Appendix 1: Financial Statements
Note 1: Summary of Significant Accounting Policies
1.1 Objective of Professional Services Review
Professional Services Review (PSR) is an Australian Public Service organisation. The objective of PSR, on behalf of the Australian Government, is to protect patients and the community from risks associated with inappropriate practice and to protect the Australian Government from having to meet the costs of services provided as a result of inappropriate practice.
PSR is structured to meet one outcome:
Outcome 1: Australians are protected from meeting the cost and associated risks of inappropriate practices of health service providers.
PSR’s activities contributing towards this outcome are classified as departmental. Departmental activities involve the use of assets, liabilities, revenues and expenses controlled or incurred by PSR in its own right.
1.2 Basis of Preparation of the Financial Statements
The financial statements are required by clause 1(b) of Schedule 1 to the Financial Management and Accountability Act 1997 and are a General Purpose Financial Report.
The statements have been prepared in accordance with:
- Finance Minister’s Orders (or FMOs), for reporting periods ending on or after 1 July 2007
- Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board that apply for the reporting period.
The financial report has been prepared on an accrual basis and is 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 report is presented in Australian dollars and values are rounded to the nearest dollar.
Unless 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 PSR and the amounts of the assets or liabilities can be reliably measured. However, assets and liabilities arising under agreements equally proportionately unperformed 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 (other than unquantifiable or remote contingencies, which are reported at Note 10).
Unless alternative treatment is specifically required by an accounting standard, revenues and expenses are recognised in the Income Statement when and only when the flow, consumption or loss of economic benefits has occurred and can be reliably measured.
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 accounting period.
1.3 Statement of Compliance
The Australian Accounting Standards require a statement of compliance with International Financial Reporting Standards (IFRSs) to be made where the financial report complies with these standards. Some Australian equivalents to IFRSs and other Australian Accounting Standards contain requirements specific to not-for-profit entities that are inconsistent with IFRS requirements. PSR is a not-for-profit entity and has applied these requirements, so while this financial report complies with Australian Accounting Standards including Australian Equivalents to International Financial Reporting Standards (AEIFRSs) it cannot make this statement.
Australian Accounting Standards require Professional Services Review to disclose Australian Accounting Standards that have not been applied, for standards that have been issued but are not yet effective.
The AASB has issued amendments to existing standards, these amendments are denoted by year and then number, for example 2005-1 indicates amendment 1 issued in 2005.
The table below illustrates standards and amendments that will become effective for Professional Services Review in the future. The nature of the impending change within the table has, out of necessity, been abbreviated and users should consult the full version available on the AASB’s website to identify the full impact of the change. The expected impact on the financial report of adoption of these standards is based on Professional Services Review’s initial assessment at this date, but may change. Professional Services Review intends to adopt all standards upon their application date.
| Title | Standard affected | Application date* | Nature of impending change | Impact expected on financial report |
|---|---|---|---|---|
| 2005-4 | AASB 139, AASB 132, AASB 1, AASB 1023 and AASB 1038 | 1-Jan-06 | Amends AASB 139, AASB 1023 and AASB 1038 to restrict the option to fair value through profit or loss and makes consequential amendments to AASB 1 and AASB 132. | No expected impact. |
| 2005-5 | AASB 1 and AASB 139 | 1-Jan-06 | Amends AASB 1 to allow an entity to determine whether an arrangement is, or contains, a lease. | No expected impact. |
| Amends AASB 139 to scope out a contractual right to receive reimbursement (in accordance with AASB 137) in the form of cash. | ||||
| 2005-9 | AASB 4, AASB 1023, AASB 139 and AASB 132 | 1-Jan-06 | Amended standards in regards to financial guarantee contracts. | No expected impact. |
| 2005-10 | AASB 132, AASB 101, AASB 114, AASB 117, AASB 133, AASB 139, AASB 1, AASB 4, AASB 1023 and AASB 1038 | 1-Jan-07 | Amended requirements subsequent to the issuing of AASB 7. | No expected impact. |
| AASB7 Financial Instruments: Disclosures | 1-Jan-07 | Revise the disclosure requirements for financial instruments from AASB132 requirements. | No expected impact. |
* Application date is for annual reporting periods beginning on or after the date shown
1.4 Revenue
Revenues from Government
Amounts appropriated for Departmental outputs appropriations for the year (adjusted for any formal additions and reductions) are recognised as revenue, 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.
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 i.e. whether they have been generated in the course of the ordinary activities of the entity.
Other Revenue
Revenue from the sale of goods is recognised when:
- the risks and rewards of ownership have been transferred to the buyer
- the seller retains no managerial involvement nor effective control over the goods
- the revenue and transaction costs incurred can be reliably measured
- it is probable that the economic benefits associated with the transaction will flow to the entity.
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
- the probable economic benefits with the transaction will flow to the entity.
PSR’s other revenues generally relate to recovery of legal costs. There is significant uncertainty as to probability that the economic benefits will flow to PSR at the completion of court actions. Accordingly, other revenues are recognised in the period that cash has been received.
1.5 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.
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 as a consequence of a restructuring of administrative arrangements (Refer to Note 1.6).
Other Gains
Gains from disposal of non-current assets are recognised when control of the asset has passed to the buyer.
1.6 Transactions with the Government as Owner
Equity Injections
Amounts appropriated which are designated as ‘equity injections’ for a year (less any formal reductions) are recognised directly in Contributed Equity in that year.
Restructuring of Administrative Arrangements
Net assets received from or relinquished to another Commonwealth agency or authority under a restructuring of administrative arrangements are adjusted at their book value directly against contributed equity.
1.7 Employee Benefits
Liabilities for services rendered by employees are recognised at the reporting date to the extent that they have not been settled.
Liabilities for ‘short-term employee benefits’ (as defined by AASB 119) and termination benefits due within 12 months of balance date are measured at their nominal amounts. The liability for wages and salaries recognised as at 30 June represent outstanding contributions for the final days of the year.
The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.
All other employee benefit liabilities are measured as the present value of the estimated future cash outflows to be made in respect of services provided by employees up to the reporting date.
Leave
The liability for employee benefits includes provision for annual leave and long service leave. No provisions have 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 agency is estimated to be less than the annual entitlement for sick leave. In the case of program support unit staff at posts, where the entitlement is vested, a liability has been recognised.
The leave liabilities are calculated on the basis of employees’ remuneration, including the agency’s employer superannuation contribution rates to the extent that the 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 the Australian Government Actuary as at 30 June 2007. 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 has not been made for separation and redundancy benefit payments as there are no plans to reduce staffing levels. PSR has planned to increase staff levels as work levels required over the next few years.
Superannuation
Staff of Professional Services Review 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 Commonwealth. The PSSap is a defined contribution scheme.
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. Where required, Professional Services Review contributes superannuation to comply with local labour laws.
Professional Services Review makes employer contributions to the Australian Government at rates determined by an actuary to be sufficient to meet the cost to the Government of the superannuation entitlements of Professional Services Review’s employees.
From 1 July 2005, new employees are eligible to join the PSSap scheme.
The liability for superannuation recognised as at 30 June represents outstanding contributions for the final days of the year.
1.8 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 non-current 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.
Professional Services Review does not have any finance leases.
Operating lease payments are expensed on an accrual basis, which is representative of the pattern of benefits derived from the leased assets however FMO 21.1 has required disclosure of lease payments to be straight lined. A provision to account for this requirement has been made.
1.9 Cash
Cash means notes and coins held with a bank or financial institution and in petty cash. Cash is recognised at its nominal amount.
1.10 Other Financial instruments
Accounting policies for financial instruments are set out in Note 14.
1.11 Trade Creditors
Trade creditors and accruals are recognised at their nominal amounts, being the amounts at which the liabilities will be settled. Liabilities are recognised to the extent that the goods or services have been received (irrespective of having been invoiced).
1.12 Contingent Liabilities and Contingent Assets
Contingent Liabilities and Assets are not recognised in the Balance Sheet but are discussed in the relevant schedules and notes. They may arise from uncertainty as to the existence of a liability or asset, or represent an existing liability or asset in respect of which settlement is not probable or the amount cannot be reliably measured. Remote contingencies are part of this disclosure. Where settlement becomes probable, a liability or asset is recognised. A liability or asset is recognised when its existence is confirmed by a future event, settlement becomes probable (virtually certain for assets) or reliable measurement becomes possible.
Where payment of court costs are agreed upon and are likely to be collected by PSR a receivable is recognised. In most cases however, collection is not possible and the debt is not recognised.
1.13 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 agency’s accounts immediately prior to the restructuring.
1.14 Infrastructure, Plant and Equipment
Asset Recognition Threshold
Purchases of infrastructure, plant and equipment are recognised initially at cost in the Balance Sheet, except for purchases costing less than $2000, which 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 taken up by Professional Services Review where there exists an obligation to restore the property to its original condition. These costs are included in the value of Professional Services Review’s leasehold improvements with a corresponding provision for the ‘make-good’ taken up.
Basis
Infrastructure, plant and equipment are carried at valuation. Revaluations undertaken up to 30 June 2002 were done on a deprival basis; revaluations since that date are at fair value. This accounting policy is required by Australian Accounting Standard AASB 1041 Revaluation of Non-Current Assets. Valuations undertaken as at 30 June 2005.
Fair and deprival values for each class of asset are determined as shown below.
| Asset Class | Fair Value measured at: | Deprival value measured at: |
|---|---|---|
| Lease Improvement | Market selling price | Depreciated replacement cost |
| Plant and Equipment | Market selling price | Depreciated replacement cost |
Leasehold improvements, plant and equipment assets are subject to a formal revaluation annually. Formal valuations are carried out by an independent qualified valuer.
Depreciation
Depreciable infrastructure, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to Professional Services Review 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.
Depreciation rates (useful lives) and methods are reviewed at each reporting date and necessary adjustments are recognised in the current, or current and future reporting periods, as appropriate. Residual values are re-estimated for a change in prices only when assets are re-valued.
Depreciation rates applying to each class of depreciable asset are based on the following useful lives:
| 2007 | 2006 | |
|---|---|---|
| Leasehold Improvements | Lease term | Lease term |
| Plant and Equipment | 3 to 25 years | 3 to 25 years |
The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed in Note 6.
1.15 Impairment of Non-Current Assets
Non current assets carried at up-to-date fair value at the reporting date are not subject to impairment testing. At reporting date all Leasehold Improvements, Infrastructure, Plant and Equipment were valued at fair value.
The non-current assets carried at cost, which are not held to generate cash inflows, have been assessed for indications of impairment. Where indications of impairment exist, the carrying amount of the asset is compared to the higher of its net selling price and depreciated replacement cost and is written down to that value if greater.
1.16 Intangibles
Professional Services Review’s intangibles comprise internally developed and commercially purchased software packages for internal use. These assets are carried at cost.
Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of Professional Services Review software is 5 to 10 years (2005-06: 5 to 10 years).
All software assets were assessed for impairment as at 30 June 2007. None were found to be impaired.
1.17 Taxation
The agency is exempt from all forms of taxation except fringe benefits tax and the goods and services tax (GST).
Revenues, expenses and assets are recognised net of GST:
- except where the amount of GST incurred is not recoverable from the Australian Tax Office
- except for receivables and payables.
1.18 Foreign Currency
Transactions denominated in a foreign currency are converted at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated at the exchange rates current as at balance date. Associated currency gains and losses are not material.
1.19 Insurance
Professional Services Review has insured for risks through the Government’s insurable risk managed fund, ‘Comcover’. Workers compensation is insured through Comcare Australia.
1.20 Comparative Figures
Comparative figures have been adjusted to reflect changes in accounting policy to enable a more meaningful analysis of data.