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03 Financial Statements

Note 1: Overview

1.1 Objectives of the Corporation

The Clean Energy Finance Corporation (‘CEFC’ or ‘the Corporation’) was established on 3 August 2012 under the Clean Energy Finance Corporation Act 2012 (Cth) (‘the CEFC Act’) and is classified as a corporate Commonwealth entity. It is a not-for-profit entity with medium to long-term portfolio benchmark return targets (before operating expenses) and, working with co-financiers, its object is to facilitate increased flows of finance into the clean energy sector. The Corporation’s functions are to:

  1. Invest, directly and indirectly, in solely or mainly Australian-based clean energy technologies and projects, which can be any one or more of the following:
    • Renewable energy technologies and projects, which include hybrid technologies that integrate renewable energy technologies and technologies (including enabling technologies) that are related to renewable energy technologies;
    • Energy efficiency technologies and projects, including technologies that are related to energy conservation technologies or demand management technologies (including enabling technologies); and
    • Low emissions technologies and projects.
  2. Liaise with relevant persons and bodies, including the Australian Renewable Energy Agency (‘ARENA’), the Clean Energy Regulator, other Commonwealth agencies and State and Territory governments, for the purposes of facilitating its investment function;
  3. Work with industry, banks and other financiers, and project proponents, to accelerate Australia’s transformation towards a more competitive economy in a carbon constrained world, by acting as a catalyst to increase investment in the clean energy sector; and
  4. Do anything incidental or conducive to the performance of the above functions. 

Effective 10 January 2017, the Corporation was issued with the Clean Energy Finance Corporation Investment Mandate Direction 2016 (No.2) (‘Investment Mandate 2016 (No.2)’) which among other things, required the Corporation to make available up to:

  • $1 billion of investment finance over 10 years for a Reef Funding Program
  • $1 billion of investment finance over 10 years for a Sustainable Cities Investment Program
  • $200 million for debt and equity investment through the Clean Energy Innovation Fund.

1.2 Basis of Preparation of the Financial Statements

The consolidated financial statements of the Clean Energy Finance Corporation (the parent) and its subsidiary (collectively, the Group) are general purpose financial statements and are required by:

  1. section 42 of the PGPA Act; and
  2. section 74 of the CEFC Act.

The consolidated financial statements have been prepared in accordance with:

  1. the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (‘FRR’); and
  2. Australian Accounting Standards (‘AAS’) and Interpretations – Reduced Disclosure Requirements (‘RDR’) issued by the Australian Accounting Standards Board (‘AASB’) that apply for the reporting period, with more extensive disclosures for Financial Instruments.

The consolidated financial statements have been prepared on an accrual basis and in accordance with the historical cost convention, except for certain financial assets and liabilities at fair value. Except where stated, no allowance is made for the effect of changing prices on the results or the financial position.

The consolidated financial statements are presented in Australian dollars and values are rounded to the nearest thousand dollars unless otherwise specified.

Further disclosures about the parent company and its subsidiary can be found at Note 7.

1.3 Events after the Reporting Period

There have been no significant events subsequent to balance date.

1.4 Taxation

The Corporation is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST). The Corporation’s wholly owned subsidiary, CEFC Investments Pty Limited, is not exempt from income tax; however, it has accumulated income tax losses at 30 June 2018, and no certainty as to whether any benefit from those losses would ever be realised as it has incurred losses for the year ended 30 June 2018.

Revenues, expenses and assets are recognised net of GST except:

  1. where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
  2. for receivables and payables.

The net amount of GST payable to the Australian Taxation Office is included as part of the payables or commitments.

The financial statements have been prepared on the basis that the Corporation is generally not entitled to input tax credits for GST included in the price of goods and services acquired because financial supplies, such as loans, are input taxed.

1.5 New Accounting Standards

Adoption of New Australian Accounting Standard Requirements

No accounting standard has been adopted earlier than the application date as stated in the standard.

The new/revised/amending standards and/or interpretations applicable to the current reporting period did not have a material effect on the Group’s financial statements.

Future Australian Accounting Standard Requirements

The following new standards that may have a material effect on the Group’s future financial statements were issued by the AASB prior to the signing of the statement by the Accountable Authority, Chief Executive and Chief Financial Officers:

Standard/Interpretation  Application date for the Group
AASB 9 Financial Instruments 1 July 2018
AASB 16 Leases 1 July 2019

All other new/revised/amending standards and/or interpretations that
were issued prior to the sign-off date and are applicable to future reporting periods (including AASB 15 Revenue from Contracts with Customers) are not expected to have a future material impact on the Group’s financial statements.

AASB 9 Financial Instruments

AASB 9, effective for annual periods beginning on or after 1 January 2018, replaces AASB 139 and includes a model for classification and measurement, a single forward-looking ‘expected loss’ impairment model and a substantially reformed approach to hedge accounting.

a) Classification and Measurement

AASB 9 classifies financial assets into one of three categories, namely:

  • Amortised Cost
  • Fair Value through Other Comprehensive Income (FVOCI)
  • Fair Value through Profit or Loss (FVTPL)

The two principal tests applied in determining which category a loan falls into are:

  • The Business Model test
  • The Cash Flows test

The Business Model test considers whether or not an asset is held in a business model where the objective is to hold financial assets in order to collect contractual cash flows.

The Cash Flows test considers whether or not the future cash flows from an asset are solely payments of principal and interest on the principal amount outstanding.

These tests have been applied for each financial asset in the Group’s portfolio and the following table provides an overview of how assets currently classified as Loans and advances or as Available-for-sale financial assets at 30 June 2018 under AASB 139 would be classified in future under AASB 9.

Classification Notes AASB 139
Loans and advances 3.1C 1,943,740 2,106 (1,945,846)  
Available-for-sale financial assets
Debt securities 3.1D 1,042,797 (4,561) (1,038,236)  
Equities and units in trusts 3.1D 353,772   (353,772)  
Amortised Cost
Loans and advances       1,857,558 1,857,558
Debt securities       337,534 337,534
Fair Value through Profit and Loss
Loans and advances       88,288 88,288
Debt securities       700,702 700,702
Equities and units in trusts       353,772 353,772
    3,340,309 (2,455) 3,337,854

Consolidated Retained Earnings
are expected to increase by $40.1 million and Reserves to decrease by $42.6 million upon adoption of AASB 9 as the Unrealised Gain on prior revaluations of Available-for-sale financial assets is reversed, for assets that will be classified at Amortised Cost under AASB 9, or transferred to Retained Earnings, for assets that will be classified at FVTPL.

The ongoing revaluation of assets which will be classified as FVTPL is also expected to increase earnings volatility following the adoption of AASB 9.

b) Provision for Impairment

AASB 9 replaces the ‘incurred loss’ model of AASB 139 with an ‘expected loss’ model and its impairment provision requirements apply to financial assets measured at Amortised Cost and to loans measured at FVOCI.

AASB 9 introduces a three-stage approach to impairment provisioning as follows:

  • Stage 1 – the recognition of 12-month expected credit losses (ECL), that is the portion of lifetime expected credit losses from default events that are expected within 12 months of the reporting date, if credit risk has not increased significantly since initial recognition;
  • Stage 2 – lifetime expected credit losses for financial instruments for which credit risk has increased significantly since initial recognition; and
  • Stage 3 – lifetime expected credit losses for financial instruments which are credit impaired.

The expected credit loss must also consider forward-looking information to recognise impairment allowances earlier in the lifecycle of an investment and, based on simulations applying the AASB 9 methodology to the Group’s portfolio during the latter part of the financial year, is likely to increase the volatility of impairment provisions; although cash flows and cash losses would remain unchanged.

At Stage 1, ECL is measured as the product of the 12-month Probability of Default (PD), the Loss Given Default (LGD) and Exposure at Default (EAD), adjusted for forward-looking information. At Stage 2, ECL is measured as the product of lifetime PD, LGD and EAD, adjusted for forward-looking information. At Stage 3, ECL is measured as the difference between the contractual and expected future cash flows from the individual exposure, discounted using the effective interest rate for that exposure.

The AASB 9 impairment provision is based on the weighted average of the calculated provision under a range of scenarios, whereas the AASB 139 impairment provision was calculated with reference to a single scenario.

The development of forward looking scenarios requires that:

  • Risks to the portfolio are understood and can be measured
  • The portfolio is segmented appropriately to enable specific forward settings to be applied
  • Development of multiple scenarios that are probability weighted
  • The use of quantitative and qualitative approaches, including expert judgement.

The Group has identified the following as forward-looking macro-economic risk indicators for different segments within our Amortised Cost loan portfolio:

  • Electricity prices
  • Interest rates
  • GDP growth rate
  • Property prices

For AASB 9 impairment provisioning purposes, the Group’s Amortised Cost portfolio has been stratified into eight segments and the impairment provisioning model uses four scenarios in calculating the impairment provision, namely: Base Case, Upside Scenario, Downside Scenario and an Electricity price collapse scenario.

The Group’s Amortised Cost loan portfolio is highly concentrated, particularly in the energy sector (consistent with its mandate) and therefore is likely to be most sensitive to decreases in electricity prices, particularly due to merchant exposure under certain project finance loans. The Group has calculated the ECL under the multiple scenarios mentioned above and these range between approximately $14 million and $50 million depending on the forward-looking macro-economic assumptions adopted and up to $100 million in an extreme electricity price collapse scenario.

CEFC’s impairment provision under AASB 9 has been calculated on a weighted average probability basis from the above scenarios to be $28.8 million as at 30 June 2018 compared to the AASB 139 impairment provisions against loans of $7.0 million (Note 3.1C) and irrevocable commitments of $3.2 million (Note 3.4). Based on these numbers, Opening Retained Earnings at 1 July 2018 will decrease by $18.5 million  upon adoption of AASB 9. This increase in impairment provision is the result of the application of a probability weighted outcome based on multiple scenarios incorporating alternative forward-looking macro-economic indicators together with the lifetime ECL impact for assets in Stage 2, both of which were requirements introduced by AASB 9.

c) Hedge accounting

The AASB 9 hedge accounting provisions are currently not expected to have a material impact on the Group’s financial statements.

d) Prior period comparatives

The Group will not be restating comparatives upon adoption of AASB 9.

AASB 16 Leases

AASB 16 effectively does away with the distinction between an operating lease and a finance lease as lessees are required to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The Group operates from leased premises and the application of AASB 16 will increase Fixed Assets and create a new Liability, on the Statement of Financial Position, and reduce Operating Expenses and increase Finance Charges on the Statement of Comprehensive Income.

Based on the operating leases that the Group has entered into as of the date of this report, when AASB 16 comes into effect on 1 July 2019, we expect to disclose both a right-to-use asset and a lease liability of approximately $4.2 million each. The maximum net impact to the income statement in a given year is expected to be approximately $0.25 million based on current interest rates.