There is an estimated 55% increase in disclosure for IFRS compliant accounts compared to the UK GAAP accounts prepared in

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1 AUDIT COMMITTEE MEETING 08 JUNE 2010 BRIEFING ON UNDERSTANDING THE ANNUAL ACCOUNTS 1. INTRODUCTION NHS Trusts are required to produce a set of accounts each year to demonstrate their accountability to tax payers and service users for their stewardship of public money. The Board is required to formally adopt the accounts once audited, though it delegates authority to the Audit Committee to provide Assurance that the accounts represent a true and fair view of the financial health of the organisation. In reaching their conclusion on the accounts, the Audit Committee is assisted by the Head of Internal Audit Opinion and External Audit s work in verifying the accounts, culminating in the Annual Governance Report, but, ultimate responsibility for the accounts rests with the Trust. The format of the accounts is specified by the NHS Manual for Accounts (MfA). The Manual was prepared to give guidance to NHS bodies on fulfilling their statutory duties in preparing and completing their annual report and accounts as well as for the financial monitoring and accounts (FMA) forms. The MFA now adopts IFRS conventions, and UK GAAP results have been restated to provide IFRS-based comparators in the accounts. There is an estimated 55% increase in disclosure for IFRS compliant accounts compared to the UK GAAP accounts prepared in The accounts comprise:- a foreword four primary statements Statement of Comprehensive Income (formerly the Income & Expenditure Account) Statement of Financial Position (formerly known as the Balance Sheet) Statement of Changes in Taxpayers Equity Cash Flow Statement the Directors Statement of Responsibilities Statement on Internal Control (SIC) external audit opinions on the accounts and VFM conclusion notes to the accounts 2. THE PRIMARY STATEMENTS 2.1 Statement of Comprehensive Income (SOCI) The I&E account and Statement of Total Recognised Gains and Losses have been replaced by the SOCI. The SOCI for the Trust illustrates the revenue (income) received from the Trust s activities during and the operating expenditure incurred as a result of this activity. The operating surplus is therefore shown as 2,078k In addition; the Trust has received interest on balances of 107k Made a loss on disposal of vehicles of 145k Incurred interest charges of 447k ( 374k relates to the Finance Leases of 9 buildings) Paid or will pay dividends of 1,327k 1

2 This results in the Trust having a retained surplus for of 266k. This is less than originally forecast, due to the impairment charge to the SOCI of 4.5m, being higher than initial estimates. The impairment charge was calculated using the Modern Equivalent Asset approach which has caused some level of confusion as to how it arose. This change in valuation approach, for specialised assets, results from a cross-government review of the subject of valuations in the public sector. It is not a change due to the move to IFRS, nor a change in accounting policy. The impact of this change in valuation is a significant issue throughout the NHS as it has resulted in many high impairment charges. To give the DoH and readers of the accounts an easier comparison of the financial position, an adjustment for impairments is shown in the Breakeven Note This shows the value excluding the impairment charge, giving the Trust a breakeven in year position of 4.7m surplus and a cumulative position of 7.5m surplus from the date the Trust was formed. Notes 4, 5 and 7 to the Accounts give a more detailed analysis of the categorisation of type of revenue and expenditure incurred by the Trust. Both revenue and expenditure have increased by 12m from Note 4 the increases in revenue have arisen mainly due to increases in the Service Level Agreements with PCT s as well as the additional activity the Trust has experienced and new initiatives such as HART and SPA. The Trust has also seen a shift in revenue as more NHS Trusts achieve FT status. Note 7 - Increases in expenditure are reflective of increases in staff costs for SPA, HART, winter pressures and the new structure of the Trust. Also, additional training has been incurred in for Emergency Care Support Workers and additional paramedics. As well as the impairment charge of 4.5m these make up the majority of increased expenditure. Other Comprehensive Income This summarises the movements in reserves as explained in the Statement of Change in Taxpayers Equity in section 2.4 below. 2.3 Statement of Financial Position (SOFP) The Statement of Financial Position represents the Assets and Liabilities of the Trust as at 31 st March 2010 with the corresponding breakdown of Taxpayers Equity. As this is the first time adoption of IFRS, comparative data is shown from 1 st April 2008 and 31 st March Property, Plant and Equipment make up 45.2m of the total 46.1m of non-current assets. A breakdown of these assets can be seen by category in Note 16. The remainder of the noncurrent assets are made up of long term back-to-back agreements with PCT s for early retirement provisions. There has been an increase in Current Receivables of 1.6m from the opening to closing balance in This is reflective of an increase in NHS receivables, partly due to 0.4m owed by South Tees NHS Foundation Trust and an increase in prepayments; 0.5m building lease payments and 0.3m car lease scheme prepayments. Prepayments make up 3.4m of the total for Current Receivables and in addition to those disclosed above other significant prepayments include vehicle insurance, at over 0.9m which is paid in advance of the start of the insurance cover period to take advantage of an early payment discount, as well prepayments for rent, rates and vehicle leases. Current and Non-current Liabilities have reduced overall, although Provisions have increased due to a new Injury Benefit provision (a breakdown of provisions is shown on Note 35) and Borrowings includes a new finance lease at Hartlepool South. The reduction is due to the settlement of the Capital Loan in Sep 09. This utilised in year cash balances and will also save the Trust future interest payments. 2

3 Trade and Other Payables within current liabilities includes deferred income from the DoH and SHA for 0.6m. This is income received in but the goods or services will not be carried out until The majority of Trade Payables consist of accruals for invoices not paid as at 31 st March 2010 and also for March overtime and expenses which were paid on April s salary. 2.4 Statement of Changes in Taxpayers Equity (SOCITE) The Statement of Changes in Taxpayers Equity shows the closing balance of Taxpayers Equity as well as in year movement of reserves. The retained earnings reserve has increased by the value of the in year surplus. The revaluation of buildings has resulted in an increase of 1.7m in the revaluation reserve balance. A government grant reserve was recognised in as 146k of SHA funding was utilised for capital expenditure purposes. The overall increase in reserves for was therefore 2.1m. 2.5 Statement of Cash Flows The Statement of Cash Flows for the Trust summarises the cash flows both into and out of the organisation during the financial year and demonstrates how the change in actual cash balances are calculated note that the decrease in cash detailed on the Cashflow statement equals the decrease in cash at bank and in hand on the SOFP. The Cashflow takes the operating surplus from the SOCI and makes adjustments for in year movements in stocks, debtors, creditors and provisions, as well as adjustments for non-cash items such as depreciation/amortisation and impairments. PDC dividend expenditure and interest paid is also deducted to calculate the net cash inflow from operating activities of 9,416k. Capital expenditure which is not reflected in the SOCI is also deducted as this is financed through operational capital, an entirely different funding stream to the revenue income which is funded by service level agreements with Commissioners. After adjusting for interest received and the proceeds from sale of assets, this gives a net cash inflow of 848k before financing. From this 848k the Capital Loan was repaid, 559k and the Trust made capital repayments on its finance leases, 295k. The overall reduction in cash for the period was 6k. 3. NOTES TO THE ACCOUNTS In addition to supporting the Primary Statements as described above, the notes also set out the accounting rules and accounting policies followed by the Trust which incorporate the accounting principles as identified by IFRS. In addition, the notes set out the financial duties of the Trust; To achieve financial balance, also known as break-even duty To not exceed the Trusts External Financing Limit (EFL) To not exceed the Trusts Capital Resource Limit (CRL) The Trust has achieved the following:- Financial Balance the Trust achieved a surplus of 266,000 as reflected in the SOCI and as shown in Note 38.1 the breakeven performance of 4.7m 3

4 EFL the Trust contained and undershot its external financing limit, requiring 2,122,000 less cash than allowable as shown in Note 38.3 CRL the Trust contained and undershot it s capital expenditure within the Capital Resource Limit, i.e., under-spent its resource limit by 311,000 as shown in Note 38.4 From , dividend payments for PDC are no longer based on asset value estimations but use actual out-turn asset values. This means that the capital cost absorption duty will always be met as shown in Note Another target for the Trust relates to the Better Payment Practice Code - the BPPC requires the Trust to pay all undisputed invoices by the due date or within 30 days of receipt of goods or a valid invoice, whichever is the later. The target for the Trust is to hit 95% of invoices to be paid both by number and by value. Note 12.1 shows the Trust comfortably met its target by number, paying 97% of non NHS trade invoices within the target and 98% of NHS trade invoices within the target. By value the non-nhs trade invoices target was missed narrowly with an out-turn of 94% but met the target for NHS trade invoices with 98% of invoices paid within the target by value. The Trust did not have to make any interest payments for the late payment of commercial debt. OTHER NOTES Note 2 Operating Segments This is a new note for and discloses the same information about each significant segment as the NHS Trust reports internally. For NEAS there is a consolidated financial report provided to the Board and therefore no segments are shown within this note. When Service Line Management is fully implemented separate segments may be shown within this note for A&E, PTS, Emergency Planning, Control and Other. Note 9.3 Staff Sickness Absence This is a new disclosure and provides information from the ESR payroll database on sickness. Long term sickness is described as over 21 working days or 29 calendar days. Note Inventories Inventories is the new terminology for stock. The Trust has stores sites at Pallion, which includes Fleet and Central Stores which make up the consumable total as well as bunkers of fuel adjacent to many stations. Inventories have increased due to the flu pandemic requiring greater volume of consumables and rises in the cost of fuel. Note 42 Losses and Special Payments All losses and special payments relate to those disclosed to the Audit Committee in reports up to 20 th April No additional losses have been recorded. Note 43 Transition to IFRS The Audit Committee has received previous reports that provided an update on the IFRS project to restate the opening and closing balances into an IFRS format. The project was closed after the remaining items were incorporated into the annual accounts process. The re-stated accounts were submitted in Nov 09 to DoH. However, a further restatement of the prior year accounts was required during the time from submission of the draft accounts on 22 nd April The reason for this further re-statement was to enable greater consistency in comparative historical data for finance leases. This additional work was anticipated at the start of the audit and the timing was planned with the SHA, Department of Health and Audit Commission. 4

5 There were two main impacts for the transition to IFRS on the prior year statements; 1. The change in accounting principles meant that the Trust was not allowed to carry forward negative revaluation reserves; and 2. The recognition of 8 finance leases relating to building leases, including sites at Bernicia House, Russell House and Scotswood House 1. The impact of not carrying forward negative revaluation reserves as allowed under DoH guidance in was to transfer 1,139k from the revaluation reserve for land to the retained earnings reserve. 2. In prior years the lease costs would have been recorded in the I&E account as an in-year operating expense. Re-classification as a finance lease meant that they were recorded in the Statement of Financial Position (SOFP) as Property, Plant & Equipment assets with a Borrowing liability of equal and opposite value at the commencement of the lease. Depreciation of the asset is carried out on a straight line basis over the period of the lease, whereas the liability reduces based on the capital repayment (non-interest element) of the lease. This causes a divergence during the life of the leases. This was the scenario that the Trust encountered during the IFRS restatement exercise. At the start of the opening balance of finance lease assets was 5.7m but the liabilities were 7.1m. This caused a reduction in the brought forward retained earnings reserve of 1.4m although this divergence will be eliminated over the remainder of the lease life as shown in Graph 1 below. In other words the Trust will have 1.4m released back to the retained earnings reserve over the remainder of the lease terms. The 1.4m is shown in Note 43 of the accounts. Graph 1 Finance Leases 4. AUDITED ACCOUNTS The Trust accounts are subject to audit by the Trust s external auditors who are required to explain the role that they undertake and give an opinion as to whether the Trust accounts represent a true and fair view of the operations of the Trust. 5

6 During the Audit errors were identified which will be reported by the Audit Commission in their Annual Governance Report. Where practical, processes will be put in place to minimise the potential for these errors re-occurring in ANNUAL REPORT The Annual Report presents the Trust s accounts in summarised format, though one set of the annual report is required to be available with the full annual accounts, a report on remuneration and an operating and financial review. The annual report also describes the activities of all of the Trust s directorates and contains a forward look at the opportunities and threats in the environment in which the Trust operates in the forthcoming years. 6. CONCLUSION It has been a challenging year for the Trust in relation to the preparation and submission of the accounts. Changes in accounting principles and additional disclosure requirements were all to be incorporated in the same time frame as last year s accounts. However, draft accounts were submitted ahead of the DoH deadline and with all financial duties achieved the Trust can look back on a successful financial year. M Rutter Financial Services Accountant 3 rd June