1.1 Objectives of Department of Veterans' Affairs
The Department of Veterans’ Affairs (DVA) is an Australian Government controlled entity. It is a not-for-profit entity. The objective of DVA is to support members of Australia’s veteran and defence force communities, war widows and widowers, widows and dependants, through programs of care, rehabilitation, compensation, income support, commemoration and defence support services.
DVA comprises the Department of Veterans’ Affairs, the Repatriation Commission, the Military Rehabilitation and Compensation Commission, the Veterans’ Review Board, the Veterans’ Children Education Boards, the Office of Australian War Graves, the Repatriation Medical Authority and the Specialist Medical Review Council.
DVA is structured to meet the following three outcomes:
Outcome 1: To maintain and enhance the financial wellbeing and self-sufficiency of eligible persons and their dependants through access to income support, compensation, and other support services, including advice and information about entitlements.
Outcome 2: To maintain and enhance the physical wellbeing and quality of life of eligible persons and their dependants through health and other care services that promote early intervention, prevention and treatment, including advice and information about health service entitlements.
Outcome 3: The acknowledgement and commemoration of those who served Australia and its allies in wars, conflicts and peace operations through promoting recognition of service and sacrifice, preservation of Australia’s wartime heritage, and official commemorations.
The continued existence of DVA in its present form and with its present programs is dependent on Government policy and on continued funding by Parliament for DVA’s administration and programs.
DVA’s 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 DVA in its own right. Administered activities involve the management or oversight by DVA, on behalf of the Government, of items controlled or incurred by the Government.
DVA is responsible for carrying out government policy and implementing programs to fulfil Australia’s obligations to war veterans and their dependants, as well as to serving and former members of the Australian Defence Force and certain Australian Federal Police personnel with approved overseas service and those Australian participants involved in British nuclear tests in Australia. DVA provides support to the Repatriation Commission and the Military Rehabilitation and Compensation Commission, and is responsible for advising the Commissions on policies and programmes for beneficiaries and administering these policies. DVA also administers legislation such as the Defence Service Homes Act 1918 under which housing assistance is provided.
The objective of the Defence Service Homes Insurance Scheme which forms part of the operations of DVA (Note 1.20) is to provide domestic building insurance in accordance with the Defence Service Homes Act 1918 and Regulations.
1.2 Basis of Preparation of the Financial Statements
The financial statements and notes are general purpose financial statements and are required by Section 49 of the Financial Management and Accountability Act 1997.
The financial statements and notes have been prepared in accordance with:
a) Finance Minister’s Orders (FMOs) for reporting periods ending on or after 1 July 2011; and
b) 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 for departmental accounts and the nearest million dollars for administered accounts, 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 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 executory 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.
Administered revenues, expenses, assets and 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 where otherwise stated in Notes 1.22 and 1.23.
1.3 Significant Accounting Judgements and Estimates
In the process of applying the accounting policies listed in this note, DVA has made the following judgements that have the most significant impact on the amounts recorded in the financial statements:
- An allowance for impairment of receivables has been estimated by management based on experience in collections over time (Note 1.12).
- An independent actuary was used to estimate the value of outstanding and estimated future claims on unexpired insurance premiums (Note 1.20).
- An independent actuary was used to estimate the military compensation provisions (Note 1.23).
- Estimation methodologies were used to estimate the Aged Care, Repatriation Pharmaceutical Benefit Scheme (RPBS), Hospitals and Treatment Account System (TAS) provisions (Note 1.22).
Other than the Military Compensation provision (Note. 1.23), no accounting assumptions or estimates have been identified as having a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.
Disclosures related to accounting assumptions and estimates for DVA insurance activities and Administered items are set out in Notes 1.20, 1.22 and 1.23.
1.4 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 new standards, revised standards, interpretations, amendments to standards which were applicable to the current reporting period and issued prior to the signing of the financial statements have no material financial impact, nor are expected to have a future financial impact.
Future Australian Accounting Standard Requirements
The new standards, revised standards, interpretations and amendments to standards which are applicable to future reporting periods that were issued by the Australian Accounting Standards Board prior to the signing of the financial statements are not expected to have a material financial impact.
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 DVA 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:
a) the risks and rewards of ownership have been transferred to the buyer;
b) DVA retains no managerial involvement nor effective control over the goods;
c) the revenue and transaction costs incurred can be reliably measured; and
d) it is probable that the economic benefits associated with the transaction will flow to DVA.
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:
a) the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and
b) the probable economic benefits associated with the transaction will flow to DVA.
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 account. Collectability of debts is reviewed at the 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.
The accounting policy relating to insurance revenue is reported at Note 1.20.
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.
There are other resources received from other Government agencies free of charge that are not quantifiable (Note 4B).
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.
Gains from Make-good
Gains from make-good are recognised either when DVA exits a lease for which DVA has been absolved of its make-good obligation or when the costs incurred are less than the provision for make-good.
1.7 Transactions with the Government as Owner
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.
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.
1.8 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 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 DVA 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 DVA’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 an actuary in 2011-12. 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. DVA 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.
DVA’s staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), the PSS accumulation plan (PSSap) or other accumulated benefit schemes.
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 in the Department of Finance and Deregulation’s administered schedules and notes.
DVA makes employer contributions to the employees’ superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Government. DVA 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 and 30 June.
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.
DVA 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.
Lease incentives taking the form of tree’ 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.
Properties occupied by DVA are subject to make-good costs when vacated at the termination of the lease. A make-good asset and provision are recognised at the commencement of a lease at the present value of the provision. Movements in the liability, as the time to make-good payment advances one period, are recognised as a finance expense. Any difference between the provision and the amount paid in the final settlement is recognised as a make-good expense or gain.
1.10 Borrowing Costs
All borrowing costs are expensed as incurred.
Cash is recognised at its nominal amount. Cash and cash equivalents include:
a) cash on hand;
b) 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;
c) cash held by outsiders; and
d) cash in special accounts.
1.12 Financial Assets
DVA classifies its financial assets in the following categories:
a) financial assets at fair value through profit or loss;
b) held-to-maturity investments;
c) available-for-sale financial assets; and
d) loans and receivables.
This 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 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.
Financial Assets at Fair Value Through Profit or Loss
Financial assets are classified as financial assets at fair value through profit or loss where the financial assets:
a) have been acquired principally for the purpose of selling in the near future;
b) are derivatives that are not designated and effective as a hedging instrument; or
c) are part of an identified portfolio of financial instruments that DVA manages together and has a recent actual pattern of short-term profit-taking.
Assets in this category are classified as current assets.
Financial assets at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest earned on the financial asset. Interest earned on financial assets at fair value through profit or loss is included in line item ‘Investment revenue’ of note 3F.
A vailable-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 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, these instruments are valued at cost. DVA holds no such instruments.
Non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis.
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.
a) 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.
b) 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.
c) 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 either financial liabilities at ‘fair value through profit or loss’ or other financial liabilities. Financial liabilities are recognised and derecognised upon ‘trade date’.
Financial Liabilities at Fair Value Through Profit or Loss
Financial liabilities at fair value through profit or loss are initially measured at fair value. Subsequent fair value adjustments are recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.
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 (irrespective of having been invoiced).
1.14 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.
1.15 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 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.
1.16 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 $2,000 (with the exception of leasehold improvements where the threshold is $50,000), which are expensed in the year of acquisition (other than where they form part of a group of similar items which are material 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 DVA where there exists an obligation to restore the property to its original condition. These costs are included in the value of DVA’s leasehold improvements with a corresponding provision for the ‘make-good’ recognised.
Fair values for each class of asset are determined as shown below:
|Asset class||Fair value measurement|
|Land||Market selling price|
|Leasehold improvements||Lesser of depreciated replacement or reproduction cost|
|Property, plant & equipment||Market selling price|
Following initial recognition at cost, property plant and equipment were carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations were conducted with sufficient frequency to ensure that the carrying amounts of assets did not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depended upon the volatility of movements in market values for the relevant assets. DVA’s leasehold improvements were last revalued by an independent qualified valuer from the Australian Valuation Office (AVO) during 2010-11.
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 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 asset 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 DVA 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 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:
|Plant and furniture||10 years||10 years|
|Office equipment||5 years||5 years|
|Computer equipment||3 years||3 years|
|Leasehold improvements||Lesser of estimated life or unexpired lease period||Lesser of estimated life or unexpired lease period|
The aggregate amount of depreciation allocated for each class of asset during the reporting period is disclosed in Note 3C.
All assets were assessed for impairment at 30 June 2013. 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 DVA 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 further future economic benefits are expected from its use or disposal.
DVA’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.
All intangible assets are amortised on a straight-line basis over their anticipated useful lives. The useful lives of DVA’s intangible assets are usually 7 years (2012: 7 years). All software assets were assessed for indications of impairment as at 30 June 2013.
1.18 Taxation / Competitive Neutrality
DVA 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:
a) where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
b) for receivables and payables.
DVA provides administrative services for the Defence Home Ownership Assistance Scheme and the Defence Home Owner Scheme. The fees charged cover DVA’s anticipated costs in providing the service to Defence and were subject to Competitive Neutrality (CN) charges. Under CN arrangements, DVA is required to make Australian Income Tax Equivalent payments to the Government, in addition to payments for FBT and GST. The amount paid during 2012-13 is disclosed in note 5A.
1.19 Foreign Currency
Transactions denominated in a foreign currency are converted to Australian dollars at the exchange rate at the date of the transaction. Foreign currency receivables and payables are translated to Australian dollars at the exchange rates current as at balance date. Associated currency gains and losses are not material.
1.20 Insurance Activities
The Defence Service Homes Insurance Scheme (DSHIS) forms part of the operations of the Health & Community Services Division of DVA. The objective of DSHIS is to provide domestic building insurance in accordance with the Defence Service Homes Act 1918 and regulations. It has been agreed that, substantially, the operations and objectives of DSHIS are controlled by DVA.
The financial statements of DSHIS are aggregated into DVA’s financial statements. In the process, all inter-entity transactions and balances are eliminated.
DSHIS is continuing to address the issue of ongoing sustainability. The strategies DSHIS is using to return to surplus include: continued appropriate premium rate increases; implementation of a prudent capital management plan; and the targeted marketing of potential new policyholders. The DSHIS Advisory Board, which provides governance for DSHIS, oversees DSHIS’s overall financial position, including the implementation of these strategies and DSHIS’s voluntary compliance with Australian Prudential Regulation Authority standards.
Direct premium revenue comprises amounts charged to policyholders, excluding amounts collected on behalf of third parties, principally GST in full. The earned portion of premiums received and receivable, including unclosed business, is recognised as revenue. Premium revenue is recognised as earned from the date of attachment of risk.
The pattern of recognition over the policy or indemnity periods is based on time, which is considered to closely approximate the pattern of risks underwritten.
Commissions Received Revenue
Commissions received revenue is recognised when it becomes due to DSHIS.
Interest revenue is recognised using the effective interest rate method as set out in AASB 139 Financial Instruments: Recognition and Measurement.
Revenue from Government
Amounts appropriated are recognised as revenue when DSHIS gains control of the appropriation. DSHIS receives appropriation revenue for interest equivalency payments only.
Fire Brigade and Emergency Services Contributions
In New South Wales, fire brigade and emergency services contributions and in Victoria, fire service contributions received or receivable from policy holders are included in premiums. A liability for fire brigade, emergency services and other charges is recognised on business written to the reporting date, regardless of whether assessments have been issued by the appropriate authority. Levies and charges payable by DSHIS are expensed on the same basis as the recognition of premium revenue, with the portion relating to unearned premium being recorded as unearned revenue.
Deferred Acquisition Costs
A portion of acquisition costs relating to unearned premium revenue can be deferred in recognition that it represents future benefits to DSHIS. Deferred acquisition assets must have a probability of future economic benefit and be able to be reliably measured. DSHIS does not have the data or reporting to reliably measure the value of this asset, therefore it does not take up a deferred acquisition asset.
Reinsurance receivables are recorded at discounted estimated value on paid claims and incurred claims not yet paid and recognised as a reduction in the claims expense.
The provision for unearned premiums represents the estimated proportion of premiums written in the current year relating to cover provided in the subsequent year. DSHIS’s system allows for the unearned proportion to be calculated for each individual policy in accordance with AASB 1023 General Insurance Contracts.
Revenue in Advance
DSHIS recognises revenue in advance where the revenue has been received prior to the period in which the revenue relates. DSHIS recognises revenue in advance at nominal value.
Liability Adequacy Test and Unexpired Risk Liability
AASB 1023 General Insurance Contracts requires the application of a liability adequacy test upon unearned premiums. Where this test indicates that DSHIS’s unearned premiums less related acquisition costs are insufficient to cover the expected future cash flows relating to future claims under the risk associated with those premiums, the difference is recognised in the Statement of Comprehensive Income. As a result of this test DSHIS has recognised no movement (2012: $1,816,000) and an unexpired risk liability of nil (2012:nil) –indicating that DSHIS’s unearned premiums are sufficient to cover expected future cash flows relating to future claims. In performing the liability adequacy test DSHIS’s actuary has applied a risk margin of 14% (2012: 14%), which has increased the expected future cash flows relating to future claims by $1,750,000 (2012: $1,600,000). The probability of adequacy applied in the test is different to the probability of adequacy adopted in determining the outstanding claims liability. No specific guidance exists for the risk margin to be used in determining the adequacy of premium liabilities. The 75% basis is considered appropriate having regard to the purpose and nature of the test, the use of the 75% basis as a regulatory benchmark in Australia, and consistency with developing market practice.
DSHIS has not taken into account the income from invested retained surpluses or agency commissions which are used to subsidise costs associated with the building policy.
DSHIS’s unadjusted unearned premium liability as at 30 June 2013 was $18,443,000 (2012: $15,557,000) and future cash flows relating to future claims under the risk associated with those premiums as advised by DSHIS’s independent actuaries was $14,300,000 (2012: $13,400,000).
The provision for outstanding claims has been determined on a case by case approach in respect of all claims reported. The liability for outstanding claims includes claims incurred but not yet paid, incurred but not reported (IBNRs), and incurred but not enough reported (IBNERs). The provision includes the expected administration costs of settling those claims. A report on the adequacy of the provision was prepared by independent actuaries (PricewaterhouseCoopers) as at 30 June 2013. The methods used to assess the outstanding liability were Projected Case Estimates (PCE) and Payment Per Claims Incurred (PPCI). This methodology meets Actuarial Standard PS 300 Valuation of General Insurance Claims.
The methodology for the estimation of the net outstanding claims provision as at 30 June 2013 consists of:
a) Predicting future claim payment cash flows in respect of claims incurred prior to 30 June 2013. Separate predictions by claim type (Liability, Catastrophe and Other) are made in respect of each combination of accident quarter and financial quarter of payment. The future cash flow predictions are derived from several actuarial models of the various claim processes. That is, actuarial models are constructed for numbers of claims reported, average payments per claim incurred, development of case estimates and payments as a proportion of case estimates. The results of the models are blended based on their individual characteristics to produce a single estimate of the outstanding claims.
b) Initially all estimates are made in 30 June 2013 dollars, but subsequently are increased to allow for inflation from that date to the date of payment.
c) Liability for outstanding claims is estimated by:
- discounting these inflated claim payments to allow for investment return at risk free rates;
- adjusting for the effect of GST; and
- adding an allowance to provide for associated claims administration expenses.
d) Gross and net liabilities are derived by making adjustments for both third party recoveries and reinsurance recoveries.
e) The estimate of liability is increased by a prudential margin.
The following assumptions have been made in determining the net outstanding claims provision as at 30 June 2013:
a) Inflation rates: 4.03% for 2013-14;
b) Discount rates: 2.5% for 2013-14;
c) Claims administration expenses: 5% of claim payments;
d) Superimposed inflation: approximately 7.2% p.a. in the actuarial model with an explicit superimposed inflation assumption;
e) Prudential margin: 9% of central estimated liability for 75% probability of sufficiency;
f) Number of claims for the 2012-13 accident year: approximately 8,987; and
g) Average claim size (in actual values) for the 2012-13 accident year: approximately $2,896.
The following assumptions were made in determining the net outstanding claims provision as at 30 June 2012:
a) Inflation rates: 4.28% for 2012-13;
b) Discount rates: 2.8% for 2012-13;
c) Claims administration expenses: 5% of claim payments;
d) Superimposed inflation: approximately 7.2% p.a. in the actuarial model with an explicit superimposed inflation assumption;
e) Prudential margin: 9% of central estimated liability for 75% probability of sufficiency;
f) Number of claims for the 2011-12 accident year: approximately 9,833; and
g) Average claim size (in 30 June 2012 values) for the 2011-12 accident year: approximately $2,767.
Process for Determining Assumptions
The process for determining each of the assumptions is as follows:
a) Inflation rates: are taken as an average of CPI (house building materials) and AWE inflation expectations which are based on internal and external forecast of future rate;
b) Discount rates: derived from a yield curve fitted to the actual yields on Commonwealth Government bonds as at 30 June 2013;
c) Claims administration expenses: assumed based on industry experience;
d) Superimposed inflation: derived internally from actuarial models based on the long term average of past experience for all non-catastrophe claims;
e) Prudential margin: selected based on analysis of historical variability within the portfolio;
f) Number of claims in 2012/13 accident year: derived from actuarial models of past claim reporting patterns; and
g) Average claim size (in actual values) for 2012/13 accident year: derived as an outcome of all the actuarial models blended to form adopted estimates of outstanding claims and hence total ultimate costs and average claim sizes.
Insurance Risk Management
Insurance risk management policies and practices are disclosed at Note 14H –Risk Management.
Process for Determining Risk Margin
The risk margin required for a 75% level of sufficiency has been estimated using various statistical modelling techniques applied to the claim data. An actuarial model (the “chain ladder”) has been fitted to 10,000 simulated claim data sets to determine 10,000 estimates of the outstanding claims and hence an approximate distribution of those amounts. The analysis is on the basis prescribed by Australian Prudential Regulation Authority in that it ignores asset risk but takes into account liability risk, including the inflation risk.
DSHIS purchases reinsurance each year for dwelling per risk, catastrophe risk and legal liability risk. Premium ceded to reinsurers is recognised as an expense and is measured at nominal value in accordance with the pattern of reinsurance service received.
1.21 Comparative Figures
Comparative figures have been adjusted to conform to changes in the presentation of the financial statements:
Senior Executive Remuneration
The comparative figures for 2012 is revised due to an increase in the senior executive remuneration threshold from $150,000 to $180,000.
Compensation and Debt Relief (Note 28)
In 2011-12, the amount estimated outstanding in relation to payments made on a periodic basic under the ‘Compensation for Detriment caused by Defective Administration Scheme’ was $46,623. Following revision, this has been restated to $101,123.
Employee Benefits (Note 3A)
In order to better represent the transactions, wages and salaries expenses of $13,305,000 have been reclassified to leave and other entitlements.
1.22 Reporting of Administered Activities (excluding Military Compensation Provision)
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.
Administered Cash Transfers to and from the Official Public Account
Revenue collected by DVA for use by the Government rather than DVA is administered revenue. Collections are transferred to the Official Public Account (OPA) 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 DVA on behalf of the Government and reported as such in the administered cash flow statement and in the administered reconciliation schedule.
All administered revenues are revenues relating to the course of ordinary activities performed by DVA 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.
Revenues mainly arise from recoveries of health payments and pension payments. It is recognised at its nominal amount due less any impairment losses. Collectability of debts is reviewed at the end of the reporting period. Impairment allowances are made when collection of the debt is judged to be less, rather than more, likely.
Where 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.
Administered investments in subsidiaries, joint ventures and associates are not consolidated because their consolidation is relevant only 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 2013. Fair value has been taken to be the Australian Government’s proportional interest in the net assets of the entities as at end of reporting period. Additional details relating to administered investments can be found at Note 18C.
DVA administers a number of grant schemes on behalf of the Government. Grant 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.
Administered Payables and Provisions
Personal Benefits Payable
Pension and compensation payments are paid in arrears following an entitlement period and any amounts determined as payable but unpaid as at 30 June 2013 are included as Administered Personal Benefits Payable.
Outstanding Treatment Accounts System (TAS) claim provision
The Outstanding TAS claims provision is an estimate of the liability outstanding for payment of eligible treatment claims on the TAS as at 30 June 2013. An estimation methodology has been applied for calculating the approximate amount of outstanding claims which will be paid in future years. This provision is not discounted as all amounts are expected to be paid within the next financial year.
Provisions for payments to hospitals
A provision has been made for outstanding eligible hospital payments. Due to the uniqueness of each state’s approach to the delivery of health care services in public institutions there is an element of uncertainty in the provision. Specifically, DVA funds veteran services in the state public hospital sector on the basis of estimating the expected cost, advancing funds based on that estimate and then receiving data after services have been provided. The data may be received well after the services have been delivered and is a consequence of the delays in the information flows from state health departments and ongoing contract management issues, which may give rise to adjustments. DVA attempts to mitigate the uncertainty through analysis of prior year trends and monitoring price movements for diagnostic related groups. This gives DVA confidence that the uncertainty is kept within manageable bounds and will not cause any material misstatement.
This provision is not discounted as all amounts are expected to be paid within the next financial year.
Repatriation Pharmaceutical Benefit Scheme (RPBS) provision
The RPBS provision is an estimate of the liability outstanding for payment of eligible claims on the RPBS as at 30 June 2013. An estimation methodology has been applied for calculating the amount of outstanding claims which will be paid in future years. This provision is not discounted as all amounts are expected to be paid within the next financial year.
Payments to CAC Act Bodies
Payments to CAC Act Bodies from accounts appropriated for that purpose are classified as administered expenses, equity injection or loans of the relevant portfolio department. The appropriation to DVA is disclosed in Note 25A - Annual Appropriations.
Payments to eligible veterans, their war widows, widow(ers) and dependents are made in accordance with the Veterans’ Entitlements Act 1986 (VEA) and associated legislation. Payments to eligible serving and former serving members of the Defence Force are made in accordance with the Military Rehabilitation and Compensation Act 2004 (MRCA) and the Safety, Rehabilitation and Compensation Act 1988 (SRCA). Each of these three Acts imposes an obligation on eligible recipients to disclose to DVA information about financial and personal circumstances that affect their entitlement to benefits. In the absence of this obligation, the cost of delivery of DVA’s services would increase as a result of the requirement to verify information provided by eligible recipients in relation to these benefits.
Unreported changes in circumstances can lead to incorrect payment, even if no deliberate fraud is intended. However, risks associated with relying on voluntary disclosure by customers are mitigated by a comprehensive risk management plan which minimises the potential for incorrect payment by subjecting customers to a variety of review processes. Risks of any non-compliance with statutory conditions on payments from appropriations are explained under Note 32.
While DVA acts promptly to address material risks as they emerge, DVA accepts that a small proportion of non-compliance may go undetected. However, given the above risk management strategy DVA is satisfied that the incidence of incorrect payment is not material in terms of total payments, and that the financial statements materially reflect the activities of DVA’s administered program.
1.23 Reporting of Administered Activities - Military Compensation Provision Military Compensation Provision
The military compensation provision represents an estimate of the present value of future payments in respect of claims under the Military Rehabilitation and Compensation Act 2004 (MRCA) and the Safety, Rehabilitation and Compensation Act 1988 (SRCA) arising from service rendered before 30 June 2013. These claims may not be received until many years after the event and subsequent payments for income support, health and rehabilitation services can extend over many years. The injury profile within the schemes creates dynamic expenditure patterns. Injuries can be of an immediate and short term duration as well as those which are more permanent resulting in long term entitlements. Historically, the expenditure trend does concentrate earlier, however the provisions have a long tail element where payments are expected to be made for the next 50 or more years. Entitlements are still being paid by DVA for dependants of World War 1 veterans, World War 2 veterans and their dependants.
Many sources of uncertainty exist when estimating a “long tail” provision. There are some inherent sources of uncertainty which arise from:
The actuarial models and methods will not exactly match the underlying claims process;
Past claim fluctuations create uncertainty in model parameters;
Unavailable data or undetected errors in data also create uncertainty in model parameters;
Future economic and environmental conditions may be different to those assumed; and
Future claim fluctuations result in uncertainty of the projected liability, even if the model and its parameters were accurate.
In the case of the military compensation provisions, there are some specific sources of uncertainty arising from the nature of the schemes and the data:
Changes in scheme experience as a result of the move from SRCA to MRCA;
MRCA is far from fully mature with experience limited to a maximum of eight years after the injury date resulting in assumptions being unavoidably based on very limited data;
For MRCA a heavy reliance is necessarily still placed on SRCA experience, whereas early experience indicates inconsistencies between the two schemes;
Rates used to discount future payments to their present value over a period of more than 50 years;
Trends in long term incapacity exit rates;
A longer lag time between injury and claim relative to other workers’ compensation schemes;
Recent evidence suggests a jump in claims for liability which is flowing through into higher permanent impairment payments under both schemes, which has been allowed for in the estimate. However it is currently unclear whether this increase is a permanent change or a short term increase;
Changes in service delivery which might accelerate or slow down the development and recording of paid or incurred claims, compared with the statistics from previous periods;
Changes in the legal environment; and
Medical and technological developments.
All of these factors create uncertainty around the assumptions adopted for future claims.
For SRCA, issues arise primarily from the feasibility of knowing whether the large increases in expenditure rates, observed in recent years, will reverse, persist or accelerate. This significant uncertainty existed at 30 June 2013 and is expected to continue into the future. The estimate as at 30 June 2013 is based on the assumption that the recent experience of increases will continue into the future.
For MRCA, the significant uncertainty arises not only from the difficulty of setting assumptions in an environment of increasing expenditure rates, but also from the limitations of the data available for analysis, partly due to the immaturity of the scheme. This significant uncertainty existed at 30 June 2013 and is expected to continue into the future. The relative youth of the scheme, the absence of comprehensive expenditure data for most of the early years of the scheme and the fact that payments are recorded by individual rather than the injury giving rise to the payment, all require approximations to be made and add uncertainty to the estimation process. Given the short history of the scheme, the estimate of the liability necessarily relies heavily on SRCA experience in setting assumptions in relation to how claims will develop over time, but there are some early indications that outcomes may be different under the two schemes.
Until additional data becomes available which will facilitate more precise outcomes, significant uncertainty will remain for both schemes. It is expected that the uncertainty will continue for 5 or more years for SRCA, whereas with MRCA the uncertainty is likely to continue for a longer period of time. The scheme liabilities will continue to be reviewed annually while the experience remains unstable.
The value of the provision represents the estimate of the present value of expected future payments against claims incurred (though potentially not reported) at the reporting date. The estimation of the liability in respect of claims which have not yet been received by DVA is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to DVA, where more information about the claim event is likely to be available. However, the nature of the compensation provided, including long term income support and lifetime coverage of relevant medical costs, means that there remains substantial uncertainty around even the latter category of claims.
DVA has reviewed the requirements of AASB 137 in a Commonwealth Government context and concluded that use of the central estimate for the valuation of the provisions is better aligned with “best estimates” requirements of the Standard. This provision is recognised under AASB 137 Provisions, Contingent Liabilities and Contingent Assets. The Australian Government Actuary (AGA) was engaged to provide an estimate of the provision as at 30 June 2013 for the estimated cost of claims incurred but not reported (IBNR) at the reporting date.
For the purpose of estimating the provisions the different types of obligations are categorised and labeled as heads of damage. These include:
Incapacity payments, split between short term and long term payments;
Permanent impairment and, for SRCA, non-economic loss payments;
In calculating the estimated cost of future claims a variety of estimation techniques are used, generally based upon statistical analyses of historical experience, which assume that the development pattern of the current and future claims will be consistent with past experience.
The following key assumptions are made in calculating this provision:
The average rates at which people who have been in receipt of incapacity payments for more than twelve months and will exit from payment is consistent with the rates observed over the last three years;
SRCA data can be used as the starting point in setting assumptions for MRCA where MRCA experience is not yet available (beyond year 9);
Payments will be made over an extended period (over 50 years);
Future payments are discounted using interest rates based on a yield curve derived from the yields on Commonwealth bonds of various durations and projected over the expected payment period (over 50 years);
Greater emphasis has been given to more recent experience assuming high rates of growth will persist; and
Normal inflation plus superimposed inflation (see below) for each head of damage.
In accordance with the accounting standards, it was determined that the use of a yield curve derived from the yields on Commonwealth bonds of various durations rather than the ten year Commonwealth bond rate (2011-12: 3.1%) was a more appropriate discount rate basis in the calculation of this provision. The interest rates forming the yield curve vary from 2.5% (year 2) to 5.4% (beyond year 40).
The financial impact of the adoption of the yield curve has resulted in a decrease of the provision of $1,067m. This partially reverses the increase in the provision of $1,446m in 2011-12, when the ten year Commonwealth bond rate (3.1%) was adopted, replacing the Long Term rate (6.0%) previously used in 2010-11. The impact of these movements is reflected in the Administered Statement of Comprehensive Income and the movement in the provisions (note 20).
Superimposed inflation represents an estimate of how costs increase over and above normal inflation rates. For example medical costs have been observed to grow at a rate faster than normal wage inflation. The estimates of the combined nominal rates of inflation (that is, normal inflation plus superimposed inflation) for each head of damage are listed below:
Short-term incapacity payments - 4.0% (2011-12: 4.0%);
Permanent impairment and non-economic loss (SRCA) - 3.5% (2011-12: 3.5%);
Permanent impairment (MRCA) - 3.5% (2011-12: 5.0%);
Medical - 4.0% (2011-12: 6.0%);
Rehabilitation (SRCA) - 6.0% (2011-12: 4.0%);
Rehabilitation (MRCA) - 4.0% (2011-12: 4.0%);
Death - 3.0% (2011-12: 3.0%); and
Other - 6.0% (2011-12: 6.0%).
The actuary obtains a balance date estimate for the current year by applying roll-forward factors to a full valuation at 30 June of the preceding financial year. Adjustments are identified to the balances of the provision previously reported.
The adjustments for the last two years are explained below:
Reconciliation of Provision
|2013 $m||2012 $m|
|Projected Liability at beginning of financial year||4,784||3,083|
|Changes in estimated liability of head of damage|
|Permanent impairment/non-economic loss||143||37|
|Attendant care and household services||50||0|
|Revised Projected Liability at beginning of financial year||5,555||3,149|
|Roll forward adjustment|
|Imputed interest earned||172||189|
|Projected Liability at 30 June before change in interest rate||5,817||3,341|
|Change in interest rate||(1,067)||1,446|
|Projected Liability at 30 June||4,750||4,787|
The movement in the projected liability at the beginning of the year is due to:
Increases in forecast medical costs of $419m for both SRCA and MRCA:
The increase of $244m in the restated SRCA liability is due to a change in the estimation methodology whereby the revised estimate of future medical outlays is based on the number of claimants from each accident year under a payment per active claimant approach. Analysis undertaken during 2012-13 indicated that this approach more accurately allows for the expected increase in later accident years than the previous modelling approach, which allowed for the increase in usage rates through superimposed inflation;
The increase of $175m in the restated MRCA liability also reflects a change in the forecasting methodology whereby future usage rates are based on a payment per active claimant approach. However an additional allowance has also been made, to allow for an increase in medical outlays arising from the emergence of the back log of permanent impairment claims (see below) which will likely result in a corresponding increase in access to medical services;
Increases in permanent impairment/non-economic loss for both SRCA and MRCA of $143m. The average claim amount under SRCA increased during 2011-12 which has been reflected in the revised estimate. The increase in the MRCA reflects the inclusion of an additional allowance for the backlog of claims now emerging, following the end of recent ADF overseas deployments;
Additional allowances for SRCA death claims of $100m due to an increase in recent claims experience resulting in a revised forecast of future claims; and
Increases in the estimated liability for attendant care and household services liability of $50m as a result of analysis similar to that described above in relation to medical costs.
It should be noted that the movement in the projected liability at the beginning of the year was calculated using a discount rate of 3.1% which is the rate used in 2011-12. The movement in the projected liability at the beginning of 2011-12 was calculated using a discount rate of 6.0%, being the rate used in 2010-11.
Sensitivity Analysis - Discount Interest rate
This provision is sensitive to interest rate assumption changes as the AGA calculates the future cash flows and then discounts these future values to the present value using the discount rate. The choice of discount rate, while not affecting the projected future cash flows themselves, will alter the present value assigned to those cash flows, and hence the estimate of the liability.
For the preparation of the 2012-13 Financial Statements DVA has adopted the use of a yield curve derived from the yield of Commonwealth bonds of varying duration, resulting in an estimated liability of $4,750m.
If the ten year Government bond rate at 30 June 2012 (3.1%) continued to be used the liability would increase to $5,817m. Alternatively if the discount rate derived from the Long-term Cost Report (6.0%) was used the estimated liability at 30 June 2013 would reduce to $4,018m.