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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 2020 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 2020) and the date of signing this report that has significantly affected or may significantly affect the AOFM’s operations.

 

R Nicholl

P Raccosta

Chief Executive Officer

Chief Financial Officer

25 August 2020

25 August 2020

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;
  • 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, including 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 manage the government’s funding task 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 had previously 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.

In 2018‑19, the Australian Government general government sector recorded a net operating balance surplus of $8.7 billion, the first surplus since 2007‑08. However, the outbreak of the Covid‑19 pandemic has created a significant deterioration in global economic conditions, arising from government policy responses to protect the health of citizens and to support their economies. In March and April 2020, the Australian Parliament passed measures to implement the Government’s economic response to the spread of the coronavirus. A significant weakening of the fiscal position has required pronounced increases in debt issuance to meet funding requirements. There remains a high degree of uncertainty about the extent of the impact of the pandemic on the Australian economy and therefore the extent to which increased debt issuance will be required is also uncertain.

The short‑term and long‑term net issuance program rose from $14 billion as announced in the 2019‑20 Budget, to an actual net issuance program of $142 billion (in face value terms) in 2019‑20. Gross issuance rose from $68 billion at Budget to $220 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 against an overarching objective of minimising cost over time 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 27 years as at 30 June 2020 (an extension of 15 years since 2011). At the start of the Covid‑19 pandemic the AOFM was well‑advanced in achieving the issuance program it announced following the 2019‑20 MYEFO, and which represented a continuation of the debt issuance strategy conducted in recent years (being one of long‑term debt portfolio management). From early April 2020 issuance was conducted with volume a primary objective so as to manage liquidity risk in the cash portfolio.

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, although it is not restricted to this approach. 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. Consistent with the AOFM’s expectations as to where market access would be most readily available in a time of crisis, a material increase in Treasury Notes issuance was used to complement a rapid increase in issuance of short‑maturity Treasury Bonds to meet the government’s cash requirements from early April 2020.

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 reducing 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 expenditure for specific purposes and for setting financial limits on that expenditure. The ABSF Special Account is to be 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 of funding 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 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.

The AOFM has responsibility for administering the ABSF and over the past year has been working to operationalise it. 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.

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.

The AOFM has responsibility for administering the SFSF and expects to receive additional departmental funding in the 2020‑21 Budget to conduct this initiative. During the period from April 2020 to June 2020 the AOFM invested in $1,839 million of debt securities issued by way of public term ($1,239 million) and private warehouse ($600million) capital market securitisation offerings. In relation to the private warehouse transactions conducted, as at 30 June 2020 total committed support to these facilities was $935 million.

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 20 March 2020 the Treasurer issued a direction under section 51JA of the Act permitting the AOFM to borrow up to $850 billion in total face value of stock and securities. The decision repeals and replaces the 2017 decision which previously set the maximum at $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 the Public Governance, Performance and Accountability Act 2013 allows the Treasurer to invest public money in authorised investments;
  • the Australian Business Securitisation Fund Act 2019 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 provides for investments in authorised debt securities and other investments and other eligible expenditures to meet the purposes of the Act.

Administered Accounts

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 ($m) for the period ended 30 June 2020

 

Notes

2020

2019

EXPENSES

Interest expense:

 

 

 

Treasury Bonds

2

15,139

15,560

Treasury Indexed Bonds

3

1,468

1,465

Treasury Notes

 

136

63

 

 

16,743

17,088

Other expenses:

 

Debt repurchases

 

399

896

Supplier expenses

 

32

12

Waiver of Tasmanian Government housing debt

8

144

Total expenses

 

17,318

17,996

INCOME

Interest revenue:

 

Loans to State and Territory Governments

 

94

106

Deposits

 

170

459

Structured Finance Securities

7

(4)

Total income

 

260

565

Surplus (deficit) before re‑measurements

 

(17,058)

(17,431)

RE‑MEASUREMENTS (net market revaluation)

Treasury Bonds

 

(9,190)

(41,160)

Treasury Indexed Bonds

 

29

(2,390)

Treasury Notes

 

(32)

Total re‑measurements

 

(9,193)

(43,550)

Surplus (deficit)

 

(26,251)

(60,981)

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 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 for debt management purposes, rather than for profit making purposes.

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 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 ($m) as at 30 June 2020

 

Notes

2020

2019

LIABILITIES

Interest bearing liabilities at fair value:

 

Treasury Bonds

2

673,729

573,557

Treasury Indexed Bonds

3

52,500

49,813

Treasury Notes

4

58,738

2,993

Interest bearing liabilities at amortised cost:

 

Loan commitments

5

1

Other debt

 

6

6

Other liabilities:

 

Securities purchased not delivered

 

121

Total liabilities

 

785,095

626,369

FINANCIAL ASSETS

 

Cash at bank

 

1

1

Assets at amortised cost:

 

Term deposits with the RBA

6

69,952

31,112

Structured finance securities

7

1,815

Loans to State and Territory Governments

8

1,492

1,711

Total assets

 

73,260

32,824

Net assets (liabilities)

 

(711,835)

(593,545)

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 $850 billion in face value terms. As at 30 June 2020 the face value on issue was $684 billion. The schedule above reports the carrying value of debt in fair value (synonymous with market value) terms.

Current/non‑current balances reported ($m)

 

2020

2019

Current assets

70,084

31,197

Non‑current assets

3,176

1,627

Current liabilities

107,655

38,162

Non‑current liabilities

677,440

588,207

 

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 ($m) for the period ended 30 June 2020

 

Notes

2020

2019

NET ASSETS

 

Opening value

 

(593,545)

(528,516)

Adjustment due to the implementation of AASB 9

 

(4)

Revised opening value

 

(593,545)

(528,520)

Surplus (deficit)

 

(26,251)

(60,981)

Transactions with the OPA

 

Special appropriations (unlimited)

10

1,913,353

548,336

Transfers to OPA

 

(2,007,091)

(552,380)

Contributed equity — special accounts

10

15,250

Special account balances

10

(13,551)

Net assets

 

(711,835)

(593,545)

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

Administered schedule of cash flows ($m) for the period ended 30 June 2020

 

Notes

2020

2019

NET CASH FROM OPERATING ACTIVITIES

 

Interest receipts

 

272

581

GST refunds from ATO

 

2

1

Interest paid on Treasury Bonds

2

(17,643)

(18,042)

Interest paid on Treasury Indexed Bonds

3

(886)

(2,966)

Interest paid on Treasury Notes

 

(107)

(62)

Interest paid on other debt instruments

 

(11)

(9)

Other payments

 

(34)

(13)

Net cash from operating activities

9

(18,407)

(20,510)

NET CASH FROM INVESTING ACTIVITIES

 

Capital proceeds from deposits

 

1,777,516

475,350

Capital proceeds from structured finance securities

 

26

State and Territory loan repayments

 

91

98

Acquisition of structured finance securities

 

(1,726)

Acquisition of deposits

 

(1,816,366)

(461,350)

Net cash from investing activities

 

(40,459)

14,098

NET CASH FROM FINANCING ACTIVITIES

 

Capital proceeds from borrowings

 

228,637

75,892

Other receipts

 

54

87

Repayment of borrowings

 

(77,732)

(65,436)

Other payments

 

(54)

(87)

Net cash from financing activities

 

150,905

10,456

TRANSACTIONS WITH OPA

 

Appropriations — unlimited special

 

1,913,353

548,336

Appropriations — special accounts

 

1,727

Receipts to OPA — special accounts

 

(28)

Receipts to OPA — other

 

(2,007,091)

(552,380)

Net cash from OPA

 

(92,039)

(4,044)

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 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 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. Since the start of the Covid‑19 pandemic the AOFM’s issuance decisions have been considerably more constrained by market conditions.

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. In line with the weakening of the government’s fiscal position, a significant increase in cash holdings in late 2019‑20 reflected the AOFM’s usual approach of holding sufficient cash portfolio asset reserves to meet at least four weeks of forecast outlays following the dislocation of funding markets in March. The change to the size of these reserves reflects an increase in forecast outlays as a result of the fiscal response to the pandemic.

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)

 

2020

2019

Fixed rate exposures

Assets

71,444

32,823

Liabilities

(784,967)

(626,363)

Floating rate or non‑interest bearing exposures

 

Assets

1,816

1

Liabilities

(128)

(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 +9 basis points change (2019: +20) ($m)

 

2020

2019

Financial Liabilities

 

Changes in fair value:

 

Treasury Bonds

4,022

7,485

Treasury Indexed Bonds

428

963

Treasury Notes

15

1

Financial Assets

 

Changes in interest revenue:

 

Structured finance securities

2

 

Sensitivity of 30 June balances to a ‑9 basis points change (2019: ‑20) ($m)

 

2020

2019

Financial Liabilities

 

Changes in fair value:

 

Treasury Bonds

(4,059)

(7,651)

Treasury Indexed Bonds

(434)

(995)

Treasury Notes

(15)

(1)

Financial Assets

 

Changes in interest revenue:

 

Structured finance securities

(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 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.

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 9 basis points (20 basis points for 2019) has been used for domestic interest rates as per standard parameters mandated 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 2020

 

First issued

2020

2019

2018

2017

21 Nov 18 — 1.00%

Apr‑14

 

 

108.65

106.61

20 Aug 20 — 4.00%

Oct‑96

176.55

173.05

170.40

167.19

21 Feb 22 — 1.25%

Feb‑12

116.97

114.63

112.87

110.75

20 Sep 25 — 3.00%

Sep‑09

125.97

123.47

121.57

119.29

21 Nov 27 — 0.75%

Aug‑17

105.60

103.50

101.91

 

20 Sep 30 — 2.50%

Sep‑10

122.89

120.45

118.60

116.37

21 Aug 35 — 2.00%

Sep‑13

113.90

111.63

109.92

107.86

21 Aug 40 — 1.25%

Aug‑15

109.29

107.12

105.48

103.49

21 Feb 50 — 1.00%

Sep‑18

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 term deposits 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 and directions from the Treasurer and policies and limits established by the Secretary to the Treasury. For 2019‑20 and 2018‑19, investments in term deposits with the RBA were the only eligible investments the AOFM was permitted to acquire under the authority of section 58 of the Public Governance, Performance and Authority Act 2013. Investments 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 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 publicly rated by a credit rating agency.

In circumstances in which the AOFM is proposing to acquire a structured finance security that is not publicly 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).

• When performance falls and credit risk increases significantly, certain contractual provisions may be triggered to protect the AOFM’s investments. Accordingly, a revision to expected future performance will take these matters into account.

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 2020:

Credit exposure to structured (securitisation) finance facilities asat30June2020 ($m)

Fund

 

Current
exposure

Undrawn
commitments

Total credit
committed

Australian Business Securitisation Fund

 

 

Public term transactions (a)

 

Private warehouse transactions (b)

15

235

250

 

Sub‑total

15

235

250

Structured Finance Support Fund

 

 

Public term transactions (a)

1,219

1,219

 

Private warehouse transactions (b)

594

341

935

 

Sub‑total

1,813

341

2,154

Total

1,828

576

2,404

(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 2020, the principal outstanding on these loans was $1,646 million.

Composition of loans to state and territory governments as at 30 June 2020:

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 2020. The New South Wales Government is the largest debtor at 46 per cent, followed by the Western Australian Government at 20 per cent

In relation to those loans administered by the AOFM, as at 30 June 2020 no housing loans were outstanding by Victoria, Tasmania or the ACT to the Australian Government. 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

 

2020

2019

Aaa / AAA

754

803

Aa1 / AA+

749

787

Aa2 / AA

305

Aa3 / AA‑

143

Total

1,646

1,895

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 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 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, 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 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 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

 

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

 

Treasury Bonds

Treasury Indexed
Bonds

Treasury Notes & 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

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 2020 ($m)

 

Carried at fair value

Carried at amortised cost

 

 

Level 1

Level 2

Level 3

Liabilities

(784,967)

(128)

Assets

73,259

 

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

 

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

Key aggregates

Interest expense ($m)

 

2020

2019

Interest paid / payable

17,645

17,781

Amortisation of net premiums

(2,506)

(2,221)

Interest expense

15,139

15,560

 

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)

 

2020

2019

Face value

587,155

502,249

Accrued interest

3,239

3,237

Unamortised net premiums

15,326

9,252

Market value adjustment

68,009

58,819

Carrying value

673,729

573,557

 

As at 30 June 2020 the weighted average market yield on Treasury Bonds was 0.63 per cent (30 June 2019: 1.19 per cent). As at 30 June 2020 the weighted average (nominal) issuance yield on Treasury Bonds was 2.53 per cent (30 June 2019: 3.01 per cent).

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

 

2020

2019

Issuance

128,200

55,000

Debt repurchased

(9,000)

(23,099)

Maturities

(34,294)

(22,836)

Change in principal value

84,906

9,065

 

Of the debt repurchased in 2019‑20, no Treasury Bonds were otherwise maturing in 2019‑20 (2018‑19: $6.3 billion).

Interest paid — schedule of cash flows ($m)

 

2020

2019

Coupons paid

18,088

18,176

Interest received on issuance

(518)

(365)

Interest paid on repurchase

73

231

Interest paid

17,643

18,042

 

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 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 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)

 

2020

2019

Interest paid / payable

890

930

Capital accretion and amortisation of net premiums

578

535

Interest expense

1,468

1,465

 

Carrying values — administered liabilities ($m)

 

2020

2019

Principal (adjusted capital value):

  Face value

38,387

36,737

  Capital accretion (to next coupon)

7,232

6,141

Total

45,619

42,878

  Accrued interest

66

63

  Unamortised net premiums

1,163

1,191

  Market value adjustment

5,652

5,681

Carrying value

52,500

49,813

As at 30 June 2020, the weighted average market (real) yield on Treasury Indexed Bonds was ‑0.10 per cent (30 June 2019: 0.00 per cent).

As at 30 June 2020, the weighted average (real) issuance yield on Treasury Indexed Bonds was 1.35 per cent (30 June 2019: 1.42 per cent).

Changes in principal value for the period ($m)

 

2020

2019

Changes in face value due to:

Issuance

1,650

5,900

Debt repurchased

..

(4,548)

Maturities

(862)

Changes in capital accretion due to:

Issuance

198

252

Debt repurchased

..

(2,318)

Maturities

(78)

Accretion for the period

893

665

Change in principal value

2,741

(989)

 

Interest paid — schedule of cash flows ($m)

 

2020

2019

Coupons paid

889

935

Interest received on issuance

(3)

(6)

Interest paid on repurchase

..

20

Accretion since issuance (on redemption)

..

2,017

Interest paid

886

2,966

 

Note 4: Treasury Notes

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

The increase in Treasury Notes outstanding reflects the AOFM needing to have relied on these short‑term borrowings through April to June to supplement Treasury Bond issuance to meet the sharp change in fiscal circumstances as a result of the pandemic. At some future point the AOFM will refinance Treasury Notes through Treasury Bond issuance. Until then maturing Treasury Notes will be financed with new Treasury Note issuance.

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 these instruments.

Key aggregates

Carrying values — administered liabilities ($m)

 

2020

2019

Face value

58,750

3,000

Unexpired interest discount

(44)

(7)

Market value adjustment

32

Carrying value

58,738

2,993

 

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

 

2020

2019

Issuance

89,936

13,500

Matured

(34,186)

(13,000)

Change in principal value

55,750

500

 

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. Terms and conditions vary, however, 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 to be 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 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 significant 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 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 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 on the basis of expected commitment draw‑downs 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)

 

2020

2019

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

..

Sub‑total

1

TOTAL

Loan commitments liabilities

1

Expected credit loss provision

..

Total

1

 

Note 6: 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.

Key aggregates

Carrying values — administered assets ($m)

 

2020

2019

Face value

69,950

31,100

Accrued interest

2

12

Carrying value

69,952

31,112

 

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

 

2020

2019

New term deposits

1,816,366

461,350

Matured term deposits

(1,777,516)

(475,350)

Change in principal value

38,850

(14,000)

 

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. 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)

 

2020

2019

Interest received / receivable

2

Amortisation of discounts

2

Concessional loan discounts

(6)

Impairment provision expenses

(2)

Interest revenue

(4)

 

Carrying values — administered assets ($m)

 

2020

2019

Australian Business Securitisation Fund

Face value

15

Unamortised net discounts

Accrued Interest

..

Expected credit loss provision

Sub‑total

15

Structured Finance Securities Fund

Face value

1,813

Unamortised net discounts

(13)

Accrued Interest

2

Expected credit loss provision

(2)

Sub‑total

1,800

Total Carrying Value

1,815

Expected to be received (a):

Within one year

53

In one to five years

1,601

In more than five years

161

Carrying value by expected recovery

1,815

Ageing:

 

 

Not overdue

1,815

Overdue

Carrying value by ageing

1,815

(a) 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.

 

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

Loss allowances recognised on SFSF ($m)

Loss allowances on SFSF investments

12 month expected credit losses (a)

Lifetime expected credit losses (b)

Total expected credit losses allowance

Opening balance — 1 July 2019

New investments acquired

2

2

Changes in provision during the year

Write‑offs

Transfers: 12 months/lifetime

Closing balance — 30 June 2020

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 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)

 

2020

2019

Face value

1,646

1,895

Unamortised net discounts

(154)

(184)

Accrued interest

Carrying value

1,492

1,711

Expected to be received:

 

 

Within one year

78

84

In one to five years

324

351

In more than five years

1,090

1,276

Carrying value by expected recovery

1,492

1,711

Ageing:

 

Not overdue

1,492

1,711

Overdue

Carrying value by ageing

1,492

1,711

 

On 12 September 2019, the Finance Minister waived the Tasmanian Government’s housing loan debt pursuant to section 63 of the Public Governance, Performance and Accountability Act 2013. The principal value of the debt waived was $157.6 million, which gave rise to an accounting loss of $143.7 million.

The fair value of these loans was $2,156 million as at 30 June 2020 (2018‑19: $2,423 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)

 

2020

2019

Surplus (deficit) as per Schedule of Comprehensive Income

(26,251)

(60,981)

Adjustments for non‑cash items:

Amortisation and capital accretion of debt instruments

(1,928)

(1,686)

Concessional loans

(6)

(17)

Re‑measurements

9,193

43,550

Adjustments for cash items:

Capital accretion costs on redemption of debt

(2,017)

Debt repurchase

399

896

Waiver of housing loans

144

Accrual adjustments:

 

 

Interest accruals on debt

33

(279)

Interest accruals on assets

9

24

Net cash from operating activities

(18,407)

(20,510)

 

Note 10: Appropriations

Administered special appropriations — unlimited ($’000)

 

2020

2019

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

87,522,536

55,983,173

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

33,569

12,742

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

9,430,970

30,989,895

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

1,816,365,550

461,350,000

Total

1,913,352,633

548,335,818

(a) The 2019‑20 amount includes $840 paid into the Debt Retirement Reserve Trust Account (2018‑19: $1,156).

 

The following details administered special appropriations that are available but were not used by the AOFM during 2019‑20 and 2018‑19 (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)

 

2020

2019

Opening balance

31,100,000

45,100,000

Acquisitions

1,816,365,550

461,350,000

Redemptions and sales

(1,777,515,550)

(475,350,000)

Closing balance

69,950,000

31,100,000

 

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

 

2020

2019

Opening balance

Statutory credit to the special account

250,000

Investments made

(14,686)

Interest received from investments

Balance

235,314

Balance represented by:

 

 

Cash — held in the Official Public Account

235,314

Establishing Instrument — the 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)

 

2020

2019

Opening balance

Statutory credit to the special account

15,000,000

Investments made

(1,712,144)

Interest and repayments of principal received from investments

28,159

Balance

13,316,015

Balance represented by:

 

 

Cash — held in the Official Public Account

13,316,015

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)

 

2020

2019

Opening balance

42

40

Commonwealth contributions and interest paid

1

1

State contributions

2

1

Debt repayments made

Balance

45

42

Balance represented by:

 

 

Cash — held in the Official Public Account

45

42

Establishing Instrument — the 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 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 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.

An 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.

2019‑20 Budget

In the 2019‑20 Budget (released in April2019) the government estimated a Headline Cash Deficit of $4.4 billion for 2019‑20. 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) and financing transactions of other government agencies; the long term debt issuance program for 2019‑20 was set at $61 billion.

At the time of the Mid‑Year Economic and Fiscal Outlook (released in December 2019) the Headline Cash Deficit for 2019‑20 was forecast to improve (by $1.6 billion) to $2.8 billion. The long term debt issuance program was reduced (by $5 billion) to $56 billion after adjustment in the level of cash holdings to be maintained.

On 20 March 2020 the Treasurer announced a deferral to the 2020‑21 Budget until 6 October 2020, to provide more time for the economic impact of the coronavirus to be better understood. 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 resulted in a significant weakening of the government’s fiscal position, which has led to a pronounced increase in debt issuance to meet funding requirements.

For the year ended 30 June 2020 the AOFM’s short‑term and long‑term gross issuance programs totalled $220 billion.

Administered schedule of comprehensive income ($m)

 

Outcome

Budget (a)

Variance

 

2020

2020

2020

EXPENSES

Interest expense

16,743

17,012

(269)

Other expenses

176

25

151

Debt repurchased

399

782

(383)

Total expenses

17,318

17,819

(501)

INCOME

Interest revenue

260

498

(238)

Total income

260

498

(238)

Surplus (deficit) before re‑measurements

(17,058)

(17,321)

263

 

 

 

 

Re‑measurements

(9,193)

5,040

(14,233)

Total re‑measurements

(9,193)

5,040

(14,233)

Surplus (deficit)

(26,251)

(12,281)

(13,970)

(a) Original Budget released in April 2019. The Budget figures are not audited.

 

Significant variances in expenses before re‑measurements

Interest expense for 2019‑20 was $269 million lower than forecast in the 2019‑20 Budget. This comprises a favourable variance for Treasury Bonds of $109 million, for Treasury Indexed Bonds of $145 million and for Treasury Notes of $15 million. These savings are due to the lower interest rate environment applicable to new borrowings. This more than offsets significant increases in debt issuance in the final quarter of 2019‑20 and a lower Treasury Bond repurchase program (which was ceased indefinitely in March 2020). In addition, in relation to Treasury Indexed Bonds, the lower interest expense is also due to the repurchase of $979 million of the August 2020 series in June 2019, which was not forecast in the 2019‑20 Budget update.

Other expenses are higher by $151 million as compared to Budget primarily due to losses arising from the waiver of $157.6 million of the Tasmanian Government’s housing debt. This was not forecast in the Budget.

Losses arising from the repurchase of debt are lower by $383 million due to lower Treasury Bond repurchases than forecast, being $9 billion as compared to $17.5 billion at Budget.

Significant variances in income before re‑measurements

Interest revenue was lower by $238 million as compared to Budget. This was primarily due to lower interest revenue on term deposits of $225 million. Despite a richer cash position in 2019‑20 than forecast, the lower interest rate environment had a commensurate impact on interest earnings.

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 portfolio for changes in market interest rates are not significant in the Budget. However, actual market yields as at 30 June 2020 were significantly lower across 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

 

2020

2020

2020

LIABILITIES

Interest bearing liabilities

784,974

619,463

165,511

Other liabilities

121

121

Total liabilities

785,095

619,463

165,632

ASSETS

Cash at bank

1

1

Investments

71,767

30,691

41,076

Loans to State and Territory Governments

1,492

1,628

(136)

Total assets

73,260

32,320

40,940

Net assets

(711,835)

(587,143)

(124,692)

(a) Original Budget released in April 2019. The Budget figures are not audited.

 

Significant variances in interest bearing liabilities

The significant weakening in the government’s fiscal position due to Covid‑19 led to an increase in short‑term and long‑term net issuance by $128 billion (in face value terms) as compared to Budget. The reduction in market yields has also led to a higher valuation in the debt outstanding.

Significant variances in investments

In line with the weakening in the government’s fiscal position and the high degree of uncertainty from the impact of the pandemic on the Australian economy and capital markets, the AOFM increased its cash holdings significantly in late 2019‑20. The actual balance of term deposits held as at 30 June 2020 was $69,950 million as compared to $30,465 million in the Budget. In addition, actual investment balances include investments in structured finance securities made through the Australian Business Securitisation Fund and the Structured Finance Support Fund. These investments were not factored into Budget forecasts.

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.

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)

 

2020

2019

2020

2019

Overnight:

Treasury Bonds

25

8

1,201

236

Treasury Indexed Bonds

138

13

1,451

157

Intra‑day:

 

Treasury Bonds

3

9

179

636

Treasury Indexed Bonds

9

1

204

30

Total

175

31

3,035

1,059

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 2020

 

Notes

2020

2019

Budget
2020

Variance from Budget

NET COST OF SERVICES

EXPENSES

Employee benefits

A

7,026

7,017

7,858

(832)

Supplier expenses

A

3,554

3,379

6,652

(3,098)

Depreciation and amortisation

C,D

671

434

550

121

Interest on lease liabilities

F

61

61

Asset revaluation decrements

 

17

17

Total expenses

 

11,329

10,830

15,060

(3,731)

OWN‑SOURCE INCOME

 

Staff secondments

 

350

310

382

(32)

Resources received

 

298

298

320

(22)

Asset revaluation increments

 

10

10

Total own‑source income

 

658

608

702

(44)

Net cost of services

 

(10,671)

(10,222)

(14,358)

3,687

APPROPRIATION FUNDING

 

Revenue from government

 

13,808

11,723

13,808

Total appropriation funding

13,808

11,723

13,808

Surplus (deficit)

 

3,137

1,501

(550)

3,687

OTHER COMPREHENSIVE INCOME

 

Asset revaluation

 

338

338

Comprehensive income

 

3,475

1,501

(550)

4,025

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in April 2019 (Budget figures are not audited).

Statement of financial position ($’000) as at 30 June 2020

 

Notes

2020

2019

Budget
2020

Variance from Budget

ASSETS

 

Financial assets:

 

Cash and cash equivalents

 

100

73

73

27

Receivables

B

27,448

24,946

23,523

3,925

Non‑financial assets:

 

Property, plant and equipment

C

6,478

1,786

2,016

4,462

Computer software

D

619

780

992

(373)

Supplier prepayments

 

152

60

223

(71)

Total assets

 

34,797

27,645

26,827

7,970

LIABILITIES

 

Payables:

 

Supplier payables

 

177

237

136

41

Salary and superannuation

 

117

48

301

(184)

Provisions:

 

Employee provisions

E

2,556

2,853

2,187

369

Lease liabilities

F

4,600

4,600

Other provisions

G

460

418

418

42

Total liabilities

 

7,910

3,556

3,042

4,868

Net assets

 

26,887

24,089

23,785

3,102

EQUITY

 

Retained surplus

 

35,105

31,968

31,167

3,938

Asset revaluation reserve

 

338

338

Contributed equity

 

(8,556)

(7,879)

(7,382)

(1,174)

Total equity

 

26,887

24,089

23,785

3,102

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in April 2019 (Budget figures are not audited).

Current/non‑current balances ($’000)

 

2020

2019

Current assets

13,249

14,316

Non‑current assets

21,548

13,329

Current liabilities

(1,104)

802

Non‑current liabilities

(6,806)

2,754

 

Statement of changes in equity ($’000) for the period ended 30 June 2020

 

Notes

2020

2019

Budget
2020

Variance from Budget

RETAINED SURPLUS

 

Opening balance

 

31,968

30,467

31,717

251

Surplus (deficit)

 

3,137

1,501

(550)

3,687

Retained surplus

 

35,105

31,968

31,167

3,938

ASSET REVALUATION RESERVE

Opening balance

 

Revaluation

 

338

338

Asset revaluation reserve

338

338

CONTRIBUTED EQUITY

 

Opening balance

 

(7,879)

(5,551)

(7,741)

(138)

Capital injection

 

359

710

359

Appropriations extinguished

I

(1,036)

(3,038)

(1,036)

Contributed equity

 

(8,556)

(7,879)

(7,382)

(1,174)

Total equity

 

26,887

24,089

23,785

3,102

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in April 2019 (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 2020

 

Notes

2020

2019

Budget
2020

Variance from Budget

NET CASH FROM OPERATING ACTIVITIES

 

Appropriations: Operating

 

11,070

9,400

13,765

(2,695)

GST received from ATO

 

5

6

5

Services and other

 

382

475

382

Employees

 

(7,378)

(6,556)

(7,815)

437

Suppliers

 

(3,384)

(2,844)

(6,332)

2,948

Interest paid on leases

 

(61)

(61)

GST paid to ATO

 

(3)

(3)

Transfers to OPA (a)

 

(384)

(481)

(384)

 

H

247

247

NET CASH FROM INVESTING ACTIVITIES

 

Purchase of assets

 

(10)

(19)

(359)

349

   

(10)

(19)

(359)

349

NET CASH FROM FINANCING ACTIVITIES

 

Appropriations: Capital

 

10

19

359

(349)

Lease liability

 

(220)

(220)

   

(210)

19

359

(569)

Net change in cash held

 

27

27

+ cash held at the beginning of period

 

73

73

73

Cash held at the end of the period

 

100

73

73

27

The above statement should be read in conjunction with the accompanying notes. Note J discusses variances between actuals and Budget released in April 2019 (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)

 

2020

2019

Wages and salaries

6,303

5,555

Superannuation

978

1,049

Leave entitlements

(271)

398

Other employee expenses

16

15

Total

7,026

7,017

 

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

Key Management Personnel ($’000)

 

2020

2019

Salary and other short‑term benefits

342

365

Annual leave accrued

29

29

Long service leave accrued

11

10

Post employment benefits (superannuation)

53

51

Total

435

455

 

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)

 

2020

2019

Internal and external audit services

424

486

Consultants

468

60

Corporate support services

896

828

Legal

206

54

Market data services

513

522

Operating lease payments — premises (a)

264

Travel

207

233

Treasury management system

257

240

Workers compensation premium

25

24

Other

558

668

Total

3,554

3,379

(a) With the adoption of AASB 16 Leases from 1 July 2019, lease payments on premises are divided into a principal component and an interest component. The interest component is not charged to supplier expenses.

 

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)

 

2020

2019

Goods and services (related)

83

16

Appropriations receivable

27,365

24,930

GST

Total

27,448

24,946

 

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

Recovery of receivables expected in ($’000)

 

2020

2019

No more than 12 months

12,997

14,183

More than 12 months

14,451

10,763

Total

27,448

24,946

 

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 Leases became operational for annual periods beginning on or after 1 January 2019. The AOFM has applied the Standard from 1 July 2019. 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 have not been 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. A revaluation gain of $390,064 was recorded for leasehold improvements, of which $10,502 was recognised as revenue in the Statement of Comprehensive Income (to reverse revaluation decrements recognised as expenses in previous reporting periods), and $379,562 was recognised in an Asset Revaluation Reserve in Equity. A revaluation loss of $17,450 was recorded for plant and equipment, and recognised as an expense in the Statement of Comprehensive Income. As at 30 June 2020, 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 this reporting period and previous reporting periods.

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

Property, plant and equipment ($’000)

 

2020

2019

Gross value:

Leasehold improvements

1,987

1,924

Plant and equipment

292

441

Right of use asset — lease premises

4,820

Accumulated depreciation:

 

 

Leasehold improvements

(323)

(472)

Plant and equipment

(5)

(107)

Right of use asset — lease premises

(293)

Total

6,478

1,786

 

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

Reconciliation of changes in gross value ($’000)

 

2020

2019

Opening value

2,365

2,354

Purchases

10

11

Initial recognition of right of use asset

4,820

Revaluation increment (decrement)

(96)

Closing value

7,099

2,365

 

Reconciliation of changes in accumulated depreciation ($’000)

 

2020

2019

Opening value

(579)

(307)

Depreciation charge for period

Leasehold improvements

(178)

(225)

Plant and equipment

(40)

(47)

Right of use asset

(293)

Revaluation increment (decrement)

469

Closing value

(621)

(579)

 

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

 

2020

2019

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 2019‑20. This has resulted in reduced depreciation expenses of $58,000 for 2019‑20 (2018‑19: 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 software’s functionality and therefore service potential. Software assets are retained at cost and are not subject to periodic revaluation.

Computer software ($’000)

 

2020

2019

Gross value

1,520

1,521

Accumulated amortisation

(901)

(741)

Total

619

780

 

No indicators of impairment were identified for computer software.

Amortisation

Software assets are amortised using the straight line method over their anticipated useful lives, being three to ten years (2018‑19: three to ten years).

Reconciliation of changes in accumulated amortisation ($’000)

 

2020

2019

Opening value

(741)

(579)

Amortisation charge for period

(160)

(162)

Closing value

(901)

(741)

 

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)

 

2020

2019

Annual leave

589

557

Long service leave

1,645

1,948

Superannuation

322

348

Total

2,556

2,853

 

Payment of employee provisions expected in ($’000)

 

2020

2019

No more than 12 months

585

517

More than 12 months

1,971

2,336

Total

2,556

2,853

 

Note F: Lease liabilities

Accounting policy

AASB 16 Leases became operational for annual periods beginning on or after 1 January 2019. The AOFM has applied the Standard from 1 July 2019. 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. Comparatives have not been restated with the adoption of AASB 16.

Lease liability ($’000)

 

2020

2019

Opening value

 

Recognised on adoption of AASB 16

4,820

Amounts recognised in profit or loss:

 

Interest expense on lease liability

61

Amounts recognised in cash flow:

 

Lease payments

(281)

Closing value

4,600

Discounted amount recognised in the Statement of Financial Position:

 

Current

225

Non‑current

4,375

Total

4,600

 

Future estimated lease payments ($’000)

 

2020

2019

Undiscounted cash flows:

 

Less than 1 year

289

281

One to five years

1,209

1,187

More than five years

3,660

3,971

Total

5,158

5,439

 

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)

 

2020

2019

Makegood on leasehold premises

460

418

Total

460

418

 

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

 

2020

2019

Opening balance

418

418

Re‑measurements (a)

42

Total

460

418

 

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

 

2020

2019

No more than 12 months

More than 12 months

460

418

Total

460

418

(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.

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)

 

2020

2019

Net cost of services

(10,671)

(10,222)

Add revenue from Government

13,808

11,723

Adjustments for non‑cash items:

 

Depreciation and amortisation

671

434

Appropriations extinguished

(1,036)

(3,038)

Net revaluation losses

7

Change in receivables for capital budget items

350

699

Adjustments for changes in assets:

 

(Increase) decrease in receivables

(2,502)

(360)

(Increase) decrease in supplier prepayments

(92)

163

Adjustments for changes in liabilities:

 

Increase (decrease) in supplier payables

(60)

101

Increase (decrease) in salary and superannuation

69

1

Increase (decrease) in employee provisions

(297)

499

Net cash from operating activities

247

 

 

Note I: Appropriations

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

Annual appropriations ($’000)

 

2020

2019

Annual appropriations:

Outputs

13,808

11,723

Departmental capital budget (a)

359

710

Appropriation withheld

Public Governance, Performance and Accountability Act 2013:

 

Section 74 — retained receipts

384

481

Total available for payment

14,551

12,914

Appropriation applied (current and prior years)

(11,053)

(9,419)

Variance

3,498

3,495

(a) On 11 October 2018, the Minister for Finance approved the reclassification of $350,000 of departmental capital funding to departmental operating funding on an ongoing basis from 2019‑20.

 

The variance in departmental appropriations available to appropriations applied (spent) is explained by lower than planned staff and supplier costs, including from the implementation and management of the Australian Business Securitisation Fund (theABSF).

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)

 

2020

2019

Acts repealed on 1 July 2019:

Supply Act (No. 1) 2016‑17

2,687

Appropriation Act (No. 1) 2016‑17

201

Appropriation Act (No. 2) 2016‑17

150

 

3,038

Acts repealed on 1 July 2020:

Appropriation Act (No. 1) 2017‑18

1,036

12,089

 

1,036

12,089

Acts to be repealed on or after 1 July 2021:

Appropriation Act (No. 1) 2018‑19

11,980

11,980

Appropriation Act (No. 3) 2018‑19

934

934

Supply Act (No. 1) 2019‑20

6,002

Appropriation Act (No. 1) 2019‑20

8,549

 

27,465

12,914

Total

28,501

28,041

Represented By:

 

Cash at bank

100

73

Appropriations receivable

27,365

24,930

Appropriations extinguished — 1 July

1,036

3,038

Total

28,501

28,041

 

Note J: Budgetary report to outcome comparison

The Budget figures shown in the primary financial statements represent the original Budget released in April 2019. 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

AASB 16 Leases became operational on 1 July 2019. At that time the AOFM recognised a ‘lease liability’ and a ‘right of use asset’ for $4.8 million in relation to the lease on its office premises. This had the effect of grossing up the AOFM’s balance sheet. In addition, from 1 July 2019 the AOFM recognised interest charges on the lease liability and depreciation on the right of use asset. In accordance with instructions from the Department of Finance, the impact of AASB 16 Leases was not incorporated into the 2019‑20 Budget (inApril 2019). The 2019‑20 Budget was prepared under AASB 117, whereby the lease on AOFM’s office premises was recognised as an operating lease. Operating leases recognised lease payments as expenses and did not recognise a lease liability or a right of use asset.

On 31 March 2020, the AOFM conducted a revaluation of its property, plant and equipment assets. Also at that time the AOFM conducted a re‑measurement of $41,800 to the make‑good liability on its leasehold premises. As a result of the re‑measurements, the AOFM recorded a net gain of $337,762 to an Asset Revaluation Reserve, an expense of $17,450 and income of $10,502. The revaluation was not forecast in the Budget.

Employee expenses were lower than forecast at Budget by $0.8 million. During 2019‑20 the AOFM sought to increase its staffing levels for the purposes of implementing and administering the Australian Business Securitisation Fund (the ABSF). Whilst the AOFM establishment size increased by 7 full time equivalents from 30 June 2019(37)to 30 June 2020(44), the average staffing level for 2019‑20 was 39 against forecasts of 47. A range of external advisory services have also been utilised in place of staff. This resulted in lower than expected staff costs. During 2020‑21 the AOFM will increase its establishment size in response to ongoing commitments particularly in relation to the ABSF and the Structured Finance Support Fund (the SFSF).

Supplier expenses were lower than forecast at Budget by $3.1 million. During 2019‑20 the AOFM received additional appropriation funding to meet anticipated additional consultancy, legal, information technology, assurance and other administrative costs arising from implementing and managing the ABSF. The AOFM has underspent as compared to Budget forecasts in this regard.

 

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 2019 to 30 June 2020. 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 2019‑20 the AOFM adopted all applicable Australian Accounting Standards that became effective during the reporting period.

The AOFM adopted AASB 16 Leases for the first time on 1 July 2019. In accordance with the requirement of the Standard the AOFM has recognised a right of use asset and a lease liability for the lease of its office premises within the Treasury Building. Further disclosures are made at Note C and F of the Departmental Financial Statements. The liability represents the discounted known future lease payments. Previously, under AASB 117 Leases, the lease of the office premises was recognised as an operating lease.

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

Establishment of forbearance SPV

Since April 2020 the AOFM has been working on an initiative with the securitisation industry to develop a forbearance special purpose vehicle (SPV) to advance funds to eligible public and private securitisation vehicles seeking liquidity advances to compensate for a portion of the missed interest component of scheduled payments not received from borrowers who have received a payment moratorium due to the impact of coronavirus.

The AOFM appointed separate professional companies to perform the roles of trustee, manager and security trustee to operate the forbearance SPV. The AOFM also appointed a standby manager and a collateral verification agent to support the operations of the forbearance SPV.

The AOFM is the only senior financier of the forbearance SPV, and through the Structured Finance Support Fund acquires debt securities issued by the forbearance SPV. The proceeds raised by the issuance of debt securities to the AOFM, provides the forbearance SPV with the funding required to make liquidity payments (secured by an interest in underlying property) to eligible securitisation vehicles.

The forbearance SPV was established on 22 July 2020.

Litigation

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 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 will be defending the claims in the legal action. Hearings are yet to commence.

ANAO Audit Opinion

The ANAO's audit opinion can be located here.