Online version of the 2013-14 Department of Health Annual Report

Note 1: Summary of Significant Accounting Policies

Notes to and Forming Part of the Financial Statements

Page last updated: 17 July 2019

1.1 Objectives of the Department of Health

The Department of Health (the Department) is an Australian Government controlled entity. It is a not-for-profit entity. The objective of the Department is to lead the development of Australia's health care system that meets the health care needs of all Australians.

The Department is structured to meet the following 15 outcomes:

Outcome 1 Population Health A reduction in the incidence of preventable mortality and morbidity in Australia, including through regulation and national initiatives that support healthy lifestyles and disease prevention
Outcome 2 Access to Pharmaceutical Services Access to cost-effective medicines, including through the Pharmaceutical Benefits Scheme and related subsidies, and assistance for medication management through industry partnerships
Outcome 3 Access to Medical Services Access to cost-effective medical, practice nursing and allied health services, including through Medicare subsidies for clinically relevant services
Outcome 4 Aged Care and Population Ageing Access to quality and affordable aged care and carer support services for older people, including through subsidies and grants, industry assistance, training and regulation of the aged care sector, this Outcome ceased during the financial year following the transfer of the function to the Department of Social Services, refer to Note 11 for details
Outcome 5 Primary Care Access to comprehensive, community-based health care, including through first point of call services for prevention, diagnosis and treatment of ill-health, and for ongoing management of chronic disease
Outcome 6 Rural Health Access to health services for people living in rural, regional and remote Australia, including through health infrastructure and outreach services
Outcome 7 Hearing Services A reduction in the incidence and consequence of hearing loss, including through research and prevention activities, and access to hearing services and devices for eligible people
Outcome 8 Indigenous Health Closing the gap in life expectancy and child mortality rates for Indigenous Australians, including through primary health care, child and maternal health, and substance use services. Responsibility for some of the functions within this Outcome was transferred during the financial year to the Department of Prime Minister and Cabinet, refer to Note 11 for details
Outcome 9 Private Health Improved choice in health services by supporting affordable quality private health care, including through private health insurance rebates and a regulatory framework
Outcome 10 Health System Capacity and Quality Improved long-term capacity, quality and safety of Australia’s health care system to meet future health needs, including through investment in health infrastructure, international engagement, consistent performance reporting and research
Outcome 11 Mental Health Improved mental health and suicide prevention, including through targeted prevention, identification, early intervention and health care services
Outcome 12 Health Workforce Capacity Improved capacity, quality and mix of the health workforce to meet the requirements of health services, including through training, registration, accreditation and distribution strategies
Outcome 13 Acute Care Improved access to public hospitals, acute care services and public dental services, including through targeted strategies, and payments to state and territory governments
Outcome 14 Biosecurity and Emergency Response Preparedness to respond to national health emergencies and risks, including through surveillance, regulation, prevention, detection and leadership in national health coordination
Outcome 15 Sport and Recreation Improved opportunities for community participation in sport and recreation, and excellence in high-performance athletes, through initiatives to help protect the integrity of sport, investment in sport infrastructure, coordination of Commonwealth involvement in major sporting events, and research and international cooperation on sport issues. This Outcome was added during the financial year following the transfer of the function from the Department of Regional Australia, Local Government, Arts and Sport, refer to Note 11 for details.

The continued existence of the Department in its present form and with its present programs is dependent on Government policy and on continuing funding by Parliament for the Department’s administration and programs.

Department activities contributing toward these outcomes are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, income and expenses controlled or incurred by the Department in its own right. Administered activities involve the management or oversight by the Department, on behalf of the Government, of items controlled or incurred by the Government.

The entity is responsible for the following administered activities on behalf of the Government:

  • payment of subsidies for residential and community programs;
  • payment of personal benefits for Medicare services, pharmaceutical services and affordability, and choice of health care initiatives; and
  • payment of grants, with the majority of these made to non-profit organisations.

The Australian Government continues to have regard to developments in case law, including the High Court's most recent decision on Commonwealth expenditure in Williams v Commonwealth (2014)  HCA 23, as they contribute to the larger body of law relevant to the development of Commonwealth programs.  In accordance with its general practice, the Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements.

1.2 Basis of Preparation of the Financial Statements

The financial statements are general purpose financial statements and are required by section 49 of the Financial Management and Accountability Act 1997 (FMA Act).

The financial statements and notes have been prepared in accordance with:

  • Finance Minister’s Orders (FMOs) for reporting periods ending on or after 1 July 2011; and
  • Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

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

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

Unless an alternative treatment is specifically required by an accounting standard or the FMOs, assets and liabilities are recognised in the Statement of Financial Position when and only when it is probable that future economic benefits will flow to the Department or a future sacrifice of economic benefits will be required and the amounts of the assets or liabilities can be reliably measured.  However, assets and liabilities arising under executor contracts are not recognised unless required by an accounting standard.  Liabilities and assets that are unrecognised are reported in the Schedule of Commitments and the Schedule of Contingencies.

Unless an alternative treatment is specifically required by an accounting standard or the FMOs, income and expenses are recognised in the Statement of Comprehensive Income when, and only when, the flow, consumption or loss of economic benefits has occurred and can be reliably measured.

Administered revenues, expenses, assets, liabilities and cash flows reported in the administered schedules and related notes are accounted for on the same basis and using the same policies as for Departmental items, except as otherwise stated in Note 1.20.

The Department's combined financial statements include the financial statements of the Therapeutic Goods Administration (TGA) and two Departmental special accounts, the Office of the Gene Technology Regulator (OGTR) and the National Industrial Chemicals Notification and Assessment Scheme (NICNAS).

All transactions between these organisations have been eliminated from the combined financial statements. Where necessary, accounting policies of the individual reporting entities have been aligned to ensure consistency in the combined financial statements.

Comparative Figures
Comparative figures have been adjusted, where required, to conform to changes in presentation of the financial statements. Comparative figures represent the Department as it was structured at 30 June 2013. Administrative Arrangement Orders, effective 18 September 2013, significantly affected the structure of the Department. Comparative figures should be read in conjunction with Notes 11A and 11B: Restructuring.

1.3 Changes in accounting policy

In 2013-14, the Department has changed its accounting policy for disclosing special account balances on the Departmental and Administered financial statements. The Departmental special account balances have been reclassified from ‘appropriation receivable’ to ‘cash and cash equivalents’. The Administered special account balances have been brought to account for the first time. The reporting of these balances as ‘cash and cash equivalents’ reflects the amount set aside in the Consolidated Revenue Fund for specific purposes. The comparative figures have been restated accordingly.

1.4 Significant Accounting Judgements and Estimates

Departmental

No accounting assumptions and estimates have been identified that have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.

Administered
The following assumptions and estimates have been identified that may have a significant risk of causing material adjustments to the carrying amounts of administered assets and liabilities within the next accounting period.

Medical Indemnity
Medical Indemnity is administered by the Department under the Medical Indemnity Act 2002 and the Midwife Professional Indemnity (Commonwealth Contribution) Scheme Act 2010. The Department administers the following medical indemnity schemes:

  • Incurred But Not Reported Scheme (IBNRS);
  • High Cost Claims Scheme (HCCS);
  • Exceptional Claims Scheme (ECS);
  • Run-Off Cover Scheme (ROCS);
  • Premium Support Scheme (PSS);
  • Midwife Professional Indemnity (Commonwealth Contribution) Scheme (MPIS); and
  • Midwife Professional Indemnity Run-off Cover Scheme (MPIRCS).

Further detail on each of these schemes is provided at Note 23 I.

The payments for medical indemnity are managed by the Department of Human Services (DHS), the service delivery agency, on behalf of the Department through its Medicare program.

The Australian Government Actuary (AGA) estimated the provision for future payments for the medical schemes administered by the Department. At the balance date provision for future payment was recognised for IBNRS, HCCS, and ROCS. No provision was recognised for ECS, MPIS or MPIRCS as, to date, no payment has been made against these schemes and they could not be reliably measured and are reported as a contingent liability in Note 25. No provision was recognised for the PSS as the nature and timing of payments associated with this scheme are based on a relatively predictable pattern of annual payments that must be settled within 12 months of the end of a premium period.

The nature of the medical indemnity liability estimates is inherently, and unavoidably uncertain.

The uncertainty arises for the following reasons:

  • it is not possible to precisely model the claim process, and random variation both in past and future claims have adverse consequences on the model;
  • there can be a long delay between incident occurrences, to notification and to settlement, making the projection of timing very uncertain;
  • the nature and cause of injury is difficult to determine and prove;
  • the claims experience can be very sensitive to the surrounding factors such as technology, legislation, attitudes and the economy; and
  • in general, these schemes have a small number of large claims which account for a substantial part of the overall cost. This is associated with large expected random variation. It follows that a wide range of results can be obtained with equal statistical significance which differs materially in the context of a Schedule of Assets and Liabilities. This is a common situation with liabilities of this nature.

The methods used by the AGA to estimate the liability under the different schemes are as follows:

  • General:

The AGA has relied on projections that have been prepared by the appointed actuaries to the five medical indemnity insurers (MIIs) and provided to the Commonwealth under the relevant provisions of the Medical Indemnity Act 2002 and the Midwife Professional Indemnity (Commonwealth Contribution) Scheme Act 2010. Payments information from the Medicare program complemented the projection. Where appropriate, adjustments have been made to those projections as described below.

  • IBNRS:

The AGA has carried out chain ladder modelling using the payments data. The results of this analysis have been compared to the projections prepared by the industry actuaries. The results closely match and as a result, the AGA has largely relied on industry projections to estimate the liability.

  • ROCS:

The AGA has developed an independent ROCS actuarial model which estimates the total annual accruing ROCS cost to the Australian Government. The model output is used to check against industry actuaries’ projections. For the estimate of the outstanding ROCS liability as at 30 June 2014, the AGA has relied on the projections from the actuary of each of the MIIs, but has adjusted the IBNRS component on comparison with the projections from its own ROCS internal model.

  • HCCS:

The AGA has relied on the projections of the industry actuaries but has made adjustments in respect of claims which are also eligible for the IBNRS and/or ROCS to ensure overall consistency of the estimates.

The experience of the Medical Indemnity claims cycle indicates that claims and subsequent payments can take a number of years to mature and settle. The Department has used a 3% per annum discount rate in the calculation of the estimate for the current year. The 10 year bond yield at 30 June 2014 was 3.54%, therefore, 3% appears appropriate. A discount rate of 4% was used last year as it best reflected the ten year bond rate (3.8%) at that time.

A sensitivity analysis was undertaken by moving the discount rate either up or down by 1%. Increasing the discount rate by one percentage point would result in a discounted liability estimate which is about 5% ($20m) less than the base estimate. On the other hand, decreasing the discount rate by one percentage point would result in a discounted liability estimate which is about 6% ($23m) higher than base estimate.

2013-14
2012-13
 
discounted
discounted
discounted
discounted
 
2%
3%1
4%
4%
 
$'m
$'m
$'m
$'m
Incurred But Not Reported
43
41
39
42
High Cost Claims Scheme
285
272
261
254
Run-Off Cover Scheme
90
82
75
96
Total
418
395
375
392

1 3% was used as the basis of estimation in 2013-14, see note 23 I. If 4% had been applied the liability amount would have been $17m lower than last year.

Medicare Outstanding Claims
Medicare payments processed by the DHS on behalf of the Department are either reimbursement to patients, made after medical services have been received from a doctor, or payments made directly to doctors through the bulk billing system. At any point in time, there are thousands of cases where a medical service has been rendered, but the Medicare payment has not yet been made. The DHS has been using the ‘Winters’ methodology to estimate the value of these outstanding claims.

Under the Winters methodology, a number of models are used to estimate the outstanding Medicare claims liabilities. The model preferred by the industry, and consistently applied in past financial statements of the Department, is Model 5. Model 5 comprises two major components: chain ladder modelling and time series modelling.

Under Model 5, user defined parameters are applied to smooth the time series observations and make predictions about future payment values. As the parameters are user defined it is reasonable to assume that different users of the model may make different choices, and therefore arrive at different estimates of the outstanding liability. In order to validate the parameters used, actual payment data has been compared to previous estimates using various parameters to predict the liability.

The AGA was engaged to analyse the monthly Medicare payment data from June 2013 to June 2014 across a range of reasonable choices for the smoothing parameters. A range of estimated liabilities from these scenarios, for each month, was then compared with the estimated liability under the Model 5 smoothing parameters. This sensitivity analysis indicates that under a reasonable range of smoothing parameter scenarios, the estimated liabilities vary by up to plus or minus 5%.

1.5 New Australian 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 Department applied amendments to AASB119 Employee Benefits and adopted AASB 13 Fair Value Measurement as per the accounting standards. This did not have a material affect, and is not expected to have a material affect, on the financial statements.

Other revised standards that were issued prior to the sign-off date and are applicable to the current reporting period did not have a financial impact, and are not expected to have a future financial impact on the Department.

Future Australian Accounting Standard Requirements
The Department expects to adopt AASB 1055 Budgetary Reporting, in line with anticipated Department of Finance amendments to the Finance Minister Orders. It is not expected to have a material impact on the financial statements.

Other new standards, revised standards, interpretations and amending standards that were issued by the AASB prior to the sign-off date are not expected to have a financial impact on the Department for future reporting periods.

1.6 Revenue

Revenue from the sale of goods is recognised when:

  • the risks and rewards of ownership have been transferred to the buyer;
  • the Department retains no managerial involvement or effective control over the goods;
  • the revenue and transaction costs incurred can be reliably measured; and
  • it is probable that the economic benefits associated with the transaction will flow to the Department.

Revenue from rendering of services is recognised by reference to the stage of completion of contracts at the reporting date. The revenue is recognised when:

  • the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and
  • the probable economic benefits associated with the transaction will flow to the Department.

Receivables for goods and services, which have 30 day terms (note the TGA operates on 28 day terms), are recognised at the nominal amounts due less any impairment allowance account. Collectability of debts is reviewed at end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

Interest revenue is recognised using the effective interest method as set out in AASB 139 Financial Instruments: Recognition and Measurement.

Resources Received Free of Charge
Resources received free of charge are recognised as revenue when and only when a fair value can be reliably determined and the services would have been purchased if they had not been donated.  Use of those resources is recognised as an expense.  Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another Government entity as a consequence of a restructuring of administrative arrangements (refer to Note 1.8).

Revenue from Government
Amounts appropriated for Departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as Revenue from Government when the Department gains control of the appropriation, except for certain amounts that relate to activities that are reciprocal in nature, in which case revenue is recognised only when it has been earned.  Appropriations receivable are recognised at their nominal amounts.

1.7 Gains

Resources Received Free of Charge
Resources received free of charge are recognised as gains when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated.  Use of those resources is recognised as an expense.

Resources received free of charge are recorded as either revenue or gains depending on their nature.

Contributions of assets at no cost of acquisition or for nominal consideration are recognised as gains at their fair value when the asset qualifies for recognition, unless received from another Government entity as a consequence of a restructuring of administrative arrangements (refer to Note 1.8).

Sale of Assets
Gains from disposal of non-current assets are recognised when control of the asset has passed to the buyer.

1.8 Transactions with the Australian Government as Owner

Equity Injections
Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) and Departmental Capital Budgets (DCBs) are recognised directly in contributed equity in that year.

Restructuring of Administrative Arrangements
Net assets received from or relinquished to another Government entity under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.

AAO changes announced during the year encompassed the following:

  • responsibility for aged care programs and functions was transferred to the new Department of Social Services (DSS);
  • responsibility for a number of Indigenous health programs and functions was transferred to the Department of Prime Minister and Cabinet (PMC); and
  • the Department assumed responsibility for sport and recreation policy from the former Department of Regional Australia, Local Government, Arts and Sport (DRALGAS).

Refer to Note 11: Restructuring for the details of assets and liabilities transferred between the affected agencies.

Other Distributions to Owners
The FMOs require that distributions to owners be debited to contributed equity unless it is in the nature of a dividend.

1.9 Employee Benefits

Liabilities for ‘short-term employee benefits’ (as defined in AASB 119 Employee Benefits) and termination benefits due within twelve months of the end of reporting period are measured at their nominal amounts.

The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

Other long-term employee benefits are measured as net total of the present value of the defined benefit obligation at the end of the reporting period minus the fair value at the end of the reporting period of plan assets (if any) out of which the obligations are to be settled directly.

  1. Leave

The liability for employee benefits includes provisions for annual leave and long service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the Department is estimated to be less than the annual entitlement for sick leave.

The leave liabilities are calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken, including the Department’s employer superannuation contribution rates to the extent that leave is likely to be taken during service rather than paid out on termination.

The liability for long service leave and annual leave expected to be settled outside of 12 months of the balance date has been determined by reference to the work of an actuary as at May 2014.  An actuary is engaged every three years to reassess the leave liability.  The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

  1. Separation and Redundancy

Provision is made for separation and redundancy benefit payments, as shown at Note 10A: Employee Provisions.  The Department recognises a provision for termination when it has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

  1. Superannuation

Under the Superannuation Legislation Amendment (Choice of Funds) Act 2004, staff of the Department are able to become a member of any complying superannuation fund.  A complying superannuation fund is one that meets the requirements under the Income Tax Assessment Act (1997) and the Superannuation Industry (Supervision) Act 1993.
The Department’s staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap) or other compliant super funds.

The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap and other compliant superannuation funds are defined contribution schemes.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

The Department makes employer contributions to the employee superannuation schemes at rates determined by an actuary to be sufficient to meet the current cost to the Government. The Department accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised as at 30 June represents outstanding contributions for the number of days between the last pay period in the financial year and 30 June.

1.10 Leases

A distinction is made between finance leases and operating leases.  Finance leases effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets. An operating lease is a lease that is not a finance lease. In operating leases, the lessor effectively retains substantially all such risks and benefits.

The Department does not hold any finance leases.

Operating lease payments are expensed on a straight-line basis which is representative of the pattern of benefits derived from the leased assets.

Surplus Lease Space
Future net outlays in respect of surplus space under non-cancellable lease agreements are expensed in the period in which the spaces are identified as becoming surplus.

Lease Incentives
Lease incentives taking the form of ‘free’ leasehold improvements and rent holidays are recognised as liabilities. These liabilities are reduced on a straight-line basis by allocating lease payments between rental expense and reduction of the lease incentive liability.

Provision for Restoration Obligation
Where the Department has a contractual obligation to undertake remedial work upon vacating leased properties, the estimated cost of that work is recognised as a liability. An equal value asset is created at the same time and amortised over the life of the lease of the underlying leasehold property.

1.11 Borrowing Costs

All borrowing costs are expensed as incurred.

1.12 Cash

Cash is recognised at its nominal amount.  Cash and cash equivalents include:

  • cash on hand;
  • demand deposits in bank accounts with an original maturity of three months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value;
  • cash held with outsiders; and
  • cash in special accounts.

Overdrafts
An overdraft occurs when the amount withdrawn from the Department’s administered bank account by the DHS, due to an agreed sweeping arrangement, is greater than the original estimated payments. A debit balance of the bank account as a result of an inaccurate estimate is authorised by the Finance Ministers delegations under section 8 (3) of the FMA Act.

1.13 Financial assets

The Department classifies its financial assets in the following categories: 

  • available-for-sale financial assets; and 
  • loans and receivables. 

The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are recognised and derecognised upon trade date.

Effective Interest Method
The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period.  The effective interest rate is the rate that exactly discounts estimated future cash receipts over the expected life of the financial asset, or, where appropriate, a shorter period.

Income is recognised on an effective interest rate basis except for financial assets that are recognised at fair value through profit or loss.

Available-for-Sale Financial Assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. 

Available-for-sale financial assets are recorded at fair value.  Gains and losses arising from changes in fair value are recognised directly in the reserves (equity) with the exception of impairment losses.  Interest is calculated using the effective interest method and foreign exchange gains and losses on monetary assets are recognised directly in profit or loss.  Where the asset is disposed of, or is determined to be impaired, part (or all) of the cumulative gain or loss previously recognised in the reserve is included in surplus and deficit for the period.

Where a reliable fair value cannot be established for unlisted investments in equity instruments, these instruments are valued at cost.  The Department has no such instruments.

Loans and Receivables
Trade receivables, loans and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’.  Loans and receivables are measured at amortised cost using the effective interest method less impairment.  Interest is recognised by applying the effective interest rate.

Impairment of Financial Assets
Financial assets are assessed for impairment at the end of each reporting period.

Financial assets held at amortised cost - If there is objective evidence that an impairment loss has been incurred for loans and receivables, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.  The carrying amount is reduced by way of an allowance account.  The loss is recognised in the Statement of Comprehensive Income.

Available-for-sale financial assets - If there is objective evidence that an impairment loss on an available-for-sale financial asset has been incurred, the amount of the difference between its cost, less principal repayments and amortisation, and its current fair value, less any impairment loss previously recognised in expenses, is transferred from equity to the Statement of Comprehensive Income.

1.14 Financial Liabilities

Financial liabilities are classified as either financial liabilities ‘at fair value through profit and loss’ or ‘other financial liabilities’. Financial liabilities are recognised and derecognised upon trade date.

The Department does not hold any financial liabilities at ‘fair value through profit and loss’.

Other financial liabilities are initially measured at fair value, net of transaction costs. These liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period.

Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

1.15 Contingent Liabilities and Contingent Assets

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 certain, and contingent liabilities are disclosed when settlement is greater than remote.

1.16 Acquisition of Assets

Assets are recorded at cost on acquisition except as stated below. The cost of acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Financial assets are initially measured at their fair value plus transaction costs where appropriate.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

1.17 Property, Plant and Equipment

Asset Recognition Threshold
Purchases of property, plant and equipment by the Department, OGTR and NICNAS are recognised initially at cost in the Statement of Financial Position, except for information technology equipment purchases costing less than $500, leasehold improvements costing less than $50,000, and all other purchases costing less than $2,000, which are expensed in the year of acquisition (other than when they form part of a group of similar items which are significant in total).

The TGA recognises purchases of property, plant and equipment initially at cost in the Statement of Financial Position, except for purchases costing less than $2,000 and leasehold improvements to properties costing less than $10,000. Purchases below these thresholds are expensed in the year of acquisition (other than when they form part of a group of similar items which are significant in total).

The initial cost of an asset includes an estimate of the cost of dismantling and removing the item and restoring the site on which it is located. This is particularly relevant to ‘make good’ provisions in property leases taken up by the Department where there exists an obligation to restore the property to prescribed conditions. These costs are included in the value of the Department’s leasehold improvements with a corresponding provision for the ‘make good’ recognised.

Revaluations
Following initial recognition at cost, property, plant and equipment are carried at latest value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depends upon the volatility of movements in market values for the relevant assets.

An independent valuation of all property, plant and equipment was carried out by the Australian Valuation Office on 30 June 2012. Any class of asset not formally revalued in a given year has been subject to independent review, or management assessment (or a desktop review) to ensure the carrying values do not materially differ from fair value.

Revaluation adjustments are made on a class basis. Any revaluation increment was credited to equity under the heading of asset revaluation reserve except to the extent that it reversed a previous revaluation decrement of the same class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reversed a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset is restated to the revalued amount.

Any class of asset not formally revalued in a given year has been subject to a management assessment (or a desktop review) to ensure the carrying value does not materially differ to its fair value.

An independent valuation of Administered land and buildings was carried out by the Australian Valuation Solutions Pty Ltd on 30 June 2014, refer Note 20B.

Depreciation
Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the Department using, in all cases, the straight-line method of depreciation. Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the improvements or the unexpired period of the lease, including any applicable lease options available.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are made in the current, or current and future reporting periods, as appropriate.

Depreciation rates applying to each class of depreciable asset are based on the following useful lives:

  2014 2013
Buildings on freehold land 20 to 25 years 20 to 25 years
Leasehold improvements Lease term Lease term
Plant and equipment 3 to 20 years 3 to 20 years

Impairment
All assets were assessed for impairment at 30 June 2014. Where indications of impairment exist, the asset’s recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs to sell and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the Department were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Derecognition
An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

1.18 Intangibles

The Department’s intangibles comprise internally developed software for internal use and purchased software. These assets are carried at cost less accumulated amortisation and accumulated impairment losses. The Department (excluding TGA) recognises internally developed software costing more than $100,000 and purchased software costing more than $500. TGA recognises internally generated and purchased software costing more than $100,000.

Software is amortised on a straight-line basis over its anticipated useful life.

The useful lives of the Department's software are:

  2014 2013
Internally developed software 2 to 10 years 2 to 10 years
Purchased software 2 to 7 years 2 to 7 years

The useful lives of the TGA’s software are:

  2014 2013
Internally developed software 3 to 10 years 3 to 10 years
Purchased software 3 to 10 years 3 to 10 years

All software assets were assessed for indications of impairment as at 30 June 2014.

1.19 Taxation

The Department is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Revenues, expenses, assets and liabilities are recognised net of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office; and for receivables and payables.

1.20 Reporting of Administered Activities

Administered revenues, expenses, assets, liabilities and cash flows are disclosed in the administered schedules and related notes.

Except where otherwise stated below, administered items are accounted for on the same basis and using the same policies as for departmental items, including the application of Australian Accounting Standards.

  1. Administered Cash Transfers to and from the Official Public Account

Revenue collected by the Department for use by the Government rather than the Department is administered revenue. Collections are transferred to the Official Public Account (OPA) maintained by the Department of Finance. Conversely, cash is drawn from the OPA to make payments under Parliamentary appropriation on behalf of Government. These transfers to and from the OPA are adjustments to the administered cash held by the Department on behalf of the Government and are reported as such in the Administered Cash Flow Statement and in the Administered Reconciliation Schedule.

  1. Revenue

All administered revenues are revenues relating to the course of ordinary activities performed by the Department on behalf of the Australian Government. As such, administered appropriations are not revenues of the individual entity that oversees distribution or expenditure of the funds as directed.

Recoveries are recognised on an accrual basis and relate to:

  • recoveries under the Medical Benefits, Pharmaceutical Benefits and Health Rebate schemes after settlement of personal injury claims; and
  • rebates associated with high cost drug recoveries.
  1. Inventories

The majority of the Department’s inventories relate to the National Medical Stockpile (the Stockpile). The Stockpile is a strategic reserve of medicines, vaccines, antidotes and protective equipment available for use as part of the national response to a public health emergency. It is intended to augment state and territory government reserves of key medical items in a health emergency, which could arise from terrorist activities or natural causes.

Other inventories held by the Department relate to brochures, pamphlets and other materials designed to promote various health initiatives.

Inventories held for sale are valued at the lower of cost and net realisable value.

Inventories held for distribution are valued at cost, adjusted for any loss of service potential.

Costs incurred in bringing each item of inventory to its present location and condition are assigned as follows:

  • Stockpile inventory and other inventory – purchase cost plus other reasonably attributable costs, such as overseas shipping and handling and import duties, less any bulk order discounts and rebates received from suppliers.
  1. Administered Investments

Administered investments in subsidiaries, joint ventures and associates are not consolidated because their consolidation is only relevant at the Whole of Government level.

Administered investments other than those held for sale are classified as available-for-sale and are measured at their fair value as at 30 June 2014.  Fair value has been taken to be the net assets contained in the management accounts of each organisation as at the end of the reporting period.

  1. Contingent Liabilities and Contingent Assets

Contingent liabilities and contingent assets are not recognised in the Administered Schedule of Assets and Liabilities 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 virtually certain, and contingent liabilities are disclosed when settlement is greater than remote.

  1. Personal Benefits

Personal benefits are the current transfers for the benefit of individuals or households, directly or indirectly, that do not require any economic benefit to flow back to Government. The Department administers a number of personal benefits programs on behalf of the Government that provide a range of health care entitlements to individuals. These include, but are not limited to:

  • Pharmaceutical Benefits (the primary means through which the Australian Government ensures Australians have timely access to pharmaceuticals);
  • Medical Benefits (provide high quality and clinically relevant medical and associated services through Medicare);
  • Private Health Insurance Rebate (helps make private health insurance more affordable, provides greater choice and accessibility to access private health care options, and reduces pressure on the public hospital system);
  • Primary Care Practice Incentives (support activities that encourage continuing improvements, increase quality of care, enhance capacity, and improve access and health outcomes for patients);
  • Targeted Assistance (support the provision of relevant pharmaceuticals, aids and appliances); and
  • Hearing Services (reduce the incidence and consequences of avoidable hearing loss in the community by providing access to high quality hearing services and devices).

Personal benefits are assessed, determined and paid by the DHS in accordance with provisions of the relevant legislation under delegation from the Department.

In the majority of cases the above payments are initially based on the information provided by customers and providers. Both the Department and DHS have established review mechanisms to identify overpayments made under various schemes. The recognition of receivables and recoveries action take place once the overpayments are identified.

  1. Grants and Subsidies

The Department administers a number of grant and subsidy schemes on behalf of the Government.

Grant and subsidy liabilities are recognised to the extent that (i) the services required to be performed by the grantee have been performed or (ii) the grant eligibility criteria have been satisfied, but payments due have not been made. A commitment is recorded when the Government enters into an agreement to make these grants but services have not been performed or criteria satisfied.

  1. Payments to Commonwealth Authorities and Companies Act (CAC Act) Bodies

Payments to CAC Act bodies from amounts appropriated for that purpose are classified as administered expenses, equity injections or loans of the relevant portfolio Department. The appropriation to the Department is disclosed in Table A of Note 28A. Payments to CAC Act bodies are disclosed in Note 18H.

  1. Medical Indemnity

The Department has responsibility for policy and legislative control of medical indemnity under the Medical Indemnity Act 2002 and the Midwife Professional Indemnity (Commonwealth Contribution) Scheme Act 2010, while DHS has responsibility for making payments under various Government medical indemnity schemes.

Further detail on each of these schemes is provided at Note 23 I.

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