Overview

Basis of Preparation of the Financial Statements

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

The financial statements have been prepared in accordance with:

1. Public Governance, Performance and Accountability (Financial Reporting) Rule 2015 (FRR); 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 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.

The financial statements of Defence Service Homes Insurance Scheme (DSHIS) are consolidated into DVA’s financial statements. In this process, all intra-entity transactions and balances are eliminated. For further details refer to Note 1.1C.

New Accounting Standards

Adoption of New Australian Accounting Standard Requirements

All new accounting standards, revised standards, 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 DVA’s financial statements.

The following new standard was issued prior to sign-off date and are applicable to the current reporting period.

• AASB 9 Financial Instruments

Future Australian Accounting Standard requirements

The following new standards will have an impact in future reporting periods.

• AASB 16 Leases (preceded by AASB 117 Leases)
• AASB 15 Revenue from Contracts with Customers
• AASB 1058 Income of Not-for-Profit Entities
• AASB 17 Insurance Contracts

Taxation

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

Competitive Neutrality

DVA provides administrative services for the Defence Home Ownership Assistance Scheme and the Defence Home Owner Scheme. The Defence Home Ownership Assistance Scheme is subject to the Australian Government’s Competitive Neutrality Policy. The fees charged cover DVA’s anticipated costs in providing the service to the Department of Defence and were subject to Competitive Neutrality charges. Under Competitive Neutrality arrangements, DVA is required to make Australian Income Tax Equivalent payments to the Government, in addition to payments for FBT and GST. For 2018-19 the fees were no longer applicable under the new Memorandum of Understanding with the Department of Defence.

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 converted to Australian dollars at the exchange rates current as at balance date. Associated currency gains and losses are not material.

Events after the reporting period

Departmental

There were no subsequent events between balance date and signing of the financial statements that had the potential to significantly affect the ongoing structure and financial activities of DVA.

Administered

There were no subsequent events between balance date and signing of the financial statements that had the potential to significantly affect the ongoing structure and financial activities of DVA.

Breaches 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.

For 2018-19, DVA conducted a section 83 compliance review to identify any new special accounts, changes to legislation, system changes or business activity changes which may impact on the previously identified section 83 control framework. None were detected.

A financial quantification of potential breaches of section 83 was performed by DVA. This review identified that potential breaches were $24.62 million for 2018-19 financial year (2017-18: $20.29 million), comprising:

• $12.79 million identified through the DVA debt register;
• $3.49 million for 2018-19 financial year from clients moving from treatment pathway 1 to treatment pathway 2 under the Military Rehabilitation and Compensation Act 2004;
• $0.64 million identified through DVA’s internal testing of transactions;
• $4.11 million of departmental expenditure identified as incorrectly recorded as administered; and
• $3.59 million identified through other review processes.

Further details of the 2018-19 section 83 review are provided in Table A below.

As noted above, potential s83 breaches of $4.11 million were identified, representing departmental expenditure incorrectly recorded as administered. The breaches were reported to the Minister for Veterans and Defence Personnel as a Notification of significant non-compliance with the finance law, in accordance with Resource Management Guide No. 214. In addition $4.11 million has been transferred to departmental operations and policies and procedures have been put in place to ensure payments are correctly recorded in future.

DVA’s Audit and Risk Committee and Financial and Performance Statements Sub-Committee formed a view that DVA had reviewed its section 83 risk in a manner consistent with the published policy statements from the Department of Finance.

DVA will continue to monitor its level of compliance with section 83 of the Constitution across all legislation for which it is administratively responsible. Where possible, future changes to procedures and amendments to legislation will continue to be progressed to reduce the risk of non-compliance to an acceptably low level across all programs.

Table A: 2018–19 Summary

1. Financial Performance

This section analyses the financial performance of DVA for 30 June 2019.

1.1. Expenses

Accounting Policy

Accounting policies for employee related expenses is contained in the People and Relationships, section 6.1.

Accounting Policy

Leases

Property 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 regular fixed increases and are in accordance with upward movements in the Consumer Price Index. Leases for DVA access centres are periods of up to 3 years. The majority of DVA’s other lease holdings are for periods of up to ten years.

Building insurance claims are typically resolved within one year. No claims development table is required under AASB 1023 General Insurance Contracts 17.7.1 (b) (iii) for lines of business typically resolved within one year.

Accounting Policy

Insurance Activities

The Defence Service Homes Insurance Scheme (DSHIS) forms part of the operations of the Client Engagement and Support Services Division of DVA. The objective of DSHIS is to provide domestic building insurance in accordance with the Defence Service Homes Act 1918 and associated Regulations. The operations and objectives of DSHIS are controlled by DVA. The continued existence of DSHIS in its present form is dependent on Government policy.

Underwriting Provisions

Unearned Premiums

• The provision for unearned premiums represents the estimated proportion of premiums written in the current year relating to cover provided in the subsequent years. 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.

Premium Revenue:

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, in 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.

Gross incurred

Gross incurred (claims expense) represents all claims paid during the reporting period and the movement in open claims recognised through the outstanding claims liability. The gross incurred is adjusted for claims development based on actuarial modelling (see note 3.4A) to take in to account incurred but not reported (IBNRs), and incurred but not enough reported (IBNERs).

Reinsurance Arrangements

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.

Commissions Received Revenue

Commissions received revenue is recognised when it becomes due to DSHIS.

1.2. Own-Source Income and Gains

Accounting Policy

Revenue from rendering of services is recognised when:

1. the amount of revenue, stage of completion and transaction costs incurred can be reliably measured; and
2. 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 of costs incurred to date bear to the estimated total costs of the transaction.

Receivables for goods and services, which have 30 day terms, are recognised at the nominal amounts due less any impairment allowance. Collectability of debts is reviewed at the end of the reporting period. Allowances are made when collectability of the debt is no longer probable.

Rendering of Services are primarily related to the administrative fee and management fee for Defence Home Owner Scheme (DHOS) and Defence Home Ownership Assistance Scheme (DHOAS).

Accounting Policy

Resources received free of charge

Resources received free of charge are recognised as revenue when, and only when, a fair value can be reliably determined and the services would have been purchased if they had not been donated. Use of those resources is recognised as an expense. Resources received free of charge are recorded as either revenue or gains depending on their nature.

2. Income and Expenses Administered on Behalf of Government

This section analyses the activities that DVA does not control but administers on behalf of the Government. Unless otherwise noted, the accounting policies adopted are consistent with those applied for departmental reporting.

2.1. Administered—Expenses

Accounting Policy

Payments to eligible veterans and their dependants, and related health care entitlements 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).

From 12 October 2017, the Safety, Rehabilitation and Compensation (Defence-related Claims) Act 1988 (DRCA) replaced SRCA for current and former Australian Defence Force (ADF) members who have injuries or illnesses arising from their service prior to 1 July 2004.

Each of these 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 in the Overview.

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.

3. Financial Position

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

3.1. Financial Assets

Accounting Policy

Receivables

Trade receivables, loans and other receivables that are held for the purpose of collecting the contractual cash flows where the cash flows are solely payments of principal and interest that are not provided at below-market interest rates are classified as subsequently measured at amortised cost using the effective interest method adjusted for any loss allowance.

Accounting Policy

Reinsurance Receivables

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.

3.2. Non-Financial Assets

Accounting Policy

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. Non-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.

Property, Plant and Equipment

Asset Recognition Threshold

Purchases of property, plant and equipment (PP&E) are recognised initially at cost in the statement of financial position, 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.

Revaluations

Following initial recognition at cost, property plant and equipment are carried at fair value. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depend upon the volatility of movements in market values for the relevant assets. A desktop revaluation was performed by independent valuers as at 30 June 2019.

Revaluation adjustments are made on an asset 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 surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset is restated to the revalued amount.

Fair value for each class of asset are determined as shown below:

Depreciation

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.

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:

Impairment

All assets were assessed for impairment at 30 June 2019. Where indications of impairment exist, the assets recoverable amount is estimated and an impairment adjustment made if the assets 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 assets. Where the future economic benefit of an asset is not primarily dependent on the assets ability to generate future cash flows, and the asset would be replaced if the entity were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Intangibles

DVA’s intangibles comprise internally developed and purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of DVA’s software is usually 1-19 years (2017-18: 1-19 years).

All software assets were assessed for indications of impairment as at 30 June 2019.

3.3. Payables

Accounting Policy

Unearned Premiums

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

Revenue in advance is recognised where the revenue has been received prior to the period in which the revenue relates. DSHIS recognises revenue in advance at nominal value.

3.4. Provisions

Accounting Policy

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 are insufficient to cover the expected future claims under the policies associated with those premiums, the difference is recognised in the Statement of Comprehensive Income as an Unexpired Risk Liability. The result of this test indicates that DSHIS unearned premiums are sufficient to cover expected future claims on unexpired policies at 30 June 2019 and as such, DSHIS has recognised no movement (2018: nil) and an unexpired risk liability of nil (2018: nil). 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 use of the 75% basis as a regulatory benchmark in Australia, is consistent with market practices.

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 insurance policy.

DSHIS’s unadjusted unearned premium liability as at 30 June 2019 was $22,187,000 (2018: $21,475,000) and future cash flows relating to future claims under the risk associated with those premiums as advised by DSHIS’s independent actuaries was $20,792,000 (2018: $18,134,000).

Outstanding Claims

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 as at 30 June 2019. 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.

Actuarial Methods

The methodology for the estimation of the net outstanding claims provision as at 30 June 2019 consists of:

a) Predicting future claim payment cash flows in respect of claims incurred prior to 30 June 2019. 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 2019 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.

Actuarial Assumptions

The following assumptions have been made in determining the net outstanding claims provision as at 30 June 2019:

a) Inflation rates: 2.25% for 2018-19;
b) Discount rates: 0.97% for 2018-19;
c) Claims administration expenses (CAE): 5% of gross outstanding claims liability;
d) Superimposed inflation: approximately 6.1% p.a. in the actuarial model with explicit superimposed inflation assumption;
e) Prudential margin: 12% of central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
f) Number of claims for the 2018-19 accident year: approximately 7,891; and
g) Average claim size (in actual values) for the 2018-19 accident year (net of all recoveries): approximately $5,877.

The following assumptions were made in determining the net outstanding claims provision as at 30 June 2018:

a) Inflation rates: 2.79% for 2017-18;
b) Discount rates: 1.57% for 2017-18;
c) Claims administration expenses (CAE): 5% of gross outstanding claims liability;
d) Superimposed inflation: approximately 7.2% p.a. in the actuarial model with explicit superimposed inflation assumption;
e) Prudential margin: 12% of central estimate (including CAE) of outstanding claims liability for 75% probability of sufficiency;
f) Number of claims for the 2017-18 accident year: approximately 7,005; and
g) Average claim size (in actual values) for the 2017-18 accident year (net of all recoveries): approximately $3,678.

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 (housing) 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 2019;
c) Claims administration expenses: assumed based on industry experience;
d) Superimposed inflation: derived 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 2018/19 accident year: derived from actuarial models of past claim reporting patterns; and
g) Average claim size (in actual values) for 2018/19 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 7.2E – 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 the Australian Prudential Regulation Authority (APRA) in that it ignores asset risk but takes into account liability risk, including the inflation risk.

Reconciliation of other provisions

DVA currently has 17 agreements for the leasing of premises which have provisions requiring DVA to restore the premises to their original condition at the conclusion of the lease. DVA has made a provision to reflect the present value of this obligation.

4. Assets and Liabilities Administered on Behalf of the Government

This section analyses assets used to conduct its operations and the operating liabilities incurred as a result DVA does not control but administers on behalf of the Government. Unless otherwise noted, the accounting policies adopted are consistent with those applied for departmental reporting.

4.1. Administered—Financial Assets

Accounting Policy

Administered Investments

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 at amortised costs and are measured at their fair value as at 30 June 2019. 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.

4.2. Administered—Non-Financial Assets

Accounting Policy

Administered non-financial assets consist entirely of the Sir John Monash Centre located in France that commemorates Australian servicemen and women who served on the Western front during the First World War. The Sir John Monash Centre was transferred to the custodianship of DVA in the 2017-18 financial year as an asset under construction from the Department of Defence, and reported as various administered asset classes from 1 July 2018.

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. Non-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.

Property, Plant and Equipment

Asset Recognition Threshold

Purchases of property, plant and equipment (PP&E) are recognised initially at cost in the statement of financial position, except for purchases costing less than $5,000, 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).

Revaluations

Following initial recognition at cost, property plant and equipment are carried at fair value. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets do not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depend upon the volatility of movements in market values for the relevant assets. DVA is required to value all assets in a class at the same time. An independent valuer will be engaged to revalue all tangible assets triennially.

Revaluation adjustments are made on an asset 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 surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reverse a previous revaluation increment for that class.

Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the asset is restated to the revalued amount.

Fair value for each class of asset are determined as shown below:

Depreciation

Depreciable 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.

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:

Impairment

All assets were assessed for impairment at 30 June 2019. Where indications of impairment exist, the assets recoverable amount is estimated and an impairment adjustment made if the assets 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 assets. Where the future economic benefit of an asset is not primarily dependent on the assets ability to generate future cash flows, and the asset would be replaced if the entity were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Intangibles

DVA’s intangibles comprise internally developed and purchased software for internal use. These assets are carried at cost less accumulated amortisation and accumulated impairment losses.

Software is amortised on a straight-line basis over its anticipated useful life. The useful life of DVA’s software is 3-20 years.

All software assets were assessed for indications of impairment as at 30 June 2019.

4.3. Administered—Provisions

Accounting Policy

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 (Defence-related Claims) Act 1988 (DRCA) arising from service rendered before 30 June 2019. These claims may not be reported until many years after the event and subsequent payments for income support, health and rehabilitation services can extend over a long period of time. The injury profile within the schemes creates dynamic expenditure patterns. Some injuries can be of a temporary nature and give rise to a short term obligation for compensation while others may result in long term entitlements. Historically, expenditure has been highest in the earlier years after the incident giving rise to the claim for compensation, however the on-going entitlement to income support and treatment means that the liability has a long tail with payments 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:

• differences between the actuarial models, methods and assumptions used to estimate the provision and the underlying claims process;
• historical data which may be inaccurate, incomplete or exhibit volatile claims trends;
• differences between the economic and environmental conditions assumed to prevail in future and actual outcomes; and
• the random element in the claims process whereby claim frequency, timing and magnitude cannot be determined with certainty, even if the model and its parameters are accurate.

There are also a range of factors which can complicate the process of setting assumptions, including:

• changes in service delivery which may 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.

In the case of the military compensation provisions, there are also specific sources of uncertainty arising from the nature of the schemes and the data available:

• the longer lag time between injury and claim, compared with other workers’ compensation schemes, presents difficulties in setting assumptions for recent accident years;
• the very long tail in payments means that the estimate of the liability is particularly sensitive to changes in the discount rate;
• the move from DRCA to MRCA is likely to have distorted the claims experience over the transition period, with a jump in DRCA claims immediately prior to closure and markedly lower than expected numbers of MRCA claims in the first few years of its operation;
• the higher level of operational deployments of the Australian defence forces from the 1990s to early 2000s has also almost certainly led to some distortion of claims reporting; and
• MRCA is far from fully mature with experience available for analysis limited to a maximum of fourteen and a half years after the injury date. This needs to be compared with DRCA experience which indicates that payments can extend out to 50 years or more after the injury. While it is necessary to rely on DRCA experience for these later development years in setting many MRCA assumptions, there is increasingly compelling evidence that the claims experience under the two schemes may not be consistent for some heads of damage.

All of these factors create uncertainty around the assumptions adopted for future claims and the resulting estimate of the provision.

The estimate of the DRCA liability as at 2019 derived from the 2018 valuation is around 20% higher than was projected last year (on a constant 5% discount rate basis), driven by experience in the permanent impairment head of damage. The increase in permanent impairment was a result of significantly higher average claim sizes than in prior years. There is still considerable uncertainty about future outcomes for DRCA, in particular, the trajectory of future claim numbers and average size.

For MRCA, significant uncertainty arises not only from the difficulty of setting assumptions for an immature scheme in a changing operational environment, but also from the limitations of the data available for analysis. In particular, the fact that payments are recorded by individual rather than the injury giving rise to the payment and that a substantial proportion of medical and other care transactions are now made using a repatriation health card, means that approximations need to be made that add uncertainty to the estimation process. This uncertainty is likely to be an ongoing feature of the MRCA provision into the future. Given the short history of the scheme and the distortions in experience as a result of deployments over the last decade and a half, the estimate of the liability necessarily relies on DRCA experience in setting assumptions regarding the development of claims at durations for which there is no MRCA data. However, as noted above, there is increasing evidence that the experience may be different under the two schemes, and MRCA data is now being used to set assumptions for the development years where experience is available.

The estimate of the MRCA liability as at 2019 derived from the 2018 valuation is around 50% higher than was projected last year (on a constant 5% discount rate basis), driven by experience in the permanent impairment head of damage. Assumptions underpinning the 2019 liability estimate have been based on unit record data to
31 December 2018. The size and persistence of the growth in MRCA outlays remains a very substantial source of uncertainty around the MRCA liability estimate. Furthermore, it will be a number of years before any significant stabilisation becomes apparent in the data. As such, the present uncertainty will persist. For MRCA, the additional uncertainty associated with the immaturity of the scheme and the distortions in early claims experience will be a feature of the analysis for a decade or more. 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.

The military compensation 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 2019 for the estimated cost of claims incurred, but not necessarily reported, at the reporting date.

For the purpose of estimating the provisions the different types of obligations are categorised and labelled as heads of damage. AGA analyses the experience under six heads of damage:

• incapacity payments, split between short term and long term payments;
• permanent impairment, including non-economic loss;
• medical;
• rehabilitation;
• death; and
• other payments, split between medical and legal expenses on the one hand and attendant and household care services on the other.

In calculating the estimated cost of future claims, a variety of estimation techniques are used, generally based upon statistical analyses of historical experience. Implicitly the valuation assumes that the development pattern of the current and future claims will be consistent with the trends apparent in recent experience.

Assumptions

The 30 June 2019 liability estimates are based on the results of the full valuation of the Military Compensation Scheme as at 30 June 2018. This valuation drew on unit record data to 31 December 2018 in setting assumptions. The following key assumptions are made in calculating the provision:

• numbers of new MRCA permanent impairment claimants are based on observed claim rates in the most recent experience from 1 July 2018 to 31 December 2019. This rate is reduced over a 10 year period to return to experience in the 2017 and 2018 calendar years;
• the distribution of impairment points associated with future MRCA claims is based on the most recent observed experience in the 2017 and 2018 calendar years;
• numbers of new incapacity episodes are based on observed claim rates and survival rates are used to project the duration of these episodes, including the proportion of claimants who will progress to long term status. The assumed survival rates vary by age;
• the incapacity exit rates (the rates at which people who have been in receipt of incapacity payments for more than twelve months will exit from payment) vary by age at commencement and have been set by reference to observed rates of exit over the three calendar years from 2016 to 2018;
• DRCA data can be used as the starting point in setting assumptions for MRCA at durations where MRCA experience is not yet available or is unreliable, but MRCA experience should be used where it is available;
• transition probabilities that take account of the individual histories of usage of medical services for up to four years previously can be used to project the number of MRCA claimants who will have medical expenditure in future years
• an allowance is made for payment inflation at rates higher than general price inflation (superimposed inflation) for most heads of damage as shown below;
• where there has been a sustained growth in usage rates, this is generally assumed to continue in the short term, though at a declining rate;
• payments will be made over an extended period (over 50 years); and
• future payments are discounted using interest rates based on a yield curve derived from the yields on Commonwealth bonds of various durations as at 30 June 2019 and extrapolated over the expected payment period (over 50 years);

In accordance with the accounting standards, the provision is calculated by discounting future payments using a yield curve derived from the yields on Commonwealth bonds of various durations as at 30 June 2019. The interest rates forming the yield curve vary from 1.0% in year 1 to a forward rate of 2.4% beyond year 40. These compare to respective rates of 1.9% and 3.5% in 2018. The net result of the change is an increase in the provision of approximately $3,900 million.

This continues the experience of the previous year, where decreasing yields had led to an increase of
$700 million between 2017 and 2018. The use of the yield curve for discounting purposes is likely to result in continuing volatility in the estimated provision. The impact of these movements and other movements in the provision is reflected in the Administered Statement of Comprehensive Income.

Superimposed inflation represents an estimate of how costs are estimated to increase over and above normal inflation rates. For example, while the legislation provides for permanent impairment payments to be indexed in line with the CPI, in practice average payments for DRCA have grown substantially faster. DVA has therefore allowed for a margin over the standard CPI assumption of 2.5% growth per annum for most heads of damage.

The estimates of the combined nominal rates of inflation (that is, normal inflation plus superimposed inflation) for each head of damage are below:

• short-term incapacity payments – 4.0% (2017-18: 4.0%);
• permanent impairment and non-economic loss (DRCA) – 5.0% (2017-18: 5.0%);
• permanent impairment (MRCA) – 2.5% (2017-18: 2.5%);
• medical – 4.0% (2017-18: 4.0%);
• rehabilitation (DRCA) – 5.0% (2017-18: 5.0%);
• rehabilitation (MRCA) - 4.0% (2017-18: 4.0%);
• death (DRCA) – 4.0% (2017-18: 4.0%);
• death (MRCA) – 2.5% (2017-18: 2.5%);
• other (Medical) (DRCA) – n/a (2017-18: 6.0%);
• other (Legal) (DRCA) – n/a (2017-18: 3.0%);
• other (Medical and Legal) (MRCA) – 4.0% (2017-18: 6.0%); and
• other (Household and Attendant Care) – 4.0% (2017-18: 4.0%).

Account Adjustments

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:

In terms of modelling and assumption changes, the major factors are:

• an increase in the permanent impairment liability of $2,740 million, as a result of increasing claims experience;
• an increase in the medical liability of $1,439 million, primarily attributable to an increased number of claimants in MRCA; and
• an increase in forecast incapacity costs of $1,009 million in total across both DRCA and MRCA, due primarily to increased projected claim numbers.

It should be noted that the estimate of the liability at the beginning of each year has been calculated using the yield curve for Commonwealth Government securities that applied at that time. Similarly, the notional premium and interest cost are calculated using the yield curve applying at the opening balance date.

Discount Rate

The provision is calculated by the AGA as the discounted value of future cashflows. Cashflows are assumed to extend over a period of more than 50 years and, as a result, the estimate of the provision is very sensitive to the interest rate used for discounting. 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.

Since 2012-13 DVA has adopted a yield curve derived from the yield of Commonwealth bonds of varying duration, for the purposes of discounting estimated future cashflows. For the preparation of the 2018-19 Financial Statements, DVA has used a yield curve derived from the yields on Commonwealth Government securities as at 30 June 2019.

If the yield curve as at 30 June 2018 (rolled forward to 2019) continued to be used the liability would increase to $19,363 million. Alternatively if the long term discount rate used in the 2018 actuarial review (5.0%) was used, the estimated liability at 30 June 2019 would reduce to $15,270 million.

Sensitivity Analysis

Given the changes in experience observed over recent years, there is necessarily considerable uncertainty around the assumptions to be adopted. The AGA has provided some advice on the sensitivity of the liability estimate to some of the key assumptions for three of the larger heads of damage.

Permanent Impairment

Claims rates for MRCA permanent impairment have grown year on year, with the largest increase seen to date in the first half of financial year 2018-19. To illustrate the sensitivity of the liability to changes in claim rates, a scenario incorporating additional growth to the heightened experience in the first half of 2018-19 was modelled. This incorporated growth rates of 30%, 20%, and 10% in the following three years to future claim rates before stabilising. Under this scenario, the estimated liability for MRCA PI increases significantly by around 60%.

Incapacity

Exit rates from incapacity declined substantially over the decade to 2014. However, since 2014, there has been a slight increase in exit rates but they remain below the rates that applied a decade ago. To illustrate the sensitivity of the liability to relatively small changes in exit rates, a scenario incorporating higher exit rates has been modelled. Under this scenario, it is assumed that 10% fewer short term recipients aged less than 50 will reach the 12 month duration and transition to long term status, while exit rates for long term recipients aged less than 35 will increase by 20%. The estimated liability for incapacity payments under this scenario reduces by around 7%.

Accrued Component of Medical Liabilities

The approach to modelling the MRCA medical head of damage relies on an assumption around the proportion of future outlays for claimants with at least one incident predating the valuation date that relate to those incidents. That is, it is assumed that a proportion of future expenditure for those claimants will relate to incidents after the valuation date and, hence, does not form part of the accrued liability. However, the available data does not support attribution of MRCA expenditure to individual claims and there is thus significant uncertainty around this

assumption. Assuming that all of the future expenditure relates to claims already incurred, which provides an upper bound on the sensitivity to this assumption, results in an increase in the MRCA medical liability of around 25%.

Veterans’ Entitlement Act 1986 (VEA)

No provision is calculated for future payments under the VEA as this Act differs in nature from both MRCA and DRCA.

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 2019. 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.

Repatriation Pharmaceutical Benefits 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 2019. 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.

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.

5. Funding

This section identifies DVA’s funding structure.

5.1. Appropriations

Accounting Policy

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.

5.2. Special Accounts

1. Appropriation: Public Governance, Performance and Accountability Act 2013, s. 78
Establishing Instrument: PGPA Act (Military Death Claim Compensation Special Account 2015 - Establishment) Determination 2015/08
Purpose: Administration of Death Claim Compensation amounts on behalf of dependants of a Defence Force member after the member’s death.

The closing balance of this special account includes amounts held in trust of $0.1 million (2018: $0.1 million).

2. Appropriation: Public Governance, Performance and Accountability Act 2013, s. 80
Establishing Instrument: Defence Service Homes Act 1918, s. 40
Purpose: To make all payments by the Commonwealth in connection with its activities as insurer under Defence Service Homes Act 1918, s. 40.

3. Appropriation: Public Governance, Performance and Accountability Act 2013, s. 78
Establishing Instrument: Financial Management and Accountability (Establishment of SOETM Special Account - DVA) Determination 2012/10
Purpose: To receive donations from veterans and others for the purposes of maintaining and improving OAWG facilities as either specified by the donor or for other general purposes.
This account is non-interest bearing and was established on 26 June 2012 by the Financial Management and Accountability (Establishment of SOETM Special Account - DVA) Determination 2012/10.

4. Appropriation: Public Governance, Performance and Accountability Act 2013, s. 78
Establishing Instrument: Financial Management and Accountability (Anzac Centenary Public Fund Special Account) Determination 2013/02
Purpose: To receive gifts or contributions of money to provide funding for events, projects, initiatives and activities relating to the Anzac Centenary.
This account is non-interest bearing.

5.3. Contribution Account

The Contribution account contains moneys on behalf of the Repatriation Commission under section 200 of the Veterans' Entitlements Act 1986.

6. People and Relationships

This section describes a range of employment and post-employment benefits provided to our people and our relationships with other key people.

6.1. Employee Provisions

Accounting Policy

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

Other long term employee benefits are measured as 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.

Leave

The liability for employee benefits includes provision for annual leave and long service 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 as at 30 June 2017. The estimate of the present value of the liability takes into account attrition rates and pay increases through promotion, inflation and enterprise agreement.

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.

Superannuation

DVA’s staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), 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.

DVA 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 Government. DVA accounts for the contributions as if they were contributions to defined contribution plans. The liability for superannuation recognised as at 30 June 2019 represents outstanding contributions.

6.2. Key Management Personnel Remuneration

6.3. 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 (the Minister for Veterans and Defence Personnel) and Executive.

In accordance with AASB 124 Related Party Disclosures, and for the purpose of related party disclosures in the financial statements, key management personnel for the Department include any of the following and their close family members:

• The Minister
• The Secretary
• The Deputy Secretaries
• General Manager, DSHIS
• Close family members of the key management personnel
• Organisations in which the key management personnel have controlling interests.

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.

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

7. Managing Uncertainties

This section analyses how DVA manages financial risks within its operating environment.

7.1. Contingent Assets and Liabilities

Accounting Policy

Contingent liabilities and contingent assets are not recognised in the statement of financial position but are reported in the relevant 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.

7.1B Administered – Contingent Assets and Liabilities

Quantifiable Administered Contingencies

DVA has no contingent liabilities in respect of claims for damages/costs (2018: nil). A small number of claims for damages were outstanding at 30 June 2019. The possible losses relating to these claims have been insured by Comcare or are provided for in the Military Compensation provision (Note 4.3).

Unquantifiable Administered Contingencies

As at 30 June 2019 DVA had a number of legal claims against it that DVA is defending which could give rise to gains or losses. It is not possible to estimate the amounts of any eventual payments that may be required in relation to these claims.

7.2. Financial Instruments

Accounting Policy

Financial Assets

With the implementation of AASB 9 Financial Instruments for the first time in 2019, the entity classifies its financial assets in the following categories:

a) financial assets at fair value through profit or loss;

b) financial assets at fair value through other comprehensive income; and

c) financial assets measured at amortised cost.

The classification depends on both the entity's business model for managing the financial assets and contractual cash flow characteristics at the time of initial recognition. Financial assets are recognised when the entity 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.

Comparatives have not been restated on initial application.

Financial Assets at Amortised Cost

Financial assets included in this category need to meet two criteria:

1. the financial asset is held in order to collect the contractual cash flows; and

2. the cash flows are solely payments of principal and interest (SPPI) on the principal outstanding amount.

Amortised cost is determined using the effective interest method.

Effective Interest Method

Income is recognised on an effective interest rate basis for financial assets that are recognised at amortised cost.

Financial Assets at Fair Value Through Other Comprehensive Income (FVOCI)

Financial assets measured at fair value through other comprehensive income are held with the objective of both collecting contractual cash flows and selling the financial assets and the cash flows meet the SPPI test.

Any gains or losses as a result of fair value measurement or the recognition of an impairment loss allowance is recognised in other comprehensive income.

Financial Assets at Fair Value Through Profit or Loss (FVTPL)

Financial assets are classified as financial assets at fair value through profit or loss where the financial assets either doesn't meet the criteria of financial assets held at amortised cost or at FVOCI (i.e. mandatorily held at FVTPL) or may be designated.

Financial assets at FVTPL 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.

Impairment of Financial Assets

Financial assets are assessed for impairment at the end of each reporting period based on Expected Credit Losses, using the general approach which measures the loss allowance based on an amount equal to lifetime expected credit losses where risk has significantly increased, or an amount equal to 12-month expected credit losses if risk has not increased.

The simplified approach for trade, contract and lease receivables is used. This approach always measures the loss allowance as the amount equal to the lifetime expected credit losses.

A write-off constitutes a de-recognition event where the write-off directly reduces the gross carrying amount of the financial asset.

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.

Financial Liabilities at Amortised Cost

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 interest basis.

Supplier and other payables are recognised at amortised cost. Liabilities are recognised to the extent that the goods or services have been received (and irrespective of having been invoiced).

All payables are expected to be settled within 12 months except where indicated.

Note 7.2C: Net Gains or Losses from Financial Liabilities

There was no income or expense from financial liabilities.

Note 7.2D: Risk Management

Insurance Risks

The risks inherent in any single insurance contract are the possibility of the insured event occurring and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, these risks are random and unpredictable. In relation to the pricing of individual insurance contracts and the determination of the level of the outstanding claims provision in relation to a portfolio of insurance contracts, the principal risk is that the ultimate claims payments will exceed the carrying amount of the provision established.

Notes:

(a) Net provisions, including prudential margin:

Equivalent net provision derived by:

(b) adding/ subtracting 1% p.a. to each future assumed inflation rate.

(c) adding/ subtracting 1% p.a. to each future assumed discount rate.

(d) adding/ subtracting 1% to superimposed inflation assumption.

(e) increasing/ reducing Incurred But Not Reported (IBNR) claims in each of the Payment Per Claims Incurred (PPCI) models by 10%.

This table has been revised to improve the transparency of the reconciliation of net outstanding claims.

Underwriting risks

Selection and pricing of risks

Risks insured are limited to dwelling houses owned by persons eligible under the Defence Service Homes Act 1918. Insurance policies are written in accordance with local management practices and regulations within each jurisdiction taking into account DVA’s underwriting standards.

Pricing of risks is controlled by use of in-house pricing models relevant to the market in which DVA operates. Experienced underwriters and actuaries maintain historical pricing and claims analysis and these are combined with a knowledge of current developments in the market.

Concentration risk

DVA manages exposure to concentration risk by issuing policies across all Australian locations. Reinsurance is purchased to reduce potential exposure to catastrophe losses.

Claims management and claims provisioning risk

DVA’s approach to determining the outstanding claims provision and the related sensitivities are set out in Note 1.1C Insurance Activities and 7.2E Sensitivity to Insurance Risk.

DVA seeks to ensure the adequacy of its outstanding claims provision by reference to the following controls:

• experienced claims managers work with underwriters on coverage issues and operate within the levels of delegation issued to them in respect of the settlement of claims;
• processes exist to ensure that all claims advices are captured and updated on a timely basis and with a realistic assessment of the ultimate claims cost; and
• the aggregate outstanding claims provision for DVA is reviewed by an external actuary annually.

Despite the rigour involved in the establishment and review of the outstanding claims provision, the provision is subject to significant uncertainty for the reasons set out in Note 1.1C.

Reinsurance counterparty risk

DVA reinsures a portion of risks underwritten to control exposure to insurance losses, reduce volatility and protect capital. DVA’s strategy in respect of the selection, approval and monitoring of reinsurance arrangements is addressed by the following protocols:

• treaty or facultative reinsurance is placed in accordance with the requirements of DVA’s reinsurance management strategy,
• reinsurance arrangements are regularly reassessed to determine their effectiveness based on current exposures, historical losses and potential future losses, and
• exposure to reinsurance counterparties and the credit quality of those counterparties is actively monitored.

Strict controls are maintained over reinsurance counterparty exposures. Reinsurance is placed with counterparties that have a Standard & Poor’s credit rating of A- or above. Credit risk exposures are calculated regularly and compared with authorised credit limits, and the arrangements discontinued from the day the counterparties’ credit rating falls below A-. DVA currently has no receivables with reinsurance counterparties below A-.

7.3. Administered—Financial Instruments

7.4. Fair Value Measurement

Accounting Policy

DVA engaged an independent valuer to conduct a desktop revaluation of all non-financial assets at 30 June 2019. An annual assessment is undertaken to determine whether the carrying amount of the assets is materially different to the fair value. Comprehensive valuations are carried out at least once every three years. The valuer provided written assurance to DVA that the models developed are in compliance with AASB 13 Fair Value Measurement. DVA conducted an independent assessment of the indicators of fair value, including a review of relevant industry and Australian Bureau of Statistics indices, Reserve Bank of Australia bond rates and applicable market prices to ensure the requirements of AASB 13 Fair Value Measurement were met.

The methods utilised to determine and substantiate the unobservable inputs are derived and evaluated as follows:

Physical Depreciation and Obsolescence - Assets that do not transact with enough frequency or transparency to develop objective opinions of value from observable market evidence have been measured utilising the Depreciated Replacement Cost approach. Under the Depreciated Replacement Cost approach the estimated cost to replace the asset is calculated and then adjusted to take into account physical depreciation and obsolescence. Physical depreciation and obsolescence has been determined based on professional judgement regarding physical, economic and external obsolescence factors relevant to the asset under consideration. For all Leasehold Improvement assets, the consumed economic benefit / asset obsolescence deduction is determined based on the term of the associated lease.

7.5. Administered—Fair Value Measurement

8. Other Information

This section provides other disclosures relevant to DVA’s financial information environment for the year.

8.1. Aggregate Assets and Liabilities

8.2. Explanations of Major Departmental Budget Variances

Explanations are provided for major variances between actual results and the original budget. Variances are considered to be ‘major’ based on the following criteria:

• the variance between budget and actual is greater than 10% for departmental; and
• the variance between budget and actual is greater than 2% for administered; or
• an item below this threshold but is considered important for the readers’ understanding or is relevant to an assessment of the discharge of accountability and to an analysis of performance of DVA.

8.3. Explanations of Major Administered Budget Variances

Explanations are provided for major variances between actual results and the original budget. Variances are considered to be ‘major’ based on the following criteria:

• the variance between budget and actual is greater than 10% for departmental; and
• the variance between budget and actual is greater than 2% for administered; or
• an item below this threshold but is considered important for the readers’ understanding or is relevant to an assessment of the discharge of accountability and to an analysis of performance of DVA.