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03 Financial Statements

Note 6: Managing Uncertainties

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

6.1: Contingent Assets and Liabilities

Quantifiable Contingencies

The Group had no significant quantifiable contingencies as at 30 June 2018 or 2017 that are not disclosed elsewhere in these accounts.

Unquantifiable Contingencies

At 30 June 2018 and 2017 the Group 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 Group 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

  2018
$'000
2017
$'000
6.2A: Categories of Financial Instruments
Financial Assets    
Cash and cash equivalents 487,754 401,974
Total cash and cash equivalents 487,754 401,974
Loans and receivables    
Trade and other receivables 12,463 8,227
Loans and advances 1,936,704 771,202
Other financial assets 163,507 278,380
Total loans and receivables 2,112,674 1,057,809
AFS financial assets    
Debt 1,042,797 563,870
Equities and units in trusts 353,772 239,075
Total AFS financial assets 1,396,569 802,945
Derivative financial instruments    
Cash flow hedge on foreign exchange 225
Total derivative financial instruments 225
Carrying amount of financial assets 3,996,997 2,262,953
Financial Liabilities    
At amortised cost    
Trade creditors and accruals 2,974 2,162
Other 2
Total at amortised cost 2,974 2,164
At fair value    
Provision for concessional investments 8,609 19,505
Total at fair value 8,609 19,505
Derivative financial instruments    
Cash flow hedge on foreign exchange 241
Total derivative financial instruments 241
Total financial liabilities 11,824 21,669
Carrying amount of financial liabilities 11,824 21,669


There were no reclassifications of financial instruments during the year.

  2018
$'000
2017
$'000
6.2B: Net Gains on Financial Assets
Cash and cash equivalents    
Interest from cash and short-term investments 10,440 7,199
Interest from other financial assets 4,994 7,488
Net gains on cash and cash equivalents 15,434 14,687
Loans and receivables    
Interest income and fees 75,223 30,045
Unwind of concessional interest rate discount 4,111 2,007
Net gains on loans and receivables 79,334 32,052
AFS financial assets    
Interest income from debt securities 25,498 12,118
Distributions from trusts and equity investments 10,090 5,328
Unwind of concessional interest rate discount on debt securities 2,003 418
Net gains on AFS financial assets 37,591 17,864
Net gains on financial assets 132,359 64,603


The total income from financial assets not at fair value through profit or loss was $132,359,000 (2017: $64,603,000).

6.2C: Credit Risk

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

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

The Group evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Group 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;
  • specific or interlocking 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.

The Group seeks to have a diversified portfolio, monitors exposures to counterparties and has set exposure limits for each counterparty.

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

   Note Not past due nor 
impaired 2018
$'000
 Not past due nor
impaired 2017
$'000
 Past due or
impaired 2018
$'000
 Past due or
impaired 2017
$'000
 Total 2018
$'000
Total 2017
$'000
Cash and cash equivalents 3.1A 487,754 401,974 487,754 401,974
Trade and other receivables 3.1B 12,463 8,227 12,463 8,227
Loans and advances 3.1C 1,943,740 773,049 3,201 1,943,740 776,250
AFS financial assets 3.1D 1,396,569 802,945 1,396,569 802,945
Other financial assets 3.1E 163,507 278,380 163,507 278,380
Derivative financial assets 3.1F 225 225
Total financial assets   4,004,033 2,264,800 3,201 4,004,033 2,268,001
Committed credit facilities 6.5 796,791 949,608 796,791 949,608
Committed trust and equity investments 6.6 354,912 307,492 354,912 307,492
Total Commitments   1,151,703 1,257,100 1,151,703 1,257,100
Total credit risk exposure   5,155,736 3,521,900 3,201 5,155,736 3,525,101


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.

The derivative financial asset has been entered into with a major Australian bank, which has a credit rating of AA–.

Ageing of financial assets that were past due but not impaired for 2018

The Group had no amounts past due but not impaired at 30 June 2018 (2017: $Nil).

6.2D: Liquidity Risk

The Group’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 Group will encounter difficulty in meeting its obligations associated with financial liabilities. This is considered highly unlikely as the Group 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 2018

  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 2,974 2,974
Provision for concessional loans 2,315 2,106 4,188 8,609
Total 5,289 2,106 4,188 11,583


Maturities for non-derivative financial liabilities 2017

  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 2,162 2,162
Provision for concessional loans 12,340 1,347 5,818 19,505
Other 2 2
Total 14,504 1,347 5,818 21,669


Any financing shortfall is addressed through the contribution of equity provided by the Australian Government
from the CEFC Special Account that was funded in an amount of $2 billion per annum for each of the five years from 1 July 2013 to 1 July 2018. The Corporation has drawn amounts totalling $4,162.8 million (2017: $2,462.8 million) from this Special Account to fund its investments and has returned amounts totalling $441.8 million (2017: $441.8 million) in relation to investments that have been redeemed or repaid, leaving a net drawn balance of $3,721 million at 30 June 2018 (2017: $2,021 million).

6.2E: Market Risk

As part of its normal operations, the Group may enter into a variety of transactions including loans, guarantees, bonds and equity and trust investments, which may have exposure to market risk. Investment carrying values and revenue earned may be impacted as a result of changes in interest rates, electricity prices, property values and foreign exchange rates.

The Group may enter into financial derivative transactions to protect against foreign exchange risks associated with its investment function. The Group does not enter into derivative instruments for speculative or trading purposes.

Derivative transactions may include:

  • interest rate swaps, forward rate agreements and futures contracts which protect against interest rate movements where the interest rate basis of the borrowing is different from that of the required liability to fund assets. These contracts are used primarily to convert between fixed rate and floating rate exposures
  • cross-currency swaps which protect the Group against interest rate and foreign exchange movements where the currency of the asset and interest receipts are not Australian dollars and
  • forward foreign exchange contracts which are used to protect against foreign exchange movements in investments, loans and borrowings. The Group also conducts stress testing, including examining the impact on the credit portfolio of adverse movements in foreign exchange rates and interest rates.
a) Interest rate risk

The Group is involved in lending and therefore its revenues and the carrying value of its AFS investments may be exposed to changes in interest rates.

The impact of a change in interest rates on the Group’s interest income is not expected to be material as the majority of the Group’s loans and advances are at fixed rates; however, interest receivable from cash and other financial assets will be impacted prospectively from a change in interest rates. The Group’s primary exposure to interest rate risks of interest bearing financial assets and financial liabilities is set out below. Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Interest on financial instruments classified as fixed rate is fixed until maturity of the instrument.

  2018
$'000
2017
$'000
Interest Bearing Financial Assets    
Classified as floating rate    
Cash and cash equivalents 487,754 401,974
Other financial assets 163,507 278,380
Loans and advances 141,413 26,978
AFS Debt 33,993 29,236
Total classified as floating rate 826,667 736,568
Classified as fixed rate    
Loans and advances 1,802,328 744,224
AFS Debt 1,008,803 534,634
Derivative financial assets 225
Total classified as fixed rate 2,811,131 1,279,083
Interest Bearing Financial Liabilities    
Classified as floating rate    
Provision for concessional loans 1,088 918
Total classified as floating rate 1,088 918
Classified as fixed rate    
Provision for concessional loans 7,521 18,587
Total classified as fixed rate 7,521 18,587


The cash and cash equivalents and other financial assets are expected to be invested in loans and advances and available-for-sale securities in the short term, and the majority of these financial assets are expected to be classified as fixed rate. A +/–50bp change in the interest rate on floating
rate financial assets would have approximately a $3.9 million (2017: $2.4 million) impact on the reported revenue and surplus.

The Group 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.

In certain circumstances cash flow hedges may be entered into to hedge the exposure to variability in interest rate movements that are attributable to future interest cash flows. The Group has not currently entered into any interest rate hedges.

The Group accounts for AFS debt securities at fair market value. A +/–10bp change in the yield of the debt securities would have approximately a $5.9 million (2017: $3.1 million) impact on the fair value at which the instruments are recorded in the statement of financial position. As the coupon on the bonds is fixed, a change in prevailing interest rates would have no impact on the reported revenue.

b) Electricity Prices

A significant portion of the Group’s loans and advances are to borrowers in the renewable energy industry, whose revenues are dependent on the electricity price. A significant change in the electricity price could have an impact on the borrowers’ ability to service their debts to CEFC and also the value of the underlying security.

The Group manages this risk by establishing limits in relation to merchant energy price exposure, including gearing and break-even covenants within contractual arrangements on projects, monitoring the creditworthiness of the equity counterparties, and monitoring the exposure to individual electricity retailers and other parties who are providing power purchase off-take agreements for the renewable projects.

c) Property Values

A portion of the Group’s AFS investments are in commercial property funds where the return and unit value are directly related to property values. The Group has also made loans and advances to borrowers in the property sector. A significant change in property values would impact on the carrying value and distributions from the AFS investments and could have an impact on the carrying value of loans and advances arising from the borrowers’ ability to service their debts to CEFC and the value of the underlying security.

The Group manages this risk by establishing limits in relation to its exposure to the various property sectors, including gearing and debt service covenants within contractual arrangements as well as monitoring the creditworthiness of the counterparties.

d) Foreign Exchange Risk

Foreign exchange risk is the risk that the fair value of foreign denominated assets and future cash flows may fluctuate because of changes in foreign exchange rates or the credit quality of the swap counterparty bank.

At year end, the Group had one US dollar denominated receivable and has entered into a single cash flow hedge relationship in relation to that loan. Movements in the foreign currency exchange rates are expected to have no impact on the reported profit or loss unless the investment is redeemed or the hedge is broken prior to anticipated maturity and crystallises a previously unrealised gain or loss. The underlying hedged item is a loan classified as loans and receivables at amortised cost.

Movement in the cash flow hedge reserve is as follows:

  2018
$'000
2017
$'000
Cash flow hedge reserve    
Opening balance cash flow hedge reserve (42)
(Decrease)/Increase in value of derivative financial asset (466) 225
Recycling of spot risk to match hedged item 748 (267)
Closing balance cash flow hedge reserve 240 (42)


Fair value hedges are intended to hedge the exposure to variability in fair value movements that are attributable to future interest cash flows only. No fair value hedges are currently held.

The table below summarises, in Australian dollar equivalents, the Group’s exposures to currencies other than the Australian dollar.

  FOREIGN CURRENCY FAIR VALUE EXPOSURES
  2018 USD
A$'000
2017 USD
A$'000
Financial assets exposures in foreign currencies at 30 June    
Loans and advances 23,833 25,218
Derivative financial asset 225
Total financial assets exposures in foreign currencies 23,833 25,443
Financial liabilities exposures in foreign currencies at 30 June    
Derivative financial instrument payable 23,592 25,443
Derivative financial liability 241
Total financial liabilities exposures in foreign currencies 23,833 25,443
Net foreign exchange exposures in foreign currencies


As shown by the above table, the net foreign exchange exposure as at 30 June 2018 is minimal. Any imbalance in this currency will arise largely due to movements in credit risk.

The exposure to foreign exchange rate movement is kept to a minimum as significant foreign currency denominated loans and advances are converted via cross currency swaps into Australian dollars. The three main components that are exposed to foreign exchange movements relate to:

i) future fixed interest profit that has been taken to income in foreign currency;
ii) future risk premiums and other residual components taken to income in foreign currency; and
iii) the allowance for credit risk which is held in Australian dollars against loans predominantly in foreign currency.

6.2F: 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 Group has 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). The CEFC Act requires the CEFC to ensure that, at any time on or after 1 July 2018, at least half of the CEFC funds invested at that time for the purposes of its investment function are invested in renewable energy technologies.

The Group 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 2018 2018
CARRYING
VALUE
  Level 1
$'000
Level 2
$'000
Level 3
$'000
Total
$'000
Total
$'000
Financial assets at fair value          
AFS financial assets 1,008,803 351,555 36,211 1,396,569 1,396,569
Other financial assets 163,507 163,507 163,507
Financial assets for which fair value is disclosed           
Loans and advances 1,057,429 974,245 2,031,674 1,936,704
Total for financial assets 1,172,310 1,408,984 1,010,456 3,591,750 3,496,780
Financial liabilities at fair value          
Derivative financial liabilities 241 241 241
Provision for concessional investments 8,609 8,609 8,609
Total for financial liabilities 241 8,609 8,850 8,850


There were no transfers between levels.

  FAIR VALUE AT 30 JUNE 2017 2017
CARRYING
VALUE
  Level 1
$'000
Level 2
$'000
Level 3
$'000
Total
$'000
Total
$'000
Financial assets at fair value           
AFS financial assets 534,634 253,256 15,055 802,945 802,945
Derivative financial assets 225 225 225
Other financial assets 278,380 278,380 278,380
Financial assets for which fair value is disclosed          
Loans and advances 637,285 186,636 823,921 771,202
Total for financial assets 813,014 890,766 201,691 1,905,471 1,852,752
Financial liabilities at fair value           
Provision for concessional investments 19,505 19,505 19,505
Total for financial liabilities 19,505 19,505 19,505


There were no transfers 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 Group. 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 Group 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 Group 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 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 Group 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 3.1C: Loans and Advances. These SCRs 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 Group 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 3.1C: Loans and Advances and these SCRs 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

  2018
$'000
2017
$'000
Loan Portfolio    
Nominal value 991,897 403,916
Less principal repayment (39,010) (20,242)
Less unexpired discount (15,010) (7,068)
Less impairment allowance (29) (1,509)
Carrying value of concessional loans 937,848 375,097

6.5: Committed Credit Facilities

Commitments represent funds committed by the Group 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.

  2018
$'000
2017
$'000
Committed credit facilities 927,423 1,159,893
Committed investments at call (130,632) (210,285)
Total committed credit facilities as per commitments note 796,791 949,608


At 30 June 2018 the Group had also entered into agreements to provide loan advances totalling $Nil (2017: $26 million) and purchase corporate bonds totalling $250 million (2017: $230 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 2018 there was approximately $7.4 million (2017: $5.6 million) of possible future concessional interest rate 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.

6.6: Committed Equity Investments

At 30 June 2018 the Group had entered into agreements to make future equity investments, not already backed by secured funding accounts, totalling $355 million (2017: $307 million) including amounts disclosed in Note 3.1G.

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