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Attachment A
General PHIAC Circulars
Circular No 67 Attachment A
Contact Officers:
Trish Cassidy (02) 6285 3134
18 August 1997
STATEMENT OF REQUIREMENTS FOR REPORTING TO PHIAC BY REGISTERED HEALTH BENEFITS ORGANISATIONS
- Preamble
1.1 In 1985 the Minister for Health endorsed recommendations made by a Joint Working Party between the (then) Voluntary Health Insurance Association of Australia and the Commonwealth Department of Health for uniform accounting standards for the health insurance industry.
1.2 The standards were provided as guidelines to assist in achieving the presentation of financial data on the industry on a uniform and consistent basis.
1.3 The Private Health Insurance Administration Council was established in 1989 with a number of functions relating to the financial operations of registered health benefits organisations. Included amongst the functions set out in the National Health Act is the following:
"(c) to establish uniform standards of reporting by registered organisations to the Council;"
1.4 To give effect to the above function, Council decided that the 1985 guidelines should be reviewed in the light of current accounting standards with a view to establishing uniform reporting standards for the industry. For this purpose a Working Party comprising industry and PHIAC representatives was established with the following terms of reference:-
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To establish the extent to which different accounting policies of registered health benefits organisations prevent valid comparisons being made between the financial data provided to PHIAC on a quarterly and annual basis;
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to identify which policies cause these problems; and
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to recommend uniform policies for application by all registered organisations; these recommendations to include uniform presentation of accounts.
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1.5 These requirements are issued by PHIAC under the provisions of Section 82M of the National Health Act. An endeavour has been made to mirror the requirements under Corporations Law but minor differences will occur in a number of areas.
1.6 These requirements are to come into effect for all reports to PHIAC for periods commencing on or after 1 July 1994. Failure to comply with these requirements will constitute a breach of a condition of registration.
- Summary of Reporting Requirements
2.1 The reporting requirements outlined in this manual are based on the expectation that all registered organisations will comply with Australian accounting standards. While only specific standards may be mentioned this is for the purpose of giving emphasis where it is relevant. The reporting requirements must be adopted by all registered organisations.
2.2 The major features of the requirements are summarised hereunder -
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Principles of accrual accounting (as defined in AASB 1001) must be applied to all items of income and expenditure.
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Minimum standards must be established and applied in the calculation of the provision for unpresented and outstanding claims.
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Non-current assets including land and buildings must be treated in the report in accordance with the provisions of AASB 1010.
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In addition, land and buildings must be independently valued at least once in every three year period.
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Investments must be shown in financial statements at net market values.
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Financial statements for presentation to PHIAC must be prepared in accordance with the model statements attached to these requirements.
- Where "diversified activities" of the registered health benefits organisation are conducted through subsidiary companies the consolidated financial statements must accompany the financial statements for health funds lodged annually with PHIAC (Item 4.5 refers).
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Profit and Loss Account
3.1 Format
3.1.1 A Profit and Loss Account must be submitted for the year ending 30 June each year in accordance with the format set out in Schedule 1 attached together with the appropriate notes.
3.2 Income
Contribution Income
3.2.1 In accounting for contribution income it is required that the principles of accrual accounting be applied ie. income reported for the period should reflect the income earned for that period. Income earned includes the following components:-
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Net cash received in the period (including refunds of contributions)
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plus contributions in advance at the start of the period
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and contributions in arrears at the end of the period,
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less contributions in advance at the end of the period
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and contributions in arrears at the start of the period.
3.2.2 The practices adopted by organisations in determining actual contributions received during the period may vary between organisations. Some organisations may only regard cash as being received when it is actually in the hands of the organisation. Others may include cash in the hands of agents and groups. The adoption of differing practices is not an issue provided the cash involved is brought to account as either cash received or in arrears.
3.2.3 Organisations must advise PHIAC if there is any change to its practices of determining cash received.
3.2.4 Contribution income must be shown as a gross figure except for discounts and refunds. Individual components must be treated thus:
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Where commissions are payable to groups or agents such commission must not be deducted from the contribution income figure but must be recorded separately as a management expense.
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Discounts on contributions paid in advance eg on a quarterly, half-yearly and yearly basis, must be treated differently from commissions and should be deducted from the gross contribution income figure. The effect is that income must be treated as the net amount received from the contributor.
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Where refunds are made these must be netted against contribution income for reporting to PHIAC.
3.2.5 The following principles should be applied when accounting for the Private Health Insurance Incentives Scheme, which came into effect from 1 July 1997:
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Upon receipt of net contributions from a member, the gross contribution amount should be recorded as income to the organisation, the net amount actually received recorded as a cash receipt, and the amount due in relation to PHIIS, recorded as a receivable.
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When the organisation actually receives the PHIIS amount from the Health Insurance Commission, the receivable is reversed, and cash receipt recorded.
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No specific manner of recording discounts in relation to amounts which will not be recoverable from the member or the HIC has been prescribed, however it is expected that contribution income would be adjusted to reflect the true position in the accounts of respective organisations, in order that income for the quarter/year is properly reported to PHIAC in accordance with accrual accounting principles. This is also the case for amounts received from the HIC in relation to suspended members.
Provision for Contributions in Arrears
3.2.6 Contributions in arrears represents monies owed and expected to be received for insurance cover in the period being reported on. Contributions in arrears must be brought to account in assessing contribution income for the period and shown as a separate asset in the balance sheet. The amount to be provided must be based on a collection ratio established from past experience.
3.2.7 It should be possible for organisations to validate the estimates for contributions in arrears as at the end of a given period by analysis of receipts in subsequent periods. This validation does not form part of these requirements but should be available to PHIAC on request at the organisation's premises.
Provision for Contributions in Advance
3.2.8 This is an important liability in assessing the viability of organisations. Contributions in advance must be a statement of fact. The figure must reflect the amounts actually received prior to balance date for insurance cover in periods after balance date.
Provision for Doubtful Debts
3.2.9 Where contributions in arrears are assessed on the basis outlined in paragraph 3.2.5 it would not be necessary to create a provision for doubtful debts in respect of contribution income.
Investment (including diversified activities) and Other Income
3.2.10 Investment and Other income includes interest, dividends, rent, commissions, agency fees and net income from diversified activities.
3.2.11 Income from investments must be accounted for on an accrual basis. Such accrued income must be clearly identified as a separate item in the balance sheet of the organisation.
3.2.12 Expenses directly related to diversified activities must be charged against the diversified income and only the net result reported in the notes accompanying the health fund accounts forwarded to PHIAC. Details of diversified activities must be included in consolidated accounts forwarded under paragraphs 4.3 - 4.5.
3.3 Expenditure
Claims Cost
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3.3.1 Claims cost is an important item in assessing the viability of organisations. It has two components; the actual claims paid (including services provided to members in lieu of benefits) and the adjustment for unpresented and outstanding claims.
A. Claims Paid
3.3.2 Claims experience should be recorded on a gross claims paid basis, that is, quantifying the actual claims paid during the accounting period.
3.3.3 The creation and treatment of provisions for unpresented and outstanding claims is considered as follows.
B. Claims Provisions
3.3.4 The total provision should be identified in financial statements as the "Provision for Unpresented and Outstanding Claims". As this provision represents a major liability for health funds it is important that it be assessed accurately.
The total provision consists of two parts:
(a) Provision for Unpresented Claims
3.3.5 This provision is to represent claims for hospitalisation and other services rendered prior to the balance date but not presented to the organisation by that date.
(b) Provision for Outstanding Claims
3.3.6 This provision represents the cost of claims which have been received or are in dispute at the balance date.
3.3.7 The total cost of these claims should be incorporated in the claims expenditure for the period of receipt with the corresponding liability listed under the total "Provision for Unpresented and Outstanding Claims" in the balance sheet.
3.3.8 The total "Provision for Unpresented and Outstanding Claims" should be assessed monthly and reported to PHIAC quarterly.
3.3.9 In assessing the provision it is important that regard be had for the following standards/factors:
- the integrity of the data base is essential to the accuracy of the financial systems. Payment data must be reconciled to the General Ledger on a monthly basis to ensure that the correct payment information is used in the calculation of the provision.
- the claims experience must be evaluated over time by relating the month of payment to the month of service. The accuracy of the calculation is improved if the claims analysis is undertaken on a table basis with particular emphasis being placed on the most recent claims experience.
- the volatility of the claims experience is affected by seasonal factors and these factors must be evaluated and built into the provision calculation. The calculations will also be affected by the number of days in the month and thus those variations must be balanced out in order to provide consistency and accuracy in the provision calculation.
- local factors including processing backlogs, changes to hospital claiming patterns, changes in fund membership must be taken into account.
administration allowance - the payment of claims incurs an administration cost and thus an allowance for that cost must be built into the total provision.
reinsurance - associated with the unpresented and outstanding claims is an additional liability for the payment to or from the Reinsurance Trust Fund which will arise in respect of those claims. While this would be extremely difficult to estimate given lack of knowledge of processing and membership experience of other funds, the best estimate should be made and included in the provision. Any expected reinsurance reimbursement should be deducted from the provision and, conversely, any expected payment should be added to the provision.
Management and Administrative Costs
3.3.10 The principles of accrual accounting as defined in AASB 1001 must be applied to match expenses payable with revenue for each period under review ie. expenses should be allocated and/or apportioned over the period to which they actually relate.
3.3.11 Management expenses should be reported to PHIAC in the categories set out in Schedule 3. The notes on pages 18-20 are provided for guidance only and should not be forwarded to PHIAC.
Reinsurance Account Transactions
3.3.12 Section 73BB of the National Health Act requires that a registered organisation establish and maintain a Reinsurance Account in respect of each fund operated. The amounts debited to the Reinsurance Account during the quarter should agree with the totals reported in PHIAC 1 returns.
3.3.13 At the end of each quarter, organisations should estimate the amount payable to or from the Health Benefits Reinsurance Trust Fund in respect of that period. The net figure should be taken into account when preparing the operating statement for the period and the estimated Trust Fund payment should be brought into the balance sheet as a liability or an asset , as the case may be.
3.3.14 While it is a requirement that the reinsurance liability must be estimated each quarter for financial reporting purposes it is recommended for management purposes that the estimate also be made on a monthly basis.
- Balance Sheet Reporting
Format
4.1 A balance sheet must be submitted for the year ending 30 June each year in accordance with the format set out in Schedule 2 attached with the appropriate notes. It must be prepared in accordance with Australian accounting standards.
Asset Revaluation
4.2 The method that should be adopted for valuing assets is set out in Appendix 1.
Diversified Activities
4.3 Where organisations engage in diversified activities through other entities the amounts invested in such activities should be separately identified in financial reports as they are excluded under the National Health Act for the purpose of determining the solvency level of the organisation.
4.4 Section 73BAB of the Act provides that the following items must be excluded from the solvency calculation:
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a loan to, debenture of or share in a prescribed company;
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that part of an asset that is mortgaged or charged for the benefit of a prescribed company;
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a loan to a person who was a director of a prescribed company; or
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any property that the Minister considers should not be accepted for solvency purposes.
A "prescribed company" is defined in the legislation as:
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a company in which the registered organisation has a controlling interest or in which the registered organisation and another registered organisation or organisations together have a controlling interest; or
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a company not being the registered organisation that is related to a company referred to in paragraph (a);
but does not include another registered organisation.
4.5 In order that the total assets under the control of an organisation can be assessed consolidated financial statements for the economic entity of which the health fund is part must accompany the annual return to PHIAC.
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- AUDIT REPORT
5.1 The annual financial reports to PHIAC for the health fund(s) operated by an organisation must be accompanied by a report from the organisation's external auditor. Where the registered organisation is also providing audited consolidated financial statements in accordance with paragraphs 4.3 to 4.5 it is not necessary to obtain a separate report in respect of the health fund operations.
Appendix 1
Valuation of Land and Buildings
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It is required that land and buildings be valued in accordance with the provisions of AASB 1010. In addition the following reporting requirements must be applied:
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Land and buildings to be recorded in the balance sheet within the "Non-current assets - Property, plant and equipment" category if the property is owner-occupied or within the "Investments" category if it is not used by the organisation. If the property is part-occupied it should be treated according to its principal purpose.
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Carrying values for land and buildings to be recorded in the balance sheet and the basis of valuation indicated in the notes to the financial statements. The initial valuation and a new valuation every three years should be carried out by an independent qualified valuer. Where valuations are made within the three years' period these may be directors' valuations provided that the directors' valuation amount does not exceed the value attributed by an independent valuer as set out under (c) below.
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To ensure a consistent approach is taken to property valuations across the industry, the following Valuation Requirements are to be applied:
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Written instructions based on Australian Institute of Valuers and Land Economists (AIVLE) requirements should be given to each valuer in respect of that portion to the property for which they have been retained. This must list each property covered by the instructions.
- The valuation is to be consistent with market levels at the valuation date. No account may be taken in the value of any anticipated future general market change in value, or special value to the owner. The AIVLE approved definition of market value is:-
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"Market value is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion"
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Assumptions for the valuation should not be specified by the organisation; the organisation must provide the valuer with all relevant information and knowledge about each property;
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An individual external valuer should not undertake more than three consecutive valuations of a particular property;
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Disclosure in financial statements should provide relevant details of the valuer's qualifications and the valuation methods and assumptions.
- In valuing space occupied by the organisations in a building owned by the company or a controlled entity of the organisations, the following principles should be adopted:
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a "notional" lease is in place for the owner occupied area;
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At the time of valuation, the assumed passing rent to be used should be the average of market face rents for the last five years;
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It should also be assumed that 20% of the area of owner occupied space is to renewed at current face market rental at the time of each valuation;
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Market incentives should be allowed for in each of the above;
- Space for which the organisation does not have genuine intentions to occupy should be treated as vacant space
The valuer should have responsibility for determining the current face market rental values as well as the appropriate term of the lease; the latter should have regard to the nature and quality of the building as well as to the likely future requirements of the organisation with particular justification necessary if the term assumed is greater than ten years.
Valuation of Investments
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Investments must be recorded in financial statements at net market values. "Net market value" is defined as the amount which could be expected to be received from the disposal of an asset in an orderly market after deducting costs expected to be incurred in realising the proceeds of such a disposal. The requirement to revalue investments each year will not apply in the case of fixed interest investments if the following conditions are satisfied:
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it is the intention that the securities be retained to maturity date;
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they must be shown in the financial statements at a value which represents no more than their recoverable amount and reference made in the notes to the approach adopted.
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The following reporting requirements must be applied:
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Investments to be disclosed in the balance sheet within the "Current assets - Investments" category or the "Non-current assets - Investments" category depending on whether they are expected to be realised within twelve months of the last financial year or some future accounting period. The amount reported for each of the above classifications must be dissected by way of a note into the categories specified in the Notes to Schedule 2.
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Changes in the net market value of investments from period to period must be brought to account on the following basis:
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The net change in value of investments classified as current assets to be disclosed in the profit and loss account as revenue or expense.
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Where a class of investments classified as non-current assets has been revalued, the net revaluation increment or decrement in respect of that class of assets shall be accounted for in accordance with the standard AASB 1010.
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Valuation of Other Non-current Assets
- Non-current assets other than land and buildings and investments must be treated in the report in accordance with the provisions of AASB1010. Accordingly it is required that they must be shown in the financial statements at a value which represents no more than their recoverable amount.