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 Objective of the Therapeutic Goods Administration

The Therapeutic Goods Administration (TGA) is a part of the Department of Health, which is an Australian Government controlled not for profit entity. The TGA contributes to Outcome 1 of the Department of 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.

Therapeutic goods are regulated to ensure that medicinal products and medical devices in Australia meet standards of safety, quality and efficacy at least equal to that of comparable countries. These products and devices should be made available in a timely manner and the regulatory impact on business kept to a minimum.
This is achieved through a risk management approach to pre-market evaluation and approval of therapeutic products intended for supply in Australia, licensing of manufacturers and post market surveillance.

The continued existence of the TGA in its present form and with its present programs is dependent on Government policy. The TGA is reflected as a departmental special account in the Department of Health’s statements.  Departmental activities involve the use of assets, liabilities, income and expenses controlled by the TGA in its own right.

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

A determination was made under the Financial Management and Accountability Act 1997 for the TGA special account to be treated as a business operation.  The financial statements and notes were therefore required by section 49 of the Financial Management and Accountability Act 1997 and are general purpose financial statements.

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

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

The financial statements have been prepared on an accrual basis and are in accordance with the historical cost convention, except for certain 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 financial statements 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 entity 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 or the Schedule of Contingencies.

Unless alternative treatment is specifically required by an accounting standard, 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.

1.3 Significant Accounting Judgements and Estimates

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

1.4 Change in Accounting Policy

In 2013-14, the TGA changed its accounting policy on the presentation of the special account balance.  The funds held in the Official Public Account have been reclassified in the Statement of Financial Position from ‘Trade and Other Receivables’ to ‘Cash and Cash Equivalents.’  Comparative figures have been restated accordingly.

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 TGA has applied the amendments to AASB 119 Employee Benefits and adopted AASB 13 Fair Value Measurement.  Other new and revised standards that were issued prior to the sign-off date and are applicable to the current reporting period did not have a material financial impact, and are not expected to have a material future financial impact, on the financial statements.

Future Australian Accounting Standard Requirements
New standards, revised standards, interpretations or amending standards that were issued by the Australian Accounting Standards Board prior to the sign-off date which are applicable to future reporting periods are not expected to have a material financial impact on the financial statements.

1.6 Revenue

Revenue from the sale of goods is recognised when:

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

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

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

The stage of completion of contracts at the reporting date is determined by reference to the proportion that costs incurred to date bear to the estimated total costs of the transaction.

Receivables for goods and services are recognised at the nominal amounts due less any impairment allowance. Collectability of debts is reviewed at the end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

The TGA recovers the cost of all activities undertaken within the scope of the Therapeutic Goods Act 1989 from industry through fees and charges.

Annual charges for entries on the Australian Register of Therapeutic Goods and manufacturing licence charges are recognised as revenue in the financial year to which the charges relate and are non-refundable, except where exemption is given on the basis of low value turnover.

Revenue for services which are charged on an hourly rate and recoveries of expenses incurred are recognised in the period in which the services are provided or the expense incurred.

Minor application fees, evaluation fees and conformity assessment fees (less than $10,000) are recognised as revenue when the invoices are raised.

Major application fees, evaluation fees and conformity assessment fees are recognised progressively as services are performed.

Revenue from Government
Appropriation revenue was provided to the TGA (through the Department of Health) to provide interest supplementation for surplus amounts standing to the credit of the Official Public Account and for funding activity associated with Government initiatives.  Departmental appropriations are recognised as revenue from Government when the TGA gains control of the appropriation.  Appropriation receivables are recognised at 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.

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

1.8 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 the 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 the 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.

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 TGA 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 apply at the time the leave is taken, including the TGA’s employee superannuation contribution rates to the extent that leave is likely to be taken during service rather than paid out on termination.

The liabilities for long service and recreation leave are determined with reference to an actuarial assessment last conducted on 23 May 2014.  An actuary is generally engaged every 3 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.

Separation and Redundancy
Provision is made for separation and redundancy benefit payments. The TGA 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 (2013-14 nil).

Under the Superannuation Legislation Amendment (Choice of Funds) Act 2004, employees of the TGA are able to become members 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 majority of employees of the TGA are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap) or other compliant superannuation 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 TGA makes employer contributions to the employees’ superannuation schemes at rates determined by an actuary to be sufficient to meet the current cost to the Government. The TGA accounts for the contributions as if they were contributions to defined contribution plans.

The liability for superannuation recognised at 30 June 2014 represents outstanding contributions for the final pay fortnight of the year.

1.9 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 rewards incidental to ownership of leased assets.  An operating lease is a lease that is not a finance lease.  The TGA does not have any finance leases.

In operating leases, the lessor effectively retains substantially all such risks and benefits.  Operating lease payments are expensed on a straight line basis which is representative of the pattern of benefits derived from the leased assets.

1.10 Fair Value Measurement

The entity deems transfers between levels of the fair value hierarchy to have occurred at the reporting date.

1.11 Cash

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

  1. cash in the TGA’s special account; and
  2. cash with outsiders.

1.12 Financial Assets

The TGA classifies its financial assets as 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.

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.

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 through 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.

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

Financial assets carried 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.

Financial assets carried at cost - if there is objective evidence that an impairment loss has been incurred, the amount of the impairment loss is the difference between the carrying amount of the asset and the present value of the estimated future cash flows discounted at the current market rate for similar assets.

1.13 Financial Liabilities

Financial liabilities are classified as ‘other financial liabilities’. Financial liabilities are recognised and derecognised upon ‘trade date’.

Other Financial Liabilities
Other financial liabilities, including borrowings, 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).

1.14 Contingent Liabilities and Contingent Assets

Contingent liabilities and contingent assets are not recognised in the Statement of Financial Position but are disclosed 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.

1.15 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 revenues 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.

1.16 Property, Plant and Equipment

Asset Recognition Threshold
Purchases of property, plant and equipment are recognised initially at cost in the Statement of Financial Position, except for purchases costing less than $2,000. Leasehold improvements to properties with values of $10,000 or greater are capitalised. Any purchases under the thresholds are expensed in the year of acquisition (other than where 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 where there exists an obligation to restore the property to its original condition. These costs are included in the value of the TGA’s leasehold improvements with a corresponding provision for the ‘make good’ recognised.

Following initial recognition at cost, property, plant and equipment assets are carried at fair 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 materially differ from the assets’ fair values at the reporting date. Independent valuations are conducted every three years, with desktop reviews carried out in the intervening years.

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

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the TGA using, in all cases, the straight-line method of depreciation.

Depreciation rates (useful lives), residual values and methods are reviewed at each reporting date and necessary adjustments are recognised 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:

  2013-14 2012-13
Leasehold improvements Lease term Lease term
Property, plant and equipment 3 to 20 years 3 to 20 years

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 cost of disposal 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 TGA were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

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

1.17 Intangibles

The TGA’s intangible assets comprise internally developed and purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Internally developed and purchased software with values of $100,000 or greater are capitalised.

Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of the TGA’s software assets are 3 to 10 years (2012-13: 3 to 10 years).

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

1.18 Taxation

The TGA is exempt from all forms of taxation except Fringe Benefits Tax (FBT), the Goods and Services Tax (GST) and certain excise and customs duties.

Revenues, expenses, assets and liabilities 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.

1.19 Comparative Figures

Comparative figures have been adjusted to conform to changes in presentation in these financial statements, where required.

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