Note 2: Reconciliation of Cash (Continued)

Note 2: Reconciliation of cash

Note 2: Reconciliation of cash (continued)

(a)During the 1999-2000 financial year, the second tranche of the Commonwealth's interest in Telstra was sold and the Commonwealth's interest in ADI Limited and Removals Australia was sold through the assets sales program. In addition, Telstra's and the Australian River Company's interest in certain controlled entities were sold.

Note 2: Reconciliation of cash (continued)

Note 2: Reconciliation of cash (continued)

(b)Commonwealth entities classified as financial institutions are the Reserve Bank of Australia and the Export Finance Insurance Corporation.

Note 3: Analysis of sub-functions

Note 3: Analysis of sub-functions (continued)

Note 4: Income tax revenue

Note 5: Indirect tax revenue

Note 6: Other taxes

Note 7: Charges for goods and services

Note 8: Interest and dividends

Note 9: Net foreign exchange gains/(losses)

Note 10: Net gains/(losses) from sale of assets

Note 11: Asset sales program

Note 12: Other sources of non-taxation revenues

Note 13: Employees

Note 14: Suppliers

Note 15: Depreciation and amortisation

Note 16: Net write-down and impairment of assets

Note 17: Other goods and services expenses

Note 18: Grants

Note 19: Borrowing costs

Note 20: Suppliers liabilities

Note 21: Grants payable

Note 22: Other payables

Note 23: Deposits

Note 24: Government securities

Note 25: Loans

Note 26: Leases

Note 27: Other interest bearing liabilities

Note 28: Employee provisions

(a)Superannuation liability predominantly represents the present value of the Commonwealth's contractual liability under its various superannuation schemes for past services as estimated by the actuaries to the respective schemes.

These liabilities do not fall due until the rules of the schemes provide for benefits to be payable, which generally is when members retire. They are thus spread over many years, of the order of sixty, into the future. Accordingly, a maturity schedule has not been provided for this liability.

When the Commonwealth discharges this liability, it will normally obtain reciprocal benefits in the form of savings in old age pension payments to past employees and the receipt of income tax on superannuation payments. In effect, these reciprocal benefits provide a partial offset to the liability, usually referred to as a clawback. The value of the clawback is the present value of additional costs that would fall elsewhere upon the Commonwealth (either through increased expenditure on old age pensions or through reduced tax receipts) if the unfunded liabilities were not discharged.

Since the liability for future pensions is not recognised in the financial statements, it has not been considered appropriate to recognise any potential savings in this liability. Also, the estimated future taxation revenue arising at the time of payment of the superannuation benefits has not been recognised as an asset in these consolidated financial statements.

Note 29: Other provisions

Note 30: Receivables

Note 30: Receivables (continued)

Note 31: Investments — accounted for using the equity method

Note 32: Investments — other

Note 33: Accrued revenue

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Note 34: Land and buildings, infrastructure, plant and intangibles

Note (a): Total (This includes amounts detailed in parts b, c, d and e)

(a)This depreciation range excludes certain leasehold improvements which have depreciation rates of up to 50 per cent.

Note 34: Land and buildings, infrastructure, plant and intangibles (continued)

Note (b): Assets at cost

(a)Pursuant to Australian Accounting Standard 38, certain Commonwealth entities, including Telstra, Snowy Mountains Hydro Electric Authority, Sydney Airport Corporation and Employment National have elected to apply the cost basis of recording property, plant and equipment. The above assets at cost table includes assets that were previously recorded at valuation for these entities.

Note 34: Land and buildings, infrastructure, plant and intangibles (continued)

Note (c): Assets at valuation

(a)Further details of assets at valuation can be found in Note 1.

The reporting periods in which these assets were revalued are as follows:

Note 34: Land and buildings, infrastructure, plant and intangibles (continued)

Note (d): Assets held under finance lease

Note 34: Land and buildings, infrastructure, plant and intangibles (continued)

Note (e): Assets under construction

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Note 35: Inventories

Note 36: Other non-financial assets

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Note 37: Equity

(a)Equity of the Commonwealth Government of Australia(a)

(a)Details contained in this table relate to the economic entity (ie, inclusive of both Commonwealth and outside equity interests).

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Note 37: Equity (continued)

Table 2 — Net revaluation increases/(decreases)

(b)Outside Equity Interests

Note: Shaded areas in Note 37(a) Accumulated Results and Reserves of the Commonwealth Government of Australia are not applicable.

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Note 38: Financial Instruments

(a)Accounting policies

The terms and conditions and accounting policies relating to the Commonwealth’s financial assets and liabilities are detailed in Table A.

(b)Derivatives

Commonwealth entities utilise derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates. Derivatives in use include interest rate swaps, interest rate futures, crosscurrency swaps and forward foreign exchange contracts.

Details of significant derivatives are outlined below.

Interest Rate Swaps

A number of Commonwealth entities utilise interest rate swaps to hedge against interest rate risk. At balance date, the notional principal amounts and periods of expiry of interest rate swaps, are as follows:

Note 38: Financial Instruments (continued)

Reserve Bank of Australia: Foreign Currency Swaps

The Reserve Bank of Australia uses foreign currency swaps to assist daily domestic liquidity management or to smooth the impact of other foreign currency transactions on Reserve Assets. As at 30 June 2001, the Bank was under contract to purchase $16.7billion (2000:$10.1billion) of foreign currency and sell $45.6billion (2000:$27.5billion) of foreign currency. As of that date, there was an unrealised net gain of $0.256 billion (2000: $0.279 billion) on these swap positions. These foreign currency swaps are off balance sheet items.

Cross-Currency Swaps

Commonwealth entities generally enter into cross-currency swaps to protect against exchange rate movements. The most significant of these contracts are entered into by:

• The Australian Office of Financial Management undertakes cross-currency swap transactions on behalf of the Commonwealth to assist with the management of exchange rate risk associated with the Commonwealth debt portfolio. As at 30June2001, the principal amount of cross-currency swap receivables was $9.317billion (2000: $8.983billion) whilst the principal amount of cross-currency swap payables was $13.079 billion (2000: $11.115 billion). The swap principal and interest payable/receivable in relation to these cross currency swaps are disclosed in the financial statements on a net basis.
• Certain other Commonwealth entities, primarily Telstra and the Export Finance Insurance Corporation, utilise cross-currency swaps to hedge borrowings denominated in foreign currencies. The remaining terms and notional principal amounts of these outstanding cross-currency swaps at balance date are:

Note 38: Financial Instruments (continued)

Interest Rate Futures

As at 30 June 2001, the Reserve Bank of Australia used interest rate futures to hedge about 91per cent of the Bank’s foreign currency reserves (excluding gold). The Export Finance Insurance Corporation also uses interest rate futures to reduce its exposure to interest rate risk on its loans and borrowings. The interest rate risks associated with these derivatives are provided in Table B.

Forward Foreign Exchange Contracts

Forward foreign exchange contracts entered into by Commonwealth entities are detailed in Part (c), Foreign exchange risk

Cashflow Matching Deed

The Australian Industry Development Corporation entered into a Cashflow Matching Deed with UBS Warburg in 1997. Under the Deed, UBS Warburg provides a cashflowmatching portfolio of assets and derivative financial instruments, which matched the cashflow requirements of the Corporation's liabilities. The derivative instruments used include interest rate swaps and exchange rate swaps. The notional principal amounts and period of expiry of the foreign currency components of the cashflowmatching swap contracts are as follows:

(c)Foreign exchange risk

Foreign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

A number of Commonwealth entities enter into forward foreign currency contracts to hedge the exchange rate risk on firm or anticipated purchase commitments and borrowings denominated in foreign currencies or to hedge the exchange risk on investments denominated in foreign currencies.

Note 38: Financial Instruments (continued)

The following table sets out the net value of outstanding contracts, including forward exchange contracts, the weighted average contracted exchange rates and the settlement period for these entities:

Where these contracts are utilised to hedge anticipated future transactions, any unrealised gains and losses on the contracts, together with the costs of the contracts, will be recognised in the financial statements at the time the underlying transaction occurs. The net unrecognised gains/(losses) on anticipated foreign currency transactions are:

Note 38: Financial Instruments (continued)

The Commonwealth, through the Australian Office of Financial Management, is open to foreign exchange risk as a result of contractual obligations in relation to crosscurrency swap contracts and foreign currency loans. As a matter of portfolio benchmark policy, exposure to movements in the Australian dollar are not hedged. As at 30 June 2001, foreign currency liabilities of $4.175 billion (2000: $2.697 billion) and foreign currency assets of $0.034 billion (2000: $0.034 billion).

(c)Interest rate risk

The Commonwealth’s exposure to interest rate risk and the effective weighted average interest rate for each class of financial asset and liability is set out at Table B.

(d)Credit risk

Credit risk in relation to financial assets, is the risk that a third party will not meet its obligations in accordance with agreed terms. Generally, the Commonwealth’s maximum exposure to credit risk in relation to each class of recognised financial asset is the carrying amount of those assets as indicated in the Consolidated Statement of Financial Position. For off-balance sheet financial instruments, including derivatives, credit risk also arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity.

The majority of Commonwealth entities do not have significant exposures to any concentrations of credit risk. Generally, Commonwealth entities' exposures are to a large number of customers or highly rated counterparties and their credit risks are very low Commonwealth entities with geographically based concentrations of credit risk outside of Australia include:

• The Export Finance and Insurance Corporation with exposure to credit risk arising from the financing and credit insurance facilities extended by the Corporation. These facilities are provided by EFIC on both a commercial basis and on the National Interest Account.

EFIC's principal exposure risk arises from Loans and Rescheduled Sovereign Debt totalling $4,089.2million as at 30 June 2001 (2000: $3,671.3million) and Export Credit Insurance, Guarantees, Residual value insurance, Bonds, Political Risk Insurance and Reinsurers with a combined risk of $2,126.6million (2000:$2,083.7million).

EFIC employs risk grading systems to rank its risks according to counter party and country risk exposures.

Note 38: Financial Instruments (continued)

• The Reserve Bank of Australia with foreign exchange holdings which are invested mainly in securities (issued by the governments of the United States, Japan and Germany) and bank deposits (with major OECD foreign commercial banks and central banks). The carrying amount of foreign exchange holdings as at 30June2001 is $35,786million (2000: $30,228).

The RBA's exposures are all to highly rated counterparties and its credit risk is very low.

• Telstra with concentrations of credit risk in the United States of $5,809 million (2000: $1,773 million), Europe $4,542 million (2000: $1,404 million) and other countries of $68 million (2000: $146 million).

From time to time the Commonwealth may have significant exposures to credit risk in relation to major asset sales.

(e)Net fair value

The net fair values of the majority of Commonwealth financial assets and liabilities equal or exceed their carrying amounts. The carrying value of assets and liabilities are determined using Generally Accepted Accounting Principles, while net fair value is often determined on market value or a discounted cash flow.

Note 38: Financial Instruments (continued)

The carrying amounts and net fair values of financial assets and liabilities as at the reporting date are as follows:

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Table A: Accounting policies

Financial instrument / Accounting policies and methods / Nature of underlying instrument
FINANCIAL ASSETS / Financial assets are recognised when control over future economic benefits is established and the amount of the benefit can be reliably measured.
Cash:
Cash — Deposits at call / Deposits are recognised at their nominal amounts. Interest is credited to revenue as it accrues. / Cash is a combination of Australian notes and coins on hand, net amounts owed to the Commonwealth for overnight clearance of financial transactions through clearing houses and deposits with financial institutions.
Receivables:
Receivables for goods and services, fees, fines and recoveries. / Receivables are recognised at the nominal amounts due less any provision for bad and doubtful debts. Collectability of debts is reviewed at balance date. Provisions are made when collection of the debt is judged to be less rather than more likely. / All receivables are with entities external to the Commonwealth. Credit sales are normally on
14—30day terms.
Receivables for loans and advances / Loans are recognised at the amounts lent. Collectability of amounts outstanding is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan or part thereof is judged to be less rather than more likely. In rare circumstances, loan repayment may be waived. Interest is credited to revenue as it accrues. / There are certain entities within the Commonwealth that have significant loan balances. The details of the significant terms and conditions relating to these loans are as follows:
Australian Office of Financial Management/Department of Finance and Administration — The Commonwealth has various funding/advance arrangements in place with the States and Territories. The States and Territories are responsible for meeting interest and principal payments.
Export Finance Insurance Corporation — Loans are made to external entities to extend the availability of export finance.
Aboriginal and Torres Strait Islander Commission — Loans are made to external parties for periods up to 25years and security is required.

Table A: Accounting policies (continued)

Financial instrument / Accounting policies and methods / Nature of underlying instrument
Receivables for asset sales / Receivables are carried at their nominal amounts due less any provision for doubtful debts. A provision for doubtful debts is recognised when collection of the full nominal amount is no longer probable. / All receivables are with entities external to the Commonwealth. Receivables for asset sales are settled in accordance with the terms agreed in the sale contract.
Receivables for bills of exchange and promissory notes / Bills of exchange and promissory notes are valued at amortised cost with interest revenue recognised on an effective yield to maturity basis. / The bills of exchange and promissory notes have varying maturity terms and interest arrangements.
Higher Education Contribution Scheme (HECS) / Loans are recognised at the amounts lent. Collectability of amounts outstanding is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan or part thereof is judged to be less, rather than more, likely. In rare circumstances, loan repayments may be waived. Indexation is credited to revenue on 1 June each year. / Loans are made under agreements with students. No security is required. All loans are indexed on 1 June each year using the movement in the CPI over the previous 12 months as the basis for indexation. Repayments are recovered through the Australian Taxation Office's taxation system.
Student Allowances / These receivables are recognised at the time an overpayment is identified or the services are performed. Fines or charges may be imposed where this is allowed under specific legislation. Collectability of amounts outstanding is reviewed at balance date. Provision is made for bad and doubtful loans where collection of the loan is judged to be less, rather than more, likely. / All receivables are recorded at their nominal values. Levies, fines and charges may be levied at rates specified in specific legislation, particularly the Student and Youth Assistance Act.
Investments:
Deposits / Depending on the type of instrument, deposits are recognised at either nominal or market value. Interest is credited to revenue as it accrues. / Deposits have varying terms and rates of interest.
Gold holdings / Gold holdings (including gold on loan to other institutions) are valued at the Australian dollar equivalent of the 3pm fix in the London gold market on the last business day of June. The Reserve Bank of Australia loans gold to financial institutions participating in the gold market. / All gold loans are secured to 110 per cent of their market value by Australian dollar denominated collateral security. Interest on gold loans is accounted for on a standard accrual basis.

Table A: Accounting policies (continued)

Financial instrument / Accounting policies and methods / Nature of underlying instrument
Domestic government securities / The Reserve Bank of Australia holds Australian dollar denominated securities issued by the central borrowing authorities of State and Territory Governments where these are acquired under repurchase agreements. Realised and unrealised gains or losses on domestic government securities are immediately taken to profit and loss. / Securities have varying interest rates and maturity dates depending on terms and conditions of the underlying security.
Foreign government securities / Foreign government securities comprise coupon and discount securities and repurchase agreements. Interest earned on discount securities is the difference between the actual purchase cost and the face value of the security. Interest earned on securities is accrued over the term of the security. / Coupon securities have bi-annual or annual interest payments depending on the currency and type of security. Securities have varying interest rates and maturity dates depending on terms and conditions of the underlying security.
Investments — QuotaInternational Monetary Fund / The investment is denominated in Special Drawing Rights and is valued at the Australian dollar equivalent. Dividend income is not earned from this investment. / The quota represents Australia's membership subscription to the International Monetary Fund (IMF). Each member is required to pay the IMF the amount of its initial quota and subsequent increases partly in the members own currency and the remainder in the form of reserve assets. A members quota is not increased until the member has consented to the increase.
Investments — International financial institutions / Investment is recognised at historical cost. Dividend income is not earned from these investments. / The investment represents Australia's membership in the Asian Development Bank, the International Bank for Reconstruction and Development, the International Finance Corporation and the European Bank for Reconstruction and Development.
Investments in other companies / Investments in other listed and unlisted companies are carried at the lower of cost and recoverable amount. The value of listed shares is determined by reference to the current quoted market price of the shares. The value of unlisted shares is determined by reference to underlying net assets. Dividends are brought to account as they are received. / The shareholdings represent shares in listed and unlisted companies.

Table A: Accounting policies (continued)