Appendix 2 Financial statements
Note 1: Summary of Significant Accounting Policies
1.1 Objectives of the Professional Services Review
Professional Services Review (PSR) is an Australian Public Service organisation. The objective of PSR 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, income and expenses controlled or incurred by PSR in its own right.
The continued existence of PSR in its present form and with its present programs is dependent on Government policy and on continuing appropriations by Parliament for PSR’s administration.
1.2 Basis of Preparation of the Financial Report
The Financial Statements and notes are required by section 49 of the Financial Management and Accountability Act 1997 and are a General Purpose Financial Report.
The Financial Statements and notes have been prepared in accordance with:
- Finance Minister’s Orders (or FMOs) or reporting periods ending on or after 1 July 2008; and
- Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.
The financial report is presented in Australian dollars and values are rounded to the nearest dollar unless otherwise specified, where numbers have been rounded, discrepancies may occur between sums of component items and totals.
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 PSR 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 agreements equally proportionately unperformed 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 alternative treatment is specifically required by an accounting standard, income 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.
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 accounting period.
1.4 Changes in 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. Thefollowing new standards are applicable to PSR in the current reporting period:
- AASB 1 First-time Adoption of Australian Equivalents to International Financial Reporting Standards (June 2007)
- AASB 7 Financial Instruments: Disclosures
- AASB 101 Presentation of Financial Statements (Dec 2007)
- AASB 116 Property, Plant and Equipment
- AASB 137 Provisions, Contingent Liabilities and Contingent Assets
- AASB 139 Financial Instruments: Recognition and Measurement
- AASB 1048 Interpretation and Application of Standards
- AASB 1049 Whole of Government and General Government Sector Financial Reporting
- AASB 2007-2 Amendments to Australian Accounting Standards arising from AASB Interpretation 12 [AASB 1, AASB 117, AASB 118, AASB 120, AASB 121, AASB 127, AASB 131 & AASB 139]
- AASB 2007-9 Amendments to Australian Accounting Standards arising from the Review of AASs 27, 29 and 31 [AASB 3, AASB 5, AASB 8, AASB 101, AASB 114, AASB 116, AASB 127 and AASB 137]
- AASB 2008-12 Amendments to Australian Accounting Standards – Reclassification of Financial Assets – Effective Date and Transition [AASB 7, ASSB 139 & AASB 2008-10]
- Interp 4 Determining whether an Arrangement contains a Lease
Future Australian Accounting Standard requirements
It is estimated that there will be no material financial impact on future reporting periods following the adoption of new standards, amendments to standards or interpretations have been issued by the Australian Accounting Standards Board but are effective for future reporting periods.
1.5 Revenue
Revenue from Government
Amounts appropriated for departmental appropriations for the year (adjusted for any formal additions and reductions) are recognised as revenue when the PSR 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.
Other Types of 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; and
- 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; and
- The probable economic benefits asociated with the transaction will flow to the PSR.
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, which have 30 day terms, are recognised at the nominal amounts due less any impairment allowance. Collectability of debts is reviewed at balance date. An impairment allowance is made when collectability of the debt is no longer probable.
1.6 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.
Sale of Assets
Gains from disposal of non-current assets is recognised when control of the asset has passed to the buyer.
1.7 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.
Other distributions to owners
The FMOs require that distributions to owners be debited to contributed equity unless in the nature of a dividend. On 24 June 2008, the Finance Minister determined a reduction in departmental appropriations following a request by PSR through the Minister for Health and Ageing. The amount determined under subsection 10 (2) of Appropriation Act (No. 3) 2003-2004, and subsection 9 (1) of Appropriation Act (No. 1) 2006-2007 was to reduce the determinations under the PSR's departmental items of $2,500,000 for 2001-2002, $2,000,000 for 2002-2003, $500,000 for 2003- 2004, and $4,493,000 for 2006-2007. On 25 June 2009 the Finance Minister determined a further reduction of appropriation pursuant to subsection 9(1) of the Appropriation Act 2004-05 reducing PSR's departmental appropriation by $37,000.
1.8 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 in AASB 119) and termination benefits due within twelve months of balance date 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.
All other employee benefit liabilities are measured at 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 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 PSR 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 applied at the time leave is taken, including the PSR’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 is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at 30 June 2009. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.
Superannuation
Staff of PSR 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.
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 by the Department of Finance and Deregulation as an administered item.
PSR makes employer contributions to the employee superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Government of the superannuation entitlements of PSR’s employees. PSR 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 final 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 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.
Where a non-current asset is acquired by means of a finance lease, the asset is capitalised at either the fair value of the lease property or, if lower, the present value of minimum lease payments at the inception of the contract and a liability is recognised at the same time and for the same amount.
The discount rate used is the interest rate implicit in the lease. Leased assets are amortised over the period of the lease. Lease payments are allocated between the principal component and the interest expense. 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 Cash
Cash and cash equivalents includes notes and coins held and any 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 is recognised at its nominal amount.
1.11 Financial Assets
PSR classifies its financial assets as ”loans and receivable”. These include trade receivables and other receivables that have fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. 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.
1.12 Financial Liabilities
Supplier and other payables move
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).
PSR classifies its financial liabilities as “other financial liabilities”. These include supplier and other payables and are
1.13 Contingent Liabilities and Contingent Assets
Contingent Liabilities and Contingent Assets are not recognised in the Balance Sheet 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.
1.14 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.
1.15 Property, Plant and Equipment
Asset Recognition Threshold
Purchases of property, plant and equipment are recognised initially at cost in the Balance Sheet, except for purchases costing less than $1,000, 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 ‘makegood’ provisions in property leases taken up by PSR where there exists an obligation to restore an asset to its original condition. These costs are included in the value of PSR’s leasehold improvements with a corresponding provision for the ‘makegood’ recognised.
Revaluations
Fair values for each class of asset are determined as shown below:
| Asset Class | Fair value measured at |
|---|---|
| Leasehold improvements | Depreciated replacement cost |
| Infrastructure, plant and equipment | Market selling price |
Following initial recognition at cost, property plant and equipment 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 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. PSR engaged an independent valuer, the Australian Valuation Office, to conduct a valuation of property, plant and equipment as at 30 June 2009, using a fair value basis.
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 asset class that was previously recognised through operating result. Revaluation decrements for a class of assets are recognised directly through operating result 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 restated to the revalued amount.
Depreciation
Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to PSR using, in all cases, the straight-line method of depreciation. Leasehold improvements are depreciated in a straight line basis over the lesser of the estimated useful life of the improvements to unexpired period of the lease.
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:
| 2009 | 2008 | |
|---|---|---|
| Leasehold improvements | Lease term | Lease term |
| Plant and Equipment | 3 to 25 years | 3 to 25 years |
Impairment
All assets were assessed for impairment at 30 June 2009. 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 PSR were deprived of the asset, its value in use is taken to be its depreciated replacement cost.
1.16 Intangibles
PSR’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. Software is amortised on a straight-line basis over its anticipated useful life. The useful lives of PSR’s software are 5 to 10 years (2007-08: 5 to 10 years).
All software assets were assessed for indications of impairment as at 30 June 2009.
1.17 Taxation
PSR is exempt from all forms of taxation except fringe benefits tax (FBT) 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 Taxation Office; and
- except for receivables and payables.