3-12-08
PPP Bulletin 1
Purpose
1. NHS bodies are required to prepare their financial statements on an
IFRS basis from the financial year 2009/10. In addition opening
balances and comparatives will need to be restated using IFRS.
2. These bulletins will be published on the Finman website in order to
provide an outline of the Department’s latest understanding in relation
to IFRS accounting for health PFI/LIFT projects in order to support the
NHS prepare for the transition to IFRS.
3. Whilst these bulletins will assist NHS foundation trusts when
considering the requirements for restating using IFRS, advice on
reporting requirements for NHS foundation trusts will be communicated
separately by Monitor and will reflect the FT FReM.
Background
4. HM Treasury have published guidance ‘Accounting for PPP
arrangements, including PFI, under IFRS’ in chapter six of the
Financial Reporting Manual (FReM) that is available at www.financialreporting.gov.uk. The guidance will support the NHS to determine
journal entries associated with their PFI schemes in order to restate
their 2008/09 opening balances.
5. The IFRS and PFI/LIFT Position Statement published on the Finman
website in October 2008 informed NHS bodies of the work being
undertaken by five accounting firms (“advisers”) to provide accounting
opinions for a sample of PFI/LIFT schemes for their host NHS bodies.
Annexe B to the Position Statement also provided a list of information
required to help NHS bodies develop accounting treatment for their
PFI/LIFT schemes.
6. Emerging results will support the Department to develop more detailed
accounting guidance for health PFI and NHS LIFT projects in due
course that will supersede these bulletins and support the NHS in
restating their 2008/09 accounts and account for future periods on an
IFRS basis. Whilst we will endeavour to provide as much guidance as
possible resulting from this ongoing work, it remains the responsibility
of each NHS body to form a view on how to account for its own
transactions.
Contents
7. This first bulletin covers the following topics:
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High level PFI conclusions;
Restatement of the opening balance sheet;
Estimating service cost elements by obtaining information from the
operator;
Initial measurement of PFI assets;
Modern equivalent assets;
Retained estate;
Accounting for Lifecycle; and
Lift – update.
High level PFI conclusions
8. The conclusion reached by advisers reviewing a sample of schemes is
that infrastructure assets associated with PFI schemes will fall to be
recognised on NHS balance sheets. This is based on the application
of IFRIC 12 “Service Concession arrangements”. As PFI contracts are
standardised it is expected that there will be very few, if any,
exceptions to this rule. Further details on the application of IFRIC 12
can be found in the Financial Reporting Manual (www.financialreporting.gov.uk).
Restatement of the opening balance sheet
9. NHS bodies will need to apply the concept of retrospective application
when restating their opening balance sheet (1 April 2008) under IFRS.
Further guidance on retrospective application is available in IFRS 1
’First-time Adoption of International Financial reporting standards’ and
in Annex C to ‘Opening Balance Sheet requirements for NHS bodies’
(available in the International Financial Reporting Standards section of
www.info.doh.gov.uk/doh/finman.nsf). Retrospective application will
require the NHS to account for health PFI projects as though the IFRS
policies had always applied.
10. In order to restate the opening balance sheet under IFRS NHS
organisations will need to:
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Reverse all previous PFI journal entries applied under UK GAAP;
Apply IFRS accounting for health PFI from the commencement of
the contract as if IFRS based policies had always applied.
11. Reversals may include journals relating to:
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Property and asset transfers from NHS bodies to the project
company;
All advance/bullet payments;
Trust incurred development costs;
Residual Interest; and
Unitary Payments
12. IFRS accounting treatment relevant to health PFI projects is detailed in
chapter 6 of the Financial Reporting Manual (FReM).
Estimating service cost elements by obtaining information from the
operator
13. Where infrastructure and service elements of a Unitary Payment
stream cannot be distinguished (i.e. currently classified as nonseparable contracts) these elements will need to be separated using
estimation techniques. This is likely to be the case for most PFI
infrastructure assets, which are currently accounted for as off-balance
sheet.
14. Initially, the service elements of the Unitary Charge may be estimated
at the commencement of the lease by obtaining information from
Project Co (“the operator”). This information may also be extracted
from the project financial model. Relevant figures include FM costs,
SPV operating costs, operator’s margin/IRR and lifecycle costs (where
lifecycle costs are deemed to be revenue in nature). The result is the
deemed “service charge”.
15. Where contracts are separable, i.e. the service elements are
identifiable, NHS trusts do not need to estimate the “service charge”.
Initial measurement of PFI assets
16. Once services have been identified/estimated, the remainder of the
Unitary Charge relates to the infrastructure assets, and includes both
capital and interest costs. At the time the assets come into use, the
NHS grantor shall recognise infrastructure assets and liabilities in their
statements of financial position at amounts equal to their fair value.
17. Fair value is the amount for which the asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm’s
length transaction.
18. The majority of advisers, who are providing an opinion on the PFI
projects being monitored, advise that construction costs outlined in the
Project Co financial model form a sound basis to estimate the fair value
for initial recognition. A corresponding liability is recognised at the
same time.
19. Having identified the cash flows associated with the infrastructure
assets and the value of these infrastructure assets and offsetting
liability it is then possible to determine the interest rate implicit in the
arrangement. This is the discount rate that, when applied to the
infrastructure cash flows. results in a present value of the minimum
lease payments equal to the fair value of the assets and offsetting
liability at initial recognition. Therefore, it is always likely to be
practicable to determine the implicit interest rate for PFI projects.
20. Following initial recognition of assets, they should be treated in the
same way as all other assets of their type. This includes component
accounting, impairment recognition, depreciation and revaluation
policy.
Modern Equivalent Assets (MEA)
21. Following the initial recognition of PFI property assets, they will
subsequently need to adhere to the HM Treasury requirement to value
property assets on a MEA basis by 1 April 2010. This will require a full
revaluation in either 2008/09 or 2009/10.
22. A formal valuation should be undertaken where possible as at 1 April
2008 so that the opening comparative balances are up-to date,
especially for projects that became operational several years ago. A
trust’s approach to subsequent valuation of PFI assets will need to be
in line with trust policy for all other assets of the same class. Further
guidance on the basis of revaluation can be found at
www.info.doh.gov.uk/doh/finman.nsf.
Retained Estate
23. Existing trust estate that was transferred to Project Co as part of the
PFI contract and derecognised under UK GAAP should be disclosed by
the NHS under IFRS as though the assets had always remained in
trust ownership.
Accounting for Lifecycle
24. The Unitary Charge includes an element to cover the lifecycle
replacement of infrastructure components for lifecycle. The occurrence
and value of lifecycle events are not spread uniformly across the life of
PFI arrangements. Nor can the actual timing of such events be
predicted at the outset. What is known at the outset is the planned
lifecycle programme including the planned enhancement/replacement
of major components of an asset and the cost contractually committed
to the planned activity. Project Co meets these costs through the build
up of a lifecycle reserve. The risk that lifecycle costs exceed planned
lifecycle costs is a Project Co risk.
25. The advisers have outlined the following two approaches that can be
used to account for lifecycle costs;
26. It may be adequate to expense lifecycle costs as incurred where the
lifecycle costs can be argued to simply reflect the risk of Project Co
keeping the assets in the condition contractually required. This is
analogous to an insurance service. Differences between carrying
asset values and the actual asset base would be recognised in the
value of the fixed asset following a revaluation process.
27. Alternatively, when a lifecycle event takes place that
enhances/replaces assets and failure to disclose the enhanced/new
assets would materially misstate trust accounts the enhanced/replaced
assets associated with the lifecycle event may need to be accounted
for discretely/separately.
28. To account for such lifecycle events a trust would have to build up a
prepayment reflecting the planned lifecycle cost. This reflects Project
Co building up a lifecycle reserve. When the lifecycle event occurs the
prepayment would be credited with the value of the lifecycle event and
the asset recognised at its fair value and subsequently accounted for in
the same way as other assets of its type. The prepayment will be built
up reflecting the planned and contractually committed cost of the
lifecycle programme such that material variations form this reflecting
the Project Co risk are separately identified as reserve balances and/or
the prepayment carrying value compared with that planned..
29. Each year’s prepayment accrued relating to lifecycle is subtracted from
that year’s unitary payment and hence the service payment is
separated from the infrastructure related payments.
30. Aside from the additional accounting entries and estimates the latter
method would require, there are questions around what happens to the
prepayment when planned lifecycle does not occur as scheduled.
31. In considering the most appropriate method, apart from materiality,
NHS bodies should bear in mind the amount of work and estimation
involved and the ultimate benefit that would be derived to the reader by
his/her enhanced understanding of the accounts. Any approach that is
proposed needs to be agreed with external auditors.
32. Where a lifecycle event is revenue in nature the cost should be
expensed as incurred.
Lift Update
33. Draft guidance, ‘Accounting for NHS LIFT under IFRS’, has been
developed by the Department of Health and is currently out for
consultation. It is hoped that the guidance can be issued to the NHS in
due course once the consultation period has ended.