The ANAO inspected the Agency’s financial records and provided an unqualified audit opinion on the financial statements and accompanying explanatory notes on 29 September 2020. The ANAO’s report and the Agency’s financial statements are presented below.

The Agency will continue to focus on its budget management in 2020–21 to maintain its financial sustainability and to deliver strongly against its statutory priorities.

Budget Variances Commentary

Expenses

Increase in employee benefits from 2018–19 relates to increases in Average Staffing Level (ASL) during 2019–20. The Agency is still under ASL budget profile (250) as at 30 June 2020 (242). Increased depreciation relates to amortisation of right-of-use assets under AASB16 Leases with $4.1 million recorded for the 2019–20 year which was not budgeted for. Write downs of $2.3 million due to the annual impairment assessment of intangible assets were also not budgeted for.

Revenue

Contribution from jurisdictions $2.0 million increase to budget relates to recognition of prior year funding previously recognised as unearned income, as part of transition to AASB 1058 Income for Not for Profit Entities.

Other revenue of $9.6 million was unbudgeted and predominately relates to funds received from the Department of Health in relation to the Electronic Prescribing Project. The revenue was recognised upon completion of milestones set out in the contract.

An operating loss was approved for 2019–20 for the allowance for depreciation/amortisation, consistent with previous years. This operating loss was approved by the Minister of Health and Minister of Finance. There is no impact on the financial sustainability of the Australian Digital Health Agency (the Agency) resulting from the operating loss in 2019–20.

Budget Variances Commentary

Assets

Total assets were higher than budgeted partially due to increases in the amount of cash held at 30 June. This favourable cash position is mainly due to accrued expenses on the statement of financial position with payments to suppliers to be made in the first months of the next reporting period.

Right-of-use assets of $15.0 million relate to implementation of AASB 16 Leases for office leases held in Sydney, Brisbane and Canberra. Other Non-Financial Assets are higher than budget due to prior year audit adjustments to recognise a prepayment for Primary Health Networks (PHN) unspent funding (refer Equity).

Liabilities

Total liabilities were higher than budgeted mainly due to the implementation of AASB 16 Leases resulting in the recognition of lease liabilities with $17.7 million recorded for office lease commitments. This was offset by a lower than anticipated payables balance at 30 June 2020.

Equity

Refer to the Statement of Changes in Equity.

Accounting Policy

Equity Injections

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.

Cash Reserve

The purpose of this reserve is to recognise the potential costs of winding up the Agency should funding not be approved for future years. The creation of this reserve account has been approved by the Board.

Budget Variances Commentary

Statement of Changes in Equity

Equity is largely in line with expectations. The total equity position of the Agency has remained stable with the exception of prior period errors and lease adjustments as noted above.

The variance of $28.0 million relates to the initial recognition of ROU Assets as required by AASB 16.

Budget Variances Commentary

Cash Flow Statement

Cash received from operating activities was higher than budget which is consistent with an increase in revenue for the Electronic Prescribing Project $6.2 million.

Cash used for supplier payments was higher than budget which is due to the timing of payments to suppliers.

Overview

Objectives of the Agency

The Australian Digital Health Agency (the Agency) is an Australian Government controlled corporate Commonwealth Agency established by the Public Governance, Performance and Accountability (Establishing the Australian Digital Health Agency) Rule 2016 (the Rule).

The Agency was established as a Corporate Commonwealth Agency on 30 January 2016 following registration of the rule on 29 January 2016 and commenced operations on 1 July 2016. All assets and liabilities of National E- Health Transition Authority and My Health Record (MHR) system operation activities managed by the Department of Health transferred to the Agency on that date.

The Agency has responsibility for the strategic management and governance for the national digital health strategy and the design, delivery and operations of the national digital healthcare system including the MHR system. It provides the leadership, coordination and delivery of a collaborative and innovative approach to utilising technology to support and enhance a clinically safe and connected national health system.

The Agency is structured to meet the following outcome:

Outcome 1: To deliver national digital healthcare systems to enable and support improvement in health outcomes for Australians

The continued existence of the Agency in its present form and with its present programs is dependent on:

• Government policy and on continued funding by the Australian Government for the Agency’s administration and programs relating to the MHR functions, extending the 2017-18 Budget measure titled My Health Record — continuation and expansion.
• Funding from the Australian Government, states and territories received pursuant to the Inter-Governmental Agreement signed in October 2018, and on any future such agreements.

The Basis of Preparation

The financial statements are general purpose financial statements as required by section 42 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

The financial statements have been prepared in accordance with:

1. Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR) for reporting periods ending on or after 1 July 2015; and
2. Australian Accounting Standards and Interpretations – Reduced Disclosure Requirements 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 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 $’000 unless otherwise specified.

The financial statements have been prepared on a going concern basis. As per the 2019–20 Health Portfolio Budget Statements (PBS), the Agency is not currently resourced for the 2020–21 full year. This is due to timing of the Budget which has been moved to October 2020 for 2020–21, noting that the Appropriation Acts of 2020-21 provided for Agency funding in line with 2019–20 estimates. The Agency is not resourced for the forward estimates; however, the Government continues to publicly support the Agency’s objectives, and the Council of Australian Governments (COAG) Intergovernmental Agreement on National Digital Health is in place until 30 June 2022. As such, the Agency continues to operate as a going concern until such time as a formal decision is made not to proceed with Agency activities as outlined in the 2019-20 PBS.

In 2019–20, COVID-19 has had significant health and economic impacts on a global scale. The Agency has assessed the potential impacts of COVID-19 on its operations, including as part of reviewing impairment of fixed assets, and there is no material impact to items presented in these accounts.

New Accounting Standards

All new, revised or amending standards and/or interpretations that were issued prior to the sign-off date and are applicable to the current reporting period did not have a material effect on the Agency’s financial statements.

Application of AASB 16 Leases

The Agency adopted AASB 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented for 2019 is not restated, that is, it is presented as previously reported under AASB 117 and related interpretations.

The Agency elected to apply the practical expedient to not reassess whether a contract is or contains a lease at the date of initial application. Contracts entered into before the transition date that were not identified as leases under AASB 117 were not reassessed. The definition of a lease under AASB 16 was applied only to contracts entered into or changed on or after 1 July 2019 which was not applicable for 2019–20. The Agency elected to exclude lease options from the valuation of right-of-use assets.

AASB 16 provides for certain optional practical expedients, including those related to the initial adoption of the standard. The Agency applied the following practical expedients when applying AASB 16 to leases previously classified as operating leases under AASB 117:

• Apply a single discount rate to a portfolio of leases with reasonably similar characteristics;
• Exclude initial direct costs from the measurement of right-of-use assets at the date of initial application for leases where the right-of-use asset was determined as if AASB 16 had been applied since the commencement date;
• Reliance on previous assessments on whether leases are onerous as opposed to preparing an impairment review under AASB 136 Impairment of Assets as at the date of initial application; and
• Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term remaining as of the date of initial application.

As a lessee, the Agency previously classified leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards of ownership. On adoption of AASB 16, the Agency recognised right-of-use assets and lease liabilities in relation to leases of office space which had previously been classified as operating leases.

The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Agency’s incremental borrowing rate as at 1 July 2019. The Agency’s incremental borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The weighted-average rate applied was 0.99%. The right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

Impact On Transition

On transition to AASB 16, the Agency recognised additional right-of-use assets and additional lease liabilities, recognising the difference in retained earnings. The impact on transition is summarised below, noting that onerous leases provision has been adjusted to ROU assets:

Prior Year Adjustments

The Agency entered into contracts for service agreements with Primary Health Networks (PHNs) in 2018–19. At the 30 June 2019, monies paid under the agreements were acquitted by the PHNs with unspent funds of $5.7 million remaining should have been reclassified to prepayments. This prior period error has been restated in the prior year in the Statement of Comprehensive Income, Statement of Financial Position and Statement of Changes in Equity. The impact is included below.

Taxation

The Agency is exempt from all forms of taxation except Fringe Benefits Tax (FBT) and the Goods and Services Tax (GST).

Events After the Reporting Period

There were no matters or circumstances which have arisen since the end of the financial year which significantly affected, or alternatively may affect the operations of the Agency, the results of these operations or state of affairs of the Agency in subsequent years.

1.1 Expenses

1. Financial Performance

This section analyses the financial performance of the Agency for the period ended 30 June 2020.

1.1 Expenses

Accounting Policy

Accounting policy for employee related expenses is contained in note 3.1.

The Agency has no short-term lease commitments as at 30 June 2020.

The above lease disclosures should be read in conjunction with the accompanying notes 2.2A and 2.4A.

Accounting Policy

Short-term leases and leases of low-value assets

The Agency has elected not to recognise right-of-use assets and lease liabilities for short-term leases of assets that have a lease term of 12 months or less and leases of low-value assets (less than $10,000). The Agency recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

The above lease disclosures should be read in conjunction with the accompanying notes 2.2A and 2.4A.

1.2 Own-source revenue and gains

Accounting Policy

The Agency receives contributions from jurisdictions based on an agreed formula as set out in Schedule A to the Intergovernmental Agreement on National Digital Health (signed October 2018). The above contributions from states and territories of $32.3 million represents half of the total contributions made under the Intergovernmental Agreement, with a further $32.3 million being contributed by the Australian Government. The latter contribution is included in Revenue from Government and is shown in note 1.2E.

In addition, as a result of implementation of AASB 1058, an additional amount of $2.0 million has been ‘earned’ in 2019–20. This amount represents amounts previously treated as an unearned in 2018–19.

Accounting Policy

Interest revenue is recognised using the effective interest method.

Lease income for 2019–20 relates to a short term sub-leasing arrangement for the Sydney Office. This space is currently not subleased, and therefore $nil receivable amounts are reported. The above lease disclosure should be read in conjunction with the accompanying notes 2.2A and 2.4A.

Currently the Agency does not derive revenue from the sale of goods and services. Other Revenue includes funding for the Electronic Prescribing Project provided by the Department of Health.

Accounting Policy

Revenue from Government

Funding appropriated to the Department of Health as a corporate Commonwealth Agency payment item for payment to this Agency is recognised as revenue from the Australian Government unless the funding is in the nature of an equity injection or a loan. The Agency’s revenue from the Australian Government includes $32.3 million paid pursuant to the Intergovernmental Agreement (refer also note 1.2A).

2.1 Financial assets

This section analyses Agency’s assets used to conduct its operations and the operating liabilities incurred as a result. Employee related information is disclosed in Section 3 People and Relationships.

2.1 Financial Assets

Accounting Policy

Cash is recognized at its nominal amount. Cash and cash equivalents include cash on hand and deposits in bank accounts with an original maturity of three months or less that are convertible to known amounts of cash and subject to insignificant risk of changes in value.

Accounting Policy

Financial assets

The Agency classifies its financial assets at the time of initial recognition depending on the nature and purpose of the asset. All receivables are classified as trade and other receivables and are expected to be recovered within 12 months unless other indicated.

The collectability of debts are reviewed at the end of the reporting period and an impairment loss allowance is recognised.

2.2 Non-financial assets

Accounting Policy

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.

Assets acquired at no cost, or for nominal consideration, are initially recognized 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 recognized as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

Asset recognition threshold

Purchases of property, plant and equipment are recognized initially at cost in the Statement of Financial Position. Purchases costing less than $2,000 are expensed in the year of acquisition (other than where they form part of a group of similar items which are significant in total) except for IT hardware a lower capitalization threshold of $500 is applicable.

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 leases taken up by the Agency where there exists an obligation to make good. These costs are included in the value of the Agency’s provisions, refer note 3.1B.

Lease Right of Use (ROU) Assets

Leased ROU assets are capitalised at the commencement date of the lease and comprise of the initial lease liability amount, initial direct costs incurred when entering into the lease less any lease incentives received. These assets are accounted for by the Agency as separate asset classes to corresponding assets owned outright.

On initial adoption of AASB 16 the Agency has adjusted the ROU assets at the date of initial application by the amount of any provision for onerous leases recognised immediately before the date of initial application. Following initial application, an impairment review is undertaken for any right of use lease asset that shows indicators of impairment and an impairment loss is recognised against any right of use lease asset that is impaired. Lease ROU assets continue to be measured at cost after initial recognition.

Revaluations

Following initial recognition at cost, property, plant and equipment (excluding ROU assets) are carried at fair value (or an amount not materially different from fair value) less subsequent accumulated depreciation and accumulated impairment losses. Valuations are 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 depends upon the volatility of movements in values for the relevant assets.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of Asset Revaluation Reserve except to the extent that it reverses a previous revaluation decrement of the same asset class that was previously recognised in the Statement of Comprehensive Income. Revaluation decrements for a class of assets are recognised directly in the Statement of Comprehensive Income except to the extent that they reversed a previous revaluation increment for that asset 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.

All revaluations were conducted in accordance with the revaluation policy. An independent valuation was performed at 30 June 2019 and no material fair value movements were identified for 2019–20. A desktop impairment review process including an assessment of any COVID-19 impacts was completed for all property, plant and equipment.

Depreciation

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

The depreciation rates for ROU assets are based on the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term.

Impairment

All assets were assessed for impairment at 30 June 2020. 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 of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the Agency were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

The Agency has assumed sublease of surplus lease space is more unlikely due to a softer rental market in part due to COVID-19, resulting in a further impairment of ROU assets in 2019–20.

Derecognition

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

Significant Judgments and Estimates - Intangibles

The Agency’s intangibles comprise software licences, data sets, internally developed software for internal use and the MHR asset. 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 which is reviewed as part of the annual impairment process.

2.3 Payables

Accounting Policy

Trade creditors and accruals

Trade creditors and accruals are recognised at amortised cost.

Liabilities are recognised to the extent that goods and services have been received.

2.4 Interest bearing liabilities

Total cash outflow for leases for the year ended 30 June 2020 was $4.1 million.

Accounting Policy

Refer to the Overview section for accounting policy on leases.

3.1 Employee provisions

Accounting Policy

Liabilities for short-term employee benefits and termination benefits expected within 12 months of the end of reporting period are measured at their nominal amounts.

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 is estimated to be less than the annual entitlement for sick leave.

The liability for long service leave has been determined by reference to the shorthand method prescribed by the Government Actuary as per the FRR and Commonwealth Agency Financial Statement Guide. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion and inflation.

Separation and Redundancy

Provision is made for separation and redundancy benefit payments. The Agency 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.

Superannuation

The Agency’s staff comprise both Australian Public Service (APS) employees and staff whose employment is subject to contracts under Common Law. Both groups of employees are reflected in the Agency’s Average Staffing Level (ASL) numbers.

APS staff are either members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), or the PSS accumulation plan (PSSap), or other superannuation funds held outside the Australian Government. 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’s administered schedules and notes.

The Agency makes employer contributions to the employees’ defined benefit superannuation scheme at rates determined by an actuary to be sufficient to meet the current cost to the Australian Government. The Agency accounts for these contributions as if they were contributions to defined benefit plans.

In respect of the other more prominent group of Common Law contract employees, the Agency makes employer contributions to funds held outside of the Australian Government.

The liability for superannuation recognised as at 30 June represents outstanding contributions, if any.

The Agency currently has three agreements for the leasing of premises and one of those agreements requires the Agency to restore the premises to their original condition at the conclusion of the lease. The Agency has made a provision for restoration to reflect the present value of this obligation.

An onerous lease provision of $1.3 million was recognised at 30 June 2019, reflecting the present value of lease expense, net of estimated sub-lease revenue, for a non-cancellable contract for office space. This has been adjusted as an impairment to the associated ROU Asset on transition to AASB16.

Provision for Restoration Obligation

Where the Agency has a contractual obligation to undertake remedial work upon vacating leased properties, the estimated cost of that work is recognised as a liability. An equal value asset is created at the same time and amortised over the life of the lease of the underlying leasehold property.

3.2 Key management personnel remuneration

Key management personnel (KMP) are those persons having authority and responsibility for planning, directing and controlling the activities of the Agency, directly or indirectly, including any board member (whether executive or otherwise). The Agency has determined the KMP to be Chief Executive Officer (CEO), Executive Leadership Team (ELT) members and Board members. KMP remuneration is reported in the table below:

3.3 Related party disclosures

The Agency is an Australian Government controlled corporate Commonwealth Agency. It has a governing Board of members, a CEO and ELT members and a Portfolio Minister.

Pursuant to AASB 124 Related Party Disclosures (AASB 124), the Agency KMP are asked to provide details of where any of their close family members, or a controlled Agency/entities has/have transacted with the Agency. Where any doubt exists, the information is to be recorded and collected in any event.

AASB 124 requires disclosure of related party relationships that include transactions where significant influence exists between the Agency and other parties. The Standard identifies that KMP have the capacity to influence the operations of the Agency, and therefore parties related to KMP become related parties to the Agency and require disclosure in the annual financial statements.

The Agency has determined that all board members, the CEO and ELT members constitute KMP. This includes those acting in a role for three months or more continuously.

Given the breadth of Government activities, related parties may transact with the government sector in the same capacity of ‘common citizens’. Common citizen or ‘open contest’ transactions are not requested or recorded as they reflect those transactions that may be undertaken with the Agency under the same terms and conditions as any other citizen.

The Agency transacts with other Australian Government controlled entities consistent with normal day-to-day business operations provided under normal terms and conditions, including the payment of workers compensation and insurance premiums. These are not considered individually significant to warrant separate disclosure as related party transactions.

Giving consideration to relationships with related entities, and transactions entered into during the reporting period by the Agency, it has been determined that there are no related party transactions to be separately disclosed.

3.4 Remuneration of auditors

Amounts paid or payable for audit of the financial statements 2019–20 is $120,000 (2019: $120,000).

4.1 Contingent assets and liabilities

Quantifiable Contingencies

The Agency had no quantifiable contingencies at reporting date.

Unquantifiable Contingencies

The Agency had no unquantifiable contingencies at reporting date.

Accounting Policy

Contingent assets and liabilities may arise from uncertainty as to the existence of an asset or liability, or where the amount cannot be reliably measured.

Contingent assets are disclosed when settlement is probable but not virtually certain.

Contingent liabilities are disclosed when settlement is greater than remote.

4.2 Financial instruments

Accounting Policy

Financial Assets

The Agency classifies its financial assets in the following categories:

1. financial assets at fair value through profit or loss;
2. financial assets at fair value through other comprehensive income; and
3. financial assets measured at amortised cost.

Financial assets are recognised when the Agency becomes a party to the contract and, as a consequence, has a legal right to receive or a legal obligation to pay cash and derecognised when the contractual rights to the cash flows from the financial asset expire or are transferred upon trade date.

Interest revenue from financial assets for 2019–20 was $0.4 million (2018–2019: $1.5 million).

Financial Liabilities

Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or amortised cost. Financial liabilities are recognised and derecognised upon ‘trade date’.

Note 4.2B: Credit Risk

The Agency is exposed to minimal credit risk as loans and receivables are cash and trade receivables. The maximum exposure to credit risk was the risk that arises from potential default of a debtor. The amount was equal to the total amount of the trade receivables of $8.1 million in 2020 (2019: $6.4 million).

The Agency had no financial assets that were past due but not impaired at 30 June 2020 (2019: None).

4.3 Fair value measurement

The Agency has Leasehold Improvement and Plant and Equipment assets that are measured at fair value. The remaining assets and liabilities disclosed in the Statement of Financial Position do not apply the fair value hierarchy.

The different levels of the fair value hierarchy are defined below:

• Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Agency can access at measurement date.
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
• Level 3: Unobservable inputs for the asset or liability.

Leasehold improvements are categorised as Level 3.

Plant and equipment are categorised as Level 2.

Accounting Policy

All revaluations were conducted in accordance with the revaluation policy stated at note 2.2. An independent valuation was performed at 30 June 2019 and no material fair value movements were identified. The Agency conducted a desktop impairment review for 2019–20 for all assets. A valuation will be conducted by independent valuer in 2020–21.

5.1 Aggregate assets and liabilities