Key components of the Australian Government's funding to the cluster in 2021–22

National Partnership Agreement on the COVID-19 Response

The National Cabinet made up of the Prime Minister, Premiers and Chief Ministers was established in early 2020 as the COVID-19 pandemic evolved. During 2019–20 (13 March 2020), the National Partnership Agreement on COVID-19 Response (the NPA) was entered into by the Australian, states and territory governments in recognition of the anticipated additional costs that state health services were likely to incur in response to the COVID-19 outbreak. Since its inception, the NPA has evolved to include additional funding streams for specific needs as they have been identified. The following diagram summarises the timeline of schedules added to the NPA and the funding revenue associated with each of these streams from 2019–20 to 2021–22.

$2.2 billion in revenue was recognised from the Commonwealth in relation to the NPA for 2021–22. Specific details of the material streams provided under each of the NPA's schedules are discussed below:

Schedule A - Hospital Payments and State Public Health Payments

In 2021–22, just under $2 billion was recognised as revenue in relation to Schedule A of the NPA, with $1.4 billion relating to State Public Health Payments. We identified overstatements netting to $44.5 million in relation to the recognition of Schedule A NPA revenues.

Schedule B - Private Hospital Capacity and Viability expenses

Last year, we reported $153.2 million was paid to the private hospital sector across 2019–20 and 2020–21. $177.8 million was returned to the Australian Government during 2020–21. In 2021–22, with the outbreak of the Delta and Omicron variants, the cluster incurred additional expenses of $150.1 million to private hospitals to make resources and capacities available for use by the public system in responding to the pandemic.

Schedule C - Coordination and delivery of a safe and effective COVID-19 vaccine

In 2021–22, $69.8 million was recognised as revenue received in the support of the acceptance and delivery of COVID-19 vaccines to the New South Wales community. The $69.8 million related to two revenue streams, namely a:

• $32 million upfront payment

• $37.8 million payment relating to a 50% contribution towards the cost of vaccine delivery.

It should be noted that the $69.8 million does not relate to the recognition of the value of vaccines received from the Commonwealth (and then, in turn, administered). The $69.8 million relates to the provision of payments to establish the infrastructure and / or the cost of physically delivering the vaccines.

As part of the COVID-19 Vaccine National Roll-out Strategy which commenced in March 2021, the Australian Government procures and distributes COVID-19 vaccines free of charge to states and territories. States and territories then provide the vaccine free of charge to the Australian public in a manner determined by those states and territories. On the basis that the state controls the inventory once it is distributed to it from the Commonwealth, the value of the inventory received, distributed and wasted requires recognition where a reliable measurement can be ascertained.

At 30 June 2022, the cluster reported $1.1 million worth of COVID-19 vaccine on hand with the key movements in relation to COVID-19 vaccines summarised in the following diagram:

As the COVID-19 vaccines were received for nil consideration, it is considered a good or service received free of charge. The value attributable to the goods received and the corresponding vaccine inventory on hand is measured at its fair value based on replacement cost. Consistent with 2020–21, the ministry could not obtain cost information from the Australian Government because of non-disclosure agreements signed by the Australian Government and the pharmaceutical companies supplying the vaccines.

An internal valuation based on publicly available information was undertaken on the four inventory lines relevant at 30 June 2022 (Pfizer, AstraZeneca, Moderna and Novavax). The value of the inventory received from the Commonwealth and administered was recognised at $129.7 million and $116.83 million, respectively.

As vaccination efforts achieved targeted levels, management assessed that there was an amount of $11.31 million which was unlikely to be consumed before expiration and this was impaired as at 30 June 2022.

In certain circumstances, vaccines are not able to be used. This can occur, for example, if a vial is dropped, not stored correctly or not fully utilised as intended. Through the course of the year, $5.36 million of vaccine inventory was written off as wasted stock.

National Health Reform Agreement

In 2011, the National Health Reform Agreement (NHRA) was signed and introduced a new activity-based funding model for Australian public hospitals. Funding for hospitals is provided based upon the assessment of likely growth rates in patient volumes, the mix of anticipated services to be delivered and the price of such services as determined by the Independent Hospitals Pricing Authority. These payments vary from year to year depending upon the mix and volume of services provided. In February 2022, the Federal Treasurer and Federal Minister for Health and Aged Care declared a Minimum Guarantee Payment for NSW Health for the 2021–22 financial year of $7.7 billion. This is to provide continued certainty during the pandemic with increased reliance on public hospital health services.

As a result of the year end reconciliation processes undertaken by the Australian Government, management reclassified $116.6 million from funding without specific performance obligations to funding with specific performance obligations.

COVID-19 inventory impairments and write offs

As at 30 June 2022, COVID-19 related inventories were reported at $571.2 million. COVID-19 related inventories includes items such as masks, gowns, gloves, sanitisers and other medical consumables. The key movements in relation to COVID-19 inventories, including Rapid Antigen Tests (RATs), are summarised in the following diagram: 

General COVID-19 inventories

HealthShare NSW assessed the impairment status of general COVID-19 inventories (excluding RATs, the impairment of which was assessed through a separate process) through the impairment model which was developed and implemented in 2020–21. This resulted in $264.9 million of COVID-19 inventories identified and accounted for as being expired or not fit for purpose. The model uses two key factors, namely the Best Before Date (BBD) and forecast consumption patterns. The BBD should be consistent with the product's packaging and/or the manufacturer's guidelines. Forecast consumption rates are based on historical average consumptions levels. In general terms, if consumption is anticipated to occur past the BBD, the value of that excess inventory would be impaired. The model therefore relied on two key inputs, being the:

• integrity of the BBD data

• assumption that the historical rate of usage would continue for the foreseeable future.

We observed improvements in the integrity of the inputs on which the general COVID-19 impairment assessment model relied. HealthShare NSW processed a $7.7 million adjustment to correct an understatement of the impairment provision due to not accurately accounting for returned stock from customers. This compares to the $114.2 million of adjustments processed to the impairment provision in 2020–21.

Impairment of RATs

HealthShare NSW reported 102.6 million RATs on hand with a value of $500.5 million at 30 June 2022 but had not included this inventory group in the general COVID-19 impairment assessment described above. Management procured the RATs in circumstances where it was very difficult to predict a future demand driven model. In doing so, management prepared for a worst-case scenario and stockpiled RATs to be able to respond to a range of demand settings. However, that worst-case scenario has yet to eventuate which means that charges for impairment of the stockpile will continue as the RATs approach expiry. Based on management's current forecast projected use, 38.3 million of RATs are unlikely to be consumed before they expire. RATs have a limited useful life, with the last batch scheduled to expire in August 2024. This resulted in a corrected understatement to the impairment provision with respect to RATs of $186.7 million.

This is considered a high-risk issue and is discussed further in Section 3.

$29.4 million disposal provision for impaired COVID-19 inventories

HealthShare NSW has reported that a plan for disposing impaired COVID-19 inventories has now been formulated and the first phase of that plan will be executed shortly. HealthShare NSW has obtained quotes sourced from relevant suppliers who can undertake this work in an environmentally friendly manner. A $29.4 million disposal provision was recognised at 30 June 2022.

$426.2 million provision for Health worker appreciation payments

The NSW Government announced in June 2022 a $3,000 payment (inclusive of superannuation) to all eligible health employees who were employed on 1 April 2022 and continued to be employed on 30 June 2022. This is in recognition of their work on the frontline of the COVID-19 pandemic. The cluster recognised a $426.2 million at 30 June 2022 for health workers including NSW Health employees, Visiting Medical Officers (VMOs) and employees of affiliated health organisations.

$103.6 million contribution to the Australian Government's RAT Concessional Access Program

On 5 January 2022, the National Cabinet agreed to support concession card holders to obtain free RATs through community pharmacies in order to promote more equitable access to RATs for lower income members of the community. The National Cabinet agreed that under the NPA, the Australian Government, together with the state and territory governments would each fund 50% of the costs of the program. 18.7 million RATs were distributed to New South Wales concession card holders and the cluster's share of the costs totalled $103.6 million in 2021–22.

$58.6 million in Hotel Quarantine receivables

Australia implemented international border restrictions early during the pandemic to prevent the spread of COVID-19. During 2020–21, we reported the Sydney Local Health District had recognised $214 million in revenues associated with the Hotel Quarantine (HQ) program. $107 million of outstanding debts was recognised as a receivable at 30 June 2021. Management assessed that $28.2 million is unlikely to be collected. 

Since 1 November 2021, international travellers who are fully vaccinated against COVID-19 are not required to enter HQ which has effectively ended the HQ program. At 30 June 2022, outstanding debts totalled $58.6 million and management recognised a $38.6 million amount which is unlikely to be collected. The majority of this relates to overseas passengers without readily available contact information and domestic travellers who have not entered a payment plan with Revenue NSW.

Since inception of the HQ program until 30 June 2022, invoices totalling $324.9 million have been issued, of which, $224.3 million have been paid, $42 million have been adjusted or waived and a further $38.6 million identified as being unlikely to be collected, leaving a net receivable of $20 million at 30 June 2022.

$33.9 million in leases associated with the Linfox leasing arrangements

On 3 April 2020, the NSW Police Force (NSWPF) and Linfox entered a logistics arrangement for stock management and warehousing of COVID-19 related inventories. The agreement had an initial term of six months expiring on 3 October 2020 with an automatic three-month option to extend, unless either party gave at least one month’s notice that it did not wish to extend the agreement beyond the Initial Term. The initial agreement did not detail specifics around which warehouses were going to be used, or what the costs per pallet would be. The category of services was defined as 'Warehouse Services' whereby Linfox would provide all required resources (including people, information technology systems and material handling equipment).

On 4 November 2020, amendments were executed by the parties, which introduced a volume floor whereby the customer agreed to a minimum storage volume of 50,000 pallets throughout the Term of the Agreement. The weekly charge for Pallet Storage (Ambient) activity was calculated based on the guaranteed minimum volume commitment of 50,000 pallets per week, per annum. The agreement was based on Linfox entering a leasing arrangement for the new St Marys warehouse until January 2024. This amendment has shifted this arrangement from 'Warehouse Services' to a 'Leasing Arrangement'.

As a result of the above, a prior period error was disclosed in the financial statements in recognition of the gross value of the storage facilities that are being used under this leasing arrangement of $33.9 million in the ministry's financial statements. The total value of all payments made by the ministry on behalf of HealthShare NSW to NSWPF of $30.5 million as resources provided free of charge was also corrected and reflected in HealthShare NSW's financial statements. 

Non COVID-19 accounting matters

The changes in office accommodation arrangement with Property NSW resulted in derecognition of right-of-use assets and lease liabilities

Property NSW (PNSW) is responsible for managing most of the state government agencies leased real estate property portfolio. During 2021–22, PNSW made some changes to its intra-government lease arrangements, including rewriting the standard Client Acceptance Letter (CAL) to include a 'Relocation and substitution right' clause. This clause allows PNSW to relocate agencies to other locations and remove their right to control the use of the identified accommodations. As a result, the new CALs no longer constitute a lease under AASB 16 'Leases'. The changes became effective from 30 June 2022. The ministry, on behalf of the cluster, accepted the changes to their office accommodation arrangements with PNSW. This has resulted in the:

• derecognition of $640.4 million of assets available for use under leasing arrangements

• derecognition of $765.7 million of lease liabilities

• recognition of $125.3 million of other gains.

Going forward, cluster agencies will recognise the office accommodation payments as expenses in their respective Statement of Comprehensive Income and continue to recognise the fit-outs and make good provisions. Cluster agencies have included appropriate disclosures in their year-end financial statements, detailing the accounting policies, significant judgments made and impact of the derecognition of the ROU assets and lease liabilities at 30 June 2022.

$138.6 million of work in progress (WIP) not rolled out timely upon completion

We identified anomalies in three health entities relating to delays in the capitalisation of WIP totalling $138.6 million, which had a flow-on impact in understatement of depreciation expense:

• Central Coast Local Health District:

  • $36 million on Wyong Hospital redevelopment with a $2.5 million understatement in depreciation expense

• Hunter New England Local Health District

  • $5.6 million relating to 13 land and building projects

• Western Sydney Local Health District

  • $28 million on the Blacktown Hospital refurbishment project which was included in both the 2020–21 comprehensive valuation and the WIP balance at 30 June 2022

  • $69 million on the Westmead Hospital redevelopment and refurbishment project with an estimated $5.2 million understatement in depreciation expense and a $5.9 million understatement in relation to the indexation uplift on this project.

$135.5 million adjustment in superannuation guarantee contributions for annual leave loading

Superannuation Guarantee Charges are payable on ordinary time earnings. Per an administrative ruling issued by the Australian Taxation Office, annual leave loading, an entitlement compensating employees for the lost opportunity to receive overtime and/or penalty rates while on annual leave, is not considered ordinary time earnings if the ministry was able to sufficiently demonstrate that the loading represented this notional loss of opportunity to work overtime.

The ministry revisited its previous superannuation assessment concluding it was unable to demonstrate a sufficient nexus between leave loading paid and a notional loss of opportunity to work overtime. As a result, unpaid superannuation contributions were accounted for in the financial statements submitted by the ministry for audit.

On 27 July 2022, after the balance date, the Federal Circuit and Family Court of Australia released a decision in the matter of Finance Sector Union of Australia v Commonwealth Bank of Australia (2022) that dealt with whether annual leave loading formed part of ordinary time earnings and therefore, required superannuation contributions to be made. The decision introduced an element of uncertainty as to whether there was a current probable or possible obligation in respect of superannuation contributions on annual leave loading under 'AASB 137 Provisions, Contingent Liabilities and Contingent Assets'.

The ministry, in conjunction with NSW Treasury, evaluated the outcomes of the Federal Court decision concluding that no liability arises to pay superannuation on annual leave loading, noting that the recent ruling supersedes the administrative ruling issued by the Australian Taxation Office. This change constitutes a Type 1 subsequent event under 'AASB 110 Events after the Reporting Period', resulting in adjustments to the balances and disclosures reported in the financial statements of the ministry and the consolidated entity.

$30.5 million adjustment relating to the Rural, Regional and Remote Clinical Trial Enabling Infrastructure grant

During 2021–22, the ministry received $30.5 million from the Commonwealth for the Rural, Regional and Remote Clinical Trial Enabling Infrastructure grant. We reviewed management's assessment and the underlying agreement in assessing the appropriate revenue accounting treatment for this arrangement. Our procedures identified an incorrect revenue accounting treatment where management has deferred this revenue. This is on the basis that whilst the agreement specifies the outcome for which the funding relates to, it is not specific with actual deliverables and what are the specific goods or services to be transferred back to the Australian Government.

The following adjustments were processed to correct the error:

• $27.5 million transfer from contract liability to revenue

• $3 million transfer from contract liability to other liability for portion relating to acquiring of non-financial assets.

$14.4 million misstatement due to in incorrect application of the asset capitalisation threshold

NSW Health applies an asset capitalisation threshold of $10,000. NSW Treasury's recommended level for capitalisation is $5,000.

During 2021–22, we further analysed the application of the threshold to understand whether there were any reportable findings or errors from its application of the $10,000 threshold. Our work identified the following factual errors, which remain uncorrected at year-end whereby equipment:

• costing more than $10,000 totalling $14.5 million had been erroneously expensed across 2020–21 and 2021–22, with a depreciation impact of $1.99 million calculated

• was recognised within the wrong expense items within the financial statements totalling $19.4 million across 2020–21 and 2021–22.

In 2021–22, there were 67 findings raised across the cluster (116 in 2020–21). 47.8% of all issues were repeat issues (47.4% in 2020–21). Of the 32 repeat issues reported this year, two issues were rated high risk and 18 issues were rated as moderate risk.

A delay in implementing audit recommendations increases the risk of error in processing information, producing management reports and generating financial statements. This can impair decision-making, affect service delivery and expose agencies to fraud, financial loss and reputational damage. Poor controls may also mean agency staff are less likely to follow internal policies, inadvertently causing the agency not to comply with legislation, regulation and central agency policies. For these reasons, it is important that management address repeat issues as soon as possible.

2021–22 audits identified four high-risk findings

High-risk findings, including repeat findings, were reported at the following cluster agencies.

The table below describes the common issues identified across the cluster by category and risk rating.