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Commonwealth of Australia - The Treasury

Annual Report 2014/15

Note 1

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Note 1: Summary of significant accounting policies

1.1 Objectives of the Treasury

The Department of the Treasury (the Treasury) is an Australian Government controlled, not-for-profit entity.

The Treasury provides policy advice and assists Treasury Ministers in the administration of their responsibilities and the administration of government decisions across a range of policy and program areas.

The Treasury is structured to meet one outcome:

Outcome 1: Informed decisions on the development and implementation of policies to improve the wellbeing of the Australian people, including by achieving strong, sustainable economic growth, through the provision of advice to government and the efficient administration of federal financial relations.

The reporting entity, referred to as ‘the Treasury’, comprises the Treasury and the Australian Government Actuary.

Activities contributing towards the outcome detailed above are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, revenues and expenses controlled or incurred by the Treasury in its own right. Administered activities involve the management or oversight by the Treasury, on behalf of the Government, of items controlled or incurred by the Government.

Departmental activities are identified under Program 1.1. Administered activities are identified under Programs 1.2 to 1.9 listed below:

  • Program 1.1 — Department of the Treasury
  • Program 1.2 — Payments to International Financial Institutions
  • Program 1.3 — Support for Markets and Business
  • Program 1.4 — General Revenue Assistance
  • Program 1.5 — Assistance to the States for Healthcare Services
  • Program 1.6 — Assistance to the States for Skills and Workforce Development
  • Program 1.7 — Assistance to the States for Disability Services
  • Program 1.8 — Assistance to the States for Affordable Housing
  • Program 1.9 — National Partnership Payments to the States

Program 1.2 provides for administered payments to International Financial Institutions as required to:

  • promote international monetary cooperation, exchange stability and orderly exchange arrangements;
  • strengthen the international financial system; and
  • support development objectives through the multilateral development banks.

Program 1.3 provides for administered activities in respect of:

  • insurance claims arising from the residual Housing Loans Insurance Corporation (HLIC) portfolio;
  • assistance under the HIH Claims Support Scheme (HCSS);
  • the Guarantee of State and Territory Borrowing in assisting state and territory governments to access funding;
  • the Guarantee Scheme for Large Deposits and Wholesale Funding to promote financial system stability in Australia; and
  • developing the Centre for International Finance and Regulation.

Program 1.4 provides for administered payments of general revenue assistance to the States and Territories, including payments of revenue received from the GST.

Programs 1.5 to 1.8 provide for administered payments to the States and Territories for healthcare services, skills and workforce development services, disability services and affordable housing services; according to the payment arrangements specified in the Intergovernmental Agreement on Federal Financial Relations.

Program 1.9 provides for administered payments to the States and Territories, according to National Partnership agreements, providing financial support for the States and Territories to be spent on improving outcomes in the areas specified.

The continued existence of the Treasury in its present form and with its present programs is dependent on government policy and on continuing appropriations by Parliament for the Treasury’s policy advice, administration and programs.

1.2 Basis of preparation of the financial statements

The financial statements are general purpose financial statements and are required by section 42 of the Public Governance, Performance and Accountability Act 2013 and general purpose financial statements.

The Financial Statements and notes have been prepared in accordance with:

  • Financial Reporting Rules (FRRs) for reporting periods ending on or after 1 July 2014; and
  • Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements have been prepared on an accrual basis and are in accordance with the historical cost convention, except for certain assets at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Unless an alternative treatment is specifically required by an accounting standard or the FRR, assets and liabilities are recognised in the statement of financial position when and only when it is probable that future economic benefits will flow to the entity or a future sacrifice of economic benefits will be required and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under executory contracts are not recognised unless required by an accounting standard. Liabilities and assets that are unrecognised are reported in the schedule of commitments or the contingencies note.

Unless alternative treatment is specifically required by an accounting standard, income and expenses are recognised in the Statement of Comprehensive Income when and only when the flow, consumption or loss of economic benefits has occurred and can be reliably measured.

Administered revenues, expenses, assets, liabilities and cash flows reported in the Schedule of Administered Items and related notes are accounted for on the same basis and using the same policies as for departmental items, except where otherwise stated at Note 1.24.

1.3 Significant accounting judgements and estimates

In the process of applying the accounting policies listed in this note, the Treasury has made the following judgements that have the most significant impact on the amounts recorded in the financial statements:

  • the employee provision has been determined by reference to standard parameters provided by the Department of Finance;
  • the fair value of land and buildings, and property, plant and equipment has been taken to be the market value of similar properties or depreciated replacement value as determined by an independent valuer;
  • the Natural Disaster Relief and Recovery Arrangements (NDRRA) liability represents the Treasury’s best estimate of payments expected to be made to States and Territories as at balance date.
    • The estimate is based on information provided by States and Territories to the Attorney General’s Department (AGD), the Commonwealth agency responsible for the administration of disaster relief. The estimates provided by States and Territories are based on their assessment of the costs expected to be incurred that would be eligible for assistance under NDRRA. AGD performs a review of estimates provided by the States and Territories in order to assess the reasonableness of estimated expenditure with regard to eligibility under the NDRRA determination.
    • The Treasury reviews the estimates to ensure they are consistent with government decisions and then calculates the provision by discounting the future cashflows. Given the nature of disasters, there is a level of uncertainty in the estimated reconstruction costs at the time of a disaster. This uncertainty decreases as reconstruction efforts progress to completion. Consistent with accounting principles, the Treasury adopts a prudent position at this time to ensure that liabilities are not understated.
    • The state that forms the most significant amount of the provision estimate is Queensland. The Queensland Reconstruction Authority (QRA) was established in 2011 in response to the severe disaster events that occurred between November 2010 and April 2011 with the purpose of managing and coordinating the Queensland Government’s program of infrastructure reconstruction within disaster affected communities. The work of QRA has progressively enhanced the accuracy of Queensland’s estimates.
    • AGD continues to work closely with the States and Territories to improve the application of the NDRRA determination, and is releasing a restructured NDRRA determination to reduce ambiguous language associated with eligibility, embed assurance arrangements and ensure that it is structured in a way that is logical and easy to use. AGD’s internal quality assurance requires states to provide additional advice and documentation in support of their estimates. The Treasury has an established memorandum of understanding with AGD that clearly identifies the roles and responsibilities of both agencies.
  • Pending the outcome of negotiations the Commonwealth Government is not recognising a receivable in 2014-15 for the East West Link project.
    • In 2013-14 the Commonwealth Government provided $1.5 billion in grant funding to the Victorian Government for the East West Link project. In 2014-15 the Victorian Government announced it had decided not to proceed with the project.
    • Consistent with the 2015-16 Budget announcement, the Commonwealth Government intends to seek the return of the $1.5 billion of grant funding in relation to the East West Link project during 2015-16. Discussions between the Commonwealth and Victorian governments regarding the return of the $1.5 billion in grant funding are ongoing.

1.4 New Australian Accounting Standards

Adoption of new Australian Accounting Standard requirements

The following new and amended standard has been adopted:

  • AASB 13 — Fair Value Measurement — reduced disclosure (adopted earlier than the application date as stated in the standard)
  • AASB 1055 — Budgetary Reporting — this standard requires the Treasury to explain significant variances between original budget and actual outcome.

All other new standards, amendments to standards and interpretations that were issued prior to the sign-off date and are applicable to the current reporting period did not have a material effect, and are not expected to have a future material effect, on the Treasury’s financial statements.

Future Australian Accounting Standard requirements

No new or revised standards that were issued prior to the sign-off date and are applicable to future reporting periods are not expected to have a future material impact on the Treasury’s financial statements.

1.5 Legal Compliance

The Australian Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth of Australia [2014] HCA 23, as they contribute to the larger body of law relevant to the development of Commonwealth programs. In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.

Section 83 of the Constitution provides that no amount may be paid out of the Consolidated Revenue Fund except under an appropriation made by law. The Department of Finance provided information to all agencies regarding the need for risk assessments in relation to compliance with statutory conditions on payments from special appropriations, including special accounts. Further details of risk assessments and compliance relating to the Treasury can be found at Note 30.

1.6 Revenue

Revenue from Government

Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as Revenue from Government when Treasury gains control of the appropriation, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.

Appropriations receivable are recognised at their nominal amounts.

Other types of revenue

Revenue from rendering of services is recognised by reference to the stage of completion of contracts at the reporting date. The revenue is recognised when:

  • the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and
  • it is probable that the economic benefits associated with the transaction will flow to the entity.

The stage of completion of contracts at the reporting date is determined by reference to the proportion that costs incurred to date bear to the estimated total costs of the transaction.

Receivables for goods and services, which have 30 day terms, are recognised at the nominal amounts due less any impairment allowance account. Collectability of debts is reviewed at balance date. Allowances are made when collectability of the debt is no longer probable.

1.7 Gains

Resources received free of charge

Resources received free of charge are recognised as gains 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. Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another government agency or authority as a consequence of a restructuring of administrative arrangements (refer to Note 1.8).

Sale of assets

Gains from disposal of assets are recognised when control of the asset has passed to the buyer.

1.8 Transactions with the Government as owner

Equity injections

Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) and Departmental Capital Budgets (DCBs) are recognised directly in contributed equity in that year.

Restructuring of administrative arrangements

Net assets received from or relinquished to another government entity under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.

Other distributions to owners

The FRRs require that distributions to owners be debited to contributed equity unless it is in the nature of a dividend.

1.9 Employee benefits

Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.

Liabilities for termination benefits due within twelve months of balance date are measured at their nominal amounts. The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

Other employee benefits are measured as the total net present value of the defined benefit obligation at the end of the reporting period minus the fair value at the end of the reporting period of the plan assets (if any) out of which the obligations are to be settled directly.

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 Treasury is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken, including the Treasury’s employer superannuation contribution rates to the extent that the leave is likely to be taken during service rather than paid out on termination.

The liability for both annual and long service leave has been determined by reference to standard parameters provided by the Department of Finance. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and general pay increases.

Separation and redundancy

Provision is made for separation and redundancy benefit payments. The department recognises a provision for termination when it has a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

Staff of the Treasury are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap) or other defined contribution schemes.

The CSS and PSS are defined benefit schemes of the Australian Government. The PSSap is a defined contribution scheme which opened for new employees on 1 July 2005.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

The Treasury makes employer contributions to the employee superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Government. The Treasury accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised as at 30 June 2015 represents outstanding contributions for the final fortnight of the year.

1.10 Leases

A distinction is made between finance leases and operating leases. Finance leases effectively transfer substantially all the risks and benefits incidental to ownership of leased assets (from the lessor to the lessee). An operating lease is a lease that is not a finance lease. In operating leases, the lessor effectively retains substantially all such risks and benefits.

Where an asset is acquired by means of a finance lease, the asset is capitalised at either the fair value of the leased property or, if lower, the present value of minimum lease payments at the inception of the contract and a liability is recognised at the same time and for the same amount.

The Treasury does not currently hold any assets under finance lease.

Operating lease payments are expensed on a straight line basis which is representative of the pattern of benefits derived from the leased assets.

1.11 Borrowing costs

All borrowing costs are expensed as incurred.

1.12 Cash

Cash and cash equivalents includes notes and coins held and any deposits in bank accounts with an original maturity of three months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value. Cash is recognised at its nominal amount. Any interest receivable is credited to revenue as it accrues. The Treasury maintains bank accounts with the Reserve Bank of Australia for administration of the receipt and payment of monies.

1.13 Financial risk management

The Treasury’s activities expose it to normal commercial financial risk. As a result of the nature of the Treasury’s business and Australian Government policies dealing with the management of financial risk, the Treasury’s exposure to market, credit and liquidity risk is considered to be low.

1.14 Financial assets

The Treasury classifies its financial instruments as loans and receivables.

The classification depends on the nature and purpose of the financial instrument and is determined at the time of initial recognition. Financial assets are recognised and derecognised upon trade date.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest rate basis except for financial assets that are recognised at fair value through profit or loss.

Loans and receivables

Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest methods less impairment. Interest is recognised by applying the effective interest rate. Collectability of debts is reviewed regularly throughout the year and at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely. Credit terms are net 30 days (2014: 30 days).

1.15 Impairment of financial assets

Financial assets are assessed for impairment at the end of each reporting period. No indicators of impairment were identified for assets as at 30 June 2015.

Financial assets held at amortised cost

If there is objective evidence that an impairment loss has been incurred for loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. The carrying amount is reduced by way of an allowance account. The loss is recognised in the statement of comprehensive income.

Financial assets held at cost

If there is objective evidence that an impairment loss has been incurred the amount of the impairment loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate for similar assets.

1.16 Financial liabilities

Other financial liabilities include trade creditors and accruals are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced). Settlement is usually made net 30 days.

1.17 Contingent liabilities and contingent assets

Contingent liabilities and contingent assets are not recognised in the statement of financial position but are reported in the relevant schedules and notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an asset or liability in respect of which the amount cannot be reliably measured. Contingent assets are reported when settlement is probable but not virtually certain and contingent liabilities are recognised when the probability of settlement is greater than remote.

1.18 Acquisition of assets

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Financial assets are initially measured at their fair value plus transaction costs where appropriate.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

1.19 Property, plant and equipment

Asset recognition threshold

Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $5,000 which are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total).

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to ‘make good’ provisions in property leases taken up by the Treasury where there exists an obligation to restore the property to its original condition. These costs are included in the value of the Treasury’s leasehold improvements with a corresponding provision for the ‘make good’ recognised.

Revaluations

Fair values for each class of asset are determined as shown below.

Asset class Fair value measured at
Buildings — leasehold improvements Estimated replacement cost of similar assets adjusted for remaining useful life.
Plant and equipment Estimated replacement cost of similar assets adjusted for remaining useful life.

Following initial recognition at cost, buildings — leasehold improvements and plant and equipment are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depends upon the volatility of movements in market values for the relevant assets. The most recent revaluation was conducted by Preston Rowe Patterson NSW Pty Limited (PRP) as at 1 July 2014.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reverses a previous revaluation decrement of the same class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset is restated to the revalued amount.

In addition to the full revaluation undertaken as at 1 July 2014, the Treasury received a fair value confirmation of leasehold improvements and plant and equipment assets as at 30 June 2015. The fair value confirmation was performed by independent valuers Australian Valuation Services (AVS) in accordance with AASB 13. AVS confirmed that net asset values materially reflected fair value at 30 June 2015.

Depreciation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the Treasury using, in all cases, the straight-line method of depreciation.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

  2015 2014
Buildings — leasehold improvements 5-10 years 5-10 years
Plant and equipment:    
Computers, plant and equipment 3-10 years 3-10 years
Motor vehicles 4 years 4 years
Office equipment 5 years 5 years

The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed at Note 8A.

Impairment

All assets were assessed for impairment at 30 June 2015. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount. No indicators of impairment were found for departmental non-financial assets as at 30 June 2015 (2014 nil).

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the Treasury were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Derecognition

An item or property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

1.20 Intangibles

The Treasury’s intangible assets comprise internally developed and purchased software for internal use. These assets are carried at cost less accumulated amortisation and any accumulated impairment losses.

Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of the Treasury’s software are three to five years (2014: three to five years).

All software assets were assessed for indications of impairment as at 30 June 2015. No indicators of impairment were identified as at 30 June 2015 (2014: nil).

1.21 Taxation

The Treasury is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Revenues, expenses and assets 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.

1.22 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 balance date.

1.23 Insurance

The Treasury is insured for risks through the Government’s insurable risk managed fund, Comcover. Workers compensation is insured through the Government’s insurable risk managed fund, Comcare Australia.

1.24 Reporting of administered activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the schedule of administered items and related notes.

Except where otherwise stated below, administered items are accounted for on the same basis and using the same policies as for departmental items, including the application of Australian Accounting Standards.

1.25 Administered cash transfers to and from the Official Public Account

Revenue collected by the Treasury for use by the Government rather than the Treasury is administered revenue. Collections are transferred to the Official Public Account (OPA) maintained by the Department of Finance. Conversely, cash is drawn from the OPA to make payments under Parliamentary appropriations on behalf of the Government. These transfers to and from the OPA are adjustments to administered cash held by the Treasury on behalf of the Government and reported as such in the administered reconciliation schedule. The schedule of administered items largely reflects the Australian Government’s transactions, through the Treasury, with parties outside the Australian Government.

1.26 Administered revenue

All administered revenues relate to the course of ordinary activities performed by the Treasury on behalf of the Australian Government.

Reserve Bank of Australia dividend

The Treasurer is able to determine what portion of the RBA’s earnings is made available as a dividend to the Commonwealth having regard to the Reserve Bank Board’s advice and in accordance with section 30 of the Reserve Bank Act 1959.

The Treasury recognise the dividend revenue and a corresponding receivable in the year the RBA reports a net profit available to the Commonwealth, subject to reliable measurement. This does not affect the timing of the dividend receipt in the Cash Flow Statement, only the timing of the accrued revenue in the Statement of Comprehensive Income. Dividends are measured at nominal amounts.

Australian Reinsurance Pool Corporation dividend and fee

The dividend and fee from the Australian Reinsurance Pool Corporation (ARPC) are recognised when the relevant Minister signs the legislative instrument, and thus control of the income stream is established. These are measured at nominal amounts.

International Monetary Fund remuneration

Remuneration is interest paid by the International Monetary Fund (IMF) to Australia for the use of its funds. It is paid on the proportion of Australia’s IMF capital subscription (quota) that was paid in Special Drawing Rights (SDR), and on the money lent by Australia under the IMF’s Financial Transaction Plan, under which members in a strong external position provide quota resources to support IMF lending to borrowing member countries.

Where the IMF’s holdings of Australian dollars fall below a specified level, it pays remuneration on Australia’s average remunerated reserve tranche position. The rate of remuneration is equal to the SDR interest rate. The SDR interest rate is the market interest rate computed by the Fund for the purposes of paying interest on holdings of SDRs, which is based on the weighted 3 month bond rates of the four entities whose currencies make up the SDR basket: the United States, United Kingdom, European Union and Japan. This rate is then adjusted to account for the financial consequences of overdue obligations to the IMF which are shared between members and reflected at Note 18 as ‘burden sharing’.

Remuneration is calculated and paid at the end of the IMF’s financial quarters. An annual maintenance of value adjustment is made to the IMF’s holdings of Australia’s quota paid in Australian dollars to maintain their value in terms of the SDR.

International Monetary Fund New Arrangement to Borrow (NAB)

Australia also receives interest on amounts lent to the IMF under the New Arrangements to Borrow (NAB). Amounts lent to the IMF under the NAB accrue interest daily at the IMF’s SDR interest rate (or such other rate as agreed by 85% of NAB participants). The IMF pays interest on NAB amounts quarterly.

The IMF must repay amounts lent through the NAB five years after each call is made. Amounts can be repaid earlier at the IMF’s discretion.

Guarantee Scheme for Large Deposits and Wholesale Funding

Under the Guarantee Scheme for Large Deposits and Wholesale Funding, a fee is paid by Authorised Deposit Taking Institutions to the Government, to guarantee the portion of eligible deposits over $1 million and for wholesale funding issuances.

The fees are reported as a fee for service in accordance with AASB 118 Revenue. The Guarantee Scheme closed to new deposits on 31 March 2010.

The Guarantee of State and Territory Borrowing

Under the Guarantee of State and Territory Borrowing, a fee is paid to provide the guarantee over new and nominated existing State and Territory securities. The fees are reported as a fee for service in accordance with AASB 118 Revenue. The guarantee closed to new issuances of guaranteed liabilities on 31 December 2010.

Financial Guarantee Contracts

Financial guarantee contracts are accounted for in accordance with AASB 139 Financial Instruments: Recognition and Measurement. They are not treated as contingent liabilities, as they are regarded as financial instruments outside the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets. The Treasury’s administered financial guarantee contracts relate to components of the Guarantee Scheme for Large Deposits and Wholesale Funding and the Guarantee of State and Territory Borrowing.

1.27 Administered capital

Appropriations of administered capital are recognised in administered equity when the amounts appropriated by Parliament are drawn down. For the purposes of the Treasury annual report, administered equity transactions are not disclosed separately.

1.28 Grants

The Treasury sought and received an exemption from reporting payments to the States and Territories as administered commitments as required by section 28 of the FRR. The Treasury formed the view that these payments do not meet the definition of a commitment and should not be reported in the administered commitments schedule.

With the exception of the accounting treatment of payments to State and Territories under Natural Disaster Relief and Recovery Arrangements detailed below, grant liabilities are recognised to the extent that (i) the services required to be performed by the grantee have been performed or (ii) the grant eligibility criteria have been satisfied, but payments due have not been made.

Grants to States and Territories

Under the Federal Financial Relations Framework, the Treasurer is responsible for payments to the States and Territories, including general revenue assistance (GST and other general revenue), National Specific Purpose Payments (National SPPs) and National Partnership (NP) payments. Portfolio Ministers are accountable for relevant government policies associated with the payment of NPs and other general revenue. An overview of these arrangements is available on the Standing Council for Federal Financial Relations’ website.

There are three main types of payments under the framework:

  • General revenue assistance, including GST revenue payments — a financial contribution to a State or Territory which is available for use by the States and Territories for any purpose.
  • National SPPs — a financial contribution to support a State or Territory to deliver services in a particular sector.
  • NP payments — a financial contribution in respect of a NP agreement to a State or Territory to support the delivery of specific projects, to facilitate reforms or to reward those jurisdictions that deliver on national reforms or achieve service delivery improvements.

The National SPPs and GST are paid under a special appropriation from the Federal Financial Relations Act 2009. After the end of the financial year, the Treasurer determines the amounts that should have been paid and an adjustment is made in respect of advances that were paid during the financial year. The authority to approve advance payments has been delegated to the Division Head, Commonwealth-State Relations Division.

The NP and other general revenue assistance payments are paid under the Federal Financial Relations Act 2009 through a determination process wherein the Treasurer may determine an amount to be paid to a State or Territory for the purpose of making a grant of financial assistance. Once determined, this amount must be credited to the COAG Reform Fund and the Treasurer must ensure that, as soon as practicable after the amount is credited, the COAG Reform Fund is debited for the purposes of making the grant. In addition, the Treasurer must have regard to the Intergovernmental Agreement on Federal Financial Relations.

The Treasury is primarily reliant on certified payment advice from the Chief Financial Officers of Commonwealth agencies, who have policy and program responsibility to assure that the terms and conditions of the NP have been met prior to making a payment. The Treasury then advises the Treasurer on amounts to be determined, based on the certified payment advices received from the Commonwealth agencies.

Natural Disaster Relief and Recovery Arrangements

The Treasury accounts for payments made to States and Territories under the Natural Disaster Relief and Recovery Arrangements (NDRRA) by recognising a liability equal to the discounted value of estimated future payments to States and Territories under NDRRA regardless of whether or not a State or Territory has completed eligible disaster reconstruction work or submitted an eligible claim under the NDRRA. As disclosed at Note 1.3, States and Territories were requested to provide an estimate of costs expected to be incurred for disasters affecting States and Territories that occurred prior to 1 July 2015 which would be eligible for assistance.

Payments to the States and Territories through the Nation Building Funds

The Nation-building Funds Act 2008 (the Funds Act) outlines the requirements for payments to be authorised from the three nation building funds (collectively known as ‘the Funds’); the responsibilities of Ministers; and the process for channelling payments to recipients through portfolio special accounts.

The three Funds are the:

  • Building Australia Fund — make payments in relation to the creation or development of transport, communications, eligible national broadband network matters, energy and water infrastructure;
  • Education Investment Fund — make payments in relation to the creation or development of higher education infrastructure, vocational education and training infrastructure, eligible education and research infrastructure; and
  • Health and Hospitals Fund — make payments in relation to the creation or development of health infrastructure.

The Treasury receives funds from the relevant portfolio agency and pays the amount to the States and Territories. These amounts are recorded as ‘COAG receipts from Government Agencies’ to recognise the income and a corresponding grant expense for the payment to the States and Territories.

Payments to Clean Energy Finance Corporation

Payments to the Clean Energy Finance Corporation from amounts appropriated for that purpose are classified as administered expenses and equity injections of the relevant portfolio department. The appropriation to the department is disclosed at Note 29A.

Mirror taxes collected by State Governments

On behalf of the States, the Government imposes mirror taxes which replace State taxes that may be constitutionally invalid in relation to Government places. Mirror taxes are collected and retained by the States, under the Commonwealth Places (Mirror Taxes) Act 1998. State Governments bear the administration costs of collecting mirror taxes. Mirror taxes are disclosed at Note 29D.

1.29 Administered investments

Development banks

Investments in development banks are classified as ‘monetary — available for sale financial assets’ refer Note 1.32. As such, the foreign currency value of investments is translated into Australian dollars (AUD) using relevant foreign currency exchange rates at balance date.

International Monetary Fund

The quota is the current value in Australian dollars of Australia’s subscription to the IMF. Quota subscriptions represent a member’s shareholding in the IMF and generate most of the IMF’s financial resources. Twenty five per cent of the quota increase will be paid in SDR and the remainder will be paid through issuing AUD denominated non-negotiable, non-interest bearing promissory notes.

Australian Government entities

Administered investments in controlled corporate entities are not consolidated because their consolidation is relevant only at the whole of government level.

The Australian Government’s investment in controlled corporate entities and companies in the Treasury portfolio are measured at their fair value as at 30 June 2015. Fair value has been taken to be the net assets of the entities as at balance date. These entities are listed below:

  • Reserve Bank of Australia
  • Australian Reinsurance Pool Corporation; and
  • Clean Energy Finance Corporation.

Impairment of administered investments

Administered investments were assessed for impairment at 30 June 2015. No indicators of impairment were identified (2014: nil).

1.30 Promissory notes

Promissory notes have been issued to the IMF, the European Bank for Reconstruction and Development, the International Bank for Reconstruction and Development, the Asian Development Bank and the Multilateral Investment Guarantee Agency.

Where promissory notes have been issued in foreign currencies, they are recorded at their nominal value by translating them at the spot rate at balance date. The promissory notes are non-interest bearing and relate to the undrawn paid-in capital subscriptions.

Foreign currency gains and losses are recognised where applicable.

1.31 IMF Special Drawing Rights Allocation

The SDR allocation liability reflects the current value in AUD of the Treasury’s liability to repay to the IMF the cumulative allocations of SDRs provided to Australia since joining the IMF. This liability is classified as ‘other payables’ at Note 21.

1.32 Provisions and contingent liabilities

HIH Claims Support Scheme liability

The HIH Claims Support Scheme (HCSS) was established by the Government following the collapse of the HIH Group of companies in March 2001. The purpose of the HCSS is to provide financial assistance to eligible HIH policy-holders affected by the collapse of the group. Initial funding of $640 million was provided by special appropriation through the Appropriation (HIH Assistance) Act 2001.

The claims portfolio is now completely extinguished with the resolution of the final outstanding claim during the 2014-15 financial year. All other claims management activities have been completed and all physical files and related materials (along with the Commonwealth’s final proof of debt) have been returned to the Liquidator.

1.33 Administered financial instruments

AASB 139 Financial Instruments: Recognition and Measurement requires financial instruments to be classified into one of four categories. The financial instruments specific to the Treasury’s administered items are classified in three of the four categories as detailed below.

Loans and receivables (these are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market):

  • IMF related monies receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • Loans to the IMF under the New Arrangements to Borrow (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • the Guarantee Scheme for Large Deposits and Wholesale Funding contractual fee receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • the Guarantee Scheme for State and Territory Borrowing contractual fee receivable (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • Loans to States and Territories (measured initially at fair value and then measured at amortised cost using the effective interest rate method); and
  • Dividends receivable (measured at fair value).

Available-for-sale financial assets:

  • investments in development banks (measured initially at cost or notional cost and then measured at fair value);
  • the IMF quota (measured initially at cost or notional cost and then measured at fair value); and
  • Investments in Government Entities (measured at fair value based on net asset position of the entity at 30 June 2015).

Financial liabilities:

  • the SDR allocation (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • promissory notes (measured initially at fair value and then measured at amortised cost using the effective interest rate method);
  • IMF related monies payable (measured initially at fair value and then measured at amortised cost using the effective interest rate method); and
  • the Guarantee Scheme for Large Deposits and Wholesale Funding contractual guarantee service obligation (measured initially at fair value and then measured at amortised cost using the effective interest rate method).

Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or that are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Although a number of the Treasury’s financial instruments are classified as ‘available-for-sale’, the Treasury does not hold these instruments for the purposes of trading. Assets that can be reliably measured at reporting date are valued at fair value, otherwise, at cost.

Promissory notes are financial liabilities that are required to be measured at amortised cost using the effective interest rate method. The contractual terms of the promissory notes are non-interest bearing making the effective interest rate zero. Therefore, the measurement would be the initial value less any repayments plus or minus movements in exchange rates as a result of translation on the balance date.

The Guarantee Scheme for Large Deposits and Wholesale Funding and the Guarantee of State and Territory Borrowing contractual fee receivable represents the requirement under AASB 139 Financial Instruments: Recognition and Measurement for the Treasury to recognise up-front, its entitlements under the financial guarantee contract to revenue received or receivable from authorised deposit-taking institutions over the contracted guarantee period. Conversely, the Treasury is required to recognise a corresponding initial liability for its contractual obligation to provide a guarantee service over the period covered by each guarantee contract (analogous to unearned income).

Recognition of these amounts only relates to fee revenue aspects of the financial guarantee contracts. These amounts do not reflect any expected liability under the Guarantee Scheme itself as these are considered remote and unquantifiable. Administered contingent liabilities and assets are disclosed at Note 25.

Administered financial instruments are accounted for in accordance with the accounting policies detailed above and are disclosed at Note 27.