STATEMENT OF FINANCIAL POSITION

Figure 5: Departmental equity, assets and liabilities

EQUITY

The total equity of the department at 30 June 2018 was $1160 million.

ASSETS

The department’s total assets increased by 24.5 per cent from the end of 2016–17 to $2808.1 million at 30 June 2018. The department’s assets are primarily retained appropriations and non-financial assets.

LIABILITIES

The department’s total liabilities increased by 17 per cent from the end of 2016–17 to $1648.1 million at 30 June 2018. The department’s liabilities primarily relate to accrued payments and staff provisions.

ADMINISTERED ITEMS

In 2017–18 the department collected and transferred $1.6 billion in child support payments between separated parents.

The department recognised $24.5 million in dividends and competitive neutrality payments on behalf of the Australian Government from Australian Hearing.

INDEPENDENT AUDITORS REPORT

FINANCIAL STATEMENTS

For the period ended 30 June 2018

STATEMENT BY THE SECRETARY AND CHIEF FINANCIAL OFFICER

In our opinion, the attached financial statements for the year ended 30 June 2018 comply with subsection 42(2) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), and are based on properly maintained financial records per subsection 41(2) of the PGPA Act.

In our opinion, at the date of this statement, there are reasonable grounds to believe that the Department of Human Services will be able to pay its debts as and when they fall due.

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CHANGES IN EQUITY

CASH FLOW STATEMENT

ADMINISTERED SCHEDULE OF COMPREHENSIVE INCOME

ADMINISTERED SCHEDULE OF ASSETS AND LIABILITIES

ADMINISTERED RECONCILIATION SCHEDULE

ADMINISTERED CASH FLOW STATEMENT

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

For the period ended 30 June 2018

TABLE OF CONTENTS

TABLE OF CONTENTS

Section	Page
Overview	12
A: Financial Performance	14
A1: Expenses	14
A2: Income	16
A3: Administered - Expenses	16
A4: Administered - Income	17
B: Financial Position	18
B1: Financial Assets	18
B2: Non-Financial Assets	19
B3: Fair Value Measurement	21
B4: Payables	22
B5: Provisions	23
B6: Administered - Financial Assets	24
B7: Administered - Fair Value Measurement	25
B8: Administered - Payables	26
B9: Administered - Provisions	26
C: Funding	27
C1: Appropriations	27
C2: Special Accounts	30
C3: Regulatory Charging	31
D: Other Items	32
D1: Contingent Assets and Liabilities	32
D2: Budgetary Reporting	33
D3: Administered - Budgetary Reporting	33
D4: Key Management Personnel Remuneration	34
D5: Related Party Disclosures	34
D6: Events After the Reporting Period	34

OVERVIEW

Objectives of the Department of Human Services

The department is an Australian Government controlled not-for-profit entity. The department delivers social and health related services, through its Centrelink, Medicare and Child Support programmes. The department builds on its foundation of service excellence to improve the delivery of services to the Australian community. Through close collaboration with the community and partner agencies, the department plays an active role in developing new approaches to social and health related policy and service delivery.

The contribution of the department to the Australian Government’s agenda is reflected in its outcome statement which is to:

Support individuals, families and communities to achieve greater self-sufficiency; through the delivery of policy advice and high quality accessible social, health and child support services and other payments; and support providers and businesses through convenient and efficient service delivery.

The department’s activities contributing to this outcome are classified as either departmental or administered. Departmental activities involve the use of assets, liabilities, revenue and expenses controlled or incurred by the department in its own right. Administered activities involve the management and oversight by the department, on behalf of the Australian Government, of items controlled or incurred by the Australian Government.

The continued existence of the department is dependent on government policy and on continuing funding by the Parliament for the department's administration and programmes.

Basis of preparation of the financial statements

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

The financial statements have been prepared in accordance with the:

• PGPA Act Financial Reporting Rule 2015 (FRR), updated for reporting periods ending on or after 1 July 2017 and
• Australian Accounting Standards Reduced Disclosure Requirements and Interpretations issued by the Australian Accounting Standards Board (AASB) that apply for the reporting period.

The financial statements are presented in Australian dollars and values are rounded unless disclosure of the full amount is specifically required.

Revenues, expenses, assets and liabilities are recognised net of GST except:

• where the amount of GST incurred is not recoverable from the Australian Taxation Office; and
• for receivables and payables.

Unless otherwise stated, administered revenue, expenses, assets, liabilities and cash flows reported in the administered schedules and related notes are accounted for on the same basis, using the same policies as for departmental items and relate to: child support; fees and fines; dividends; and competitive neutrality items.

Taxation

The department is exempt from all forms of taxation except fringe benefits tax and the goods and services tax.

New Australian accounting standards

Adoption of new Australian accounting standard requirements

New and revised accounting standards and interpretations that were issued prior to the signing of the financial statements and were applicable to the current reporting period did not have a material financial impact and are not expected to have significant future financial impact on the department’s financial statements.

Future accounting standard requirements

The department will apply AASB 16 Leases from
2019-20. The standard will require the net present value of payments under most operating leases to be recognised as assets and liabilities. An initial assessment indicates that the implementation of the standard will have a substantial impact on the financial statements. The department has commenced the analysis to quantify the impact, however, further work is required before the full impact is finalised.

The department will also apply AASB 9 Financial Instruments from 2018-19; and AASB 15 Revenue from Contracts with Customers and AASB 1058 Income for Not-for-Profit Entities from 2019-20. These standards are not expected to have a material impact on the transactions and balances recognised in the financial statements.

Commonwealth expenditure

The Australian Government continues to have regard to developments in case law, including the High Court’s most recent decision on Commonwealth expenditure in Williams v Commonwealth [2014] HCA 23, as they contribute to the larger body of law relevant to the development of Commonwealth programmes. In accordance with its general practice, the Australian Government will continue to monitor and assess risk and decide on any appropriate actions to respond to risks of expenditure not being consistent with constitutional or other legal requirements. As at 30June2018 the department has assessed that it has no spending activities having a high or medium constitutional risk.

Breach of section 83 of the Constitution

Section 83 of the Constitution provides that no amount may be paid out of the Consolidated Revenue Fund except under an appropriation made by law. Payments made which are not supported by an appropriation are not consistent with section 83 of the Constitution.

It is impractical for the department to completely eliminate the potential for non-compliance with section 83. The department has not identified any instances of non-compliance resulting from serious mismanagement. There have been a small number of instances of minor non-compliance. The identified non-compliance represents a small proportion of the total payments made, both by value and by volume and was caused by inaccurate customer supplied bank account data and minor administrative errors.

In 2017-18 the department identified 283 payments totaling $35,896.10 from the Child Support Special Account that were not consistent with section 83 of the Constitution. The department undertook recovery action or offsets of an amount against future payments to the customer. As at 30 June 2018 $10,877.77 had been recovered or offset.

In 2017-18 the department identified two payments totaling $13,004.79 from the Recovery of Compensation for Health Care and Other Services Special Account that were not consistent with section 83 of the Constitution. The department undertook recovery action and as at 30 June 2018 $12,949.44 had been recovered.

A: Financial Performance

for the period ended 30 June 2018

A1: Expenses

Operating lease payments are expensed on a straight line basis which is representative of the pattern of benefits derived from the leased assets.

Lease payments are subject to increases in accordance with upwards movements in the consumer price index, market rates, fixed increase rates or a combination of the aforementioned rates. Lease terms are determined by property use and generally range between one and ten years. Three per cent of office accommodation leases have terms of greater than ten years. Most lease agreements include option terms of three to five years that are exercisable at the Commonwealth's discretion and generally provide for an adjustment of rentals to current market levels upon exercise of an option term.

Lease incentives provided to the department by way of rent free periods, leasehold improvements or cash incentives are recognised as lease incentive liabilities (note B4.2 refers). Lease payments are allocated between a reduction of the lease incentive liabilities and the property rental expense to effect a spreading of the rental expense in accordance with the pattern of benefits derived from the rental properties.

The department makes an immediate allowance for property make-good where required under lease agreements (note B5.2 refers).

A property lease is deemed onerous if it relates to a vacant floor and/or an identifiable and separable portion of a building for which there are no immediate future plans or sub-let arrangements (e.g. a vacant, self-contained floor of a larger building or wing). In these instances a provision for surplus lease space is recognised and subject to annual review (note B5.2 refers).

A2: Income

Own source revenue mainly relates to the provision of shared services to other government entities.

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.

Gains include incidental transactions and events outside of ordinary operations such as: Contributions of assets at no cost or for nominal consideration; gains arising from the disposal of non-current assets; reversals of provisions, previous asset write-downs and impairment; and resources received free of charge where the services would have been purchased if they had not been donated.

A2.2: Revenue from Government

Amounts appropriated for departmental outputs for the year (adjusted to reflect the department’s funding agreement, formal additions, reductions and restructures) are recognised as revenue from government when the department gains control of the appropriation.

Appropriations receivable are recognised at their nominal amounts (note B1.1 refers).

Amounts appropriated which are designated as equity injections (less any formal reductions) and the departmental capital budget are recognised directly in contributed equity in that year (statement of changes in equity refers).

Income and Expenses Administered on Behalf of Government

A3: Administered - Expenses

Child support maintenance expenses are recognised and measured in line with child support revenue (note A4 refers).

A4: Administered - Income

Non-taxation revenue

All administered revenue is revenue relating to the course of ordinary activities performed by the department on behalf of the Australian Government.

Child support maintenance revenue

The child support programme acts as the intermediary in the transfer of child support payments, which are collected from the non-custodial parent and then paid to the custodial parent.

Revenue from the assessment and collection of child support is recognised in the administered schedule of comprehensive income at the nominal amounts. The revenue is recognised at the point when a child support assessment, private child support agreement or maintenance court order is registered for collection by the child support registrar under the Child Support (Registration and Collection) Act 1988. In accordance with the Act, the revenue is adjusted when a private settlement is agreed by both parents for a particular period of payment.

Fees and Fines

Under section 67 of the Child Support (Registration and Collection) Act 1988, a late payment penalty is applied whenever a non-custodial parent fails to make their child support payment to the custodial parent by the due date and where the outstanding maintenance debt exceeds $1,000.

Late payment penalties are recognised as revenue in the administered financial statements at the time the cash is received. Of the $8.8 million of fees and fines revenue in administered income, $8.5 million (2017: $7.8 million) relates to penalty revenue receipts.

Dividend revenue

The Australian Government owns 100 per cent of the issued share capital of Australian Hearing. Dividends from Australian Hearing are recognised in the administered financial statements and have been paid or are payable to the official public account.

Competitive neutrality revenue

Australian Hearing provides services on a for-profit basis and is subject to the Australian Government’s competitive neutrality policy. Under competitive neutrality arrangements Australian Hearing is required to make payroll tax and income tax equivalent payments to the Australian Government. These amounts are recognised in the administered financial statements and have been paid or are payable to the official public account.

Gains include incidental transactions and events outside of ordinary operations such as reversals of previous asset impairments.

B: Financial Position

B1: Financial Assets

Cash is recognised at its nominal amount and includes cash on hand.

The department 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 otherwise indicated.

Trade receivables are recognised when the department becomes party to an agreement and has the right to receive cash. Trade receivables have 30 day terms (2017: 30 days) and are recognised at the nominal amount due less any impairment allowance. The collectability of debts are reviewed at the end of the reporting period and an impairment allowance is recognised. This includes an allowance for all trade receivables owed by external entities that are more than 90 days overdue.

B2: Non-Financial Assets

The asset thresholds and useful lives for each asset class remain unchanged from 2017.

Unless otherwise stated, depreciation and amortisation rates are applied on a straight-line basis and rates are reviewed annually, as are useful lives and residual values. Any necessary adjustments are recognised as appropriate. Where material software assets have not been budgeted to be enhanced, replaced, or retired, a minimum remaining useful life of two years is applied.

All property, plant and equipment is reported at fair value (note B3 refers). Cost is considered an acceptable fair value proxy for assets under construction. An indexation test is applied annually to verify that the carrying amount is acceptable. Revaluations are conducted by an independent valuer. In 2017-18 JLL Public Sector valuations (formerly Australian Valuation Solutions) conducted the revaluation of leasehold improvement and make-good relating to leasehold improvements as well as data centre asset classes (2017: revaluation of all leasehold improvement and make-good relating to leasehold improvements).

Software assets are carried at cost less accumulated amortisation and impairment except for software assets under development which are recognised at cost.

All non-financial assets are assessed annually for indicators of impairment and, where appropriate, the asset’s carrying value is adjusted to fair value. In 2017-18, impairment was assessed by management applying professional judgement, supported by the use of an independent service provider. This assessment takes into account how assets are being used and is impacted by factors such as legislative changes, program cessations and platform changes. This has resulted in an impairment expense of $17.5 million (2017: $92.3 million).

No indicators of impairment were found for other non-financial assets.

B3: Fair Value Measurement

The department adopts a risk-based asset valuation approach to measure non-financial assets at fair value in accordance with AASB 13 Fair Value Measurement. Each class of non-financial assets is subject to a formal independent valuation at least once every three years dependent upon an annual risk assessment. In years where a formal valuation is not undertaken non-financial assets are subject to a desktop review.

Fair value is a market-based, rather than entity specific, measurement. The objective in all cases is to estimate the price at which an orderly transaction to sell the asset would take place between market participants under current market conditions at the measurement date. Where possible, assets are valued based upon observable inputs, such as quoted prices in active markets or other market transactions or information. Where this information is not available, valuation techniques rely upon unobservable inputs.

The different levels of the fair value hierarchy are:

Level 1: Quoted prices (unadjusted) in active markets for identical assets.

Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset, either directly or indirectly.

Level 3: Unobservable inputs for the asset.

In 2018, level 2 valuations were based on market comparable information. In 2018 and 2017 level 3 valuations were based on depreciated replacement cost and adjusted market comparable information.

A revaluation of non-financial assets was completed in 2018 for leasehold improvements and data centre asset classes in property, plant and equipment (2017: leasehold improvements). Results of the revaluation are disclosed at note B2.1.

The following table provides an analysis of assets that are measured at fair value. The remaining assets disclosed in the statement of financial position do not apply the fair value hierarchy.

B4: Payables

Supplier and other payables are recognised at the present value of expected future cash flows. Trade creditors and accruals are recognised to the extent that the goods and services have been received (irrespective of having been invoiced). Credit terms for goods and services are expected to be settled within 30 days (2017: 30 days).

B5: Provisions

The department's leave liability includes provisions for annual and long service leave. No provision is made for personal leave, which is non-vesting.

In accordance with AASB 119 Employee Benefits, recreation and long service leave liabilities are measured at the present value of the estimated future cash outflows. The interest rates used in discounting future cash flows relate to market yields on government bonds which have a comparable term to the leave obligations. In 2016 the department engaged the Australian Government Actuary to undertake a triennial actuarial assessment of the leave provisions taking into account the likely tenure of existing staff, patterns of leave claims and payouts, future salary movements, and discount rates.

The department recognises a provision for separations and redundancies where there is a detailed formal plan that has been communicated to the affected staff.

B6: Administered - Financial Assets

Child support maintenance receivables and impairment allowance

The child support programme acts as the intermediary in the transfer of child support payments, which are collected from the non-custodial parent and then paid to the custodial parent. The majority of the receivable balance relates to maintenance debt for which the Commonwealth does not have any financial exposure given that the child support programme acts as the intermediary only.

The department actively manages the collection of child support debt on a continual basis and engages the Australian Government Actuary (AGA) annually to perform a review of the impairment allowance for child support maintenance debt.

Since 30 June 2017, changes in collection rates and the discounted mean term have resulted in the impairment allowance for child support maintenance debt changing from 44.39 per cent to 44.83 per cent as at 30 June 2018. This resulted in an increase to the impairment allowance of $6.8 million in 2017-18.

AASB 136 Impairment of Assets requires that payments are discounted at a rate reflecting the estimated timing of the payments. As at 30 June 2018 the AGA’s assessment was that the mean term for child support receivables was approximately five and a half years and the five and a half year bond rate was applied (2017: seven year collection and bond rate).

As at 30 June 2018 the five and a half year bond rate was 2.36 per cent and the ten year bond rate was 2.63 per cent. If the ten year bond rate was applied the result would be a further increase in the impairment allowance of approximately $7.3 million.

Child support penalty receivables

Child support penalty revenue is recognised in the administered financial statements at the time cash is received not when the debt is raised (note A4 refers). As at 30 June 2018, amounts not recorded in the financial statements included: Total outstanding penalty debt $902.6 million (2017: $853.4 million); penalty debts raised during 2017-18, $131.4 million (2017: $130.2 million); and total penalty debts remitted, written off, waived or discharged, $73.7 million (2017: $120.2 million).

B7: Administered - Fair Value Measurement

Administered non-financial assets are measured at fair value in accordance with AASB 13 Fair Value Measurement and consistent with the departmental policy described at note B2 and B3.

The fair value of administered investments is taken to be the Australian Government’s proportional interest in the net assets of the entity. The Australian Government owns 100 per cent of the issued share capital of Australian Hearing, a Corporate Commonwealth Entity. The principal activity of Australian Hearing is to help people manage their hearing impairment in order to improve their quality of life.

B8: Administered - Payables

Child support maintenance payables reflect amounts collected and due to be transferred to the custodial parent. All payables are expected to be settled within 12 months and are measured at their nominal amount.

Recovery of compensation payable reflects amounts collected from insurers and third parties for compensation recovery claims not yet finalised.

B9: Administered - Provisions

The child support maintenance provision reflects child support obligations to the custodial parent that have been assessed but not yet received. The liability is calculated on the basis of the present value of the estimated future cash flows to be made to custodial parents at the reporting date. Estimated future cash flows are calculated with reference to the past experience of the recoverability of gross child support receivables from non-custodial parents. The estimate does not include future cash outflows that may result from child support re-assessments, relating prior to the reporting date, that are requested by non-custodial or custodial parents after the reporting date.

C: Funding

C1: Appropriations

Figures in text have been rounded. Discrepancies between totals and sims of components are due to rounding.

Figures in text have been rounded. Discrepancies between totals and sums of components are due to rounding.

C2: Special Accounts

The Child Support Special Account is used for the receipt of child support payments and the making of regular and timely payments to the custodial parents. The nature of the special account requires that child support monies received into the account are paid from the account to the relevant recipients. As such net child support receivables reported on the schedule of administered items are offset by equivalent child support provisions.

The Recovery of Compensation for Health Care and Other Services Special Account is used for the recovery of Medicare benefits, residential care and home care subsidies where the recipient receives compensation from a third party as a result of the injury or illness for which they had received benefits. The department is responsible for case management and the recovery of benefits back to the Australian Government. Compensation recovery revenue, receivables and transfers to the official public account are reported by the relevant policy agency.

C3: Regulatory Charging

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The department is responsible for the administration of early release of superannuation benefits on specific compassionate grounds. The department receives direct appropriation for the delivery of the service. The department provides details of the cost of delivery of the service to Treasury each year. Treasury liaises with the Australian Prudential Regulation Authority each year to confirm the agreed amount of levies collected on behalf of the department under the Financial Institutions Supervisory Levy Collection Act 1998.

The other entities involved in this cost recovery activity are the Australian Taxation Office and the Australian Securities and Investments Commission.

The Cost Recovery Implementation Statement for the above activity is available at: https://www.apra.gov.au/sites/default/files/apra_cris_2018-19.pdf

On 1 July 2018, this activitiy transferred to the Australian Taxation Office.

D: Other Items

D1: Contingent Assets and Liabilities

Contingent assets and liabilities may arise from uncertainty as to the existence of a liability or asset, 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.

Unquantifiable contingencies

The department had a number of legal claims for which it has denied liability and is defending as well as claims which the department is pursuing. It is not possible to estimate the amount of any eventual payments or compensation in relation to these claims.

There were no quantifiable or unquantifiable administered contingent assets or liabilities in 2018 and 2017.

D2: Budgetary Reporting

Statement of comprehensive income

In 2017-18 the department reported an operating deficit of $74.5 million against a budgeted deficit of $269.5 million¹. This $195.0 million variance represents 4.1 per cent of the budgeted $4.8 billion net cost of services reported in the 2017-18 Portfolio Budget Statements published in May 2017.

The department’s total expenses of $4.7 billion varies by 6.0 per cent to the original budget. The main causes of the variation is a reduction in expenditure relating to reduced costs of delivering some budget measures, delays in the passage of legislation associated with some budget measures, and a general lower than budgeted expenditure on suppliers. These were offset by an increase in employee benefits reflecting the effect of a change in the bond rate used to estimate the present value of future leave payments and salary increase paid to staff.

The department’s total revenue of $4.6 billion varies by 2.2 per cent to the original budget. Total revenue was lower than budget reflecting a reduction in revenue from government, the result of budget adjustments and decisions of government since the 2017‑18 Budget.

¹_{The Government does not provide operating funding for make-good, depreciation or amortisation expenses. Rather, capital funding is received when assets need to be replaced and is recognised directly in equity.}

Statement of financial position

As at 30 June 2018 the department’s total equity was $1,160.0 million compared to the original budget of $833.2 million. The original budget was prepared before the 2017 actual figures were known and used an estimated rather than actual final outcome. A more positive operating result than estimated was achieved for 2017, and combined with the positive result in 2018 has improved the department’s equity.

Total assets are higher than budget by 30.9 per cent primarily as a result of the positive variance in budgeted deficit which is largely reflected in the appropriation receivable balance. The positive variance also relates to lease incentive assets.

Total liabilities are higher than budget by 25.6 per cent. The major movements were due to higher than budgeted year-end supplier payables and lease incentive liabilities.

During 2017-18, the department received $367.0 million in contributed equity, $15.9 million more than originally budgeted. This increase mainly reflects additional capital funding provided during 2017-18 to support measures approved in the 2017-18 Mid-Year Economic and Fiscal Outlook update process.

Cash flow statement

The variances between budget and actuals in the cash flow statement are primarily the flow on effect from the events described above. Overall, the department operated within $5.2 million of the budgeted closing cash position.

D3: Administered - Budgetary Reporting

In 2017-18 the department administered $1.6 billion of expenses on behalf of the government, 1.0 per cent within budget and total income of $1.6 billion, 0.1 per cent within budget.

Approximately 99 per cent of the administered expense and administered income relates to child support.

The assets primarily relate to the debts owing from non-custodial parents. Similarly, the liabilities are in respect of the related payables owed to custodial parents.

D4: Key Management Personnel Remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities, directly or indirectly of the department. The department has determined the key management personnel to be the Secretary and Deputy Secretaries¹. Key management personnel remuneration is reported in the table below.

D5: Related Party Disclosures

Related party relationships

The entity is an Australian Government controlled entity. Related parties to this entity are key management personnel, including the Portfolio Minister and Executive, and other Australian Government entities.

Transactions with related parties

Given the breadth of government activities, related parties may transact with the government sector in the same capacity as ordinary citizens. Such transaction include the payment or refund of taxes, receipt of a Medicare rebate or higher education loans. These transactions have not been separately disclosed in this note.

Significant transactions with related parties can include:

• the payments of grants or loans;
• the purchase of goods and services;
• asset purchases, sales transfers or leases;
• debts forgiven; and
• guarantees.

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

D6: Events After the Reporting Period

Departmental

There were no subsequent events that had the potential to significantly affect the ongoing structure and financial activities of the department.

Administered

There were no subsequent events that had the potential to significantly affect the financial activities delivered on behalf of the government.