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
2018
$'000
2017
$'000
2018
$'000
2017
$'000
Contingent assets
Balance from previous period  - 266 - 266
Assets realised  - (266) - (266)
Total contingent assets - - - -
Net contingent assets/(liabilities) - - - -

Unquantifiable Contingencies

Legal matters

The Department, on behalf of the Commonwealth, is party to several matters before the Federal Court of Australia and the High Court of Australia. Costs may be awarded to or against the Commonwealth for these matters, subject to the Court's decisions. The potential costs or gains cannot be reliably estimated.

7.1B: Administered—Contingent Assets and Liabilities
Claims for damages or costsTotal
2018
$'000
2017
$'000
2018
$'000
2017
$'000
Contingent assets
Balance from previous period 1,938 2,457 1,938 2,457
New contingent assets recognised 20 76 20 76
Re-measurement 7 (38) 7 (38)
Assets realised (1,455) (557) (1,455) (557)
Total contingent assets 510 1,938 510 1,938
Contingent liabilities
Balance from previous period 12,255 11,195 12,255 11,195
Re-measurement 233 1,060 233 1,060
Total contingent liabilities 12,488 12,255 12,488 12,255
Net contingent assets/(liabilities) (11,978) (10,317) (11,978) (10,317)

Quantifiable Administered Contingent Assets

Insurance claims have been submitted to recover costs for damage to properties and infrastructure on Christmas Island and the Jervis Bay Territory.

Quantifiable Administered Contingent Liabilities

Asbestos Remediation costs

The Department maintains registers of Australian Government owned properties in the Indian Ocean Territories, Jervis Bay Territory and Norfolk Island where materials containing asbestos have been identified. Asbestos management plans are in place for these properties, except for certain properties on Norfolk Island where management plans were being developed at 30 June 2018. Contingent liabilities have been quantified for the cost to remediate asbestos in properties in the Indian Ocean Territories and Jervis Bay Territory if conditions change to increase the risk of exposure, such as through damage or renovation. The cost of remediation to properties on Norfolk Island, 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 2018–19 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 2018.

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.

WSA Co Limited—Indemnities

Indemnities have been provided in connection with the establishment of WSA Co, including:

  1. protection for Directors of WSA Co Limited to protect them against certain claims relating to their employment as Directors. Unless the indemnity agreements are varied or brought to an end, they cease to apply from the date the Commonwealth has fully satisfied its obligations to subscribe for equity to WSA Co pursuant to the WSA Co Equity Subscription Agreement
  2. liabilities and costs that may be incurred by WSA Co in the event the Commonwealth terminates the Equity Subscription Agreement between WSA Co and the Commonwealth.

Inland Rail—Termination of the Equity Financing Agreement

The Australian Government will provide sufficient funding to cover all costs and liabilities incurred by the Australian Rail Track Corporation (ARTC) for delivery of Inland Rail in the event that the Commonwealth terminates the Equity Financing Agreement between the Commonwealth and the ARTC.

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 New South Wales Rural Fire Service (NSW RFS) provides fire-fighting services in the Jervis Bay Territory (JBT). Due to the cross-border delivery of fire services from NSW to the JBT, 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.

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 has a constructive obligation to meet 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-five 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 entities.

Potential per- and poly-fluoroalkyl substances contamination—federally leased airports

Airservices Australia has identified a number of sites in Australia that potentially have been contaminated with per- and poly-fluoroalkyl substances (PFAS) previous contained in firefighting foams.

Airport Lessee Companies are responsible for the environmental management of their airport sites. The airport leases contain an indemnity in favour of the Commonwealth specifically relating to damages, costs or injury arising out of any damage or injury to the environment on-airport, both before and after the grant time (with some exceptions applying to the latter). However, which entity is liable for costs/damages/injury arising from PFAS contamination on federally lease airports has not yet been tested or established.

Currently, there are two class actions against the Commonwealth before the Federal Court seeking damages over the use of historical PFAS-containing firefighting foam by the Department of Defence at Williamtown and Oakey. The outcomes of these class actions may have implications for the Department, the Department of Defence and Airservices Australia.

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.

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
2018
$'000
2017
$'000
Financial Assets
Loans and receivables
Cash and cash equivalents 3,010 1,850
Trade receivables 3,609 428
Accrued revenue 1,593 1,084
Total loans and receivables 8,212 3,362
Total financial assets 8,212 3,362
Financial Liabilities
Financial liabilities measured at amortised cost
Trade creditors 3,134 2,885
Accrued expenses 17,889 20,037
Total financial liabilities measured at amortised cost 21,023 22,922
Total financial liabilities 21,023 22,922

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

7.2B: Net Gains or Losses on Financial Assets
2018
$'000
2017
$'000
Loans and receivables
Impairment 14 (144)
Net gains/(losses) on loans and receivables 14 (144)
Net gains/(losses) on financial assets 14 (144)

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
2018
$'000
2017
$'000
Financial Assets
Loans and receivables
Cash and cash equivalents 12,433 65,905
Loans to state and territory governments 2,147,525 1,556,144
Other receivables—fees receivable 1,966 1,833
Accrued revenue 6,177 3,285
Total loans and receivables 2,168,101 1,627,167
Available-for-sale financial assets
Investments 5,380,447 4,776,549
Total available-for-sale financial assets 5,380,447 4,776,549
Total financial assets 7,548,548 6,403,716
Financial Liabilities
Financial liabilities measured at amortised cost
Trade creditors and accruals 20,224 12,320
Subsidies payable 11,640 8,196
Grants payable 29,004 29,550
Concessional loan commitments 102,071 213,280
Total financial liabilities measured at amortised cost 162,939 263,346
Total financial liabilities 162,939 263,346

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

7.3B: Net Gains and Losses on Financial Assets
2018
$'000
2017
$'000
Loans and receivables
Interest revenue 74,420 46,162
Concessional loan expenses (10,246) (18,692)
Impairment (766) (56,770)
Net gains on loans and receivables 63,408 (29,300)
Available-for-sale financial assets
Dividend revenue 84,289 82,814
Gains/(losses) recognised in other comprehensive income 89,738 394,903
Net gains/(losses) on available-for-sale financial assets 174,027 477,717
Net gains/(losses) on financial assets 237,435 448,417

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

7.4 Administered—Fair Value Measurement

7.4A: Fair Value Measurement
Fair value measurements at the end of the reporting period
2018
$'000
2017
$'000
Financial assets
Investments accounted for using the net assets method 775,877 377,043
Investments accounted for using the discounted cashflow method 4,604,570 4,399,506
Total financial assets 5,380,447 4,776,549
Non-financial assets
Land 73,223 407,048
Buildings 132,214 133,098
Artworks 33,662 33,662
Other heritage and cultural 81,294 81,235
Other property, plant and equipment 334,736 355,848
Intangibles—Phosphate mine leases 3,749 4,999
Total non-financial assets 658,878 1,015,890
Total fair value measurements of assets in the statement of financial position 6,039,325 5,792,439

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 reported in Notes 3.2A and 4.2A were 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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