Statement by the Chief Executive Officer and Chief Financial Officer
National Audit Office report
Primary financial statements
Statement of comprehensive income
Statement of financial position
Statement of changes in equity
Cash flow statement
Overview
Notes to financial statements
Financial performance
Note 1.1 Expenses
Note 1.2 Own-source revenue and gains
Financial position
Note 2.1 Financial assets
Note 2.2 Non-financial assets including fair value measurement
Note 2.3 Payables
Note 2.4 Interest bearing liabilities
People and relationships
Note 3.1 Employee provisions
Note 3.2 Key management personnel remuneration
Note 3.3 Related party disclosures
Managing uncertainties
Note 4.1 Contingent assets and liabilities
Note 4.2 Cash and financial instruments

Statement by the Chief Executive Officer and Chief Financial Officer

In our opinion, the attached financial statements for the year ended 30 June 2020 comply with subsection 42(2) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), and are based on properly maintained financial records as 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 Independent Hospital Pricing Authority will be able to pay its debts as and when they fall due.

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National Audit Office report

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Statement of comprehensive income

for the period ended 30 June 2020

The above statement should be read in conjunction with the accompanying notes.

Budget Variances Commentary

Statement of Comprehensive Income

Total expenses of $22.757m were $0.588m lower than the budgeted amount of $23.345m. The main driver was lower supplier expenses of $2.530m which was partially offset by higher employee benefits of $0.857m and, depreciation and amortisation expense of $0.858m.

Supplier expenses were lower than budget primarily due to a greater proportion of projects being managed in-house which resulted in net savings and deferred program activity arising from state and territory hospital resources being reassigned to manage the COVID-19 pandemic.

Employee benefits were higher than budget due to a greater number of staff compared to budget assumptions and, depreciation and amortisation was higher primarily due to the exclusion of depreciation on right-of-use assets in the budget assumptions. Note that estimates from the adoption of AASB 16 Leases were excluded from budget assumptions consistent with Department of Finance advice provided to Commonwealth entities.

Total own source income of $8.582m was $0.261m greater than the budgeted amount of $8.321m, primarily due to higher resources received free of charge of $0.521m which was partially offset by lower sales of goods and rendering of services of $0.096m, and interest of $0.164m. Resources received free of charge exceeded the budget primarily due to the recovery of higher employee expenses. Sales of goods and rendering of services were lower than budget due to fewer sales of licences relating to the Australian Refined Diagnosis Related Groups classification systems and interest was lower than budget due to larger than anticipated reduction in interest rates.

Statement of financial position

as at 30 June 2020

The above statement should be read in conjunction with the accompanying notes.

Budget Variances Commentary

Statement of Financial Position

Total assets of $22.456m were $7.148m higher than the budget of $15.308m primarily due to the recognition of right-of-use assets in relation to the lease of office space of $6.112m. The cash balance was also $1.034m higher than budget primarily due to the current year surplus.

Total liabilities of $8.962m were $6.391m higher than the budget of $2.571m primarily due to the recognition of lease liabilities in relation to the lease of office space of $6.433m. Note that estimates from the adoption of AASB 16 Leases were excluded from budget assumptions consistent with Department of Finance advice provided to Commonwealth entities.

Total equity of $13.494m was $0.757m higher than the budget of $12.737m primarily due to the current period surplus noting that the budget is derived on a break-even assumption.

Statement of changes in equity

for the period ended 30 June 2020

The above statement should be read in conjunction with the accompanying notes.

Budget Variances Commentary

Statement of Changes in Equity

Total equity of $13.494m was $0.757m higher than the budget of $12.737m primarily due to the current period surplus noting the budget is derived on a break-even assumption. IHPA has applied AASB 16 Leases using the modified retrospective approach and applied adjustments on initial application against retained earnings in accordance with the standard.

Cash flow statement

for the period ended 30 June 2020

The above statement should be read in conjunction with the accompanying notes.

Budget Variances Commentary

Statement of Changes in Cash Flow

The closing cash balance of $14.119m was $1.034m higher than the budgeted amount of $13.085m primarily due to the current period surplus, noting the budget is derived on a break-‍even assumption.

Overview

Objectives of the Independent Hospital Pricing Authority

The Independent Hospital Pricing Authority (IHPA) is a corporate Commonwealth entity under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).

IHPA's role and functions are set out in the National Health Reform Act 2011.

IHPA’s functions include to:

• determine the National Efficient Price and National Efficient Cost for public hospital services
• develop national classifications for Activity Based Funding
• resolve disputes on cost-shifting and cross-border issues.

IHPA is structured to meet the following outcome: promote improved efficiency in, and access to, public hospital services primarily through setting the national efficient price and levels of block funding for hospital activities.

The continued existence of the entity in its present form, and with its present programs, is dependent on government policy and on continuing funding by Parliament for the entity's administration and programs.

The basis of preparation

The financial statements are general purpose financial statements and are required by section 42 of the PGPA Act.

The financial statements have been prepared in accordance with the:

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 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, unless otherwise specified.

Significant changes affecting IHPA during 2019–20

No significant changes affecting IHPA have occurred in this reporting period.

COVID-19 pandemic impacts

Due to state and territory hospital resources being reassigned to manage the COVID-19 pandemic, some forecast expenditure relating to the non-admitted costing study has been deferred until such time resources become available. There were no other financial impacts from the pandemic.

New Accounting Standards

Adoption of new Australian Accounting Standard requirements

IHPA has adopted all new, revised and amending standards and interpretations that were issued by the Australian Accounting Standards Board (AASB) prior to the sign-off date and which are applicable to the current reporting period.

The following new, revised and amending standards and interpretations were issued by the AASB prior to the signing of the statement by the Chief Executive Officer and Chief Financial Officer:

All other new, revised and amending standards or interpretations that have been issued by the AASB prior to sign-off date that are applicable to future reporting periods are not expected to have a future material financial impact on IHPA's financial statements.

Application of AASB 16 Leases

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

Impact on transition

On transition to AASB 16, IHPA recognised additional right-of-use assets and lease liabilities and reduced lease payable to nil, recognising the difference in retained earnings. The impact on transition is summarised below:

The following table reconciles IHPA's minimum lease commitments disclosed in IHPA's 30 June 2019 annual financial statements to the amount of lease liabilities recognised on 1 July 2019:

Significant accounting judgements and estimates

Except where specifically identified and disclosed, IHPA has determined that no accounting assumptions and estimates have a significant risk of causing a material adjustment to carrying amounts of assets and liabilities within the next accounting period.

Comparative figures

Comparative figures have been adjusted, where required, to conform to changes in presentation of the financial statements.

Taxation

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

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.

Events after the reporting period

No events have occurred since the reporting date which have had a material impact on the financial statements.

Financial performance

This section analyses the financial performance of IHPA for the year ended 30 June 2020.

Note 1.1 Expenses

Accounting Policy

Employee benefits

Accounting policies for employee benefits is contained in the People and Relationships section.

Leasing commitments

On the 1 June 2018, IHPA in its capacity as lessee entered into a 5 year lease (with 5 year extension option) for office space. The lease is subject to an annual cost increase and is not able to be cancelled.

The Entity has applied AASB 16 Leases using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117. Refer to Overview section for accounting policy on leases.

Note 1.2 Own-source revenue and gains

Accounting Policy

Sale of goods and rendering of services

Revenue from the sale of goods is recognised when:

1. the risks and rewards of ownership have been transferred to the buyer, and
2. IHPA retains no managerial involvement or effective control over the goods.

Revenue from rendering of services is recognised by reference to the stage of completion at the reporting date. The revenue is recognised when the:

1. amount of revenue, stage of completion and transaction costs incurred can be reliably measured, and
2. probably economic benefits associated with the transactions will flow to IHPA.

The stage of completion of contracts at the reporting date is determined by reference to the proportion that costs incurred to date bear to the estimated total costs of the transaction.

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

Accounting Policy

Revenue 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 revenue.

Accounting Policy

Revenue from Government

Funding received or receivable from non-corporate Commonwealth entities is recognised as Revenue from Government by IHPA unless the funding is in the nature of an equity injection or a loan.

Financial position

This section analyses the IHPA'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.

Note 2.1 Financial assets

Accounting Policy

Cash and cash equivalents

Cash is recognised at its nominal amount. Cash and cash equivalents includes:

1. cash on hand, and
2. demand deposits in bank accounts with an original maturity of 3 months or less that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value.

Accounting Policy

Trade and other receivables

IHPA's financial assets are comprised of trade receivables and other receivables that are held for the purpose of collecting the contractual cash flows. All of IHPA's financial assets are measured, and carried, at amortised cost.

Impairment

All assets were assessed for impairment as at 30 June 2020. Where indications of impairment exist, the asset's recoverable amount is estimated and an impairment adjustment made if the asset's recoverable amount is less than its carrying amount.

Note 2.2 Non-financial assets including fair value measurement

No indicators of impairment were found for property, plant and equipment or intangibles.

Note 2.2B: Fair Value Measurement

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

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

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at measurement date.

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

Level 3: Unobservable inputs for the asset or liability.

Accounting Policy

Property, plant and equipment, and intangibles

Assets are recorded at cost on acquisition except as stated below. The cost on acquisition includes the fair value of assets transferred in exchange and liabilities undertaken. Financial assets are initially measured at their fair value plus transaction costs where appropriate.

Assets acquired at no cost, or for nominal consideration, are initially recognised as assets and income at their fair value at the date of acquisition, unless acquired as a consequence of restructuring of administrative arrangements. In the latter case, assets are initially recognised as contributions by owners at the amounts at which they were recognised in the transferor’s accounts immediately prior to the restructuring.

Asset recognition threshold

Purchases of property, plant and equipment 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 significant in total).

Revaluations

Following initial recognition at cost, property, plant and equipment are carried at fair value less subsequent accumulated depreciation and accumulated impairment losses. Valuations are conducted with sufficient frequency to ensure that the carrying amounts of assets did not differ materially from the assets’ fair values as at the reporting date. The regularity of independent valuations depended upon the volatility of movements in market values for the relevant assets.

Revaluation adjustments are made on a class basis. Any revaluation increment is credited to equity under the heading of asset revaluation reserve except to the extent that it reversed a previous revaluation decrement of the same asset class that was previously recognised in the surplus/deficit. Revaluation decrements for a class of assets are recognised directly in the surplus/deficit except to the extent that they reversed a previous revaluation increment for that class.

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

Depreciation

Depreciable property, plant and equipment assets are written-off to their estimated residual values over their estimated useful lives to the entity 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 2020. Where indications of impairment exist, the assets recoverable amount is estimated and an impairment adjustment made if the asset’s recoverable amount is less than its carrying amount.

The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset. Where the future economic benefit of an asset is not primarily dependent on the asset’s ability to generate future cash flows, and the asset would be replaced if the entity were deprived of the asset, its value in use is taken to be its depreciated replacement cost.

Derecognition

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

Intangibles

The entity's intangibles comprise internally developed 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 lives of the entity's software are 1 to 4 years (2019: 1 to 4 years). All software assets were assessed for indications of impairment as at 30 June 2020.

Fair value measurement

IHPA tests the procedures of the valuation model as an internal management review at least once every 12 months (with a formal revaluation undertaken once every three years). If a particular asset class experiences significant and volatile changes in fair value (i.e. where indicators suggest that the value of the class has changed materially since the previous reporting period), that class is subject to specific valuation in the reporting period, where practicable, regardless of the timing of the last specific valuation.

Note 2.3 Payables

Note 2.4 Interest bearing liabilities

IHPA has applied AASB 16 Leases using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported as an operating lease expense under AASB 117. Refer to Overview section for accounting policy on leases.

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.

Note 3.1 Employee provisions

Accounting Policy

Employee provisions

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

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 the entity’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 estimate of the present value of the liability takes into account attrition rates, and pay increases through promotion and inflation.

Superannuation

The entity's staff are members of the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), or the PSS accumulation plan (PSSap), or other superannuation funds held outside the Australian Government. The CSS and PSS are defined benefit schemes for the Australian Government. The PSSap is a defined contribution scheme.

The liability for defined benefits is recognised in the financial statements of the Australian Government and is settled by the Australian Government in due course. This liability is reported in the Department of Finance’s administered schedules and notes.

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

Note 3.2 Key management personnel remuneration

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any Pricing Authority member. The entity has determined the key management personnel to be the Chief Executive Officer and the Pricing Authority members.

Key management personnel remuneration is reported in the table below:

The total number of key management personnel that are included in the above table is 10 (2019: 10).

¹ The above key management personnel remuneration excludes the remuneration and other benefits of the Portfolio Ministers whose remuneration and other benefits are set by the Remuneration Tribunal and are not paid by the entity.

Note 3.3 Related party disclosures

Related party relationships:

The entity is an Australian Government controlled entity. Related parties to this entity are the key management personnel as per Note 3.2 Key Management Personnel Remuneration 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 transactions 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.

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

Managing uncertainties

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

Note 4.1 Contingent assets and liabilities

Quantifiable contingencies

There were no quantifiable contingent assets or liabilities in this reporting period (2019: nil).

Unquantifiable contingencies

There were no unquantifiable contingent assets or liabilities in this reporting period (2019: nil)

Significant remote contingencies

There were no significant remote contingent assets or liabilities in this reporting period (2019: nil).

Accounting Policy

Contingent asset and liabilities

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

Note 4.2 Cash and financial instruments

Accounting Policy

Cash and cash equivalents

Cash is recognised at its nominal amount.

Classification and measurement

The classification and measurement of IHPA's financial assets under AASB 9 is determined by its business model for managing its financial assets and the contractual cash flow characterisitcs of those assets.

Financial assets

IHPA's financial assets are comprised of trade receivables and other receivables that are held for the purpose of collecting the contractual cash flows. All of IHPA's financial assets are measured, and carried, at amortised cost.

Financial liabilities

IHPA's financial liabilities are measured, and carried, at amortised cost. Supplier and other payables are recognised to the extent that the goods or services have been received, irrespective of having been invoiced. Lease liabilities are measured using the effective interest method.

Impairment

AASB 9 requires IHPA to impair its financial assets by applying the 'expected credit losses' (ECL) model. IHPA has taken advantage of the practical expedient which allows the use of a Provision Matrix to calculate expected credit losses on trade receivables. IHPA has assessed the loss allowance for its financial assets at an amount equal to lifetime expected credit losses.

Due to the nature of IHPA's receivables, a nil loss allowance has been calculated. There is no impairment of IHPA's financial assets for 2019-20.