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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 2021 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 2021) 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 while managing the trade-offs between cost and risks for the cash and debt portfolios over the medium-long term;
  • enabling the government to meet its cash outlay requirements at all times; and
  • being a credible custodian of the Australian Government Securities market; and managing the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF).

The AOFM manages a portfolio of debt and financial assets on behalf of the Australian Government. It issues Treasury Bonds, Treasury Indexed Bonds and Treasury Notes to achieve the government’s funding task in financing budget deficits. It also manages the government’s cash in the Official Public Account (OPA) which are used to meet 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 had previously been used to maintain liquidity in 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.

The outbreak of the Covid-19 pandemic created a significant deterioration in global economic conditions, including in Australia which experienced a sharp downturn in GDP in the June 2020 quarter of seven per cent. In March and April 2020, the Australian Parliament passed measures to implement the Government’s initial economic response to the spread of the coronavirus. Further economic response packages were implemented in 2020-21.

Australia’s success in managing the public health crisis in 2020-21, including through targeted economic support measures put the Australian economy on a firm path towards a strong economic recovery. Strong commodity prices have provided measurable Budget support. Nonetheless downside risks have remained with weakness in certain sectors of the Australian economy. Uncertainty remains about the pandemic, its containment and its economic effects, and the Australian economy is facing renewed challenges arising from ongoing outbreaks.

The fiscal recovery is reflected in reduced AOFM issuance since Budget 2020-21 (released in October 2020). The long-term net issuance program for 2020‑21 fell from $196 billion as announced in the 2020-21 Budget, to an actual long-term net issuance issuance program of $164 billion (in gross issuance terms this was a planned reduction from $242 billion to $210 billion).

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. 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. Due to the severe funding conditions at the onset of the pandemic the AOFM relied heavily on the short term funding market and shorter-dated Treasury Bonds. Over the course of 2020‑21 as funding conditions became more favourable the AOFM returned to a long‑dated issuance bias for Treasury Bonds and achieved a weighted average issuance tenor of over 10 years for the financial year.  

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 surpluses in deposits with the RBA. Holding balances of highly liquid assets allows flexibility to meet unexpected expenditure requirements and disruptions in the markets (while also covering for discrepancies between actual and forecast revenue and outlays).

In recent years, these assets have been restricted to term deposits with the RBA. In November 2020 the AOFM established a new investment facility to replace term deposits – a cash management account – to more flexibly and more efficiently manage cash liquidity.

The AOFM maintained significant precautionary asset balances during the financial year. This conservative liquidity position was achieved through front loading the Treasury Bond issuance program towards the first half of the year with a reasonably high weekly issuance rate and multiple syndications, and an increased reliance on the Treasury Note market to fund within year cash shortfalls. The overall liquidity buffer was also supported by notable periods of stronger than forecast revenue collection.

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. The aim is to improve access to, and over time reduce the cost of finance to SMEs.

In April 2019, the Australian Business Securitisation Fund Act 2019 was passed by Parliament and received Royal Assent. The Act is supported by the Australian Business Securitisation Fund Rules 2019 and the Australian Business Securitisation Fund Investment Mandate Directions 2019

The ABSF consists of:

  • the ABSF Special Account; and
  • investments in authorised debt securities.

A Special Account is a legal construct for hypothecating funds for specific purposes and for setting financial limits on those funds . The ABSF Special Account is being credited over a period of 5 years (in accordance with a schedule set out in the Act) with $2 billion to meet the purposes set out in the Act. The ABSF Special Account received its first credit on 1 July 2019 for an amount of $250 million. It received a further $250 million credit on 1 July 2020. The final tranche of funding will be credited on 1 July 2023.

All eligible expenditure of the ABSF is to be made from the ABSF Special Account.  Eligible expenditure comprises investments in authorised debt securities and investment related costs incurred exclusively in connection with the ABSF. For each of its eligible investments, the AOFM (on behalf of the Commonwealth of Australia) enters into an agreement with the issuer to provide a level of commitment for a period of time, subject to the continued satisfaction of warranties, representations and conditions precedent. 

All receipts of the ABSF (such as interest earned and proceeds from the redemption and sale of investments) must be credited to the ABSF Special Account. This allows the ABSF to reinvest associated capital and earnings.

An authorised debt security comprises a debt security issued:

  • by a trustee of a trust or a special purpose vehicle;
  • expressed in Australian dollars;
  • relating to amounts of credit of less than $5 million (secured or unsecured) provided predominantly for business purposes;
  • where the credit is not provided by a major bank (as defined in the Major Bank Levy Act 2017) or a subsidiary of a major bank; and
  • that is not a first loss security.

In 2018-19 the AOFM received additional departmental funding to conduct this initiative. In June 2020 the AOFM made its first investment in which it committed $250 million to SME warehouse financing facilities. Given its objectives of developing the securitisation market for SME loans, market conditions in the first half of 2020-21 did not support a continuation of investment activity to progress the objectives of the ABSF. In January 2021 the AOFM recommenced the program by issuing an invitation for proposals from market participants. In 2020‑21 the AOFM made no new commitments, but invested an additional $100 million in an existing warehouse facility.

Structured Finance Support Fund (SFSF)

In March 2020 the Australian Parliament passed the Structured Finance Support (Coronavirus Economic Response Package) Bill 2020. Its purpose is to ensure continued access by smaller lenders (ADIs that do not have access to the term funding facility offered by the RBA and non-ADI lenders) to funding markets to mitigate any impacts arising from the economic effect of the Covid‑19 pandemic. This was achieved by the AOFM making targeted investments in the structured finance market.

The Act is supported by the Structured Finance Support (Coronavirus Economic Response Package) Rules 2020 and the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020.

The Act established the Structured Finance Support Fund (SFSF) which consists of:

  • the Structured Finance Support (Coronavirus Economic Response) Fund Special Account; and
  • investments, being authorised debt securities or other investments prescribed by the Rules.

The SFSF Special Account was credited with $15 billion on the commencement of the Act.  All receipts of the SFSF (such as interest receipts and proceeds from the redemption and sale of investments) must be credited to the SFSF Special Account. All eligible expenditure of the SFSF is to be made from the SFSF Special Account. Eligible expenditure comprises investments and costs incurred exclusively in connection with administering the SFSF.

Three work-streams have been pursued in progressing the objectives of the SFSF: (1) supporting public market transactions; (2) investing in private warehouse facilities; and (3) establishing and funding a forbearance facility (the ‘Forbearance SPV’).

The AOFM has responsibility for administering the SFSF and received additional departmental funding of $10 million over 4 years in the 2020‑21 Budget to conduct this program. During 2020-21 the AOFM invested $1,385 million in debt securities issued by way of public term ($119 million) and private warehouse ($1,266 million) capital market securitisation offerings. In relation to the private warehouse transactions conducted, as at 30 June 2021 total committed support to these facilities was $1,132 million. In addition, during 2020-21 the AOFM invested in $47 million of securities issued by the Forbearance SPV. As at 30 June 2021, $38 million was invested in securities issued by the Forbearance SPV.

Due to improving market conditions the AOFM did not provide financial support to the primary securitisation market in 2020-21, including in circumstances where support was offered. In addition, after the provision of support in early July 2020, no financial support was provided for the remainder of the financial year to the secondary market. The improvement in market conditions, particularly in the second half of 2020-21 has resulted in interest from a number of originators looking to replace the Commonwealth as a financier to their private warehouse financing facilities. Accordingly, the estimated size of the SFSF program was revised down to $4 billion in the 2021-22 Budget (released in May 2021).

The Forbearance SPV

The Forbearance SPV is an Australian resident, insolvency remote unit trust created pursuant to the Forbearance SPV Trust Deed (dated 22 July 2020).

The Forbearance SPV was established jointly by the securitisation industry and the government to allow smaller lenders (through their securitisation vehicles) to gain access to the majority of the capitalised interest associated with loans in hardship. The purpose is to keep non-bank originators in business by preventing their securitisation vehicles from going into default and triggering liquidation events. The Forbearance SPV provides liquidity funding (by way of loans) to participating trust vehicles of smaller lenders for 90 per cent of the value of missed interest payments on eligible Covid-19 hardship loans.

Liquidity funding was available to meet missed interest payments on eligible Covid-19 hardship loans for the period from 1 April 2020 to 31 March 2021. The first liquidity funding payments were made in September 2020 (which included back payments to 1 April 2020). 

To fund the liquidity payment loans, the Forbearance SPV issues funding notes in which SFSF funds are invested. The funding notes are debt obligations of the Forbearance SPV and incur a fixed rate of interest. Participating lenders are required to provide first loss credit support for liquidity payments made by the Forbearance SPV to their participating trusts.

The Forbearance SPV charges interest at a fixed rate of 5 per cent per annum on loans made to securitisation vehicles participating in the program. Correspondingly, the interest rate paid on the funding notes is 5 per cent per annum. The AOFM has assessed that the interest rate on the liquidity facility is materially consistent with market interest rates at the time the program was established. Given that there were no observable market transactions for financial instruments with equivalent economic characteristics, judgement was required in reaching this assessment.

The Forbearance SPV is not a consolidated entity of the AOFM. Further disclosures are provided at Note 7.

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, which 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 7 October 2020 the Treasurer issued an amended direction under section 51JA of the Act permitting the AOFM to borrow up to $1,200 billion in total face value of stock and securities. The decision replaces the March 2020 decision which set the maximum at $850 billion;
  • the Loans Securities Act 1919, which includes provisions relating to overseas borrowings, securities lending, repurchase agreements and other financial arrangements;
  • the Financial Agreement Act 1994, which formalises debt consolidation and redemption arrangements applying since 1 July 1990 between the Australian Government and the State and Northern Territory Governments;
  • the Public Governance, Performance and Accountability Act 2013, which allows the Treasurer to invest public money in authorised investments (under section 58), and the Finance Minister to establish and maintain banking accounts (under section 53);
  • the Australian Business Securitisation Fund Act 2019, which provides for investments in authorised debt securities and other eligible expenditures to meet the purposes of the Act; and
  • the Structured Finance Support Fund (Coronavirus Economic Response Package) Act 2020, which provides for investments in authorised debt securities and other investments and other eligible expenditures to meet the purposes of the Act.

 

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 for 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, investments for policy purposes and investments of funds surplus to the government’s immediate financing needs.

 

Administered schedule of comprehensive income ($ millions)

for the period ended 30 June 2021

 

Notes

                   2021

                   2020

EXPENSES

 

 

 

Interest expense:

 

 

 

Treasury Bonds

2

                15,984

                15,139

Treasury Indexed Bonds

3

                     977

                  1,468

Treasury Notes

 

                       81

                     136

 

 

                17,042

                 16,743

Other expenses:

 

 

 

Debt repurchases

 

                           -

                     399

Supplier expenses

 

                       82

                       32

Waiver of Tasmanian Government housing debt

 

                           -

                     144

Total expenses

 

                17,124

                17,318

INCOME

 

 

 

Interest revenue:

 

 

 

Loans to State and Territory Governments

 

                       88

                       94

Deposits

 

                     104

                     170

Structured Finance Securities

      7

                       57

                       (4)

Total income

 

                     249

                     260

Surplus (deficit) before re-measurements

 

                (16,875)

               (17,058)

RE-MEASUREMENTS (net market revaluation)

 

 

 

Treasury Bonds

 

                30,198

                 (9,190)

Treasury Indexed Bonds

 

                (1,357)

                       29

Treasury Notes

 

                       32

                     (32)

Total re-measurements

 

                28,873

                (9,193)

Surplus (deficit)

 

                 11,998

             (26,251)

 

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

 

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

‘Debt repurchases’ represent the total proceeds paid from repurchasing debt prior to maturity less the amortised cost carrying value of the debt using the effective interest method. The AOFM conducts these transactions at market rates.

The category ‘Surplus (deficit) before re-measurements’ records a financial result that is consistent with an accrual (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 for debt management purposes, rather than for profit making purposes.

The category ‘Re-measurements’ provides information on the unrealised changes in the market valuation 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 an implicit cost or revenue and 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 2021

 

Notes

                   2021

                   2020

LIABILITIES

 

 

 

Interest bearing liabilities at fair value:

 

 

 

Treasury Bonds

2

             807,354

             673,729

Treasury Indexed Bonds

3

                53,809

                52,500

Treasury Notes

4

                27,250

                58,738

Interest bearing liabilities at amortised cost:

 

 

 

Other debt

 

                          6

                          6

Other liabilities:

 

 

 

Loan commitments

5

                          2

                          1

Securities purchased not delivered

 

                           -

                     121

Total liabilities

 

               888,421

              785,095

FINANCIAL ASSETS

 

 

 

Cash held in the OPA

 

                          1

                          1

Cash held in the cash management account

6

                 56,551

                           -

Assets at amortised cost:

 

 

 

Deposits with the RBA

6

                           -

                69,952

Structured finance securities

7

                  1,850

                  1,815

Loans to State and Territory Governments

8

                  1,414

                  1,492

Accrued interest on cash management account

6

                          5

                           -

Total assets

 

                59,821

                73,260

Net assets (liabilities)

 

            (828,600)

             (711,835)

 

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 $1,200 billion in face value terms. As at 30 June 2021 the face value on issue was $817 billion. The schedule above reports the carrying value of debt in fair value (synonymous with market value) terms. 

 
Current/non-current balances reported ($ millions)

 

Current

Non-Current

 

2021

2020

2021

2020

LIABILITIES

 

 

 

 

Interest bearing liabilities at fair value:

 

 

 

 

Treasury Bonds

16,564

45,116

790,790

628,613

Treasury Indexed Bonds

8,243

3,673

45,566

48,827

Treasury Notes

27,250

58,738

-

-

Interest bearing liabilities at amortised cost:

 

 

 

 

Other debt

6

6

-

-

Other liabilities:

 

 

 

 

Loan commitments

2

1

-

-

Securities purchased not delivered

-

121

-

-

Total liabilities

52,065

107,655

836,356

677,440

 

 

 

 

 

ASSETS

 

 

 

 

Financial assets:

 

 

 

 

Cash at bank

1

1

-

-

Cash held in the cash management account

56,551

-

-

-

Assets at amortised cost:

 

 

 

 

Deposits with the RBA

-

69,952

-

-

Structured finance securities

508

53

1,342

1,762

Loans to State and Territory Governments

80

78

1,334

1,414

Accrued interest on cash management account

5

-

-

-

Total assets

57,145

70,084

2,676

3,176

 

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 a significant impact on its operations.

 

Administered reconciliation schedule
($ millions)

for the period ended 30 June 2021

 

Notes

               2021

               2020

NET ASSETS

 

 

 

Opening value

 

        (711,835)

       (593,545)

Surplus (deficit)

 

            11,998

         (26,251)

Transactions with the OPA

 

 

 

Cash management account transfers

 

            56,551

                      -

Special appropriations (unlimited)

10

          729,377

       1,913,353

Transfers to OPA

 

       (914,790)

      (2,007,091)

Contributed equity - special accounts

10

                 250

            15,250

Change in special account balances

10

               (151)

           (13,551)

Net assets

 

         (828,600)

         (711,835)

 

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

 

Administered schedule of cash flows
($ millions)

for the period ended 30 June 2021

 

Notes

               2021

               2020

NET CASH FROM OPERATING ACTIVITIES

 

 

 

Interest receipts

 

                 240

                 272

Other receipts

 

                     1

                      -

GST refunds from ATO

 

                     6

                     2

Interest paid on Treasury Bonds

2

          (19,564)

         (17,643)

Interest paid on Treasury Indexed Bonds

3

            (1,373)

              (886)

Interest paid on Treasury Notes

 

              (112)

              (107)

Interest paid on other debt instruments

 

                (13)

                (11)

Other payments

 

                (88)

                (34)

Net cash from operating activities

9

          (20,903)

          (18,407)

NET CASH FROM INVESTING ACTIVITIES

 

 

 

Capital proceeds from deposits

 

          604,950

       1,777,516

Capital proceeds from structured finance securities

 

              1,501

                   26

State and Territory loan repayments

 

                   92

                   91

Acquisition of structured finance securities

 

            (1,652)

            (1,726)

Acquisition of deposits

 

         (535,000)

     (1,816,366)

Net cash from investing activities

 

            69,891

          (40,459)

NET CASH FROM FINANCING ACTIVITIES

 

 

 

Capital proceeds from borrowings

 

          308,850

          228,637

Other receipts

 

                 135

                   54

Repayment of borrowings

 

         (172,523)

          (77,732)

Other payments

 

             (135)

               (54)

Net cash from financing activities

 

           136,327

           150,905

 

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

 

 

Administered schedule of cash flows ($ millions) (continued)

for the period ended 30 June 2021

 

Notes

2021

2020

EXPENSES

 

 

 

Interest expense:

 

 

 

Treasury Bonds

  2

15,984

15,139

Treasury Indexed Bonds

  3

977

1,468

Treasury Notes

 

81

136

 

 

17,042

16,743

Other expenses:

 

 

 

Debt repurchases

 

   -

399

Supplier expenses

 

82

32

Waiver of Tasmanian Government housing debt

 

 -

144

Total expenses

 

17,124

17,318

INCOME

 

 

 

Interest revenue:

 

 

 

Loans to State and Territory Governments

 

88

94

Deposits

 

104

170

Structured Finance Securities

       7

57

(4)

Total income

 

249

260

Surplus (deficit) before re-measurements

 

(16,875)

(17,058)

RE-MEASUREMENTS (net market revaluation)

 

 

 

Treasury Bonds

 

30,198

(9,190)

Treasury Indexed Bonds

 

(1,357)

29

Treasury Notes

 

32

 (32)

Total re-measurements

 

28,873

(9,193)

Surplus (deficit)

 

11,998

(26,251)

 

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

(a)      In November 2020 the AOFM established a new liquidity facility – a cash management account with the RBA to manage cash liquidity more flexibly and more efficiently. The principal balance of the cash management account is reported as ‘cash’ on the administered balance sheet.

 

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 comprises 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 can 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, those assets held for policy purposes - loans to State and Territory Governments and structured finance securities - are held in separate portfolios.

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. Weekly issuance decisions (guided by the debt strategy) take into account prevailing market conditions and investor demand.

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 cost, refinancing risk and liquidity risk. The AOFM aims to hold enough cash at all times to fund at least four weeks of projected net outlays. Due to the large increase in the size of government net cash outlays arising from the Covid-19 pandemic, asset balances required to provide cash coverage have increased significantly. The increased reliance on Treasury Notes has reduced the cost of holding the precautionary asset balances.

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 accrual 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)

 

               2021

               2020

Fixed interest rate exposures

 

 

Assets

            57,965

            71,444

Liabilities

        (888,413)

       (784,967)

Floating interest rate or non-interest bearing exposures

 

 

Assets

              1,856

              1,816

Liabilities

                   (8)

               (128)

 

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 74 basis points rise (2019-20: +9) ($m)

 

               2021

               2020

Financial Liabilities

 

 

 Changes in fair value:

 

 

   Treasury Bonds

            38,704

              4,022

   Treasury Indexed Bonds

              3,377

                 428

   Treasury Notes

                   35

                   15

Financial Assets

 

 

 Changes in interest revenue:

 

 

   Structured finance securities

                 14

                     2

 

Sensitivity of 30 June balances to a 74 basis points fall (2019-20: -9) ($m)

 

               2021

               2020

Financial Liabilities

 

 

 Changes in fair value:

 

 

   Treasury Bonds

         (41,965)

          (4,059)

   Treasury Indexed Bonds

           (3,801)

            (434)

   Treasury Notes

               (35)

              (15)

Financial Assets

 

 

 Changes in interest revenue:

 

 

   Structured finance securities

              (14)

               (2)

 

In undertaking the sensitivity analysis, a parallel shift in interest rates (real and nominal) is applied to instruments with all other variables held constant. 

For fixed rate instruments, a shift in market interest rates on 30 June balances only influences 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.

For floating rate instruments, the impact on interest revenue or interest expense represents an annualised estimate calculated as if the positions as at the period end were outstanding for the entire year.

A sensitivity of 74 basis points (9 basis points for 2019-20) has been used for domestic interest rates as per standard parameters mandated by the Department of Finance.

In 2020-21 the Department of Finance made an amendment to its methodology for determining the standardised rate for conducting interest rate sensitivity analysis.

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 redemption. 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

 

 First issued

               2021

               2020

               2019

20 Aug 20 - 4.00%

Oct-96

 

            176.55

            173.05

21 Feb 22 - 1.25%

Feb-12

            118.14

            116.97

            114.63

20 Sep 25 - 3.00%

Sep-09

            127.23

            125.97

            123.47

21 Nov 27 - 0.75%

Aug-17

            106.66

            105.60

            103.50

20 Sep 30 - 2.50%

Sep-10

            124.12

            122.89

            120.45

21 Aug 35 - 2.00%

Sep-13

            115.04

            113.90

            111.63

21 Aug 40 - 1.25%

Aug-15

            110.39

            109.29

            107.12

21 Feb 50 - 1.00%

Sep-18

            104.64

            103.60

           101.55

 

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 comprised of balances acquired for cash management purposes and structured (securitisation) finance securities to support the purposes of the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF).

Investments acquired for cash management purposes are made in accordance with legislative requirements, delegations from the Treasurer and the Minister for Finance and policies and limits established by the Secretary to the Treasury. For 2019-20 and 2020-21 cash management investments have, consistent with past practice, been restricted to deposits with the RBA. Deposits with the RBA are considered to carry zero credit risk.

The AOFM invests in debt securities issued by way of capital market securitisation offerings under the authority of either section 12 of the Australian Business Securitisation Fund Act 2019 or section 12 of the Structured Finance Support (Coronavirus Economic Response Package) Act 2020.

  • Securitisation is a process in which assets with an income stream are pooled and converted into tranches of debt securities, with each tranche having different risk and return characteristics. In the case of the ABSF investments the underlying assets are secured and unsecured loans to small and medium enterprises. In the case of the SFSF investments the underlying assets may be residential loans, commercial loans, car and equipment loans and leases, credit card liabilities and buy-now-pay-later liabilities.

The prediction of the performance of a pool of assets through a structured product is difficult given that creditworthiness is heavily reliant on the specific characteristics of each pool and economic conditions. A deep history of performance data may not be available, and new entrants to this market may have little or no performance history. Furthermore, the structured (securitisation) finance securities in which the AOFM may invest may not be rated by a credit rating agency.

In circumstances in which the AOFM is proposing to acquire a structured finance security that is not rated, it will engage an advisor to undertake pre-trade loan pool analysis and credit risk assessment.

Post-trade performance monitoring of each security acquired is also conducted, including defaults, prepayment rates, losses, profitability, and level of credit enhancement. The actual historical performance of loan pools may guide revisions of expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide an estimate as to expected future credit losses (either for the next 12 months or full life to maturity, depending on the circumstances).  

Debt securities acquired through the ABSF and the SFSF must be made in accordance with the relevant Act, Rules, Directions, and Investment Policy.

The maximum exposure to the credit risk of structured (securitisation) finance securities acquired by the AOFM through the ABSF and the SFSF is the principal outstanding, plus the total amount of undrawn commitments remaining over the life of the respective facilities. However, the likely amount of loss arising from undrawn commitments may be less than the total amount committed as the commitments are contingent on maintenance of specific credit standards.

The table below shows the credit exposure to structured (securitisation) finance facilities as at 30 June 2021:

Credit exposure to structured (securitisation) finance facilities as at 30 June 2021 ($m)

Exposure by fund

 

Current
exposure

Undrawn
commitments

Total credit
committed

Australian Business Securitisation Fund (ABSF)

     

 

Public term transactions (a)

-

-

-

 

Private warehouse transactions (b)

102

148

250

 

Sub-total

102

148

250

Structured Finance Support Fund (SFSF)

     

 

Public term transactions (a)

946

-

946

 

Private warehouse transactions (b)

773

359

1,132

 

Forbearance SPV

38

-

38

 

Sub-total

1,757

359

2,116

 

 

     

 

Total

1,859

507

2,366

(a)      Debt securities (backed by underlying collateral) issued by way of public offer by special purpose vehicles for the purposes of funding their lending activities.

(b)      Temporary lines of credit (backed by underlying collateral) provided to special purpose vehicles for the purposes of funding their lending activities.

 

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 2021, the principal outstanding on these loans was $1,554 million.

Composition of loans to state and territory governments as at 30 June 2021:

 This is a pie chart. It displays in face value terms the proportion of loans outstanding by each State.

In relation to those loans administered by the AOFM, as at 30 June 2021 no housing loans were outstanding by Victoria, Tasmania, or the ACT. The maximum exposure to credit risk is the principal value of loans outstanding.

Credit exposure to state and territory governments by credit rating ($m)

 

Principal value

 

2021

2020

Aaa / AAA

-

754

Aa1 / AA+

1,416

749

Aa2 / AA

-

-

Aa3 / AA-

138

143

Total

1,554

1,646

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 manage refinancing risk by issuing debt across a wide range of maturities that comprise the 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 bond 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 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, since 2016 the AOFM has conducted regular buy backs of Treasury Bonds that no longer form part of the ASX three‑year futures contract. As these buy-back operations are required to be funded by new issuance the AOFM has ceased these operations indefinitely in response to the pandemic.

The AOFM manages liquidity risk by maintaining sufficient cash and short‑term investments and by maintaining access to the Treasury Notes market so as 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 over the year and subject to forecast risk, as 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 $10 billion (increased on 27 April 2020 from the previous 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 2021 ($m)

 

 Treasury Bonds
 Treasury Indexed
Bonds
 Treasury   Notes                 & Other
Total

Principal payments:

 

 

 

 

within 1 year

                16,398

                  8,082

                27,252

                51,732

1 to 5 years

             248,662

                  9,851

                           -

             258,513

5 to 10 years

             324,200

                14,006

                           -

             338,206

10 to 15 years

                98,450

                  5,004

                           -

             103,454

15 years+

                63,200

                  8,328

                           -

                71,528

Total Principal

             750,910

                45,271

                27,252

             823,433

Interest payments:

 

 

 

 

within 1 year

                19,016

                     802

                          3

                19,821

1 to 5 years

                59,624

                  2,681

                           -

                62,305

5 to 10 years

                38,478

                  1,839

                           -

                40,317

10 to 15 years

                12,092

                     894

                           -

                12,986

15 years+

                11,579

                     791

                           -

                12,370

Total Interest

              140,789

                  7,007

                           3

               147,799

 

Future undiscounted cash outflows of liabilities as at 30 June 2020 ($m)

 

 Treasury Bonds

Treasury Indexed Bonds

Treasury Notes & Other

Total

Principal payments:

 

 

 

 

within 1 year

            43,545

              3,639

            58,798

          105,982

1 to 5 years

          183,160

              8,001

                      -

          191,161

5 to 10 years

          238,700

            14,950

                      -

          253,650

10 to 15 years

            80,750

              6,381

                      -

            87,131

15 years+

            41,000

            12,648

                      -

            53,648

Total Principal

          587,155

            45,619

            58,798

          691,572

Interest payments:

 

 

 

 

within 1 year

            18,232

                 806

                   79

            19,117

1 to 5 years

            55,810

              2,755

                      -

            58,565

5 to 10 years

            36,885

              1,886

                      -

            38,771

10 to 15 years

            10,460

                 956

                      -

            11,416

15 years+

              7,960

                 873

                      -

              8,833

Total Interest

            129,347

              7,276

                    79

          136,702

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 period end. 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 is based on quoted prices in active markets for identical instruments; Level 2 is based on quoted prices or other observable market data not included in Level 1; Level 3 is based on significant inputs to valuation other than observable market data.

Fair value hierarchy for assets and liabilities as at 30 June 2021 ($m)

 

 Carried at fair value

Carried at amortised cost

 

Level 1

Level 2

Level 3

 

Liabilities

(888,413)

-

-

(8)

Assets

-

-

-

59,821

 

Fair value hierarchy for assets and liabilities as at 30 June 2020 ($m)

 

Carried at fair value

Carried at

 

Level 1

Level 2

Level 3

 

amortised cost

Liabilities

(784,967)

-

-

(128)

Assets

-

-

-

73,259

 

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 holders of the securities to exchange or convert Treasury Bonds. There are also no options to either party for early redemption. The AOFM buy back activities are a separate consideration and are based on an open market transaction entered into between the AOFM and the bondholder. The AOFM issues Treasury Bonds primarily through a competitive auction process to registered bidders. In circumstances where a ‘high‑volume’ transaction is seen as advantageous syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Bonds primarily on an accrual 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 fair value of Treasury Bonds is determined by reference to observable market rates for these instruments.

Key aggregates

Interest expense ($m)

 

               2021

               2020

Interest paid / payable

            19,630

            17,645

Amortisation of net premiums

           (3,646)

           (2,506)

Interest expense

            15,984

            15,139

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)

 

               2021

               2020

Face value

          750,910

          587,155

Accrued interest

              3,304

              3,239

Unamortised net premiums

            15,329

            15,326

Market value adjustment

            37,811

            68,009

Carrying value

          807,354

          673,729

As at 30 June 2021 the weighted average market yield on Treasury Bonds was 0.99 per cent (30 June 2020: 0.63 per cent). As at 30 June 2021 the weighted average (nominal) issuance yield on Treasury Bonds was 2.07 per cent (30 June 2020: 2.53 per cent).

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

 

               2021

               2020

Issuance

          207,300

          128,200

Debt repurchased

                     ..

            (9,000)

Maturities

         (43,545)

          (34,294)

Change in principal value

        163,755

           84,906

 

Of the debt repurchased in 2019-20, no Treasury Bonds were otherwise maturing in 2019-20.

Interest paid - schedule of cash flows ($m)

 

               2021

               2020

Coupons paid

            20,125

            18,088

Interest received on issuance

              (561)

              (518)

Interest paid on repurchase

                     ..

                   73

Interest paid

          19,564

            17,643

 

 

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 circumstances where a ‘high-volume’ transaction is seen as advantageous syndicated issuance is undertaken.

Accounting policy

The AOFM monitors the cost and risk on Treasury Indexed Bonds primarily on an accrual 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 fair value of Treasury Indexed Bonds is determined by reference to observable market rates for these 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)

 

               2021

               2020

Interest paid / payable

                 810

                 890

Capital accretion and amortisation of net premiums

                 167

                 578

Interest expense

                 977

               1,468

 

 

 

Carrying values - administered liabilities ($m)

 

               2021

               2020

Principal (adjusted capital value):

 

 

Face value

            38,826

            38,387

Capital accretion (to next coupon)

              6,445

              7,232

 

            45,271

            45,619

Accrued interest

                   53

                   66

Unamortised net premiums

              1,476

              1,163

Market value adjustment

              7,009

              5,652

Carrying value

             53,809

             52,500

 

As at 30 June 2021, the weighted average market (real) yield on Treasury Indexed Bonds was -0.95 per cent (30 June 2020: -0.10 per cent).

As at 30 June 2021, the weighted average (real) issuance yield on Treasury Indexed Bonds was 1.21 per cent (30 June 2020: 1.35 per cent).

 

Changes in principal value for the period ($m)

 

                   2021

                   2020

Changes in face value due to:

 

 

Issuance

                  2,500

                  1,650

Debt repurchased

                       -

                          ..

Maturities

               (2,061)

                         -

Changes in capital accretion due to:

 

 

Issuance

                     337

                     198

Debt repurchased

                        -

                          ..

Maturities

                  (1,578)

                           -

Accretion for the period

                     454

                     893

Change in principal value

                    (348)

                   2,741

 

Interest paid - schedule of cash flows ($m)

 

               2021

               2020

Coupons paid

                 831

                 889

Interest received on issuance

                  (8)

                  (3)

Interest paid on repurchase

                     -

                     ..

Accretion since issuance (paid on redemption)

                 550

                     ..

Interest paid

              1,373

                  886

 

 

Note 4: Treasury Notes

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

The AOFM placed an increased reliance on the Treasury Notes market at the onset of the pandemic to supplement Treasury Bond issuance to meet the sharp change in the fiscal circumstances. Over the course of the year as the financing task stabilised and bond market conditions improved, the volume outstanding of Treasury Notes declined as new issuance reduced.

Accounting policy

The AOFM monitors the cost and risk on Treasury Notes primarily on an accrual 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 these instruments.

Key aggregates

Carrying values - administered liabilities ($m)

 

                   2021

                   2020

Face value

                27,250

                58,750

Unexpired interest discount

                        ..

                   (44)

Market value adjustment

                         ..

                       32

Carrying value

                27,250

                 58,738

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

 

               2021

               2020

Issuance

            94,500

            89,936

Matured

        (126,000)

         (34,186)

Change in principal value

          (31,500)

            55,750

Note 5: Loan commitments liabilities

In fulfilling its role in administering the Australian Business Securitisation Fund (ABSF) and the Structured Finance Support Fund (SFSF), the AOFM’s investments include entering into agreements on behalf of the Commonwealth of Australia with warehouse financing facilities to provide funding (through the acquisition of debt securities via securitisation offerings) up to an agreed commitment level for a defined period of time, subject to the continued satisfaction of warranties, representations and conditions precedent. Whilst terms and conditions vary, they typically provide an option for a financing facility to borrow at a fixed margin to a floating market interest rate benchmark based on prevailing market conditions when the financing agreement is struck. These are known as loan commitments (being a present obligation to provide credit under specified terms and conditions). The Australian Business Securitisation Fund Investment Mandate Directions 2019 and the Structured Finance Support (Coronavirus Economic Response Package) (Delegation) Direction 2020 contemplate the prospect of providing financing facilities at rates of return below the current market rate to fulfil the policy objectives.

Accounting policy

Loan commitments are measured at fair value on initial striking of the financing agreement. Where the AOFM enters into an agreement with a financing facility to provide funding at below market interest rates, a loan commitment liability (and a day-1 loss expense) is recognised at the commitment date estimating the financial effect of the concession.

The financial effects of providing below-market financing where the borrower has flexibility as to the timing and amount to borrow over the expected life of the agreement is difficult to assess. It requires judgement as to the borrower’s expected use of the facility over its expected term. The AOFM applies its judgement to faithfully represent the financial effects of providing such facilities at below market levels (rates) despite the risk of measurement error.

In circumstances where a commitment liability is recognised, it is reversed and allocated (or amortised) to interest revenue over the expected term of the financing facility using the effective interest rate at the time the loan commitment agreement is struck. The AOFM does not re-balance the loan commitment liability periodically to reflect the actual pattern of usage.

Where the AOFM enters into an agreement with a warehouse financing facility to provide funding at-market, the commitment is recorded off-balance sheet (i.e. a loan commitment liability is not raised).

In addition, AASB 9 requires reporting entities to make an allowance for expected credit losses on all loan commitments. The allowance represents the discounted present value of the difference between contractual cash flows due over the expected life of an asset and the expected cash flows (including timing differences). However, AASB 9 requires the carrying value of loan commitments to be the higher of:

·                the allowance for expected credit losses; and

·                the unamortised balance of the loan commitment liability.

The AOFM applies this test at the debt security level.

On initial striking of a financing agreement, the AOFM recognises a 12-month expected credit loss (ECL) for expected loan commitment draw-downs over the next 12 months, where this provision exceeds the carrying value of the committed liability for the facility (where relevant).  Periodically, actual historical performance of each facility is used to revise expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide a revised estimate as to the expected future credit losses. Where relevant, and subject to the carrying value test discussed above, the impairment provision on loan commitments is revised accordingly. Where credit risk has increased significantly since striking of a financing facility agreement, the expected credit loss allowance must be made based on expected commitment drawdowns over the full life. 

·                The process of calculating the forward looking loss allowance for both the 12‑month ECL and lifetime ECL categories requires the use of significant estimates and judgements of the probability of default, loss given default, exposure at default, and economic conditions.

Debt securities acquired by the AOFM through the ABSF and the SFSF are reported at Note 7.

 

Key aggregates

Carrying values – Loan commitments liabilities ($m)

 

                   2021

                   2020

Australian Business Securitisation Fund

 

 

Loan commitments liabilities

                           -

                           -

Expected credit loss provision

                          ..

                           ..

 Sub-total

                         ..

                           ..

Structured Finance Support Fund

 

 

Loan commitments liabilities

                           -

                          1

Expected credit loss provision

                          2

                          -

 Sub-total

                          2

                          1

TOTAL

 

 

Loan commitments liabilities

                           -

                          1

Expected credit loss provision

                          2

                          ..

Total

                          2

                        1

 

 

 

Change in expected credit loss allowances ($m)

 

12 month expected          credit losses

Lifetime    expected       credit losses

Total expected credit losses allowance

Loss Allowance on loan commitments

(a)

(b)

 

Australian Business Securitisation Fund (ABSF)

 

 

 

Opening balance – 1 July 2020

                       ..

                           -

                        ..

Changes in provision during the year

                           ..

                           -

                        ..

Transfers:

 

 

 

to 12 month

                           -

                           -

                           -

to lifetime

                           -

                           -

                           -

Sub-total for ABSF – 30 June 2021

                           ..

                           -

                            ..

Structured Finance Support Fund (SFSF)

 

 

 

Opening balance – 1 July 2020

                          -

                           -

                           -

Changes in provision during the year

                          2

                           -

                          2

Transfers:

 

 

 

to 12 month

                           -

                           -

                           -

to lifetime

                           -

                           -

                           -

Sub-total for SFSF – 30 June 2021

                          2

                                 -

                            2

(a)    A 12 month forward looking expected credit loss provision is required for those debt securities that have not experienced a significant increase in credit risk since initial recognition. If the credit risk of an exposure has not increased significantly since initial recognition, the investment will remain in this category. If credit risk has increased significantly, the investment will be transferred to the lifetime expected losses category.

(b)   A lifetime forward looking expected credit loss provision is required for those debt securities that have experienced a significant increase in credit risk (whether or not objective evidence of impairment has occurred) since initial recognition. Where objective evidence of impairment has occurred a lifetime credit loss provision is also required to be recognised on such investments.

 

Note 6: Deposits with the RBA

For many years, the AOFM has invested its precautionary cash balances in term deposits through a facility offered by the RBA. These investments were made under the authority of section 58 of the Public Governance, Performance and Accountability Act 2013. On 7 November 2020 the RBA and the AOFM replaced the term deposit facility with a cash management account agreement to improve the efficiency and effectiveness of Commonwealth cash management. The cash management account was created under the authority of section 53 of the Public Governance, Performance and Accountability Act 2013. The cash management account resides outside the Official Public Account (OPA) and earns a market-related rate of interest. The agreement is structured so that on a daily basis, excess OPA balances (above an agreed minimum threshold) are swept to the cash management account at the end of each day, and returned at the start of the next day.

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 and classified as investments in the balance sheet. The balances held in the cash management account are effectively ‘at call’ and classified as ‘cash’ in the balance sheet.

Key aggregates

Carrying values - administered assets ($m)

 

               2021

               2020

 

 Cash management account

 Term deposits

Face value

            56,551

            69,950

Accrued interest (a)

                     5

                     2

Carrying value

              56,556

             69,952

a)    The accrued interest on the cash management account is reported separately to the principal value of the investment balance on the administered balance sheet.

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

 

               2021

               2020

Term Deposits

 

 

Placements

          535,000

       1,816,366

Maturities

       (604,950)

      (1,777,516)

Change in principal value

         (69,950)

            38,850

Cash Management Account

 

 

Placements

     14,642,331

                      -

Maturities

   (14,585,780)

                      -

Change in principal value

             56,551

                       -

 

Note 7: Investments in structured finance securities

Investments acquired by the AOFM through the Australian Business Securitisation Fund and the Structured Finance Support Fund represent debt securities in structured finance vehicles, and are either public term securitisations or private warehouse financing facilities or the debt securities issued by the Forbearance SPV. The contractual cash flows received on these debt securities represent payments of principal and interest on that outstanding principal consistent with a basic lending arrangement.

Accounting policy

The AOFM recognises these investments at fair value on initial recognition. The AOFM’s business model is to hold these investments primarily to collect the contractual cash flows, and as such they are carried at amortised cost on subsequent measurement using the effective interest method.

Periodically, actual historical performance of each investment is used to revise expected future performance. This information is used to gauge whether credit risk has increased significantly since acquisition and to provide a revised estimate as to the expected future credit losses. Where relevant, the impairment provision is revised accordingly.

·                Impairments on these investments are required to be measured on an expected credit loss (ECL) basis under AASB 9. The process of calculating the forward looking loss allowance for both the 12-month ECL and lifetime ECL categories requires the use of significant estimates and judgements of the probability of default, loss given default, exposure at default, and economic conditions.

Key aggregates

Interest revenue ($m)

 

               2021

               2020

Interest received / receivable

                     54

                     2

Amortisation of discounts

                       6

                     2

Concessional loan discounts

                        -

                   (6)

Impairment provision expenses

                      (3)

                   (2)

Interest revenue (a)

                       57

                   (4)

a)       Includes earnings from debt securities issued by the Forbearance SPV.

 

Carrying values - administered assets ($m)

 

               2021

               2020

Australian Business Securitisation Fund (ABSF)

 

 

Face value

                 102

                   15

Unamortised net discounts

                      -

                      -

Accrued Interest

                     ..

 ..

Expected credit loss provision

..

..

ABSF Sub-total

                 102

                   15

Structured Finance Support Fund (SFSF) (a)

 

 

Face value

              1,757

              1,813

Unamortised net discounts

                 (7)

                 (13)

Accrued Interest

                     2

                     2

Expected credit loss provision

                   (4)

                   (2)

SFSF Sub-total

              1,748

              1,800

Total carrying Value

              1,850

              1,815

Expected to be received (b):

 

 

Within one year

                 508

                   53

In one to five years

              1,320

              1,601

In more than five years

                   22

                 161

Carrying value by expected recovery

              1,850

              1,815

Ageing:

 

 

Not overdue

              1,850

              1,815

Overdue

                      -

                      -

Carrying value by ageing

              1,850

              1,815

(a)    Includes debt securities issued by the Forbearance SPV.

(b)    The maturity profile is based on the weighted average life of each investment and disregarding estimated principal repayments (the timing and quantum of which are uncertain) prior to that time.

 

 

Change in principal value (face value) of investments for the period ($m)

 

                   2021

                   2020

Australian Business Securitisation Fund (ABSF)

 

 

Acquisitions

                     100

                       15

Redemptions

                    (13)

                          -

Total change in principal value for ABSF

                       87

                       15

Structured Finance Support Fund (SFSF) (a)

 

 

Acquisitions

                  1,432

                  1,839

Redemptions

               (1,488)

                    (26)

Total change in principal value for SFSF

                    (56)

                1,813

(a)      Includes debt securities issued by the Forbearance SPV.

 

The table below sets out the loss allowances recognised by the AOFM.

Loss allowances recognised 30 June 2021 ($m)

 

12 month expected      credit losses
(a)
Lifetime expected   credit losses
(b)
Total expected credit losses allowance

Australian Business Securitisation Fund (ABSF)

     

Opening balance – 1 July 2020

                            ..

                           -

                       ..

Changes in provision during the year

                          ..

                           -

                         ..

Write-offs

                           -

                           -

                           -

Transfers: 12 months/lifetime

                           -

                           -

                           -

Sub-total for ABSF – 30 June 2021

                          ..

                           -

                           ..

Structured Finance Support Fund (SFSF)

     

Opening balance – 1 July 2020

                          2

                           -

                          2

Changes in provision during the year

                          2

                           -

                          2

Write-offs

                           -

                           -

                           -

Transfers: 12 months/lifetime

                           -

                           -

                           -

Sub-total for SFSF – 30 June 2021

                          4

                           -

                          4

Total loss allowances as at 30 June 2021

                          4

                       -

                         4

a)       A 12 month forward looking expected credit loss provision is required for those debt securities that have not experienced a significant increase in credit risk since initial recognition. If the credit risk of an exposure has not increased significantly since initial recognition, the investment will remain in this category. If credit risk has increased significantly, the investment will be transferred to the lifetime expected losses category.

b)      A lifetime forward looking expected credit loss provision is required for those debt securities that have experienced a significant increase in credit risk (whether or not objective evidence of impairment has occurred) since initial recognition. Where objective evidence of impairment has occurred a lifetime credit loss provision is also required to be recognised on such investments.

The Forbearance SPV

The value of interest revenue earned and investments identified in the above tables for the Structured Finance Support fund are inclusive of the Forbearance SPV.

The Forbearance SPV is an Australian resident insolvency remote unit trust created pursuant to the Forbearance SPV Trust Deed, dated 22 July 2020. The trustee (BNY Trust (Australia) Registry Limited) is a company incorporated in Australia. The AOFM has struck a financing facility with the trustee to acquire variable funding notes (being debt securities) issued by the Forbearance SPV in relation to specific originators to fund the making of liquidity payment loans to the participating trusts of the relevant originators. Originators provide first loss credit support through the acquisition of first loss notes issued by the Forbearance SPV. The Commonwealth is the Participation Unitholder of the Forbearance SPV which provides it with a passive income entitlement to any residual income generated by the Forbearance SPV. The passive income entitlement defrays a portion of the costs arising from operating the Forbearance SPV.

Interest revenue earned from the Forbearance SPV in 2020-21 was $0.6 million (2019-20: $nil). As at the end of the financial year the carrying value of debt securities held in the Forbearance SPV was as follows:

Carrying value of debt securities held in the Forbearance SPV at 30 June 2021 ($m)

 

               2021

               2020

Forbearance SPV

 

 

Face value of securities

                   38

                      -

Accrued Interest

                     ..

                      -

Expected credit loss provision

                     ..

                      -

Total Carrying Value

                  38

                      -

Change in principal value (face value) of investments for the period ($m)

 

                   2021

                   2020

Forbearance SPV

 

 

Acquisitions

                       47

                           -

Redemptions

                       (9)

                           -

Total change in principal value

                        38

                           -

 

In addition, for 2020-21 the AOFM received $0.07 million in residual income generated by the Forbearance SPV.

Use of the Forbearance SPV liquidity funding was substantially lower than expected due to the rapid improvement in Covid-19 hardship loans over the course of 2020-21.

 

 

Note 8: 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)

 

               2021

               2020

 

 

 

Face value

              1,554

              1,646

Unamortised net discounts

               (140)

              (154)

Accrued interest

                      -

                      -

Carrying value

              1,414

              1,492

Expected to be received:

 

 

Within one year

                   80

                   78

In one to five years

                 330

                 324

In more than five years

              1,004

              1,090

Carrying value by expected recovery

              1,414

              1,492

Ageing:

 

 

Not overdue

              1,414

              1,492

Overdue

                      -

                      -

Carrying value by ageing

              1,414

              1,492

 

The fair value of these loans was $1,935 million as at 30 June 2021 (2019-20: $2,156 million). In estimating fair value data from Treasury Bonds is used.

 

Note 9: 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)

 

                   2021

                   2020

Surplus (deficit)

                11,998

                (26,251)

Adjustments for non-cash items:

 

 

Amortisation and capital accretion of debt instruments

                 (3,479)

                  (1,928)

Amortisation of financial assets

                      (20)

                      (16)

Concessional loan discounts

                           -

                          6

Impairment provision expenses

                          3

                          2

Re-measurements

                (28,873)

                  9,193

Adjustments for cash items:

 

 

Capital accretion costs on maturity of debt

                     (550)

                           -

Debt repurchase

                           -

                     399

Waiver of housing loans

                           -

                     144

Accrual adjustments:

 

 

Interest accruals on debt

                       22

                       35

Interest accruals on assets

                       (4)

                          9

Net cash from operating activities

                (20,903)

                 (18,407)

 

 

Note 10: Appropriations

Administered special appropriations – unlimited ($’000)

 

                2021

                2020

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

    194,288,950

      87,522,536

s13A - payment of costs and expenses incurred in relation to issuing and managing debt and depository interests

             87,589

             33,569

s13B - payment of costs and expenses incurred in repurchasing debt prior to maturity

                  545

        9,430,970

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)

                      7

                      8

Public Governance, Performance and Accountability
Act 2013

 

 

s58(7) - investments made in the name of the Commonwealth
of Australia (b)

    535,000,000

 1,816,365,550

s77 - repayment of monies received where there is no appropriation for the repayment

                      3

                       -

Total

729,377,094

1,913,352,633

(a)     The 2020-21 amount includes $605 paid into the Debt Retirement Reserve Trust Account (2019-20: $840).

(b)    On 7 November 2020 the term deposit investment facility with the RBA was replaced with a cash management account. The reported figures comprise investments made in term deposits only. The cash management account was created under the authority of section 53 of the Public Governance, Performance and Accountability Act 2013 and deposits made into the account from the OPA do not entail the use of an appropriation as it is considered part of the Consolidated Revenue Fund.

 

The following details administered special appropriations that are available but were not used by the AOFM during 2020-21 and 2019-20 (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. On 7 November 2020 the AOFM ceased making investments under section 58.

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

 

                2021

                2020

Opening balance

      69,950,000

      31,100,000

Acquisitions

    535,000,000

 1,816,365,550

Redemptions and sales

(604,950,000)

(1,777,515,550)

Closing balance

                  -

      69,950,000

Special account — Australian Business Securitisation Fund (ABSF) ($‘000)

 

               2021

               2020

Opening balance

          235,314

                      -

Statutory credit to the special account

          250,000

          250,000

Investments made

        (100,072)

          (14,686)

Capital proceeds received from investments

            12,569

                      -

Interest received from investments

                 689

                      -

Balance

          398,500

          235,314

Balance represented by:

 

 

Cash - held in the Official Public Account

          398,500

          235,314

 

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

Purpose — to increase the availability, and reduce the cost of credit provided to small and medium enterprises by the Commonwealth investing in debt securities in accordance with the Australian Business Securitisation Fund Act 2019.

The ABSF Special Account received its first funding credit of $250 million on 1 July 2019.  A second tranche of funding of $250 million was made on 1 July 2020. Additional funding, each of $500 million, will occur on 1 July 2021, 1 July 2022 and 1 July 2023.

Special account — Structured Finance Support Fund (SFSF) ($‘000)

 

               2021

               2020

Opening balance

     13,316,015

                      -

Statutory credit to the special account

                      -

     15,000,000

Investments made

     (1,551,842)

     (1,712,144)

Program and commitments fees received

              1,022

                      -

Capital proceeds received from investments

       1,488,024

                     -

Interest received from investments

            52,204

            28,159

Other payments

               (12)

                      -

Other receipts

                   74

                      -

Balance

     13,305,485

     13,316,015

Balance represented by:

 

 

Cash - held in the Official Public Account

     13,305,485

     13,316,015

 

Receipts and payments reported above are inclusive of receipts from and payments to the Forbearance SPV. Receipts from and payments to the Forbearance SPV are as follows:

 

 

Forbearance SPV – receipts and payments ($‘000)

 

               2021

               2020

 

 

 

Investments made

          (47,023)

                      -

Program and commitments fees received

                      -

                      -

Capital proceeds received from investments

              8,648

                      -

Interest received from investments

                 635

                      -

Other payments

                      -

                      -

Other receipts

                   74

                      -

Net cash outflows for the Forbearance SPV

          (37,666)

                      -

 

Establishing Instrument – The Structured Finance Support (Coronavirus Economic Response Package) Act 2020, section 11.

Purpose - to ensure continued access by smaller lenders to funding markets to mitigate impacts arising from the economic effect of business restoration during the Covid‑19 pandemic.

The SFSF Special Account received a statutory funding credit of $15 billion on 25 March 2020.

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

 

               2021

               2020

Opening balance

                   45

                   42

Commonwealth contributions and interest paid

                      ..

                     1

State contributions

                     2

                     2

Debt repayments made

                 (23)

                     -

Balance

                   24

                   45

Balance represented by:

 

 

Cash - held in the Official Public Account

                  24

                  45

 

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.

 

Note 11: Budgetary report to outcome comparison

The AOFM produces estimates of the impact of its debt financing operations through the issuance of Australian Government Securities (AGS) and certain financial assets for the Australian Government Budget which is usually released in April/May each year for the Budget year (the financial year commencing on the following 1 July) and three forward years. Due to the pandemic, the 2020-21 Budget was released in October 2020.

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) are central to determining 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 level of AGS yields (or interest rates) and the chosen maturities and mix of debt to be issued. These decisions are based on the debt management strategy for the period ahead, which in turn takes into account longer-term portfolio considerations.

It is assumed that the future 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.

2020-21 Budget

The outbreak of the Covid-19 pandemic and associated policy responses has created a significant deterioration in global economic conditions. This has also impacted the Australian economy and the government’s fiscal position, which has led to a pronounced increase in debt issuance to meet funding requirements.

In the 2020-21 Budget the government estimated a Headline Cash Deficit of $230 billion for 2020-21. After AGS maturities and redemptions of $54 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 at year end) and financing transactions of other government agencies; the long term gross debt issuance program for 2020-21 was set at $242 billion.

At the time of the Mid-Year Economic and Fiscal Outlook (released in December 2020) the Headline Cash Deficit for 2020-21 was forecast to improve (by $15 billion) to $215 billion. The long term gross debt issuance program was reduced (by $10 billion) to $232 billion after (downward) adjustment in the level of Treasury Notes to be outstanding.

In the 2021-22 Budget (released in May 2021) the Headline Cash Deficit for 2020-21 was forecast to improve further (by $47 billion) to $168 billion. The long term gross debt issuance program was reduced further (by $20 billion) to $212 billion.

For the year ended 30 June 2021 the AOFM’s actual long-term gross issuance program totalled $209.8 billion.

Administered schedule of comprehensive income ($m)

 

Outcome

Budget (a)

Variance

 

2021

2021

2021

EXPENSES

 

 

 

Interest expense

17,042

16,724

318

Other expenses

82

80

2

Total expenses

17,124

16,804

320

INCOME

 

 

 

Interest revenue

249

214

35

Total income

249

214

35

(16,875)

(16,590)

(285)

 

 

 

 

 

Re-measurements

28,873

5,815

23,058

Total re-measurements

28,873

5,815

23,058

Surplus (deficit)

11,998

(10,775)

22,773

(a)     Original Budget released in October 2020.  The Budget figures are not audited.

 

Significant variances in expenses before re‑measurements

Interest expense for 2020-21 was $318 million higher than forecast in the 2020-21 Budget. This comprises an unfavourable variance of $46 million on Treasury Bonds, an unfavourable variance of $290 million on Treasury Indexed Bonds, and a favourable variance of $18 million on Treasury Notes. The nominal interest rate environment for 2020-21 was higher than forecast in the Budget and resulting in higher costs on new borrowings. This was largely offset by a lower than forecast debt issuance program. The inflation environment for 2020-21 was slightly higher than forecast and which led to higher interest costs on Treasury Indexed Bonds.

Significant variances in income before re‑measurements

Interest revenue for 2020-21 was $35 million higher than forecast in the 2020-21 Budget. This comprises a favourable variance of $24 million on cash deposits for liquidity purposes and a favourable variance of $11 million on securitisation investments. Cash deposit revenue was higher due to a richer average cash buffer throughout 2020-21 than forecast. In relation to securitisation investments, actual investment activity was significantly lower than forecast, however lower than forecast impairment losses more than offset the lower revenue.

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 assumption, re-measurements of the AGS portfolio for changes in market interest rates are not significant in the Budget. Actual market yields as at 30 June 2021 were significantly higher at the longer end (by between 40 and 60 basis points) of the Treasury Bond yield curve as 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

 

                   2021

                   2021

                   2021

LIABILITIES

 

 

 

Interest bearing liabilities (at fair value)

             888,413

             978,283

               (89,870)

Other liabilities

                          8

                     122

                    (114)

Total liabilities

             888,421

             978,405

                (89,984)

ASSETS

 

 

 

Cash at bank

                56,552

                          1

                56,551

Investments

                  1,850

                43,103

              (41,253)

Loans to State and Territory Governments

                  1,414

                  1,414

                           -

Accrued interest on cash management account

                          5

                           -

                           5

Total assets

                59,821

                44,518

                  15,303

Net assets

           (828,600)

              (933,887)

                105,287

(a)    Original Budget released in October 2020.  The Budget figures are not audited.

 

Significant variances in interest bearing liabilities

The stronger than expected fiscal recovery, in the second half of 2020-21 reflecting Australia’s success in managing the public health crisis arising from the Covid-19 pandemic, resulted in lower than forecast AGS debt outstanding due to a smaller than forecast issuance program for 2020‑21. The long term net issuance program for 2020-21 was $32 billion smaller (in face value terms) than forecast in the 2020-21 Budget. The rise in market yields has also led to a lower valuation in the debt outstanding by $23 billion. Conversely, the rise in market interest rates during 2020-21 resulted in a reduction of around $12 billion in proceeds received (called issuance premiums) from debt issuance as compared to Budget. Finally, the AOFM’s reliance on short term funding markets (through the Treasury Notes market) was lower than forecast at year end by around $23 billion due to the better than expected fiscal position.

Significant variances in cash and investments

The better than expected fiscal position as at 30 June 2021 resulted in higher precautionary cash balances than forecast by around $20 billion as at year end. In addition, due to better than expected market conditions in securitisation markets, the size of the Structured Finance Support Fund (SFSF) was around $5 billion smaller than forecast in the Budget as at year end.

 

Note 12: Securities lending facility

The AOFM has a securities lending facility for Treasury Bonds and Treasury Indexed Bonds, which is operated by the RBA on behalf of the Australian Government.

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 completed during the period

 

 Number

Face value ($m)

 

2021

2020

2021

2020

Overnight:

 

 

 

 

Treasury Bonds

66

25

5,337

1,201

Treasury Indexed Bonds

55

138

650

1,451

Intra-day:

 

 

 

 

Treasury Bonds

1

3

250

179

Treasury Indexed Bonds

-

9

-

204

Total

122

175

6,237

3,035

 

No transactions were open at the beginning of the year.

One transaction for $8 million for Treasury Indexed Bonds was open at the end of the year. This transaction is not included in the above table.

Separate to the securities lending facility, bond market participants can borrow Treasury Bonds and Treasury Indexed Bonds from the RBA in which the securities are sourced from the RBA’s holdings.

 

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 2021

 

Notes

                  2021

                  2020

 Budget 2021

 Variance from Budget

NET COST OF SERVICES

 

 

 

 

 

EXPENSES

 

 

 

 

 

Employee benefits

A

8,194

7,026

8,419

(225)

Supplier expenses

A

7,400

3,554

8,505

(1,105)

Depreciation and amortisation

C,D

574

671

842

(268)

Interest on lease liabilities

F

64

61

64

-

Asset revaluation decrements

 

-

17

-

-

Asset write-offs

 

13

-

-

13

Total expenses

 

16,245

11,329

17,830

(1,585)

OWN-SOURCE INCOME

 

 

 

 

 

Staff secondments

 

57

350

394

(337)

Resources received free of charge

298

298

320

(22)

Asset revaluation increments

 

-

10

-

-

Total own-source income

 

355

658

714

(359)

Net cost of services

 

(15,890)

(10,671)

(17,116)

1,226

APPROPRIATION FUNDING

 

 

 

 

 

Revenue from government

 

16,499

13,808

16,499

-

Total appropriation funding

 

16,499

13,808

16,499

-

Surplus (deficit)

 

609

3,137

(617)

1,226

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

Asset revaluation

 

-

338

-

-

Comprehensive income

 

609

3,475

(617)

1,226

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in October 2020 (Budget figures are not audited).

Statement of financial position ($’000)

as at 30 June 2021
 
Notes

                  2021

                  2020

 Budget
2021

 Variance from Budget

ASSETS

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

Cash and cash equivalents

 

                    100

                    100

                    100

                          -

 

Receivables

B

               28,633

               27,448

               27,494

                 1,139

 

Non-financial assets:

 

 

 

 

 

 

Property, plant and equipment

C

                 6,117

                 6,478

                 6,152

(35)

 

Computer software

D

                    613

                    619

                    469

                    144

 

Supplier prepayments

 

                    355

                    152

                    152

                    203

 

Total assets

 

               35,818

               34,797

               34,367

                 1,451

 

LIABILITIES

 

 

 

 

 

 

Payables:

 

 

 

 

 

 

Supplier payables

 

                    749

                    177

                    177

                    572

 

Salary and superannuation

 

                    141

                    117

                    118

                       23

 

Provisions:

 

 

 

 

 

 

Employee provisions

E

                 2,896

                 2,556

                 2,601

                    295

 

Lease liabilities

F

                 4,375

                 4,600

                 4,375

                          -

 

Other provisions

G

                    460

                    460

                    460

                          -

 

Total liabilities

 

                 8,621

                 7,910

                 7,731

                    890

 

Net assets

 

               27,197

               26,887

               26,636

                    561

 

EQUITY

 

 

 

 

 

 

Retained surplus

 

               35,714

               35,105

               34,488

                 1,226

 

Asset revaluation reserve

 

                    338

                    338

                    338

                          -

 

Contributed equity

 

              (8,855)

               (8,556)

               (8,190)

                   (665)

 

Total equity

 

               27,197

                26,887 

              26,636

                     561

 

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in October 2020 (Budget figures are not audited).

 

Current/non-current balances ($’000)

 

Current

Non-Current

 

2021

2020

2021

2020

ASSETS

 

 

 

 

Financial assets:

 

 

 

 

Cash and cash equivalents

100

100

-

-

Receivables

11,634

12,997

16,999

14,451

Non-financial assets:

 

 

 

 

Property, plant and equipment

-

-

6,117

6,478

Computer software

-

-

613

619

Supplier prepayments

355

152

-

-

Total assets

12,089

13,249

23,729

21,548

 

 

 

 

 

LIABILITIES

 

 

 

 

Payables:

 

 

 

 

Supplier payables

749

177

-

-

Salary and superannuation

141

117

-

-

Provisions:

 

 

 

 

Employee provisions

879

585

2,017

1,971

Lease liabilities

233

225

4,142

4,375

Other provisions

-

-

460

460

Total liabilities

2,002

1,104

6,619

6,806

 

 

 

Statement of changes in equity ($’000)

for the period ended 30 June 2021

 

Notes

                  2021

                  2020

 Budget
2021

 Variance from Budget

RETAINED SURPLUS

 

 

 

 

 

Opening balance

 

              35,105

              31,968

             35,105

                       -

Surplus (deficit)

 

                   609

                3,137

               (617)

               1,226

Retained surplus

 

              35,714

              35,105

             34,488

               1,226

ASSET REVALUATION RESERVE

 

 

 

 

 

Opening balance

 

                   338

                       -

                  338

                       -

Revaluation

 

                       -

                   338

                       -

                       -

Asset revaluation reserve

 

                   338

                   338

                  338

                       -

CONTRIBUTED EQUITY

 

 

 

 

 

Opening balance

 

              (8,556)

                   (7,879)

             (8,556)

                       -

Capital injection

 

                   366

                      359

                  366

                       -

Appropriations extinguished

I

                 (665)

                 (1,036)

                       -

                 (665)

Contributed equity

 

               (8,855)

                 (8,556)

               (8,190)

                 (665)

Total equity

 

                27,197

                  26,887

                26,636

                   561

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in October 2020 (Budget figures are not audited).

 

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

 

Statement of cash flows ($’000)

for the period ended 30 June 2021

 

Notes

                  2021

                  2020

 Budget 2021

 Variance from Budget

NET CASH FROM OPERATING ACTIVITIES

 

 

 

 

 

Appropriations: Operating

 

               14,906

               11,070

               16,848

            (1,942)

GST received from ATO

 

                         3

                         5

                          -

                         3

Services and other

 

                    131

                    382

                    394

                  (263)

Employees

 

                (7,856)

                (7,378)

                (8,374)

                    518

Suppliers

 

               (6,761)

                 (3,384)

                 (8,185)

                 1,424

Interest paid on leases

 

                    (64)

                     (61)

                     (64)

                          -

GST paid to ATO

 

                          -

                     (3)

                          -

                          -

Transfers to OPA (a)

 

                  (134)

                  (384)

                   (394)

                    260

 

H

                    225

                    247

                    225

                          -

NET CASH FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchase of assets

 

                   (221)

                    (10)

                 (366)

                    145

   

                  (221)

                     (10)

                 (366)

                    145

NET CASH FROM FINANCING ACTIVITIES

 

 

 

 

 

Appropriations: Capital

 

                    221

                       10

                    366

                   (145)

Lease liability

 

                   (225)

                  (220)

                  (225)

                          -

   

                       (4)

                  (210)

                    141

                    (145)

Net change in cash held

 

                          -

                       27

                          -

                          -

+ cash held at the beginning of period

 

                    100

                       73

                    100

                          -

Cash held at the end of the period

 

                    100

                       100

                    100

                         -

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in October 2020 (Budget figures are not audited).

 

(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)

 

                   2021

                   2020

Wages and salaries

                  6,738

                  6,303

Superannuation

                  1,148

                     978

Leave entitlements

                     300

                 (271)

Other employee expenses

                          8

                       16

Total

                  8,194

                   7,026

For 2020-21 the AOFM’s average staffing level was 46, which represented an increase (by 7) from an average staffing level of 39 in 2019-20.

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

Key Management Personnel ($’000)

 

                   2021

                   2020

Salary and other short-term benefits

                     375

                     342

Annual leave accrued

                       29

                       29

Long service leave accrued

                       11

                       11

Post employment benefits (superannuation)

                       53

                       53

Total

                     468

                    435

 

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)

 
                   2021
                   2020
Collateral verification agent services (a)
                  1,199
                           -
Consultants and contractors for ABSF and SFSF
                     437
                     315
Corporate support services
                     931
                     896
Internal and external audit services
                     469
                     424
Investment management services for ABSF and SFSF
                  1,250
                     153
Legal (b)
                     575
                     206
Market data services
                     538
                     513
Other
                  1,122
                     558
Travel
                       27
                     207
Treasury management system
                     611
                     257
Trust management expenses (a)
                     215
                           -
Workers compensation premium
                       26
                       25
Total
                  7,400
                  3,554

(a)    These expenses are wholly attributable to the operation of the Forbearance SPV.

(b)  Legal expenses primarily relate to assistance with developing transaction documents for the Forbearance SPV and advice on legal documentation arising from transaction due diligence and execution for the ABSF and the SFSF.

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)

 

                   2021

                   2020

Goods and services (related)

                       53

                       83

Appropriations receivable

                28,572

                27,365

GST and FBT

                          8

                           -

Total

                  28,633

                27,448

 

No receivable is overdue.  All receivables are with related entities.

Recovery of receivables expected in ($’000)

 

                   2021

                      2020

No more than 12 months

                11,634

                     12,997

More than 12 months

                16,999

                    14,451

Total

                 28,633

                     27,448

 

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.

AASB 16 sets out the rules for recognition, measurement and disclosure of leases and requires most leases to be recognised under a single lease model, removing the distinction between finance and operating leases. It requires a lessee to recognise a “right of use asset” and a lease liability on its balance sheet.

On 1 July 2019, the AOFM recognised as a lease liability its obligations arising from the lease of its office premises within the Treasury Building for the expected remaining term. The lease term ends on 21 December 2025 and there are two 5-year extension options exercisable by the AOFM (which the AOFM is planning to exercise). A right of use asset was initially recognised on 1 July 2019 and measured at a value equivalent to the lease liability. The right of use asset is subsequently depreciated using the straight line method to the end of the expected lease term. Comparatives were not restated with the adoption of AASB 16.

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, those items of property, plant and equipment whose fair value can be measured reliably are valued 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.

A valuation was conducted by an independent valuer, Jones Lang LaSalle, as at 31 March 2020. As at 30 June 2021, the AOFM had cumulative net revaluation losses of $81,065 for plant and equipment which were recognised as expenses in the Statement of Comprehensive Income in previous reporting periods. As at 30 June 2021, the balance of the asset revaluation reserve represents revaluation gains on leasehold improvements.

Right of use assets are retained at cost and are not subject to periodic revaluation.

Property, plant and equipment ($’000)

 

                   2021

                   2020

Gross value:

 

 

Leasehold improvements

                  2,025

                  1,987

Plant and equipment

                     283

                     292

Right-of-use asset - lease premises

                  4,820

                  4,820

Accumulated depreciation:

 

 

Leasehold improvements

                  (407)

                  (323)

Plant and equipment

                   (19)

                     (5)

Right-of-use asset - lease premises

                  (585)

                   (293)

Total

                  6,117

                  6,478

 

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

Reconciliation of changes in gross value ($’000)

 

                   2021

                   2020

Opening value

                  7,099

                  2,365

Purchases

                       45

                       10

Initial recognition of right of use asset

                           -

                  4,820

Revaluation increment (decrement)

                           -

                      (96)

Disposals

                      (16)

                           -

Closing value

                  7,128

                  7,099

 

Reconciliation of changes in accumulated depreciation ($’000)

 

                   2021

                   2020

Opening value

                   (621)

                  (579)

Depreciation charge for period

 

 

Leasehold improvements

                    (86)

                  (178)

Plant and equipment

                    (14)

                    (40)

Right-of-use asset

                    (292)

                   (293)

Revaluation increment (decrement)

                           -

                     469

Disposals

                          2

                           -

Closing value

                  (1,011)

                    (621)

Depreciation

Leasehold improvements are depreciated using the straight line method over the expected lease term.

The right of use asset is depreciated using the straight line method over the expected lease term.

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

Useful life

 

2021

2020

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.

The useful lives of leasehold improvements and furniture and fittings were reassessed in 2020-21 and no changes were made to useful lives. No change was made to depreciation expenses for 2020-21 arising from useful life revisions (2019‑20: a reduction of $58,000).

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 software’s functionality and therefore service potential. Software assets are retained at cost and are not subject to periodic revaluation.

Computer software ($’000)

 

                   2021

                   2020

Gross value

                  1,696

                  1,520

Accumulated amortisation

                (1,083)

                  (901)

Total

                    613

                    619

 

No indicators of impairment were identified for computer software.

Reconciliation of changes in gross value ($’000)

 

                   2021

                   2020

Opening value

                  1,520

                  1,520

Purchases

                     176

                           -

Disposals

                           -

                           -

Closing value

                   1,696

                   1,520

Amortisation

Software assets are amortised using the straight line method over their anticipated useful lives, being three to ten years (2019-20: three to ten years).

Reconciliation of changes in accumulated amortisation ($’000)

 

 2021

2020

Opening value

(901)

(741)

Amortisation charge for period

(182)

(160)

Closing value

(1,083)

(901)

 

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 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)

 

                   2021

                   2020

Annual leave

                     711

                     589

Long service leave

                  1,823

                  1,645

Superannuation

                     362

                     322

Total

                  2,896

                  2,556

 

Payment of employee provisions expected in ($‘000)

 

                   2021

                   2020

No more than 12 months

                     879

                     585

More than 12 months

                  2,017

                  1,971

Total

                   2,896

                   2,556

 

 

Note F: Lease liabilities

Accounting policy

AASB 16 sets out the rules for recognition, measurement and disclosure of leases and requires most leases to be recognised under a single lease model, removing the distinction between finance leases and operating leases. It requires lessees to recognise a “right of use asset” and a lease liability on its balance sheet. On 1 July 2019, the AOFM recognised as a lease liability its obligations arising from the lease of its office premises within the Treasury Building for the expected remaining term. The lease liability is initially measured at the present value of the estimated future lease payments as at 1 July 2019, discounted at the Australian Government’s borrowing rate. The lease liability is subsequently measured at amortised cost using the effective interest method.

Lease liability ($’000)

 

                   2021

                   2020

Opening value

 

 

Recognised on adoption of AASB 16

                  4,600

                  4,820

Amounts recognised in profit or loss:

 

 

Interest expense on lease liability

                       64

                       61

Amounts recognised in cash flow:

 

 

Lease payments

                    (289)

                  (281)

Closing value

                  4,375

                  4,600

Discounted amount recognised in the Statement of Financial Position:

 

 

Current

                     233

                     225

Non-current

                  4,142

                  4,375

Total

                 4,375

                   4,600

Future estimated lease payments ($’000)

 

                   2021

                   2020

Undiscounted cash flows:

 

 

Less than 1 year

                     293

                     289

One to five years

                  1,227

                  1,209

More than five years

                  3,349

                  3,660

Total

                  4,869

                   5,158

 

 

Note G: Other provisions

Other provisions are for the restoration costs 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 exercisable at AOFM’s discretion.

Other provisions ($’000)

 

2021

 2020

Makegood on leasehold premises

460

 460

Total

460

460

 

 

Reconciliation of movements in other provisions ($'000):

 

 2021

 2020

Opening balance

460

418

Re-measurements (a)

 -

 42

Total

460

460

(a)    In accordance with AASB Interpretation 1: Changes in Existing Decommissioning, Restoration and Similar Liabilities, the provision increment has been recognised as an adjustment to the Asset Revaluation Reserve in Equity.

 

Other provisions expected to be settled in ($’000)

 

                   2021

                   2020

No more than 12 months

                           -

                           -

More than 12 months

                     460

                     460

Total

                      460

                      460

 

Note H: 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)

 

                   2021

                   2020

Net cost of services

             (15,890)

             (10,671)

Add revenue from Government

                16,499

                13,808

Adjustments for non-cash items:

 

 

Depreciation and amortisation

                     574

                     671

Appropriations extinguished

                   (665)

                 (1,036)

Net revaluation losses

                           -

                          7

Loss on disposal of assets

                       13

                           -

Change in receivables for capital budget items

                     146

                     350

Adjustments for changes in assets:

 

 

(Increase) decrease in receivables

                 (1,185)

                 (2,502)

(Increase) decrease in supplier prepayments

                   (203)

                      (92)

Adjustments for changes in liabilities:

 

 

Increase (decrease) in supplier payables

                     572

                      (60)

Increase (decrease) in salary and superannuation

                       24

                       69

Increase (decrease) in employee provisions

                     340

                    (297)

Net cash from operating activities

                      225

                      247

 

Note I: Appropriations

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

Annual appropriations ($’000)

 

                   2021

                   2020

Annual appropriations:

 

 

Outputs

                16,499

                13,808

Departmental capital budget (a)

                     366

                     359

Public Governance, Performance and Accountability
  Act 2013:

 

 

Section 74 - retained receipts

                     134

                     384

Total available for payment

                16,999

                14,551

Appropriation applied (current and prior years)

              (15,127)

              (11,053)

Variance

                 1,872

                 3,498

 

The variance in departmental appropriations available to appropriations applied (spent) is explained by lower than planned staff and supplier costs, including from the management of the ABSF and the SFSF. 

 

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)

 

                   2021

                   2020

Acts repealed on 1 July 2020:

 

 

Appropriation Act (No. 1) 2017-18

                           -

                  1,036

 

                           -

                  1,036

Acts repealed on 1 July 2021:

 

 

Appropriation Act (No. 1) 2018-19

                      665

                11,980

Appropriation Act (No. 3) 2018-19

                           -

                     934

 

                      665

                12,914

Acts to be repealed on or after 1 July 2022:

 

 

Supply Act (No. 1) 2019-20

                   6,002

                  6,002

Appropriation Act (No. 1) 2019-20

                  5,671

                  8,549

Supply Act (No. 1) 2020-21

                  8,403

                           -

Appropriation Act (No. 1) 2020-21

                  8,596

                           -

 

                28,672

                14,551

Total 

                29,337

                28,501

Represented By:

 

 

Cash at bank

                     100

                     100

Appropriations receivable

                28,572

                27,365

Appropriations extinguished - 1 July

                     665

                  1,036

Total 

                29,337

                28,501

 

 

Note J: Budgetary report to outcome comparison

The Budget figures shown in the primary financial statements represent the original Budget released in October 2020. The Budget figures are not audited.

Judgement is applied when determining variances requiring explanation. Considerations include the value of the variance, the nature of the item and its usefulness in analysing financial performance.

Significant variances in the Departmental financial statements

Employee expenses were $0.2 million lower than forecast at Budget. During 2020-21 the AOFM sought to increase its staffing levels for the purposes of managing the ABSF and the SFSF. Whilst the establishment size increased, the average staffing level for 2020‑21 was 46 against forecasts of 50. This resulted in lower than anticipated staff costs.

Supplier expenses were $1.1 million lower than forecast at Budget. Supplier expenses incorporate service provision for the management of the ABSF and the SFSF, including collateral verification agent services for the Forbearance SPV, investment and credit analysis, pre-trade and post-trade investment management, legal advice and document drafting. These costs are highly contingent on the level of investment activity and proposals received from market participants. Accordingly, they can be highly variable from year‑to-year and difficult to forecast. The level of investment activity and proposals reviewed during the second half of 2020-21 were lower than anticipated.

Staff secondment income during 2020-21 was lower than forecast at Budget by $0.3 million. Due to the additional demands on the AOFM arising from the Covid-19 pandemic, and specifically greater debt issuance to fund the Budget and new programs to support securitisation markets, the AOFM restricted staff secondment activity.  

 

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 2020 to 30 June 2021. 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.

In accordance with the requirements of clause 32 of the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 the Forbearance SPV has not been consolidated in accordance with AASB 10 Consolidated Financial Statements or in accordance with AASB 128 Investments in Associates and Joint Ventures. The AOFM has applied AASB 9 Financial Instruments to its debt security investments in the Forbearance SPV.

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 2020-21 the AOFM adopted all applicable Australian Accounting Standards that became effective during the reporting period.

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.  These are not expected to significantly impact the AOFM’s accounts.

 

Post balance date events

Litigation -  Kathleen O’Donnell v Commonwealth of Australia and others

On 22 July 2020 documents were filed with the Federal Court of Australia (FCA) bringing proceedings against the Commonwealth of Australia, the Secretary of the Department of the Treasury and the Chief Executive Officer of the AOFM. The Concise Statement lodged with the FCA states that the Applicant is the holder of and an investor in exchange-traded Australian Government Bonds. The claim provides that the information statements published by the AOFM setting out information to potential investors about these financial products fail to disclose Australia’s climate change risks for investors. The Applicant further claims that as such the Commonwealth has breached its duties of disclosure under the Australian Securities and Investment Commission Act 2001, and the Treasury Secretary and the Chief Executive Officer of the AOFM have breached their duties under the Public Governance, Performance and Accountability Act 2013.

The Applicant has sought injunctive relief and is not making a claim for damages.

The Commonwealth rejects the claims and is defending the claims in the legal action. In November 2020 a case management hearing was held in the FCA before Justice Murphy. The FCA ordered that:

·         the Applicant file a Statement of Claim within 28 days;

·         the Commonwealth is to review and identify any asserted deficiencies in the proposed pleadings as set out in the Statement of Claim by early February;

·         the Applicant is to file an amended Statement of Claim in response to deficiencies identified by the Commonwealth within 14 days; and

·         by early March 2021 the Commonwealth is to file an interlocutory application, or otherwise file a defence by mid-March 2021.

On 23 December 2020 the Applicant lodged a Statement of Claim with the FCA. On 1 February 2021, the Commonwealth responded to the Statement of Claim setting out the deficiencies apparent in it. On 10 February the Applicant filed a request to the court for a short extension of the timetable. The Commonwealth did not object to the proposed amendments to the timetable and on 26 February 2021 the Applicant filed an Amended Statement of Claim.

On 11 March 2021 the Commonwealth lodged an interlocutory application with the FCA, and on 2 June 2021 lodged a submission in support of its interlocutory application to strike-out key pleadings made by the Applicant in the Amended Statement of Claim. On 2 July 2021, the Applicant lodged a response to the strike-out application with the filing of a Further Amended Statement of Claim. The Commonwealth lodged reply submissions to the FCA on 16 July 2021.

On 28 July 2021, the FCA held a hearing of the Commonwealth’s interlocutory application seeking strike-out of the Applicant’s Further Amended Statement of Claim. At the conclusion of the hearing the FCA gave the Applicant an opportunity to advance her case with a further amended pleading.

On 6 August 2021, the Applicant lodged a Second Further Amended Statement of Claim with the FCA. The Commonwealth lodged reply submissions on 20 August 2021. The FCA is yet to make a ruling on the matter.

ANAO audit opinion