Part 4: Financial Statements – Notes

Contents

Notes to and forming part of the financial statements
for the period ended 30 June 2011

Note 1: Summary of significant accounting policies

1.1 Basis of preparation of the financial statements

The Australian Office of Financial Management (AOFM), a ‘prescribed agency’ under the Financial Management and Accountability Act 1997 (Commonwealth), is a specialised agency responsible for the management of Australian Government debt and financial assets. The financial statements cover the AOFM as an individual entity and are for the reporting period 1 July 2010 to 30 June 2011. They are required by section 49 of the Financial Management and Accountability Act 1997, and are general purpose financial statements prepared on a going concern basis.

The financial statements have been prepared in accordance with:

  • the Finance Minister’s Orders (FMOs) for financial reporting (being theFinancial Management and Accountability Orders (Financial Statements for Reporting Periods Ending on or after 1 July 2010) made under section 63 of the Financial Management and Accountability Act 1997);
  • Australian Accounting Standards, including Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period; and
  • other authoritative pronouncements of the AASB, which includes theFramework for the Preparation and Presentation of Financial Statements.

Since 2005 the AASB has adopted International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) for the purposes of setting Australian Accounting Standards. In some instances the Australian Accounting Standards are modified for the private and public not-for-profit sectors.

The financial statements have been prepared on an accruals basis under the historic cost accounting convention, as modified by the revaluation of certain classes of financial assets and financial liabilities (including derivative financial instruments), certain classes of infrastructure, plant and equipment and employee entitlements.

The financial statements are presented in Australian dollars, and values are rounded to the nearest thousand dollars unless disclosure of the full amount is specifically required by the FMOs.

Liabilities and assets which are unrecognised in the Agency Balance Sheet or the Schedule of Assets and Liabilities Administered on Behalf of Government are reported in Note 11 (departmental) and Note 23 (administered).

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.

1.2 Significant accounting estimates and judgments

Subject to one exception, no accounting assumptions or estimates have been identified that have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next reporting period. The residential mortgage-backed securities (RMBS) acquired by the AOFM are fully amortising instruments. The repayment of principal on each RMBS security is dependent on the payment priorities set out in the issuance documentation and the timing of principal repaid on each RMBS security may vary over its life and cannot be precisely forecast. For valuation purposes, the repayment profile is estimated to produce a weighted average life for each security. The weighted average life represents a measure of the estimated point in time in which a holder of a security will receive (in undiscounted terms) repayment of 50 per cent of the principal invested. The weighted average life of each security is estimated, including on the basis of actual repayment history where available. The estimated weighted average life is an important factor in the valuation of RMBS securities.

1.3 Statement of compliance with International Financial Reporting Standards

In some circumstances compliance with Australian Accounting Standards will not lead to compliance with International Financial Reporting Standards. Paragraph 16 of AASB 101 Presentation of Financial Statements requires that where an entity’s financial statements comply with International Financial Reporting Standards, then such compliance shall be made in an explicit and unreserved statement in the notes to the financial statements.

These financial statements and associated notes do not fully comply with International Financial Reporting Standards, due to the application of not-for-profit provisions in AASB 116 Property, Plant and Equipment relating to the accounting treatment arising from revaluations.

(a) New Australian Accounting Standards applicable to the reporting period

The AOFM would need the Finance Chief Executive’s approval to apply a new Australian Accounting Standard prior to its mandatory application date, unless early adopted in the FMOs.

During 2010-11 the AOFM adopted all applicable Australian Accounting Standards that became effective during 2010-11. These pronouncements did not have a material impact on the amounts reported for the current and prior years.

(b) New Australian Accounting Standards applicable in future reporting periods

A number of revised or new Australian Accounting Standards have been issued that are effective for future reporting periods. With the exception of AASB 9Financial Instruments (effective for the 2013-14 financial year) the revisions are not expected to materially affect the accounting treatment of the AOFM’s assets, liabilities, revenue or expenses.

AASB 9 Financial Instruments

The International Accounting Standards Board has been progressively replacing the current standard for the measurement and recognition of financial instruments (IAS 39 Financial Instruments: Recognition and Measurement (in Australia AASB 139)) with a new standard IFRS 9 Financial Instruments (in Australia AASB 9).

IFRS 9/AASB 9 currently contains the requirements for the recognition and measurement of financial assets and liabilities and derecognition. The requirements for amortised cost and impairment and hedge accounting are expected to be released shortly.

Financial assets

Currently, the AOFM classifies its administered financial assets into the following categories: financial assets at fair value through profit or loss, and loans and receivables (which requires measurement at amortised cost). The AOFM determines which classification applies to each class of financial assets on the basis of how it manages the assets and assesses the performance of the financial assets. Where the AOFM’s management monitors cost and risk in mark-to-market terms (and not necessarily only in those terms) the AOFM designates the relevant financial assets at fair value through profit or loss.

All of the AOFM’s administered financial assets, with the exception of loans to the State and the Northern Territory Governments, are designated at fair value through profit or loss. Loans to the State and the Northern Territory Governments are measured at amortised cost.

AASB 9 establishes new rules for determining the accounting treatment for financial assets. AASB 9 requires that a financial asset is to be carried at fair value through profit or loss, except where the business objective of the entity is to hold the instrument to collect its contractual cash flows (rather than trading to earn capital profits) and those contractual cash flows are in the nature of principal and interest on the principal outstanding, and in which case the financial asset is to be carried at amortised cost. Where an entity’s objective changes so too should the accounting treatment, where relevant. The sale of financial assets carried at amortised cost for portfolio management, credit or liquidity reasons would not represent a change of purpose from one of collection of contractual cash flows to one of trading to earn capital profits. Under AASB 9, derivatives are deemed to be held for trading to earn capital profits, and accordingly must be carried at fair value through profit or loss.

From a preliminary examination, the AOFM has assessed that all of its non-derivative financial assets may need to be carried at amortised cost under the new standard. AASB 9 has retrospective application, and accordingly on the first day of the reporting period AASB 9 is adopted (1 July 2013 for the 2013-14 financial year) the AOFM would need to re-state its financial asset values as at 30 June 2012 and 30 June 2013 in accordance with the new requirements and re-state its 2012-13 comparative profit and loss results.

This would entail de-recognising the unrealised fair value gains and losses on the portfolio of administered financial assets on the financial asset values as at 30 June 2012 and 30 June 2013 and the unrealised fair value gains and losses reported in profit and loss for the 2012-13 financial year.

The AOFM is well placed to meet this change as its financial management information system maintains both amortised cost and mark–to-market information for each class of financial asset.

The financial impact of the change cannot currently be quantified.

Financial liabilities

Currently, the AOFM classifies its financial liabilities into the following categories: financial liabilities at fair value through profit or loss, and other financial liabilities (which requires measurement at amortised cost). The AOFM determines which classification applies to each class of financial liability on the basis of how it manages and assesses the performance of the financial liability.

All of the AOFM’s administered financial liabilities, with the exception of debt on allocation to the State and Northern Territory Governments, are designated at fair value through profit or loss. Debt on allocation to the State and Northern Territory Governments are measured at amortised cost.

The classification requirements for financial liabilities remain largely unchanged in AASB 9 from AASB 139. Furthermore, except in limited circumstances (which are not applicable to the AOFM), AASB 9 prohibits the revocation of a previous designation of a financial liability as measured at fair value through profit or loss. Accordingly, the AOFM will be required to maintain its existing accounting treatment for financial liabilities when AASB 9 becomes operative.

For financial liabilities carried at fair value through profit or loss, AASB 9 has adopted revised disclosure for the presentation of unrealised fair value gains and losses. These changes require the gain or loss to be apportioned between changes in credit risk (recognised in other comprehensive income) and other changes (recognised in profit or loss), unless such a presentation would create or enlarge an accounting mismatch.

1.4 Departmental and administered items

Departmental assets, liabilities, revenue and expenses are those items that are controlled by the AOFM and used or incurred to deliver goods and services to the Government, including:

  • computers, plant and equipment;
  • liabilities for employee entitlements;
  • receipts deemed appropriated under the Financial Management and Accountability Act 1997; and
  • employee expenses and other administrative expenses.

Administered assets, liabilities, revenue and expenses are those items which are controlled by the Government and managed or overseen by the AOFM on behalf of the Government. These items include debt issued to finance the Government’s fiscal requirements, investments of funds surplus to the Government’s immediate financing needs and investments in residential mortgage-backed securities to support competition in the residential mortgage market and to meet government policy objectives.

The purpose of separation of administered and departmental items is to enable assessment of the administrative efficiency of the AOFM in providing goods and services to the Government.

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

1.5 Revenue (Departmental)

The revenue described in this note is revenue relating to the departmental activities of the AOFM.

(a) Revenue from Government – output appropriations

Amounts appropriated for departmental outputs for the year (adjusted for any formal additions and reductions) are recognised as revenue. Appropriation receivables are recognised (at their nominal amounts) for output appropriations that are undrawn by the AOFM and have not lapsed.

On 1 July 2010, the Government’s new ‘net cash appropriation framework’ came into effect. Under this arrangement, agencies receive an output appropriation equivalent to budgeted expenses less depreciation, amortisation and make good expenses. In addition, a capital budgeting regime has been introduced to provide a cash appropriation for budgeted expenditures for the replacement of departmental infrastructure, plant and equipment and intangibles. The capital appropriations are not recognised as revenue from Government in the Statement of Comprehensive Income.

(b) Resources received free of charge

Resources received free of charge are recognised as revenue when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense.

(c) Other revenue

Revenue from the rendering of a service is recognised by reference to the stage of completion of contracts or other agreements to provide the service. Other revenue includes amounts received and receivable for salary packaging arrangements for staff and transfers of annual leave and long service leave entitlements from other government agencies.

1.6 Transactions with the Government as owner (Departmental)

(a) Equity injections

Amounts which are designated as ‘equity injections’ for a year (less any formal reductions) are recognised directly in Contributed Equity in the Balance Sheet in the financial year that the appropriation takes effect.

Appropriation receivables are recognised (at their nominal amounts) for equity injections that are undrawn by the AOFM and have not lapsed.

For 2010-11 the AOFM received a capital injection of $0.250 million under the new ‘net cash appropriation framework’. Under this framework, the AOFM is provided with capital funding in the form of an equity injection for the replacement of departmental infrastructure, plant and equipment and intangibles.

(b) Distributions to owners

Distributions to owners are deducted from Contributed Equity in the Balance Sheet unless the distributions are in the nature of a dividend. Dividends are deducted from Retained Surplus in the Balance Sheet. No distributions to owners were made in 2010-11 (2009-10: $2.177 million being the return to Budget of unused depreciation funding).

1.7 Employee benefits (Departmental)

Liabilities for services rendered by employees are recognised at the end of the financial year to the extent that they have not been settled.

(a) Salaries

Outstanding salaries, and superannuation in relation to those salaries, are recognised at their nominal (undiscounted) amounts.

(b) Leave

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

The AOFM obtains advice from the Australian Government Actuary on the valuation of its leave liabilities. Leave liabilities are calculated on the basis of employees’ remuneration at the end of the financial year adjusted for expected increases in remuneration effective from 1 July.

Liabilities for annual leave are measured at the nominal amount required to settle the obligation.

All long service leave employee benefits are measured at the present value of the estimated future cash flows to be made in respect of all employees at the end of the financial year. In determining the present value of the long service leave liability, the AOFM commissions an annual actuarial assessment by the Australian Government Actuary of the anticipated attrition rates and pay increases through promotion and inflation. The Australian Government Actuary has recommended the application of the shorthand method, as prescribed by the FMOs, for determining the present value of the long service leave liability.

(c) Superannuation

Staff and contractors of the AOFM contribute to the Commonwealth Superannuation Scheme (CSS; a defined benefit scheme), Public Sector Superannuation Scheme (PSS; a defined benefit scheme), Public Sector Superannuation Accumulation Plan (PSSap; an accumulation scheme) and other nominated schemes.

The AOFM makes employer contributions to the CSS and PSS superannuation schemes at rates determined by an actuary to be sufficient to meet the current cost to the Government of the superannuation entitlements of its employees. The liability for defined superannuation benefits payable to an employee upon termination of employment with the Australian Government is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This defined benefit liability is reported by the Department of Finance and Deregulation as an administered item. The AOFM accounts for its contributions to the CSS and PSS as if they were defined contribution plans.

An on-cost liability, based on actuarial assessment, has been recognised in the Balance Sheet for employer superannuation contributions payable on accrued annual leave and long service leave as at the end of the financial year. Employer superannuation contributions are payable on leave benefits that are taken during service, but are not payable on leave benefits paid out on termination.

In addition, a liability has been recognised at the end of the financial year for outstanding superannuation contributions payable in relation to the final fortnight of the financial year.

1.8 Leases (Departmental)

A distinction is made between finance leases and operating leases. Finance leases effectively transfer from the lessor to the lessee substantially all risks and benefits incidental to ownership of leased non-current assets. Under operating leases the lessor effectively retains substantially all such risks and benefits.

The AOFM holds operating leases only. Operating lease payments are charged as an expense on a straight-line basis over the lease term.

1.9 Cash (Departmental)

Cash means notes and coins held and any deposits held at call with a bank. Deposits held with a bank that are not at call are classified as investments. Cash is recognised at its nominal amount.

1.10 Financial instruments (Departmental)

The AOFM recognises a financial asset or financial liability on its Balance Sheet when and only when it becomes a party to the contractual provisions of the instrument. A financial asset is de-recognised when the right to receive cash flows from the financial asset has expired or substantially all the risks and rewards of ownership have been transferred to another party. A financial liability is de-recognised when the obligation in the contract is discharged, cancelled or has expired.

The AOFM classifies its departmental financial assets as loans and receivables. Loans and receivables primarily comprise amounts due from other parties for the reimbursement of staff costs associated with staff secondments. Loans and receivables are initially recognised at fair value and are subsequently measured at amortised cost. Amounts due from the Official Public Account (OPA) for undrawn departmental appropriations are not financial instruments as they are not contractually based.

Financial liabilities represent trade creditors and accruals and are recognised at the amounts at which they are expected to be settled.

All departmental financial assets and financial liabilities are denominated in Australian dollars, are non-interest bearing and their fair values approximate their carrying values. Accordingly, the AOFM is not exposed to interest rate risk or exchange rate risk on its departmental financial instruments. The AOFM’s maximum exposure to credit risk on departmental financial assets approximates their carrying values. The AOFM’s exposure to credit risk on its departmental financial instruments is immaterial.

1.11 Infrastructure, plant and equipment (Departmental)

(a) Asset recognition threshold on acquisition

Purchases of infrastructure, plant and equipment are recognised initially at cost in the Balance Sheet, except for purchases costing less than $500, which are expensed at the time of acquisition. The asset recognition threshold is applied to each functional asset. That is, items or components that form an integral part of an asset are grouped as a single asset.

(b) Revaluations

Basis

Following initial recognition at cost, valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not materially differ from the assets’ fair values as at the reporting date, in accordance with AASB 116 Property, Plant and Equipment.

Fair value has been determined as depreciated replacement cost for leasehold improvements and market selling price in an active market for computers, plant and equipment.

Revaluation adjustments are made on a class basis. Revaluation increments for a class are credited directly to a revaluation reserve in Equity except to the extent that they reverse a previous revaluation decrement of the same asset class. Revaluation decrements for a class of assets are recognised as an expense directly through the Statement of Comprehensive Income except to the extent that they reverse a previous revaluation increment for that class. Upon disposal, any revaluation reserve relating to the asset sold is transferred to Retained Surplus.

For all assets, excluding leasehold improvements, any accumulated depreciation or amortisation as at the revaluation date is eliminated against the gross carrying amount of the asset. For leasehold improvements, accumulated amortisation on revaluation is restated proportionately in accordance with the gross carrying amount of the asset.

Frequency

Infrastructure, plant and equipment assets are formally revalued every 3 years. All infrastructure, plant and equipment assets were last revalued as at 31 March 2009.

Assets acquired after the commencement of a revaluation are not captured by the revaluation.

Conduct

All valuations are conducted by an independent qualified valuer.

(c) Impairment

All infrastructure, plant and equipment assets were assessed for impairment at the end of the financial year. No allowance for impairment was required.

(d) Depreciation

The depreciable value of infrastructure, plant and equipment assets is written off over the estimated useful lives of the assets to the AOFM using the straight-line method of depreciation. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvements and the unexpired period of the lease. The depreciable value of infrastructure, plant and equipment assets is based on a zero residual value.

Depreciation rates (useful lives) are reviewed at least annually, and if required the remaining useful life of an asset is adjusted. Adjustments are recognised in the current, or current and future, reporting periods as appropriate.

Depreciation expenses have been determined by applying rates to new depreciable assets based on the following useful lives:

Sub-class of depreciable asset 2011 2010
Leasehold improvements lease term lease term
Computers 3-5 years 3-5 years
Office equipment 5 years 5 years
Furniture 10 years 10 years

The aggregate amount of depreciation allocated to each class of asset during the reporting period is disclosed at Note 4C.

1.12 Computer software (Departmental)

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

An item of software represents:

  • a software licence granted for greater than 12 months; or
  • a developed software application.

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

Software assets are amortised on a straight-line basis over their anticipated useful lives, being 3 to 5 years (2009-10: 3 to 5 years). Software assets are carried at cost and are not subject to revaluation.

An impairment assessment was made as at the end of the financial year and an impairment allowance was not required.

1.13 Taxation (Departmental)

The AOFM is exempt from all forms of taxation except for Fringe Benefits Tax (FBT) and the goods and services tax (GST).

Revenue, expenses, assets and liabilities are recognised net of GST, except:

  • where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
  • for receivables and payables (where GST is applicable).

Receipts and payments in the Statement of Cash Flows are recorded at their GST inclusive amounts.

All supplies provided by the AOFM are input taxed under the GST legislation, except for remuneration benefits provided to staff and staff secondments in Australia. In accordance with applicable GST regulations the AOFM is entitled to a reduced input tax credit (equal to 75 per cent of the GST paid) on some purchases, such as security transaction services, which are applied in making input taxed supplies.

1.14 Reporting of administered activities

Administered revenue, expenses, assets, liabilities and cash flows are presented in the Schedule of Administered Items and related notes. Except where otherwise stated, administered items are prepared on the same basis of accounting and using the same policies as for departmental items, including the application of Australian Accounting Standards.

(a) Administered cash transfers to and from the Official Public Account (OPA)

Administered appropriations from the OPA (such as appropriations for the repayment of maturing debt) or transfers by the AOFM of administered receipts to the OPA (such as proceeds from the issuance of debt) are not reported. This accounting treatment seeks to report the Government’s transactions with parties outside the General Government Sector and acknowledges that these transactions with the OPA are internal to the Administered entity. An exception to the above policy relates to the disclosure of administered cash flows, given that cash transferred between the OPA and the AOFM’s administered bank accounts is necessary for the completeness of the cash flow disclosures.

1.15 Exemption from FMOs

Section 17.5 of the FMOs provides an exemption to the AOFM from presenting its Schedule of Income and Expenses Administered on Behalf of Government, and associated notes, in accordance with the Annexure to the FMOs. Instead, the AOFM is required to comply with AASB 101 Presentation of Financial Statements for presenting its administered revenue and expenses.

Paragraph 85 of AASB 101 encourages reporting entities to adopt a presentation for reporting revenue and expenses that is most relevant to users in understanding the entity’s financial performance.

With the adoption of fair value through profit or loss measurement for certain classes of financial assets and financial liabilities the AOFM has presented its administered revenue and expenses into two categories:

  • administered operating result before re-measurements; and
  • administered re-measurements.

The category ‘administered operating result 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 and is most relevant to the AOFM’s role in managing its debt portfolio whereby debt and financial instruments are predominately issued and held to maturity (and with portfolio restructuring performed primarily for portfolio management, credit or liquidity purposes, rather than for profit making purposes). Where a financial asset is sold or financial liability is bought back prior to maturity the realised gain or loss, calculated on an amortised cost basis, is recognised within this category. Realised and unrealised foreign currency gains and losses are also included in this category.

The category ‘administered re-measurements’ provides information on the unrealised changes in the market valuation of the portfolio of administered financial assets and financial liabilities during the financial year. This is relevant for assessing changes in financial risk exposures and changes to the value of transactions managed from year to year. The revaluation effect will net to zero over the life of a financial instrument.

1.16 Recognition and de-recognition of financial instruments

The AOFM recognises a financial asset or financial liability in its Schedule of Assets and Liabilities Administered on Behalf of Government when and only when it becomes a party to the contractual provisions of the financial instrument. A financial asset is de-recognised when the right to receive cash flows from the financial asset has expired and substantially all the risks and rewards of ownership have been transferred to another party. A financial liability is de-recognised when the obligation in the contract is discharged, cancelled or has expired.

The AOFM accounts for purchases and sales of financial instruments on a trade date basis, that is, the date on which transactions are executed. Depending on the transaction type this may be several days prior to settlement.

1.17 Classification and measurement of financial instruments

The AOFM classifies its administered financial assets into the following categories: financial assets at fair value through profit or loss; and loans and receivables. The AOFM classifies its financial liabilities in the following categories: financial liabilities at fair value through profit or loss; and other financial liabilities. See Note 24A for further details of the AOFM’s financial instrument categories.

The AOFM has determined the classifications on the basis of how it manages and assesses the performance of its financial assets and financial liabilities. Where the AOFM’s management monitors cost and risk in mark-to-market terms (and not necessarily only in those terms), the AOFM has classified the relevant financial assets and liabilities at fair value through profit or loss.

(a) Non-derivative financial assets at fair value through profit or loss

This category comprises short-term Australian dollar denominated deposits, bank accepted bills and negotiable certificates of deposit and Australian dollar denominated semi-government bonds and residential mortgage-backed securities. Under section 39(2) of the Financial Management and Accountability Act 1997, the AOFM invests public money for the purpose of managing the balance of the OPA, to smooth debt issuance between financial years (by undertaking debt issuance earlier than would otherwise be required and investing the proceeds in highly liquid assets until required) and to support the residential mortgage market.

These assets are measured at fair value on initial recognition and at fair value on subsequent measurement. Changes in carrying value are attributed between changes in amortised cost of the asset and other changes. Changes in carrying value attributable to amortised cost are recognised as Interest Revenue in the Schedule of Income and Expenses Administered on Behalf of Government. Where a security is acquired at a premium or discount to its par value, the premium or discount is recognised at that time and included in the carrying value of the asset. The premium or discount is amortised over the life of the security using the effective interest rate method and recognised in Interest Revenue. Other changes in carrying value (including unrealised changes in valuation due to a change in interest rates) are recognised as Re-measurements in the Schedule of Income and Expenses Administered on Behalf of Government.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The AOFM classifies a financial asset as a loan and receivable (as opposed to a financial asset at fair value through profit or loss) in circumstances where the cost and risk of the asset are not being monitored in mark-to-market terms.

Currently, this category comprises debt on allocation to, and advances made to, the State and Northern Territory Governments.

Until July 1990, the Australian Government borrowed on behalf of the State and Northern Territory Governments and allocated a portion of the proceeds of its Treasury Bond raisings to those Governments to fund the redemption of previous allocations of raisings. Until 1986, the Australian Government also borrowed on behalf of the State and Northern Territory Governments to raise new borrowings. In addition to Treasury Bond allocations, there are outstanding balances on stock issued by the States prior to 1 January 1924 and taken over by the Australian Government in 1927 (under the originalFinancial Agreement Act). The States and the Northern Territory are responsible for meeting all obligations as to interest and principal on the debt on allocation to them in accordance with the provisions of the Financial Agreement Act 1994 (the current agreement). As at 30 June 2011 approximately $9 million of perpetual debt with no fixed maturity date issued by New South Wales, Victoria and South Australia remained outstanding under the arrangements governed by the Financial Agreement Act 1994(30 June 2010: $10 million). All other debt has been redeemed. Redemption of the perpetual debt is at the discretion of the relevant State.

In addition to debt governed by the Financial Agreement Act 1994, from 1945 to 1989 the Australian Government made concessional advances to the State and Northern Territory Governments under Commonwealth-State financing arrangements, which were not evidenced by the issue of securities (namely, housing advances and specific purpose capital advances). The principal value of these advances outstanding (for which the AOFM is responsible for administering) was $2,973 million as at 30 June 2011 (30 June 2010: $3,068 million).

Loans and receivables 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 as Interest Revenue in the Schedule of Income and Expenses Administered on Behalf of Government.

For financial assets measured at amortised cost, interest revenue earned but not yet received is recognised as Accrued Revenue in the Schedule of Assets and Liabilities Administered on Behalf of Government.

(c) Non-derivative financial liabilities at fair value through profit or loss

Currently this category comprises all Commonwealth Government Securities (CGS) debt with the exception of debt on allocation to State and Northern Territory Governments and overdues. CGS primarily comprises Treasury Bonds, Treasury Indexed Bonds and Treasury Notes.

These liabilities are measured at fair value on initial recognition and at fair value on subsequent measurement. Changes in carrying value are attributed between changes in amortised cost of the liability and other changes. Changes in carrying value attributable to amortised cost are recognised as Interest Expense in the Schedule of Income and Expenses Administered on Behalf of Government. Where a security is issued at a premium or discount to its par value, the premium or discount is recognised at that time and included in the carrying value of the liability. The premium or discount is amortised over the life of the security using the effective interest rate method and recognised in Interest Expense. Other changes in carrying value (including unrealised changes in valuation due to a change in interest rates) are recognised as Re-measurements in the Schedule of Income and Expenses Administered on Behalf of Government.

For Treasury Indexed Bonds, the principal value appreciates over time with the rate of inflation (in line with a 6 month lagged consumer price index). As future inflation rates are uncertain, an estimate of the Australian Government’s future redemption cost on maturity is not disclosed in the financial statements. Capital accretion is recognised in Interest Expense over time.

There are no options available to either the Australian Government or the holder of the securities to exchange or convert CGS. There are also no options to either party for early redemption.

(d) Other non-derivative financial liabilities

This category comprises debt on allocation to State and Northern Territory Governments and overdues.

These liabilities are measured at fair value on initial recognition and at amortised cost on subsequent measurement using the effective interest method. Changes in carrying value are recognised as Interest Expense in the Schedule of Income and Expenses Administered on Behalf of Government.

For financial liabilities measured at amortised cost, interest incurred but not yet paid is recognised as Accrued Expenses in the Schedule of Assets and Liabilities Administered on Behalf of Government.

(e) Derivative financial instruments

Derivatives are required by AASB 139 Financial Instruments: Recognition and Measurement to be measured at fair value on initial recognition and at fair value on subsequent measurement. The accounting treatment for changes in fair value depends on whether the derivative is designated as a hedging instrument, and on the nature of the hedge.

The AOFM has not designated a hedge relationship between its derivatives and physical CGS debt portfolio. Accordingly, interest rate swaps the AOFM enters into are classified at fair value through profit or loss.

Changes in the carrying value of interest rate swaps are attributed between changes in amortised cost and other changes. Changes in carrying value attributable to amortised cost are recognised as Interest Expense (for the pay leg) and as Interest Revenue (for the receive leg) in the Schedule of Income and Expenses Administered on Behalf of Government. Other changes in carrying value (including unrealised changes in valuation due to a change in interest rates) are recognised as Re-measurements in the Schedule of Income and Expenses Administered on Behalf of Government.

1.18 Fair value estimation of financial instruments

Where a financial instrument is traded in an active market, fair value is based on quoted market rates as at the end of the financial year. Where market rates are unavailable because a financial asset or financial liability is not traded in an active market, valuation techniques are used, including quotes for similar instruments and discounted cash flow analysis. Fair value measurement requires maximising the use of market observable inputs and minimising the use of unobservable inputs. Where markets are distorted or illiquid, with pricing not necessarily reflective of underlying credit and cash flow fundamentals, assumptions may be necessary to derive the fair value of a financial instrument.

Fair value is synonymous with market value and represents the estimated exchange equivalent price using relevant inputs from reference markets and valuation techniques. Fair value is determined on the presumption that the reporting entity is a going concern and is operating in an active market under normal conditions, without any intention or need to liquidate, curtail materially the size of its activities or undertake transactions on adverse terms.

(a) Non-derivative financial instruments at fair value

The fair value of Treasury Bonds is based on discounted cash flows using a zero coupon curve valuation methodology created from observable market rates. The zero coupon curve is based on market yields of the most liquid Treasury Bond lines as at the end of the financial year.

The fair values of Treasury Indexed Bonds are based on observable market quotes for each issue.

The fair values of domestic semi-government debt investments are based on observable market quotes for each issue.

The fair value of term deposit investments with the RBA is based on a zero coupon curve using the overnight cash rate and overnight indexed swap rates. These yields reflect a default free credit risk. The valuation approach for Treasury Notes is largely equivalent.

The fair value of short-term marketable securities is based on a zero coupon curve using the overnight cash rate and bank bill swap rates.

For residential mortgage-backed securities each issue is modelled to determine its weighted average life, which is tested and compared against other sources where available. Fair value is determined using the weighted average life, market quotes (where available) and assumptions based on credit quality considerations.

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

1.19 Other significant administered accounting policies

(a) Revenue

All administered revenue is revenue relating to the activities performed by the AOFM on behalf of the Australian Government.

Interest revenue is earned on loans to State and Northern Territory Governments, residential mortgage-backed securities, term deposits, fixed interest and discount securities and the receive legs of interest rate swaps. Interest is credited to revenue as it accrues and is calculated on an amortised cost basis using the effective interest rate method.

Net interest earnings on securities lending transactions are reported as revenue when received.

(b) Grants

Under the Financial Agreement Act 1994, the Australian Government assists the State and Northern Territory Governments to redeem maturing debt on allocation to them. Payments made under these arrangements are recognised as grants expenses as and when they fall due and payable.

(c) Borrowing costs

In accordance with section 21.1 of the FMOs borrowing costs are expensed as incurred. Under AASB 123 Borrowing Costs, borrowing costs directly attributable to a qualifying asset may be capitalised or expensed. A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or sale. The AOFM’s borrowing program does not specifically raise funds for qualifying assets.

(d) Cash

The AOFM maintains a number of administered operational bank accounts with the RBA. Interest is not paid on these accounts. Deposits are recognised at their nominal amounts.

(e) Securities lending facility

The AOFM has a securities lending facility available for Treasury Bonds and Treasury Indexed Bonds. The facility is operated by the RBA and is governed by the terms and conditions of an agency agreement between the RBA and the AOFM. The purpose of the facility is to enhance the efficiency of the bond market by allowing bond market participants to borrow Treasury Bonds and Treasury Indexed Bonds (generally for a period of no more than several days) when they are not readily available from other sources in the market.

The securities lending facility operates by entering into two simultaneous repurchase agreements with the party wishing to borrow securities – a repurchase agreement (the sale of securities to the party and agreement to buy them back at a future time at an agreed price) and a reverse-repurchase agreement (the purchase of securities from the party and agreement to sell them back at a future time at an agreed price). The net effect of these two transactions is that the Australian Government holds securities as collateral, and not cash, for securities loaned to bond market participants.

The exchange of securities is market value matched subject to a 2 per cent initial margin imposed by the AOFM for credit risk mitigation purposes. There is provision for making margin calls after initial exchange where the securities pledged as collateral by the other party fall in value relative to the Treasury Bonds or Treasury Indexed Bonds loaned under the facility. The repurchase and reverse-repurchase agreements are at-call, that is, they do not have set terms.

Interest is payable under the facility where lending is overnight. Interest is not payable on intra-day lending. The interest rate payable by the other party is the RBA target cash rate. The interest rate payable by the AOFM is the target cash rate less a margin. Net interest earnings of the Australian Government are reported as revenue when received. The temporary sale of CGS under the facility is recorded off-balance sheet. See Note 26 for details of transactions undertaken during the financial year under the facility.

(f) Repurchase agreements

During the financial year the AOFM established Global Master Repurchase Agreements with a number of members of its investment facility dealing panel for the purpose of entering into repurchase transactions on financial assets that it holds (primarily semi-government bonds).

A repurchase transaction involves the sale of a financial asset and agreement to buy it back at an agreed price, at a future date or on demand. The exchange of securities for cash is market value matched. There is provision for repricing in circumstances where the securities fall or rise in value by more than a threshold amount. Interest is payable by the AOFM on the value of cash received at an agreed (fixed) market interest rate set at the time the transaction is struck.

As the AOFM has not transferred the risks and rewards of ownership of the financial asset sold, the financial asset continues to be recorded in the Schedule of Assets and Liabilities Administered on Behalf of Government and is not de-recognised. See Note 24K for details of repurchase transactions during the financial year.

(g) Foreign currency

Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current as at the end of the financial year. Net foreign exchange gains and losses (both realised and unrealised) arising from foreign currency transactions are reported in the Schedule of Income and Expenses Administered on Behalf of Government.

Note 2: Objectives and activities of the AOFM

The AOFM manages a portfolio of debt and financial assets on behalf of the Australian Government. It issues Treasury Bonds and Treasury Indexed Bonds to finance projected budget deficits. It also manages the Government’s cash in the Official Public Account (OPA) which is surplus to immediate requirements by making investments in term deposits, money market instruments and semi-government bonds. It uses these instruments, together with the issue of Treasury Notes, 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. In managing its portfolio and undertaking these tasks it seeks to minimise accrual debt servicing costs over the medium term at an acceptable level of risk.

Financing the budget

For many years debt issuance by the AOFM was undertaken solely with the objective of maintaining the Treasury Bond and Treasury Bond futures markets, as successive budget surpluses removed the need to borrow to fund the Budget. The forecast Budget outlook changed in the Updated Economic and Fiscal Outlook published on 3 February 2009 and the objective of issuance changed to funding the Budget. Since this time, the AOFM has significantly increased debt issuance and intensified its promotional activities with investors (including overseas investors) and intermediaries.

Portfolio management

Until 30 June 2008 the AOFM used interest rate swaps to reduce the accrual cost of its borrowing by exchanging fixed rate exposure for floating rate exposure. It stopped doing this because interest rate structures had reduced the potential savings. The portfolio of interest rate swaps was wound down and the last interest rate swap contract matured on 18 May 2010. The cost and risk of the debt portfolio is now managed through debt issuance and investment activities.

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. It also invests in term deposits with the RBA and buys short-dated discount securities. In December 2009 it extended the range of eligible investments for short-term cash management purposes to include semi-government bonds with maturities of less than one year. During 2010-11 the AOFM undertook repurchase transactions by temporarily selling these semi-government bonds for short-term funding of the OPA.

The OPA is recorded in the Department of Finance and Deregulation’s financial statements and is not reported by the AOFM. The AOFM holds continuing balances of short-term assets to allow it to respond flexibly and quickly to swings in cash requirements.

Investments in residential mortgage-backed securities

In September 2008, the Government announced that the AOFM would invest up to $4 billion in residential mortgage-backed securities (RMBS) to support competition in the Australian residential mortgage market. In October 2008, this initiative was extended to $8 billion, including $4 billion to be invested in RMBS securities by issuers that were not authorised deposit taking institutions. In November 2009, the Government extended the program by up to an additional $8 billion subject to market conditions. An additional objective of the extended program was to provide support for lending to small business through participating lenders agreeing to direct some of the proceeds received for lending to small business. In December 2010, the Government announced an extension to the program by up to an additional $4 billion (bringing the program to $20 billion) as part of its Competitive and Sustainable Banking Package.

Legislation

The AOFM’s borrowing and portfolio management activities comply with applicable legislative requirements and accounting standards. 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 domestic stock, including Treasury Bonds, Treasury Indexed Bonds and Treasury Notes. It also provides a standing authority to the Treasurer to borrow in Australian currency up to a statutory maximum;
    • on 29 June 2011, Appropriation Act (No.2) 2011-12 received royal assent. The Act includes a number of amendments to theCommonwealth Inscribed Stock Act 1911, including increasing the legislative limit on borrowing to $250 billion; repealing the special circumstances provision; and establishing standing appropriations to meet the expenses incurred to issue and manage debt, and expenses incurred in repurchasing debt prior to maturity;
  • the Loans Redemption and Conversion Act 1921 gives the Treasurer the power to borrow money necessary for the purpose of paying off, repurchasing or redeeming any loan;
  • the Loans Securities Act 1919 includes provisions relating to overseas borrowings, and provides authority to enter into swaps, securities lending, repurchase agreements and other financial arrangements;
  • the Loans (Temporary Revenue Deficits) Act 1953 gives the Treasurer the power to borrow to meet expected within-year deficits of the Consolidated Revenue Fund. All borrowings raised under the authority of this Act must be repaid in the same financial year;
  • the Financial Agreement Act 1994 formalises debt consolidation and redemption arrangements applying since 1 July 1990 between the Australian Government and the States and Territories; and
  • section 39 of the Financial Management and Accountability Act 1997 gives the Treasurer the power to invest public money in authorised investments.

Note 3: Financial risk management

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

Timing mismatches between the Australian Government’s receipts and expenditures cause large fluctuations in the volume of short-term assets and liabilities held 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 its debt, long-term financing and short-term financing are managed through separate portfolios, the debt portfolio and the cash management portfolio. In addition, the AOFM’s investments in residential mortgage-backed securities and advances to State and Northern Territory Governments (which were made under previous Commonwealth-State financing arrangements and were not evidenced by the issue of securities) are held in separate portfolios.

(a) 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. The AOFM largely holds its debt and assets until maturity. Accordingly, the primary measure used to assess cost and return is the accruals basis of accounting under the historic cost accounting convention. Market value measures (which include unrealised changes in the valuation of financial assets and financial liabilities due to changes in interest rates) are considered to be secondary.

Debt portfolio

The AOFM manages the interest rate structure of the debt portfolio through the choice of instruments and bond series in issuing debt. The cost and interest rate risk of the debt portfolio is regularly measured and reported to senior management, the Secretary to the Treasury and the AOFM Advisory Board.

Cash management portfolio

The cash management portfolio holds a fluctuating portfolio of short-term investments and debt securities. Given the short tenor of the financial instruments in this portfolio, the level of interest rate risk is considered to be low.

Residential mortgage-backed securities

Interest earned on residential mortgage-backed securities comprises a floating interest rate (based on the 1-month BBSW rate) plus a fixed margin set at the time each investment is acquired. The AOFM monitors movements in these interest rates as part of its management of the overall portfolio.

See Note 24C for details of the AOFM’s interest rate risk profile.

(b) Inflation risk

The AOFM currently has four series of Treasury Indexed Bonds on issue. These instruments have their principal value indexed against the (all Groups) Australian Consumer Price Index (CPI). The interest is a fixed real rate of interest payable on the accreted principal value. Accordingly these debt instruments expose the AOFM 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.

(c) Exchange rate risk

Exchange rate risk arises from debt denominated in foreign currency. Only a small residual amount of such debt remains in the AOFM’s portfolio and the AOFM seeks to repurchase this debt when available on acceptable terms. The volume of foreign currency debt remaining is monitored by senior management.

See Note 24D for details of the AOFM’s exposure to foreign exchange risk.

(d) Liquidity & refinancing risk

The AOFM manages liquidity risk by maintaining sufficient cash and short-term investments to ensure that the Government can meet its financial obligations, both planned and unplanned, as and when they fall due. The AOFM maintains the daily volume of cash in the OPA, within a limit set by the Treasurer and the Minister for Finance and Deregulation, by monitoring the projected daily transactions of major spending and revenue agencies, undertaking investment of funds that are surplus to immediate cash requirements, by issuing Treasury Notes and entering into repurchase agreements. The AOFM also has access to an overdraft facility with the RBA. The overdraft facility is not to be used in normal day-to-day operations but only to cover temporary, unexpected shortfalls of cash and it has a limit of $1 billion. Should circumstances arise for the overdraft to exceed this limit, Ministerial approval is required.

During the financial year, the AOFM changed the maturity date for new Treasury Bond lines issued to the 21st of the month (from the 15th), in order to more closely align semi-annual coupon payments and repayment of principal on their maturity with tax receipts into the OPA. Over time this will assist in reducing the size of timing mismatches between the Government’s receipts and expenditures.

The AOFM seeks to control refinancing risk by issuing along the entire yield curve. This creates a range of short-dated and mid-to-long-dated exposures that balance cost and refinancing patterns. In formulating its annual debt issuance strategy the AOFM considers the volume of debt in any one line and the maturity structure (including number of bond lines and maturity gaps between lines) of its debt. The AOFM CEO approves the debt issuance program.

Senior management monitors the daily balance in the OPA, holdings of short-term assets and short-term and long-term debt issuance activity.

See Note 24E for details of the maturity profile of AOFM’s cash flow obligations arising from its liability position as at year end.

(e) Credit risk

The AOFM’s investment activity is made in accordance with legislative limits, delegations and directions from the Treasurer and policies and limits established by the Secretary to the Treasury. Section 39 of the Financial Management and Accountability Act 1997 and associated regulations specify authorised investments. Directions from the Treasurer further limit the class of acceptable assets. The Secretary to the Treasury sets class and individual issuer exposure limits, including credit rating requirements.

The AOFM CEO approves the individual issuer names eligible for investment and from time to time may impose further restrictions on class and individual issuer exposure limits.

Eligible investments and their limitations are as follows:

Eligible investment classes Limits framework
Securities issued or guaranteed by the Commonwealth, a State or Territory Class and individual issuer limits.
AAA rated or equivalent debt securities issued or guaranteed by the government of a foreign country in Australian dollars Class and individual issuer limits.
AAA rated or equivalent debt securities issued by a financial institution or supranational in Australian dollars Class and individual issuer limits.
Bank accepted bills of exchange and negotiable certificates of deposit rated at least A1 or equivalent issued in Australian dollars by an authorised deposit taking institution, where the remaining term to maturity is no more than 12 months Class, credit rating and individual issuer limits.
Commercial paper issued in Australian dollars rated at least A1+ or equivalent where the remaining term to maturity is no more than 12 months Class and individual issuer limits.
Deposits with the Reserve Bank of Australia No limits apply.
AAA rated or equivalent residential mortgage-backed securities issued in Australia A limit of $20 billion invested in face value terms with no single issuer limits. In April 2011 the Treasurer issued a direction which limits investments to RMBS issues made by lenders that operate independently of the four major Australian banks.

See Note 24F for details of the AOFM’s exposure to credit risk.

Residential mortgage-backed securities (RMBS)

The credit quality of RMBS derives from the underlying quality of the mortgage assets and structural enhancements such as lenders’ mortgage insurance, liquidity facilities, and the issue of different classes of securities. At the time of acquisition, each RMBS issue must meet a range of eligibility criteria set by the AOFM, including AAA (or equivalent) credit rating by at least two ratings agencies, denomination in Australian dollars and fully amortising. Mortgages backing the securities must be secured by a first registered prime mortgage over Australian residential property and meet various limits, including mortgage loan size and loan-to-value ratios. Each mortgage pool must be subject to independent review by a leading accounting firm to provide assurance that the eligibility criteria have been met. The AOFM monitors the performance of each RMBS issue through a monthly report by the issuer on mortgage portfolio characteristics. As at 30 June 2011 all RMBS securities held by the AOFM were rated AAA or equivalent.

See Note 24G for details of the AOFM’s portfolio of RMBS investments.

Other assets and credit exposures

The AOFM has a credit risk exposure on its advances to the State and Northern Territory Governments. This risk is regarded as minimal.

To protect the Australian Government’s financial position with respect to securities lending arrangements, the market value of the collateral securities taken from counterparties is at least 2 per cent greater than the market value of the Treasury Bonds or Treasury Indexed Bonds lent. The AOFM has the right to seek additional collateral if there is a decline in the market value of the collateral securities relative to the lent securities.

With respect to repurchase transactions, if at any time the Australian Government has a net exposure of greater than $1 million in aggregate for all repurchase transaction exposures to a counterparty, the AOFM may require that the net exposure be eliminated by the repricing of the transactions with the counterparty. The AOFM undertakes repurchase transactions only with counterparties that have a short-term credit rating of at least A1 (or equivalent), and with whom the AOFM has an executed Global Master Repurchase Agreement.

(f) Prepayment risk

The RMBS acquired by the AOFM are fully amortising, pass through instruments. This means that the principal collections from the underlying portfolio of mortgages are repaid to the holders of the securities thereby reducing the principal outstanding on them.

Principal and interest on the underlying loans are received by the servicer and paid to an issuer bank account. On a scheduled basis, typically monthly, in accordance with a set priority of payments (a ‘cash flow waterfall’), the cash collected is used to pay any taxes, fees and expenses of the issuer, and interest and principal due on each class of outstanding RMBS. Due to the pass through nature of the RMBS, the repayment of principal is dependent upon the timing of principal repayments on the underlying mortgages and the operation of the cash flow waterfall. Accordingly, the rate at which principal is repaid varies over time and the actual date that the securities will be repaid in full cannot be precisely determined (this is referred to as prepayment risk).

The AOFM monitors the performance of each RMBS issue through a monthly report by the issuer. The report provides details of cash received from payments on the underlying mortgages, payments made, the rate of the loan principal repayments ahead of scheduled principal payments and the estimated weighted average remaining life of RMBS.

See Note 24G for details of the AOFM’s portfolio of RMBS investments.

Note 4: Expenses

Note 4: Expenses
2011
$’000
2010
$’000
Note 4A: Employee benefits
Wages and salaries 4,665 3,926
Superannuation 830 728
Leave and other entitlements (147) 342
Other employee expenses 243 247
Total employee benefits 5,591 5,243
Note 4B: Supplier expenses
Corporate support services 377 417
Market data services 650 596
Operating lease rentals(a) 317 322
Registry, depository and transaction services 665 639
Syndicated debt issuance and associated services 1,952 6,194
Travel 303 279
Workers compensation premium 18 20
Other(b) 1,584 1,321
Total supplier expenses 5,866 9,788
Supplier expenses are made up of:
Provision of goods – related entities 1 1
Provision of goods – external entities 41 37
Provision of services – related entities 1,663 1,693
Provision of services – external entities 4,161 8,057
5,866 9,788
Note 4C: Depreciation and amortisation
Depreciation of infrastructure, plant and equipment:
Computers, plant and equipment 97 97
Leasehold improvements 67 66
Amortisation of intangibles:
Computer software 151 133
Total depreciation and amortisation 315 296
Note 4D: Write-down and impairment of assets
Computers, plant and equipment – disposed 1 1
Leasehold Improvements – disposed 13
Total write-down and impairement of assets 14 1
Total expenses 11,786 15,328
  1. Amounts relate to minimum lease payments only. Novated lease payments from salary packaging of motor vehicles are disclosed in ‘other employee expenses’.
  2. Includes notional ANAO financial statement audit fees of $0.294 million (2009-10: $0.295 million).

Note 5: Income

Note 5: Income
2011
$’000
2010
$’000
Note 5A: Sale of goods and rendering of services
With related entities:
Staff secondments to other agencies 583 532
Total sale of goods and rendering of services 583 532
Note 5B: Other revenue
Resources received free of charge – ANAO audit services 294 295
Other 189 387
Total other revenue 483 682
Note 5C: Revenue from government
Appropriations – departmental output 15,896 12,569
Total revenue from government 15,896 12,569
Total income 16,962 13,783

Note 6: Financial assets

Note 6: Financial assets
2011
$’000
2010
$’000
Note 6A: Receivables
With related parties:
Goods and services 133 167
Appropriations receivable(a):
Output 17,897 12,466
Equity injection 662 949
Departmental capital budget 106
With external parties
Other 3 9
Total receivables 18,801 13,591
Receivables are expected to be recovered in:
No more than 12 months 136 176
More than 12 months 18,665 13,415
18,801 13,591
Receivables are aged as follows:
Not overdue 18,800 13,591
Overdue 1
18,801 13,591
  1. Appropriations receivable are appropriations controlled by the AOFM but held in the OPA under the Government’s ‘just-in-time’ drawdown arrangements.

Note 7: Non-financial assets

Note 7: Non-financial assets
2011
$’000
2010
$’000
Note 7A: Infrastructure, plant and equipment
Computers, plant and equipment:
Gross value – at cost 290 224
Accumulated depreciation (105) (37)
185 187
Gross value – at 2009 valuation (fair value) 146 167
Accumulated depreciation (100) (93)
46 74
Under construction 17
17
248 261
Leasehold improvements:
Gross value – at 2009 valuation (fair value) 972 972
Accumulated depreciation (643) (607)
329 365
Total infrastructure, plant and equipment 577 626

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

All revaluations are independent and are conducted in accordance with the revaluation policy stated at Note 1.11. In 2008-09, the revaluations were conducted by an independent valuer, the Australian Valuation Office. As at 31 March 2009, a revaluation increment was made of $58,642 being $4,015 for leasehold improvements and $54,627 for computers, plant and equipment. The full value of the revaluation increments for each class of assets was recognised in revenue to reverse previous revaluation decrements recognised as expenses. As at 30 June 2011 the AOFM had cumulative net revaluation losses of $28,196 for leasehold improvements and $58,869 for computers, plant and equipment which were previously recognised as expenses in the Statement of Comprehensive Income.

Note 7B: Intangibles
2011
$’000
2010
$’000
Note 7B: Intangibles
Computer software (purchased):
Gross value – at cost 3,320 3,033
Accumulated amortisation (2,890) (2,739)
Total intangibles 430 294

No indicators of impairment were identified for intangible assets.

The following tables reconcile the opening and closing balances of infrastructure, plant and equipment, and intangible assets.

Note 7C: Reconciliation of opening and closing balances – 2010
Leasehold improvements Computers,
plant and
equipment
Computer
software
(purchased)
Total
2011
$’000
2011
$’000
2011
$’000
2011
$’000
As at 1 July 2010
Gross book value 972 391 3,033 4,396
Acc depreciation/amortisation (607) (130) (2,739) (3,476)
Net book value 1 July 2010 365 261 294 920
Additions:
Purchases 44 85 287 416
Depreciation/amortisation charge (67) (97) (151) (315)
Disposals:
Gross book value (44) (23) (67)
Acc depreciation/amortisation 31 22 53
Net book value 30 June 2011 329 248 430 1,007
As at 30 June 2011
Gross book value 972 453 3,320 4,745
Accumulated depreciation/amortisation (643) (205) (2,890) (3,738)
329 248 430 1,007

Note 7: Non-financial assets (continued)

Note 7C: Reconciliation of opening and closing balances – 2009
Leasehold improvements Computers,
plant and
equipment
Computer
software
(purchased)
Total
2010
$’000
2010
$’000
2010
$’000
2010
$’000
As at 1 July 2009
Gross book value 955 186 3,018 4,159
Accumulated depreciation/amortisation (541) (45) (2,641) (3,227)
Net book value 1 July 2009 414 141 377 932
Additions:
Purchases 17 218 50 285
Depreciation/amortisation charge (66) (97) (133) (296)
Disposals:
Gross book value (13) (35) (48)
Accumulated depreciation/amortisation 12 35 47
Net book value 30 June 2010 365 261 294 920
As at 30 June 2010
Gross book value 972 391 3,033 4,396
Accumulated depreciation/amortisation (607) (130) (2,739) (3,476)
365 261 294 920
Note 7D: Other non-financial assets
2011
$’000
2010
$’000
Note 7D: Other non-financial assets
Prepayments 140 98
Total other non-financial assets 140 98
Other non-financial assets are expected to be recovered in:
No more than 12 months 140 98
More than 12 months
140 98

No indicators of impairment were identified for other non-financial assets.

Note 8: Payables

Note 8: Payables
2011
$’000
2010
$’000
Note 8A: Supplier payables
With related entities:
Trade creditors and accruals(a) 52 34
With external parties:
Trade creditors and accruals(a) 265 277
Total supplier payables 317 311
Supplier payables are expected to be settled in:
No more than 12 months 303 292
More than 12 months 14 29
317 311
Note 8B: Other payables
Salaries and wages 108 75
Superannuation 18 13
Tax and other 15 21
Total other payables 141 109
Other payables are expected to be settled in:
No more than 12 months 141 109
More than 12 months
141 109
  1. Settlement is usually made net 30 days

Note 9: Provisions

Note 9: Provisions
2012
$’000
2011
$’000
Note 9A: Employee provisions
Annual leave 408 389
Long service leave 819 984
Superannuation 154 126
Total employee provisions 1,381 1,499
Employee provisions are expected to be settled in:
No more than 12 months 303 613
More than 12 months 1,078 886
1,381 1,499
Note 9B: Other provisions
Make-good on leasehold premises(a) 133 130
Total other provisions 133 130
Other provisions are expected to be settled in:
No more than 12 months
More than 12 months 133 130
133 130
Reconciliation of movements in other provisions:
Opening 130 125
Re-measurement 3 5
Closing balance 133 130
  1. In accordance with the terms of its lease agreement for office accommodation, the AOFM is required to restore its leased premises to original condition at the conclusion of the lease in 2015. The AOFM has made a provision to recognise this obligation.

Note 10: Cash flow reconciliation

Australian Accounting Standards allow the presentation of a Statement of Cash Flows using the direct method or the indirect method. The direct method reports gross operating cash flows based on the accounting records of the entity. The indirect method represents a reconciliation of operating cash flows to an entity’s operating result.

The FMOs require the AOFM to prepare its Statement of Cash Flows under the direct method. Where a Statement of Cash Flows is reported using the direct method, Australian Accounting Standards require a reconciliation of the entity’s operating result (or net cost of services) as reported in the Statement of Comprehensive Income to the net cash from Operating Activities reported in the Statement of Cash Flows. This is equivalent to the indirect method.

The table below represents this reconciliation:

Reconciliation of cash and cash equivalents in Balance Sheet and the Statement of Cash Flows
2012
$’000
2011
$’000
Net cost of services (10,720) (14,114)
Add revenue from Government 15,896 12,569
Adjustments for non-cash items:
Depreciation and amortisation 315 296
Write-down and impairment of assets 14 1
Appropriations returned to government (2,177)
Infrastructure, plant and equipment and intangibles accruals 15 (55)
Adjustments for changes in assets:
(Increase) decrease in receivables (5,210) 3,296
(Increase) decrease in other prepayments (42) (8)
(Decrease) increase in capital appropriations receivable (181)
Adjustments for changes in liabilities:
Increase (decrease) in employee provisions (118) 317
Increase (decrease) in other provisions 3 5
Increase (decrease) in other payables 32 21
Increase (decrease) in supplier payables 6 106
Net cash from (used by) operating activities 10 257

Australian Accounting Standards require a reconciliation of cash and cash equivalents reported in the Statement of Cash Flows to items that comprise cash and cash equivalents in the Balance Sheet. The table below represents this reconciliation:

Reconciliation of cash and cash equivalents in Balance Sheet and the Statement of Cash Flows
2011
$’000
2010
$’000
Items in Balance Sheet
Financial assets – cash and cash equivalents 100 90
Total items in the Balance Sheet 100 90
Total as per Statement of Cash Flows 100 90

Note 11: Contingent liabilities and assets

Unquantifiable contingencies

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

Remote contingencies

The AOFM has indemnified a number of contractors providing goods and services under contract for losses incurred by the contractor due to, amongst other things, the AOFM’s failure to observe certain terms of contract, or for wrongful, unlawful or negligent acts committed by the AOFM. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.

Note 12: Executive remuneration

Remuneration means any money, consideration or benefit including wages, salaries, performance pay, accrued leave entitlements (excluding superannuation on-costs), superannuation contributions (including notional contributions made to defined benefits schemes at a rate determined by the Department of Finance and Deregulation), the cost of motor vehicles, housing, commuting, fringe benefits tax and allowances. Remuneration does not include reimbursement of out-of-pocket expenses incurred for work related purposes. Where the AOFM is not entitled to an input tax credit, remuneration includes the non-recoverable GST amount.

AOFM employees are not eligible to receive performance bonuses.

Remuneration expenses for officers in the senior executive service

Remuneration expenses (on an accruals basis) for officers in the senior executive service
Actual remuneration expensed(a) during the financial year 2011
$’000
2010
$’000
Short-term employee benefits:
Salary (including annual leave taken)(b) 271 243
Annual leave accrued 19 21
290 264
Post employment benefits:
Superannuation(b)(c) 41 54
41 54
Termination benefits:
Separation payments
Other long-term benefits:
Long service leave 28 14
28 14
Total 359 332
  1. Excludes officers not in the Senior Executive Service on acting arrangements in positions that are Senior Executive Service positions, and Senior Executive Service officers not employed for the full year whose total remuneration was less than $150,000 for the year.
  2. Salary and superannuation excludes accruals for amounts due but unpaid as at the end of the financial year.
  3. Superannuation contributions are paid into the employees’ superannuation scheme at a rate determined by the Department of Finance and Deregulation. The contributions made by the AOFM into a defined benefit scheme do not necessarily correspond with the officer’s benefit under the scheme which is governed by legislation.
  4. The value of long service leave provision at the end of June is determined based on advice from the Australian Government Actuary. The valuation includes the use of a discount rate to equate the expected future payments of the benefit to a net present value. The discount rate is determined based on future expectations of long-term salary increases and the long-term bond rate. Changes from year to year in the discount rate used to value long service leave have an impact on the level of remuneration reported for a financial year. As at 30 June 2011 the discount rate was 92.7 per cent (96.7 per cent as at 30 June 2010).

Annualised remuneration

The following table shows the fixed annualised remuneration package for the AOFM’s substantive Senior Executive Service officer as at 30 June:

Annual remuneration package for substantive senior executive as at 30 June 2011
Fixed elements
No. Salary
$’000
Other
$’000
Total
$’000
Total remuneration
$300,000 to $329,000 1 314 314
Total 1 314 314
Annual remuneration package for substantive senior executive as at 30 June 2010
Fixed elements
No. Salary
$’000
Other
$’000
Total
$’000
Total remuneration
$240,000 to $270,000 1 268 268
Total 1 268 268

In addition to fixed remuneration Senior Executive Service officers receive the following package benefits:

  • annual leave – 20 days per year;
  • long service leave – in accordance with the Long Service Leave (Commonwealth Employees) Act 1976; and
  • superannuation contributions paid into an Australian Government Superannuation scheme at a rate determined by the Department of Finance and Deregulation.

Remuneration of officers not in the senior executive service

During 2010-11 the AOFM employed 5 officers (2009-10: 4) (excluding overseas seconded staff) whose total salary paid for the financial year was $150,000 or more. These officers were not members of the Senior Executive Service and are not disclosed in remuneration in the above tables.

Note 13: Remuneration of auditors

Financial statement audit services are provided free of charge to the AOFM. The fair value of the audit services provided by the Australian National Audit Office was:

Remuneration of auditors
2011
$
2010
$
Remuneration of auditors 294 295

Auditors’ remuneration is disclosed inclusive of GST.

No other services were provided by the Auditor-General.

Note 14: Average staffing level

The average staffing level (paid only) for the AOFM during the year was:

Remuneration of auditors
2011
$
2010
$
Average staffing level 37 36

Note 15: Compensation and debt relief in special circumstances

Departmental
No ‘Act of Grace’ payments were made during the reporting period (nil for 2009-10).
No waivers of amounts owing to the Government were made pursuant to subsection 34(1) of the Financial Management and Accountability Act 1997 during the reporting period (nil for 2009-10).
No payments were made under the ‘Defective Administration Scheme’ during the reporting period (nil for 2009-10).
No payments were made under section 73 of the Public Service Act 1999 during the reporting period (nil for 2009-10).No payments were made under ex-gratia programs during the reporting period (nil for 2009-10).
Administered
No ‘Act of Grace’ payments were made during the reporting period (nil for 2009-10).
No waiver of amounts owing to the Government were made pursuant to subsection 34(1) of the Financial Management and Accountability Act 1997 during the reporting period (nil for 2009-10).
No payments were made under the ‘Defective Administration Scheme’ during the reporting period (nil for 2009-10).
No payments were made under section 73 of the Public Service Act 1999 during the reporting period (nil for 2009-10).
No payments were made under ex-gratia programs during the reporting period (nil for 2009-10).

Note 16: Income before re-measurements administered on behalf of Government

Note 16: Administered income before re-measurements
2011
$’000
2010
$’000
Note 16A: Interest revenue(a)
Loans to State and Territory Governments:
State and Territory debt 272 309
Advances 158,006 162,248
Deposits 391,459 647,350
Discount securities 95,803 102,438
Fixed interest securities 123,107 63,942
Residential mortgage-backed securities 606,956 374,145
Swaps interest 85,883
Total interest revenue 1,375,603 1,436,315
Note 16B: Other revenue
Securities lending and other revenue 243 281
Total other revenue 243 281
Total income administered on behalf of Government 1,375,846 1,436,596
  1. Recognised using the effective interest rate method.

Note 17: Expenses before re-measurements administered on behalf of Government

Note 17: Expenses before re-measurements administered on behalf of Government
2011
$’000
2010
$’000
Note 17A: Grants
Public Sector:
State and Territory Governments(a) 26 28
Total grants 26 28
Note 17B: Interest expense
Commonwealth Government Securities interest:(b)
Treasury Bonds 7,526,579 5,186,144
Treasury Indexed Bonds 1,020,994 705,405
Treasury Notes 712,357 410,596
Other debt 702 803
9,260,632 6,302,948
Swaps interest 45,047
Interest on repurchase agreements 12,203
Other interest costs 22 18
Total interest expense 9,272,857 6,348,013
Total expenses administered on behalf of Government 9,272,883 6,348,041
  1. Grants represent Commonwealth contributions into the Debt Retirement Reserve Trust Account – see Note 27G.
  2. Recognised using the effective interest rate method.

Note 18: Administered gains (losses) before re-measurements

Note 18: Administered gains (losses) before re-measurements
2011
$’000
2010
$’000
Note 18A: Net foreign exchange gains (losses)
Foreign currency denominated loans and securities 1,299 334
Total net foreign exchange gains (losses) 1,299 334
Note 18B: Net gains (losses) on sale of financial instruments(a)
Sale of fixed interest assets 270 (26,833)
Repurchase of debt (62) (25,754)
Total net gains (losses) on sale of financial instruments 208 (52,587)
Total gains (losses) before re-measurements 1,507 (52,253)
  1. Total net gains (losses) on sale of financial instruments represents the total proceeds paid or received from a sale or termination, less the amortised cost carrying value using the effective interest method at the time of sale or termination.

Note 19: Administered re-measurements

Note 19: Administered re-measurements
2011
$’000
2010
$’000
Net market revaluation gains (losses)(a)
Commonwealth Government Securities 335,829 (2,829,175)
Deposits and discount securities 138 (131)
Fixed interest securities (1,615) 36,377
Residential mortgage-backed securities (8,495) 64,263
Interest rate swaps (44,010)
Total net market revaluation gains (losses) 325,857 (2,772,676)
  1. Net market revaluation gains (losses) represents the unrealised fair value gains (losses) on the portfolio of administered financial assets and financial liabilities. Changes in the carrying value of financial assets and financial liabilities are attributed between changes in the amortised cost carrying value and other changes in carrying value. Changes attributable to amortised cost are recognised in revenue before re-measurements or expenses before re-measurements. Other changes in carrying value (including due to a change in interest rates) are recognised as administered re-measurements. Where a financial asset is sold or a financial liability is repurchased during the financial year, the cumulative unrealised market value gain or loss at the time of the sale is reversed against administered re-measurements. The revaluation effect will net to zero over the life of a financial instrument, either at maturity or on termination prior to maturity.

Note 20: Assets administered on behalf of Government(a)

Note 20: Administered assets(a)
2011
$’000
2010
$’000
Note 20A: Investments (under FMA section 39)(b)
Designated at fair value through profit or loss:
Deposits 10,665,514 14,960,696
Discount securities 3,587,119 4,259,203
Fixed interest securities 3,620,934
Residential mortgage-backed securities 10,778,744 7,869,201
Total investments (under FMA section 39) 25,031,377 30,710,034
Investments maturing:(c)
Within one year 14,437,161 23,246,837
In one to five years 8,161,823 7,175,920
In more than five years 2,432,393 287,277
25,031,377 30,710,034
Note 20B: Receivables
At amortised cost:
Loans to State and Territory Governments:
Principal 2,981,452 3,078,596
Balance of special account(d) (566) (494)
Unamortised net discounts (362,712) (383,932)
Total receivables 2,618,174 2,694,170
Receivables maturing:
Within one year 1,811 1,930
In one to five years 27,626 26,219
In more than five years 2,588,737 2,666,021
2,618,174 2,694,170
Receivables are aged as follows:
Not overdue 2,618,174 2,694,170
Overdue
2,618,174 2,694,170
Note 20C: Accrued revenue
Accrued interest on loans to State and Territory Governments 456 478
Total accrued revenue 456 478
Accrued revenue maturing:
Within one year 456 478
456 478
  1. Where the AOFM applies fair value accounting to a financial asset, the aggregate value of the financial asset is recorded against a single financial statement class. Where the historic cost accounting convention is applied, the value of a financial asset is disaggregated and recorded against several financial statement classes (for example, the principal value of a financial asset is classified separately to coupons receivable on the asset).
  2. FMA = Financial Management and Accountability Act 1997.
  3. The maturity profile is based on contractual repricing dates, with the exception of residential mortgage-backed securities. For residential mortgage-backed securities the maturity profile is based on the weighted average life of each investment and disregarding estimated principal repayments prior to that time.
  4. Refer to Note 27G for special account balances.

Note 21: Liabilities administered on behalf of Government(a)

Note 21A: Liabilities administered on behalf of Government
2011
$’000
2010
$’000
Note 21A: Commonwealth Government Securities
Designated at fair value through profit or loss:
Treasury Bonds 166,082,689 130,252,730
Treasury Indexed Bonds 19,645,142 16,198,297
Treasury Notes 16,021,226 10,899,702
Other debt 6,728 8,703
201,755,785 157,359,432
At amortised cost
Other debt 14,633 16,088
Total Commonwealth Government Securities 201,770,418 157,375,520
Commonwealth Government Securities maturing: (b)
Within one year 30,365,227 31,201,906
In one to five years 87,445,736 65,227,210
In more than five years 83,959,455 60,946,404
201,770,418 157,375,520
Note 21B: Accrued expenses
Interest payable on other debt (at amortised cost) 93 103
Total accrued expenses 93 103
Accrued expenses maturing:
Within one year 93 103
93 103
  1. Where the AOFM applies fair value accounting to a financial liability, the aggregate value of the financial liability is recorded against a single financial statement class. Where the historic cost accounting convention is applied, the value of a financial liability is disaggregated and recorded against several financial statement classes (for example: the principal value of a financial liability is classified separately to coupons payable on the liability).
  2. The maturity profile is based on contractual repricing dates.

Note 22: Administered reconciliation table

Note 22: Administered reconciliation table
2011
$’000
2010
$’000
Opening administered assets less administered liabilities (123,970,319) (68,993,137)
Administered income and expenses:
Administered income before re-measurements 1,375,846 1,436,596
Administered gains (losses) before re-measurements 1,507 (52,253)
Administered expenses before re-measurements (9,272,883) (6,348,041)
Re-measurements – net market revaluation gains (losses) 325,857 (2,772,676)
Administered transfers(to)/from Australian Government:
Special appropriations (unlimited) 386,835,783 414,967,174
Transfer to OPA (429,415,601) (462,208,034)
Change in special account balanace (72) 52
Closing administered assets less administered liabilities (174,119,882) (123,970,319)

Note 23: Administered contingent liabilities and assets

Unquantifiable contingencies

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

Remote contingencies

  1. The Government has indemnified agents of foreign currency denominated loans issued by the Australian Government outside Australia against any loss, liability, costs, claims, charges, expenses, actions, or demands due to any misrepresentation by the Australian Government and any breach of warranties. The AOFM is not aware of any event that has occurred that may trigger action under the indemnities.
  2. In the unlikely event of default by a borrower of Treasury Bonds or Treasury Indexed Bonds under the securities lending facility, the AOFM would be in a position to sell the securities pledged by the borrower to offset the increased liability to the Government. As at 30 June 2011 there were no open transactions under the AOFM’s securities lending facility (30 June 2010: two).

Note 24: Administered financial instruments

Note 24A: Categories of administered financial assets and liabilities

Under Australian Accounting Standards a financial instrument must be measured at fair value on initial recognition. After initial recognition the accounting treatment for a financial instrument is dependent on the category under which the financial instrument is classified.

Under AASB 139 derivatives must be classified at fair value through profit or loss. The classification of non-derivative financial assets and liabilities is dependent upon condition based tests in AASB 139. The following table illustrates AOFM’s financial instruments by category:

Note 24A: Categories of administered financial assets and liabilities
2011
$’000
2010
$’000
Administered financial assets (recognised)
Cash 622 622
Loans and receivables (at amortised cost):
Loans to State and Territory Governments 2,618,174 2,694,170
Accrued interest on loans to State and Territory Governments 456 478
2,618,630 2,694,648
Fair value through profit or loss (designated by the AOFM):
Investments 25,031,377 30,710,034
Carrying amount of financial assets 27,650,629 33,405,304
Administered financial liabilities
Fair value through profit or loss (designated by the AOFM):
Treasury Bonds 166,082,689 130,252,730
Treasury Indexed Bonds 19,645,142 16,198,297
Treasury Notes 16,021,226 10,899,702
Other debt 6,728 8,703
201,755,785 157,359,432
Other financial liabilities (at amortised cost):
Other debt 14,633 16,088
Interest payable on other debt 93 103
14,726 16,191
Carrying amount of financial liabilities 201,770,511 157,375,623
Net assets (174,119,882) (123,970,319)

Note 24B: Interest Rate Swaps

Under the interest rate risk management framework which applied before 2008-09 for the purposes of managing the cost and interest rate risk associated with the debt portfolio, the AOFM entered into domestic interest rate swap contracts under which it was obliged to receive and pay interest at fixed and/or floating interest rates. These swaps were not held for trading purposes, nor were they designated for hedge accounting. In 2008-09 the AOFM began running down its portfolio of interest rate swaps and on 18 May 2010 the last interest rate swap contract matured.

The following table outlines the notional principal amount of swaps outstanding. The notional principal amounts are not exchanged and act as a reference on which interest payments are calculated.

Note 24B: Interest Rate Swaps
2011
$’000
2010
$’000
National principal – opening balance 2,425,000
New swap transactions
Matured (2,425,000)
Closing balance

Note 24C: Interest rate risk

The AOFM’s exposure to interest rate risk and corresponding weighted average effective interest rates as at 30 June 2011 for each class of financial assets and financial liabilities is set out below. The maturity profile is based on contractual repricing dates except for residential mortgage-backed securities in which the maturity profile is based on the weighted average life of each security. Those financial instruments with a fixed interest rate expose the net debt portfolio to changes in fair value with changes in interest rates, whilst those financial instruments at floating interest rates expose the net debt portfolio to changes in debt servicing costs with changes in interest rates. The extent to which the AOFM can match the repricing profile of its financial assets with those of its financial liabilities is limited by the differences in the volumes and the need for assets to be available for cash management or other purposes.

Note 24C: Interest rate risk – By instrument as at 30 June 2011
Maturing in
Fixed interest rate
$’000
Floating interest rate
$’000
Non interest bearing
$’000
1 year or less
$’000
1 to 5 years
$’000
5 years or more
$’000
Total
$’000
Weighted average interest(a)
%
Financial assets
Cash 622 622 622
Loans to State and Territory Governments 2,618,627 3 2,267 27,626 2,588,737 2,618,630 5.88
Deposits 10,665,514 10,665,514 10,665,514 4.75
Discont securities 3,587,119 3,587,119 3,587,119 4.91
Residential mortgage-backed securities 10,778,744 184,528 8,161,823 2,432,393 10,778,744 6.13
Total financial assets 16,871,260 10,778,744 625 14,440,050 8,189,449 5,021,130 27,650,629
Financial liabilities
Treasury Bonds 166,082,689 14,338,068 81,943,916 69,800,705 166,082,689 5,19
Treasury Indexed Bonds 19,645,142 5,501,820 14,143,322 19,645,142 3.27
Treasury Notes 16,021,226 16,021,226 16,021,226 4.75
Other debt 15,521 5,933 6,026 15,428 21,454 3.45
Total financial liabilities 201,764,578 5,933 30,365,320 87,445,736 83,959,455 201,770,511
Net assets (184,893,318) 10,778,744 (5,308) (15,925,270) (79,256,287) (78,938,325) (174,119,882)
  1. Interest rates are nominal interest rates with exception to Treasury Indexed Bonds (which are real interest rates).
Note 24C: Interest rate risk – By portfolio as at 30 June 2011
Maturing in
Fixed interest rate
$’000
Floating interest rate
$’000
Non interest bearing
$’000
1 year or less
$’000
1 to 5 years
$’000
5 years or more
$’000
Total
$’000
Weighted average interest(a)
%
Long term debt portfolio
Financial assets 8,227 3 96 8,134 8,230 2.96
Financial liabilities (185,743,352) (5,933) (14,344,094) (87,445,736) (83,959,455) (185,749,285) (a)
Net assets (185,735,125) (5,930) (14,343,998) (87,445,736) (83,951,321) (185,741,055)
Cash management portfolio
Financial assets 14,252,633 622 14,253,255 14,253,255 4.79
Financial liabilities (16,021,226) (16,021,226) (16,021,226) 4.75
Net assets (1,768,593) 622 (1,767,971) (1,767,971)
Residential mortgage backed securities
Financial assets 10,778,744 184,528 8,161,823 2,432,393 10,778,744 6.13
Financial liabilities
Net assets 10,778,744 184,528 8,161,823 2,432,393 10,778,744
State and Territory Government advances
Financial assets 2,610,400 2,171 27,626 2,580,603 2,610,400 5.89
Financial liabilities
Net assets 2,610,400 2,171 27,626 2,580,603 2,610,400
Total net assets (184,893,318) 10,778,744 (5,308) (15,925,270) (79,256,287) (78,938,325) (174,119,882)
  1. Financial liabilities in the debt portfolio comprise debt instruments that incur a nominal interest rate and debt instruments that incur a real interest rate. As at 30 June 2011, the weighted average interest rate of debt instruments at nominal interest rates was 5.19 per cent and the weighted average interest rate of debt instruments at real interest rates was 3.27 per cent.
Note 24C: Interest rate risk – By instrument as at 30 June 2010
Maturing in
Fixed interest rate
$’000
Floating interest rate
$’000
Non interest bearing
$’000
1 year or less
$’000
1 to 5 years
$’000
5 years or more
$’000
Total
$’000
Weighted average interest(a)
%
Financial assets
Cash 622 622 622
Loans to State and Territory Governments 2,694,645 3 2,408 26,219 2,666,021 2,694,648 5.88
Deposits 14,960,696 14,960,696 14,960,696 4.50
Discount securities 4,259,203 4,259,203 4,259,203 4.83
Fixed interest securities 3,620,934 3,620,934 3,620,934 4.78
Residential mortgage-backed securities 7,869,201 406,004 7,715,920 287,277 7,869,201 6.06
Total financial assets 25,535,478 7,869,201 625 23,249,867 7,202,139 2,953,298 33,405,304
Financial liabilities
Treasury Bonds 130,252,730 19,121,099 65,227,210 45,904,421 130,252,730 5.16
Treasury Indexed Bonds 16,198,297 1,175,134 15,023,163 16,198,297 3.50
Treasury Notes 10,899,702 10,899,702 10,899,702 4.52
Other debt 18,924 5,970 6,074 18,820 24,894 3.71
Total financial liabilities 157,369,653 5,970 31,202,009 65,227,210 60,946,404 157,375,623
Net assets (131,834,175) 7,869,201 (5,345) (7,952,142) (58,025,071) (57,993,106) (123,970,319)
  1. Interest rates are nominal interest rates with exception to Treasury Indexed Bonds (which are real interest rates).
Note 24C: Interest rate risk – By portfolio as at 30 June 2010
Maturing in
Fixed interest rate
$’000
Floating interest rate
$’000
Non interest bearing
$’000
1 year or less
$’000
1 to 5 years
$’000
5 years or more
$’000
Total
$’000
Weighted average interest(a)
%
Long term debt portfolio
Financial assets 9,728 3 107 9,624 9,731 2.97
Financial liabilities (146,469,951) (5,967) (20,302,200) (65,227,210) (60,946,404) (146,475,921) (a)
Net assets (146,460,223) (5,967) (20,302,200) (65,227,210) (60,936,780) (146,466,190)
Cash management portfolio
Financial assets 22,840,833 622 22,841,455 22,841,455 4.61
Financial liabilities (10,899,702) (10,899,702) (10,899,702) 4.52
Net assets 11,941,131 622 11,941,753 11,941,753
Residential mortgage backed securities
Financial assets 7,869,201 406,004 7,175,920 287,277 7,869,201 6.06
Financial liabilities
Net assets 7,869,201 406,004 7,175,920 287,277 7,869,201
State and Territory Government advances
Financial assets 2,684,917 2,301 26,219 2,656,397 2,684,917 5.89
Financial liabilities
Net assets 2,684,917 2,301 26,219 2,656,397 2,684,917
Total net assets (131,834,175) 7,869,201 (5,345) (7,952,142) (58,025,071) (57,993,106) (123,970,319)
  1. Financial liabilities in the debt portfolio comprise debt instruments that incur a nominal interest rate and debt instruments that incur a real interest rate. As at 30 June 2010, the weighted average interest rate of debt instruments at nominal interest rates was 5.16 per cent and the weighted average interest rate of debt instruments at real interest rates was 3.50 per cent.

Note 24D: Foreign exchange risk

Foreign exchange risk arises from debt the AOFM holds in foreign denominated currencies and represents the risk to debt servicing costs and the value of the net debt portfolio caused by a change in foreign exchange rates. Currently the AOFM’s foreign exchange risk arises from contractual obligations on foreign currency loans and securities. The AOFM’s exposure to foreign exchange risk is not material.

The Australian equivalent principal value of foreign currency loans and securities is disclosed in the following table:

Note 24D: Foreign exchange risk
2011
AUD $’000
2010
AUD $’000
Foreign currency denominated liabilities
Current:
Pounds sterling 79 93
Japanese yen 5 5
Swiss francs 57 55
Euros 7 8
148 161
Non-current:
United States dollars 4,955 6,243
Pounds sterling 621 731
5,576 6,974
Total foreign currency denominated liabilities 5,724 7,135
Foreign currency denominated assets
Current:
Pounds sterling 3 3
3 3
Non-current:
Pounds sterling 621 731
621 731
Total foreign currency denominated assets 624 734

Note 24E: Contractual maturities of financial liabilities

The following table discloses the undiscounted value of the contractual maturities of financial liabilities as at the end of the financial year, including estimated future interest payments.

Note 24E: Contractual maturities of financial liabilities – 2011
Contractual maturities Within 1 year 1 to 2 years 2 to 5 years 5+ years Total
Treasury Bonds 23,038,860 33,562,722 69,832,029 80,596,071 207,029,682
Treasury Indexed Bonds(a) 647,169 647,169 6,898,598 16,140,539 24,333,475
Treasury Notes 16,100,000 16,100,000
Other debt(b) 415 415 1,245 5,370 7,445
Total 39,786,444 34,210,306 76,731,872 96,741,980 247,470,602
Note 24E: Contractual maturities of financial liabilities – 2010
Contractual maturities Within 1 year
$’000
1 to 2 years
$’000
2 to 5 years
$’000
5+ years
$’000
Total
$’000
Treasury Bonds 25,781,813 20,191,110 60,161,762 54,118,310 160,252,995
Treasury Indexed Bonds(a) 1,686,974 504,383 1,513,149 16,217,552 19,922,058
Treasury Notes 11,000,000 11,000,000
Other debt(b) 523 523 1,568 7,289 9,903
Total 38,469,310 20,696,016 61,676,479 70,343,151 191,184,956
  1. The interest payments and principal value are indexed against the (all groups) Australian Consumer Price Index (CPI). There is a six month lag between the calculation period for the CPI and its impact on the value of interest and principal. Interest payments and principal value on redemption are projected at the CPI for the March quarter and held constant thereafter.
  2. Perpetual debt and overdue debt has been excluded from this analysis.

Note 24F: Credit risk

The AOFM’s assets are of strong credit quality. Over the reporting period the AOFM limited its financial investments to term deposits with the RBA, investment grade money market securities and semi-government bonds. In addition, its loans comprise advances and debt on allocation to the State and Territory Governments. The AOFM’s exposure to credit risk under the securities lending facility and its repurchase agreements as at year end is zero.

The following tables set out the AOFM’s credit risk by asset class and credit rating as at 30 June 2011 and 30 June 2010.

Note 24F: Credit risk – By instrument as at 30 June 2011
S&P or Fitch long-term rating AAA AA+ to AA- A+ to A- Total
Moody’s long-term rating Aaa Aa1 to Aa3 A1 to A3
$’000 $’000 $’000 $’000
By instrument
Cash(b) 622 622
Loans to State and Territory Governments 2,058,576 697,552 2,756,128
Deposits(b) 10,665,514 10,665,514
Discount securities 3,339,127 247,992 3,587,119
Residential mortgage-backed securities 10,778,744 10,778,744
Total 23,503,456 4,036,679 247,992 27,788,127
  1. Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.
  2. Cash and deposits are held with the RBA. The RBA does not issue debt in the wholesale market and accordingly does not have a credit rating. However, as Australia’s central bank it is deemed to have the same credit rating as the Australian Government.
Note 24F: Credit risk – By portfolio as at 30 June 2011
S&P or Fitch long-term rating AAA AA+ to AA- A+ to A- Total
Moody’s long-term rating Aaa Aa1 to Aa3 A1 to A3
$’000 $’000 $’000 $’000
By portfolio
Long term debt 8,796 8,796
Cash management 10,666,136 3,339,127 247,992 14,253,255
Residential mortgage-backed securities 10,778,744 10,778,744
State and Territory Government advances 2,049,780 697,552 2,747,332
Total 23,503,456 4,036,679 247,992 27,788,127
  1. Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.
Note 24F: Credit risk – By instrument as at 30 June 2010
S&P or Fitch long-term rating AAA AA+ to AA- A+ to A- Total
Moody’s long-term rating Aaa Aa1 to Aa3 A1 to A3
$’000 $’000 $’000 $’000
By portfolio
Cash(b) 622 622
Loans to State and Territory Governments 2,144,787 723,478 2,868,265
Deposits(b) 14,960,696 14,960,696
Discount securities 3,619,277 639,926 4,259,203
Fixed interest securities 2,911,492 709,442 3,620,934
Residential mortgage-backed securities 7,869,201 7,869,201
Total 27,886,798 5,052,197 639,926 33,578,921
  1. Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.
  2. Cash and deposits are held with the RBA. The RBA does not issue debt in the wholesale market and accordingly does not have a credit rating. However, as Australia’s central bank it is deemed to have the same rating as the Australian Government.
Note 24F: Credit risk – By portfolio as at 30 June 2010
S&P or Fitch long-term rating AAA AA+ to AA- A+ to A- Total
Moody’s long-term rating Aaa Aa1 to Aa3 A1 to A3
$’000 $’000 $’000 $’000
By portfolio
Long term debt 10,224 10,224
Cash management 17,872,810 4,328,719 639,926 22,841,455
Residential mortgage-backed securities 7,869,201 7,869,201
State and Territory Government advances 2,134,563 723,478 2,858,041
Total 27,886,798 5,052,197 639,926 33,578,921
  1. Where a counterparty has a split rating, the AOFM’s exposure to the counterparty is allocated to the lower credit rating.

Note 24G: Residential mortgage-backed securities

The AOFM has acquired a portfolio of AAA rated (or equivalent) residential mortgage-backed securities with a face value of $13,372.180 million.

Details of residential mortgage-backed securities acquired by the AOFM since the Government announced this initiative in September 2008 are contained in the following tables.

Note 24G: Residential mortgage-backed securities
Opening balance Amount invested Principal repayments Sales Invested as at Year end
$’000 $’000 $’000 $’000
Financial year
2008-09 6,203,420 179,281 6,024,139
2009-10 6,024,139 2,819,540 850,664 73,790 7,919,225
2010-11 7,919,225 4,349,220 1,438,640 10,829,805
Total 13,372,180 2,468,585 73,790
Note Note 24G: Residential mortgage-backed securities
Originator & Issue Acquisition date Original amount invested Principal repayment and sales Principal invested as 30-Jun-11 Principal invested as 30-Jun-10
$’000 $’000 $’000 $’000
AMP:
Progress 2009-1 Trust 30-Mar-09 425,000 170,607 254,393 341,398
Progress 2010-1 Trust 29-Jan-10 36,000 36,000 36,000
Progress 2011-1 Trust 28-May-11 138,000 138,000
Australian Central Credit Union:
Light Trust No.2 28-Jul-09 190,000 69,591 120,409 169,058
Light Trust No.3 18-Nov-10 243,500 243,500
Bank of Queensland:
Reds Trust Series 2009-1 21-Apr-09 500,000 66,607 433,393 500,000
Reds Trust Series 2010-1 17-Feb-10 250,000 60,782 189,218 235,502
Reds Trust Series 2010-2 27-Aug-10 497,600 497600
Bendigo and Adelaide Bank:
Torrens Series 2009-1 18-Mar-09 475,000 197,536 277,464 354,689
Torrens Series 2010-1 24-Mar-10 123,000 35,568 87,432 116,966
Torrens Series 2010-2 20-Jul-10 496,000 496000
Torrens Series 2010-3 16-Dec-10 415,000 80,339 334,661
Challenger:
Challenger Millennium 2008-2 12-Dec-08 500,000 179,362 320,638 376,678
Challenger Millennium 2009-1 24-Apr-09 500,000 112,937 387,063 450,602
Community CPS:
Barton 2011-1 14-Apr-11 90,900 90900
Credit Union Australia:
Harvey Trust 2009-1 26-Mar-09 350,000 55,560 294,440 350,000
Harvey Trust 2010-1 10-Mar-10 143,000 35,611 107,389 133,380
Firstmac:
Firstmac RMBS 2-2008 21-Nov-08 496,000 155,573 340,427 384,372
Firstmac RMBS 1-2009 05-Jun-09 498,620 92,658 405,962 493,458
Firstmac RMBS 2-2009 24-Nov-09 215,140 19,740 195,400 195,400
Firstmac RMBS 1-2010 09-Sep-10 190,770 190770
Greater Building Society:
GBS Receivables Trust No.4 11-Sep-09 190,000 28,680 161,320 190,000
IMB:
Illawarra Series 2010-1 31-Mar-10 157,500 33,507 123,993 151,872
ING Bank
IDOL 2010-1 20-Oct-10 250,000 250,000
IDOL 2011-1 17-Jun-11 206,000 206,000
Liberty Financial:
Liberty Prime Series 2009-1 20-Apr-09 500,000 236,878 263,122 349,076
Liberty Prime Series 2009-2 21-Oct-09 99,800 25,739 74,061 93,288
Liberty Prime Series 2010-1 18-Aug-10 100,400 100400
Liberty Prime Series 2011-1 13-Apr-11 50,750 50,750
Macquarie Bank:
Puma P-16 02-Sep-10 247,500 247,500
Puma P-17 20-Apr-11 157,500 157,500
Members Equity Bank:
SMHL 2008-2 09-Dec-08 500,000 225,841 274,159 365,135
SMHL 2009-1 14-May-09 500,000 157,915 342,085 484,399
SMHL 2010-1 15-Mar-10 250,000 82,568 167,432 232,956
SMHL 2010-2E 14-Jul-10 250,000 250,000
SMHL 2010-3 28-Sep-10 290,000 290,000
MyState Financial:
ConQuest 2010-2 04-Aug-10 170,000 170,000
Police and Nurse Credit Society:
Pinnacle 2010-T1 03-Dec-10 111,100 111,100
Resimac:
Resimac 2008-1 15-Dec-08 500,000 219,493 280,507 359,144
Resimac 2009-1 28-May-09 458,800 136,863 321,937 398,765
Resimac 2009-2 28-Oct-09 56,400 56,400 56,400
Resimac 2010-1 17-May-10 10,000 2,114 7,886 9,810
Resimac 2010-2 25-Nov-10 148,000 148,000
Resimac 2011-1 19-May-11 192,000 1,967 190,033
Suncorp-Metway:
Apollo Series 2009-1 Trust 04-Sep-09 499,200 16,879 482,321 499,200
Apollo Series 2010-1 Trust 09-Jun-10 300,000 300,000 300,000
Wide Bay Australia:
WB Trust 2009-1 16-Jul-09 299,500 41,460 258,040 291,677
WB Trust 2010-1 21-Dec-10 104,200 104,200
13,372,180 2,542,375 10,829,805 7,919,225

Note 24H: Net fair values of administered financial assets and liabilities

Note 24H: Net fair values of administered financial assets and liabilities by instrument as at 30th June 2011
Principal value(a) Total carrying amount Aggregate net fair value
2011$’000 2011$’000 2011$’000
Administered financial assets (recognised)
Cash 622 622 622
Loans to State and Territory Governments(b) 2,980,886 2,618,630 2,755,562
Deposits 10,650,000 10,665,514 10,665,514
Discount securities 3,600,000 3,587,119 3,587,119
Residential mortgage-backed securities 10,829,805 10,778,744 10,778,744
Total financial assets (recognised) 28,061,313 27,650,629 27,787,561
Administered financial liabilities (recognised)
Treasury Bonds 161,242,900 166,082,689 166,082,689
Treasury Indexed Bonds 18,144,012 19,645,142 19,645,142
Treasury Notes 16,100,000 16,021,226 16,021,226
Other debt 19,588 21,454 21,454
Total financial liabilities (recognised) 195,506,500 201,770,511 201,770,511
Net financial assets (recognised) (167,445,187) (174,119,882) (173,982,950)
  1. Comprises the face value of financial instruments, with the exception of Treasury Indexed Bonds where the inflation adjusted capital value at the end of the financial year is included in the principal figure. An estimate of the redemption value on maturity is not provided for Treasury Indexed Bonds. For all other financial liabilities the principal value represents the amount due on maturity.
  2. Loans to State and Territory Governments are recognised at amortised cost in the Schedule of Assets and Liabilities Administered on Behalf of Government. These transactions are not traded and, especially for those with the longest terms to maturity, a direct market benchmark to underpin fair value measurement does not exist. In estimating aggregate net fair value, the AOFM based its valuation from data on Treasury Bonds.
Note 24H: Net fair values of administered financial assets and liabilities by portfolio as at 30th June 2011
Principal value(a) Total carrying amount Aggregate net fair value
2011$’000 2011$’000 2011$’000
Long term debt
Financial assets 8,137 8,230 8,230
Financial liabilities (179,406,500) (185,749,285) (185,749,285)
Net assets (179,398,363) (185,741,055) (185,741,055)
Cash management
Financial assets 14,250,622 14,253,255 14,253,255
Financial liabilities (16,100,000) (16,021,226) (16,021,226)
Net assets (1,849,378) (1,767,971) (1,767,971)
Residential mortgage-backed securities
Financial assets 10,829,805 10,778,744 10,778,744
Financial liabilities
Net assets 10,829,805 10,778,744 10,778,744
State and Territory Government advances
Financial assets 2,972,749 2,610,400 2,747,332
Financial liabilities
Net assets 2,972,749 2,610,400 2,747,332
Net financial assets (recognised) (167,445,187) (174,119,882) (173,982,950)

Under Australian Accounting Standards the AOFM is required to disclose the quality of significant inputs used to determine the fair value of all financial assets and financial liabilities measured at fair value as at year end, by assigning a 3 level hierarchy to those valuations.

Administered Financial assets and liabilities By valuation as at 30 June 2011
Level 1(a) Level 2(b) Level 3(c) Total
2011
$’000
2011
$’000
2011
$’000
2011
$’000
Administered financial assets (measured at fair value only)
Deposits 10,665,514 10,665,514
Discount securities 3,587,119 3,587,119
Residential mortgage-backed securities 10,778,744 10,778,744
25,031,377 25,031,377
Administered financial liabilities (measured at fair value only)
Treasury Bonds 166,082,689 166,082,689
Treasury Indexed Bonds 19,645,142 19,645,142
Treasury Notes 16,021,226 16,021,226
Other debt 6,728 6,728
185,727,831 16,027,954 201,755,785
  1. The fair value method is determined using unadjusted quoted prices in active markets for identical financial instruments.
  2. The fair value is determined by price quotations in non-active markets for identical financial instruments, or from price quotations in an active market for similar assets or liabilities or from other inputs that are observable by market data. The fair value is estimated by using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
  3. The fair value is determined from inputs not based on observable market data. This includes significant adjustments to observable market data.
Net fair values of administered financial assets and liabilities by portfolio as at 30th June 2010
Administered financial assets (recognised) Principal value(a) Total carrying amount Aggregate net fair value
2010$’000 2010$’000 2010$’000
Administered financial assets (recognised)
Cash 622 622 622
Loans to State and Territory Governments(b) 3,078,103 2,694,648 2,867,772
Deposits 14,950,000 14,960,696 14,960,696
Discount securities 4,295,000 4,259,203 4,259,203
Fixed interest securities 3,552,470 3,620,934 3,620,934
Residential mortgage-backed securities 7,919,225 7,869,201 7,869,201
Total financial assets (recognised) 33,795,420 33,405,304 33,578,428
Administered financial liabilities (recognised)
Treasury Bonds 124,695,087 130,252,730 130,252,730
Treasury Indexed Bonds 14,961,771 16,198,297 16,198,297
Treasury Notes 11,000,000 10,899,702 10,899,702
Other debt 22,331 24,894 24,894
Total financial liabilities (recognised) 150,679,189 157,375,623 157,375,623
Net financial assets (recognised) (116,883,769) (123,970,319) (123,797,195)
  1. Comprises the face value of financial instruments, with the exception of Treasury Indexed Bonds where the inflation adjusted capital value at the end of the financial year is included in the principal figure. An estimate of the redemption value on maturity is not provided for Treasury Indexed Bonds. For all other financial liabilities the principal value represents the amount due on maturity.
  2. Loans to State and Territory Governments are recognised at amortised cost in the Schedule of Assets and Liabilities Administered on Behalf of Government. These transactions are not traded and, especially for those with the longest term to maturity, a direct market benchmark to underpin fair value measurement does not exist. In estimating aggregate net fair value, the AOFM based its valuation from data on Treasury Bonds.
Net fair values of administered financial assets and liabilities by portfolio as at 30 June 2010
Principal value(a) Total carrying amount Aggregate net fair value
2010$’000 2010$’000 2010$’000
Long term debt
Financial assets 9,627 9,731 9,731
Financial liabilities (139,679,189) (146,475,921) (146,475,921)
Net assets (139,669,562) (146,466,190) (146,466,190)
Cash management
Financial assets 22,798,092 22,841,455 22,841,455
Financial liabilities (11,000,000) (10,899,702) (10,899,702)
Net assets 11,798,092 11,941,753 11,941,753
Residential mortgage-backed securities
Financial assets 7,919,225 7,869,201 7,869,201
Financial liabilities
Net assets 7,919,225 7,869,201 7,869,201
State and Territory Government advances
Financial assets 3,068,476 2,684,917 2,858,041
Financial liabilities
Net assets 3,068,476 2,684,917 2,858,041
Net financial assets (recognised) (116,883,769) (123,970,319) (123,797,195)
Net fair values of administered financial assets and liabilities by valuation hierarchy as at 30 June 2010
Level 1(a) Level 2(b) Level 3(c) Total
2010$’000 2010$’000 2010$’000 2010$’000
Administered financial assets (measured at fair value only)
Deposits 14,960,696 14,960,696
Discount securities 4,259,203 4,259,203
Fixed interest securities 3,620,934 3,620,934
Residential mortgage-backed securities 7,869,201 7,869,201
3,620,934 27,089,100 30,710,034
Administered financial liabilities (measured at fair value only)
Treasury Bonds 130,252,730 130,252,730
Treasury Indexed Bonds 16,198,297 16,198,297
Treasury Notes 10,899,702 10,899,702
Other debt 8,703 8,703
146,451,027 10,908,405 157,359,432
  1. The fair value is determined using unadjusted quoted prices in active markets for identical financial instruments.
  2. The fair value is determined by price quotations in non-active markets for identical financial instruments, or from price quotations in an active market for similar assets or liabilities, or from other inputs that are observable by market data. The fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices).
  3. The fair value is determined from inputs not based on observable market data. This includes significant adjustments to observable market data.

Note 24I: Movement in commonwealth government securities on issue (face value)

Note 24I: Movement in commonwealth government securities on issue (face value) – 2011
Opening balance Issuance Maturities/ Redemptions Other Closing balance
2011
$’000
2011
$’000
2011
$’000
2011
$’000
2011
$’000
Treasury Bonds 124,695,087 55,350,000 (18,802,187) 161,242,900
Treasury Indexed Bonds(a) 11,415,265 3,250,000 (736,265) 13,929,000
Treasury Notes 11,000,000 60,600,000 (55,500,000) 16100000
Other debt(b) 22,331 (1,332) (1,411) 19,588
Total 147,132,683 119,200,000 (75,039,784) (1,411) 191,291,488
  1. The inflation adjusted capital accretion for Treasury Indexed Bonds is excluded from these amounts.
  2. This includes foreign currency denominated amounts. Changes in value due to foreign currency translation are shown in the ‘Other’ column. The foreign currency denominated face value is restated into Australian dollars for the opening and closing values using end of year exchange rates.
Note 24I: Movement in commonwealth government securities on issue (face value) – 2010
Opening balance Issuance Maturities/ Redemptions Other Closing balance
2010
$’000
2010
$’000
2010
$’000
2010
$’000
2010
$’000
Treasury Bonds 78,403,136 52,301,000 (6,009,049) 124,695,087
Treasury Indexed Bonds(a) 6,020,000 6,111,000 (715,735) 11,415,265
Treasury Notes 16,700,000 31,899,000 (37,599,000) 11,000,000
Other debt(b) 23,612 (771) (510) 22,331
Total 101,146,748 90,311,000 (44,324,555) (510) 147,132,683
  1. The inflation adjusted capital accretion for Treasury Indexed Bonds is excluded from these amounts.
  2. This includes foreign currency denominated amounts. Changes in value due to foreign currency translation are shown in the ‘Other’ column. The foreign currency denominated face value is restated into Australian dollars for the opening and closing values using end of year exchange rates.

Note 24J: Movement in investments held (face value)

Note 24J: Movement in investments held (face value) – 2011
Opening balance Acquisitions Maturities/ Redemptions Other Closing balance
2011$’000 2011$’000 2011$’000 2011$’000 2011$’000
Deposits 14,950,000 281,200,000 (285,500,000) 10,650,000
Discount securities 4,295,000 9,800,000 (10,495,000) 3,600,000
Fixed interest securities 3,552,470 783,000 (4,335,470)
Residential mortgage-backed securities 7,919,225 4,349,220 (1,438,640) 10,829,805
Total 30,716,695 296,132,220 (301,769,110) 25,079,805
Note 24J: Movement in investments held (face value) – 2010
Opening balance Acquisitions Maturities/ Redemptions Other Closing balance
2010$’000 2010$’000 2010$’000 2010$’000 2010$’000
Deposits 26,500,000 341,800,000 (353,350,000) 14,950,000
Discount securities 1,000,000 14,745,000 (11,450,000) 4,295,000
Fixed interest securities 2,024,000 4,302,470 (2,774,000) 3,552,470
Residential mortgage-backed securities 6,024,139 2,819,540 (924,454) 7,919,225
Total 35,548,139 363,667,010 (368,498,454) 30,716,695

Note 24K: Repurchase agreements

In 2010-11 the AOFM entered into repurchase transactions against its holdings of semi-government bonds in order to provide short-term funding to meet anticipated shortfalls in the OPA. A repurchase transaction involves the sale of a financial asset and agreement to buy it back at an agreed price, at a future specified date or on demand. Interest is payable by the AOFM on the value of cash received at an agreed (fixed) market interest rate set at the time the transaction is struck.

The following repurchase transactions were executed in 2010-11:

Repurchase transactions executed in 2010-11
Semi-government bond series Number of transactions Interest paid Face value of bonds sold
2011 No. 2011$’000 2011$’000
NSWTC 7% 01 Dec 10 1 999 600,000
SAFA 5.75% 15 Jun 11 7 5,356 2,600,000
TASCORP 5.75% 15 Jun 11 2 990 600,000
WATC 7% 15 Apr 11 7 4,858 2,301,000
17 12,203 6,101,000

Note 25: Market risk sensitivity of administered financial instruments

AASB 7 Financial Instruments: Disclosures requires each entity with financial instruments to present a market risk sensitivity analysis for each type of market risk exposure arising from financial instruments held. Market risk represents the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices.

The main types of market risk the AOFM’s portfolio of debt and financial assets is exposed to are domestic interest rate risk and domestic inflation risk.Moreover, by generally issuing/buying and holding to maturity, the market risk most relevant to the AOFM is the risk of fluctuations to future interest cash flows and principal amounts arising from changes in interest rates and inflation. The risk of fluctuations in the fair value of the AOFM’s net debt portfolio is of a secondary order.

Accordingly, the AOFM has focused its market risk sensitivity analysis on an accruals (or amortised cost) basis of accounting under the historic cost accounting convention, as it provides the best predictive value of future cash flows (and hence costs and returns) arising from the AOFM’s portfolio of debt and financial assets.

(a) Interest rate risk sensitivity analysis

Domestic nominal interest rates impact on debt servicing costs when the AOFM enters the primary market to raise new borrowings or refinance maturing debt. When the AOFM borrows to repay maturing debt, there is a risk that debt servicing costs will change due to the interest rate on the new debt being higher or lower than the interest rate on the maturing debt. Furthermore, when the AOFM enters the market to raise new borrowings the interest cost locked-in will be dependent on the absolute level of market interest rates at that time.

Australian dollar denominated residential mortgage-backed securities investments provide for the AOFM to receive interest at a floating interest rate plus a fixed margin set at the time each investment is acquired. When interest rates rise (fall), investment return will also rise (fall).

As the manager of the Government’s liquidity, the AOFM holds a fluctuating portfolio of Australian dollar deposits and discount securities. These investments have fixed interest rates and given their use for cash management purposes they have very short terms to maturity (generally no more than a few months). When these investments mature and new investments are made the return may change due to re-investment at higher or lower interest rates.

Under previous Commonwealth-State financing arrangements the Australian Government made concessional Australian dollar loans to the States and the Northern Territory. These loans are of a fixed interest credit foncier nature. Changes in market interest rates do not cause changes in future cash flows of interest or principal.

At 1 July 2011, if domestic interest rates had experienced an immediate 100 basis point parallel upward (downward) movement across the yield curve, and if that change were to persist for the 12 months to 30 June 2012, with all other variables held constant, the effect on the AOFM’s operating result before re-measurements (calculated on an accruals basis) and equity position for the year ended 30 June 2012 would be as follows:

Operating result sensitivity to changes in domestic interest rates(a) (calculated on an accruals basis)
-1% +1%
Change in interest rates from 1 July 2011 for 12 months to 30 June 2012 Carrying amount as at 30 Jun 2011
$’000
Impact on profit 2011-12
$’000
Impact on equity 2011-12
$’000
Impact on profit 2011-12
$’000
Impact on equity 2011-12
$’000
Financial assets
Cash 622
Loans to State and Territory Governments 2,618,630
Deposits 10,665,514 (104,763) (104,763) 104,763 104,763
Discount securities 3,587,119 (33,466) (33,466) 33,466 33,466
Residential mortgage-backed securities 10,778,744 (130,506) (130,506) 130,506 130,506
Financial liabilities
Treasury Bonds 166,082,689 219,342 219,342 (203,623) (203,623)
Treasury Indexed Bonds 19,645,142
Treasury Notes 16,021,226 144,430 144,430 (144,430) (144,430)
Other debt 21,454
Total increase (decrease) in accrual result (before re-measurements) 95,037 95,037 (79,318) (79,318)
  1. Changes in nominal interest rates only.

The corresponding figures for the previous 12 months are as follows:

Operating result sensitivity to changes in domestic interest rates(a) (calculated on an accruals basis)
-1% +1%
Change in interest rates from 1 July 2011 for 12 months to 30 June 2012 Carrying amount as at 30 Jun 2011$’000 Impact on profit 2011-12 $’000 Impact on equity 2011-12 $’000 Impact on profit 2011-12 $’000 Impact on equity 2011-12 $’000
Financial assets
Cash 622
Loans to State and Territory Governments 2,694,648
Deposits 14,960,696 (147,452) (147,452) 147,452/td> 147,452
Discount securities 4,259,203 (35,536) (35,536) 35,536 35,536
Fixed interest securities 3,620,934
Residential mortgage-backed securities 7,869,201 (100,157) (100,157) 100,157 100,157
Financial liabilities
Treasury Bonds 130,252,730 244,851 244,851 (231,129) (231,129)
Treasury Indexed Bonds 16,198,297
Treasury Notes 10,899,702 87,471 87,471 (87,471) (87,471)
Other debt 24,894
Total increase (decrease) in accrual result (before re-measurements) 49,177 49,177 (35,455) (35,455)
  1. Changes in nominal interest rates only.

(b)Inflation risk sensitivity analysis

The AOFM currently has four series of Treasury Indexed Bonds on issue. These instruments have their principal value indexed against the (all Groups) Australian Consumer Price Index (CPI). The interest is a fixed real rate of interest payable on the accreted principal value. Accordingly these debt instruments expose the AOFM to cash flow 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. As the CPI increases, debt servicing costs and the principal payable on maturity also rises.

At 1 July 2011, if the CPI were to experience an immediate 1 per cent increase (decrease) and that change were to persist for 12 months to 30 June 2012, with all other variables held constant, the effect on the AOFM’s operating result before re-measurements (calculated on an accruals basis) and equity position for the year ended 30 June 2012 would be as follows:

Operating result sensitivity to changes in the consumer price index (calculated on an accruals basis)
-1% +1%
Change in CPI from 1 July 2011 for 12 months to 30 June 2012 Carrying amount as at 30 Jun 2011$’000 Impact on profit 2011-12
$’000
Impact on equity 2011-12
$’000
Impact on profit 2011-12
$’000
Impact on equity 2011-12
$’000
Financial assets
Cash 622
Loans to State and Territory Governments 2,618,630
Deposits 10,665,514
Discount securities 3,587,119
Residential mortgage-backed securities 10,778,744
Financial liabilities
Treasury Bonds 166,082,689
Treasury Indexed Bonds 19,645,142 207,319 207,319 (205,149) (205,149)
Treasury Notes 16,021,226
Other debt 21,454
Total increase (decrease) in accrual result (before re-measurements) 207,319 207,319 (205,149) (205,149)

The corresponding figures for the previous 12 months are as follows:

Operating result sensitivity to changes in domestic interest rates(a) (calculated on an accruals basis)
-1% +1%
Change in interest rates from 1 July 2010 for 12 months to 30 June 2011 Carrying amount as at 30 Jun 2010$’000 Impact on profit 2010-11 $’000 Impact on equity 2010-11 $’000 Impact on profit 2010-11 $’000 Impact on equity 2010-11 $’000
Financial assets
Cash 622
Loans to State and Territory Governments 2,694,648
Deposits 14,960,696
Discount securities 4,259,203
Fixed interest securities 3,620,934
Residential mortgage-backed securities 7,869,201
Financial liabilities
Treasury Bonds 130,252,730
Treasury Indexed Bonds 16,198,297 170,750 170,750 (170,059) (170,059)
Treasury Notes 10,899,702
Other debt 24,894
Total increase (decrease) in accrual result (before re-measurements) 170,750 170,750 (170,059) (170,059)

Assumptions and methods used

Interest rate risk sensitivity has been measured assuming that for the next 12 months domestic interest rates are 100 basis points higher and lower across the entire yield curve than those observed as at year end. The analysis was performed as follows:

  • the sensitivity of debt servicing costs for the next 12 months on Treasury Bonds comprised the difference between:
    • debt servicing costs on the planned issuance program to refinance maturing debt and to raise new borrowings for the next 12 months at the observed or estimated market yield for the relevant line of stock as at year end; and
    • debt servicing costs on the planned issuance program to refinance maturing debt and to raise new borrowings for the next 12 months at yields that are 100 basis points higher and lower than the observed or estimated market yield for the relevant line of stock as at year end;
  • the sensitivity of debt serving costs for the next 12 months on Treasury Notes comprised the difference between:
    • debt servicing costs on Treasury Notes held at the end of the financial year for the full 12 months at the observed or estimated rate as at year end; and
    • debt servicing costs on Treasury Notes held at the end of the financial year for the full 12 months at yields 100 basis points higher and lower than the observed or estimated rate as at year end. The 100 basis point shift is applied from the date the positions held as at year end mature and is held constant at that level thereafter;
  • the sensitivity of returns for the next 12 months on residential mortgage-backed securities comprised the difference between:
    • the return at the relevant reference market interest rate at the end of the financial year (being the 1-month BBSW rate plus specific fixed margin set for each security at the time of acquisition); and
    • the return at a yield that is 100 basis points higher and lower than the relevant reference market interest rate as at year end plus the fixed margin for each security. The 100 basis point shift is applied from the date of the first rate re-set after the end of the financial year and is held constant at that level thereafter;
  • the sensitivity of returns for the next 12 months on term deposits comprised the difference between:
    • the return on term deposits held at the end of the financial year for the full 12 months at the relevant reference market interest rate (being the relevant Overnight Indexed Swap (OIS) rate) as at year end; and
    • the return on term deposits held at the end of the financial year for the full 12 months at a yield that is 100 basis points higher and lower than the relevant OIS swap rate as at year end. The 100 basis point shift is applied from the date of the first re-investment after the end of the financial year and is held constant at that level thereafter.

Inflation risk sensitivity has been measured assuming that for each quarter in the next financial year the CPI is 1 per cent higher and lower (when compared to the year before) than in the base case. The analysis was performed as follows:

  • the sensitivity of debt servicing costs for the next financial year on Treasury Indexed Bonds comprised the difference between:
    • debt servicing costs for the next financial year on the basis that inflation persists at the average rate experienced in the financial year (base case); and
    • debt servicing costs for the next financial year on the basis that the CPI index is higher and lower by 1 per cent than the assumed base case level for each quarter.

For the purposes of calculating sensitivity analysis, it has been assumed that the AOFM will issue $51,000 million of Treasury Bonds and $2,000 million of Treasury Indexed Bonds during the 2011-12 financial year (2010-11: $56,000 million and $4,000 million respectively). It is also assumed that the volume of Treasury Notes outstanding as at 30 June 2011 of $16,100 million will remain at these levels for the full 12 months to 30 June 2012 (2010-11: $11,000 million). It is assumed that the volume of term deposit investments will remain at levels as at 30 June 2011 of $10,650 million for the full 12 months to 30 June 2011 (2010-11: $14,950 million). Residential mortgage-backed securities will have a principal repayment rate based on an estimated cash flow waterfall for each issue acquired to 30 June 2011. During 2011-12 the AOFM will make further investments of $6,628 million in RMBS. These new issues have been modelled to have no principal repayments in 2011-12. Interest earned on investments is assumed to be returned to the OPA when received and not re-invested.

The sensitivity analysis does not consider possible adjustments that the AOFM might make to the composition of its portfolio in response to the assumed interest rate changes.

(c) Fair value sensitivity

The fair value sensitivity of the portfolio (excluding loans to State and Territory Governments, which are measured on an accruals basis) to changes in domestic interest rates as at 30 June 2011 was $81.314 million per basis point (30 June 2010: $63.973 million per basis point). This means that a 1 basis point (or 0.01 per cent) parallel increase (decrease) in interest rates across the yield curve would result in a favourable (unfavourable) change of $81.314 million in the fair value of the portfolio as at 30 June 2011 ($63.973 million as at 30 June 2010).

Note 26: Securities lending facility

Details of Treasury Bonds and Treasury Indexed Bonds loaned to bond market participants on an overnight basis under the securities lending facility are as follows:

Security lending transactions completed during the year
Bond series Number of transactions Face value loaned Net income earned
2012
$’000
2012
$’000
(i)Open transactions as at the beginning of the financial year
February 2017 2 83,460 7
2 83,460 7
(ii)New transaction completed during the financial year
Treasury Bonds:
April 2012 6 219,600 19
May 2013 8 134,000 20
December 2013 1 141,000 12
October 2014 2 25,000 2
April 2015 15 375,309 62
June 2016 1 5,500 1
February 2017 8 185,710 20
January 2018 1 10,200 3
42 1,096,319 139
Treasury Indexed Bonds:
August 2020 4 146,500 57
September 2025 1 8000 1
5 154,500 58
Total 49 1,334,279 204

The corresponding figures for the previous 12 months are as follows:

Security lending transactions completed for the previous 12 months
Bond series Number of transactions Face value loaned Net income earned
2010
$’000
2010
$’000
(i)Open transactions as at the beginning of the financial year
Treasury Bonds:
June 2011 3 230,850 49
April 2012 23 967,610 120
May 2013 1 13,000 1
June 2014 7 270,115 23
April 2015 20 754,200 80
February 2017 2 38,500 6
56 22,74,275 279
Treasury Indexed Bonds:
August 2015 2 12,500 2
2 12,500 2
Total 58 2,286,775 281
(iii) Open transactions as at the end of the financial year
February 2017 2 83,460

Intra-day lending during 2010-11 was as follows:

Intra-day lending during 2010-11
Bond series Number of transactions Face value loaned
Treasury Bonds
April 2012 2 110,000
May 2013 1 17,000
April 2015 1 109,000
June 2016 1 65,000
March 2019 1 5,000
May 2021 1 58,000
7 364,000

The corresponding figures for the previous 12 months are as follows:

Intra-day lending during 2009-10
Bond series Number of transactions Face value loaned
Treasury Bonds
June 2011 9 543,000
June 2014 1 49000
April 2015 2 600,000
May 2021 1 105,000
13 1,297,000

Note 27: Disclosures of appropriations

Note 27A: Annual appropriations

Outcome 1 – 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
Appropriation Act FMA Act
Annual appropriation Appropriation reduced(b) Section 30 Section 31 (GST ex) Total appropriation Appropriation applied Variance(d)
2011$’000 2011$’000 2011$’000 2011$’000 2011$’000 2011$’000 2011$’000
Departmental
Ordinary annual services(a) 16,146 797 16,943 (11,396) 5,547
Other services
Equity(c) (287) (287)
Total departmental 16,146 797 16,943 (11683) 5,260
Administered
Ordinary annual services
Outcome 1 10 (10)
Total administered 10 (10)
  1. Amounts presented in this table exclude GST where the GST is recoverable from the ATO.
  2. Reductions are presented in Note 27C. This administered reduction is legally affected underAppropriation Act (No. 1) 2010-11 when the AOFM’s annual report is tabled in Parliament.
  3. During 2010-11 the AOFM drew against its equity injection to extend its software licence for its debt management system.
  4. The AOFM reallocated future years’ outputs appropriations into 2010-11 to meet the costs of a syndicated issuance of Treasury Indexed Bonds. The volume of issuance was less than anticipated and so in consequence were the costs of syndication. This largely explains the variance reported for departmental ordinary annual services.
Outcome 1 – The advancement of macroeconomic growth and stability, and the effective operation of financial markets, through issuing debt, investing in financial assets and managing debt, investments and cash for the Australian Government
Appropriation Act FMA Act
Annual appropriation Appropriation reduced(b)(c) Section 30 Section 31 (GST ex) Total appropriation Appropriation applied Variance(d)
2010$’000 2010$’000 2010$’000 2010$’000 2010$’000 2010$’000 2010$’000
Departmental
Ordinary annual services(a) 12,638 (69) 915 13,484 (14,586) (1,102)
Other services
Equity
Total departmental 12,638 (69) 915 13,484 (14,586) (1,102)
Administered
Ordinary annual services
Outcome 1 10 (10)
Total administered 10 (10)
  1. Amounts presented in this table exclude GST where the GST is recoverable from the ATO.
  2. Departmental appropriations were reduced by determinations made by the Finance Minister:
    – on 29 June 2010 to reduce the AOFM’s 2009-10 departmental appropriations under Appropriation Act (No. 1) 2009-10 by $69,000.
  3. Administered reductions are effected when the AOFM’s annual report is tabled in Parliament. The reduction of $10,000.00 was made under Appropriation Act (No.1) 2009-10 and occurred on the tabling of the AOFM’s annual report for 2009-10.
  4. The departmental ordinary annual services variance is due to an operating loss for 2009-10. On 28 September 2009 the Finance Minister approved the AOFM to operate at a loss to enable it to conduct a syndicated issue of Treasury Indexed Bonds.

Note 27B: Unspent departmental annual appropriation

Outcome 1 — 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
2012
$’000
2011
$’000
Unspent departmental annual appropriation
Appropriation Act 2 2000-01 662 949
Appropriation Act 1 2006-07 1,703 1,703
Appropriation Act 3 2006-07 100 100
Appropriation Act 1 2007-08 2,964 2,964
Appropriation Act 1 2008-09 2,677 2,677
Appropriation Act 1 2009-10 5,112 5,112
Appropriation Act 1 2010-11 5,547
Total 18,765 13,505
Represented by:
Cash at bank 100 90
Appropriation receivable – output 17,897 12,466
Appropriation receivable – equity injection 662 949
Appropriation receivable – departmental capital budget 106
18,765 13,505

Note 27C: Reduction in administered items

The AOFM receives an annual administered appropriation of $10,000 to meet potential payments that may arise on certain overdues that matured some time ago and an alternative appropriation source does not exist. The unspent and uncommitted funds arising from this appropriation are returned to the Budget on an annual basis.

For 2010-11 the AOFM received an appropriation authority of $10,000 inAppropriation Act (No. 1) 2010-11 for this purpose. Section 11 of Appropriation Act (No.1) 2010-2011 creates an automatic reduction to the appropriation on tabling of the AOFM’s annual report in Parliament where it identifies that an administered appropriation is no longer required, either in full or part.

The following table specifies the reduction in the annual administered appropriation for the AOFM. It reduces the AOFM’s annual administered appropriation of $10,000 appropriated in Appropriation Act (No. 1) 2010-2011 to nil.

Outcome 1 — 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
2011
$0.00
Reduction in administered items
Total administered items appropriated 2010-12 10,000.00
Less administered items required by the agency as per Appropriation Act, section 11:
Appropriation Act (No. 1) 2010-2011 0.00
Total administered items required by the agency 0.00
Total reduction in administered items – effective 2011-12 10,000.00

Note 27D: Administered special appropriations (unlimited amount)

The following table details administered special appropriations applied by the AOFM:

Note 27D: Administered special appropriations (unlimited amount)
2011$’000 2010$’000
Airports (Transitional) Act 1996, section 78
Purpose: payment of principal and interest on former debts of the Federal Airports Corporation
Australian National Railways Commission Sale Act 1997, section 67AW
Purpose: payment of principal and interest on former debts of the National Railways Commission
Commonwealth Inscribed Stock Act 1911, section 6
Purpose: payment of principal and interest on money raised by Stock issued under the Act 84,433,082 50,146,325
Commonwealth Inscribed Stock Act 1911, section 13A
Purpose: payment of costs and expenses incurred in relation to issuing debt and managing debt(a)
Commonwealth Inscribed Stock Act 1911, section 13B
Purpose: payment of costs and expenses incurred in repurchasing debt prior to maturity(a)
Financial Agreement Act 1994, section 5
Purpose: debt redemption assistance and payment of interest to bond holders on behalf of the States and Northern Territory on public debt under the Act 312 329
Financial Management and Accountability Act 1997, section 30A
Purpose: payments of recoverable GST
Financial Management and Accountability Act 1997, section 39(9)
Purpose: to make investments in the name of the Commonwealth of Australia(b) 296,180,266 364,820,018
Loans Redemption and Conversion Act 1921, section 5
Purpose: payment of principal, interest and costs of converting loans made in accordance with the Act
Loans Securities Act 1919, section 4
Purpose: payment of principal and interest on money raised by stock issued under the Act 463 502
Loans Securities Act 1919, section 5B
Purpose: payment of money under a swap or repurchase agreement and any expenditure in connection with the negotiation, management or service of, or a repayment under, any such agreement(c) 6,221,662 63,951
Loans Securities Act 1919, section 5BA
Purpose: payment of money to enter into securities lending arrangements
Moomba-Sydney Pipeline System Sale Act 1994, section 19
Purpose: payment of principal and interest on former debts of the Pipeline Authority
Qantas Sale Act 1992, section 18
Purpose: payment of principal and interest on former debts of Qantas
Snowy Hydro Corporatisation Act 1997, section 22
Purpose: payment of principal and interest on former debts of the Snowy Mountains Hydro Electricity Authority
Treasury Bills Act 1914, section 6
Purpose: payment of principal and interest on money raised by issuance of Treasury Bills
Total 386,835,785 415,031,125
  1. On 29 June 2011, Appropriation Act (No.2) 2011-12 received royal assent. The Act includes amendments to the Commonwealth Inscribed Stock Act 1911, including the establishment of standing appropriations.
  2. The AOFM draws appropriations to make investments. Some of these investments are used to manage the daily variations in the balance of the Official Public Account (OPA). The cash flows into and out of the OPA are highly variable from day to day and so in consequence are the number, size and timing of these investments. The amount reported for 2010-11 includes $102.189 million for the repurchase of Treasury Bonds prior to maturity. The 2009-10 reported amount includes $1,138.920 million for the repurchase of Treasury Indexed Bonds prior to maturity.
  3. Master Agreements executed between the Commonwealth and swap counterparties provide for settlement of interest rate swaps on a net basis per transaction. All amounts in relation to swap transactions are disclosed in this note on an aggregate basis. During 2010-11 the AOFM conducted (for the first time) repurchase transactions with a number of members of its investment facility dealing panel.

Note 27E: Special appropriations (refund provisions)

In 2009-10 and 2010-11 the AOFM did not use section 28 of the Financial Management and Accountability Act 1997 which provides for repayments of monies received by the Commonwealth where no other appropriation exists to refund the monies received.

Note 27F: Special appropriations (FMA section 39)

Note 27F: Special appropriations (FMA section 39)
Investment of public money: Special appropriations under section 39 of the FMA Act in face value terms(a) 2011
$’000
2010
$’000
Amount invested brought forward from previous period 30,716,695 35,548,139
Investments made during the year(b) 296,232,220 364,382,745
Investments redeemed during the year (301,869,110) (369,214,189)
Amount invested carried to the next period (at face value)(c) 25,079,805 30,716,695

FMA = Financial Management and Accountability Act 1997.

  1. Amounts include repurchase of debt prior to maturity.
  2. The AOFM has recast the 2009-10 comparative for ‘investments made during the year’ and ‘investments redeemed during the year’ by $715.7 million to reflect the repurchase and subsequent cancellation of Treasury Indexed Bonds in October 2009.
  3. This does not equate to actual expenditures made to acquire investments as investments are quoted in face value terms. See Note 27D for expenditures made.
  4. See Note 24J for details of investments held.

Note 27G: Special accounts (Administered)

Debt Retirement Reserve Trust Account (DRRTA)

Establishing Instrument – Financial Management and Accountability Act 1997, section 21.

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

Debt Retirement Reserve Trust Account
2011
$’000
2010
$’000
Balance brought forward from previous period 494 546
Appropriation for reporting period 26 28
Interest amounts credited 22 18
Other receipts:
State and Territory contributions 1,331 85
Available for payments 1,873 677
Total increase 1,379 131
Payments made:
Debt repayments (1,307) (183)
Total decrease (1,307) (183)
Balance 566 494
Balance represented by:
Cash – held in the Official Public Account 566 494
Total balance carried to the next period 566 494

Note 27H: Assets held in trust (Administered)

Monies standing to the credit of the Debt Retirement Reserve Trust Account are held on behalf of the States and Northern Territory. These monies are held for the purposes prescribed by the Financial Agreement Act 1994.

Details of balances, payments and receipts in relation to the Debt Retirement Reserve Trust Account are provided in Note 27G: Special accounts (Administered).

Note 28: Reporting of outcomes

The AOFM delivers a single 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.

Note 28: Reporting of outcomes
Outcome 1 Outcome 1
2011
$’000
2010
$’000
Expenses
Administered 9,272,883 6,348,041
Departmental 11,786 15,328
Total expenses 9,284,669 6,363,369
Own-source income
Administered
Interest 1,375,603 1,436,315
Other 243 281
Gains (losses) 327,364 (2,824,929)
Total administered 1,703,210 (1,388,333)
Departmental
Other(a) 722 919
Total departmental 722 919
Total own-source income 1,703,982 (1,387,414)
Net cost/(contribution) of outcome 7,580,687 7,750,783

Note 29: Comprehensive income (loss) attributable to the AOFM

Note 29: Net cash appropriation arrangements
2011$’000 2010$’000
Comprehensive income (loss) 5,491 (1,545)
Plus non-appropriated expenses:
Depreciation and amortisation 315
Comprehensive income (loss) attributable to the AOFM 5,491 (1,545)

Note 30: Events occurring after reporting date

There have been no significant events occurring after the reporting date that would materially affect these financial statements.

Last updated: 31 July 2015