Explanatory Note for non-NHS bodies
Accounting Treatment relating to NHS revenue funded projects
1.
What is an NHS revenue funded project?
Under NHS revenue funded projects, usually referred to as Design, Build, Finance &
Maintain (“DBFM”) schemes, the Health Board pays the private sector partner (i.e. either
sub-hubco under the hub programme or the private sector partner under the Non-Profit
Distributing (“NPD”) model) for the services it provides, which may include the construction
of a new facility.
What does this mean?
2.
•
No payment is made until the facility is available and ready for use – no stage
payments during construction;
•
Payment of an annual Unitary Charge or Service Payment for the life of the project
(this is not rent and it is not a lease);
•
No service, no payment – deductions apply if, for example, consulting rooms are
unavailable due to a burst pipe which is not fixed within a certain timeframe;
•
DBFMs generally have a fixed end date – usually 25 years from the completion of the
construction;
•
Unitary Charge Payment from Service Availability throughout 25 Year life of the
contract, a proportion of which increases in line with inflation; and
•
Unitary Charge paid on a monthly basis less any deductions levied against the subhubco (which is a special purpose vehicle (SPV) set up by hubco for the purposes of
ring fencing individual DBFM projects under the hub programme)
What does the Unitary Charge include?
• Capital expenditure – this includes the capital cost of the building plus associated
finance costs with regard to borrowing;
•
Sub-hubco costs – costs of administering and running the sub-hubco;
•
Lifecycle – replacement costs for major equipment during the life of the project i.e.
replacing boilers and lifts etc; and
•
Hard facilities management – maintenance costs of the building.
It does not cover rates, energy costs or insurance costs.
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3.
4.
Land issues
Under the hub programme, the Procuring Authority (“Participant”) retains ownership of the
land and anything built by sub-hubco on it, i.e.:
•
Sub-hubco does NOT lease the land to the Participant;
•
The Participant grants sub-hubco a licence to occupy the land to the extent required to
perform the services;
•
The Participant will be required to warrant the title to the site; and
•
The Participant may grant sub-leases of the facility to other bodies i.e. GP Practices
Accounting/ Classification & budgetary treatment of DBFM projects
All DBFM schemes need to be considered for both:
1. The accounting implications of the scheme for the procuring authority; and
2. The budgetary implications for the NHS Board and Scottish Government.
Depending on the specific details of each NHS DBFM project, there may be different
budgetary treatments with regard to how the NHS Board deals with the Unitary Charge
payments in its accounts.
4.1. Accounting Implications
The UK now follows the International Financial Reporting Standards (“IFRS”) rather than
UK Generally Accepted Accounting Practice (“UK GAAP”) which was previously the case.
UK GAAP had a risk based approach to the classification of projects as on or off balance
sheet. On the basis that a DBFM project could demonstrate that the majority of the project’s
risk was held by the private sector provider the project was classified as off the public
sector’s balance sheet.
However, under IFRS, which has a control based approach to asset classification, as the asset
will be controlled by the NHS it will almost inevitably be regarded as on the public sector’s
balance sheet1;
4.2. Budgetary Implications
Scottish Government (“SG”) budgets are classified as either for revenue purposes or for
capital purposes. The capital budgets have decreased substantially and the SG have
introduced the revenue funded projects as a mechanism to take forward projects where there
is insufficient capital cover. All DBFM projects, as revenue funded projects therefore need to
meet the requirements of revenue funding. This is a condition of SG support.
1
There needs to be a clear distinction between budgetary treatment and accounting. In an accounting sense these
projects will be on balance sheet but in accordance with HMT guidance if they are service concessions under
IFRIC12 and pass ESA 95 test they are budgeted for as off balance sheet
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From a budgeting perspective, HM Treasury rules state that where a DBFM project is:
i.
assessed as a service concession under the terms of IFRIC12; and
ii.
satisfies the test outlined below for risk transfer under ESA95,
it will be classified as revenue and an adjustment will be made to the capital and revenue
budgets to reflect the impact of the difference between treatment under IFRS and UK GAAP.
In terms of HM Treasury spending controls the Unitary Charge will score against the revenue
budget.
For an asset to be classified as a non-government asset under ESA 95, two of the following
three risks have to have been transferred to the private sector provider:
•
Construction Risk;
•
Availability Risk; and/or
•
Demand Risk.
If the DBFM project is classified as a “non-government asset” under HM Treasury budget
rules this is the best position for the NHS Board. If after applying HM Treasury budget
guidance they are classified as a “government asset” the NHS Board will have to:
 allocate the capital budget available in respect of the facility; and
 pay for the Unitary Charge from their revenue budget (note that this does not mean
that the NHS is physically paying for the asset twice, more that it scores against both
capital and revenue budgets)
It is a condition of the Scottish Government Revenue Support package that the projects are
classified as “non-government.”
Therefore, it is important that an NHS Board reviews each project undertaken within the hub
initiative and satisfies itself of the appropriate accounting treatment in order to assess its
financial impact. The hub DBFM contract has been designed to meet the risk transfer
requirements of ESA95 for construction and availability risk. This should be backed up with
appropriate professional advice where considered necessary and confirmation from auditors
that they are content with the accounting treatment proposed.
5.
What about Leases?
A finance or operating lease is not expected to be treated as a service concession under
IFRIC12 since:
•
There would generally not be an integrated provision of construction and services.
The public sector would also normally be responsible for internal repairs and
insurance; and
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•
The public sector would not generally control the residual interest in the asset.
Therefore the assessment of the lease would currently be under IAS17 as to whether it was
considered to be a finance lease (on balance sheet) or an operating lease (off balance sheet).
The rules associated with IAS17 suggest the following with regard to the structure of any
lease if it were to be treated as an operating lease:
•
There could no control over the asset at the end of the lease from the public sector
(e.g. no right to buy at pricing below the market level);
•
The lease term could not be for the major part of the economic life of the building and
hence the present value of the minimum lease payments could not make up
substantially all of the fair value of the building; and
•
No substantial termination amounts due to hubco on cancellation of the remaining life
of the lease, if this is a long term lease.
Therefore this may only be suitable for generic buildings that have alternative uses (e.g.
offices), for which hubco is prepared to take ongoing void risk and residual value risk. For
example if the NHS Board were taking occupancy of a minority part of a building and the
hubco were prepared to market the building to other tenants.
In any event a joint exposure draft has been released by the IASB and FASB proposing a
change to accounting rules that would also see operating leases being recorded on balance
sheet. Although the effective date of a final standard may be some time away, it is sensible to
plan projects on this basis of this emerging treatment of leases. In brief for all leases, lessees
would record an intangible asset for the right to use the leased asset and a liability for the
obligation to make lease payments (including the present value of future obligations).
Therefore this would suggest that a lease (whether a finance lease or operating lease under
current accounting rules) is not a viable option for an NHS Board or Local Authority getting
funding from the Scottish Government, as this would create a double hit to capital and
revenue budgets.
SFT Contacts:
Andrew Bruce: 0131 510 0807
Neil Grice: 07540 123335
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