Are you ready for reporting change?

by Debbie Paterson

06 August 2018


Throughout August we are taking the opportunity to focus on some key areas of the HFMA’s policy and technical work and remind members about some of the outputs that might be useful. Each week we are highlighting a different topic. This week, the focus is on financial reporting and the forthcoming application of new accounting standards.

Financial reporting requirements have remained stable over the past three or four years – but this is all about to change. It is not clear that finance teams are ready for these changes.

The HFMA has just completed its year-end survey for 2017/18 with finance managers reporting that the accounts preparation, audit and submission went relatively smoothly this year. Some organisations faced specific issues relating to particular transactions – new subsidiaries or a change in valuation methodology.

Guidance and templates were largely available on time, although there is always room for improvement. The main complaint in relation to guidance is the difficulty in identifying updates and changes. More consistency in approach across the Department of Health and Social Care, NHS Improvement and NHS England and in some cases, simple changes – including highlighting changes in annual guidance – would be very well received.

After five years of surveys, for the first time this year there were a significant number of negative comments around auditors – that some were under-prepared, understaffed and that queries were raised at the last minute. Perhaps we should have expected this considering it was the first year of the new audit contracts for trusts and clinical commissioning groups.

The first audit for an audit firm under new contractual arrangements is always going to take more time and will, perhaps, throw up new audit issues. However, there are lessons to learn and we will be feeding back our findings to the National Audit Office.

This period of financial reporting stability is about to come to an end with the application of three new accounting standards in the next two years.

2018/19 sees the adoption of IFRS 9 Financial instruments and IFRS 15 Revenue from contracts with customers. The DHSC issued the Group accounting manual 2018/19 in April and that sets out how these standards will be adapted and interpreted for the public sector.

Somewhat worryingly, around a third of respondents to our year end survey have yet to consider the impact of these new standards (nearer to 40% for the financial instruments standard). There is a wide consensus that IFRSs 9 and 15 will not have a significant impact, but it is difficult to understand what that assessment is based on when so many have not yet started work.

When you also consider the fact that only 26 of those who responded have actually read IFRSs 9 and 15, rising to 36 for IFRS 16, perhaps next year it will be accountants rather than the auditors or regulators who will face criticism.

The main impact of IFRS 9 is likely to be in relation to impairment of receivables. Balances with bodies in the DHSC group are exempted from the impairment review, so this is likely to impact those bodies who have material contracts with non-NHS bodies. For once, the impact may be greater for non-acute bodies that may provide services to local authorities.

We understand that the DHSC, NHS Improvement and NHS England are working on a review of the NHS standard contracts in relation to IFRS 15. However, NHS bodies need to review their own contracts to be sure that they are recognising income in accordance with the new standard.

The standard that is causing the most concern is IFRS 16 on leases. It was over 10 years in the development and those working on its application can understand exactly why that is. We have published a briefing which sets out the impact of the standard on NHS bodies. This has been updated as further information is released.

The Treasury released an exposure draft on the application of the standard to the public sector back in May and responses have just been submitted. The biggest outstanding question for NHS bodies is the impact this standard will have on capital financing arrangements and performance against the capital departmental expenditure limit or CDEL.

Unfortunately, these are questions that were not answered by the exposure draft. The Treasury is still working with the Office of National Statistics on how to align the national accounting requirements (ESA10), which still recognises finance and operating leases, with IFRS 16, which removes that distinction for lessees. The DHSC, NHS Improvement and NHS England are working out how the standard will affect the group consolidation.

Some NHS bodies are waiting for detailed guidance, but it is clear that they need to start work now gathering all of the information needed to be able to undertake the necessary calculations as well as to meet the standard’s more onerous disclosure requirements.