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					     Department of Health                                                                                       NHS Finance Manual



7: Strategic Health Authority IFRS Manual
For Accounts 2009/10
Contents

Introduction ............................................................................................................................... 3
Operating Cost Statement (SHA 01) ........................................................................................ 7
Note 2.1.1 - Revenue Resource Limit and Operational Financial Balance (SHA 01) ............... 7
Statement of Financial Position (SHA 02) ................................................................................ 8
Statement of Changes in Taxpayers‟ Equity (SHA 03) ............................................................. 9
Statement of Cash Flows (SHA 04) .......................................................................................... 9
Notes to the Accounts ............................................................................................................ 10
Note 1 - Accounting Policies ................................................................................................... 10
Note 2.1 - Financial performance targets ............................................................................... 11
Note 2.1.3 - Calculation of capital charges interest (SHA 05) ................................................. 11
Note 2.2 - Operating revenue (SHA 05) ................................................................................. 12
Note 2.2 - Appropriations in Aid included in operating income (SHA 05) ................................ 13
Note 2.3.1 - Programme Costs (SHA 05) ............................................................................... 13
Note 2.3.3 - Workforce Development Confederation cost (SHA 05) ....................................... 16
Note 2.4 - Operating Leases (SHA 05) ................................................................................... 16
Note 2.5.1 - Staff numbers and related costs (SHA 06).......................................................... 16
Note 2.5.2 - Average number of persons employed during the year (SHA 06) ....................... 17
Note 2.5.3 - Staff Sickness Absence (SHA 06) - not required for 2008/09 restatement ......... 18
Note 2.5.4 - Retirements due to ill health (SHA 06) ................................................................ 19
Note 2.3.2 - Strategic Health Authority management costs (SHA 06) .................................... 19
Note 2.6 - Better Payment Practice Code - measure of compliance (SHA 06) ....................... 19
Note 2.7 - Late Payment of Commercial Debts (Interest) Act 1998 (SHA 06) ....................... 20
Note 2.11 - Other Gains and Losses (SHA 07) ...................................................................... 20
Note 2.12 - Finance Costs and Finance Revenue (SHA 07) .................................................. 20
Note 3.2 - Property, Plant and Equipment (SHA08) ............................................................... 20
Note 3.1 - Intangible non-current assets (SHA 09) ................................................................. 22
Note 3.2.3 Analysis of Impairments and Reversals charged to Operating Costs (SHA 10) .... 22
Note 3.2.2 - Non-current assets held for sale (SHA 11) ......................................................... 24
Note 3.4 - Trade and other receivables (SHA11) ................................................................... 24
Movement in provisions for impairment of receivables (SHA 11) ........................................... 24
Non-Current assets held for sale period ended (SHA 11) ...................................................... 24
Cash and cash equivalents (SHA 11) ..................................................................................... 24
Note 10 - Intra Government and other balances (SHA11) ...................................................... 25
Note 3.5 - Trade and other payables (SHA12) ....................................................................... 25
Note 3.5.1 - Other financial liabilities (SHA 12)....................................................................... 25
Note 3.11 - Events after the reporting period (SHA 13) .......................................................... 26
Note 3.12 - Capital and other commitments (SHA 13)............................................................ 26
Note 3.7 - Provision for liabilities, charges and other contingencies (SHA 16) ....................... 27
Note 3.10 Contingencies (SHA21).......................................................................................... 28
Note 9 Financial assets and liabilities (SHA 17) ..................................................................... 28
Note 4.1 - Movement in Working Capital / Note 4.4 Reconciliation of Statement of Financial
Position to movement in working capital (SHA 18) ................................................................. 28
Reconciliation of cash drawings to Parliamentary Funding (SHA 18) ..................................... 29

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Note 5 - Losses and special payments (SHA 19) ................................................................... 29
Note 3.15 - Transfer of property, plant and equipment to DH (SHA 20) ................................. 29
Note 3.16 - Transfer of assets and liabilities to PCTs (SHA 20) ............................................. 30
Segmental Analysis (SHA21) ................................................................................................. 30
Note 3.3 - Analysis of Strategic Health Authority‟s gross capital expenditure to net capital
resource outturn (SHA 24) ...................................................................................................... 31
Note 11 First time adoption of IFRS ....................................................................................... 31
Note 6 - Related party transactions ........................................................................................ 32
Annex 1 - Pooled Budgets ...................................................................................................... 33
Annex 2 - Accounting for the European Union Greenhouse Gas Emissions Trading Scheme
 ............................................................................................................................................... 34
Annex 3 - Accounting for Defined Benefit Pension Schemes ................................................. 37
Annex 4 - Financial Instruments ............................................................................................. 41




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7        Strategic Health Authority IFRS forms completion

Introduction
Context of the chapter
7.1      The guidance in this chapter assumes knowledge of International Financial Reporting
         Standards (IFRS) and must be read together with:
                Chapter 3 Financial Reporting Requirements, which, in the second table, gives
                 guidance specific to the NHS on the application of IFRS; and
                Chapter 8 Proforma accounts, which give the standard accounting policies that
                 must be adopted by all bodies and the primary statements notes and disclosures
                 required under IFRS.

7.2      This draft is published in June 2009, revising the version dated December 2008.

Format of the chapter
7.3      The guidance in this chapter provides:
                reference to the international standards and interpretations that directly apply to
                 each subject
                additional guidance considered necessary for NHS bodies, over and above that
                 given in chapter 3 and the proforma accounts, and
                additional guidance specifically for the Financial Monitoring and Accounts (FMA)
                 forms.

7.4      For some subjects, short guidance notes on the subject as a whole are given in the
         Annex to this chapter. Cross-references are provided in the body of the chapter.

Financial statements (Annual Accounts) and summarisation schedules
7.5      DH prepares summarised accounts for each type of NHS body. The summarisation
         schedules for this process are included within the Financial Monitoring and Accounts
         series of forms (SHA01 etc). This manual provides guidance for the completion of
         those forms. DH provides spreadsheet versions of the proforma accounts, and this is
         populated to some extent automatically on completion of the FMA forms. The FMA
         forms format cannot be amended and the figures in the FMA forms must be consistent
         with those in the financial statements The financial statements should be modified to:
         - Delete lines or entire notes where they are inapplicable in the current and prior years
         - Insert extra lines/notes to give additional information where this is considered
         appropriate for public accountability
         - Include narrative explanations of circumstances specific to the SHA.


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7.6      Indeed, it is expected that the annual accounts format will be extensively edited by the
         SHA, in view of the fact that the accounts are very much “owned” by the SHA and are a
         key component of public accountability. SHAs will wish to ensure that their individual
         accounts ensure that users are given a clear understanding of the SHA‟s activities.

Basic terms
7.7      On the move to international standards, some basic terms change, as follows:

                             UK GAAP                                    IFRS

              Balance Sheet                          Statement of Financial Position

              Fixed                                  Non-current

              Stocks                                 Inventories

              Debtors                                Receivables

              Creditors                              Payables

              Income and Expenditure Reserve         Retained Earnings (Trusts)
                                                     General Fund (PCTs, SHAs)

7.8      The IFRS terms are used throughout this manual.

Consistency - year to year
7.9      Throughout the Annual Accounts, opening balances must equal the closing balances of
         the previous year, unless a balance is the subject of a formal prior-period adjustment.
         The opening balances on SHA FMA forms must equal the prior-year closing balances,
         whether or not a prior-period adjustment has been made in Annual Accounts.

Gross accounting
7.10 Generally, revenue and expenditure should be recorded gross. The exception to this is
     when a member of staff is employed jointly by the SHA and another NHS body, that is,
     part-time for each. In this case, only the element of the salary relating to the SHA
     should be recorded as expenditure. However, staff seconded to another organisation
     but still employed by the SHA should be accounted for on a gross basis. Where a SHA
     works for another NHS body on an agency basis, for example, processing invoices, the
     transactions it processes on behalf of the other body should not be reflected in the
     SHA‟s accounts. Where the SHA is paid for providing the service, that payment should
     be reflected in its accounts.

Judgement
7.11 In many instances judgement must be applied in the preparation of financial
     statements. DH cannot help with that responsibility. Preparers of accounts should
     discuss proposals on material matters of judgement with their statutory auditor as soon
     as possible, to ascertain any potential impact on the audit opinion.

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7.12 One such matter is that of materiality. IAS 8 Accounting Policies, changes in
     accounting estimates and errors makes it clear that accounting policies set out in IFRS
     need not be developed or applied if the impact of applying them would be immaterial.
     IAS 1 Presentation of Financial Statements says that specific disclosure requirements
     set out in individual standards or interpretations need not be satisfied if the information
     is not material. Paragraph 30 of the Framework for the Preparation and Presentation of
     Financial Statements says “information is material if its omission or misstatement could
     influence the economic decisions of users”. Materiality depends on the size and nature
     of the omission or misstatement judged in the surrounding circumstances. The size or
     nature of the item, or a combination of both, could be the determining factor. This
     assessment of materiality is unchanged from UK GAAP. IAS 8 also notes that “it is
     inappropriate to make, or leave uncorrected, immaterial departures from IFRSs to
     achieve a particular presentation of an entity‟s financial position, performance or cash
     flows”. Where disclosure of material information is appropriate, you should be clear
     and succinct.

7.13 The Framework also says (at paragraph 44) “the benefits derived from information
     should exceed the cost of providing it”. This is also a matter of judgement.

Consultation with DH
7.14 There are particular decision points when directors of finance are required to consult
     with the NHS Financial Controller‟s office at DH. The decision points are proposals to:
               adopt a novel or contentious accounting policy (which is not set out in this
                manual) to reflect their specific circumstances
               change asset lives significantly (this would be if asset lives are changed by more
                than 10% unless the asset is planned for disposal)
               value the reproduction of an existing asset rather than a modern equivalent
               use significant alternative accounting treatments for financial instruments
               alter the balance on „other reserves‟ for other than routine transactions.


Completion of Financial Monitoring and Accounting Forms (FMA forms)
               The FMA forms are marked "£000" or "£"
               Figures must be entered in pounds thousands or in pounds, respectively
               Figures must be rounded to the nearest whole figure (i.e. do not enter decimal
                parts of a figure), and
               Where no values are required, cells should be left blank or a figure “0” inserted.
                Do not write in “NIL” or “N/A”

Freetext
7.15 The freetext sheet contained in the FMA file is used to provide additional information on
     items included in the accounts.

7.16 The following will always require details to be included in the freetext sheet.
               Operating expenses

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                o Other auditor‟s remuneration - provide details of any significant „other auditors
                  remuneration‟
                o Other – provide details where „other‟ is greater than 10% of total operating
                  expenses
                 Property, Plant and equipment – the reason for reversal of impairments and if
                  material, the financial effect of any changes to the economic life or residual
                  value
                 PFI – provide details of bandings if higher than in shown in the relevant FMA
                  form (an entry here is unlikely for SHAs)
                 Events after the reporting period – provide details
                 Contingent liabilities/assets – provide details
                 Third Party Assets - any third party assets should be disclosed
                 Losses and Special Payments - details of all cases over £250,000 should be
                  disclosed. Include a summary of the case details and the total value of the
                  case. In the case of fraud, whether a prosecution has been instigated and any
                  amounts that have been recovered
                 Receivable / Payable balances and Income and Expenditure figures – reason for
                  adjustment to balances
                 For any movements in other reserves
                 Disputed items – an analysis breaking it down by body

7.17 Additional space is provided to allow SHAs to add information that may be helpful for
     the auditors and DH in respect of unusual or material entries in the FMAs.


Prior Period Adjustments (PPA)
7.18 Exceptionally PPAs may be required to present a true and fair view. In preparing
     annual accounts, IAS 8 must be followed when correcting material prior period errors.
     For FMA forms however, SHAs are not permitted to deal with material prior period
     errors by restatement. Treasury budgeting requires that resource consumption
     misstated in previous periods is taken into account in the current period, impacting
     upon the current period performance against the Resource Limit. Where a PPA is
     recognised in the accounts, an additional line entry must be added to the Operating
     Cost Statement and the note on Financial Performance to reconcile the outturn to that
     recorded on FMA forms (it is the FMA net operating cost that determines performance
     against the Resource Limit).

7.19 Accounting policies are determined nationally by DH therefore you will be advised by
     DH of any prior period adjustment for a change in accounting policy.

IAS19 Employee Benefits disclosures for pension schemes other than NHS Pensions
Scheme
7.20 Some SHAs may have staff who are members of a pension scheme other than the
     NHS Pension Scheme e.g. Local Government schemes. Further disclosures will be

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       required for these schemes where the assets/liabilities of the scheme can be
       separately identified.

7.21 Where this is the case, the SHA should refer to the annex to this chapter (and IAS 19)
     to understand the necessary disclosures and must establish a dialogue with the Local
     Authority and their actuary to ensure that the necessary information is available.

Deaneries
7.22 Deaneries are not statutory corporate bodies and an SHA that hosts a Deanery must
     account for the income and expenditure of the Deanery within its own accounts, using
     gross accounting principles. Because of the close operational relationship between
     Deaneries and WDCs the income and expenditure of the Deanery may form part of the
     WDC segment (if this is separately accounted for under segmental analysis).


Operating Cost Statement (SHA 01)
7.23   The relevant standard is IAS 1 Presentation of Financial Statements.

7.24 The Operating Cost Statement (OCS) summarises, on an accruals basis, the SHAs net
     operating costs. The accounts forms do not show lines for exceptional items by
     default, Authorities must always consider the need to disclose such income and
     expenditure in the OCS and Statement of Cash Flows, adding relevant lines and
     explanations as appropriate.

Profit/Loss on the disposal of property, plant and equipment
7.25 An interpretation of IAS 1 permitted by the FReM (5.4.11) is that profit on disposal of an
     item of property, plant and equipment can be accounted for as negative expenditure to
     the extent that the profit represents a final adjustment of depreciation (shown in Note
     2.3.1 on SHA05 against “depreciation”). Where this is not the case, profits should be
     accounted for as income at Note 2.2 on SHA 05.

7.26 Further detail on the content of the various lines is given below in the sections on
     individual notes that feed into the Operating Cost Statement.


Note 2.1.1 - Revenue Resource Limit and Operational Financial Balance
(SHA 01)
7.27 The achievement of operational financial balance is an administrative and not a
     statutory duty placed on all SHAs. This is defined as not exceeding their resource limit
     when unplanned resource support is excluded from the resource limit. Operational
     financial balance (OFB) should be achieved every year.

7.28 This note also shows how the SHA has met is own statutory duty and remained within
     its Resource Limit (RL). In order to achieve this duty the net resource outturn will be
     less than the revenue resource limit.

7.29 Total Net operating cost: equals the figure on the OCS.


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7.30 Prior period adjustments: this line should be inserted in the Accounts format only
     where an adjustment in respect of a material error in the prior period is required. There
     is no equivalent line in the FMA forms as PPAs are treated as in-year transactions. In
     the Accounts note, this line has the effect of adding back the PPA so as to bring the
     Accounts figure for “operating costs less non-discretionary expenditure” into agreement
     with that shown in the FMA forms.

7.31 Under / (over) spend against Revenue Resource Limit (RRL): This represents the
     SHA‟s performance against the RRL for the year. Use of the “PPA” line in the Accounts
     (above) brings the Accounts and FMA figures at this point into agreement.

7.32 SHAs should provide a narrative disclosure on freetext to explain the reasons for any
     failure to achieve OFB and set out the steps to be taken to ensure the achievement of
     the duty in future years.


Statement of Financial Position (SHA 02)
7.33   The relevant standard is IAS 1 Presentation of Financial Statements.

7.34 In the annual accounts, the format in the proforma accounts must be followed, although
     where balances are „nil‟ for each year, lines may be deleted. Further detail on the
     content of various lines is given below in the sections on individual notes that feed into
     the Statement of Financial Position.

7.35 No provision is made in the summarisation schedules to report balances or transactions
     in the Government Grant Reserve (GGR). This is because it is unlikely that SHAs will
     have any material balances in this category. If any do exist, SHAs should include GGR
     balances with the general fund, and disclose the split between the two on the free-text
     sheet. In the Annual Accounts, the GGR should be separately disclosed.

7.36 Assets and liabilities are reported as current and non-current on the Statement of
     Financial Position. IAS1 provides the following definitions:
       „An Asset shall be classified as current when it satisfies any of the following criteria:
       - it is expected to be realised in, or is intended for sale or consumption in, the entity‟s
          normal operating cycle
       - it is held primarily for the purpose of being traded
       - it is expected to be realised within twelve months after the Statement of Financial
        Position date, or
       - it is cash or a cash equivalent unless it is restricted from being exchanged or used to
       settle a liability for at least twelve months after the Statement of Financial Position
       date date.

            All other assets shall be classified as non-current‟

        „A liability shall be classified as current when it satisfies any of the following criteria:
                it is expected to be settled in the entity‟s normal operating cycle
                it is held primarily for the purpose of being traded

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                 it is due to be settled within twelve months after the Statement of Financial
                  Position date, or
                 the entity does not have an unconditional right to defer settlement of the liability
                  for at least twelve months after the Statement of Financial Position date.

                All other liabilities shall be classified as „non-current.‟

7.37 IAS1 (para 52) also requires that where a balance sheet asset or liability line item
     combines amounts that fall due within one years and amounts that fall due after more
     than one year, the split must be separately disclosed in the notes. There may be
     instances where assets/liabilities move between non-current and current, such as
     provisions that become payable within one year.

7.38 Under IAS 7, cash comprises “cash on hand and demand deposits” and cash
     equivalents are “short-term, highly liquid investments that are readily convertible to
     known amounts of cash and which are subject to an insignificant risk of changes in
     value”. Therefore, cash and cash equivalents on the Statement of Financial Position
     could comprise cash at bank and in hand plus short term investments, although it is
     unlikely that SHAs would hold these.


Statement of Changes in Taxpayers’ Equity (SHA 03)
7.39 The line in the Accounts format for “prior period adjustments” is not available in SHA03
     as PPAs are not permitted in the Summarised Accounts, except under clearly defined
     circumstances and at Treasury discretion.

7.40 Net gain/(loss) on revaluation of property, plant or equipment, Net gain/(loss) on
     revaluation of intangible non-current assets: These lines report all revaluations,
     impairments or indexation (if applied locally) that are not applied to the OCS.

7.41 Release of Reserves to the OCS: Typically, transfers from the government grant
     reserve in respect of depreciation, revaluation and disposal will be recorded here.

7.42 Transfers between reserves: Transfers from the revaluation reserve to the general
     fund (e.g. in respect of depreciation charges in excess of historic cost depreciation) will
     also be shown here. Other transactions to be posted here include the release of any
     revaluation reserve balance to the General Fund.

7.43 The taxpayers‟ equity balance will equal the corresponding figures shown on the
     Statement of Financial Position.


Statement of Cash Flows (SHA 04)
7.44 The relevant standard is IAS 7 Statement of Cash Flows. For foreign exchange
     entries, the relevant standard is IAS 21 The Effects of Changes in Foreign Exchange
     Rates.

7.45 The cash flows reported under IAS 7 relate to movements in cash and cash equivalents
     (short-term highly-liquid investments that are readily converted into known amounts of

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       cash and subject to insignificant risk of changes in value, which is assumed if the
       instrument‟s maturity is 90 days or less).

7.46 Cash transferred (to) / from other NHS bodies: This line reports cash movements
     where the other leg of the entry is included in “transfers (to)/from other NHS bodies” in
     the General Fund and reported in the Statement of Changes in Taxpayers‟ Equity. This
     line is not intended to be used for routine “trading” transactions, but permits one-off
     transfers of cash (e.g. from a dissolved NHS trust or restructurings within Resource
     Account bodies, including DH, to be recorded). Where an entry is recorded here and in
     SHA 03, a free-text comment should be made to explain the circumstances and record
     the name of the counter-party.

7.47 This line cannot be used to record loans (as SHAs have no powers to make or receive
     such loans) or brokerage.

Foreign currency exchange differences, gains and losses
7.48 IAS 7 requires any foreign exchange gains and losses to be shown on the Statement of
      Cash Flows. The definitions of cash and cash equivalents include any such items that
      are denominated in foreign currencies. Exchange rate gains and losses that go
      through the Operating Cost Statement include those on settled and unsettled
      transactions, typically on monetary assets such as receivables and payables. These
      gains and losses are non-cash flow items, and therefore should be excluded from the
      figure in the Statement of Cash Flows note. This is usually done via an addition of
      losses, deduction of gains in the cash flow from operating activities section of the
      Statement of Cash Flows. However, IAS 7 requires the effect of exchange rate
      changes on cash and cash equivalents held or due in foreign currency to be presented
      on the face of the Statement of Cash Flows in order to reconcile the opening and
      closing cash and cash equivalent balances, notwithstanding the fact that such gains or
      losses are not cash flows [IAS 7 para 28].

7.49 IAS 21 The Effect of Changes in Foreign Exchange Rates is also relevant. As these
     will not be material at the summarised level, SHA 04 does not make provision for their
     disclosure. In the rare event that a SHA does have material currency translation gains
     and losses, an additional line should be added to the annual accounts as an
     adjustment below “net operating cost”.


Notes to the Accounts
Note 1 - Accounting Policies
7.50   The relevant standards are: IAS 1 Presentation of Financial Statements and IAS 8
       Accounting Policies, Changes in Accounting Estimates and Errors.

7.51 Strategic Health Authorities accounts must be produced to reflect the accounting
     policies given in Note 1 to the accounts. SHAs do not have the authority to amend
     these policies. These are the accounting policies directed by the Secretary of State
     and therefore represent the minimum level of disclosure that should be given. Where a
     policy has no material bearing on the SHA‟s activities in the current or comparative
     period then it should be excluded from the annual accounts.


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7.52 IAS 1 requires the presentation of a summary of accounting policies which discloses
     the measurement basis used in preparing financial statements and all other accounting
     policies that are significant to the understanding of financial statements. SHAs should
     disclose key sources of estimation uncertainty and judgements made in applying
     accounting policies.

Judgements
7.53 Certain management judgements made in the process of applying the accounting
     policies may have a significant impact on the amounts recognised in financial
     statements. Examples include:
               Whether substantially all the significant risks and rewards of ownership of financial
                assets and lease assets are transferred to or from other entities
               Whether, in substance, particular sales of goods or services are financing
                arrangements and therefore do not give rise to revenue in the hands of the seller
                or expenditure in the purchaser‟s statements
               Whether the substance of the relationship between the entity and a special
                purpose entity indicates that the special purpose entity is controlled by the entity.

Estimation
7.54 SHAs should disclose information about key sources of estimation uncertainty at the
     Statement of Financial Position date that have a significant risk of causing a material
     adjustment to the carrying amounts of assets and liabilities in the next financial year.
     Notes must give details of their nature and carrying amount at the Statement of
     Financial Position date.

7.55 The determination of the carrying values of some assets and liabilities may require
     estimation of the effects of future uncertain events. An example would be the
     estimation of the recoverable amount of plant, property and equipment in the absence
     of recently observed market prices.


Note 2.1 - Financial performance targets
7.56 These notes show how the SHA has performed against its financial performance
     targets using the criteria of the FMAs i.e. all local PPAs are treated as in-year
     expenditure for the purposes of measuring financial performance. In the 2009/10
     accounts (and forms), the 2008/09 comparators should not be restated to an IFRS
     basis. This is because financial performance in 2008/09 was measured on a UK GAAP
     basis and will not be re-opened.


Note 2.1.3 - Calculation of capital charges interest (SHA 05)

7.57 This note details the calculation of capital charge interest. It may also be included in
     the SHA‟s accounts.




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7.58 Opening and closing adjustments to the net relevant assets values are required to
     avoid distortion of the average net assets for the year. Although the basis of the
     calculation is (opening + closing balances)/2 is intended to be simple and provide a
     reasonable estimate, material acquisitions or disposals close to the period start/close
     would otherwise distort the average. SHAs should therefore use these adjustment
     lines to refine the averaging calculation. It is a fundamental principle however that
     where assets transfer from one NHS body to another (including DH) 12 months‟ worth
     capital charges must be charged in respect of the asset concerned. The situation
     should never arise where both parties exclude the asset from the adjusted closing
     balance calculation.

7.59 Opening Adjustments: These are adjustments for any capital purchases or disposals
     that take place close enough to the start of the year to be included or excluded in the
     cost of capital charge for the year. The figure will be positive for purchases or transfers
     in and negative for disposals or transfers out.

7.60 Closing Adjustments: These are adjustments for any capital purchases or disposals
     that take place close enough to the end of the year to be excluded or included in the
     cost of capital charge for the year. The figure will be negative for purchases or transfers
     in and positive for disposals or transfers out.

7.61 Cost of Capital Charge: The cost of capital charge for the year is calculated as 3.5%
     of the average relevant net assets figure.

7.62 Quasi Capital Charges: These are capital charges relating to non-operational retained
     estate that are accounted for by the SHA.

7.63 Retained Estate Capital Charges: These are the capital charges accounted for by the
     SHA relating to operational retained estate.


Note 2.2 - Operating revenue (SHA 05)
7.64 The relevant standard is: IAS18 Revenue

7.65 This note analyses operating revenue (i.e. income) between that from fees and charges
     to external customers, local authorities and other customers (which are in respect of the
     public sector, e.g. other NHS bodies). Rental income from operating leases must be
     separately identified.

7.66 All income from other Strategic Health Authorities, PCTs, NHS Trusts, other NHS
     bodies and the Department of Health (but not funding) must be included in „Other‟
     income.

7.67 Income should be recorded as follows:
               gross in the maincode 07 column
               income received from other Strategic Health Authorities analysed in the column
                headed maincode 10, will equal the figure on SHA23, maincode C, subcode 190.
                A list of SHAs can be found on SHA23a.



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               income received from other NHS bodies within the resource boundary in the
                column headed maincode 11, will equal the figure on SHA23, maincode C,
                subcode 150. A list of other NHS RAB bodies can be found on SHA23d, and
                PCTs can be found in Chapter 6
               income received from NHS bodies not within the resource boundary but within the
                Central Government Accounting boundary in the column headed maincode 12, will
                equal the figure on SHA23, maincode C, subcode 300 (entries will be rare). A list
                of NHS CGAs can be found on SHA22d
               income received from NHS bodies not within the RAB boundary or the CGA
                boundary but within WGA (Whole of Government Accounting) boundary in the
                columns headed maincode 13, will equal the figure on SHA23, maincode C,
                subcode 290. WGA bodies include NHS Foundation Trusts, NHS Trusts and the
                WGA SpHAs. A list of WGA SpHAs can be found on SHA22f, NHS Trusts and
                NHS Foundation Trusts can be found in chapter 6
               the total at maincode 300, i.e. the gross, must be more than or equal to the sum
                of maincodes 10. 11, 12 & 13.


Note 2.2 - Appropriations in Aid included in operating income (SHA 05)
7.68 The Total Appropriated-in-Aid at subcode 310 must agree to Note 2.2 of the annual
     accounts total Operating Income, Appropriated in Aid column. A full analysis is not
     required for summarisation schedules.

7.69 Appropriation in Aid is income arising from the provision of goods and services to non-
     NHS bodies, individuals, the private sector and donations. It excludes any income from
     NHS bodies, including NHS Trusts, PCTs, other SHAs and the Department of Health.

7.70 The SHA should use the same classifications as used for „miscellaneous income from
     outside the NHS‟ in monitoring forms. Where a difference arises between this and the
     figure reported on monitoring returns then the two figures and a brief explanation of the
     difference should be included on the freetext sheet.

7.71 Income received from PCTs, other SHAs, SpHAs, NDPBs and NHS Trusts for services
     provided to them, or from the Department of Health for trading activities (but not
     funding), should not be included as Appropriation in Aid. (This income will be analysed
     in Note 2.2 to the accounts as not Appropriated in Aid.)


Note 2.3.1 - Programme Costs (SHA 05)
7.72   The relevant standards are IAS 1 Presentation of Financial Statements (paragraph 99),
       and IFRS 7 Financial Instruments Disclosures (paragraph 20(e)).

7.73 The purpose of this note is to analyse the gross expenses of the Authority, by
     classification based on expenditure type for all services.

7.74 Expenditure should be recorded across the columns following the principles provided
     for operating income.


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7.75 Non-executive members’ remuneration: The entry here is the total of the
     remuneration of the Chairman and non-executive members of the authority. The
     employers‟ national insurance contributions for non-executive members should be
     included in other salaries and wages.

7.76 Other salaries and wages: The figure at this subcode includes NHS staff salaries and
     wages, employers‟ national insurance contributions, employers‟ pension contributions
     and agency costs attributable to the functions described above. It includes costs
     incurred on staff seconded into the SHA and any net costs of staff seconded out.

7.77 Consultancy services: Treasury requires (PES (2007) 08) data to be gathered on
     expenditure on professional services and consultancy. This subcode should record
     expenditure on the following professional services:
                          General Management Consultancy
                          Legal
                          Human Resources
                          Financial
                          IT Consultancy
                          Property Services/Estates
            where expenditure falls into the PES definition of consultancy.

7.78 Definition: There is a distinction between time limited/ad hoc consultancy assignments
     and those related to steady state/operations codifying and reporting expenditure on
     “consultancy” services. Therefore advisory, design & developmental and
     implementation consultancy services are in scope when reporting „management
     consultancy‟ costs. The use of consultants by the client side when:
                        a system/initiative/programme has passed into an operational/steady state
                         stage as part of what might be described as the contract management
                         team
                        or any other role where an external resource engaged to do a job that,
                         normally, a NHS employee would be engaged to do,
       would be viewed as staff substitutes/interim management, and should not be
       included here.

7.79   Consultancy as part of an ongoing contracted out service whose costs would be
       bundled into the running costs of the service is out of scope. These costs are reported
       as part of the cost of the contracted out service.

               Consultancy Services (included)             Managed Service (excluded)
             Advice                                    Steady state – Contract management
             Design and development
             Implementation, commissioning             Steady state – service provision




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7.80 Establishment expenses: This includes expenditure on printing and stationery,
     postage, telephones, advertising and travelling, subsistence and removal expenses for
     the authority.

7.81 Transport and moveable plant: This item is the total of any authority expenditure on
     fuel and oil, maintenance of such items (equipment, materials and external contracts),
     hire of transport, and miscellaneous transport expenses.

7.82 Premises and non-current plant: The items totalled at this subcode are the
     expenditure on the following items and external contracts, etc, relating to coal, oil,
     electricity, gas, other fuel, water and sewerage, cleaning, furniture, furnishings and
     fittings, office equipment, computer hardware and software, data processing services,
     rates, rents, engineering and building maintenance and gardening.

7.83 External contractors: The expenditure recorded here is that on any non-staff agency
     services not covered by contracts for the purchase of health care or premises or fixed
     plant and not provided by another NHS body.

7.84 Impairments: non-current asset impairments are analysed to show any impairments on
     intangible assets separately. Financial instruments disclosures also require that
     impairments and reversals of impairments of financial assets are separately disclosed
     (to be analysed by class in the accounts, in the unlikely event that material transactions
     of this type occur in the SHA).

7.85 Impairment of receivables: This equals the sum of debts which are not financial
     assets written off in the year, and the increase or decrease in the “provision of
     irrecoverable debts”.

7.86 Auditors’ remuneration - audit fee: This entry is the audit fee the SHA incurs in
     relation to audit work carried out by external auditors on behalf of the Audit
     Commission under the Code of Audit Practice.

7.87 Auditors’ remuneration - other fees: This covers fees payable to the external auditor
     for other work. paid or payable to the external auditor for additional work over and
     above that required to meet the requirements of the Code of Audit Practice.

7.88 The Companies Act (Disclosure of Auditor Remuneration) Regulations 2005 requires
     that in addition to the disclosure of the audit fee, non-audit fees are disclosed across
     the following headings: „Audit Fee for Associated Companies‟; „Taxation Services‟; „IT
     Services‟; „Internal Audit Services‟; „Valuation and Actuarial Services‟; „Litigation
     Services‟; „Recruitment and Remuneration Services‟; „Corporate Finance Services‟; and
     „All Other Services‟. As the amounts involved under these headings are unlikely to be
     material at a national level, the FMAs do not collect this information. However, SHAs
     must provide this detail in their accounts and provide details of any „Other auditors
     remuneration‟ on the freetext sheet on the FMAs.

7.89 Interest payable: Payments made under the Late Payment of Commercial Debts
     (Interest) Act- should be recorded in this subcode.

7.90 Training (Workforce Development Confederations (WDC): This entry is for use by
     those Strategic Health Authorities who act as the confederation lead and should record


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       the gross expenditure on WDC. Staff salaries relating to the SHA's own staff engaged
       on WDC duties must continue to be recorded under „other salaries and wages‟, above.

7.91 Miscellaneous: This is the total of any other gross expenditure of the authority not
     covered elsewhere in Note 2.3. Where the amount in this field exceeds 10% of the
     total, the SHA must provide an analysis in the "free text" sheet. A validation rule is set
     up to show a "failure" where this figure exceeds 10%. This is intended to be a reminder
     only, and Authorities may submit HAA forms to the Department, provided that a "free
     text" note has been made.


Note 2.3.3 - Workforce Development Confederation cost (SHA 05)
7.92 Where WDC costs are material a further breakdown of the expenditure is required.

7.93 NHS Bodies: is the cost of training provided by NHS bodies including the SHA itself.

7.94 Educational Institutions: is payment for training provided by education bodies outside
     the NHS, such as universities and colleges.

7.95 Other: covers all other expenses of the WDC, such as administrative costs.

7.96 Total: is the total of the previous three lines, and must agree to the „Training (WDC)‟
     line on programme expenditure, above.

7.97 Where the amount included under Educational Institutions forms a substantial part of
     the total, a further breakdown of this figure by institution and type of training provided
     would provide additional information for the user of the accounts. SHAs should add
     detail to their accounts as required.


Note 2.4 - Operating Leases (SHA 05)
7.98 The relevant standards are:
                o IAS17 Leases;
                o SIC 15 Operating Leases – Incentives;
                o SIC 27 Evaluation the Substance of Transactions Involving the Legal Form
                  of a Lease; and
                o IFRIC 4 Determining whether an Arrangement contains a Lease.

7.99 Contingent rents are to be disclosed as an expense (for lessees) or income (for
     lessors). These are the portion of the lease payment that is not fixed in amount but is
     based on the future amount of a factor that changes other than with the passage of
     time (e.g. percentage of future sales, amount of future use, future price indices, future
     market rates of interest). Where necessary, the note should also disclose the total of
     future minimum sublease payments to be received under non-cancellable subleases at
     the Statement of Financial Position date.


Note 2.5.1 - Staff numbers and related costs (SHA 06)

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7.100 This note is a requirement of the Companies Act 2006, section 411.

7.101 The costs must be split over the following columns:

              o Permanently employed – this is staff directly employed by the SHA and
                includes staff on outward secondment or on loan to other organisations. The
                recovery of the cost of these staff should be netted off.

              o Other – this is others engaged on the objectives of the SHA and will include
                staff on inward secondment or loan from other organisation, agency/temporary
                staff and contract staff. “Contract staff” means staff engaged by the SHA on a
                contract to undertake a project or task. It does not include amounts payable to
                contractors in respect of the provision of services (e.g. cleaning or security).

7.102 The figures exclude non-executive directors but include executive board members and
      staff recharged by other NHS bodies. The total will not be the same as the „other
      salaries and wages‟ figure in programme costs, which excludes all directors‟ costs.

7.103 Salaries and wages is the total gross pay of all executive members and all part time
      and full time employees. The figures exclude redundancy payments and the value of
      benefits in kind and includes agency and contract staff.

7.104 Social security costs is the total of the SHA‟s Employers NIC net of statutory
      maternity pay (SMP) deductions.

7.105 Employer contributions to the NHS BSA – Pensions Division: The entry under this
      subcode comprises employer‟s contributions to the NHSBSA – Pensions Division. It
      does not include NIC and early retirement costs.

7.106 Other Pension Costs covers pension costs other than pension scheme contributions
      to the NHSBSA – Pensions Division (e.g. to the Local Authority Scheme). It includes
      early retirement costs (including interest under the 5-instalment option).


Note 2.5.2 - Average number of persons employed during the year (SHA
06)
7.107 This note is a requirement of the Companies Act 2006, section 411. The note is
      analysed over the same column heading as staff costs above and the same definitions
      apply.

7.108 To avoid possible double counting, staff on outward secondment should not be
      included in the average number of employees. The figures should relate to all persons
      employed by the Authority but exclude non-executive directors.

7.109 The „contracted hours‟ method of calculating whole time equivalent numbers should be
      used. This is calculated by taking the contracted hours of each employee and dividing
      by the standard working hours to obtain the whole time equivalent.




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Note 2.5.3 - Staff Sickness Absence (SHA 06) - not required for 2008/09
restatement
7.110 The FReM requires, staff sickness absence data to be disclosed in the accounts.
      Comparative 2008/09 data will not be required in the 2009/10 accounts, therefore this
      table does not need to be completed for the 2008/09 restatement exercise.

7.111 Days lost (Long term) (sc180): Long term absences are all absence which are of 21
      working days or 29 calendar days or more.

7.112 Days lost (Short term) (sc190): Short term absences are all absence which are less
      than 21 working days or 29 calendar days

7.113 Total Staff Years (sc210): A full-time employee working all year, is equivalent to 1 staff
      year. For part-time workers, the ratio of their contracted hours to those of a full-time
      employee are used to scale the total potential staff year. This is done in the following
      way:

                                                           Contracted Hours 
                Staff Year Proportion (1) 1 Staff Year                    
                                                           Standard Hours 

                If an employee starts or leaves employment within the year, this is also used to
                „scale‟ the staff year. The location of the date worked within a 365-day calendar
                (366 for a leap year) is used:

                                                                        End Day - Start Day - 1 
                Staff Year Proportion (2) Staff Year Proportion (1)                             
                                                                                 365              

                In the above equation the End Day and Start Day are the numerical days within
                the year – i.e. 1st January is 1 and 31st of December is 365. The “-1” adjusts the
                figure so that it is inclusive; i.e. for an employee working all year we would have
                365 – (1 – 1) = 365.

                Where employees change their working patterns during the year (e.g. moving
                from full-time to part-time working) they will have multiple records in the
                personnel data collection. The analysis will utilise these records as separate
                personnel.

                Once the proportion of a staff year worked by each employee has been
                determined, these should be totalled to arrive at the “Total Staff years” figure to
                be entered at sc300.

7.114 Average working days lost (sc220): The average working days lost should be
      calculated as the total days lost (sc290) divided by the total number of staff years
      (sc300).

7.115 Total staff employed in period (headcount) (sc230): This is the total headcount
      number (current staff and leavers) during the 12 month reporting period. Employees
      can be permanent, on a fixed-term contract or employed on a casual basis. Self-
      employed, contract workers and agency workers are excluded.

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7.116 Total staff employed in period with no absence (headcount) (sc240): This is the
      total number of staff from the headcount figure (as calculated above) who had no
      sickness absence within that period. The length of absence is immaterial and should
      not be taken into account.


Note 2.5.4 - Retirements due to ill health (SHA 06)
7.117 This note discloses the number and average additional pension liabilities of individuals
      who retired early on ill health grounds during the year. The amount entered should be
      the figure supplied to the SHA by the NHS BSA - Pensions Division.


Note 2.3.2 - Strategic Health Authority management costs (SHA 06)
7.118 Total Strategic Health Authority management costs: The purpose of this sub-code
      is to record the components (staff and non-staff) and the overall total Strategic Health
      Authority management cost as defined at
      http://www.dh.gov.uk/PolicyAndGuidance/OrganisationPolicy/FinanceAndPlanning/NH
      SManagementCosts/fs/en


Note 2.6 - Better Payment Practice Code - measure of compliance (SHA 06)
7.119 This note relates to compliance with the better payment practice code in respect of
      invoices received from NHS and non-NHS trade creditors. It shows:
               the number and value of bills paid in the year
               the number and value of bills paid within the target period, and
               the percentage of bills paid within target.

7.120 The note must be completed on the basis of total bills paid during the year. The
      calculations are carried out excluding invoices issued up to 31 March that are currently
      in dispute at year-end. Entries should be in whole numbers and, for the value figures,
      in £000s.

7.121 The prompt payment code is summarised as follows:
       ●        Target: pay all NHS and non-NHS trade creditors within 30 calendar days of
                receipt of goods or a valid invoice (whichever is later) unless other payment
                terms have been agreed
       ●        Compliance: ensure creditors receive payment by Bank Automated Credit
                System (BACS) within 30 days (or date and issue cheque within that period) or
                within otherwise agreed timescale.

7.122 To meet compliance targets all invoices must be paid within thirty days or within
        otherwise agreed timescales.

7.123 Further details and guidance on the Better Payment Practice Code and „A User‟s
        Guide to late payments legislation‟ can be found at www.payontime.co.uk.

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7.124 Queries on the better payment practice code notes should be directed to the Financial
      Monitoring and Analysis Branch at Quarry House, telephone 0113 254 5344


Note 2.7 - Late Payment of Commercial Debts (Interest)
Act 1998 (SHA 06)
7.125 This note relates to the above legislation which allows entities to claim interest from
      other entities on debts incurred under contracts agreed after 1 November 1998.

7.126 It shows the amount included within Interest Payable (Note 2.3) arising from claims
      made by entities under this legislation

7.127 A user‟s guide to late payments legislation can be found on the Better Practice Group‟s
      website at www.payontime.co.uk

7.128 Queries on the better payments practice code notes should be directed to Resource
      Allocation, Monitoring and Analysis section at Quarry House, room 4W52, telephone
      0113 254 5344.


Note 2.11 - Other Gains and Losses (SHA 07)
7.129 The standards relevant to this note are IAS 1 Presentation of Financial Statements,
      paragraph 98(c) and (d) and IRFS 7 Financial Instruments: Disclosures, paragraph 20.

            Further guidance on the disclosures on financial instruments required in this note is
            provided in Annex 4.


Note 2.12 - Finance Costs and Finance Revenue (SHA 07)
7.130 The relevant standard is IFRS 7 Financial Instruments: Disclosures, paragraph 20(b).

7.131 Points to note:
            ● „Interest on late payment of commercial debt‟ must equal the amount disclosed
              in the note „The Late Payment of Commercial Debts (Interest) Act 1998‟
            ● „Other interest expense‟ includes interest on early retirements payable over five
              instalments
            ● „Other finance costs‟ includes:
                           -   unwinding of the discount on provisions
                           -   the net finance cost of non-NHS pension schemes (see annex to this
                               chapter).


Note 3.2 - Property, Plant and Equipment (SHA08)
7.132 The standard applicable to this note is IAS 16 Property, Plant and Equipment and IFRS
      5 Non-current assets held for sale and discontinued operations.


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7.133 There may be instances where it will be unclear which category an asset falls into; for
      example, many items of equipment are computer-controlled and could conceivably fall
      into more than one category: "IT equipment" or as "machinery". Decisions on
      categorisation must be made locally, after consultation with auditors if appropriate, as
      they will not be material from the viewpoint of national accounts.

7.134 Reclassifications: This reflects the movement of assets from one category to another
      within the SHA. The total of the line must equal zero. The most likely occurrence is
      from assets under construction to buildings, installations and fittings on completion of
      construction.

7.135 Transfers to/from other NHS bodies is the value of assets transferred to/from other
      NHS bodies without payment during the year. All transactions with NHS Trusts or
      Foundation Trusts must be dealt with as cash purchases and sales (i.e. as additions
      and disposals). Assets are transferred or sold at net book value.

7.136 Transferred to non-current assets held for sale: This category of asset is reported
      separately on the face of the Statement of Financial Position. The line removes non-
      current assets from the totals of property plant and equipment when they become “held
      for sale”. IFRS 5 gives the criteria for recognition of these assets.

Contents – Cost / Valuation section
7.137 Cost or valuation at 1 April xx: The figures are:
       ●        For land (freehold and leasehold), buildings, dwellings and assets under
                construction - the closing "net book value" figures of the previous year.

       ●        For plant and machinery, transport equipment, information technology and
                furniture and fittings - the closing "cost or valuation" figures from the previous
                year. The figure includes the gross cost of equipment still in use, even if fully
                depreciated.

7.138 Revaluation: NHS bodies are required to ensure that assets are carried at current cost
      using a suitable method selected by them. Where indices are used, these should be
      widely recognised and in common use. The source of the index should be disclosed in
      the narrative to the note in the accounts. The revaluations line should only be used for
      upward revaluations, and even so, only when the upward revaluation is not the reversal
      of an impairment.

7.139 Impairments relate to impairment losses charged to reserves. This includes
      downward revaluations.

Contents – Depreciation section
7.140 Depreciation at 1 April xx is used to record depreciation relating to plant and
      machinery, transport equipment, information technology and furniture and fittings only.
      No cumulative depreciation should be carried forward in respect of land, buildings and
      dwellings.

7.141 Impairments reflects impairment losses that are charged to the OCS.



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7.142 Reversal of impairments reflects increases in the value of assets that reverse earlier
      impairments taken to the OCS. Reversals of impairments will be rare.


Note 3.2.1 - Economic Lives of Non-current assets (SHA 08)
7.143 This table collects the range of the economic lives of fixed assets used by SHAs. This
      information is needed by DH to provide an analysis in the SHA summarised accounts
      as required by the National Audit Office. It is also required to be reproduced in the
      SHA accounts.


Note 3.1 - Intangible non-current assets (SHA 09)
7.144 The standards applicable to this note are IAS 38 Intangible Assets, and SIC 3
      Intangible Assets – Web Site Costs.

7.145 Where there is an active market, intangible assets must be carried at a market value.
      In all other respects, the guidance, for „Property, plant and equipment‟ applies.

7.146 EU Emissions Trading Scheme allowances should be included here if they are not
      expected to be realised within twelve months of the end of the reporting period.

7.147 The „revaluation‟ lines should only be used for upward revaluations and, even so, only
      when these are not reversals of impairments. Downward revaluations are impairments
      are recognised as impairments.

7.148 Reclassification is the cost/depreciation of assets moved from one category to
      another. The total of the line must equal zero. This will only be transfers from
      development expenditure to other intangible assets as projects are completed.

7.149 Transfers to/from other NHS bodies is the value of assets transferred to/from other
      NHS bodies without payment during the year. Assets are transferred at net book value.
      Assets cannot be transferred to NHS Trusts or Foundation Trusts but must be sold at
      NBV or a loss on disposal recorded equal to the difference between the disposal price
      and NBV.

7.150 Goodwill is mentioned in the FReM, but this is not relevant to the NHS as goodwill
      cannot be purchased and is not internally generated in the NHS.


Note 3.2.3 Analysis of Impairments and Reversals charged to Operating
Costs (SHA 10)
7.151 HM Treasury require Government bodies to analyse impairments into seven categories,
      with further details of „other‟ to be recorded in freetext if applicable.

7.152 Loss or Damage resulting from normal business operations: All losses of and
      damage to non-current assets that reduce the recoverable amount to below its book
      value other than those caused by a catastrophe (see below). Normal business
      operations covers all loss and damage to assets that results from management and
      staff action (or inaction), or the actions of third parties. This category includes theft.

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7.153 Loss as the result of a catastrophe: Damage to non-current assets as a result of a
      catastrophe. A catastrophe is defined as: „such events as will be generally easy to
      identify, they include major earthquakes, volcanic eruptions, tidal waves, exceptionally
      severe hurricanes, droughts and other natural disasters; acts of war, riots and other
      political events; and technological accidents such as major toxic spills or release of
      radioactive particles into the air‟.

7.154 For the avoidance of doubt, the following are not catastrophes within the meaning of
      this definition. Prison or street riots; loss or damage due, for example, to an ingress of
      water that could have been avoided by better maintenance; and relocation to a site
      where flooding is likely, these are all examples of losses resulting from management
      action or inaction. Such events are very rare in global terms and exceptionally rare in
      the UK.

7.155 Abandonment of assets in the course of construction: The impairment of assets in
      the course of construction as a result of a management decision to abandon the
      construction process, i.e. management decides that it no longer requires the facility
      under construction and the construction costs to date are completely written off or
      substantially written off to reflect reduced facility. This category includes the
      abandonment of software assets in the course of construction.

7.156 Unforeseen Obsolescence: All assets are subject to obsolescence. However the rate
      of obsolescence tends to be category specific e.g. IT assets suffer a faster rate of
      obsolescence than do buildings. NHS bodies will take account of foreseeable
      obsolescence when establishing asset lives. Unforeseen obsolescence will generally
      only occur either as the result of the introduction of a completely new technology or a
      change in legislation rendering the asset illegal. As such events are exceptionally rare
      DH should be contacted prior to the use of this category.

7.157 Over Specification of Assets (Gold Plating): “Gold plating” is the unnecessary over-
      specification of assets at the point at which the asset is first constructed or purchased.
      Care should be taken not to impair assets as being gold plated where they are of a high
      specification by necessity. The key is that the higher specification must be justifiable, if
      it is not an impairment should be taken.

7.158 Other Impairments: This category includes impairments that cannot be scored to
      another impairment category with the exception of downward movement due to change
      in market price (see below) and include:
               Write Downs of Development Land – This occurs where land is purchased for
                some form of social development. The cost of the land and any clean up cost
                can be greater than the disposal value resulting in an impairment
               Changes in Use – This usually occurs where specialised assets no longer required
                for their original purpose are put to a non-specialised use (e.g. a hardened aircraft
                hangar used as a store). However, impairment can result from the change of use
                of any asset including non-specialised assets
               Disposals – write downs to open market value where an asset is available for sale.
                This includes write downs of specialised properties which are written down to open
                market value from depreciated replacement cost immediately prior to sale



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               Uncompensated Seizures – The seizure of assets by governments or institutional
                units, other than for the settlement of fines or taxes, for which full compensation is
                not provided
               Changes in Market Price - Any impairments arising from change in market price
                will be recorded here.
               Impairment on bringing a new asset into use.


Note 3.2.2 - Non-current assets held for sale (SHA 11)
7.159 This category of asset is reported separately on the face of the Statement of Financial
      Position, with non-current assets being transferred when they become “held for sale”.
      IFRS 5 gives the criteria for recognition of these assets.


Note 3.4 - Trade and other receivables (SHA11)
7.160 The relevant standards are

                o IAS 1 Presentation of Financial Statements, paragraph 78(b)

                o IFRS 7 Financial Instruments Disclosures, paragraph 36

7.161 Short-term receivables will be valued at cost.

7.162 Provision for impairment of trade receivables: Intra-NHS transactions (other than
      those with Foundation Trusts) cannot give rise to “bad debts”. Other receivables
      should be reviewed for impairments, as necessary.

7.163 Receivables with Scottish, Welsh and Irish bodies should be treated as non-NHS.


Movement in provisions for impairment of receivables (SHA 11)
7.164 The relevant standard is IFRS 7 Financial Instruments: disclosures, paragraph 37(a).
      Further details are provided in Annex 4.


Non-Current assets held for sale period ended (SHA 11)
7.165 The relevant standard is IFRS 5 Non-current assets held for Sales and Discontinued
      Operations. See Chapter 3 of the Manual for further guidance.


Cash and cash equivalents (SHA 11)
7.166 This note is required by IAS 7 Cash Flow Statements (7.45). It reconciles the balance
      on the Statement of Cash Flows to the equivalent items reported on the Statement of
      Financial Position. There is also a FReM requirement to show the make up of the
      balances.


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Note 10 - Intra Government and other balances (SHA11)
7.167 The FReM requires this note to the accounts.

7.168 Intra government balances are defined as balances between the reporting entity and
      other bodies within the boundary set for the whole of government accounts. Details of
      this boundary are available on the WGA website at www.wga.gov.uk

7.169 The disclosure should be analysed between
               balances with other central government bodies which are
                   o Strategic Health Authorities
                   o Primary Care Trusts
                   o All English other NHS RAB bodies and NHS Central Government Bodies
                   o WGA Special Health Authorities and Other WGA bodies not included
                     under the „balances with public corporations and trading funds‟ heading.
               balances with local authorities
               balances with NHS Trusts (including NHS Foundation Trusts)
               balances with public corporations and trading funds. NHS public corporations
                and trading funds are:
                   o Medicines and Healthcare Products Regulatory Agency (MHRA)
                   o NHS Logistics Authority
                   o Plasma Resources UK Ltd
                   o NHS Direct
                   o NHS Professionals
                   o NHS Blood and Transplant
               balances with bodies external to government - this is the required to enable this
                note to balance back to the receivable / payable figure in the Statement of
                Financial Position.

7.170 A full list of public corporations and trading funds can be found at
      www.wga.gov.uk/pages/tablea.html#a1.


Note 3.5 - Trade and other payables (SHA12)
7.171 The relevant standard is IAS 1 Presentation of Financial Statements (paragraph 77).

7.172 Short-term payables will be valued at cost.

7.173 Payables with Scottish, Welsh and Irish bodies should be treated as non-NHS.


Note 3.5.1 - Other financial liabilities (SHA 12)
7.174 The relevant standard is IAS 1 Presentation of Financial Statements, paragraph 77

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7.175 Pension liabilities (non-NHS scheme) should be included here.


Note 3.11 - Events after the reporting period (SHA 13)
7.176 The relevant standard is IAS10 Events after the Reporting Period.

7.177 Adjusting events will be reflected in the financial statements.

7.178 Where non-adjusting events after the date of the Statement of Financial Position are so
      material that non-disclosure could influence the economic decisions of users taken on
      the basis of the financial statements, the following information is required:
               the nature of the event, and
               an estimate of its financial effect, or a statement that such an estimate cannot be
                made

7.179 SHAs should disclose the date when the financial statements were authorised for issue
      and who gave that authorisation (IAS 10 (17))


Note 3.12 - Capital and other commitments (SHA 13)
7.180 IAS 16 (para 74c) and IAS 38 (para 122e) require that the contractual commitments at
      the year end to purchase property, plant and equipment and intangible assets are
      disclosed. An asset provided under a finance lease does not give rise to an entry on
      the Statement of Financial Position respect of the creation of the non-current asset and
      its related capital creditor until the asset is delivered and is operational in the SHA‟s
      hands. When a SHA has signed an “on-balance sheet” finance lease contract in the
      accounting period (whether PFI or other), but the asset does not become operational
      until a future period, a disclosure in the format provided in Chapter 8 should be
      included as a note to the Accounts.


7.181 Material projects should be separately identified with narrative details as to cost, the
      likely timescale, the method of finance and a brief description of the nature of the
      project.


Note 3.13 - Finance Leases (SHA 13)
7.182 The relevant standards are:

            o IAS17 Leases

            o SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a
              Lease

            o IFRIC 4 Determining whether an Arrangement contains a Lease

7.183 The minimum lease payments are:


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            o the payments over the term of the lease,

            o less all of the following:

                           o   contingent rent;

                           o   costs for services;

                           o   costs that will be reimbursed;

                           o   any amounts guaranteed by the other party or a related party to
                               them, and

                           o   where the lessee has the option to purchase the asset at a price
                               that makes it reasonably certain at the inception of the lease that
                               the option will be exercised, the payment to exercise the option.

7.184 The „present values of minimum lease payments‟ are the „minimum lease payments‟
      discounted to present value. „Future finance charges‟ are entered in the first two
      columns only. These equal the total discounts applied in the first three lines. When
      netted off, therefore, the net totals in the first two columns equal the totals in the third
      and fourth columns.


7.185 Whilst unlikely, it is possible that SHAs may have arrangements in place which
      constitute a Service Concession under IFRIC 12 Service Concession Arrangements
      and SIC 29 Service Concession Arrangements: Disclosures. Where SHAs have
      arrangements which they consider might fall within this guidance, they should follow
      Treasury‟s guidance in chapter 6 of the FReM at www.financial-reporting.gov.uk and
      the DH guidance on accounting for PFI under IFRS, on the download/IFRS section of
      the finman website.


Note 3.7 - Provision for liabilities, charges and other contingencies (SHA
16)
7.186 IAS37 Provisions, Contingent Liabilities and Contingent Assets should be followed
      when accounting for provisions.

7.187 The FReM requires the expected timing of cash flows to be stated in relation to the
      spending review period rather than the bandings required by IAS37. The required dates
      are included in the proforma accounts. It has been clarified with HM Treasury that
      „within the period to 2011‟ means any time up to 31 March 2011; „between 2010 and
      2016‟ means between 1 April 2011 and 31 March 2016; and „between 2017 and 2021‟
      means between 1 April 2016 and 31 March 2021.

7.188 Provisions for emissions under EU ETS should be recorded under the „other‟ column.

7.189 Disclosure must also be made of the total amount included in the provisions of the
      NHSLA at 31 March in respect of clinical negligence liabilities of the SHA. The NHS
      Litigation Authority will provide this figure.


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Note 3.10 Contingencies (SHA21)

7.190 The relevant standard is IAS37 Provisions, Contingent Liabilities and Contingent
      Assets

7.191 The likely outcome of a contingency will usually be based on legal advice.

7.192 A potential liability might be split into two parts with one part recognised in the
      statement of financial position (an accrual or provision, dependant on probability) and
      the other part disclosed as a contingency.

7.193 Overage is a contingent asset.

7.194 Where any of this information is not disclosed because it is impracticable to do so, that
      fact must be stated. In extremely rare cases where disclosure of the information could
      be expected to seriously prejudice the position of the Strategic Health Authority, the
      general nature of the dispute should be disclosed, together with the fact that, and the
      reason why, the usual information has not been disclosed.

7.195 Any envisaged offsetting income must be separately disclosed.


Note 9 Financial assets and liabilities (SHA 17)
7.196 The relevant standards are:
               IAS 32 Financial Instruments: Presentation
               IAS 39 Financial Instruments: Recognition and Measurement
               IFRS 7 Financial Instruments: Disclosures
               IFRIC 9 Reassessment of Embedded Derivatives.

7.197 Points to note:
               Disclosures must cover all financial instruments, even when their accounting is
                covered by other more specific IFRSs, for instance, leases and PFI. See
                paragraph 7 of the financial instrument guidance at Annex 3 to this chapter for
                the full list of financial instruments.
               The disclosures in this note apply to all the SHA‟s financial instruments except
                interests in subsidiaries, associates and joint ventures and employers‟ rights and
                obligations under employee benefit plans. They therefore apply to financial
                instruments whose accounting is unchanged by the financial instrument
                standards, such as current payables and receivables, and financial instruments
                that are measured under other standards, such as finance leases.


Note 4.1 - Movement in Working Capital / Note 4.4 Reconciliation of
Statement of Financial Position to movement in working capital (SHA 18)



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7.198 Note 4.4 provides the reconciliation between the Statement of Financial Position and
      the movement in working capital note 4.1. It applies to the summarisation schedules
      only and there is no corresponding note in the annual accounts. As well as assisting
      SHAs in accurately completing note 4.1 the note is also used to verify data for the
      national summarisation exercise.

7.199 Transfers to/from other NHS bodies (is the value of receivables / payables /
      provisions transferred to/from the SHA during the year, i.e. where the other leg of entry
      is the general fund). Where the SHA has capital receivables / payables with other NHS
      bodies recorded on HAA19, the movement in the capital receivable should be included
      here.

7.200 Financing transactions records the movements in receivables as a result of financing
      transactions such as a loan and the movements in payables as a result of receiving
      cash from within the NHS that is in substance a loan and other financing transactions
      such as bank loans.


Reconciliation of cash drawings to Parliamentary Funding (SHA 18)
7.201 This note is included in summarisation forms only: it is not required in the annual
      accounts.

7.202 Net Advances: should equal the net cash advanced to OPG accounts as notified to
      SHAs by the cash funding section of DH at the year end. SHAs should not use other
      figures without the prior agreement of the funding section of DH (contact Lisa Thomas
      on e-mail Lisa.Thomas@dh.gsi.gov.uk).

7.203 Transfers (to)/from other Resource Account NHS bodies allows SHAs to adjust
      cash advances where cash is transferred between NHS bodies within the Resource
      Account (e.g. where a SHA was receiving cash on behalf of a PCT until the PCT had
      set up its own OPG account. The SHA must have agreed the amount of transfer with
      the RA body involved. Any entry here must be matched by an equal and opposite entry
      in the related RA Body account. This mechanism is a second best solution as such
      adjustments should be made by formal cash-limit adjustments where possible.

7.204 Parliamentary funding credited to General Fund is the total of the previous two lines.


Note 5 - Losses and special payments (SHA 19)
7.205 Treasury‟s “Managing Public Money” and detailed DH guidance on the subject should
      be followed. Note: figures recorded here are recorded on an accruals basis.


Note 3.15 - Transfer of property, plant and equipment to DH (SHA 20)
7.206 This form records the value, by property, of all property, plant and equipment
      transferred to the DH by a SHA. Transfers should be entered as negative values. This
      note is not included in the accounts pro forma.



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Note 3.16 - Transfer of assets and liabilities to PCTs (SHA 20)
7.207 This form records the value of all assets and liabilities transferred to a PCT by an SHA.
      Assets transferred should be entered as negative values and liabilities as positive
      values. All transfers must correspond to the records of PCTs. All transactions with a
      particular PCT should be shown on one line only. This note is not included in the
      accounts pro forma.

7.208 The purpose of this note is to enable the Department to produce consolidated resource
      accounts.


Segmental Analysis (SHA21)
7.209 SHAs should apply IFRS 8 Operating Segments. IFRS 8 defines an operating segment
      as a component of an entity:
                - that engages in activities from which it may earn revenues and incur expenses
                (including revenue and expenses generated internally)
                - whose operating results are regularly reviewed by the entity‟s „chief operating
                decision maker‟ to make decisions about resource allocation to the segment and
                assess its performance, and
                - for which discrete financial information is available.
       It is expected that WDC functions will form a separate segment.

7.210 The standard sets quantitative thresholds in order to enable the reporting entity to
      indentify a management number of segments (10% of revenue (income), profit/loss or
      assets, unless this would result in less than 75% of the body‟s revenue being included
      in reportable segments). SHAs should consider expenditure as the relevant
      measurement rather than revenue.

7.211 As well as the identified operating segments, an „all other segments‟ category must be
      included, as part of the reconciliation to total revenue, profit or loss, and assets.

7.212 The amounts reported for each operating segment should be the amounts reported to
      the Chief Operating Decision Maker (CODM). Only those elements of cost, income,
      assets and liabilities that are used by the CODM for the purposes of allocating
      resources and measuring performance should be given.

7.213 The proforma accounts operating segments note is an example only: alternative
      formats can be used. As segmental reporting is determined by internal reporting to
      management, there can be no national standardisation of the segments to be reported
      upon.

7.214 Common costs: A cost that is directly attributable to an individual segment should be
      allocated to that segment. Common costs are costs relating to more than one
      segment. In most circumstances it will be possible to apportion these reasonably
      between the segments, in which case the apportioned costs should be included in the
      net operating cost figure. For example, the cost of support staff may be apportioned
      between the segments according to the amount of time spent on the different activities.


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       Where common costs cannot be reasonably apportioned, they should be deducted
       from the total, as shown in the proforma note.

7.215 Net assets: Net assets (if any) are the average relevant net assets for each segment at
      the year-end and agree in total to the Statement of Financial Position. Assets and
      liabilities used jointly by the different segments should be allocated to the segments on
      a reasonable basis.


Note 3.3 - Analysis of Strategic Health Authority’s gross capital
expenditure to net capital resource outturn (SHA 24)
7.216 Gross capital expenditure is the gross capital expenditure of the SHA, calculated on
      an accruals basis.

7.217 Net book value of assets disposed of: Note, this is the NBV and not the sale
      proceeds.

7.218 Capital resource limit is the amount set by the Department. Any queries with regard to
      the Capital Resource Limit should be addressed to Resource Allocation, Monitoring
      and Analysis branch on 0113 2545479.

7.219 (Over)/underspend against the CRL is the SHA‟s performance against their CRL.


Note 11 First time adoption of IFRS
7.220 Transition to IFRS has a separate standard - IFRS 1 First-time Adoption of International
      Financial Reporting Standards.

7.221 The first IFRS financial statements should show:
               reconciliations of taxpayers‟ equity under GAAP to that under IFRSs as at 31
                March 2009
               a reconciliation of revenue statement performance for 2008/09 under UK GAAP to
                the IFRS equivalent.

7.222 IFRS 1 seeks to provide transparency about impairment losses recognised on
      transition to IFRSs. These losses might otherwise receive less attention than
      impairment losses recognised in earlier or later periods. A narrative disclosure is
      required where any impairments or reversal of impairments are recognised for the first
      time in the opening IFRS Statement of Financial Position. The same disclosures as in
      the Note on “impairments” should be given.

7.223 An entity may become aware of errors made under previous GAAP. The
      reconciliations must therefore distinguish between the correction of errors and IFRS
      accounting policy changes.

7.224 The disclosure requirements of IAS 8 about changes in accounting policies do not
      apply to an entity's first IFRS financial statements.



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Note 6 - Related party transactions
7.225 Related party disclosures must be in accordance with IAS 24 Related Party
      Disclosures.

7.226 As HM Treasury considers Government Departments and their agencies, and
      Department of Health Ministers, their close families and entities controlled or influenced
      by them, as being parties related to NHS bodies.




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Annex 1 - Pooled Budgets
1.      The relevant standard is IAS 31 Interests in Joint Ventures.

2.      A pooled budget is not an entity in its own right and so will fall into the IAS 31 category
        „jointly controlled operations‟ (IAS 31.13-17) or, if there is joint control or joint
        ownership of assets, the IAS 31 category „jointly controlled assets‟ (IAS 31.18-23).

3.      If you are in a „jointly controlled operation‟, you must recognise in your financial
        statements:
               ● the assets you control
               ● the liabilities you incur
               ● the expenses you incur
               ● your share of the income from the pooled budget activities.

4.      If you are involved in a „jointly controlled assets‟ arrangement, in addition to the above,
        you must recognise in your financial statements:
               ● your share of the jointly controlled assets (classified according to the nature
                      of the assets)
               ● your share of any liabilities incurred jointly
               ● your share of the expenses jointly incurred.

5.      It is for you to decide whether to include in your financial statements a policy note on
        the subject and a note of the income and expenditure and balances of the pooled
        budget. There is no IFRS requirement to do so but, either way, you will need working
        papers to support your own transactions and balances that result from pooled budget
        activities.

6.      It is important to remember that a pooled budget is simply an aggregation of balances
        that belong to the pooled budget partners rather than an entity in its own right. For
        example, if you put cash into a pooled budget and this is used to contribute to the
        purchase of an asset and to buy services, with some cash held at the year end, your
        financial statements must include:
                ● the share of the asset purchased (plus share of the depreciation and any
                       change in value)
                ● the expenditure (and payables, if relevant) on which the cash has been used
                ● an appropriate share of income (and receivables, if relevant) in line with the
                       pooled budget agreement
                ● your cash balance remaining at year end, even if this is held on an agency
                       basis by a pooled budget partner (in their financial statements the cash
                       would be a „Third Party Asset‟).

     7. You may purchase services available under a pooled budget of which you are a
        partner. Your expenditure on the services will become income of the pooled budget, of
        which you will be due a share as a partner of the pooled budget. Similarly, if you owe
        money for services provided under the pooled budget, the creditor balance in your
        books will be a debtor balance of the pooled budget, of which you own a share. The
        agreement of balances exercise will only apply to the share owned by other partners of
        the pooled budget.



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Annex 2 - Accounting for the European Union Greenhouse Gas Emissions
Trading Scheme

Introduction
   1. The European Union Emissions Trading Scheme is a European-wide scheme to
      reduce carbon dioxide emissions. It may be extended to cover other gases in the
      future. The scheme started on 1 January 2005, with the first phase running to 31
      December 2007. The second phase runs from 1 January 2008 to 31 December 2012.
      Further five-year phases are expected subsequently.

   2. A letter was issued to the Chief Executives of NHS trusts on 11 December 2003 to give
      notice of the scheme and to advise the statutory requirement for NHS installations of
      20 megawatts or more thermal capacity per site to register with DEFRA. Eighty three
      NHS trusts registered. Finance staff should liaise with estates staff to establish
      whether their NHS trust is within the scheme.

   3. The scheme works on a „cap and trade‟ basis. Government sets emissions limits and
      issues „allowances‟ limits to all registered installations to reflect these, with one
      allowance equating to one tonne of carbon dioxide. Installations can buy and sell
      allowances on the open market.

   4. Participants of the scheme therefore have three choices. They can:
            ● limit their emissions to their cap
            ● reduce their emissions to below their cap and either sell their surplus allowances
            or hold them for the next year (provided that it is in the same phase of the scheme),
            or
            ● produce emissions above their cap and buy additional allowances or borrow from
            the following year‟s allocation (provided that it is in the same phase of the scheme) or
            incur a penalty, in which case the shortfall in allowances must still be made good.

   5. Allowances are issued to registered installations free of charge. Actual emissions for
      the year have to be verified and the appropriate number of allowances surrendered for
      cancellation by 30 April 2006.

   6. Further details of the scheme can be found at
      http://www.defra.gov.uk/environment/climatechange/trading/index.htm.

Trading
   7. NHS trusts are permitted to trade in allowances if they have identified that they will
      have too many or too few, and the trading can be undertaken ahead of the actual
      need. However, under Treasury rules, trading is not acceptable solely for the purpose
      of speculating in the market. Treasury have advised that the following websites
      provide useful information on prices and trading:
        www.pointcarbon.com
        www.nordpool.com
        www.exaa.at/cms/4
        www.eex.de

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   8. Whilst the issue of allowances by government is outside the scope of VAT, the trading
      of allowances is a business supply taxable at the standard rate of 15% (17.5% from
      January 2010). Therefore, if you sell allowances, VAT should be charged unless the
      sale is to a person outside the UK, when special rules apply (and see paragraph 9 re
      trading within the NHS). If you buy allowances, a proportion of the VAT charged can
      be recovered, in line with the proportion of your activity that is taxable business activity.

   9. Since NHS bodies (other than Moorfields Eye Hospital) are within a single VAT
      registration group, transactions between them are not subject to VAT. NHS bodies
      wishing to trade in allowances are therefore encouraged to look to other NHS bodies in
      the first instance to find a trading partner.

   10. The NHS Purchasing and Supply Agency (PASA) is participating in a collaborative
       program, led by The Energy Consortium (TEC), with other government bodies, to
       establish a public sector-wide framework for verification of allowances under phase
       two. This project should be available from November 2008.

   11. A subsequent cross-government project is underway for brokerage services that will
       allow individual organisations to buy and sell carbon allowances through a managed
       framework. This should be available from early 2009.

Accounting
   12. There is currently no guidance issued by the International Accounting Standards Board
       (IASB) or the UK Accounting Standards Board (ASB) on accounting for cap and trade
       emission rights schemes. However the Financial Reporting Advisory Board (FRAB)
       and Treasury have agreed the accounting that should be followed by bodies that are
       required to conform to the Financial Reporting Manual (which include NHS trusts) as
       detailed here.

   13. The Emissions Trading Scheme commenced 1 January 2005. However, no real
       market in allowances had developed until July 2005, when there was a market price of
       23 Euros/allowance. As there was no value at which to account for allowances until
       that date, there was no requirement for entries in respect of the scheme in the 2004/05
       accounts.

   14. Allowances are recognised as „other current assets‟ or intangible assets dependent
       upon the expected date of realisation (under or over twelve months after the end of the
       reporting period, respectively). They are held at open market value, with a matching
       credit to the government grant reserve. As carbon dioxide emissions are made, a
       provision must be recognised for the obligation to hand over allowances, the matching
       debit being to the OCS. At the same time, transfers should be made to recognise the
       government grant in the OCS. At the end of the reporting period, the asset, provision
       and government grant reserve should be revalued to current market value. The
       surrender of allowances is recognised by extinguishing the provision and the matching
       value of allowances within current asset investments.

   15. Unusually, therefore, the balance on the government grant reserve will only match the
       balance for the related allowances at the start of the year. This is because the


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       government grant is transferred to the income and expenditure account over the
       course of the year whilst the allowances balance is not reduced until their surrender.

   16. In debit and credit form, the entries are:

     On receipt of allowances:
      Dr: Other current assets/intangible assets
      Cr: Government grant reserve
               at open market value.

     As emissions are made:
       Dr: Income and expenditure account
       Cr: Provisions
               for the obligation to hand over allowances, and

       Dr: Government grant reserve
       Cr: Income and expenditure account
               to recognise use of the government grant.

     Revaluation as at the end of the reporting period
       Dr: Other current assets/intangible assets
       Cr: Government grant reserve

       Dr: Income and expenditure account
       Cr: Provision

       Dr: Government grant reserve
       Cr: Income and expenditure account

     Surrender of allowances
       Dr: Provision
       Cr: Other current assets

   17. A worked example prepared by Treasury can be viewed at www.financial-
       reporting.gov.uk under „Practical Examples and Proformas‟ then „Emissions Rights
       Worked Examples‟. The worked example does not form part of the Financial Reporting
       Manual therefore NHS trusts are not bound by it. However, the above principles of
       accounting are reflected in the Manual and therefore must be respected.

Contacts

   18. Verification and trading queries should be addressed to energyteam@pasa.nhs.uk




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Annex 3 - Accounting for Defined Benefit Pension Schemes

            1. The relevant standard is IAS 19 Employee Benefits.

            2. This guidance is for NHS bodies that have staff who are members of a defined
               benefit pension scheme other than the NHS Pension Scheme and where their
               assets and liabilities in the scheme can be separately identified, for example,
               Local Government Pension Schemes.

            3. Bodies that have staff members in such a scheme should ensure that the
               accounting entries and disclosures in the accounts comply with IAS 19.
               Accounting for defined benefit pension schemes is complex because actuarial
               assumptions are required to measure the obligation and the expenses, with the
               possibility that actual results differ from the assumed results. These differences
               are actuarial gains and losses. Obligations are measured on a discounted basis
               because they will often be settled many years after the employee renders the
               services which causes a liability to be accrued.

            4. Actuaries advising the employer will generally provide the calculations of the
               defined benefit obligation and the current and prior service cost, although this is
               not a requirement of IAS 19. In addition, actuaries will generally provide the
               necessary information for disclosure, including the key assumptions used in
               their calculations. However NHS bodies are reminded that they retain
               responsibility for all figures included within their accounts, and should put in
               place those measures they consider sufficient to satisfy themselves and their
               auditors that the amounts included – and assumptions underlying these
               amounts – are reasonable.

            5. Where NHS bodies are members of a Local Government Pension Scheme, it is
               common for the scheme to contract with an actuary on behalf of all member
               bodies.

       Guidance
            6. Under defined benefit plans, the pension scheme is obliged to provide the
               agreed benefits to current and former employees of entities which are part of the
               scheme. The risks lie with the employer, in particular the risk that the benefits
               will cost more than the entity expected (i.e. the funding risk associated with a net
               deficit). Employers should also note that all unfunded post-employment benefits
               are categorised as „defined benefit‟ obligations under IAS 19.

            7. Under a defined benefit scheme the (net) surplus or deficit of the pension fund is
               shown on the Statement of Financial Position. If there is an excess of liabilities
               over assets a deficit is recognised, vice versa a surplus.

            8. The carrying value of the surplus or deficit is the fair value of the scheme‟s
               assets allocated to the specific employer, less the present value of the scheme‟s
               liabilities, plus or minus the actuarial gains/losses and past service costs not yet
               recognised.

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            9. The fair value of the plan assets is the market price of the assets the plan holds.
               Where no market price is available, the fair value of the plan assets is
               estimated, for example by discounting back expected future cash flows using a
               risk and maturity adjusted discount rate.

            10. To determine the present value of the future benefits likely to arise, the entity
                must apply the projected unit credit method to determine the present value of its
                defined benefit obligations and the related current service cost, and where
                applicable, past service cost. This method sees each period of service as giving
                an additional unit of benefit entitlement. Calculation for a scheme usually
                requires the services of a qualified actuary.

            11. Changes in the value of plan assets and obligations are shown on the
                Statement of Comprehensive Income / Operating Cost Statement and are made
                up of current service cost, interest cost, expected return on plan assets,
                actuarial gains and losses and past service costs. They can all be recognised in
                one line of income or expense on the Statement of Comprehensive Income /
                Operating Cost Statement - there is no need to break down the line into its
                various components.

            12. The current service cost is defined as „the increase in the present value of the
                defined benefit obligation resulting from employee service in the current period‟.
                It is the present value of the increase in cost due to the employee having
                worked one extra year. This cost is determined independently of the funding of
                the plan, and should be the same irrespective of whether the plan is in deficit or
                surplus. It is not necessarily a stable percentage of pensionable pay year on
                year - it will vary if the discount rate changes or if the average age of employees
                changes.

            13. Past service costs are „the increase in present value of the defined benefit
                obligation for employee service in prior periods, resulting in the current period
                from the introduction of, or changes to, post-employment benefits or other long
                term employee benefits‟. An example would be if the rules changed so that
                pensions payment increased by a minimum increment each year so, instead of
                an employee‟s pension being fixed on retirement, it increases over the rest of
                his/her life.

            14. When there are changes to the level of benefits already earned, the present
                value of the increase or reduction in benefits should be charged to the income
                statement (or equivalent) over the period during which the increases vest.

            15. Often changes vest immediately they are granted, such as the example of
                guaranteed pension increases, so there is an immediate expense. Where
                benefit improvements have been awarded but some have not yet vested, only
                the vested portion is recognised in the employer‟s financial statements. An
                example of unvested benefit would be if employees must participate in the
                scheme for 5 years before being entitled to receive a pension. When the
                benefits are enhanced, these additional benefits vest immediately for employees
                that have participated for more than 5 years but, for those that have participated
                for less than 5 years the benefit enhancement will vest when they have done so.


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                The unrecognised portion should be deducted from the plan liabilities in arriving
                at the asset or liability to be recognised on the Statement of Financial Position.

            16. The interest cost hitting the Statement of Comprehensive Income / Operating
                Cost Statement each year is the unwinding of the discount on the scheme
                liabilities.

            17. The expected return on plan assets reflects how a scheme is funded. The
                Statement of Comprehensive Income / Operating Cost Statement is credited
                each year with the expected long-term rate of return on the assets based on
                their market values at the beginning of the year.

            18. Actuarial gains and losses comprise:

                     i. Experience adjustments (the effects of differences between the previous
                        actuarial assumptions and what has actually occurred); and

                    ii. The effects of changes in actuarial assumptions.

            19. So an example of an actuarial gain or loss would be the difference between the
                expected return on plan assets and the actual return on those assets, or the
                effect of changes in life expectancy expectations, or rate of salary increases.

            20. IAS 19 permits two methods of recognition of actuarial gains and losses. The
                FReM only allows an accounting policy option of recognising actuarial gains and
                losses in equity. IAS 19 contains extensive disclosure requirements in respect of
                defined benefit pension plans. [IAS 19 para 120, 120A].

            Disclosures

            21. Disclosures include:

                          The accounting policy for recognising actuarial gains and losses.
                          A description of the plans.
                          Reconciliations of the opening and closing balances of both the present
                           value of the defined benefit obligation and the fair value of plan assets (if
                           any).
                          A split of the defined benefit obligation in to funded and unfunded
                           amounts.
                          A reconciliation of the present value of the defined benefit obligation and
                           the fair value of plan assets to the assets and liabilities recognised on the
                           Statement of Financial Position.
                          The total income statement (or equivalent) expense, split into its separate
                           components.
                          The amounts recognised in the SORIE, and the cumulative total of any
                           actuarial gains and losses so recognised.
                          A breakdown of plan assets into major sub-categories.


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                          How the expected rate of return is calculated.
                          Details of the principal actuarial assumptions (we would expect this to
                           include mortality given comments in the media and by regulators).
                          Sensitivity analysis for medical cost trend rates.
                          A five-year history of the present value of the defined benefit obligation,
                           fair value of plan assets, experience adjustments thereon, and the
                           surplus or deficit in the plan.
                          The best estimate of future contributions to be paid.




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Annex 4 - Financial Instruments
Introduction
   1. The relevant standards are:
       IAS 32 Financial Instruments: Presentation
       IAS 39 Financial Instruments: Recognition and Measurement
       IFRS 7 Financial Instruments: Disclosures
       IFRIC 9 Reassessment of Embedded Derivatives

   2. The standards are complex and this guidance provides only a basic overview of the
      issues that may affect NHS bodies.

   3. DH and all NHS bodies have financial instruments. However, the accounting for basic
      short-term financial instruments will be unchanged by the adoption of these standards.
      All bodies will need to check whether they have longer-term or more complex financial
      instruments whose accounting may change. If so, you will need to ensure that the
      requirements in the standards are followed. Treasury has also provided some
      guidance, which is available at www.financial-reporting.gov.uk

Financial instruments
   4. FRS 25 defines a financial instrument as “a contract that gives rise to a financial
      asset of one entity and a financial liability or equity instrument of another entity”.

   5. The definitions for financial assets and liabilities are complex. From DH/NHS bodies‟
      perspective: financial assets will be:
             Cash,
             An equity instrument (eg shareholding) of another entity, or
             A contractual right to receive cash or another financial asset (or to exchange
            financial assets/liabilities with conditions favourable to the entity)

       and financial liabilities will be:
             a contractual obligation to pay cash or another financial asset (or to exchange
            financial assets/liabilities with conditions unfavourable to the entity).

   6. Some examples of what are and what are not financial instruments will help
      understanding. Firstly, other than for cash, there has to be a contract.

   7. The following are not financial instruments because they arise under legislation rather
      than under contract:
            Public Dividend Capital
            European Union Emissions Trading Scheme allowances
            Early retirement liabilities (with the NHS Business Services Authority)
            Injury benefit liabilities (with the NHS Business Services Authority)


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       The following are, or could be, financial instruments:
            Cash at bank and in hand
            Receivables and payables
            Loans
            Investments
            Provisions (which arise under contract)
            Finance leases
            PFI
            Interests in subsidiaries, associates and (in some circumstances) joint ventures.

       However, to be classed as financial assets or liabilities, they must meet the definitions
       in 5, above, for example, prepayment debtors are not financial assets because they
       are contractual rights to receive goods or services rather than to receive cash or
       another financial asset.

   8. The accounting for some financial instruments is already covered by specific financial
      reporting standards:
            Provisions (IAS 37)
            Leases (IAS 17)
            PFI (Mirror of IFRIC 12)
            Interests in subsidiaries, associates and joint ventures (IAS 27, 28 and 31)

   9. This leaves cash, other receivables and payables, loans, and other investments to be
      accounted for under the financial instrument standards. The standards require
      financial instruments to be recognised initially at fair value. In many instances the
      transaction value is fair value and so the accounting will not change. This is the case
      for cash, short-term receivables , short-term payables, and loans and investments that
      carry a market rate of interest. Also the government financial reporting manual dictates
      the accounting for investments of resource account bodies in entities outside the
      resource accounting boundary (for example loans and public dividend capital). It
      requires these to be held at historic cost less any impairment. The accounting for
      these investments is not affected by the financial instrument standards.

   10. The financial instrument standards are therefore only likely to bring changed
       accounting for:
             Long-term receivables and payables that are financial instruments. They are
            likely to require discounting to reflect fair value.
             Any loans that are not at a market rate of interest. Their value would need to be
            adjusted to reflect fair value.
             Any investments that are not at a market rate of interest, that are not interests in
            subsidiaries, associates or joint ventures and that are not investments of resource
            account bodies in bodies outside the resource accounting boundary. Their value
            would need to be adjusted to reflect fair value.


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             Derivatives and embedded derivatives. These may need to be recognised for the
            first time.
             Any financial guarantees
             Any hedge instruments.

Derivatives
   11. A derivative is a financial instrument that derives its value from an underlying variable.
       For a financial instrument to be a derivative it must have all three of the following
       characteristics:
             The value changes in response to a change in a specified variable eg interest
            rate, foreign exchange rate, prices index, credit rating, commodity price and so on
             Requires no or little initial investment, and
             Is settled at a future date

       A contract with a bank to buy foreign currency, at a future date, at an agreed rate, is an
       example of a derivative.

   12. Embedded derivatives are derivatives that form part of another contract and cannot be
       transferred independently. FRS 26 defines an embedded derivative as “a component
       of a hybrid (combined) instrument that also includes a non-derivative host contract –
       with the effect that some of the cash flows of the combined instrument vary in a way
       similar to a stand-alone derivative. An embedded derivative causes some or all of the
       cash flows that otherwise would be required by the contract to be modified according to
       a specified interest rate, financial instrument price, commodity price, foreign exchange
       rate, index of prices or rates, credit rating or credit index, or other variable, provided in
       the case of a non-financial variable that the variable is not specific to a party to the
       contract.”

   13. A critical indicator of an embedded derivative is variation of cash flows over the life of a
       contract. Embedded derivatives can arise inadvertently through market practices or
       common contracting arrangements. An example is given at the end of this section.

   14. Examples of host contracts that could have embedded derivatives are:
            Purchase and sale agreements
            Debt instruments
            Leases (operating and finance)
            PFI contracts

       Contracts rarely make explicit reference to a derivative. Instead they may include
       reference to, for example:
            Pricing based on a formula
            Right to purchase/sell additional units
            Indexed to/adjusted by


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            Limits
            Rights to cancel/extend/repurchase

   15. However, an embedded derivative is only accounted for separately from the host
       contract if the economic characteristics and risks of the embedded derivative are not
       closely related to those of the host contract i.e. the economic characteristics or risks
       of the embedded derivative differ from those of the host contract.

   16. For instance, if a loan with an RPI-linked component is given by DH to a PFI
       consortium, the index-linked element does not need to be accounted for separately.
       This is because the index relates to inflation in the entity‟s own economic environment:
       it is closely related because all parties are UK-based and all the materials and
       workforce are being paid for in Sterling.

   17. However, a lease for a photocopy where part of the price of the contract varies with the
       price of paper is an example of an embedded derivative that is not closely related. The
       cost of paper does not have the same economic characteristics or risks of the lease of
       the machine. In this case, the embedded derivative would be accounted for separately
       from the lease.

   18. Care must be taken in this assessment since, for example, if the effect on the fair value
       or cash flows is magnified eg twice the rate of RPI, this may be sufficient to remove the
       close relationship. FRS 26 does not define the term „closely related‟ but a series of
       examples is contained in the Application Guidance of the standard.

   19. If an embedded derivative is closely related to the host contract, the embedded
       derivative can be ignored and the contract accounted for in accordance with the
       relevant standard. If an embedded derivative is not closely related to the host contract
       and the value of the embedded derivative cannot be determined, the whole contract
       must be accounted for „at fair value through profit and loss‟, that is, changes in fair
       value of the whole contract go through the operating cost statement or income and
       expenditure account.

   20. Unless clearly immaterial, DH/NHS bodies will need to review all contracts to
       identify any embedded derivatives that are not closely related to the host
       contracts, so that they can be accounted for separately from the host contracts, with
       changes in fair value taken through the operating cost statement or income and
       expenditure account (unless the derivative is used for hedging). Auditors will need to
       see evidence of the review. Bodies will also need to implement a system change to
       ensure that, in future, embedded derivatives that are not closely related are identified
       at the time of entering into contracts.

   21. Example
       An NHS trust enters into a contract to buy a large machine from the US. The machine
       was built using US components and was assembled in the US. If the contract was
       settled in US dollars, the embedded foreign currency derivative would be closely
       related to the host contract and so would not be accounted for separately. However, if
       the contract was settled in Euros, the embedded derivative would not be closely
       related, movements on the exchange rate with the Euro having different economic

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       characteristics and risks from those of the host contract. If the value of the host
       contract was 2m Euros, the fair value of the derivative would be the difference between
       the 2m Euros translated at the period closing rate and the original spot rate when the
       contract was entered into. If the Euro spot rate when the contract was entered into
       was 1.48 and the period end spot rate was 1.61, the accounting treatment would be:
                2m/1.48 = £1,351,351
                2m/1.61 = £1,242,236
       The fair value is £1,351,351 – £1,242,236 = £109,115

       The accounting entries would be:
                Dr:        Derivatives   £109,115
                Cr:        Gains/losses from derivatives (I&E A/c) £109,115

Financial guarantees
   22. Public sector organisations may take on liabilities by issuing specific guarantees
       (usually for loans) and writing letters of comfort.

       Under FRS 26, a financial guarantee is “a contract that requires the issuer to make
       specified payments to reimburse the holder for a loss it incurs because a specified
       debtor fails to make a payment when due in accordance with the original or modified
       terms of a debt instrument.” These contracts can take various legal forms, including a
       guarantee, some types of letters of credit, letters of comfort or a credit insurance
       contract.

   23. Indemnities, for example for activities of board members, do not meet the above
       definition for financial guarantees. Instead, they should be treated as contingent
       liabilities under FRS 12.

   24. Example

       DH guarantees a private sector loan to an NHS body, to secure a beneficial rate of
       interest. The fair value of the guarantee is the present value of the interest saving (ie
       the difference between the interest charged and what would have been charged
       without the guarantee) over the life of the loan. DH would account for this as:
                Dr:        Investment in NHS body
                Cr:        Guarantee liability
       The guarantee liability is amortised to the operating cost statement over 5 years.

       In the NHS body‟s accounts, the same figure is credited to equity (capital contribution
       by DH). This, together with the credit to „loan payable‟ balances the cash received.

Hedge instruments
   25. Hedging is the use of financial instruments provided by commercial markets to offset
       changes in fair values or cash flows of another transaction, to control or limit risk. It is
       unlikely that DH/NHS bodies use hedge instruments.


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Recognition and de-recognition
   26. Financial assets and liabilities are recognised when the body becomes a party to the
       contract or, in the case of trade debtors/creditors, when the goods have been
       delivered.

   27. Financial assets should be derecognised when:
               the contractual rights to the cash flows of the financial asset have expired, or
               the financial asset has been transferred (eg sold) and the risks and rewards of
                ownership have transferred.
       Financial liabilities should be derecognised when the liability has been discharged, that
       is, paid or expired.

Measurement and classification
   28. Initially, all financial instruments must be measured at fair value. Fair value is a quoted
       market price, if available. If there is no market price, a valuation technique should be
       used, for example the value of a recent similar transaction at arms length or discounted
       cash flows from the transaction. If discounted cash flows are used, the discount rate to
       use is the higher of the rate intrinsic to the financial instrument and the real discount
       rate set by Treasury (currently 2.2%). Exceptionally, if no reliable estimate of fair value
       can be made, cost can be used.

   29. Subsequent measurement is different for different categories of financial Instruments.
       The categories in the tables, below, are defined in FRS 26.

     Financial assets               Examples                       Subsequent Measurement

     Financial assets               Derivatives (other than if a   Fair value with movements
     carried at „fair value         financial guarantee or a       through OCS/I&E A/c
     through profit and loss‟       hedge instrument)
     Held to maturity               These are rare in practice.    *Amortised cost
     investments                    They are long term
                                    investments unlikely to be
                                    held by DH and NHS
                                    bodies
     Loans and receivables                                         *Amortised cost
                                                                   (except loans by DH to bodies
                                                                   outside the departmental
                                                                   boundary. Treasury requires
                                                                   these to be carried at cost less
                                                                   impairment)
     Available for sale             LIFT investments               Fair value with movements
                                                                   through reserves.
                                                                   Accumulated gains or losses in
                                                                   equity are recycled to OCS/I&E
                                                                   A/c on derecognition or
                                                                   impairment of the investment



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     Financial Liabilities    Examples                     Subsequent Measurement

     Financial liabilities    Derivatives                  Fair value with movements
     carried at „fair value                                through OCS/I&E A/c
     through profit and
     loss‟
     Financial Guarantees                                  The higher of
                                                           The amount determined in
                                                           accordance with FRS 12 and
                                                           The amount initially recognised
                                                           less, where appropriate,
                                                           cumulative amortisation
   Other financial              Loans from DH              *Amortised cost
   liabilities
*Amortised cost is the initial value minus both principal repayments and cumulative
amortisation.

   30. In determining the categorisation of their financial instruments, DH and NHS bodies
       must ensure that they are aware of, and can manage, the financial consequences.

Impairments
   31. Financial assets, other than those measured at fair value through profit and loss, must
       be reviewed for impairment at each statement of financial position date. There is no
       requirement to impair financial liabilities.

   32. Impairments should be recognised when they occur, not when expected. An
       impairment loss must impact on future cash flows, and there must be objective
       evidence of impairment as a result of one or more events that occurred after initial
       recognition. FRS 26.59 provides examples. Impairments are always charged to the
       operating cost statement or income and expenditure account, not to reserves.

   33. The measurement and accounting for impairments varies depending on the
       classification of the financial asset.
       Financial assets carried at amortised cost (loans and receivables, and held to
       maturity investments) – the impairment loss is measured as the difference between
       the carrying amount and the present value of future estimated cash flows discounted at
       the asset‟s original effective interest rate (see FRS 26.9). If the impairment loss
       decreases in a subsequent period, and this can be related to an objective event
       occurring after the impairment was recognised (for example, an improvement in credit
       rating) the impairment can be reversed. The reversal must not result in a carrying
       amount higher than what the amortised cost would have been had the impairment not
       been recognised.
       `Financial assets carried at cost – the impairment is calculated as the difference
       between the carrying amount and the present value of the estimated future cash flows
       discounted at the current market rate for similar financial assets. These impairment
       losses may not be reversed.


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       Available for sale financial assets – Where there is evidence of impairment of this
       class of asset the amount of any fall in value previously recognised in reserves must
       be removed from reserves and charged to the operating cost statement or income and
       expenditure account. The impairment loss may be reversed if its reversal can be
       objectively linked to an event occurring after the impairment was recognised in the
       income statement.

Disclosures
   34. The objective of FRS 29 is to require entities to provide disclosures in their financial
       statements that enable users to evaluate:
             the significance of financial instruments for the entity‟s financial position and
            performance, and
             the nature and extent of risks arising from financial instruments to which the entity
            is exposed during the period and at the reporting date, and how the entity manages
            those risks.




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