Valuations and provisions highlighted as priority areas for 2020/21 year-end

In terms of financial reporting requirements, 2020/21 is a straightforward year, now that the IFRS 16 leasing standard has been deferred.

There are few changes to accounting standards and NHS bodies are likely to be affected by only one of them. It is the change to the definition of material in international accounting standards IASs 1 (Presentation of financial statements) and 8 (Accounting policies, changes in accounting estimates and errors). Information is considered material ‘if omitting, mis-stating or obscuring it could reasonably be expected to influence decisions ….’.

The reference to obscuring data is new – information should not be inappropriately aggregated or hidden in lots of immaterial information to make it less obvious. The other new reference is the inclusion of a reasonability test when thinking about whether information will influence decision-making. This amendment to the standards is unlikely to have a big impact on the preparation of NHS accounts, but will need to be considered when determining materiality and reviewing the statements.

It is likely that judgements and estimates will be difficult this year. In its year-end letter, the Financial Reporting Council (FRC) makes it clear that the backdrop of Brexit and Covid-19 is a high level of economic uncertainty: ‘Where judgements have been made involving significant estimation uncertainty, we expect to see increased disclosure of relevant sensitivities or ranges of possible outcomes to help users of the accounts understand the assumptions made and the extent of the changes that might be reasonably possible in the next 12 months.’

In its report Developments in audit 2020, the FRC has also identified that two of the most common areas for audit improvement are sufficient challenge of management and the audit of going concern. Both involve management making judgements and estimates, so this is likely to be an area of interest to auditors.

The uncertainties in 2020/21 mean that judgements and estimates will be harder to make. Relying on the previous year or even past experience as a basis for decisions is not going to be possible. The areas that are worth thinking about early are valuations and provisions.

At the end of 2019/20, most valuers included a statement about the fundamental uncertainty in their valuation as a result of Covid-19 and this was referred to by some auditors in their reports.

It is looking less and less likely that this will change by the end of this financial year. It may be worth having early discussions with valuers and auditors about this.

Where NHS bodies are considering the valuation of their specialised assets on a modern equivalent asset basis, the impact of Covid-19 on what a modern equivalent asset would look like should be considered. Often when considering a hypothetical new build, a judgement is made that it would have a smaller footprint, but may have more floors than the existing estate. In a world where social distancing and one-way systems are the norm, is this still the case? Do those judgements need to be revisited?

In relation to provisions, holiday pay accruals will be different this year. Staff have been unable to take all of their holiday this year, and the amount of untaken leave that can be carried forward from one leave year to another has been increased. Those bodies that have not usually included a holiday pay provision in their accounts on the basis of materiality may need to revisit that assumption.

The Restriction of Public Sector Exit Payments Regulations 2020 came into force on 4 November, introducing a £95,000 cap on exit packages from that date. So, provisions for exit payments will need to be reviewed as a result.

Finally, stock/inventory is likely to be different in 2020/21. The levels of personal protective equipment (PPE) held in stock will probably be higher than in previous years, which may mean stock becomes material for some NHS bodies.

Some of the stock, particularly of PPE, may not have been purchased by the organisation that is storing it, so agreement needs to be reached as to whose accounts it will sit in.

In 2019/20 some NHS bodies received qualified audit opinions as auditors were unable to attend stock-takes during March 2020. It would therefore be sensible for management to review the arrangements that are currently in place to satisfy themselves that stock is appropriately recorded in the accounts, so that they can implement alternative procedures early in 2021 if necessary.

Debbie Paterson is HFMA policy and technical manager