NOTE 1: Summary of Significant Accounting Policies

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1.1 Objective of The Department of Health and Ageing

The Department is structured to meet 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.
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.
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	Sports Performance and Participation	Improved opportunities for community participation in sport and recreation, and excellence in high-performance athletes, including through investment in sport infrastructure and events, research and international cooperation. (This Outcome ceased during the financial year following the transfer of the function to the Department of Prime Minister and Cabinet. 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 appropriations 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.

1.2 Basis of Preparation of the Financial Statements

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

• Finance Minister’s Orders (or FMOs) for reporting periods ending on or after 1 July 2010; 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 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 balance sheet 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 unrealised 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 Schedule of Administered Items 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 1.21.

Principles of Consolidation

All transactions between these organisations have been eliminated from the consolidated financial statements. Where necessary, account balances of the individual reporting entities have been aligned in the consolidation to ensure consistency in the consolidated financial statements.

Comparative Figures

1.3 Significant Accounting Judgements and Estimates

1.4 Accounting Policy Change and Prior Period Error

Accounting Policy Change

Prior Period Errors

The movement between appropriation revenue and recoveries revenue of $78,000 has been reflected in the Schedule of Administered items and Administered Reconciliation Table.

An error was made in the 2010 Balance Sheet in relation to the classification of a component of subsidies and personal benefits as payables as opposed to provisions. Comparatives have been adjusted to reclassify subsidies of $379,000,000 and personal benefits of $770,585,000 as subsidies and personal benefits provisions respectively.

1.5 New Australian Accounting Standards

Adoption of New Australian Accounting Standard Requirements

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

1.6 Revenue

• the risks and rewards of ownership have been transferred to the buyer;
  
• the agency 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.

• 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 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

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 agency or authority as a consequence of a restructuring of administrative arrangements.

Revenue from Government

From 1 July 2010, net cash appropriation arrangements have been implemented as part of the Operation Sunlight reform agenda. Net cash appropriation arrangements involve the cessation of funding for depreciation, amortisation and make good expenses and funding for these expenses has been replaced with a Departmental Capital Budget (DCB). To aid transparency of operating results as a consequence of this change, Note 5 includes a reconciliation of the operating result by including non-appropriated depreciation and amortisation expenses.

Parental Leave Payments Scheme

1.7 Gains

Resources Received Free of Charge

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 Australian Government agency or authority as a consequence of a restructuring of administrative arrangements.

Sale of Assets

1.8 Transactions with the Australian Government as Owner

Equity

Restructuring of Administrative Arrangements

Other Distributions to Owners including Repayments of Appropriations

1.9 Employee Benefits

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.

(a) LeaveThe liability for employee benefits includes provisions for annual leave and long service leave. The 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 employee 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 has been determined by reference to the work of an actuary as at 30 June 2011. An actuary is 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.

(b) Separation and RedundancyProvision is made for separation and redundancy benefit payments. The Department recognises a provision for termination when it has a detailed formal plan for the terminations and has informed those employees affected that the terminations will be carried out.

(c) SuperannuationUnder the Superannuation Legislation Amendment (Choice of Superannuation 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 majority of staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS) or the PSS accumulation plan (PSSap).

The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

Liability for defined benefits is recognised in the financial statements of the Government and is settled by the Australian Government in due course. This liability is reported by the Department of Finance and Deregulation as an administered item.

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 of the superannuation entitlements of the Department’s employees.

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

1.10 Leases

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

Lease Incentives

Provision for Restoration Obligation

1.11 Borrowing Costs

1.12 Cash and Cash Equivalents

• cash on hand;
  
• demand deposits in bank accounts with an original maturity of 3 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 held in special accounts.

1.13 Financial Assets

• 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

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 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 profit or loss for the period.

Where a reliable fair value cannot be established for unlisted investments in equity instruments, cost is used. The Department has no such instruments.

Loans and Receivables

Impairment of Financial Assets

Financial assets held at amortised cost – If there is objective evidence that an impairment loss has been incurred for loans and receivables or held to maturity investments held at amortised cost, 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 recognised and derecognised upon ‘trade date’.

Other financial liabilities are initially measured at fair value, net of transaction costs.

Other financial 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

1.16 Acquisition of Assets

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 at the amounts at which they were recognised in the transferor agency’s accounts immediately prior to the restructuring.

1.17 Property, Plant and Equipment

Asset Recognition Threshold

The TGA recognises purchases of property, plant and equipment initially at cost in the Balance Sheet, except for leasehold improvements to properties costing less than $10,000, internally developed software and purchased software costing less than $100,000, and all other purchases costing less than $2,000. 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

Fair values for each class of asset are determined as shown below:

Asset Class	Fair value measured at:
Land	Market selling price
Buildings (excluding leasehold improvements)	Market selling price
Leasehold improvements	Depreciated replacement cost
Property, plant and equipment	Depreciated replacement cost

Following initial recognition at cost, property, plant and equipment were 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 as at the reporting date. The regularity of independent valuations depends upon the volatility of movements in market values for the relevant assets.

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 reverses a previous revaluation decrement of the same class that was previously recognised through the surplus/deficit. Revaluation decrements for a class of assets are recognised directly through the surplus/deficit except to the extent that they reverse 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.

Refer to Note 1.18 for policy regarding revaluation of intangible assets.

Administered land and buildings were revalued by Aon Risk Services Australia Ltd at 30 June 2011, refer Note 19D.

Depreciation

Depreciation rates (useful lives) 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:

	2011	2010
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 2011. 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

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

The useful lives of the Department’s software are:

	2011	2010
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:

	2011	2010
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 2011.

1.19 Inventories

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 is assigned as follows:

• raw materials and stores – purchase cost on a first-in-first-out basis; and
• finished goods and work-in-progress – cost of direct materials and labour plus attributable costs that can be allocated on a reasonable basis.

1.20 Taxation

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 which are recognised inclusive of GST.

1.21 Reporting of Administered Activities

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.

(a) 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 maintained by the Department of Finance and Deregulation. 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 agency on behalf of the Government and are reported as such in the Statement of Cash Flows in the Schedule of Administered items and in the Administered Reconciliation Table in Note 21.

(b) Revenue

All administered revenues are revenues relating to the course of ordinary activities performed by the Department on behalf of the Australian Government. 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.

Where loans and receivables are not subject to concessional treatment, they are carried at amortised cost using the effective interest method. Gains and losses due to impairment derecognition and amortisation are recognised through profit or loss.

(d) 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 2011. Fair value has been taken to be the net assets contained in the management accounts of each organisation as at 30 June 2011.

(e) Guarantees to Subsidiaries, Joint Ventures and Associates

The amounts guaranteed by the Commonwealth have been disclosed in the Schedule of Administered Items and Note 22. At the time of completion of the financial statements, there was no reason to believe that the guarantees would be called upon, and recognition of a liability was therefore not required. The guarantees are in relation to lease obligations and are measured at the present value of future lease payments.

(f) Other Guarantees

There are no quantifiable administered amounts guaranteed by the Commonwealth to disclose in the Schedule of Administered Items.

(g) Indemnities

The maximum amounts payable under the indemnities given is disclosed in the Schedule of Administered Items – Contingencies. At the time of completion of the financial statements, there was no reason to believe that the indemnities would be called upon, and no recognition of any liability was therefore required.

(h) 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.

(i) Payments to Commonwealth Authorities and Companies Act (CAC) Bodies

From 2009-10, payments to CAC Act bodies from amounts appropriated for that purpose are classified as administered expenses of the relevant portfolio department. The appropriation to the Department is disclosed in Table A in Note 24. Payments to CAC bodies are disclosed in Note 18H.

(j) Medical Indemnity

Medicare Australia administers part of the Australian Government’s medical indemnity legislation. Medicare Australia has responsibility for administering the following medical indemnity schemes:

• Incurred But Not Reported Scheme (IBNRS);
• High Cost Claims Scheme (HCCS);
• Exceptional Claims Scheme (ECS);
• Premium Support Scheme (PSS);
• Run-Off Cover Scheme (ROCS);
• United Medical Protection Support Payments Scheme (UMPSPS); and
• Run-Off Cover Support Payment Scheme (ROCSPS).

The Australian Government Actuary (AGA) has noted that the IBNRS, HCCS and ROCS estimates are subject to significant inherent uncertainty due to the long period over which claim payments will be made, and the difficulty in estimating the amount that will eventually be paid for individual claims.

All amounts invoiced under the UMPSPS and ROCSPS have been recognised as administered taxation revenue by the Department.

A contingent liability is disclosed in the Schedule of Administered Items in relation to the ECS and IBNRS.

Further detail on each of these schemes is provided at Note 20H.

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