Act 2013.

In our opinion, and on the condition of receiving continuing appropriations from Parliament, there are reasonable grounds to believe that the Australian Office of Financial Management will be able to pay its debts as and when they fall due.

No matter, transaction or event of a material or unusual nature has arisen in the interval between the end of the reporting period (30 June 2019) and the date of signing this report that has significantly affected or may significantly affect the AOFM’s operations.

Objectives and activities of the AOFM

The AOFM’s activities are focused on delivering to the following policy outcome:

the advancement of macroeconomic growth and stability, and the effective operation of financial markets, through issuing debt, investing in financial assets and managing debt, investments and cash for the Australian Government.

The AOFM aims to achieve the outcome through the following objectives:

• meeting the budget financing task in a cost-effective manner subject to acceptable risk;
• facilitating the government’s cash outlay requirements as and when they fall due; and
• being a credible custodian of the Australian Government Securities market and other portfolio responsibilities.

The AOFM manages a portfolio of debt and financial assets on behalf of the Australian Government. It issues Treasury Bonds and Treasury Indexed Bonds to finance budget deficits. It also manages the government’s cash in the Official Public Account (OPA) which is surplus to immediate requirements to manage the within-year financing task. It undertakes the administration, financial and operational risk management, and financial reporting of its portfolio of debt and assets.

Financing the budget

In the absence of budget deficits debt issuance by the AOFM has been used to maintain the Treasury Bond and Treasury Bond futures markets. Since the onset of the Global Financial Crisis in 2008-09 the AOFM has had to significantly increase debt issuance and intensify its engagement with investors (including overseas investors) and intermediaries.

Portfolio management

The cost and risk of the debt portfolio is managed through debt issuance and (where appropriate) investment activities. Since early 2009, budget deficits have required debt issuance volumes that have exceeded those necessary to maintain liquidity in Treasury Bond and Treasury Bond futures markets, affording the AOFM with a greater level of flexibility in setting its issuance program against an overarching objective of minimising cost subject to acceptable risk. In recent years the AOFM has lengthened the duration of its Treasury Bond portfolio through longer term issuance as a means of reducing refinancing risk and the variability of debt servicing costs over time. The Treasury Bond yield curve extends to 28 years currently (an extension of 16 years since 2011).

Cash management

The AOFM manages the overall level of cash in the OPA to ensure that the government is able to meet its financial obligations as and when they fall due. To this end, it makes short term borrowings by issuing Treasury Notes and invests OPA cash surplus to immediate requirements in term deposits with the RBA. The AOFM holds continuing balances of highly liquid assets to allow it to respond flexibly and quickly to meet unexpected expenditure requirements and disruptions in the markets.

The OPA is recorded in the Department of Finance’s financial statements and is not reported by the AOFM.

Australian Business Securitisation Fund (ABSF)

In November 2018 the government announced the establishment of the Australian Business Securitisation Fund (ABSF) to foster competition in the small and medium enterprise (SME) lending market with the aim of improving access to, and over time the cost of finance to SMEs.

In February 2019, the government introduced the Australian Business Securitisation Fund Bill 2019 into Parliament to establish the ABSF and to credit it over a period of 5 years with $2 billion to meet the purposes set out in the Bill. The Bill received royal assent on 5 April 2019. The ABSF received its first credit of funding on 1 July 2019 for an amount of $250 million. On 1 July 2020 the ABSF will receive a further funding credit of $250 million.

The AOFM is responsible for administering the ABSF.

Legislation

The AOFM’s borrowing and portfolio management activities comply with applicable legislative requirements. The key legislative mechanisms that governed these activities during the reporting period were as follows:

• the Commonwealth Inscribed Stock Act 1911 represents the Australian Government’s primary vehicle for the creation and issuance of stock, including Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. It also provides a standing authority to the Treasurer to borrow in Australian currency;
  • On 9 May 2017 the Treasurer issued a direction under section 51JA of the Act permitting the AOFM to borrow up to $600 billion.
• the Loans Securities Act 1919 includes provisions relating to overseas borrowings, securities lending, repurchase agreements and other financial arrangements;
• the Financial Agreement Act 1994 formalises debt consolidation and redemption arrangements applying since 1 July 1990 between the Australian Government and the State and Northern Territory Governments;
• section 58 of Public Governance, Performance and Accountability Act 2013 allows the Treasurer to invest public money in authorised investments; and
• the Australian Business Securitisation Fund Act 2019.

Administered accounts

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

Administered assets, liabilities, revenue and expenses are those items that an entity does not control but over which it has management responsibility on behalf of the government and which are subject to prescriptive rules or conditions established by legislation, or Australian Government policy, in order to achieve Australian Government outcomes. These items include debt issued to finance the government’s fiscal requirements and investments of funds surplus to the government’s immediate financing needs.

Administered schedule of comprehensive income ($ millions) for the period ended 30 June 2019

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

Interest expense and interest revenue are determined using the effective interest method.

The category ‘gains (losses)’ represents the total proceeds paid or received from repurchasing debt prior to maturity or from selling a financial asset prior to maturity, less the amortised cost carrying value of the debt or financial asset using the effective interest method at the time of repurchase or sale. The AOFM conducts these transactions at market rates.

The category ‘surplus (deficit) before re-measurements’ records a financial result that is consistent with an accruals (or amortised cost) basis of accounting under the historic cost accounting convention. This is most relevant to the AOFM’s role in managing the debt portfolio, which is predominately issued and held to maturity, and where portfolio restructuring is performed primarily for debt market management purposes, rather than for profit making purposes. With the growth in the volume of debt outstanding in individual bond lines, the role of the buyback program will increase in significance.

The category ‘re-measurements’ provides information on the unrealised changes in the market revaluation of the portfolio of administered financial assets and financial liabilities (which are carried at fair value through profit or loss) during the financial year. This is relevant for assessing changes in financial risk exposures and changes to the value of transactions managed from year to year. The revaluation effect will net to zero over the life of a financial instrument.

Administered schedule of assets and liabilities ($ millions) as at 30 June 2019

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

The Treasurer has issued a direction under the Commonwealth Inscribed Stock Act 1911 permitting the AOFM to borrow up to a limit of $600 billion in face value terms. As at 30 June 2019 the face value on issue was $542 billion. The schedule above reports the carrying value of debt in fair value terms.

Current/non-current balances reported ($ millions)

Financial assets and financial liabilities denoted as being measured at amortised cost, are measured at fair value on initial recognition and at amortised cost on subsequent measurement using the effective interest method. Changes in carrying value, including amortisation of premiums or discounts, are recognised in Interest Revenue (for assets) and Interest Expense (for liabilities).

Financial assets and financial liabilities denoted as being measured at fair value, are measured at fair value on initial recognition and at fair value through profit or loss on subsequent measurement. Changes in carrying value are attributed between changes in amortised cost and other changes. Changes in carrying value attributable to amortised cost, including amortisation of premiums or discounts, are recognised in Interest Revenue (for assets) and Interest Expense (for liabilities). Other changes in carrying value (including unrealised changes in valuation due to a change in interest rates) are recognised in Re-measurements.

The AOFM is not aware of any quantifiable or unquantifiable administered contingencies as of the signing date that may have an impact on its operations.

Administered reconciliation schedule ($ millions) for the period ended 30 June 2019

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

Administered schedule of cash flows ($ millions) for the period ended 30 June 2019

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

Note 1: Financial risk management

The government is exposed to financial risks arising from its portfolio of financial assets and liabilities — interest rate risk, inflation risk, credit risk, liquidity risk and refinancing risk. These risks are managed by the AOFM within a financial risk management framework that includes directions from the Treasurer and policies and limits approved by the Secretary to the Treasury and overseen by the CEO and senior management of the AOFM.

Timing mismatches between the Australian Government’s receipts and expenditures cause large fluctuations in the volume of short term assets and liabilities managed by the AOFM, and thus in the overall size of its net portfolio, relative to the gross volume of debt outstanding. To provide stability in the management of the longer term component of debt, long term financing and short term financing are managed through separate portfolios, the debt portfolio and the cash management portfolio. In addition, loans to State and Territory Governments are held in a separate portfolio.

Debt portfolio

The debt portfolio is used to meet the Australian Government’s budget financing needs, to support efficient Treasury Bond and Treasury Bond futures markets, and to promote depth and breadth in the investor base. Issuance is the primary mechanism for managing interest rate risk of the debt portfolio. That is, the AOFM manages the cost structure of the debt portfolio through the choice of instruments and bond series in issuing debt. The annual debt issuance strategy is informed by qualitative and quantitative factors to achieve an interest rate profile that appropriately balances cost and cost variability, investor demand and diversification, the refinancing task and financial market efficiency.

Cash management portfolio

The cash management portfolio is used to manage within year timing mismatches between Australian Government receipts and expenditures. The cash management portfolio holds a fluctuating portfolio of short term investments and short term liabilities. The portfolio is managed to achieve an appropriate balance between refinancing risk, liquidity risk and interest rate risk.

Interest rate risk

Interest rate risk represents the risk to debt servicing cost outcomes and investment return outcomes, and to the value of debt and financial assets caused by changes in interest rates.

In its ordinary course of business the primary measure used by the AOFM to assess interest rate risk is the accruals basis of accounting under the historic cost accounting convention. Fair value measures of interest rate risk are considered to be secondary.

Financial instruments with a fixed interest rate expose the portfolio to changes in fair value with changes in interest rates, whilst those financial instruments at floating interest rates expose the portfolio to changes in debt servicing costs with changes in interest rates. The extent to which the AOFM can match the repricing profile of financial liabilities with financial assets is limited due to the significant differences in the volumes and the need for assets to be available for cash management or other purposes. The interest rate exposure is predominately to fixed interest instruments.

Interest exposure of assets and liabilities ($m)

The following sensitivity analysis illustrates the interest rate risk sensitivity of administered financial instruments and the financial impact on profit or loss and equity to financial positions held as at period end.

Sensitivity of 30 June balances to a +20 basis points change (2018: +20) ($m)

Sensitivity of 30 June balances to a -20 basis points change (2018: -20) ($m)

In undertaking the sensitivity analysis a parallel shift in interest rates (real and nominal) is applied to instruments.

For fixed rate instruments, a shift in market interest rates on 30 June balances only has an effect on those instruments carried at fair value, by altering their fair value carrying amount as at 30 June. Fixed rate instruments carried at fair value include Treasury Bonds and Treasury Indexed Bonds.

A sensitivity of 20 basis points has been used for domestic interest rates as per standard parameters set by the Department of Finance.

Inflation risk

Treasury Indexed Bonds have their principal value indexed against the all Groups Australian Consumer Price Index (CPI). Interest is paid at a fixed rate on the accreted principal value. Accordingly these debt instruments expose the government to inflation risk on interest payments and on the value of principal payable on maturity. There is a six month lag between the calculation period for the CPI and its impact on the value of interest and principal.

Treasury Indexed Bonds lines index value for next interest payment as at 30 June

Credit risk

Credit risk is the risk of non-performance (including partial performance) by a counterparty to a financial contract, leading to a financial loss for the creditor.

The AOFM’s investment activity is made in accordance with legislative requirements, delegations and directions from the Treasurer and policies and limits established by the Secretary to the Treasury. For 2018–19 and 2017–18, investments in term deposits with the RBA were the only eligible investments the AOFM was permitted to acquire. Investments with the RBA are considered to carry zero credit risk.

Under Commonwealth-State financing arrangements between 1945 and 1989, the Australian Government made concessional loans (not evidenced by the issuance of debt securities) to State and Northern Territory Governments for specific purposes. As at 30 June 2019, the principal outstanding on these loans was $1,895 million.

Composition of loans to state and territory governments as at 30 June 2019:

Value of loans to state and territory governments by credit rating ($m)

Where a counterparty has a split rating between the rating agencies (Standard and Poor’s and Moody’s), the AOFM’s exposure is allocated to the lower credit rating.

To protect the Australian Government’s financial position with respect to securities lending arrangements (which allows market participants to borrow Treasury Bonds and Treasury Indexed Bonds not readily available from other sources), the market value of the collateral securities taken from counterparties is greater than the market value of the securities lent. There is a right to seek additional collateral if there is a decline in the relative value of these securities.

Liquidity risk and refinancing risk

Refinancing risk is the risk that when maturing debt needs to be funded by debt issuance, it may have to be refinanced at a higher cost or market conditions may prevent sufficient funds from being raised in an orderly manner. The AOFM seeks to control refinancing risk by issuing along the entire yield curve. This creates a range of short-dated and mid-to-long dated exposures that balance cost and refinancing patterns. In formulating its debt issuance strategy the AOFM considers the volume of debt in any one line and the maturity structure of its debt (including the number of bond lines and the maturity gaps between lines).

The AOFM monitors market conditions in order to form a view on refinancing risk due to issuance at a particular point in time. In addition, as a means of reducing refinancing risk in future years and to improve market efficiency, the AOFM conducts regular buy backs of Treasury Bonds that no longer form part of the ASX three-year futures contract.

The AOFM manages liquidity risk by maintaining sufficient cash and short-term investments to ensure that the government can meet its financial obligations as and when they fall due. The AOFM manages the daily volume of cash in the OPA by monitoring the projected daily transactions of major spending and revenue agencies, undertaking investment of funds that are surplus to immediate cash requirements, and by issuing Treasury Notes. The cash flows into and out of the OPA are highly variable and difficult to forecast from day to day, and so in consequence are the size and timing of cash management activities. The AOFM also has access to an overdraft facility with the RBA. The overdraft facility is not to be used in normal day to day operations but only to cover temporary, unexpected shortfalls of cash and it has a limit of $1 billion (in the absence of Ministerial approval). The AOFM monitors the daily balance in the OPA, holdings of short-term assets, and short-term and long-term debt issuance activities.

The following table discloses the undiscounted value of the contractual maturities of financial liabilities as at the reporting date, including estimated future interest payments. Interest payments and the principal value on redemption of Treasury Indexed Bonds are based on capital values as at period end.

Future undiscounted cash outflows of liabilities as at 30 June 2019 ($m)

Future undiscounted cash outflows of liabilities as at 30 June 2018 ($m)

Fair value reported

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date. This is the quoted market price if one is available.

AASB 13 requires assets and liabilities measured at fair value to be disclosed according to their position in a fair value hierarchy. This hierarchy has three levels: Level 1 which is valuation based on quoted prices in active markets for identical instruments; Level 2 which is valuation based on quoted prices or other observable market data not included in Level 1; Level 3 which is valuation based on significant inputs to valuation other than observable market data.

Fair value hierarchy 2019 ($m)

In 2019, the carrying value of term deposits was changed to amortised cost from fair value due to the introduction of AASB 9.

Fair value hierarchy 2018 ($m)

Note 2: Treasury Bonds

Treasury Bonds are denominated in Australian dollars and pay a fixed coupon semi-annually in arrears. Treasury Bonds are redeemable at face value on maturity. There are no options available to either the Australian Government or the holder of the securities to exchange or convert Treasury Bonds. There are also no options to either party for early redemption. The AOFM issues Treasury Bonds primarily through a competitive auction process to registered bidders. In certain circumstances syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Bonds primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Bonds to be carried at fair value through profit or loss under AASB 9. The accounting treatment for Treasury Bonds remained unchanged with the transition from AASB 139 to AASB 9.

The fair value of Treasury Bonds is determined by reference to observable market rates for identical instruments.

Key aggregates

Interest expense ($m)

Interest expense over the last five years ($m)

Whilst the interest expense on the Treasury Bond portfolio has risen over time due to higher borrowing levels, the accrual cost in yield terms has fallen as a consequence of the lower interest rate environment.

Carrying values — administered liabilities ($m)

Carrying values over the last 5 years ($m)

As at 30 June 2019 the weighted average market yield on Treasury Bonds was 1.19 per cent (30 June 2018: 2.39 per cent). As at 30 June 2019 the weighted average (nominal) issuance yield on Treasury Bonds was 3.01 per cent (30 June 2018: 3.14 per cent).

Changes in principal value (face value) for the period ($m)

Of the debt repurchased in 2018-19, $6.3 billion was for Treasury Bonds otherwise maturing in 2018-19 (2017-18: $7.7 billion).

Interest paid — schedule of cash flows ($m)

Note 3: Treasury Indexed Bonds

Treasury Indexed Bonds are denominated in Australian dollars and are capital indexed with the principal value of the bond adjusted by reference to movements in the CPI (based on a six month lag).

Interest payments are made quarterly in arrears, at a fixed rate, on the adjusted capital value. At maturity, investors receive the adjusted capital value of the security.

The AOFM issues Treasury Indexed Bonds primarily through a competitive auction process to registered bidders. In certain circumstances syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Indexed Bonds primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Indexed Bonds to be carried at fair value through profit or loss under AASB 9. The accounting treatment for Treasury Indexed Bonds remained unchanged with the transition from AASB 139 to AASB 9.

The fair value of Treasury Indexed Bonds is determined by reference to observable market rates for identical instruments.

Capital accretion is recognised in Interest Expense over time with each quarterly release of the CPI.

As future inflation rates are uncertain and it is not appropriate for the AOFM to express a view on the inflation outlook, an estimate of the adjusted capital value on maturity of each series of Treasury Indexed Bonds is not disclosed in the financial statements.

Key aggregates

Interest expense ($m)

Interest expense over the last five years ($m)

Carrying values — administered liabilities ($m)

Carrying values over the last 5 years ($m)

As at 30 June 2019, the weighted average market (real) yield on Treasury Indexed Bonds was 0.00 per cent (30 June 2018: 0.51 per cent).

As at 30 June 2019, the weighted average (real) issuance yield on Treasury Indexed Bonds was 1.42 per cent (30 June 2018: 1.63 per cent).

Changes in principal value for the period ($m)

Of the debt repurchased in 2018-19, $1.5 billion was for Treasury Indexed Bonds otherwise maturing in 2018-19 (2017-18: nil).

Interest paid — schedule of cash flows ($m)

Note 4: Treasury Notes

Treasury Notes are short term discount instruments, denominated in Australian dollars and repayable at face value on maturity.

Accounting policy

The AOFM monitors the cost and risk on Treasury Notes primarily on an accruals basis, but also on a fair value basis. The AOFM has designated Treasury Notes to be carried at fair value through profit or loss under AASB 9.

The fair value of Treasury Notes is determined by reference to observable market rates for identical instruments.

Key aggregates

Carrying values — administered liabilities ($m)

Carrying values over the last 5 years ($m)

Changes in principal value (face value) for the period ($m)

The average tenor of issuance was around three months (2017-18: three months).

Note 5: Term deposits with the RBA

Term deposits with the RBA are Australian dollar denominated investments placed for a fixed term of less than six months at an agreed fixed interest rate, with interest calculated on a simple interest basis. Term deposit investments are made under the authority of section 58 of the Public Governance, Performance and Accountability Act 2013.

Accounting policy

The AOFM’s business model is to hold term deposits primarily to collect the contractual cash flows, as such term deposits are carried at amortised cost from 1 July 2018 under AASB 9. Previously, under AASB 139 term deposits were carried at fair value. The 2018 comparatives have not been restated.

Key aggregates

Carrying values — administered assets ($m)

	2019	2018
Face value	31,100	45,100
Accrued interest	12	36
Market value adjustment (a)	-	4
Carrying value	31,112	45,140

(a)  Not applicable for 2018-19.

Carrying values over the last 5 years ($m)

Changes in principal value (face value) for the period ($m)

	2019	2018
New term deposits	461,350	473,450
Matured term deposits	(475,350)	(485,150)
Change in principal value	(14,000)	(11,700)

Note 6: Loans to State and Territory Governments

Loans to State and Territory Governments predominantly comprise concessional housing advances and specific purpose capital advances made between 1945 and 1989 under Commonwealth — State financing arrangements. These loans are structured with annual repayments which incorporate principal and interest.

Accounting policy

Loans to State and Territory Governments are measured at fair value on initial recognition and at amortised cost on subsequent measurement using the effective interest method. An expected credit loss provision is not made on these loans.

Key aggregates

Carrying values — administered assets ($m)

	2019	2018
Face value	1,895	1,993
Unamortised net discounts	(184)	(201)
Accrued interest	-	-
Carrying value	1,711	1,792
Expected to be received:
Within one year	84	82
In one to five years	351	345
In more than five years	1,276	1,365
Carrying value by expected recovery	1,711	1,792
Ageing:
Not overdue	1,711	1,792
Overdue	-	-
Carrying value by ageing	1,711	1,792

The fair value of these loans is $2,423 million (2017-18: $2,297 million). In estimating fair value data from Treasury Bonds is used.

Note 7: Cash flow reconciliation

The following table reconciles the surplus (deficit) reported in the Schedule of Comprehensive Income to net cash flows from operating activities reported in the Schedule of Cash Flows.

Reconciliation of net cash from operating activities ($m)

	2019	2018
Surplus (deficit)	(60,981)	(16,170)
Adjustments for non-cash items:
Amortisation and capital accretion of debt instruments	(1,686)	(1,806)
Amortisation of concessional loans	(17)	(16)
Net (gains) losses	896	512
Re-measurements	43,550	(581)
Adjustments for cash items:
Capital accretion costs on redemption of debt	(2,017)	(162)
Accrual adjustments:
Interest accruals on debt	(279)	(543)
Interest accruals on assets	24	24
Net cash from operating activities	(20,510)	(18,742)

Note 8: Appropriations

Administered special appropriations — unlimited ($’000)

	2019	2018
Commonwealth Inscribed Stock Act 1911
s13AA - payment of principal and interest on money raised by Stock issued under the Act and payments on depository interests in Stock issued under the Act	55,983,173	57,529,106
s13A - payment of costs and expenses incurred in relation to  issuing and managing debt and depository interests	12,742	31,305
s13B - payment of costs and expenses incurred in repurchasing debt prior to maturity	30,989,895	26,560,649
Financial Agreement Act 1994
s5 - debt redemption assistance and payment of interest to bond holders on behalf of the State and Northern Territory Governments on public debt under the Act (a)	8	8
Public Governance, Performance and Accountability Act 2013
s58(7) - investments made in the name of the Commonwealth of Australia	461,350,000	473,450,000
Total	548,335,818	557,571,068

(a)  The 2018-19 amount includes $1,156 paid into the Debt Retirement Reserve Trust Account (2017-18: $1,131).

The following details administered special appropriations that are available but were not used by the AOFM during 2018-19 and 2017-18 (where relevant):

• Australian National Railways Commission Sale Act 1997, sec 67AW — Purpose: payment of principal and interest on former debts of the National Railways Commission.
• Loans Redemption and Conversion Act 1921, sec 5 — Purpose: payment of principal, interest and costs of converting loans made in accordance with the Act.
• Loans Securities Act 1919, sec 4 — Purpose: payment of principal and interest on money raised by stock issued under the Act.
• Loans Securities Act 1919, sec 5B — Purpose: payment of money under a swap or other financial arrangement and any expenditure in connection with the negotiation, management or service of, or a repayment under, any such agreement.
• Loans Securities Act 1919, sec 5BA — Purpose: payment of money to enter into securities lending arrangements.
• Moomba-Sydney Pipeline System Sale Act 1994, sec 19 — Purpose: payment of principal and interest on former debts of the Pipeline Authority.
• Public Governance, Performance and Accountability Act 2013, sec 74A — Purpose: payments of recoverable GST.
• Treasury Bills Act 1914, sec 6 — Purpose: payment of principal and interest on money raised by issuance of Treasury Bills.

The following table details the investments (in face value terms) made in the name of the Commonwealth under the authority of section 58 of the Public Governance, Performance and Accountability Act 2013.

PGPA Act investments — in face value ($’000)

	2019	2018
Opening value	45,100,000	58,718,811
Acquisitions	461,350,000	473,450,000
Redemptions and sales	(475,350,000)	(487,068,811)
Closing value	31,100,000	45,100,000

Administered annual appropriations ($’000)

	2019	2018
Annual appropriations	-	10
Total available for payment	-	10
Appropriation applied	-	-
Variance	-	10

Unspent administered annual appropriation ($’000)

	2019	2018
Appropriation Act 1 2017-18	-	10

Special account — Debt Retirement Reserve Trust Account (DRRTA) ($’000)

	2019	2018
Opening balance	40	44
Appropriation for reporting period:
Commonwealth contributions	1	1
Interest amounts credited	-	1
State contributions	1	1
Available for payments	42	47
Debt repayments made	-	(7)
Balance	42	40
Balance represented by:
Cash - held in the Official Public Account	42	40

Establishing Instrument — Public Governance, Performance and Accountability Act 2013, section 80.

Purpose — to fund the redemption of the State and Territory debt governed by the Financial Agreement Act 1994. Monies standing to the credit of the DRRTA are applied to repurchase debt of the States and the Northern Territory.

Monies standing to the credit of the Debt Retirement Reserve Trust Account are held on behalf of New South Wales and Victoria. These monies are held for the purposes prescribed by the Financial Agreement Act 1994.

Special account — Australian Business Securitisation Fund (ABSF)

Establishing Instrument — Australian Business Securitisation Fund Act 2019, section 11.

Purpose — to establish the $2 billion ABSF to increase access to and over time reduce the cost of finance to small and medium enterprises (SME) by making targeted interventions in the SME securitisation market.

The ABSF received its first funding credit of $250 million on 1 July 2019.

Note 9: Budgetary report to outcome comparison

The AOFM produces budget estimates of Australian Government Securities (AGS) and certain financial assets for the Australian Government Budget which is released in April/May each year for the Budget year (the financial year commencing on the following 1 July) and three forward years.

The projections of debt issuance and asset holdings are a consequence of the expenditure, investment and revenue decisions and assumptions made by the government in producing its Budget. As part of the Budget process, the AOFM receives an estimate of the aggregated annual financing task for the Budget year and forward years from the Treasury. The Headline Cash Surplus/Deficit (which represents net cash flows after operating activities and investing activities for policy purposes; and before investments for liquidity purposes and financing activities) is the closest published aggregate to this financing task. The financing task plus the volume of maturing AGS debt and planned early repurchases of AGS debt (that would otherwise mature in a future year) determines the size of the planned debt issuance program in each year.

The volume of AGS debt that needs to be issued in face value terms to generate the required level of financing will depend on the future level of AGS yields (or interest rates) and the mix and tenor of debt to be issued. The mix and tenor of debt to be issued is based on the debt management strategy for the period ahead, which in turn takes into account longer-term portfolio considerations.

A technical assumption is made about future AGS yields. It is assumed that the AGS yields for different tenors of debt will be the same as the prevailing observed market rates at the time the budget estimates are prepared.

2018-19 Budget

In the 2018-19 Budget (released in May 2018) the government estimated a Headline Cash Deficit of $27.6 billion for 2018-19. After AGS maturities and redemptions of $48.4 billion, operational considerations (such as market conditions, the uncertainty and timing associated with future year funding requirements, the strength of revenue collections relative to forecast and the level of cash holdings to maintain) and financing transactions of other government agencies; the long term debt issuance program for 2018-19 was set at $77 billion.

At the time of the Mid-Year Economic and Fiscal Outlook (released in December 2018) the Headline Cash Deficit for 2018-19 was forecast to improve (by $9.3 billion) to $18.3 billion. The long term debt issuance program was reduced (by $19 billion) to $58 billion after adjustment for a reduction in the level of cash holdings to maintain.

At the time of 2019-20 Budget (released in April 2019) the Headline Cash Deficit was forecasted to improve further (by $5.6 billion) to $12.7 billion. The long term issuance program was increased (by $1.9 billion) to $59.9 billion after operational considerations.

Administered schedule of comprehensive income ($m)

	Outcome	Budget (a)	Variance
	2019	2019	2019
EXPENSES
Interest expense	17,088	17,781	(693)
Supplier expenses	12	30	(18)
Total expenses	17,100	17,811	(711)
INCOME
Interest revenue	565	597	(32)
Total income	565	597	(32)
GAINS (LOSSES)
Debt repurchased	(896)	(641)	(255)
Total gains (losses)	(896)	(641)	(255)
Surplus (deficit) before re-measurements	(17,431)	(17,855)	424
RE-MEASUREMENTS
Net market revaluation	(43,550)	1,315	(44,865)
Total re-measurements	(43,550)	1,315	(44,865)
Surplus (deficit)	(60,981)	(16,540)	(44,441)

(a)  Original Budget released in May 2018. The Budget figures are not audited.

Significant variances in expenses before re-measurements

Interest expense for 2018-19 was $0.7 billion lower than forecast at Budget, primarily due to lower interest costs on Treasury Bonds ($0.5 billion) and Treasury Indexed Bonds ($0.2 billion).

The lower interest expense is attributable to lower levels of issuance than forecast (due to an improvement in the fiscal position), lower issuance rates than forecast (due to lower bond yields) and higher debt repurchases than forecast.

Significant variances in gains (losses)

Repurchases of future year maturities of $15 billion for Treasury Bonds and $2 billion for Treasury Indexed Bonds was forecast at Budget. Such repurchases mitigate future funding and refinancing risks. Over the course of 2018-19, the AOFM conducted buybacks of future year maturities of $16.7 billion for Treasury Bonds and $3.1 billion for Treasury Indexed Bonds. This was due to greater than expected investor demand.

In addition, as part of its cash management operations the AOFM repurchases debt maturing in the current financial year from time-to-time. In 2018-19 the AOFM repurchased $6.3 billion of near maturity Treasury Bonds and $1.5 billion of near maturity Treasury Indexed Bonds. The early redemption of within year maturities are not forecast in the Budget. The additional repurchases of debt prior to maturity realised additional accounting losses.

Significant variances in re-measurements

It is assumed in the Budget that AGS yields for different tenors of debt will be the same as the prevailing observed market rates (at the time when the budget estimates are prepared). Due to this technical assumption, re-measurements of the portfolio for changes in market interest rates are not significant. However, actual market yields as at 30 June 2019 were significantly lower across the nominal yield curve by around 120 basis points than as at 30 June 2018. This has resulted in an increase in the market value of the AGS portfolio compared to Budget. There is an inverse relationship between yield and price for bonds.

Administered schedule of assets and liabilities ($m)

	Outcome	Budget (a)	Variance
	2019	2019	2019
LIABILITIES
Interest bearing liabilities	626,369	594,437	31,932
Total liabilities	626,369	594,437	31,932
ASSETS
Cash at bank	1	1	-
Investments	31,112	35,660	(4,548)
Loans to State and Territory Governments	1,711	1,712	(1)
Total assets	32,824	37,373	(4,549)
Net assets	(593,545)	(557,064)	(36,481)

(a)  Original Budget released in May 2018. The Budget figures are not audited.

 

Significant variances in interest bearing liabilities

The value of the AGS portfolio outstanding was $31.9 billion higher than Budget. This is primarily attributable to differences in the market revaluation for 2018-19 of $44.9 billion (due to significant reductions in market yields as compared to Budget) and offset by lower face value of debt outstanding of $19.2 billion (due to lower issuance arising from an improved fiscal position).

Significant variances in investments

The AOFM had $31.1 billion (in face value terms) of term deposit investments as at 30 June 2019, which was $4.5 billion less than forecast in Budget. Term deposits are highly variable in nature as they are influenced by the government’s payments and receipts, and due to AOFM operational considerations.

Note 10: Securities lending facility

The AOFM has a securities lending facility for Treasury Bonds and Treasury Indexed Bonds, operated by the RBA. The purpose of the facility is to enhance the efficiency of the bond markets by allowing bond market participants to borrow Treasury Bonds and Treasury Indexed Bonds when they are not readily available in those markets. Bonds are lent on an intra-day or overnight basis.

Transactions undertaken during the period

	Number		Face value ($m)
	2019	2018	2019	2018
Overnight:
Treasury Bonds	8	28	236	1,220
Treasury Indexed Bonds	13	26	157	458
Intra-day:
Treasury Bonds	9	8	636	738
Treasury Indexed Bonds	1	-	30	-
Total	31	62	1,059	2,416

No transactions were open at the beginning or end of the year.

Departmental accounts

Departmental assets, liabilities, revenue and expenses are those items that an entity has control over and include ordinary operating costs and associated funding, salaries, employee entitlements and operational expenses.

Statement of comprehensive income ($’000) for the period ended 30 June 2019

	Notes	2019	2018
NET COST OF SERVICES
EXPENSES
Employee benefits	A	7,017	6,822
Supplier expenses	A	3,379	3,460
Depreciation and amortisation		434	433
Total expenses		10,830	10,715
OWN-SOURCE INCOME
Staff secondments		310	447
Resources received free of charge		298	290
Total own-source income		608	737
Net cost of services		10,222	9,978
APPROPRIATION FUNDING
Revenue from government		11,723	10,834
Total appropriation funding		11,723	10,834
Surplus (deficit)		1,501	856

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

Statement of financial position ($’000) as at 30 June 2019

	Notes	2019	2018
ASSETS
Financial assets:
Cash and cash equivalents		73	73
Receivables	B	24,946	24,586
Non-financial assets:
Property, plant and equipment	C	1,786	2,047
Computer software	D	780	942
Supplier prepayments		60	223
Total assets		27,645	27,871
LIABILITIES
Payables:
Supplier payables		237	136
Salary and superannuation		48	47
Provisions:
Employee provisions	E	2,853	2,354
Other provisions	F	418	418
Total liabilities		3,556	2,955
Net assets		24,089	24,916
EQUITY
Retained surplus		31,968	30,467
Contributed equity		(7,879)	(5,551)
Total equity		24,089	24,916

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

Current/non-current balances reported ($’000)

	2019	2018
Current assets	14,316	12,866
Non-current assets	13,329	15,005
Current liabilities	802	672
Non-current liabilities	2,754	2,283

Statement of changes in equity ($’000) for the period ended 30 June 2019

	Notes	2019	2018
RETAINED SURPLUS
Changes for period:
Surplus (deficit)		1,501	856
Change for period		1,501	856
+ opening value		30,467	29,611
Closing balance		31,968	30,467
CONTRIBUTED EQUITY
Changes for period:
Capital injection - capital budget		710	713
Return of capital - appropriations extinguished		(3,038)	(1,631)
Change for period		(2,328)	(918)
+ opening value		(5,551)	(4,633)
Closing balance		(7,879)	(5,551)
Total equity		24,089	24,916

The AOFM is not aware of any quantifiable or unquantifiable departmental contingencies as of the signing date that may have an impact on its operations.

Statement of cash flows ($’000) for the period ended 30 June 2019

	Notes	2019	2018
OPERATING ACTIVITIES
Cash received (used):
Appropriations		9,400	10,256
GST received from ATO		6	5
Services and other		475	537
Employees		(6,556)	(6,732)
Suppliers		(2,844)	(3,543)
GST paid to ATO		-	(8)
Transfers to Official Public Account (a)		(481)	(542)
Net cash from operating activities	G	-	(27)
INVESTING ACTIVITIES
Cash received (used):
Purchase of leasehold improvements		-	(204)
Purchase of plant and equipment		(11)	(9)
Purchase of prepayment		(8)	-
Net cash from investing activities		(19)	(213)
FINANCING ACTIVITIES
Cash received (used):
Appropriations		19	213
Net cash from financing activities		19	213
Net change in cash held		-	(27)
+ cash held at the beginning of period		73	100
Cash held at the end of the period		73	73

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

(a)  Non appropriation receipts are required to be returned to the Official Public Account (OPA). They increase the AOFM’s available appropriation under section 74 of the Public Governance, Performance and Accountability Act 2013 and when subsequently drawn down for use by the AOFM they are recorded as appropriations.

Note A: Expenses

Employee benefits ($’000)

	2019	2018
Wages and salaries	5,555	5,384
Superannuation	1,049	943
Leave entitlements	398	197
Other employee expenses	15	298
Total	7,017	6,822

The below table sets out the CEO’s actual remuneration (on an accruals basis).

Key Management Personnel ($’000)

	2019	2018
Short-term employee benefits:
Salary and other short-term benefits	365	354
Annual leave accrued	29	29
Long service leave accrued	10	9
Post employment benefits (superannuation)	51	51
Total	455	443
Number of key management personnel	1	1

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly. The Chief Executive Officer (CEO), the Secretary to the Treasury and the Treasurer have been determined to be key management personnel for the AOFM. The CEO only is remunerated by the AOFM.

Supplier expenses ($’000)

	2019	2018
ANAO - notional audit fee	298	290
Corporate support services	828	829
Depository and transaction services	20	168
Market data services	522	555
Operating lease payments - premises	264	277
Travel	233	316
Treasury management system	240	289
Workers compensation premium	24	21
Other	950	715
Total	3,379	3,460

The AOFM’s operating lease is for its office premises within the Treasury Building and is a sub-lease from the Department of the Treasury. The sub-lease is largely a back-to-back arrangement of the Department of the Treasury’s lease with the building owner, the Department of Finance.

The lease term ends on 21 December 2025, and there are two 5-year extension options.

Rental payments, with the exception of years where there is a market review (2021, 2024 and upon extension) increase by 3 per cent per annum.

Future estimated lease payments ($’000)

	2019
Within 1 year	281
1 to 5 years	1,187
Over 5 years	3,971
Total	5,439

Note B: Receivables

Accounting policy

Receivables are measured at fair value on initial recognition and at amortised cost on subsequent measurement.

Appropriations receivable are recognised at their nominal amounts. Appropriations receivable are appropriations controlled by the AOFM but held in the OPA under the government’s ‘just in time’ drawdown arrangements.

Receivables ($’000)

	2019	2018
Goods and services (related)	16	112
Appropriations receivable	24,930	24,474
GST	-	-
Total	24,946	24,586

No receivable is overdue.

Recovery of receivables expected in ($’000)

	2019	2018
No more than 12 months	14,183	12,570
More than 12 months	10,763	12,016
Total	24,946	24,586

Note C: Property, plant and equipment

Accounting policy

Asset recognition threshold on acquisition

Purchases of leasehold improvements are recognised initially at cost except for purchases costing less than $10,000 which are expensed at the time of acquisition. For leasehold improvements the estimated cost of removal and restoring the leased premises to their original condition is included in the initial cost of leasehold improvements.

Purchases of plant and equipment are recognised initially at cost except for purchases costing less than $1,000 which are expensed at the time of acquisition.

Revaluations

Following initial recognition at cost, valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not materially differ from fair value as at the reporting date. Fair value is determined by depreciated replacement cost for leasehold improvements and by secondary market information for plant and equipment.

Property, plant and equipment ($’000)

	2019	2018
Gross value:
Leasehold improvements	1,924	1,924
Plant and equipment	441	430
Accumulated depreciation:
Leasehold improvements	(472)	(247)
Plant and equipment	(107)	(60)
Total	1,786	2,047

No indicators of impairment were identified for property, plant and equipment.

Reconciliation of changes in gross value ($’000)

	2019	2018
Opening value	2,354	2,335
Purchases	11	19
Disposals	-	-
Closing value	2,365	2,354

Reconciliation of changes in accumulated depreciation ($’000)

	2019	2018
Opening value	(307)	(36)
Depreciation charge for period	(272)	(271)
Disposals	-	-
Closing value	(579)	(307)

Depreciation

Leasehold improvements are depreciated on a straight line basis over the unexpired period of the lease.

Plant and equipment is depreciated on a straight line basis, on the basis of the following useful lives.

Useful life

	2019	2018
Artwork	100 years	100 years
Furniture and fittings	Lease term	Lease term
ICT equipment	3-5 years	3-5 years

Useful lives are assessed annually and revised if necessary to reflect current estimates of an asset’s useful life to the AOFM. Revisions in useful life affect the rate of depreciation applied for the current period and future periods.

No useful lives were revised in 2018-19 (2017-18: nil).

Note D: Computer software

Accounting policy

Asset recognition threshold on acquisition

Purchases of computer software are recognised initially at cost except for purchases costing less than $10,000 which are expensed at the time 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.

Computer software ($’000)

	2019	2018
Gross value	1,521	1,521
Accumulated amortisation	(741)	(579)
Total	780	942

No indicators of impairment were identified for computer software.

Amortisation

Software assets are amortised on a straight line basis over their anticipated useful lives, being three to ten years (2017-18: three to ten years).

Software assets are carried at cost and are not subject to revaluation.

Reconciliation of changes in accumulated amortisation ($’000)

	2019	2018
Opening value	(579)	(417)
Amortisation charge for period	(162)	(162)
Closing value	(741)	(579)

Note E: Employee provisions

Accounting policy

Leave

The liability for employee benefits includes provisions for annual leave and long service leave. No provision has been made for sick leave as 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.

Long service leave and annual leave are measured at the present value of the estimated future payments to be made. In determining the present value, the AOFM commissions a periodic actuarial assessment.

Superannuation

The AOFM contributes to defined benefit superannuation schemes (the Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme) and accumulation plans (defined contribution schemes) on behalf of staff.

The AOFM accounts for its superannuation contributions as if they were defined contribution plans i.e. it has no ongoing liability to report. The superannuation benefits payable to an employee upon termination of employment with the Australian Government from defined benefit schemes is recognised in the financial statements of the Department of Finance and is settled by the Australian Government in due course.

An on cost liability is recognised for superannuation contributions payable on accrued annual leave and long service leave as at the end of the financial year.

Employee provisions ($’000)

	2019	2018
Annual leave	557	524
Long service leave	1,948	1,583
Superannuation	348	247
Total	2,853	2,354

 

Payment of employee provisions expected in ($’000)

	2019	2018
No more than 12 months	517	489
More than 12 months	2,336	1,865
Total	2,853	2,354

Note F: Other provisions

Other provisions are for the restoration of the AOFM’s leasehold premises on expiry of its lease.

The AOFM lease for its office premises ends on 21 December 2025, there are two 5 year extension options.

Other provisions ($’000)

	2019	2018
Make good on leasehold premises	418	418
Total	418	418
Other provisions are expected to be settled in:
No more than 12 months	-	-
More than 12 months	418	418
Total	418	418

Reconciliation of movements in other provisions ($’000)

	2019	2018
Opening balance	418	418
New / re-measurements	-	-
Total	418	418

Note G: Cash flow reconciliation

The following table reconciles the AOFM’s operating cash flows as presented in the Statement of Cash Flows to its net cost of services presented in the Statement of Comprehensive Income.

Reconciliation of net cost of services to net operating cash flows ($’000)

	2019	2018
Net cost of services	(10,222)	(9,978)
Add revenue from Government	11,723	10,834
Adjustments for non-cash items:
Depreciation and amortisation	434	433
Appropriations extinguished	(3,038)	(1,631)
Asset accruals	-	194
Change in receivables for capital budget items	699	500
Adjustments for changes in assets:
(Increase) decrease in receivables	(360)	87
(Increase) decrease in supplier prepayments	163	(165)
Adjustments for changes in liabilities:
Increase (decrease) in supplier payables	101	(374)
Increase (decrease) in salary and superannuation	1	(2)
Increase (decrease) in employee provisions	499	75
Increase (decrease) in other provisions	-	-
Net cash from operating activities	-	(27)

Note H: Appropriations

The following table outlines appropriations for the period and the amount of appropriations utilised for the period.

Annual appropriations ($’000)

	2019	2018
Annual appropriations:
Outputs	11,723	10,867
Departmental capital budget	710	713
Appropriation withheld (a)	-	(33)
Public Governance, Performance and Accountability Act 2013:
Section 74 - retained receipts	481	542
Total available for payment	12,914	12,089
Appropriation applied (current and prior years)	(9,419)	(10,496)
Variance	3,495	1,593

(a)  On 29 June 2018, $33,000 relating to savings measures announced at MYEFO 2017-2018 was withheld via section 51 of the Public Governance, Performance and Accountability Act 2013.

The variance in departmental appropriations available to appropriations applied (spent) is explained by lower administrative costs than expected.

The following table outlines the unspent balance of appropriations available to the AOFM as at the end of the reporting period.

Unspent departmental annual appropriations ($’000)

	2019	2018
Appropriation Act (No. 1) 2015-16 (a)	-	1,631
Supply Act (No. 1) 2016-17 (b)	2,687	4,966
Appropriation Act (No. 1) 2016-17 (b)	201	7,342
Appropriation Act (No. 2) 2016-17 (b)	150	150
Appropriation Act (No. 1) 2017-18	12,089	12,089
Appropriation Act (No. 1) 2018-19	11,980	-
Appropriation Act (No. 3) 2018-19	934	-
Total	28,041	26,178
Represented By:
Cash at bank	73	73
Appropriations receivable	24,930	24,474
Appropriations extinguished - 1 July	3,038	1,631
Total	28,041	26,178

(a)  The Appropriation Act was repealed on 1 July 2018 and unspent funds were no longer available for use at this time. Unspent funds were accounted for as a return of capital on 30 June 2018 (refer to Statement of Changes in Equity).

(b)  These Acts were repealed on 1 July 2019 and unspent funds were no longer available for use at this time. Unspent funds were accounted for as a return of capital on 30 June 2019 (refer to Statement of Changes in Equity).

Note I: Budgetary report to outcome comparison

The Budgetary comparison is to the original Budget released in May 2018. The Budget figures are not audited.

Statement of comprehensive income ($’000)

	Outcome	Budget (a)	Variance
NET COST OF SERVICES
EXPENSES
Employee benefits	7,017	6,669	348
Supplier expenses	3,379	4,811	(1,432)
Depreciation and amortisation	434	500	(66)
Total	10,830	11,980	(1,150)
OWN-SOURCE INCOME
Revenue	608	691	(83)
Total	608	691	(83)
Net cost of services	10,222	11,289	(1,067)
APPROPRIATION FUNDING
Revenue from government	11,723	10,789	934
Total	11,723	10,789	934
Surplus (deficit)	1,501	(500)	2,001

(a)  Original Budget released in May 2018. The Budget figures are not audited.

 Statement of financial position ($’000)

	Outcome	Budget (a)	Variance
ASSETS
Financial assets:
Cash and cash equivalents	73	100	(27)
Receivables	24,946	25,660	(714)
Non-financial assets:
Property, plant and equipment	1,786	2,322	(536)
Computer software	780	1,604	(824)
Supplier prepayments	60	58	2
Total	27,645	29,744	(2,099)
LIABILITIES
Payables	285	559	(274)
Employee provisions	2,853	2,366	487
Other provisions	418	418	-
Total	3,556	3,343	213
Net assets	24,089	26,401	(2,312)
EQUITY
Retained surplus	31,968	29,611	2,357
Contributed equity	(7,879)	(3,210)	(4,669)
Total	24,089	26,401	(2,312)

(a)  Original Budget released in May 2018. The Budget figures are not audited.

Statement of changes in equity ($’000)

	Outcome	Budget (a)	Variance
EQUITY
RETAINED SURPLUS
Opening balance	30,467	30,111	356
Surplus (deficit)	1,501	(500)	2,001
Total	31,968	29,611	2,357
CONTRIBUTED EQUITY
Opening balance	(5,551)	(3,920)	(1,631)
Capital injections	710	710	-
Appropriations extinguished	(3,038)	-	(3,038)
Total	(7,879)	(3,210)	(4,669)

(a)  Original Budget released in May 2018. The Budget figures are not audited.

Statement of cash flows ($’000)

	Outcome	Budget (a)	Variance
OPERATING ACTIVITIES
Cash received	9,881	11,487	(1,606)
Cash used	(9,881)	(11,487)	1,606
Net cash from operating activities	-	-	-
INVESTING ACTIVITIES
Cash received	-	-	-
Cash used	(19)	(710)	691
Net cash from investing activities	(19)	(710)	691
FINANCING ACTIVITIES
Cash received - appropriations	19	710	(691)
Net cash from financing activities	19	710	(691)
Net change in cash held	-	-	-
+ cash held at the beginning of period	73	100	(27)
Cash held at the end of the period	73	100	(27)

(a)  Original Budget released in May 2018. The Budget figures are not audited.

Significant variances in the Departmental financial statements

Employee expenses were higher than forecast at Budget primarily due to the valuation of employee leave entitlements, the present value of which increased due to an increase in the factor applied to the nominal value of future cash flows, and due to an increase in the rates applied for superannuation oncosts. These revisions were based on independent advice received for the valuation of the AOFM’s leave provisions.

During 2018-19 the AOFM incurred lower than forecast supplier expenses for undertaking its issuance program and managing its portfolio of financial assets and liabilities. Reasons for this include the use of conservative assumptions in estimating certain expenditures and savings achieved on other expenditure classes.

Appropriation funding was greater than Budget by $0.9 million, due to additional funding provided to implement and manage the Australian Business Securitisation Fund (ABSF).

Receivables were lower than estimated at Budget by $0.7 million. This comprises lower than anticipated unbilled recoveries from secondments ($0.2 million) and a lower than anticipated appropriation receivable ($0.5 million).

Expenditure on infrastructure, plant and equipment and software was lower than forecast due to changes in the expected timing of capital expenditures on fit-out and debt management system assets. Subject to a few exceptions, the AOFM acquires managed services by way of outsourcing and cloud computing, which has reduced its call on capital expenditures particularly in relation to information and communication technology. In recognition of this change, from the 2019-20 Budget the AOFM has reduced its capital budget allocation.

The balance of contributed equity as at 30 June 2019 was lower than Budget due to the extinguishment of appropriations (which were not forecast).

Basis of preparation of the financial statements

The Australian Office of Financial Management is a listed entity under the Public Governance, Performance and Accountability Act 2013. The AOFM is a not-for-profit Australian Government entity.

These financial statements cover the AOFM as an administrative entity of the Commonwealth of Australia and are for the reporting period 1 July 2018 to 30 June 2019. They are required by section 42 of the Public Governance, Performance and Accountability Act 2013, and are general purpose financial statements prepared on a going concern basis.

The financial statements have been prepared in accordance with:

• the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
• Australian Accounting Standards that apply for the reporting period.

The financial statements have been prepared on an historical cost basis, except for certain assets and liabilities which are carried at fair value or on a discounted cash flow basis as required or allowable by relevant accounting standards.

The financial statements are presented in Australian dollars and values are rounded as indicated.

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

New Australian Accounting Standards applicable to the reporting period

During 2018-19 the AOFM adopted all applicable Australian Accounting Standards that became effective during the reporting period.

AASB 9 became operational on 1 July 2018 and at that time the AOFM made a change to the accounting treatment of its administered term deposit investments from being carried at fair value through profit or loss to amortised cost. The carrying value adjustment on 1 July 2018 (of $4 million) was recognised directly in opening equity. Comparatives were not adjusted.

In re-stating its term deposits to amortised cost from fair value through profit or loss as at 1 July 2018, the AOFM used the effective interest method applicable at the time of initial recognition of the investments. If the AOFM had not reclassified its term deposits it would have recognised an unrealised fair value loss of $3 million for 2018-19.

New Australian Accounting Standards applicable in future reporting periods

A number of revised or new Australian Accounting Standards have been issued that are effective for future reporting periods. With the exception of AASB 16 Leases (effective for the 2019-20 financial year), the revisions are not expected to materially affect the AOFM’s assets, liabilities, revenue and expenses.

AASB 16 Leases

Currently, accounting standards distinguish between operating leases and finance leases. Lessees are required to recognise finance leases only on the balance sheet. Under AASB 16 the majority of leases will need to be recognised on the balance sheet by lessees.

On 1 July 2019 the AOFM will recognise a lease liability and an equivalent ‘right of use’ asset for $4.8 million pertaining to its property sub-lease with the Department of Treasury. Comparatives will not be adjusted.

ANAO Audit Opinion