21. Financial instruments

A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial assets and liabilities are recognised on the balance sheet when the department becomes a party to the contractual provisions of the financial instrument.  The department’s financial instruments include cash and deposits; receivables; advances paid; payables; advances received; and borrowings.

Due to the nature of operating activities, certain financial assets and financial liabilities arise under statutory obligations rather than a contract. Such financial assets and liabilities do not meet the definition of financial instruments as per AASB 132 Financial Instruments: Presentation. These include statutory receivables arising from taxes including GST.

The department has limited exposure to financial risks as discussed below.

Exposure to interest rate risk, foreign exchange risk, credit risk, price risk and liquidity risk arise in the normal course of activities. The department’s investments are predominantly managed through the Northern Territory Treasury Corporation adopting strategies to minimise the risk.

a) Categories of financial instruments

The carrying amounts of the department’s financial assets and liabilities by category are disclosed in the table below.

2018-19 Categories of financial instruments

Fair value through profit or loss
Mandatorily at fair value
$000
Designated at fair value
$000
Amortised cost
$000
Fair value through other comprehensive income
$000
Total
$000
Cash and deposits 0 0 71,482 0 71,482
Receivables10 0 4,781 0 4,781
Advances paid 0 0 3,332 0 3,332
Total financial assets 0 0 79,595 0 79,595
      
Payables 0 0 1 216 0 1,216
Advances received 0 0 3 332 0 3,332
Financial lease liabilities 0 0 364 0 364
Total financial liabilities 0 0 4,912 0 4,912

1 Total amounts disclosed here exclude statutory amounts.

2017-18 Categories of financial instruments

Fair value through profit or loss Held to maturity investments
$000
Financial assets – loans and receivables
$000
Financial assets – available for sale
$000
Financial liabilities – amortised
cost
$000
Held for trading
$000
Designated at fair value
$000
Total
$000
Cash and deposits 0 58,199 0 0 0 0 58,199
Receivables10 0 0 1,516 0 0 1,516
Advances paid 0 0 0 5,332 0 0 5,332
Total financial assets 0 58,199 0 6,848 0 0 65,047
        
Payables 0 1,750 0 0 0 0 1,750
Advances received 0 0 0 0 0 5,332 5,332
Financial lease liabilities 0 0 0 0 0 369 369
Total financial liabilities 0 1,750 0 0 0 5,701 7,451

1Total amounts disclosed here exclude statutory amounts.

Classification of financial instruments from 1 July 2018

From 1 July 2018, the department classifies its financial assets in the following measurement categories:

  • those to be measured subsequently at fair value (either through other comprehensive income (OCI) or through profit or loss)
  • those to be measured at amortised cost.

The classification depends on the department’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, the department has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

The department reclassifies debt investments when and only when its business model for managing those assets changes.

At initial recognition, the department measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

Debt instruments

Subsequent measurement of debt instruments depends on the department’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the department classifies its debt instruments:

  • Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is calculated using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses).
  • FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses and interest income which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is calculated using the effective interest rate method.
  • FVTPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognised in profit or loss and presented net within other gains/ (losses) in the period in which it arises.

Changes in the fair value of financial assets at FVTPL are recognised in other gains/(losses) in the statement of profit or loss as applicable.

Financial liabilities are classified into the following categories either at FVTPL or at amortised cost. The classification and measurement of financial liabilities under AASB 9 is substantially the same as in AASB 139, except where an entity designates financial liabilities at FVTPL. For such liabilities, the fair value changes of liabilities designated at FVTPL are presented as follows:

  • the fair value changes attributable to changes in the liability’s credit risk are recognised in OCI
  • the remaining changes in the fair value are recognised in profit or loss.

Classification of financial instruments until 30 June 2018

The department has elected not to restate comparative information. As a result, the comparative information provided continues to be accounted for in accordance with AASB 139.

Financial assets are classified into the following categories:

  • financial assets at fair value through profit or loss
  • held-to-maturity investments
  • loans and receivables
  • available-for-sale financial assets.

Financial liabilities are classified into the following categories:

  • financial liabilities at fair value through profit or loss (FVTPL)
  • financial liabilities at amortised cost.

Financial assets or financial liabilities at fair value through profit or loss

Financial instruments are classified as at FVTPL when the instrument is either held for trading or is designated as at FVTPL. Financial instruments classified as at FVTPL are initially and subsequently measured at fair value. Gains or losses on these assets are recognised in the net result for the year.

Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the entity has the positive intent and ability to hold to maturity. Held-to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those held for trading and available for sale. Loans and receivables exclude statutory receivables. Loans and receivables are measured initially at fair value and subsequently at amortised cost using the effective interest rate method less impairment.

Financial liabilities at amortised cost

Financial liabilities are measured at amortised cost include all advances received, finance lease liabilities and borrowings. Amortised cost is calculated using the effective interest method.

b) Credit risk

The department has limited credit risk exposure (risk of default). In respect of any dealings with organisations external to Government, the department has adopted a policy of only dealing with credit worthy organisations and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults.

The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses,represents the department’s maximum exposure to credit risk without taking account of the value of any collateral or other security obtained.

Credit risk relating to receivables is disclosed in Note 11 and advances paid in Note 12.

c) Liquidity risk

Liquidity risk is the risk that the department will not be able to meet its financial obligations as they fall due. The department’s approach to managing liquidity is to ensure that it will always have sufficient funds to meet its liabilities when they fall due. This is achieved by ensuring that minimum levels of cash are held in the department’s bank account to meet various current employee and supplier liabilities. The department’s exposure to liquidity risk is minimal. Cash injections are available from the Central Holding Authority in the event that one-off extraordinary expenditure items arise that deplete cash to levels that compromise the department’s ability to meet its financial obligations.

The following tables detail the department’s remaining contractual maturity for its financial liabilities, calculated based on undiscounted cash flows at reporting date. The undiscounted cash flows in these tables differ from the amounts included in the balance sheet which are based on discounted cash flows.

2019 Maturity analysis for financial liabilities

Carrying
amount
$000
Less than
a Year
$000
1 to 5 Years
$000
More than
5 Years
$000
Total
$000
Liabilities      
Payables 1,216 1,216 0 0 1,216
Advances received 3,332 3,332 0 0 3,332
Financial leased liabilities 364 17 68 541 626
Total financial liabilities 4,912 4,565 68 541 5,174

2018 Maturity analysis for financial liabilities

Carrying
amount
$000
Less than
a Year
$000
1 to 5 Years
$000
More than
5 Years
$000
Total
$000
Liabilities      
Payables 1,750 1,750 0 0 1,750
Advances received 5,332 5,332 0 0 5,332
Financial leased liabilities 369 17 68 558 643
Total financial liabilities 7,451 7,099 68 558 7,725

d) Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. It comprises interest rate risk, price risk and currency risk.

i) Interest rate risk

The department has limited exposure to interest rate risk as the department’s financial assets and financial liabilities, with the exception of finance leases are non interest bearing. Finance lease arrangements are established on a fixed interest rate and as such do not expose the department to interest rate risk.

ii) Price risk

The department is not exposed to price risk as the department does not hold units in unit trusts.

iii) Currency risk

The department is not exposed to currency risk as the department does not hold borrowings denominated in foreign currencies or transactional currency exposures arising from purchases in a foreign currency.


ANNUAL REPORT 2018-19 - DEPARTMENT OF PRIMARY INDUSTRY AND RESOURCES


Last updated: 23 October 2019

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