7. Managing Uncertainties

This section analyses how the Department manages financial risks within its operating environment.

7.1 Contingent Assets and Liabilities

7.1A: Contingent Assets and Liabilities
Claims for damages or costsTotal
2017
$'000
2016
$'000
2017
$'000
2016
$'000
Contingent assets        
Balance from previous period 266  - 266 -
New contingent assets recognised  - 266 - 266
Assets realised (266)  - (266) -
Total contingent assets - 266 - 266
Net contingent assets/(liabilities) - 266 - 266

Quantifiable Contingencies

Insurance claims

The Department received proceeds from an insurance claim for storm damage and business interruption costs incurred in April 2015 at the Department's Sydney offices.

7.1B: Administered—Contingent Assets and Liabilities
 Claims for
damages or costs
Total
2017
$'000
2016
$'000
2017
$'000
2016
$'000
Contingent assets        
Balance from previous period 2,457 3,624 2,457 3,624
New contingent assets recognised 76 25 76 25
Re-measurement (38) (501) (38) (501)
Assets realised (557) (691) (557) (691)
Total contingent assets 1,938 2,457 1,938 2,457
Contingent liabilities        
Balance from previous period 11,195 10,614 11,195 10,614
Re-measurement 1,060 581 1,060 581
Total contingent liabilities 12,255 11,195 12,255 11,195
Net contingent assets/(liabilities) (10,317) (8,738) (10,317) (8,738)

Quantifiable Administered Contingent Assets

Insurance claims have been submitted to recover business interruption costs on Christmas Island and damage to properties on Cocos (Keeling) Islands and the Jervis Bay Territory.

Quantifiable Administered Contingent Liabilities

Asbestos Remediation costs

At 30 June 2017 the Department provided for asbestos remediation costs in the Schedule of Administered Assets and Liabilities where there is a present obligation to remediate and the cost of remediation can be reliably measured (see Note 4.4). The contingent liabilities in the table above have been recognised for properties in the Indian Ocean Territories and Jervis Bay Territory where asbestos management plans are in place and remediation may be required if conditions change, such as through damage or renovation.

Asbestos management plans are also in place for Commonwealth owned properties on Norfolk Island, but the cost of remediation for these properties if conditions change has not been quantified.

Unquantifiable Administered Contingencies

The Department, on behalf of the Australian Government, has entered into the following indemnities and arrangements which are considered significant in nature and were disclosed in 2017–18 Budget Paper No.1—Statement of Risks. The probability that the Department will incur costs as a result of these arrangements is considered remote and no claims have been identified at 30 June 2017.

Maritime Industry Finance Company Limited—Board Members' Indemnity

Indemnities for Maritime Industry Finance Company Limited (MIFCO) board members were provided to protect them against civil claims relating to their employment and conduct as Directors. MIFCO was placed into voluntary liquidation in November 2006 and was deregistered on 24 April 2008. The indemnity is not time limited and continues even though the company has been liquidated.

Moorebank Intermodal Terminal—Indemnities

Indemnities have been provided in connection with the development of the Moorebank Intermodal Terminal, including:

  1. Protection for the Directors and Officers of the Moorebank Intermodal Company Ltd (MICL) against civil claims relating to their employment and conduct. The indemnities apply to the period of appointment as Directors or Officers of the company;
  2. Costs that may be incurred by MICL in the event that the Commonwealth terminates the Equity Funding Agreement between the Commonwealth and MICL for reasons other than a breach by MICL;
  3. Costs and liabilities incurred by the private sector owner of the Glenfield Waste Site for any easement for the rail spur across the Glenfield Waste Site, to the extent that such costs or liabilities are caused, or contributed to, by the Commonwealth or its agents; and
  4. Costs and liabilities that may be incurred by the State of NSW arising under the Native Title Act 1993 (Cth) associated with the construction of a rail bridge over the Georges River to the Moorebank Intermodal Terminal.

Tripartite deeds relating to the sale of federal leased airports

The tripartite deeds between the Australian Government, the airport lessee company and financiers, amend airport (head) leases to provide for limited step-in-rights for financiers in circumstances where the Australian Government terminates the head lease to enable the financiers to correct the circumstances that triggered such a termination event. The tripartite deeds may require the Australian Government to pay financiers compensation as a result of terminating the (head) lease, once all Australian Government costs have been recovered.

New South Wales Rural Fire Fighting Service—indemnity

The Jervis Bay Territory Rural Fires Ordinance 2014 (the Ordinance) provides the legislative basis for fire management services in the Jervis Bay Territory (JBT). Due to the cross-border delivery of fire services from NSW to the JBT, the Ordinance is based on the NSW Rural Fires Act 1997 and Rural Fires Regulations 2008 with modifications to reflect the JBT's jurisdictional and administrative circumstances. Under this mechanism, the NSW Rural Fire Service (NSW RFS) is the sole fire management service provider. To provide this service, the NSW RFS requires the Australian Government to provide an uncapped indemnity whereby the Australian Government would be liable for any damages, arising in good faith, from the provision of the agreed scope of fire management services. The likelihood of an event occurring that may result in a liability for the Australian Government has been assessed as remote. Risks are mitigated through the training and professional qualifications of NSW RFS staff and the establishment and enforcement of a robust legislative framework for JBT fire management.

Australian Maritime Safety Authority Incident Costs

In the normal course of operations, the Australian Maritime Safety Authority (AMSA) is responsible for the provision of funds necessary to meet the clean-up costs arising from ship-sourced marine pollution and, in all circumstances, is responsible for making appropriate efforts to recover the costs of any such incidents. The Australian Government meets costs that cannot be recovered from such incidents. It is not possible to estimate the amounts of any eventual payments that may be required in relation to these incident costs. AMSA has established a pollution response reserve of $10 million supported by a commercial line of credit of $40 million to provide funding should the overall clean-up costs exceed the liability limit of the ship owner.

Underwriting of air services—External Territories

Underwriting agreements are in place for the provision of air services to Norfolk Island and the Indian Ocean Territories. The extent of any claim is recognised as a liability once the amount is verified, can be reliably measured and settlement is probable.

Service Delivery Arrangement Indemnities—Indian Ocean Territories and Norfolk Island

A range of services are delivered to the Indian Ocean Territories under Service Delivery Agreements (SDAs) with approximately forty Western Australian (WA) Government entities. The Australian Government has provided certain indemnities for the WA Government, their respective officers, agents, contractors and employees against civil claims relating to their employment and conduct as officers.

Similar arrangements are in place with the NSW Government for service delivery arrangements on Norfolk Island.

The likelihood of an event occurring that may result in a liability for the Australian Government has been assessed as remote and the risks are currently mitigated through the training and professional qualifications of the staff of these agencies.

Accounting Policy

Contingent Assets and Contingent Liabilities

Contingent assets and contingent liabilities are not recognised in the Statement of Financial Position or Administered Schedule of Assets and Liabilities but are reported in the 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 disclosed when settlement is probable but not virtually certain and contingent liabilities are disclosed when settlement is greater than remote.

Financial Guarantee Contracts

Financial guarantee contracts are accounted for in accordance with AASB 139 Financial Instruments: Recognition and Measurement. They are not treated as a contingent liability, as they are regarded as financial instruments outside the scope of AASB 137 Provisions, Contingent Liabilities and Contingent Assets.

Accounting Judgements and Estimates

Indemnities and/or guarantees

The maximum amounts payable under the indemnities given is disclosed above. At the time of completion of the financial statements, there was no reason to believe that the indemnities and/or guarantees would be called upon, and no recognition of any liability was therefore required.

7.2 Financial Instruments

7.2A: Categories of Financial Instruments
 2017
$'000
2016
$'000
Financial Assets    
Loans and receivables    
Cash and cash equivalents 1,850 2,138
Trade receivables 428 827
Accrued revenue 1,084 1,314
Total loans and receivables 3,362 4,279
Total financial assets 3,362 4,279
Financial Liabilities    
Financial liabilities measured at amortised cost    
Trade creditors 2,885 963
Accrued expenses 20,037 15,812
Total financial liabilities measured at amortised cost 22,922 16,775
Total financial liabilities 22,922 16,775

The carrying value of financial assets and liabilities is a reasonable approximation of fair value.

7.2B: Net Gains or Losses on Financial Assets
 2017
$'000
2016
$'000
Loans and receivables    
Impairment 144 177
Net losses on loans and receivables 144 177
Net losses on financial assets 144 177

There was no income or expense associated with financial liabilities during the financial year.

Accounting Policy

Financial assets

The Department classifies its financial assets in the following categories:

  1. available-for-sale financial assets; and
  2. loans and receivables.

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are recognised and derecognised upon trade date. Assets in these categories are classified as current assets.

Effective Interest Method

Income is recognised on an effective interest rate basis.

Available-for-Sale Financial Assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.

Available-for-sale financial assets are recorded at fair value. Gains and losses arising from changes in fair value are recognised directly in reserves (equity) with the exception of impairment losses. Interest is calculated using the effective interest method and foreign exchange gains and losses on monetary assets are recognised directly in profit or loss. Where the asset is disposed of or is determined to be impaired, part (or all) of the cumulative gain or loss previously recognised in the reserve is included in the surplus or deficit for the period.

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 method less impairment. Interest is recognised using the effective interest rate.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period.

Available for sale financial assets—If there is objective evidence that an impairment loss on an available-for-sale financial asset has been incurred, the amount of the difference between its cost, less principal repayments and amortisation, and its current fair value, less any impairment loss previously recognised in expenses, is transferred from equity to the Statement of Comprehensive Income.

Loans and receivables—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 Liabilities

Financial liabilities are classified as ‘other financial liabilities’. Financial liabilities are recognised and derecognised upon ‘trade date’.

Other Financial Liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. These liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

Supplier and other payables 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).

All payables are expected to be settled within 12 months except where indicated.

7.3 Administered—Financial Instruments

7.3A: Categories of Financial Instruments
 2017
$'000
2016
$'000
Financial Assets    
Loans and receivables    
Cash and cash equivalents 65,905  -
Loans to state and territory governments 1,556,144 1,038,517
Other receivables—fees receivable 1,833 2,446
Accrued revenue 3,285 3,259
Total loans and receivables 1,627,167 1,044,222
Available-for-sale financial assets    
Investments 4,776,549 4,321,699
Total available-for-sale financial assets 4,776,549 4,321,699
Total financial assets 6,403,716 5,365,921
Financial Liabilities    
Financial liabilities measured at amortised cost    
Trade creditors and accruals 12,320 12,010
Subsidies payable 8,196 12,773
Grants payable 29,550 23,519
Total financial liabilities measured at amortised cost 50,066 48,302
Total financial liabilities 50,066 48,302

The carrying value of financial assets and liabilities is a reasonable approximation of fair value.

7.3B: Net Gains and Losses on Financial Assets
 2017
$'000
2016
$'000
Loans and receivables    
Interest revenue 46,162 33,774
Impairment (56,770) (1,054)
Net gains on loans and receivables (10,608) 32,720
Available-for-sale financial assets    
Dividend revenue 82,814 94,259
Gains/(losses) recognised in other comprehensive income 394,903 (266,440)
Net gains/(losses) on available-for-sale financial assets 477,717 (172,181)
Net gains/(losses) on financial assets 467,109 (139,461)

There was no income or expense associated with financial liabilities during the financial year.

7.4 Fair Value Measurement

7.4A: Fair Value Measurement
 Fair value measurements
at the end of the reporting period
2017
$'000
2016
$'000
Non-financial assets    
Land and Buildings 19,919 20,773
Property, plant and equipment 5,768 7,007
Total non-financial assets 25,687 27,780
Total fair value measurements of assets in the statement of financial position 25,687 27,780

7.5 Administered—Fair Value Measurement

7.5A: Fair Value Measurement
 Fair value measurements at the end of the reporting period
2017
$'000
2016
$'000
Financial assets    
Investments accounted for using the net assets method 377,043 361,299
Investments accounted for using the discounted cashflow method 4,399,506 3,960,400
Total financial assets 4,776,549 4,321,699
Non-financial assets    
Land 407,048 233,858
Buildings 133,098 155,721
Artworks 33,662 33,662
Other heritage and cultural 81,235 81,119
Other property, plant and equipment 355,848 358,688
Intangibles—Phosphate mine leases 4,999 6,249
Total non-financial assets 1,015,890 869,297
Total fair value measurements of assets in the statement of financial position 5,792,439 5,190,996

Accounting Policy

Fair Value Measurements

The Department deems transfers between levels of the fair value hierarchy to have occurred at the date of the event or change in circumstances that caused the transfer.

The fair value of investments accounted for using the net asset method is based on advice from each entity on their net asset position at the end of the reporting period.

The fair value of investments accounted for using the discounted cash flow method comprise Airservices Australia and the Australian Rail Track Corporation (ARTC). The fair value of the investment in Airservices Australia was based on advice from a valuation expert using a discounted cash flow method. The fair value of the investment in ARTC was determined in accordance with the policies, judgements and estimates reported in Note 4.1.

The fair value of non-financial assets was determined based on advice from valuation experts. The experts provided written assurance to the Department that the model used to value the assets was in compliance with AASB 13 and represents their highest and best use.

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