03Financial Statements

CEFC ANNUAL REPORT / 2015–16

Note 6: Managing Uncertainties

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

6.1: Contingent Assets and Liabilities      

Quantifiable Contingencies

The Corporation had no significant quantifiable contingencies as at 30 June 2016 or 2015.

Unquantifiable Contingencies

At 30 June 2016 and 2015 the Corporation had no significant unquantifiable contingencies.

Accounting Policy

Contingent liabilities and contingent assets are not recognised in the statement of financial position but are reported in the relevant schedules and 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 more than likely and contingent liabilities are disclosed when settlement is greater than remote.

Concessionality that may arise in relation to contingent credit facilities, in the situation where the Corporation has retained discretion as to whether it will fund these future commitments (i.e. they are subject to the occurrence of future uncertain events), is not recorded until such time as the loan commitments become non-contingent.

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.

6.2: Financial Instruments

 

2016
$’000

2015
$’000

6.2A: Categories of Financial Instruments

Financial Assets

 

 

Cash and cash equivalents

232,778

149,577

Total cash and cash equivalents 

232,778

149,577

Loans and receivables

 

 

Trade and other receivables

3,853

6,451

Short-term investments

-

100,000

Loans and advances

402,225

322,871

Other financial assets

306,594

597,875

Total loans and receivables

712,672

1,027,197

AFS financial assets

 

 

Debt

276,973

75,902

Equity securities

721

1,155

Total AFS financial assets

277,694

77,057

Carrying amount of financial assets

1,223,144

1,253,831

Financial Liabilities

 

 

At amortised cost

 

 

Trade creditors and accruals

1,324

1,617

Other

166

304

Total at amortised cost

1,490

1,921

At fair value

 

 

Provision for concessional loans

12,986

10,233

Total at fair value

12,986

10,233

Total financial liabilities

14,476

12,154

Carrying amount of financial liabilities

14,476

12,154

 

2016
$’000

2015
$’000

6.2B: Net Gains on Financial Assets

Cash and cash equivalents

 

 

Interest from cash and short-term investments

7,536

12,711

Interest from other financial assets

12,209

15,932

Net gains on cash and cash equivalents

19,745

28,643

Loans and receivables

 

 

Interest income and fees

24,910

22,826

Unwind of concessional loan discount

2,011

1,508

Net gains on loans and receivables

26,921

24,334

AFS financial assets

 

 

Interest income from debt securities

4,347

1,642

Distributions from equity investments

30

19

Net gains on AFS financial assets

4,377

1,661

Net gains on financial assets

51,043

54,638

 The total interest income from financial assets not at fair value through profit or loss was $51,043,000 (2015: $54,638,000).

 

2016
$’000

2015
$’000

6.2C: Net losses on Financial Liabilities

Financial liabilities - at amortised cost

 

 

Interest expense

-

6

Net losses on financial liabilities - at amortised cost

-

6

Net losses on financial liabilities

-

6

 The total interest expense from financial liabilities not at fair value through profit or loss was $Nil (2015: $6,000).

6.2D: Credit Risk

Credit risk arises from the possibility of defaults on contractual obligations, resulting in financial loss.

The Corporation manages its credit risk by undertaking background and credit checks prior to allowing a debtor relationship. In addition, the Corporation has policies and procedures that guide employee’s debt recovery techniques.

The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on Management’s credit evaluation of the counterparty. Collateral held will vary, but may include:

a floating charge over all assets and undertakings of an entity, including uncalled capital and called but unpaid capital;

  • a floating charge over all assets and undertakings of an entity, including uncalled capital and called but unpaid capital;
  • specific or inter-locking guarantees;
  • specific charges over defined assets of the counterparty; and
  • loan agreements which include affirmative and negative covenants and in some instances, guarantees of counterparty obligations.

Credit quality of financial instruments not past due or individually determined as impaired

 

Note

Not past due
nor impaired

2016
$’000

Not past due
nor impaired

2015
$’000

Past due
or impaired

2016
$’000

Past due
or impaired

2015
$’000

Total

2016
$’000

Total

2015
$’000

Cash and cash equivalents

3.1A

232,778

149,577

-

-

232,778

149,577

Short-term investments

3.1B

-

100,000

-

-

-

100,000

Trade and other receivables

3.1C

3,853

6,451

-

-

3,853

6,451

Loans and advances

3.1D

402,452

322,276

2,692

3,431

405,144

325,707

AFS financial assets

3.1E

277,694

77,057

-

-

277,694

77,057

Other financial assets

3.1F

306,594

597,875

-

-

306,594

597,875

Total financial assets

 

1,223,371

1,253,236

2,692

3,431

1,226,063

1,256,667

Committed credit facilities

6.5

789,206

704,245

-

-

789,206

704,245

Total Commitments

 

789,206

704,245

-

-

789,206

704,245

Total credit risk exposure

 

2,012,577

1,957,481

2,692

3,431

2,015,269

1,960,912

Cash and cash equivalents are held with authorised deposit-taking institutions in Australia in accordance with the prudential controls set by the PGPA Act.

Non-financial assets, including property, plant and equipment, have not been included in the above table as there is no significant associated credit risk.

Ageing of financial assets that were past due but not impaired for 2016

The Corporation had no amounts past due but not impaired at 30 June 2016 (2015: $Nil).

6.2E: Liquidity Risk

The Corporation’s financial liabilities are trade creditors, operating leases, provisions for concessional loans and amounts owing to the Australian Taxation Office. The exposure to liquidity risk is based on the notion that the Corporation will encounter difficulty in meeting its obligations associated with financial liabilities. This is considered highly unlikely as the Corporation has significant cash balances, all invested short-term, access to government funding, and internal policies and procedures in place to ensure there are appropriate resources to meet its financial obligations.

Maturities for non-derivative financial liabilities 2016

 

On
demand

$’000

within
1 year

$’000

1 to
2 years

$’000

2 to
5 years

$’000

> 5 years

$’000

 

Total

$’000

Trade creditors and accruals

-

1,324

-

-

-

1,324

Provision for concessional loans

-

5,362

950

6,674

-

12,986

Other

-

166

-

-

-

166

Total

-

6,852

950

6,674

-

14,476

 Maturities for non-derivative financial liabilities 2015

 

On

demand

$’000

within
1 year

$’000

1 to
2 years

$’000

2 to
5 years

$’000

> 5 years

$’000

 

Total

$’000

Trade creditors and accruals

-

1,617

-

-

-

1,617

Provision for concessional loans

-

1,670

2,773

5,790

-

10,233

Other

-

304

-

-

-

304

Total

-

3,591

2,773

5,790

-

12,154

Any financing shortfall is addressed through the contribution of equity provided by the Australian Government from the CEFC Special Account that is to be funded in an amount of $2 billion per annum for each of the 5 years commencing 1 July 2013. The Corporation has drawn amounts totalling $1,462.8 million from this Special Account to fund its investments and has returned amounts totalling $441.8 million in relation to investments that have been redeemed or repaid, leaving a net drawn balance of $1,021 million at 30 June 2016 (2015: $1,081 million).

6.2F: Market Risk

The Corporation holds basic financial instruments that do not expose it to certain direct market risks, such as ‘Currency risk’ and ‘Other price risk’. However, the Corporation is involved in lending and therefore inherent interest rate risks arise.

The Corporation accounts for loans and advances at amortised cost, so any change to fair value arising from a movement in the market interest rates has no impact on the reported profit or loss unless an investment is sold prior to maturity and crystallises a previously unrealised gain or loss.

The Corporation accounts for AFS debt securities at fair market value. A +/-10bp change in the yield of the debt securities would have approximately a $1.5 million (2015: $0.4 million) impact on the fair value at which the instruments are recorded in the statement of financial position.

6.2G: Concentration of Exposure

Concentration of credit risk exists when a number of counterparties are engaged in similar activities, or operate in the same geographical areas or industry sectors and have similar economic characteristics so that their ability to meet contractual obligations is similarly affected by changes in economic, political or other conditions.

The Corporation will have a significant concentration of exposure to the energy and renewables sectors since it has been established for investment in commercialisation and deployment of (or in relation to the use of) Australian based renewable energy, energy efficiency and low emissions technologies (or businesses that supply goods or services needed to develop the same), with at least 50% of its investment in the renewables sector.

The Corporation is in the early stage of investment and therefore will have a relatively concentrated exposure to individual assets, entities and industries until such time as it is able to establish a more broad and diversified portfolio.

6.3: Fair Value of Financial Instruments

The following table provides an analysis of financial instruments that are measured at fair value, or for which fair value is disclosed, by valuation method.

The different levels are defined below:

Level 1: Fair value obtained from unadjusted quoted prices in active markets for identical instruments.

Level 2: Fair value derived from inputs other than quoted prices included within Level 1 that are observable for the instrument, either directly or indirectly.

Level 3: Fair value derived from inputs that are not based on observable market data.

Fair value hierarchy for financial instruments:

 

Fair Value at 30 June 2016

2016 Carrying
Value Total 
$’000

 

Level 1
$’000

Level 2 
$’000

Level 3 
$’000

Total 
$’000

Financial assets at fair value

 

 

 

 

 

AFS financial assets

257,541

20,000

153

277,694

277,694

Financial assets for which fair value is disclosed

Loans and advances

-

261,000

164,000

425,000

402,225

Total for financial assets

257,541

281,000

164,153

702,694

679,919

Financial liabilities at fair value

Provision for concessional loans

-

-

12,986

12,986

12,986

Total for financial liabilities

-

-

12,986

12,986

12,986

There was no transfer between levels.

 

Fair Value at 30 June 2015

2015 Carrying
Value Total 
$’000

 

Level 1
$’000

Level 2 
$’000

Level 3 
$’000

Total 
$’000

Financial assets at fair value

 

 

 

 

 

AFS financial assets

77,027

-

30

77,057

77,057

Financial assets for which fair value is disclosed

Loans and advances

-

235,000

115,000

350,000

322,871

Total

77,027

235,000

115,030

427,057

399,928

Financial liabilities at fair value

Provision for concessional loans

-

-

10,233

10,233

10,233

Total for financial liabilities

-

-

10,233

10,233

10,233

There was no transfer between levels.

Accounting Policy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

   - in the principal market for the asset or liability, or

   - in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Corporation. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Corporation uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Corporation determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Management assessed that cash, cash equivalents, short-term investments, trade and other receivables, other financial assets, supplier payables, and other payables approximate their carrying amounts largely due to the short-term maturities of these instruments.

The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following is a description of the determination of fair value for financial instruments using valuation techniques:

AFS financial assets

   - Fair value of quoted debt securities is derived from quoted market prices in active markets;

   - Fair value of quoted equities is derived from quoted market prices in active markets; and

   - Fair value of the unquoted equities has been estimated using a Discounted Cash Flow (‘DCF’) model. The valuation requires Management to make certain assumptions about the model inputs, including forecast cash flows, the discount rate, credit risk and volatility. The probabilities of the various estimates within the range can be reasonably assessed and are used in Management’s estimate of fair value for these unquoted equity investments.

Loans and advances

   - The fair value on day one is the transaction price, and subsequent fair value is determined by applying market interest rates and using the valuation technique of discounted cash flows through an external valuation system.

   - Non-concessional loans are classified as level 2 and the long-term fixed-rate and variable-rate receivables are valued by the Corporation through an external valuation system that recognises the discounted value of future cash flows based on current market interest rate (base rate plus a credit adjusted margin) for each customer. The credit adjusted margin for each customer is determined by reference to their SCR as set forth in Note 3.1D: Loans and Advances. These SCR’s are reviewed regularly throughout the year by the credit managers within the portfolio management team and any significant changes are reported quarterly to the Board.

   - Concessional loans together with any loans that are identified as requiring a specific impairment allowance are classified as level 3 as the impact on the estimated fair value of the loan arising from the concessionality or a forecast shortfall in cash flows in the case of an impaired loan have to be derived from inputs that are not necessarily based on observable market data. Concessional loans include inputs such as the likely rate of deployment of capital by co-financiers and impaired loans will include inputs such as the likely recovery amount and date of realisation in respect of any security held. Concessional long-term fixed-rate and variable-rate receivables are also valued by the Corporation through an external valuation system that recognises the discounted value of future cash flows based on current market interest rate (base rate plus a credit adjusted margin) for each customer. The credit adjusted margin for each customer is determined by reference to their SCR as set forth in Note 3.1D: Loans and Advances and these SCR’s are reviewed regularly throughout the year by the credit managers within the portfolio management team and any significant changes are reported quarterly to the Board. The impact of concessionality as well as recoverable amounts related to security on impaired assets are factored into the forecasts of future cash flows for each of the transactions.

   - When it is likely that a loan or debt will not be recovered in full, a specific event is recognised and recorded using the discounted cash flow method. All individual facilities are reviewed regularly.

Accounting Judgements and Estimates

Where the fair values of financial assets and financial liabilities recorded on the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but if this is not available, judgement is required to establish fair values. The judgements include considerations of liquidity and model inputs such as discount rates, prepayment rates and default rate assumptions.

6.4: Concessional Loans

 

2016
$’000

2015
$’000

Loan Portfolio

 

 

Nominal value

173,978

123,165

Less principal repayment

(11,276)

(6,729)

Less unexpired discount

(7,857)

(7,044)

Less impairment allowance

(1,008)

(1,336)

Carrying value of concessional loans

153,837

108,056

6.5: Committed Credit Facilities

Commitments represent funds committed by the Corporation to third parties where the funds remain available but undrawn at year end. Commitments to provide credit may convert to loans and other assets in the ordinary course of business. As these commitments may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements.

 

2016
$’000

2015
$’000

Committed credit facilities

514,206

499,245

Committed investments at call

275,000

205,000

Total committed credit facilities as per commitments note

789,206

704,245

At 30 June 2016 the Corporation had entered into agreements to provide loan advances totalling $45 million and purchase corporate bonds totalling $150 million subject to the occurrence of future uncertain events. Due to the uncertainty around the occurrence of the future events, these amounts have been excluded from Committed Credit Facilities.

At 30 June 2016 there was approximately $4.2 million of possible future concessional loan charges to be recorded in relation to the above contingent credit facilities. The actual amount of concessionality cannot be determined until such time as the loan commitments become non-contingent.