Defence Annual Report 2002-03 :: Chapter Three :: 2002-03 Financial Statements :: Notes To And Forming Part Of The Financial Statements

*Department of Defence*
**Notes To And Forming Part Of The Financial Statements**
for the year ended 30 June 2003
Departmental - Other Disclosures
Note 18:	Analysis of Equity
(a) Terms, conditions and accounting policies
Defence's accounting policies, including the terms and conditions of each class of departmental financial asset, financial liability and equity instrument, both recognised: and unrecognised as at 30 June 2003, are as follows

Financial instrument	Notes	Accounting Policies and Methods (including recognition criteria and measurement basis)	Nature of Underlying Instrument (including significant terms and conditions affecting the amount, timing and certainty of cash flows)
FINANCIAL ASSETS		Financial assets are recognised when control over future economic benefits is established and the amount of the benefit can be reliably measured.	Refer to details below.
Cash	6A	Cash includes cash on hand and at bank, measured in nominal dollars. Cash held in foreign currencies is converted to AUD at the exchange rates applying at 30 June 2003.	Defence invests funds with the Reserve Bank at call and on term deposit. At call daily interest rates were 2% pa and term deposit interest rates ranged from 4.2% pa to 4.95% pa. Interest is credited to revenue as it accrues. Defence also holds balances with other financial institutions with an average weighted rate of 0.547% (2002: 1.01%). The department ceased to invest domestic funds in January 2003.
Receivables for goods and services and other receivables	6B	Receivables are carried at nominal amounts less a provision for doubtful debts. The provision is based on an analysis of the expected realisation of outstanding debts and write-off experience from prior years. Bad debts are written off as they are identified. Receivables is measured in nominal dollars. Receivables held in foreign currencies are converted to AUD at the exchange rates applying at 30 June 2003.	Receivables are with entities predominantly external to the Commonwealth. Credit terms are 30 days (2001-02: 30 days).
Receivables - Foreign Military Sales base-level funding	6B	The balance of the US Federal Reserve Bank account is held at nominal amounts in United States dollars (USD) and converted to AUD at 30 June 2003 at the exchange rates applying	Under the foreign military sales program, a prescribed amount is required to be maintained in the United States Federal Reserve Bank account. This currently stands at $US40m or $AUD59.719m. (2002: $US 40m or $AUD 71.684m).
Capital Use Charge Receivable	6C	This receivable opening balance recognises an overpayment of Capital Use Charge in the previous financial year.	The Government has decided that the Capital Use Charge will not operate after 30 June 2003, and accordingly, the final year charge has been set at a level that ensures budget neutrality.
Appropriations receivable	6B	These receivables are recognised at their nominal amounts.	Amounts appropriated by the Parliament in the current or previous years which are available to be drawndown by the Department . Also includes amounts to be appropriated by the Parliament in a future year for services provided in previous years under a purchasing workload or similar agreement.
Receivables - sale of capital assets	6B	Receivables for the sale of capital assets are carried at nominal amounts. Receivables held in foreign currencies are converted to AUD at the exchange rate applying at 30 June 2003	Terms and conditions are contractually determined at the time of sale.
FINANCIAL LIABILITIES		Financial liabilities are recognised when a present obligation to another party is entered into and the amount of the liability can be reliably measured.	Refer to details below.
Finance lease liabilities	8a	Liabilities are recognised at the present value of the minimum lease payments at the beginning of the lease. The discount rates used are estimates of the interest rates implicit in the leases.	As at 30 June 2003 Defence had finance leases with an average lease term of 15 years (2001-02: 15 years). The interest implicit in the leases averaged 7.527% for 2002-03 (2001-02: 7.482%).
Suppliers and other payables	10A & 10B	Creditors and accruals are recognised at their nominal value, being the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).	All creditors are entities that are not part of the Commonwealth legal entity. Settlement is usually made within 30 days (2001-02: 30 days).
Unrecognised Financial Liabilities
Indemnities/guarantees	13	All indemnities/guarantees are considered remote and are reported in a separate note to the financial statements unless they have been specifically identified otherwise.	Indemnities issued cover potential losses for which Defence may otherwise be liable at law although the initial loss would accrue to the other party, or potential losses or damages for which Defence would not be liable without the indemnity.

(b) Interest rate risk
Defence's exposure to interest rate risks and the effective interest rate of financial assets and liabilities are as follows:

Financial Instrument	Notes	Floating interest rate		Fixed interest rate						Non interest bearing		Total		Weighted average effective annual interest rate
		Floating interest rate		1 year or less		1 to 5 years		> 5 years		Non interest bearing		Total		Weighted average effective annual interest rate
		2002-03 $'000	2001-02 $'000	2002-03 $'000	2001-02 $'000	2002-03 $'000	2001-02 $'000	2002-03 $'000	2001-02 $'000	2002-03 $'000	2001-02 $'000	2002-03 $'000	2001-02 $'000	2002-03 %	2001-02 %
Financial Assets
Cash on hand	6A	-	-	-	-	-	-	-	-	3,364	1,565	3,364	1,565	N/A	N/A
Cash at bank⁽¹⁾ ⁽²⁾	6A	115,972	487,999	-	-	-	-	-	-	(19,779)	(453,911)	96,193	34,088	0.547	1.01
Term deposits	6A	-	-		799,500	-	-	-	-	-	-	-	799,500	4.78	4.75
Receivables for goods and services (gross)	6B	-	-	-	-	-	-	-	-	77,321	177,138	77,321	177,138	N/A	N/A
Capital Use Charge receivable	6C	-	-	-	-	-	-	-	-	-	137,978	-	137,978	N/A	N/A
FMS base-level funding⁽¹⁾	6B	59,719	71,684	-	-	-	-	-	-	-	-	59,719	71,684	N/A	N/A
Appropriations receivable	6B	-	-	-	-	-	-	-	-	870,201	-	870,201	-	N/A	N/A
Other receivables	6B	-	-	-	-	-	-	-	-	149,016	166,278	149,016	166,287	N/A	N/A
Total		175,691	559,683	-	799,500	-	-	-	-	1,080,123	(3,738)	1,255,814	1,355,445
Total Assets												51,410,618	49,953,117
Financial Liabilities
Finance lease	8A	-	-	9,774	8,914	46,699	42,669	287,265	308,688	-	-	343,738	360,271	7.53	7.48
Suppliers	10A	-	-	-	-	-	-	-	-	1,200,066	1,033,744	1,200,066	1,033,744	N/A	N/A
Other payables	10B	-	-	-	-	-	-	-	-	30,130	15,052	30,130	15,052	N/A	N/A
Total		-	-	9,774	8,914	46,699	42,669	287,265	308,688	1,230,196	1,048,796	1,573,934	1,409,067
Total Liabilities												5,235,244	4,363,671
Unrecognised Indemnity	13	-	-	-	-	-	-	-	-	1,123,699	582,600	1,123,699	582,600	N/A	N/A

Notes

Interest earned is returned to the Official Public Account through the administered entity.
The Department ceased to invest domestic funds in January 2003. The interest rate of 4.78% relates to July 2002 to January 2003.

(c) Net fair values of financial assets and liabilities
The aggregate net fair values of financial assets and financial liabilities, as at 30 June 2003, are as follows:

		2002-03		2001-02
Financial Instrument	Note	Total Carrying Amount	Aggregate Net Fair Value	Total Carrying Amount	Aggregate Net Fair Value
Financial Instrument		$'000	$'000	$'000	$'000
Departmental Financial Assets
Cash	6A	99,557	99,557	35,653	35,653
Receivables - goods and services	6B	77,321	77,321	177,138	102,783
Receivables - FMS base-level funding	6B	59,719	59,719	71,684	71,684
Receivables - other	6B	149,016	149,016	166,287	133,491
Appropriations receivable	6B	870,201	870,201	-	-
Appropriations receivable - CUC	6C	-	-	137,978	137,978
Term deposit	6A	-	-	799,500	799,500
Total financial assets		1,255,814	1,225,814	1,388,240	1,355,444

Financial Liabilities (Recognised)
Finance leases	8A	343,738	343,738	360,271	360,271
Suppliers	10A	1,200,066	1,200,066	1,033,744	1,033,744
Other payables	10B	30,130	30,130	15,052	15,052
Total Financial Liabilities (Recognised)		1,573,934	1,573,934	1,409,067	1,409,067

Financial Liabilities (Unrecognised)

Unrecognised indemnities		1,123,699	1,123,699	582,600	582,600

The following assumptions are used to determine the net fair value of financial assets and liabilities:

Recognised Financial Instruments

Departmental Financial Assets

For the departmental financial assets the carrying amounts approximate their fair values.

Financial Liabilities (Recognised)

Finance leases: the net fair value of finance leases is based on discounted cash flow analysis using current incremental borrowing rates for similar types of borrowing arrangements.

Suppliers and accruals: the carrying amount approximates net fair value.

Unrecognised Financial Instruments

Indemnities: the net fair values of indemnities are regarded as the maximum possible loss, which the Commonwealth faces while the indemnity remains current

(d) Credit risk exposure

Defence's maximum exposure to credit risk at the reporting date in relation to each class of recognised financial assets is the carrying amount of those assets as indicated in the Statement of Financial Position. Defence has no significant exposures to any concentrations of credit risk. All figures for credit risk referred to do not take into account the value of any collateral or other security.

(e) Foreign exchange risk

Foreign currency transactions are recorded at the rate of exchange at the date of the transaction. Foreign currency receivables, payables and provisions are translated at exchange rates current at the balance date. Exchange gains and losses are brought to account in determining the operating result for the year. These exchange gains and losses are not speculative and no hedging is undertaken. Defence is exposed to foreign currency exchange rate risk through primary financial assets and liabilities. The following table summarises, by currency in Australian dollars, the foreign exchange risk in respect of recognised financial assets and financial liabilities.

	United States Dollars	New Zealand Dollars	Euro Dollars	English Pounds	Indian Rupee	Canadian Dollars	Swiss Francs	Other	Total
	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000	$'000

Financial Assets
Cash	137,506	13	172	-	3,464	-	-	343	141,498
Receivables	73,473	22,779	-	22	-	-	1	-	96,275
	210,979	22,792	172	22	3,464	-	1	343	237,773

Financial Liabilities
Suppliers	248,685	38	13,531	11,456	-	3,239	1,138	415	278,502

Departmental currency risk is minimised through budget supplementation for any adverse movements in exchange rates on financial assets and financial liabilities held in foreign currencies.

2002-03 Financial Statements

(a) Terms, conditions and accounting policies