All registered funded agencies and ambulance services must obtain the appropriate approvals prior to seeking to borrow funds from third parties and prior to entering into third-party finance arrangements for any overdrafts, borrowings or finance leases. These may be for purposes such as capital works and equipment expenditure, including motor vehicles.
Section 30(2) of the Health Services Act 1988 requires registered funded agencies to obtain approval from both the Minister for Health and the Treasurer before seeking financial accommodation. An approved borrower may obtain financial accommodation, whether within or outside Victoria, secured or arranged in a manner and for a period approved by the Treasurer. These borrowings are guaranteed by the State of Victoria.
Section 44 of the Ambulance Services Act 1986 requires an ambulance service to obtain approval from the Treasurer before seeking financial accommodation.
These above sections do not apply to a financial accommodation provided by the Secretary to the department. Under Section 17A of the Health Services Act 1988 'The Secretary [to the Department of Health and Human Services] may provide grants, payments, subsidies or other financial assistance to agencies from funds administered by the Secretary for that purpose on the terms and conditions that the Secretary considers appropriate.'
In addition, the conditions of funding in the department's policy and funding guidelines require that registered funded agencies and ambulance services must not enter into any expenditure related to equipment purchases and capital works where the estimated total costs or total end costs of the works exceeds 10 per cent of the annual revenue of the agency or health service or $2 million, whichever is the lesser amount, unless:
- the agency or health service has provided a detailed business plan to the Secretary relating to the proposed expenditure
- the expenditure has been approved by the Secretary.
The Secretary’s approval in relation to any expenditure referred to in the above clauses does not imply or in any way obligate the Secretary or the department to provide any financial support for the works.
While the department does not place restrictions on the particulars of operating leases, operating lease proposals must comply with the Department of Treasury and Finance’s Victorian risk management framework. A financial evaluation must be performed on any operating lease which is of greater duration than 12 months and for a capital value worth more than $1 million. This must be approved by the board of management of the registered funded agencies.
Loans (department funded)
A financial accommodation from the department will generally be met through a loan. The loan must be approved by the Secretary to the department for funds sourced from within the department.
A loan is a financial accommodation that is repaid in a subsequent year or years. In order to repay a loan the funded agency needs to generate a cash surplus. All loan approvals must include an agreed repayment schedule. All repayments will be recalled as negative adjustments to the regular payments to funded agencies. Funded agencies are required to report the adjustments in their cash flow reports (where provided). Loan repayments should be over a maximum period of five years, irrespective of when the repayments start.
Department-funded loans can only be approved by the Secretary to the department and the formal loan agreement prepared by the department's Legal Services is available on request.
Additional loans and loan variations
Where a funded agency is granted an additional loan, this must be recorded separately and not combined with other loans.
Loans may be varied to amend the repayment period or individual repayment amounts, but not the total loan amount. Where approval to vary a loan is granted a separate loan variation must be prepared by the department's Legal Services.
Department funded loans are reported as a liability in the balance sheet of the funded agency and as an asset in the department’s books.
Loans (funded external to the department)
Section 30(2) of the Health Services Act 1988 requires registered funded agencies to obtain approval from both the Minister for Health and the Treasurer before seeking external financial accommodation. Unlike loans provided by the department (which are generally interest free), externally sourced funds are likely to be on commercial terms and attract interest payments.
The loan approval requires a formal briefing to be prepared for the Minister (through the Secretary) which will include a letter and appropriate schedule(s) addressed to the Treasurer seeking approval.
Funded agencies will be formally advised by letter of their status as an approved borrower, together with the terms and conditions of the borrowing.
Externally funded loans are reported as a liability in the balance sheet of the funded agency.
Grants received in advance and recalled in the financial year that they are provided are referred to as cash advances.
This allows the funded agency to meet their immediate cash needs and gives them time to make some savings to generate additional cash to be repaid later in the year. In effect the cash is not repaid, but deducted from the scheduled grant payment in a subsequent month or months.
In July the department gave Hospital B $5 million in cash in addition to expected percentage of grant payments due. The hospital is advised that the cash will be deducted from their May and June grant payments later that financial year.
Cash advances are to be reported under financing activities in the cash flow statement.
Income (payments) received in advance
Grants provided in one year, which are expected to be spent over more than one year, are referred to as income received in advance.
The department decides to fund a palliative care research project for $150,000 per year for three years and provides a grant of $450,000 to Hospital B in Y1. The revenue is recognised once the agency has control of it – once it hits the bank account. So in Y1 the hospital receives income of $450,000 and only has expenditure of $150,000. It therefore reports a surplus of $300,000 in Y1, and deficits in the years when the subsequent expenses are made.
In accordance with accounting standard AASB 1004 Contributions the grant must be recognised in full as revenue when it is received. The related expenses are recognised in the year(s) in which the expenses are incurred.
The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract; that is, the customer (‘lessee’) and the supplier (‘lessor’).
AASB 16 Leases was issued in February 2016 and defines a lease as a contract that conveys to the customer (‘lessee’) the right to use an asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially all the economic benefits from that use. AASB 16 is effective from 1 January 2019.
Under the new lease accounting arrangements, hospitals will replace, in part an operating expense with a capital expense. Under existing operating leases, the lease payments are expensed. As finance leases, hospitals will incur an interest expense and a depreciation expense.
Under the new standard, with two exceptions, all leases will be categorised as finance leases. The exceptions are:
- leases entered into for a period of less than 12 months
- leases for equipment items less than the adopted capitalisation threshold.
Under the standing directions of the Minister for Finance, Direction 3.7.2 Treasury and investment risk management directs public sector bodies to centralise all their investments and financial arrangements with Treasury Corporation of Victoria (TCV) and Victorian Funds Management Corporation (VFMC), subject to some exceptions. There are currently a limited number of automatic exemptions:
- investments under $2 million
- transactional funds.
Agencies with investments of more than $2 million (excluding transactional funds) are required to invest these funds with TCV and VFMC.
This requirement is mandatory for all public health services, public hospitals, multi-purpose services, the Victorian Institute of Forensic Mental Health and Health Purchasing Victoria.