IFRS and PFI/PPP
Questions and Answers
Q1: Are all PFI infrastructure assets going to appear on trust balance sheets as a
result of IFRS adoption?
A: Very probably, yes. When applying the new accounting rules most infrastructure
assets will have to be recognised on NHS balance sheets. The IASB have not issued a
standard on accounting for Service Concessions by the grantor (public sector bodies).
IFRIC 12 “Service Concession Arrangements” provides guidance to operators (private
sector partners) on how to account for service concession arrangement. The standard
states that infrastructure assets should not be recognised by the operator if the grantor
controls or regulates the services and price, the grantor controls the residual interest in
the assets(s), and the assets are constructed or acquired for the purpose of the contract.
HMT have introduced a chapter in their FReM on IFRIC 12 which states that if the
aforementioned conditions are met or if the operator already held the asset, the
contract is a service concession within the meaning of IFRIC 12 and the grantor
should recognise the infrastructure asset on their balance sheet. Further guidance is
available from finman website at http://www.info.doh.gov.uk/doh/finman.nsf
and HMT FReM website www.financial-reporting.gov.uk
Q2: What is an infrastructure asset?
A: Unfortunately, there is no universally accepted accounting definition of
infrastructure assets, although they usually display one or more of the following
characteristics:
i.
ii.
iii.
iv.
they are part of a system or network;
they are specialised in nature and do not have alternative uses;
they are immovable; and
they may be subject to constraints on disposal.
In practice, these are likely to be non current assets such as buildings, plant,
machinery, equipment, etc. NHS bodies will need to review assets to determine
whether they are infrastructure assets. Further guidance and examples of
infrastructure assets can be found in paragraph 6.2.30 of the IFRS based FReM at
www.financial-reporting.gov.uk
Q3: How is the accounting for NHS LIFT schemes going to be affected by IFRS?
A: It is not currently certain how NHS LIFT Leaseplus Agreements will be accounted
for under IFRS. Although leases of LIFT buildings are substantially similar to
conventional property leases, which would generally be off balance sheet under IFRS
accounting rules, there are some aspects of LIFT leases which may affect this
analysis. These include the residual value sharing arrangements at the end of the
lease, the nature of the buildings (more complex /specialist buildings which are not
common in LIFT are more likely to be on balance sheet) and whether the range of
services associated with the lease contract differ materially from a conventional
property lease. We are currently reviewing detailed analysis from external accounting
firms to achieve a clearer consensus on the likely accounting classification in order to
help PCTs in their analysis.
Further detailed guidance will be issued to the NHS once the work with the
accounting firms has been completed.
Q4: What about Equipment (Managed Equipment Service) and other PFI assets.
A: IFRIC 12 deals with infrastructure assets only. Equipment and other assets,
deemed to be non infrastructure, included within PFI schemes which are provided by
the private sector partner and paid for via the unitary charge are not covered by the
standard. The FReM states that issues not addressed specifically by their IFRIC 12
guidance should be resolved by reference to other IFRS. The other standards
applicable are IAS 16 (Property, Plant and Equipment), IAS 17 (Leases), and IFRIC
4 (Determining whether an arrangement contains a lease). The latter requires you to
look at service contracts that are not formally described or recognised as leases to
ascertain if in fact a lease exists. If it does then it should be accounted for
appropriately. NHS bodies will need to evaluate each contract and piece of
equipment on a contract-by-contract basis to evaluate whether equipment (such as
MRI scanners and other big ticket items within PFI contracts) are lease agreements
rather than service contracts. Further guidance can be found on the finamn website at
http://www.info.doh.gov.uk/doh/finman.nsf and HMT FReM website at
www.financial-reporting.gov.uk.
Q5: When do I need to adopt IFRS?
A: The NHS will adopt IFRS for the financial year 2009/10 onwards and Treasury
Technical Note1 (Revised), How to account for PFI transactions, will be withdrawn at
the same time. However, 2008/9 accounts will need to be restated on an IFRS basis.
In addition, Trusts will as part of their budget-setting process for 2009/10 need to
forecast their 2009/10 net-assets on an IFRS basis, so that they can ensure that they
have made the correct allowance for capital charge expenditure. As part of their
budget setting, they will also need to consider how the unitary payment should be
accounted for under IFRS.
NHS bodies will be required to submit a restated April 08 balance sheet to DH and the
Audit Commission by 31 December 2008. This will be based on transitional balances
as at 1 April 2008. A further restatement exercise will be undertaken by NHS bodies
in the Summer of 2009 following the statutory audit of the 2008/9 accounts.
Q6: At what stage (after contract signature, during construction, or upon
completion of construction) do we bring our PFI infrastructure asset onto our
balance sheet?
A: As construction risk lies with the operator, the infrastructure asset should be
brought onto your balance sheet when the asset first comes into use. This usually
coincides with the unitary charge becoming payable for services provided from the
infrastructure asset. Schemes where phases are completed should be incorporated
onto your balance sheet as and when each phase comes into use. For complex multi
phased schemes, the treatment and valuations should be discussed in advance with
your external auditors.
HM Treasury may introduce different timing rules for public expenditure purposes.
Q7: How do we value our PFI infrastructure assets?
A: The valuation methodology will depend on whether the contract is separable
between the service element, interest charge and the infrastructure asset. If it is
separable, the asset will be measured as under IAS 17 (Leases). This will require you
to determine the inherent (or implicit) interest rate in the lease
Where the contract is not separable the service element of the payment must be
estimated, which could be achieved by obtaining information from the operator or
using the fair value approach. Guidance on how to calculate the component parts
using the annuity rate is available on the FReM website. In practice, it is likely that
the FV approach will be preferred rather than referral to the operator. The fair value
of the asset determines the amount to be recorded as an asset with an offsetting
contract liability. The total unitary charge is then divided into three: repayment of the
capital element of the contract obligation and the interest expense on it (using the
interest rate implicit in the contract), with the remainder deemed to relate to the
service charge. In determining the interest rate implicit in the contract, the FReM
states you should use the risk-free market rate at the time the contract was signed. In
practice there is flexibility to use a more appropriate rate which reflects the source of
the borrowing. DH and Monitor are considering this and further guidance will be
issued in due course.
Under either approach, the grantor will recognise a liability on their balance sheet for
the capital value of the contract, which excludes the interest charge and service
elements (which are expensed). Further guidance and details on how to obtain the
risk-free market rate can be found on the HMT FReM website at www.financialreporting.gov.uk
Q8: What disclosures need to be made for my PFI scheme?
A: Guidance on disclosures can be found in chapter 5 of the FReM. There are no
differences to the current disclosure requirements. Further guidance can be found on
the HMT FReM website at www.financial-reporting.gov.uk
Q9: We have an operational PFI scheme how do we bring it onto our balance
sheet?
A: The asset should be initially recorded at the opening balance sheet date using the
valuation at that date. The asset should be measured in the same way as other noncurrent assets of that type. The liability should be measured at its fair value at the
balance sheet date, which is normally the outstanding liability in respect of the
property (excluding the interest and service elements) discounted by the interest rate
implicit in the contract. The difference between the FV of the asset and the FV of the
liability is treated as a PPA if material.
The Department is currently monitoring the development of detailed accounting
advice that a number of NHS organisation are commissioning. In due course, where
possible we will look to issue supporting guidance for the NHS.
Q10. Do I need to obtain a new audit view for my PFI/PPP/LIFT project?
A: A new audit view in respect of the accounting treatment for the majority of these
schemes is unnecessary. The presumption here is that PFI-provided assets will be onbalance sheet. In such circumstances it is not necessary to commission new
accounting opinions. Where this change in accounting treatment is required there will
be a considerable amount of work for the organisation affected to determine the
detailed implications resulting from such a change. The position on LIFT is less clear
and, as stated in Q3, we need to complete further work with the accounting
profession.
The Department of Health will produce detailed accounting implications from the
introduction of IFRS and where possible we will look to issue further guidance for the
NHS. In the absence of this guidance, the NHS needs to prepare themselves for the
introduction of IFRS and in particular, the potential impact of any PFI projects.
The work is due to be completed this Autumn..
Q11: We are in the process of procuring our PFI hospital/LIFT building – how
do we demonstrate affordability in our business case.
A: For PFI schemes, your affordability model should assume the infrastructure asset is
on the trust’s balance sheet. This will have revenue implications and mean the capital
value of the scheme will score against capital DEL totals. At present, how these
pressures will be managed has yet to be determined.
Capital resources will need to be committed to cover the value of non-current assets
coming into use, after 1st April 2009, as a result of PFI or lease transactions judged to
be finance leases. NHS Trusts and PCTs will need to estimate the value of such noncurrent assets and corresponding liabilities. The value of the non-current assets that
will come into use after 1st April 2009 will need to be included in NHS Trusts and
PCTs capital expenditure forecasts for 2009-10 and subsequent years that are
submitted to the Department as part of the annual financial planning process.
Monitor will continue to assess PFI proposals for FTs in accordance with “Roles
and responsibilities in the approval of NHS foundation trust PFI
schemes”, which sets out the relative responsibilities of each of the
parties involved in prospective NHS foundation trust PFI schemes. The
Department of Health's role will continue to include the issue of a Deed
of Safeguard where required.
Schemes that are in procurement are being dealt with on a scheme by scheme basis.
For Schemes that are not yet in procurement, at the OBC approval stage DH will form
a view about the level of PFI investment that is affordable, and will allow schemes to
proceed to procurement if they have reasonable certainty of sign-off.
With regard to any data collection exercise, if required, this will be
handled by Monitor on behalf of DH.
In respect of LIFT business cases, the assessment of affordability will also be partly
determined by the accounting classification. The Department of Health and
Community Health Partnerships are monitoring the development of detailed
accounting advice that a number of PCTs are commissioning in respect of a sample of
NHS LIFT projects. In due course where possible we will look to issue supporting
guidance for the NHS. In the meantime queries should be referred to DH.
Q12: Will the liabilities count as borrowing in calculating performance against
prudential borrowing limits?
A: Monitor is currently considering how to reflect the change in treatment of PFI
projects in its Prudential Borrowing Code. It recognises that it will need to change the
calculation of Borrowing Limits to reflect the change in accounting treatment, and
Monitor will be consulting on proposed changes in due course.
The borrowing arrangement applying to NHS trusts will also be adjusted to reflect the
changes in accounting treatment.
Q13: Is the Department going to fund the revenue implications of bringing PFI
infrastructure assets on balance sheet.
A: At present, how these pressures will be managed has yet to be determined but
instructions will be issued shortly.
Q14: We do not have the capital resource to bring the asset onto our balance
sheet. Is the department going to provide resource cover?
A: Again, instructions on how trusts should manage this will be provided shortly. In
the meantime, trusts should contact the SHA or DH for advice.
Q15: Do we impair/revalue PFI infrastructure assets?
A: PFI infrastructure assets should be revalued/impaired like other trust assets in line
with trust revaluation policies.
Q16: If project assets are to be recognised on the publics sectors balance sheet
does this mean public sector procurement costs can be capitalised?
A: The NHS bodies should follow instructions set out under IFRS applicable to the
assets that will be disclosed. Any such proposed treatment should be discussed with
external auditors
Q17: How do we account for costs for enabling works?
A: Assuming the expenditure meets the criteria for enabling works (if in doubt discuss
with your Auditor), these should be capitalised at cost similar to other trust assets and
impaired/revalued in line with other trust assets..
Q18: How do we account for enhancements/additions to PFI on balance sheet
assets.
A: This depends on how these were financed. If they were financed by the trust they
should be recorded as a trust asset (i.e. capitalising the cost to date). If financed via
the Unitary Charge then it is likely that the recognition of the asset will be matched
with an increased finance lease liability. This treatment would be applicable following
both replacement of assets through planned and unplanned lifecycle and variations to
existing contracts if material.
Q19: How do we account for land or other assets we have provided to the
operator as part of the PFI deal?
A: The trust should derecognise the asset provided to the operator (and not used in the
contract) and recognise any consideration received. If the consideration is in the form
of reduced future payments this should be recognised as a prepayment and discounted
if material.
The accounting treatment of land leased to the operator on which the hospital is built
does not change.
Q20: I understand there are new requirements around the accounting for
Financial Instruments. Will this affect how I account for my PFI scheme?
A: New accounting standards applicable to Financial Instrument are relevant for the
NHS in preparation of their 2008/09 accounts. The NHS will therefore need to follow
this standard in order to establish treatment of any financial instruments. The specific
issue of concern for organisations with PFI schemes is whether they will need to
disclose any derivatives that are embedded in a PFI scheme.
This will require an assessment of existing PFI arrangements. NHS bodies have been
asked to make an initial estimate of the impact of Financial Instruments (FRS 26) in
their Quarter 1 monitoring returns. More detailed information will collected in Q2
monitoring returns in November 2008.
An assessment of changes in accounting treatment associated with a PFI scheme
required under IFRS should include considering whether this includes treatment
associated with any financial instruments. Further guidance and examples of Financial
Instruments can be found in chapter 9 of the IFRS based FReM.
http://www.financial-reporting.gov.uk
Q21. Does this mean I should pull my PFI/LIFT procurement?
A: No. Trusts facing this problem should consult either their SHA or DH.
Q.22. Does this mean LIFT will be equally affected?
A: This is still being determined. Trusts should consult either their SHA or DH.
Queries in relation to IFRS adoption should be addressed to your SHA Lead.