First, the Treasury is still developing practical guidance on the application of international financial reporting standard IFRS 16 to private finance initiatives.
While developing that guidance, the Treasury has identified an issue concerning the timing and approach to revaluing the liability, to include changes that have taken place to date.
It is recommending that PFI liabilities should be revalued at 1 April 2022 for indexation changes that have taken place until that date using a cumulative catch-up approach. Until the guidance or FRAB minutes are issued, we will not know whether FRAB agreed with this recommendation. But NHS bodies with PFIs should be aware of the current thinking.
The second issue is the Department of Health and Social Care will update the Group accounting manual 2022/23 (GAM) using the frequently asked questions process to take account of the impact of the Health and Care Act 2022. Having said that, the Department expects that the new act will have a limited impact on the financial reporting guidance included in the GAM.
However, the act does include new reporting requirements that will be included in the guidance on the annual report. For example, the act requires integrated care boards to detail the amount of their expenditure that relates to mental health services and the proportion of expenditure that this represents.
Looking further ahead, the Treasury is conducting a thematic review on the valuation of non-investment assets such as property, plant, equipment and intangible assets. The review is considering the costs and benefits of the current requirements and whether there is an alternative to the current accounting policy to hold non-financial assets at valuation.
The preliminary findings are that the anticipated benefits and uses for the current regime have not been realised in practice and the scope for using the current data is limited.
The paper does not explicitly say what those anticipated benefits were. But when the move to resource accounting was being developed by the UK government in the 1990s and in the early 2000s, it was expected that reflecting the value of assets in the accounts would result in a clearer understanding of the cost of capital.
Accounts preparers have highlighted the time and expense incurred by engaging third parties to provide valuation services as well as the time and effort put into auditing these valuations.
Discussion with stakeholders indicates that this burden is not uniform across government, and larger central government departments have a relatively smooth valuation process.
Stakeholders have noted that the evolution of the audit regime and audit practice may be driving the increased burden rather than the requirement to revalue assets.
The paper notes that the issue seems to be more acute in the local government sector – the NHS was not mentioned, but it is likely that NHS bodies encounter the same issues as their local government colleagues.
Alternatives have been identified and discussed as part of the initial evaluation, which was undertaken by Deloitte:
- The historical/deemed cost model in accordance with IFRS
- The revaluation model for all non-investment assets in accordance with IFRS (including IFRS 13)
- A differential regime with a historical/deemed cost model for certain categories of assets such as specialised assets, and a revaluation model for non-specialised assets
- A periodic reset of historic/deemed cost – reset carrying values to current value every five years (but no annual requirement to hold at valuation).
None of these options are without drawbacks, so other alternatives will be considered in the next stage of the review. This will include further consideration of how the differential approach could be applied and what criteria could be used to segment different types of asset. This next stage is likely to include data collection by the Treasury from government departments and local authorities.
Finally, IFRS 17 Insurance contracts remains on FRAB’s agenda, although there was only a verbal update at the June meeting.
At its March meeting, FRAB agreed with the Treasury’s proposal to defer the mandatory adoption of the standard to 2025/26. The Treasury continues to consider what adaptations and amendments will need to be made to the standard before it is applied in the public sector.
Details of the FRAB June meeting can be found here
Debbie Paterson is HFMA senior technical manager
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