Australia Post Annual Report 2008–09

Notes to and forming part of the Financial Report for the year ended 30 June 2009
(gg) Financial guarantees
Financial guarantees are initially measured at
fair value. At each subsequent reporting date,
they are carried at the higher of the initial fair
value amount less cumulative amortisation
or the amount determined under AASB 137:
Provisions, Contingent Assets and Contingent
Liabilities. The fair value of financial guarantee
contracts discussed in note 18 has been
assessed using a probability-weighted
discounted cashflow approach. In order to
estimate the fair value under this approach
the following assumptions are made.
Probability of Default (PD): This represents
the likelihood of the guaranteed party
defaulting over the terms of relevant
agreements and is assessed based on
historical default rates of companies rated
by Standard & Poor’s. The range used in
the model is between 0% and 5%.
Loss Given Default (LGD): This represents the
proportion of the exposure that is not expected
to be recovered in the event of a default by the
guaranteed party and is based on the result of
studies into the recovery rate for unsecured
debt obligations. The range used in the model
is between 0% and 50%.
Exposure at Default (EAD): This represents
the maximum loss that the corporation is
exposed to if the guaranteed party was to
default. The model assumes that the
guaranteed loan/facility contract is at
maximum possible exposure at the time of
default and hence, equates to the values
disclosed in note 18.
When the uncertainty associated with an
assumption is sufficient to warrant
consideration of a range of possible
assumptions, the maximum in the range
was used for valuation purposes. The value
of the financial guarantee over each future
year of the guarantees’ life is then equal to
PD x LGD x EAD, which is discounted over
the contractual term of the guarantee, to
reporting date, to determine the fair value.
The discount rate adopted was based on the
Commonwealth government bond yield. The
contractual term of the guarantee matches
the underlying obligation to which it relates.
70
(hh) Contributed equity
Ordinary shares are classified as equity.
Incremental costs directly attributable to
the issue of new shares or options are
shown in equity as a deduction, net of
tax, from the proceeds.
Australia Post Annual Report 2008–09 | Financial and statutory reports
(ii) Insurance
Generally, the corporation self-insures
its own risks. However, with respect to
catastrophic losses appropriate insurance
coverage for both the corporation and its
controlled entities has been arranged with
general insurers. Payments on account of
losses and insurance premiums paid in any
year are charged against revenue for the year.
Where appropriate, the controlled entities
insure their other risks with general insurers.
(jj) Contingent liabilities and
contingent assets
Contingent liabilities and contingent assets
are not recognised in the balance sheet but
are reported in the relevant schedules and
notes. They may arise from uncertainty as
to the existence of a liability or asset, or may
represent an existing liability or asset in
respect of which settlement is not probable
or the amount cannot be reliably measured.
Contingent assets are reported when
settlement is probable, and contingent
liabilities are recognised when settlement
is not considered remote.
(kk) Comparatives
Where necessary, comparatives have been
reclassified and repositioned for consistency
with current-year disclosures.