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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 2019 comply with subsection 42 (2) of the Public Governance, Performance and Accountability Act 2013, and are prepared from properly maintained financial records as required by subsection 41 (2) of the Public Governance, Performance and Accountability Act 2013.

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

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

 

R Nicholl

Chief Executive Officer

23 August 2019

P Raccosta

Chief Financial Officer

23 August 2019

Objectives and activities of the AOFM

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

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

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

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

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

Financing the budget

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

Portfolio management

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

Cash management

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

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

Australian Business Securitisation Fund (ABSF)

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

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

The AOFM is responsible for administering the ABSF.

Legislation

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

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

Administered accounts

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

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

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

 

Notes

2019

2018

EXPENSES

Interest expense:

Treasury Bonds

2

15,560

15,363

Treasury Indexed Bonds

3

1,465

1,566

Treasury Notes

 

    63

    67

Interest expense

 

17,088

16,996

Supplier expenses

 

    12

    29

Total expenses

 

17,100

17,025

INCOME

Interest revenue:

Loans to State and Territory Governments

 

  106

  110

Deposits

 

  459

  650

Residential mortgage-backed securities

 

       -

    26

Total income

 

  565

  786

GAINS (LOSSES)

Residential mortgage-backed securities sales

 

       -

    11

Debt repurchased

 

(896)

(523)

Total gains (losses)

 

(896)

(512)

Surplus (deficit) before re-measurements

 

(17,431)

(16,751)

RE-MEASUREMENTS (net market revaluation)

Treasury Bonds

 

(41,160)

  823

Treasury Indexed Bonds

 

(2,390)

(238)

Treasury Notes

 

       -

      1

Other

 

       -

(5)

Total re-measurements

 

(43,550)

  581

Surplus (deficit)

 

(60,981)

(16,170)

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

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

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

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

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

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

 

Notes

2019

2018

LIABILITIES

Interest bearing liabilities at fair value:

Treasury Bonds

2

573,557

524,403

Treasury Indexed Bonds

3

49,813

48,548

Treasury Notes

4

2,993

2,492

Interest bearing liabilities at amortised cost:

Other debt

 

6

 6

Interest bearing liabilities

 

626,369

575,449

Total liabilities

 

626,369

575,449

FINANCIAL ASSETS

Cash at bank

 

1

 1

Assets at fair value:

Term deposits with the RBA

5

 -

45,140

Assets at amortised cost:

Term deposits with the RBA

5

31,112

 -

Loans to State and Territory Governments

6

1,711

1,792

Total assets

 

32,824

46,933

Net assets (liabilities)

 

(593,545)

(528,516)

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

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

Current/non-current balances reported ($ millions)

 

2019

2018

Current assets

31,197

45,222

Non-current assets

1,627

1,711

Current liabilities

38,162

35,016

Non-current liabilities

588,207

540,433

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

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

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

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

 

Notes

2019

2018

NET ASSETS

Opening value

 

(528,516)

(486,594)

Adjustment due to the implementation of AASB 9

 

(4)

-

Revised opening value

 

(528,520)

(486,594)

Administered schedule of comprehensive income:

Surplus (deficit)

 

(60,981)

(16,170)

Administered transfers (to) from Australian Government:

Special appropriations (unlimited)

8

548,336

557,571

Transfers to OPA

 

(552,380)

(583,323)

Change in special account balance

 

-

-

Net assets

(593,545)

(528,516)

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

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

 

Notes

2019

2018

OPERATING ACTIVITIES

Cash received (used):

Interest receipts

 

581

801

GST refunds from ATO

 

 1

 2

Interest paid on Treasury Bonds

2

(18,042)

(18,295)

Interest paid on Treasury Indexed Bonds

3

(2,966)

(1,142)

Interest paid on Treasury Notes

 

(62)

(70)

Interest paid on other debt instruments

 

(9)

(7)

Other payments

 

(13)

(31)

Net cash from operating activities

7

(20,510)

(18,742)

INVESTING ACTIVITIES

Cash received (used):

Capital proceeds from deposits

 

475,350

485,150

Capital proceeds from RMBS

 

 -

1,929

State and Territory loan repayments

 

 98

96

Acquisition of deposits

 

(461,350)

(473,450)

Net cash from investing activities

 

14,098

13,725

FINANCING ACTIVITIES

Cash received (used):

Capital proceeds from borrowings

 

75,892

94,820

Other receipts

 

 87

 43

Repayment of borrowings

 

(65,436)

(64,051)

Other payments

 

(87)

(43)

Net cash from financing activities

 

10,456

30,769

TRANSACTIONS WITH OPA

Cash from (to):

Appropriations

 

548,336

557,571

Receipts sent to OPA

 

(552,380)

(583,323)

Net cash from OPA

 

(4,044)

(25,752)

Net change in cash held

 

 -

 -

+ cash held at the beginning of period

 

 1

1

Cash held at the end of the period

 

1

 1

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

Note 1: Financial risk management

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

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

Debt portfolio

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

Cash management portfolio

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

Interest rate risk

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

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

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

Interest exposure of assets and liabilities ($m)

 

2019

2018

Fixed rate exposures

Assets

32,823

46,932

Liabilities

(626,363)

(575,443)

Floating rate or non-interest bearing exposures

Assets

1

1

Liabilities

(6)

(6)

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

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

 

2019

2018

Changes in fair value:

Treasury Bonds

7,485

6,396

Treasury Indexed Bonds

963

728

Other

1

(1)

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

 

2019

2018

Changes in fair value:

Treasury Bonds

(7,651)

(6,532)

Treasury Indexed Bonds

(995)

(747)

Other

(1)

1

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

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

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

Inflation risk

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

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

 

First issued

2016

2017

2018

2019

21 Nov 18 - 1.00%

Apr-14

104.74

106.61

108.65

 

20 Aug 20 - 4.00%

Oct-96

164.25

167.19

170.40

173.05

21 Feb 22 - 1.25%

Feb-12

108.80

110.75

112.87

114.63

20 Sep 25 - 3.00%

Sep-09

117.19

119.29

121.57

123.47

21 Nov 27 - 0.75%

Aug-17

 

 

101.91

103.50

20 Sep 30 - 2.50%

Sep-10

114.32

116.37

118.60

120.45

21 Aug 35 - 2.00%

Sep-13

105.96

107.86

109.92

111.63

21 Aug 40 - 1.25%

Aug-15

101.68

103.49

105.48

107.12

21 Feb 50 - 1.00%

Sep-18

 

 

 

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

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

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

This is a pie chart. It displays in face value terms the proportion of loans outstanding by each State and the Northern Territory to the Australian Government as at 30 June 2019. The New South Wales Government is the largest debtor at 42 per cent, following by the Western Australian Government at 18 per cent

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

 

Principal value

Estimated fair value

 

2019

2018

2019

2018

Aaa / AAA

803

851

1,014

975

Aa1 / AA+

787

273

1,012

313

Aa2 / AA

305

869

397

1,009

Total

1,895

1,993

2,423

2,297

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

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

Liquidity risk and refinancing risk

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

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

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

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

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

 

 Treasury Bonds

 Treasury Indexed
Bonds

 Other

Total

Principal payments:

within 1 year

34,294

-

2,994

37,288

1 to 5 years

163,006

10,949

-

173,955

5 to 10 years

198,799

14,136

-

212,935

10 to 15 years

61,100

5,773

-

66,873

15 years+

45,050

12,020

-

57,070

Total Principal

502,249

42,878

2,994

548,121

Interest payments:

within 1 year

17,365

870

12

18,247

1 to 5 years

53,819

2,737

-

56,556

5 to 10 years

36,916

2,067

-

38,983

10 to 15 years

10,627

1,049

-

11,676

15 years+

8,740

1,007

-

9,747

Total Interest

127,467

7,730

12

135,209

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

 

 Treasury Bonds

 Treasury Indexed
Bonds

 Other

Total

Principal payments:

within 1 year

29,185

2,561

2,493

34,239

1 to 5 years

180,449

15,306

-

195,755

5 to 10 years

169,800

12,566

-

182,366

10 to 15 years

75,100

5,506

-

80,606

15 years+

38,650

7,928

-

46,578

Total Principal

493,184

43,867

2,493

539,544

Interest payments:

within 1 year

17,767

1,004

13

18,784

1 to 5 years

55,431

2,904

-

58,335

5 to 10 years

37,009

2,066

-

39,075

10 to 15 years

11,068

968

-

12,036

15 years+

8,872

520

-

9,392

Total Interest

130,147

7,462

13

137,622

Fair value reported

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

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

Fair value hierarchy 2019 ($m)

 

Carried at fair value

Carried at amortised cost

 

 Level 1

 Level 2

 Level 3

Liabilities

(626,363)

 -

 -

(6)

Assets

 -

 -

 -

 32,823

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

Fair value hierarchy 2018 ($m)

 

 Carried at fair value

Carried at amortised cost

 

 Level 1

 Level 2

 Level 3

Liabilities

(575,443)

 -

 -

(6)

Assets

 -

45,140

 -

1,792

Note 2: Treasury Bonds

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

Accounting policy

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

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

Key aggregates

Interest expense ($m)

 

2019

2018

Interest paid / payable

17,781

17,751

Amortisation of net premiums

(2,221)

(2,388)

Interest expense

15,560

15,363

Interest expense over the last five years ($m)

This is a bar chart. It displays the annual interest expense on Treasury Bonds over the past 5 years

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)

 

               2019

               2018

Face value

          502,249

          493,184

Accrued interest

              3,237

              3,498

Unamortised net premiums

              9,252

            10,062

Market value adjustment

            58,819

            17,659

Carrying value

          573,557

          524,403

Carrying values over the last 5 years ($m)

This is a bar chart. It displays the carrying value, in fair value terms, of the Treasury Bonds liability as at 30 June over the past 5 years

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

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

 

2019

2018

Issuance via tender

51,400

59,800

Issuance via syndication

3,600

15,700

Debt repurchased

(23,099)

(22,892)

Matured

(22,836)

(23,468)

Change in principal value

9,065

29,140

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

Interest paid — schedule of cash flows ($m)

 

2019

2018

Coupons paid

18,176

18,529

Interest received on issuance

(365)

(478)

Interest paid on repurchase

231

244

Interest paid

18,042

18,295

Note 3: Treasury Indexed Bonds

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

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

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

Accounting policy

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

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

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

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

Key aggregates

Interest expense ($m)

 

               2019

               2018

Interest paid / payable

                 930

                 984

Capital accretion and amortisation of net premiums

                 535

                 582

Interest expense

              1,465

              1,566

Interest expense over the last five years ($m)

This is a bar chart. It displays the annual interest expense on Treasury Indexed Bonds over the past 5 years

Carrying values — administered liabilities ($m)

 

               2019

               2018

Principal (adjusted capital value):

Face value

            36,737

            36,247

Capital accretion (to next coupon)

              6,141

              7,620

Adjusted capital value

            42,878

            43,867

Accrued interest

                   63

                   82

Unamortised net premiums

              1,191

              1,308

Market value adjustment

              5,681

              3,291

Carrying value

            49,813

            48,548

Carrying values over the last 5 years ($m)

This is a bar chart. It displays the carrying value, in fair value terms, of the Treasury Indexed Bonds liability as at 30 June over the past 5 years

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

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

Changes in principal value for the period ($m)

 

 Principal (face value)

Adjusted Capital Value

 

2019

2018

2019

2018

Issuance via tender

2,150

2,550

2,387

2,739

Issuance via syndication

3,750

3,000

3,765

3,010

Debt repurchased

(4,548)

(2,732)

(6,866)

(2,922)

Matured

(862)

-

(940)

-

Accretion

-

-

665

798

Change in principal value

490

2,818

(989)

3,625

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

Interest paid — schedule of cash flows ($m)

 

2019

2018

Coupons paid

935

983

Interest received on issuance

(6)

(4)

Interest paid on repurchase

20

1

Accretion since issuance (on redemption)

2,017

162

Interest paid

2,966

1,142

Note 4: Treasury Notes

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

Accounting policy

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

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

Key aggregates

Carrying values — administered liabilities ($m)

 

2019

2018

Face value

3,000

2,500

Unexpired interest discount

(7)

(8)

Market value adjustment

-

-

Carrying value

2,993

2,492

Carrying values over the last 5 years ($m)

This is a bar chart. It displays the carrying value, in fair value terms, of the Treasury Notes liability as at 30 June over the past 5 years

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

 

2019

2018

Issuance via tender

13,500

13,500

Matured

(13,000)

(14,500)

Change in principal value

500

(1,000)

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

Note 5: Term deposits with the RBA

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

Accounting policy

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

Key aggregates

Carrying values — administered assets ($m)

 

2019

2018

Face value

31,100

45,100

Accrued interest

12

36

Market value adjustment (a)

-

4

Carrying value

31,112

45,140

(a)  Not applicable for 2018-19.

Carrying values over the last 5 years ($m)

his is a bar chart. It displays the carrying value of Term Deposit investments held as at 30 June over the past 5 years. For 2019 the carrying value is in amortised cost terms, and for all other years displayed the carrying value is in fair value terms.

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

 

2019

2018

New term deposits

461,350

473,450

Matured term deposits

(475,350)

(485,150)

Change in principal value

(14,000)

(11,700)

Note 6: Loans to State and Territory Governments

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

Accounting policy

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

Key aggregates

Carrying values — administered assets ($m)

 

2019

2018

Face value

1,895

1,993

Unamortised net discounts

(184)

(201)

Accrued interest

-

-

Carrying value

1,711

1,792

Expected to be received:

Within one year

84

82

In one to five years

351

345

In more than five years

1,276

1,365

Carrying value by expected recovery

1,711

1,792

Ageing:

Not overdue

1,711

1,792

Overdue

-

-

Carrying value by ageing

1,711

1,792

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

Note 7: Cash flow reconciliation

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

Reconciliation of net cash from operating activities ($m)

 

2019

2018

Surplus (deficit)

(60,981)

(16,170)

Adjustments for non-cash items:

Amortisation and capital accretion of debt instruments

(1,686)

(1,806)

Amortisation of concessional loans

(17)

(16)

Net (gains) losses

896

512

Re-measurements

43,550

(581)

Adjustments for cash items:

Capital accretion costs on redemption of debt

(2,017)

(162)

Accrual adjustments:

Interest accruals on debt

(279)

(543)

Interest accruals on assets

24

24

Net cash from operating activities

(20,510)

(18,742)

Note 8: Appropriations

Administered special appropriations — unlimited ($’000)

 

2019

2018

Commonwealth Inscribed Stock Act 1911

s13AA - payment of principal and interest on money raised by Stock issued under the Act and payments on depository interests in Stock issued under the Act

55,983,173

57,529,106

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

12,742

31,305

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

30,989,895

26,560,649

Financial Agreement Act 1994

s5 - debt redemption assistance and payment of interest to bond holders on behalf of the State and Northern Territory Governments on public debt under the Act (a)

8

8

Public Governance, Performance and Accountability Act 2013

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

461,350,000

473,450,000

Total

548,335,818

557,571,068

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

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

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

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

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

 

2019

2018

Opening value

45,100,000

58,718,811

Acquisitions

461,350,000

473,450,000

Redemptions and sales

(475,350,000)

(487,068,811)

Closing value

31,100,000

45,100,000

Administered annual appropriations ($’000)

 

2019

2018

Annual appropriations

-

10

Total available for payment

-

10

Appropriation applied

-

-

Variance

-

10

Unspent administered annual appropriation ($’000)

 

2019

2018

Appropriation Act 1 2017-18

-

10

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

 

2019

2018

Opening balance

40

44

Appropriation for reporting period:

Commonwealth contributions

1

1

Interest amounts credited

-

1

State contributions

1

1

Available for payments

42

47

Debt repayments made

-

(7)

Balance

42

40

Balance represented by:

Cash - held in the Official Public Account

42

40

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

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

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

Special account — Australian Business Securitisation Fund (ABSF)

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

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

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

Note 9: Budgetary report to outcome comparison

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

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

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

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

2018-19 Budget

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

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

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

Administered schedule of comprehensive income ($m)

 

Outcome

Budget (a)

Variance

 

2019

2019

2019

EXPENSES

Interest expense

17,088

17,781

(693)

Supplier expenses

12

30

(18)

Total expenses

17,100

17,811

(711)

INCOME

Interest revenue

565

597

(32)

Total income

565

597

(32)

GAINS (LOSSES)

Debt repurchased

(896)

(641)

(255)

Total gains (losses)

(896)

(641)

(255)

Surplus (deficit) before re-measurements

(17,431)

(17,855)

424

RE-MEASUREMENTS

Net market revaluation

(43,550)

1,315

(44,865)

Total re-measurements

(43,550)

1,315

(44,865)

Surplus (deficit)

(60,981)

(16,540)

(44,441)

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

Significant variances in expenses before re-measurements

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

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

Significant variances in gains (losses)

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

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

Significant variances in re-measurements

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

Administered schedule of assets and liabilities ($m)

 

Outcome

Budget (a)

Variance

 

2019

2019

2019

LIABILITIES

Interest bearing liabilities

626,369

594,437

31,932

Total liabilities

626,369

594,437

31,932

ASSETS

Cash at bank

1

1

-

Investments

31,112

35,660

(4,548)

Loans to State and Territory Governments

1,711

1,712

(1)

Total assets

32,824

37,373

(4,549)

Net assets

(593,545)

(557,064)

(36,481)

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

 

Significant variances in interest bearing liabilities

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

Significant variances in investments

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

Note 10: Securities lending facility

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

Transactions undertaken during the period

 

 Number

Face value ($m)

 

2019

2018

2019

2018

Overnight:

Treasury Bonds

8

28

236

1,220

Treasury Indexed Bonds

13

26

157

458

Intra-day:

Treasury Bonds

9

8

636

738

Treasury Indexed Bonds

1

-

30

-

Total

31

62

1,059

2,416

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

Departmental accounts

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

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

 

Notes

2019

2018

NET COST OF SERVICES

EXPENSES

Employee benefits

A

7,017

6,822

Supplier expenses

A

3,379

3,460

Depreciation and amortisation

 

434

433

Total expenses

 

10,830

10,715

OWN-SOURCE INCOME

Staff secondments

 

310

447

Resources received free of charge

 

298

290

Total own-source income

 

608

737

Net cost of services

 

10,222

9,978

APPROPRIATION FUNDING

Revenue from government

 

11,723

10,834

Total appropriation funding

 

11,723

10,834

Surplus (deficit)

 

1,501

856

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

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

 

Notes

2019

2018

ASSETS

Financial assets:

Cash and cash equivalents

 

73

73

Receivables

B

24,946

24,586

Non-financial assets:

Property, plant and equipment

C

1,786

2,047

Computer software

D

780

942

Supplier prepayments

 

60

223

Total assets

 

27,645

27,871

LIABILITIES

Payables:

Supplier payables

 

237

136

Salary and superannuation

 

48

47

Provisions:

Employee provisions

E

2,853

2,354

Other provisions

F

418

418

Total liabilities

 

3,556

2,955

Net assets

 

24,089

24,916

EQUITY

Retained surplus

 

31,968

30,467

Contributed equity

 

(7,879)

(5,551)

Total equity

 

24,089

24,916

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

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

 

2019

2018

Current assets

14,316

12,866

Non-current assets

13,329

15,005

Current liabilities

802

672

Non-current liabilities

2,754

2,283

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

 

Notes

2019

2018

RETAINED SURPLUS

Changes for period:

Surplus (deficit)

 

1,501

856

Change for period

 

1,501

856

 + opening value

 

30,467

29,611

Closing balance

 

31,968

30,467

CONTRIBUTED EQUITY

Changes for period:

 

 

 

Capital injection - capital budget

 

710

713

Return of capital - appropriations extinguished

 

(3,038)

(1,631)

Change for period

 

(2,328)

(918)

 + opening value

 

(5,551)

(4,633)

Closing balance

 

(7,879)

(5,551)

Total equity

 

24,089

24,916

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

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

 

Notes

2019

2018

OPERATING ACTIVITIES

Cash received (used):

Appropriations

 

9,400

10,256

GST received from ATO

 

6

5

Services and other

 

475

537

Employees

 

(6,556)

(6,732)

Suppliers

 

(2,844)

(3,543)

GST paid to ATO

 

-

(8)

Transfers to Official Public Account (a)

 

(481)

(542)

Net cash from operating activities

G

-

(27)

INVESTING ACTIVITIES

Cash received (used):

Purchase of leasehold improvements

 

-

(204)

Purchase of plant and equipment

 

(11)

(9)

Purchase of prepayment

 

(8)

-

Net cash from investing activities

 

(19)

(213)

FINANCING ACTIVITIES

Cash received (used):

 

 

 

Appropriations

 

19

213

Net cash from financing activities

 

19

213

Net change in cash held

 

-

(27)

+ cash held at the beginning of period

 

73

100

Cash held at the end of the period

 

73

73

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

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

Note A: Expenses

Employee benefits ($’000)

 

2019

2018

Wages and salaries

5,555

5,384

Superannuation

1,049

943

Leave entitlements

398

197

Other employee expenses

15

298

Total

7,017

6,822

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

Key Management Personnel ($’000)

 

2019

2018

Short-term employee benefits:

Salary and other short-term benefits

365

354

Annual leave accrued

29

29

Long service leave accrued

10

9

Post employment benefits (superannuation)

51

51

Total

455

443

Number of key management personnel

1

1

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

Supplier expenses ($’000)

 

2019

2018

ANAO - notional audit fee

298

290

Corporate support services

828

829

Depository and transaction services

 20

168

Market data services

522

555

Operating lease payments - premises

264

277

Travel

233

316

Treasury management system

240

289

Workers compensation premium

24

21

Other

950

715

Total

3,379

3,460

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

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

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

Future estimated lease payments ($’000)

 

2019

Within 1 year

281

1 to 5 years

1,187

Over 5 years

3,971

Total

5,439

Note B: Receivables

Accounting policy

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

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

Receivables ($’000)

 

2019

2018

Goods and services (related)

16

112

Appropriations receivable

24,930

24,474

GST

 -

 -

Total

24,946

24,586

No receivable is overdue.

Recovery of receivables expected in ($’000)

 

2019

2018

No more than 12 months

14,183

12,570

More than 12 months

10,763

12,016

Total

24,946

24,586

Note C: Property, plant and equipment

Accounting policy

Asset recognition threshold on acquisition

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

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

Revaluations

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

Property, plant and equipment ($’000)

 

2019

2018

Gross value:

Leasehold improvements

1,924

1,924

Plant and equipment

441

430

Accumulated depreciation:

Leasehold improvements

(472)

(247)

Plant and equipment

(107)

(60)

Total

1,786

2,047

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

Reconciliation of changes in gross value ($’000)

 

2019

2018

Opening value

2,354

2,335

Purchases

11

19

Disposals

-

-

Closing value

2,365

2,354

Reconciliation of changes in accumulated depreciation ($’000)

 

2019

2018

Opening value

(307)

(36)

Depreciation charge for period

(272)

(271)

Disposals

-

-

Closing value

(579)

(307)

Depreciation

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

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

Useful life

 

2019

2018

Artwork

 100 years

 100 years

Furniture and fittings

 Lease term

 Lease term

ICT equipment

 3-5 years

 3-5 years

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

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

Note D: Computer software

Accounting policy

Asset recognition threshold on acquisition

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

An item of software represents a software licence granted for greater than 12 months; or a developed software application.

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

Computer software ($’000)

 

2019

2018

Gross value

1,521

1,521

Accumulated amortisation

(741)

(579)

Total

780

942

No indicators of impairment were identified for computer software.

Amortisation

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

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

Reconciliation of changes in accumulated amortisation ($’000)

 

2019

2018

Opening value

(579)

(417)

Amortisation charge for period

(162)

(162)

Closing value

(741)

(579)

Note E: Employee provisions

Accounting policy

Leave

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

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

Superannuation

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

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

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

Employee provisions ($’000)

 

2019

2018

Annual leave

557

524

Long service leave

1,948

1,583

Superannuation

348

247

Total

2,853

2,354

 

Payment of employee provisions expected in ($’000)

 

2019

2018

No more than 12 months

517

489

More than 12 months

2,336

1,865

Total

2,853

2,354

Note F: Other provisions

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

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

Other provisions ($’000)

 

2019

2018

Make good on leasehold premises

418

418

Total

418

418

Other provisions are expected to be settled in:

No more than 12 months

-

 -

More than 12 months

418

418

Total

418

418

Reconciliation of movements in other provisions ($’000)

 

2019

2018

Opening balance

418

418

New / re-measurements

 -

-

Total

418

418

Note G: Cash flow reconciliation

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

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

 

2019

2018

Net cost of services

(10,222)

(9,978)

Add revenue from Government

11,723

10,834

Adjustments for non-cash items:

Depreciation and amortisation

434

433

Appropriations extinguished

(3,038)

(1,631)

Asset accruals

 -

194

Change in receivables for capital budget items

 699

500

Adjustments for changes in assets:

(Increase) decrease in receivables

(360)

 87

(Increase) decrease in supplier prepayments

163

(165)

Adjustments for changes in liabilities:

Increase (decrease) in supplier payables

101

(374)

Increase (decrease) in salary and superannuation

 1

(2)

Increase (decrease) in employee provisions

499

75

Increase (decrease) in other provisions

 -

 -

Net cash from operating activities

 -

(27)

Note H: Appropriations

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

Annual appropriations ($’000)

 

2019

2018

Annual appropriations:

Outputs

11,723

10,867

Departmental capital budget

  710

713

Appropriation withheld (a)

 -

(33)

Public Governance, Performance and Accountability Act 2013:

Section 74 - retained receipts

481

542

Total available for payment

12,914

12,089

Appropriation applied (current and prior years)

(9,419)

(10,496)

Variance

3,495

1,593

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

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

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

Unspent departmental annual appropriations ($’000)

 

2019

2018

Appropriation Act (No. 1) 2015-16 (a)

  -

1,631

Supply Act (No. 1) 2016-17 (b)

2,687

4,966

Appropriation Act (No. 1) 2016-17 (b)

201

7,342

Appropriation Act (No. 2) 2016-17 (b)

150

150

Appropriation Act (No. 1) 2017-18

12,089

12,089

Appropriation Act (No. 1) 2018-19

11,980

 -

Appropriation Act (No. 3) 2018-19

934

 -

Total

28,041

26,178

Represented By:

Cash at bank

 73

 73

Appropriations receivable

24,930

24,474

Appropriations extinguished - 1 July

3,038

1,631

Total

28,041

26,178

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

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

Note I: Budgetary report to outcome comparison

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

Statement of comprehensive income ($’000)

 

Outcome

Budget (a)

Variance

NET COST OF SERVICES

EXPENSES

Employee benefits

7,017

6,669

348

Supplier expenses

3,379

4,811

(1,432)

Depreciation and amortisation

  434

500

(66)

Total

10,830

11,980

(1,150)

OWN-SOURCE INCOME

Revenue

608

 691

(83)

Total

608

691

(83)

Net cost of services

10,222

11,289

(1,067)

APPROPRIATION FUNDING

Revenue from government

11,723

10,789

934

Total

11,723

10,789

934

Surplus (deficit)

1,501

(500)

2,001

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

 Statement of financial position ($’000)

 

Outcome

Budget (a)

Variance

ASSETS

Financial assets:

Cash and cash equivalents

73

100

(27)

Receivables

24,946

25,660

(714)

Non-financial assets:

Property, plant and equipment

1,786

2,322

(536)

Computer software

780

1,604

(824)

Supplier prepayments

 60

 58

 2

Total

27,645

29,744

(2,099)

LIABILITIES

Payables

285

559

(274)

Employee provisions

2,853

2,366

487

Other provisions

418

 418

 -

Total

3,556

3,343

213

Net assets

24,089

26,401

(2,312)

EQUITY

Retained surplus

31,968

29,611

2,357

Contributed equity

(7,879)

(3,210)

(4,669)

Total

24,089

26,401

(2,312)

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

Statement of changes in equity ($’000)

 

Outcome

Budget (a)

Variance

EQUITY

RETAINED SURPLUS

Opening balance

30,467

30,111

356

Surplus (deficit)

1,501

(500)

2,001

Total

31,968

29,611

2,357

CONTRIBUTED EQUITY

Opening balance

(5,551)

(3,920)

(1,631)

Capital injections

710

710

 -

Appropriations extinguished

(3,038)

 -

(3,038)

Total

(7,879)

(3,210)

(4,669)

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

Statement of cash flows ($’000)

 

Outcome

Budget (a)

Variance

OPERATING ACTIVITIES

Cash received

9,881

11,487

(1,606)

Cash used

(9,881)

(11,487)

1,606

Net cash from operating activities

-

 -

 -

INVESTING ACTIVITIES

Cash received

 -

 -

 -

Cash used

(19)

(710)

691

Net cash from investing activities

(19)

(710)

691

FINANCING ACTIVITIES

Cash received - appropriations

 19

710

(691)

Net cash from financing activities

 19

710

(691)

Net change in cash held

 -

 -

 -

+ cash held at the beginning of period

 73

 100

(27)

Cash held at the end of the period

 73

100

(27)

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

Significant variances in the Departmental financial statements

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

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

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

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

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

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

Basis of preparation of the financial statements

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

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

The financial statements have been prepared in accordance with:

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

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

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

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

New Australian Accounting Standards applicable to the reporting period

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

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

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

New Australian Accounting Standards applicable in future reporting periods

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

AASB 16 Leases

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

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

ANAO Audit Opinion