NHS trust accounts A guide for non-executives

Transcription

1 NHS trust accounts A guide for non-executives

2 Published by the Healthcare Financial Management Association (HFMA), Suite 32, Albert House, 111 Victoria Street, Bristol BS1 6AX Tel: (44) Fax: (44) ISBN This guide has been developed by the HFMA with support from the Audit Commission. The author is Steve Brown, HFMA Head of Policy. We are keen to obtain feedback on ways in which the content, style and layout can be improved to better meet the needs of its users. Please forward your comments to or to the address above. While every care has been taken in the preparation of this publication, the publishers and authors cannot in any circumstances accept responsibility for error or omissions, and are not responsible for any loss occasioned to any person acting or refraining from action as a result of any material within it. Healthcare Financial Management Association All rights reserved. The copyright of this material and any related press material featuring on the website is owned by Healthcare Financial Management Association (HFMA). You may not copy any part of this document or related material from the website or do any other act in relation to any part of this site that is prohibited by copyright other than the following: You may quote from material produced by HFMA so long as you give due accreditation to the author, content contributor and the association. You may print or download it to a local hard disk for your personal use only. This does not however authorise you to incorporate any part of this document or website in any commercial document or in any material sold or otherwise made available for profit without the written consent of HFMA and due accreditation. Enquiries about reproduction outside of these terms should be sent to the publishers at or posted to the above address.

3 NHS trust accounts: a guide for non-executives 1 Contents Foreword 2 Acknowledgements 2 Summary 3 The primary statements 6 Income and Expenditure Account 6 Balance Sheet 8 Cash Flow Statement 10 Statement of Total Recognised Gains and Losses 14 Notes to the accounts 16

4 2 NHS trust accounts: a guide for non-executives Foreword NHS Trust Accounts: A Guide for Non-executives is a helpful companion to the well-established Healthcare Financial Management Association (HFMA) Introductory Guide to NHS Finance and guides the reader step by step through the annual accounts. It is essential reading for anyone without NHS finance expertise wishing to interpret, understand and challenge a trust s financial statements. Financial reporting requirements are complex and understanding a set of NHS accounts can be difficult. Non-executive directors (NEDs) play a critical role providing effective scrutiny to ensure that accountability and value for money are demonstrated. This guide is designed to help NEDs and other users of the accounts first understand and, more importantly, draw conclusions and ask pertinent questions about the trust s accounts. The guide provides the reader with easy to follow explanations of the primary statements and notes, with additional boxed texts for key concepts. It clearly explains the role of the NED and the external auditor. It also includes an invaluable list of questions for NEDs to assure themselves that the financial statements represent a true and fair view of the trust s finances. Both the HFMA and the Audit Commission are committed to improving accountability and good financial reporting across the NHS and commend this guide to you as an important contribution in this area. We trust that you will find the guide helpful. Andy McKeon Managing Director, Health, Audit Commission Andy Leary Chairman, HFMA Acknowledgements The author is grateful for the help and guidance of the following people in the production of this guide: Steve Appleton, Audit Commission Robin Beeby, Department of Health John Cooper, George Eliot Hospital NHS Trust Tony Copeman, Doncaster Primary Care Trust Richard Edwards, Audit Commission Anna Green, HFMA Emma Knowles, Audit Commission Joanne Lowther, Department of Health Richard Parker, George Eliot Hospital NHS Trust Chris Steele, Department of Health Steve Warren, Department of Health

5 NHS trust accounts: a guide for non-executives 3 Summary NHS organisations have a statutory duty to produce annual accounts (also known as financial statements) and an annual report. The annual accounts are the main way in which trusts discharge their accountability to taxpayers and service users for their stewardship of public money. The trust board is required to formally approve the accounts once they have been audited and therefore it is vital that NEDs understand them. Alongside this formal requirement, understanding the annual accounts is imperative if NEDs are to fully appreciate the financial health of their organisation. This is because, while the accounts reflect the immediate past performance during the last 12 months, they also set out the financial foundations on which the organisation will build its future performance. The format of the accounts is specified by the NHS trust Manual for Accounts and consists of: four primary statements: Income and Expenditure Account; Balance Sheet; Cash Flow Statement; and Statement of Total Recognised Gains and Losses; notes to the accounts; statement on internal control; directors statement of responsibilities; and the auditor s report. This guide focuses on the four primary statements and the notes to the accounts. Each primary statement and the key notes to the accounts are explained using an illustrative set of accounts. It is intended that NEDs will use the guide as a source of reference to look at if additional understanding is required for a particular aspect of the accounts. The guide also includes some questions that NEDs should consider before approving the annual accounts. NEDs responsibilities A critical aspect of a NED s role is to provide constructive challenge and scrutiny of the organisation s financial information and systems of control. To fulfil their financial management responsibilities, NEDs need to satisfy themselves that the organisation s financial management arrangements are operating effectively and that the financial reporting and the statement on internal control are both accurate. (The statement on internal control provides assurance about the system of internal control and demonstrates that accountable officers (chief executives) are doing their reasonable best to manage the principal risks to the organisation achieving its objectives.) The guide includes questions that NEDs could consider when providing constructive challenge on the annual accounts. The most important aspects to consider are whether there have been significant changes from previous years, whether the accounts reflect the activities undertaken during the year and whether the position reported is consistent with in-year forecasts. The primary statements The Income and Expenditure Account records the income and the costs incurred by the trust during the year in the course of running its operations. It includes cash expenditure on staff and supplies as well as non-cash expenses such as depreciation (a charge that reflects the consumption of the assets used in delivering healthcare). It is the equivalent of the profit and loss account in the private sector. If income exceeds expenditure, the trust has a surplus. If expenditure exceeds income, a deficit is incurred. The Balance Sheet provides a snapshot of the trust s financial condition at a specific moment in time the end of the financial year. It lists assets (everything the trust owns that has monetary value), liabilities (money owed to external parties) and taxpayers equity (public funds invested in the trust). At any given time, the assets minus the liabilities must equal taxpayers equity.

6 4 NHS trust accounts: a guide for non-executives The Cash Flow Statement summarises the cash flows of the trust during the accounting period. These cash flows include those resulting from operating and investment activities, capital transactions, payment of dividends and financing. If an organisation reports a surplus on the income and expenditure (I&E) account it does not mean its cash balance has increased by an equivalent amount. Similarly an I&E deficit would not necessarily translate into an actual shortage of cash in the short term. For example, while depreciation is included as a charge on the I&E account, it does not involve an outlay of cash. Similarly any capital purchase will involve an upfront outlay of the full purchase price, while the I&E account will only record the depreciation of the asset spreading the full cost over the lifetime of the asset. The impact of an organisation s operating performance on its cash position can only be gleaned from the Cash Flow Statement and the Balance Sheet. The Statement of Total Recognised Gains and Losses provides a summary of all the trust s gains and losses. The I&E account will only provide details of gains and losses that have been realised. But the Statement provides a summary of all gains and losses regardless of whether or not they were shown in the I&E account or the Balance Sheet. It starts with the trust s surplus or deficit before the payment of dividends (taken from the I&E account) and then provides details of unrealised gains and losses (ie gains or losses which have not yet had any cash consequences) such as those arising from the revaluation of property. Notes to the accounts The notes to the accounts provide additional details on the entries in the primary statements as well as additional disclosures, such as the accounting policies that the organisation follows when preparing its accounts. Prior year comparators The accounts include figures for the year just ended alongside the comparative figures for the prior year. This helps to identify where income, expenditure, assets and liabilities have changed compared with the previous 12 months. Where differences are significant, NEDs should ensure they understand why the differences have arisen. However, if the figures are the same for the two years it does not mean NEDs should not probe deeper. For example, steady expenditure in a particular area could indicate a failure to deliver on a savings programme. Publication NHS bodies must publish an annual report and audited accounts as one document and present it at a public meeting. NHS organisations can choose to produce summary financial statements for publication with the annual report in addition to the full set of accounts. The summary financial statements consist of the four primary statements and selected notes. Where summary financial statements are produced, the full annual accounts must be made available to the public if requested.

7 NHS trust accounts: a guide for non-executives 5 The role of the auditor External auditors are appointed by the Audit Commission and have two broad objectives: to review and report on the trust s annual accounts and statement on internal control and to review whether the trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. Auditors are required to comply with the Code of Audit Practice (published by the Audit Commission) and International Standards on Auditing (United Kingdom and Ireland) (ISAs (UK&I)). The appointed auditor will audit the trust s annual accounts and give an opinion stating whether the accounts give a true and fair view of the organisation s affairs at the end of the financial year. Auditors will also consider the annual report and make a statement in their audit opinion if its contents are inconsistent with their knowledge of the organisation. In addition to their opinion on the accounts, auditors are also required to issue: a report to those charged with governance (in most cases the audit committee) incorporating the report required under ISA (UK&I) 260 and setting out the main matters arising from the audit of the annual accounts; and an annual audit letter summarising the key issues arising from audit work throughout the year. Auditors also have special reporting powers and can issue a public interest report or make a referral to the Secretary of State. Timetable For the 2006/07 financial year, the following deadlines were set by the Department of Health: Deadline for unaudited accounts to be with auditors and the Department of Health 1 May Deadline for submitting audited accounts to the Department of Health 25 June Sources of further information Audit Commission Achieving First-class Financial Management in the NHS (2004) Good Governance: Good Financial Management (2004) World-class Financial Management (2005) Audit Commission Review of the NHS Financial Management and Accounting Regime (2006) Department of Health NHS Trust Manual for Accounts 2006/07 HFMA Effective Governance in Healthcare: An Introductory Guide (2006) Introductory Guide to NHS Finance (2006)

8 6 NHS trust accounts: a guide for non-executives The primary statements Income and Expenditure Account Note Current year Prior year Income from activities 3 72,941 70,129 Other operating income 4 10,123 14,358 Operating expenses 5-7 (87,825) (82,937) OPERATING (DEFICIT) SURPLUS (4,761) 1,550 Cost of fundamental reorganisation/restructuring 0 0 Profit (loss) on disposal of fixed assets (DEFICIT) SURPLUS BEFORE INTEREST (4,761) 1,550 Interest receivable Interest payable Other finance costs unwinding of discount (DEFICIT) SURPLUS FOR THE FINANCIAL YEAR (4,573) 1,683 Public Dividend Capital dividends payable (2,721) (2,469) RETAINED SURPLUS (DEFICIT) FOR THE YEAR (7,294) (786) Note to the Income and Expenditure Account This note shows the trust s underlying financial performance, stripping out the impact of any financial support received from the NHS Bank or from within the local health economy (internally generated) to help the trust manage its financial position. In 2006/07 the provision of financial support has been replaced by a regime of loans and deposits with the Department of Health. Details of loans received or deposits placed with the Department of Health can be found in Notes 14 and 15 to the accounts. Current year Prior year Retained deficit for the year (7,294) (786) Financial support included in retained deficit for the year NHS Bank 0 0 Financial support included in retained deficit for the year internally generated 0 0 Retained deficit for the year excluding financial support (7,294) (786) These two lines provide details of any financial support either from the NHS Bank or from other NHS bodies in the local health economy (internally generated) that has been used to improve the reported year-end position. The real underlying performance for the year. Questions Do changes in income from the prior year correspond with your knowledge of the trust s activities? Is the surplus or deficit consistent with the forecasts made during the year? Do the figures seem reasonable and complete, including those entries that are zero? Does the financial support disclosed agree with your knowledge of the trust s financial position?

9 NHS trust accounts: a guide for non-executives 7 This includes all income from patient care. The main source of income is from primary care trusts (PCTs). Other sources of income are private patients and the NHS Injury Costs Recovery Scheme. Non-patient care income including education, training and research funding. All operating costs including staff, supplies, premises costs and services from other NHS and non-nhs bodies. The operating surplus/deficit is equivalent to the operating profit/loss in the private sector. In the NHS, most costs arising from reorganisations would be classified as operating expenses and not identified separately. The difference between the sale proceeds of a fixed asset (such as a building or piece of equipment) and its current value. Trusts earn interest on short-term deposits but there are strict rules that limit the scope of investments. Interest is payable on loans, on late payments and charges on finance leases. A financing charge relating to provisions made for future payment, for instance expected payouts relating to a permanent injury benefit claim. The unwinding charge entered here reflects the difference between this year s and last year s estimates for the current cost of future payments (Box A). This is a dividend paid to the Treasury via the Department of Health. It represents a charge for capital. It can be seen as the dividend paid on the Secretary of State s investment in the trust both relating to the original capital assets transferred to the trust on formation and any subsequently issued public dividend capital. It is calculated at 3.5% of forecast net relevant assets and is paid in two instalments during the year. Note 23.2 shows whether the dividends actually paid equal 3.5% of actual average net relevant assets. The retained surplus/deficit shows whether the trust has achieved its departmental financial target to breakeven for the year. This is different from the statutory duty to breakeven taking one year with another which is measured over three or exceptionally five years. The trust s performance against this statutory duty is shown in Note 23. Box A Supplementary information Provisions NHS trusts make provisions for expected future liabilities. For example, as the result of an expected personal injury claim made by a member of staff the trust could expect to make a payment in the future to settle the claim. Or the trust may be responsible for future pension payments to staff, who are injured at work and retire on ill-health grounds.the full cost of likely future payouts such as these has to be included as operating expenditure in the year in which the incident relating to the claim occurred.the provision in the accounts is discounted to reflect the falling value of money (a payment in five years time is worth less than a payment of the same amount now because of the impact of inflation). Each year as the provision moves nearer to being settled the value of the provision shown in the Balance Sheet increases as the discount originally applied reverses (ie the impact of the time value of money reduces as the time of settlement nears) gradually increasing the provision to its estimated value at the settlement date.the annual increase is charged to the income and expenditure account as unwinding of discounts.

10 8 NHS trust accounts: a guide for non-executives Balance Sheet Note Current year Prior year FIXED ASSETS Intangible assets Tangible assets 11 78,077 75,136 Investments CURRENT ASSETS 78,077 75,136 Stocks and work in progress 12 1,489 1,635 Debtors 13 3,104 4,720 Investments Cash at bank and in hand ,840 6,602 CREDITORS: Amounts falling due within one year 15 (10,032) (6,230) NET CURRENT (LIABILITIES) ASSETS (5,192) 372 TOTAL ASSETS LESS CURRENT LIABILITIES 72,885 75,508 CREDITORS: Amounts falling due after more than one year PROVISIONS FOR LIABILITIES AND CHARGES 16 (181) (447) TOTAL ASSETS EMPLOYED 72,704 75,061 FINANCED BY: TAXPAYERS EQUITY Public dividend capital 22 48,940 44,989 Revaluation reserve 17 29,427 29,454 Donated asset reserve 17 1,049 1,082 Government grant reserve Other reserves Income and expenditure reserve 17 (6,712) (464) TOTAL TAXPAYERS EQUITY 72,704 75,061 Questions Are the changes in fixed assets in line with your knowledge of the trust s capital programme? Do the changes in debtors and creditors from the prior year seem reasonable? Are there any significant variances, or figures that seem very high or very low? Does the trust have a positive working capital? Has the level of provisions changed significantly from the previous year? If so, are you satisfied with the reasons for this? Does the Balance Sheet balance?

11 NHS trust accounts: a guide for non-executives 9 Computer software licences, other licences, patents and development expenditure. Land, buildings, dwellings, assets under construction, plant and machinery, transport, information technology (IT) and furniture and fittings. NHS trusts do not generally have powers to invest surplus funds. Foundation trusts do have more freedom to make investments, which generate income for the trust.an example of a fixed asset investment might be an investment in a subsidiary company set up to exploit intellectual property. Any such investment would require approval from the Secretary of State. Debtors represent money owed to the trust at the Balance Sheet date. NHS trusts do not generally have powers to invest surplus funds. Foundation trusts do have more freedom to make investments, which generate income for the trust. Deposits with the Department of Health would be shown as current asset investments. Includes all cash balances in bank accounts. However, an overdraft would appear in creditors and is not offset against other cash and bank balances. Creditors represent money owed by the trust including any loans repayable to the Department of Health. The difference between current assets and current liabilities. This is the working capital of the trust used to maintain day-to-day operations. Negative working capital would suggest the need for short-term support or a working capital loan to help the trust meet payments due to creditors. This is available through the Department of Health s working capital loans and deposits scheme. Creditors represent money owed by the trust including any loans repayable to the Department of Health. A provision is a liability where the amount and timing are uncertain.while there has been no cash payment at this point, the trust anticipates making a payment at a future date and so its net assets need to be reduced accordingly. At the formation of NHS trusts, assets (land buildings, equipment and working capital) transferred to the new trusts. The value of these assets is in effect the public s equity stake in the trust and is known as Public Dividend Capital (PDC). It is similar to company share capital and as with company shares, a dividend is payable to the Department of Health. It is calculated at 3.5% of forecast net relevant assets. Each year the Department of Health issues new PDC to support NHS capital development and this too attracts dividend payments. From 2007/08, the practice of issuing PDC to trusts to support new capital projects is being replaced with a more commercial system involving interest-bearing loans. Reserves record the changes in asset values held by the trust as well as any cumulative surplus/deficit reported through the I&E account. More detail is given in Note 17.

12 10 NHS trust accounts: a guide for non-executives Cash Flow Statement Note Current year Prior year OPERATING ACTIVITIES Net cash inflow from operating activities 18 3,665 4,016 RETURNS ON INVESTMENTS AND SERVICING OF FINANCE Interest received Interest paid 0 0 Interest element of finance leases 0 0 Net cash inflow from returns on investments and servicing of finance CAPITAL EXPENDITURE (Payments) to acquire tangible fixed assets (5,083) (4,682) Receipts from sale of tangible fixed assets 0 0 (Payments) to acquire intangible assets 0 0 Receipts from sale of intangible assets 0 0 (Payments) to acquire/receipts from sale of fixed asset investments 0 0 Net cash inflow/(outflow) from capital expenditure (5,083) (4,682) DIVIDENDS PAID (2,721) (2,469) Net cash (outflow) before management of liquid resources and financing (3,951) (3,002) MANAGEMENT OF LIQUID RESOURCES (Purchase) of investments with Department of Health 0 0 (Purchase) of other current asset investments 0 0 Sale of investment with Department of Health 0 0 Sale of other current asset investments 0 0 Net cash inflow/(outflow) from management of liquid resources 0 0 Net cash inflow/(outflow) before financing (3,951) (3,002)

13 NHS trust accounts: a guide for non-executives 11 Cash generated from normal operating activities (Note 18). Cash received on short-term deposits and interest paid relating to costs of financing the trust, eg loans or deposits with the Department of Health and interest charges under finance leases. Payments for new capital assets and receipts from asset sales. The PDC dividend paid to the Department of Health. Cash flows relating to current asset investments including any deposits placed with Department of Health under the loans and deposits scheme. The net cash inflow/(outflow) from operating activities, costs of running the trust, capital receipts and payments and the payment of dividend. In effect the additional cash the trust needed over and above what it could generate itself to conduct its business. The Department of Health set a limit on the amount of external finance trusts can obtain. Performance against this limit is shown in Note 23.3.

14 12 NHS trust accounts: a guide for non-executives Cash Flow Statement (continued) Note Current year Prior year FINANCING Public dividend capital received 4,951 3,024 Public dividend capital repaid (not previously accrued) (1,000) 0 Public dividend capital repaid (accrued in prior period) 0 0 Loans received from Department of Health 0 0 Other loans received 0 0 Loans repaid to Department of Health 0 0 Other loans repaid 0 0 Other capital receipts 0 0 Capital element of finance lease rental payments 0 0 Cash transferred (to)/from other NHS bodies 0 0 Net cash inflow/(outflow) from financing 3,951 3,024 Increase/(decrease) in cash 0 22 Question Do the figures seem reasonable and complete, including those entries that are zero?

15 NHS trust accounts: a guide for non-executives 13 Provides details of where additional cash came from to support cash needs. In case of net inflow of cash, shows how extra cash was used. Receipt or payment of PDC during the year to finance the purchase of new fixed assets or to return capital to the Department of Health following the disposal of fixed assets. These are loans both for working capital purposes and for capital. Other capital receipts are donations and government grants for the purchase of fixed assets.

16 14 NHS trust accounts: a guide for non-executives Statement of Total Recognised Gains and Losses Current year Prior year (Deficit) surplus for the financial year before dividend payments (4,573) 1,683 Unrealised surplus (loss) on fixed asset revaluations/indexation 1,067 6,587 Increases in the donated asset and government grant reserve due to receipt of donated and government grant financed assets Total recognised gains and loses for the financial year (3,409) 8,374 Prior period adjustment 0 0 Total gains and losses recognised in the financial year (3,409) 8,374 Question Do the figures appear reasonable, for instance, those relating to donated and government grant funded assets?

17 NHS trust accounts: a guide for non-executives 15 Taken from the I&E account. Gains/losses that the trust has made because of a change in the asset values, but where the assets have not been sold so there is no cash profit. In essence the gain is only potential. Gains due to donations or assets financed by non-department of Health government grants. If trusts have materially under- or over-reported gains or losses in a prior year, a correction can be made here to recognise the additional gain/loss. Trusts can only make prior period adjustments for two reasons; either because of a fundamental accounting error in a prior year s accounts or because of a material change in accounting policy. Total gain/loss for the year.

18 16 NHS trust accounts: a guide for non-executives Notes to the accounts 1. Accounting policies This note sets out the accounting rules, which NHS trusts must follow when preparing their accounts. These policies are largely dictated by UK Generally Accepted Accounting Practice (UK GAAP) and the Department of Health Manual for Accounts and Capital Accounting Manual. NHS trusts do not have the authority to amend these policies. One of the main policies is that income and expenditure is recognised on an accruals basis, meaning it is recorded in the period in which services are provided not when cash is received or paid out. Where income is received for an activity to be delivered in the following year, that income is deferred. It also sets out the rules directing when purchases should be recorded as capital expenditure and how assets should be valued and depreciated. In summary this section explains the basis on which all entries in the accounts are made. 2. Segmental analysis This note separates out the financial results for healthcare-related activities from any other activities pursued by the trust. For most trusts, there will be no need for any segmental analysis as all activities will be classed as healthcare activities. There are tight criteria governing where segmental reporting may be required (for instance the activity earns returns on investment that are out of line with healthcare activities) and if it is significant (for instance its assets are 10 per cent or more of the total net assets of the trust). 3. Income from activities This note gives a more detailed breakdown of the trust s income for patient care services in the form of a table. Income is net of any credit notes issued in-year. Income from activities Current year Prior year Strategic health authorities (SHAs) 1,267 1,246 NHS trusts 0 0 PCTs 71,022 67,851 Foundation trusts 0 0 Local authorities 0 0 Department of Health 0 0 NHS other 0 0 Non NHS Private patients Non NHS Overseas patients (non-reciprocal) 0 0 Non NHS Road Traffic Act Non NHS Other ,941 70,129 Income received from SHAs and other trusts for patient care services. The main source of income is for work commissioned by PCTs. This entry would also include any income to offset any fixed asset impairments (Box B). Income received for joint care arrangements with local authorities or for delayed discharges. Income from treating overseas visitors from countries where there are no reciprocal healthcare agreements. Reciprocal arrangements exist with most European countries meaning healthcare is delivered free to patients. Trusts receive funding from the Department of Health via their PCT. If someone is injured in a road traffic accident, and requires hospital treatment the trust is able to charge a standard accident and emergency attendance fee and if inpatient care is provided the costs (up to a limit) can be claimed through the private insurance system. Now replaced by the NHS Injury Costs Recovery Scheme. Question Do the income figures appear reasonable and can officers explain the reasons for any significant changes from the previous year?

19 NHS trust accounts: a guide for non-executives Other operating income This provides a breakdown of income not directly related to patient care. Other operating income Current year Prior year Patient transport services 0 0 Education, training and research 4,712 4,781 Charitable and other contributions to expenditure Transfers from donated asset reserve Transfers from government grant reserve 0 0 Non-patient care services to other bodies 2,997 6,870 Income generation 1, Other income 1,020 1,316 10,123 14,358 For an ambulance trust only, this item would appear in income from activities (Note 3). This is notional income to offset the depreciation charge relating to donated assets or assets funded via government grants. Examples include for laundry, pathology, payroll, internal audit and training services. Income from non-patient care activities such as car parking, catering, staff nurseries and accommodation charges. Other income covers income not reported in the categories above and may include staff payments relating to use of cars provided by the trust or income received from the Department of Health for non-patient care services. Funds to cover the costs of providing education and training come from MPET (Medical and Professional Education and Training) levies. The levies comprise SIFT (Service Increment For Teaching undergraduate medical students) MADEL (Medical And Dental Education Levy for postgraduate medical training) and NMET (Non Medical Education and Training for nursing and other professional staff training).these funds are allocated by the Department of Health via SHAs. Organisations undertaking research can also receive funding through a research and development levy. Box B Supplementary information Impairments Impairments occur where there is a loss in the value of a fixed asset compared to that recorded in the Balance Sheet. If something happens to the asset or the environment in which it is used that could indicate a fall in value, trusts are required to undertake an impairment review. Alternatively, impairments may come to light as a result of the routine five-yearly revaluation of NHS assets or as part of a valuation in preparation for redevelopment or disposal. Circumstances which may indicate an impairment include where an asset becomes surplus to requirements, where an asset cannot be used or where the asset becomes obsolete or is damaged. An impairment could take place because a change in the fixed asset or the business environment has permanently reduced its capacity to generate revenue, or more usually in the NHS, to provide services.this is a consumption of the economic benefits that had been expected to flow from the continuing use of the fixed asset so its value to the trust is reduced.alternatively, the impairment could be caused by a general fall in prices and so be seen as temporary. Different accounting treatments apply in each case. In the first case, the consumption of economic benefits is treated in the same way as depreciation and so treated as a cost in the I&E account.the second case is treated purely as a valuation adjustment and is dealt with by adjusting the revaluation reserve on the Balance Sheet and recorded in the Statement of Total Recognised Gains and Losses. To protect organisations from taking a hit on their bottom line (the trust s overall financial position), the Department of Health currently provides funding for impairments that go through the I&E account at a proportion of the impairment value depending on the size of the impairment.the trust would then use the cash from this income to repay PDC to reflect the fall in the value of its fixed assets.

20 18 NHS trust accounts: a guide for non-executives 5. Operating expenses This note is split into two parts, the first analyses the trust s operating expenses and the second further analyses operating lease costs and commitments. An operating lease (which would cover only a proportion of the asset s useful life and often includes maintenance or service aspects) is distinct from a finance lease, which is defined as a lease where the risks and rewards of ownership transfer to the lessee. Finance leases are therefore treated as capital expenditure. Payments under finance leases are capitalised and therefore are included on the Balance Sheet. They also impact on the trust s capital resource limit (CRL) (Note 23.4). There are detailed rules to distinguish between finance and operating leases. Operating expenses Current year Prior year Services from other NHS trusts 1,254 1,237 Services from other NHS bodies Services from foundation trusts 6 15 Purchase of healthcare from non-nhs bodies Directors costs Staff costs 61,599 57,577 Supplies and services clinical 11,731 11,550 Supplies and services general 1,239 1,168 Establishment 966 1,167 Transport Premises 2,884 2,477 Bad debts Depreciation and amortisation 3,810 3,557 Fixed asset impairments and reversals 0 0 Audit fees Other auditor s remuneration 0 0 Clinical negligence annual premium 1,666 1,761 Other 993 1,099 87,825 82,937 Questions Do the expenditure figures appear reasonable and can officers explain the reasons for any significant changes from the previous year? Directors and staff costs are often of interest to users of the accounts. Are you satisfied that these are correct? Can officers explain the level of bad debts that have been written off? Do you know what expenditure has been included in the other category?

21 NHS trust accounts: a guide for non-executives 19 These three lines show the trust s expenditure under contracts with other trusts, foundation trusts and other NHS bodies (including PCTs). It might typically include services such as pathology, speech therapy, occupational health services or back office functions such as payroll. Trusts can purchase healthcare services from the private sector. These could include diagnostic services. This figure includes the total paid to executive and non-executive directors including employer s National Insurance, employer s pension costs and early retirement costs. It excludes redundancy costs. Total employment costs of all staff other than directors. Costs include employer s National Insurance and pension contributions and early retirement costs and payments made to outside organisations for agency staff. However, redundancy costs are reported in other costs below. Establishment includes items such as printing, postage, telephone, advertising and travel expenses. Transport includes vehicle insurance, fuel and oil, maintenance equipment and hire of transport. Premises include all the trust s utility costs, furniture and other property-related revenue expenditure such as rates, rent and insurance. These are non-nhs debts written off during the year because they will not be paid.also included is the increase or decrease in the provision for non-nhs debts which are unlikely to be paid in the future. Depreciation is an accounting charge recognising that capital assets are consumed over their useful lives. For instance, IT equipment is depreciated over five/seven years on a straight line basis, meaning one-fifth/seventh of its upfront cost is assigned to each of the five/seven years of the assumed asset life.as there is no cash outlay for this expenditure the cash retained from depreciation charges is used to fund capital expenditure or repay amounts of PDC. Amortisation is the equivalent to depreciation for intangible fixed assets recognising the consumption of the asset over the course of its life. When a trust impairs a fixed asset, due to the consumption of economic benefit, the reduction in value is recorded here as expenditure. Although this does not itself involve a cash payment, it would worsen the organisation s reported financial position perhaps even resulting in a deficit on its I&E account. In the NHS, a system has operated whereby the Department of Health provides funding for these impairment charges (recorded under PCT income Note 3).This offsets the impairment charge to the I&E account.the trust would then be expected to use the cash to repay PDC (see Balance Sheet), hence creating a circular flow of funds. The trust pays an annual premium to the NHS Litigation Authority (NHSLA) as part of the Clinical Negligence Scheme for Trusts. Premium levels are influenced by a range of factors, including the type of trust, the specialties it provides and the number of clinical staff it employs. Discounts are available to those trusts that achieve the relevant NHSLA risk management standards and to those with a good claims history. All other expenditure including redundancy costs, injury benefit costs and non-car and non-property insurance.

22 20 NHS trust accounts: a guide for non-executives 6. Staff costs and numbers This note gives details about the number and cost of the trust s employees including senior managers. It identifies salary costs and pension contributions as well as giving details of management costs and ill-health retirements. Question Does the change in staff costs correspond to the change in staff numbers from the previous year? 7. Better Payment Practice Code The Better Payment Practice Code requires trusts to pay all undisputed NHS and non-nhs trade invoices by the due date or within 30 days of receipt of goods or a valid invoice, whichever is the later. The target in the NHS is for trusts to pay 95 per cent of invoices within 30 days. This note reports on how the trust performed against this target. It also gives details of any interest paid under late payment legislation, which is included within the interest payable line of the I&E account (Note 9). Question Has the trust met the target of paying 95 per cent of undisputed invoices within 30 days? 8. Profit/loss on disposal of fixed assets This note analyses the profit or loss on disposal of fixed assets. The note can be omitted if the amount is immaterial. The profit or loss is the difference between the sale proceeds (less any costs incurred in disposing of the asset) and the net book value of the asset. The note breaks the profit or loss into components relating to disposal of fixed assets, intangible fixed assets, land and buildings and plant and equipment (Box C).

23 NHS trust accounts: a guide for non-executives Interest payable and similar charges This note analyses interest payable on any finance leases, late payment of invoices under the Late Payment of Commercial Debts (Interest) Act 1988 and on loans made to the trust by the Department of Health. 10. Intangible fixed assets Intangible fixed assets include software licences, trademarks, patents and research development expenditure. A table tracks through the value of intangible fixed assets from their value at the beginning of the year, taking account of additional purchases, donations, disposals, revaluations and amortisation to arrive at the new total value for the year end. The table is very similar to that included for tangible fixed assets (Note 11). 11. Tangible fixed assets Tangible fixed assets include: land, buildings, dwellings, assets under construction, plant and machinery, transport equipment, IT and furniture and fittings. A table shows the changes in the trust s tangible fixed assets during the year. The table separates out the different types of asset. Below is an example for buildings and plant and machinery. This section also includes analysis of the net book value of land, buildings and dwellings that are held on freehold, long leasehold (over five years) and short leasehold. This should include on-balance Sheet private finance initiative deals. See table overleaf. Box C Supplementary information Valuations NHS asset values carried in the Balance Sheet (ie their net book value) are governed by a number of rules. If an open market value (ie what it could be sold for) can be established for a building for its existing use, this is the value that should be used. This would be determined by professional valuers. However, most NHS buildings are specialised in nature and there is no real open market. Instead the valuation is based on depreciated replacement cost (DRC) which involves establishing the cost of replacing the building and then depreciating it (reducing the value) to reflect its condition and age. This value is determined by professional valuers, who have to apply prescribed rules and methodologies. In both circumstances the asset values are updated annually using indices to ensure the valuation is current. A full revaluation of the NHS estate is undertaken every five years. Equipment assets are valued at current cost, which is generally the depreciated replacement cost. In practice this is currently the purchase cost, indexed to reflect changes in value of the asset as new, and then depreciated. Example of how a new fixed asset would be shown in the accounts A trust builds a small unit at a construction cost of 1m.The cash payments to build the asset are shown in the Cash Flow Statement as acquisition of tangible fixed assets. The unit is a specialised building and is professionally valued on a DRC basis at 0.9m which is included in the fixed assets category in the Balance Sheet. The difference between the valuation and build costs ( 0.1m) is taken to the revaluation reserve as a loss and is reported in the Statement of Total Recognised Gains and Losses. This treatment is specified in the NHS Capital Accounting Manual.The building is depreciated (eg 0.025m) once it starts being used and the charge is taken to the I&E account and reduces the asset value in the Balance Sheet (year-end value 0.875m). In the following year the net book value of the building ( 0.875m) is indexed and the change in value (eg an increase of 0.05m) is added to the fixed asset as shown in the Balance Sheet.This gain is also taken to the revaluation reserve and reported in the Statement of Total Recognised Gains and Losses. Depreciation is charged for the year based on the value of the building after indexation has been applied.

24 22 NHS trust accounts: a guide for non-executives Tangible fixed assets Buildings excluding dwellings Plant and machinery Cost or valuation at beginning of year 54,448 16,031 Additions purchased 1,305 1,077 Additions donated 97 Additions government granted 0 0 Impairments 0 0 Reclassifications 1, Indexation Other in-year revaluation (578) 0 Disposals 0 (267) Cost or valuation at end of year 57,514 18,093 Depreciation at beginning of year 0 9,585 Charged during the year 2,107 1,145 Impairments 0 0 Reversal of impairments 0 0 Reclassifications 0 0 Indexation Other in-year revaluation 0 0 Disposals 0 (267) Depreciation at end of year 2,107 10,614 Net book value Purchased at beginning of year 54,158 5,689 Donated at beginning of year Government granted at beginning of year 0 0 Total at beginning of year 54,448 6,446 Purchased at end of year 55,116 6,766 Donated at end of year Government granted at end of year 0 0 Total at end of year 55,407 7,479 Question Does the asset classification agree with your knowledge of the trust s assets?

25 NHS trust accounts: a guide for non-executives 23 For land/buildings and assets under construction the cost/value of assets at the start of the year will be the value when bought or at the last formal revaluation plus the impact of any subsequent indexation and depreciation charged to date (ie the closing net book value of the previous year). For other assets it will be the original purchase cost adjusted for indexation (Box D). Changes to the existing asset base covering new assets bought and sold and the impact of indexation. The cost/value of assets at the end of the year. For plant and machinery this is the gross value and takes no account of depreciation charged since its purchase. For buildings it takes account of depreciation up to and including the previous year. Depreciation is the charge made to reflect the consumption of an asset s value over its lifetime. Opening depreciation for plant and machinery is the depreciation charged since the asset was bought. However, cumulative depreciation is not recorded for buildings. Instead their closing net book value from the previous year (which takes account of depreciation for that year) is used as the opening balance for cost/value. Land is not depreciated. The table then tracks the movements in depreciation during the year. An asset s net book value ie the asset s value as recorded in the accounts is the current value or cost of replacement minus the depreciation charged. Box D Supplementary information Revaluation and indexation The NHS uses current cost accounting to report the value of its assets.this aims to capture the impact of inflation on asset values by reporting them at their current replacement cost (ie the cost of obtaining an identical replacement). It differs from historic cost accounting, which would value an asset for Balance Sheet purposes at the price paid when it was bought. It would be time-consuming and costly to fully revalue all assets every year. Instead the NHS uses a system of indexation. Each year assets values are multiplied by published indices to give the new current cost/value. In addition land and buildings face a full professional revaluation every five years. The net book value is the current cost/value of the asset (the original cost/value plus indexation) minus the depreciation charged since acquisition. Land is not depreciated. If a revaluation results in a new valuation that is lower than the current book value, this reduction is an impairment. Depending on the cause of the impairment, the loss in value is either treated as a cost in the I&E account or dealt with by adjusting the revaluation reserve on the Balance Sheet (Box B, page 17).

26 24 NHS trust accounts: a guide for non-executives 12. Stocks and work in progress This section analyses the stock and work in progress broken down into raw materials and consumables, work in progress and finished goods. Entries under work in progress will be rare as, in the past, partially completed spells have not generally been accounted for as work in progress. Trusts can, however, account for partially completed spells if this is consistent with their accounting policies. Similarly there are likely to be few entries under finished processed goods. 13. Debtors This section analyses the trust s debtors (ie the amounts of money owing to the trust at the Balance Sheet date). It divides the analysis between the amounts falling due within one year and those due after more than one year. The analysis is broken down into NHS debtors, prepayments and accrued income and other debtors. It also identifies any provision for potential bad debts with non-nhs bodies (ie the debts they do not expect to be paid). Transactions with other NHS bodies are never treated as bad debts. A prepayment is an amount already paid for benefits that will be delivered in future. So, for instance, a trust might pay for next year s rates and this would increase its debtors. Accrued income is money owed to the trust for which the trust has not yet raised an invoice. Question Are there any particularly large debtors or creditors this year, or significant changes from the prior year? Can officers explain the reasons for these? 14. Investments NHS trusts have limited powers to make investments. There are two categories of investment: fixed asset and current. Fixed asset investments, which for instance could include an investment in a subsidiary company established to exploit intellectual property, are held for the long term and are rare as the Secretary of State for Health must approve them. Current asset investments are held for the short term. Treasury management rules prevent NHS trusts from taking unnecessary risks with public money, prohibiting investments in stocks and shares. For trusts current asset investments would include any amounts deposited with the Department of Health under the loans and deposits scheme. Allowances issued under the European emissions trading scheme (permissions to emit pre-agreed amounts of carbon) are also treated as current asset investments although they are identified separately. 15. Creditors Creditors (representing the money owed by the trust but as yet unpaid) are analysed in two groups those due within one year and those due after more than one year. The separate analysis is needed to assess the trust s working capital or net current assets, which represents the money the trust can call upon to finance its day-to-day operations. The breakdown separates out NHS creditors from non-nhs trade creditors and includes a separate line for tax and social security payments still to be made. The trust may have more short-term liabilities than assets, giving it negative working capital. In this event it is likely to need support from the working capital loans and deposit scheme to maintain liquidity (ie have access to enough cash to meet its bills in the short term). Question Are there any particularly large debtors or creditors this year, or significant changes from the prior year? Can officers explain the reasons for these?