D1 : Financial instruments | Annual Report 2017-18

Key judgements and estimates

Loans to state and territory governments

Concessional loan balances receivable from states and territories are measured at amortised cost and no security is held
for these. Repayments are based on a reducing balance method. The amortised cost differs from fair value which has
been disclosed under Note D1.2.

Investments in Commonwealth corporate entities (CCEs)

CCEs are wholly owned by the Commonwealth and managed by Finance on behalf of the Commonwealth. CCEs are
not controlled by Finance and have been reported as investments and measured at fair value.

The following are details of Finance’s CCEs:

• CSC is a trustee and administrator of Commonwealth superannuation schemes. The value of CSC has been measured using the net assets (NET) reported in its financial statements. A change in the net assets would result in an equal change in reported fair value.
• Australian Naval Infrastructure (ANI) Pty Ltd has begun the redevelopment of the Osborne South Shipyard and is in the process of establishing its long term leasing/access arrangements for the critical infrastructure in its ownership. The value of ANI has been measured using the net assets (NET) reported in its financial statements. A change in the net assets would result in an equal change in reported fair value.
• ASC Pty Ltd (ASC) provides ongoing capability for the through life support of the Collins class submarine and is the shipbuilder for the Air Warfare Destroyer and Offshore Patrol Vessel programs. ASC has been measured using reporting date value of the future cash flows of the company sourced from the 2018-23 Corporate Plan and an extended forecast model out to 2027 based on information in the ASC internal valuation.
  • On 29 June 2018, the Government announced plans for the construction of anti-submarine warfare frigates (Future Frigate program – Hunter Class frigates). The frigates will be built by ASC Shipbuilding, which is currently wholly owned by the Commonwealth (through ASC Pty Ltd) and will become a subsidiary of BAE Systems during the construction phase. Details in relation to the transfer of ASC Shipbuilding to BAE Systems are currently being determined. Cash flows in relation to ASC Shipbuilding have been excluded from the valuation.
  • ASC’s cash flows have been discounted using the weighted average cost of capital (WACC). The WACC is calculated based on a number of inputs derived from either professional judgement or observable historical market data of comparable entities. The impact of WACC changes is included as part of Market Risk analysis in Note D2.1.

D1.2 Fair value information by financial asset class

The following table sets out the fair value, valuation techniques and inputs used for Administered financial instruments. The techniques used to value financial instruments have not changed during the year.

Financial instruments have been valued using inputs under the following fair value hierarchy:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that Finance can access at measurement date.
• Level 2: observable inputs that are derived from prices in active markets.
• Level 3: inputs that are not observable and involve significant judgement.

Fair value measurements at the end of the reporting period

¹ Price Index (PI) values based on observable market data relating to prices, industry accepted pricing models and broker/dealer quotes

Movements of recurring level 3 financial assets

Foreign exchange gains/losses

All foreign currency transactions during the period are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency items at reporting date are translated at the exchange rate existing at reporting date. Exchange differences are recognised in the surplus/(deficit) in the period in which they arise.