The meeting would have been the first between the pair since revelations last year that Australia had spied on Mr Yudhoyono, his wife and senior members of the government.

Mr Abbott had not formally confirmed plans to make the visit but Fairfax Media understands the Prime Minister was due to fly out on Monday and return late on Tuesday in a trip that would have gone some way towards taking the bilateral relationship out of the deep freeze.

President Yudhoyono’s invitation was seen as an olive branch from the Indonesians in the final months of the current administration.

Planning for the trip, to the Open Government Partnership conference, which will be held a week before the first federal budget, was in the advanced stages.

The official reason proffered for the cancellation is that the final stages of budget preparation, combined with managing the release of the Commission of Audit on Thursday, has led to the decision to decline the trip.

But it is understood that the interception of the first asylum seeker boat in months to enter Australian waters – reported by The West Australian newspaper on Friday – has played a major part in the decision.

The boat has reportedly been spotted in waters between Ashmore Reef and Java and was to be intercepted by Customs, but it is unclear whether the boat would be taken to Australia or turned back.

The Australian government has maintained a strict secrecy about “on water” operations since the election.

On Friday, Immigration Minister Scott Morrison boasted it had been four full calendar months since a successful people-smuggling venture to Australia.

Mr Morrison declined to comment on the reports of the interception on Friday. The current operation sparked fears of a potentially embarrassing situation.

A spokeswoman for the Prime Minister said he had hoped to attend the conference but stressed the invitation had never been formally accepted.

However, the Prime Minster’s office had informally accepted the invitation with the full knowledge of the budget date in mind.

“The Prime Minister is grateful for the invitation. Unfortunately the Prime Minister is unable to attend at this time and he hopes to visit Indonesia to meet with the President at a mutually convenient time,’’ the spokeswoman said.

A spokeswoman for Immigration Minister Scott Morrison said: “For operational security reasons, the government does not confirm or otherwise comment on reports of on-water activities in relation to Operation Sovereign Borders or disclose details of any operations."

A spokesman for President Susilo Bambang Yudhoyono said no offence would be taken from the Prime Minister’s absence, and it would have no effect on negotiations towards a “code of conduct” about spying that are underway between the two countries.

Though there had been a number of background conversations about Mr Abbott’s attendance at the Bali meeting, nothing had finally confirmed, spokesman Teuku Faizasyah told Fairfax Media.

Dr Yudhoyono understood the need for Mr Abbott to stay in Canberra to help prepare the budget and deal with the Commission of Audit report, Mr Teuku said.

Though he had read media reports of an asylum boat near Ashmore Reef, Mr Teuku said he had heard nothing first hand and had no reason to believe this was the reason for the trip being cancelled.

Mr Teuku said the resolution to diplomatic tensions over spying was being negotiated between each country’s foreign ministers, Marty Natalegawa and Julie Bishop, and that the Bali meeting between Mr Abbott and Dr Yudhoyono would not have addressed issue.

with Saffron Howden and Michael Bachelard