FINANCIAL REPORTING MANUAL CHAPTER 1:...

FINANCIAL REPORTING MANUAL CHAPTER 1: INTRODUCTION

1 Introduction

Chapter 1 Contents

1.1 Objectives of the Manual ............................................................................................ 11

1.2 Compliance with the Manual ...................................................................................... 11 Financial statements must give a true and fair view................................................... 11

Objectives of section 226 of the Companies Act ................................................... 12 Interpretation of section 226 of the Companies Act for the public sector context.. 12

Non-departmental public bodies................................................................................. 12 Trading funds.............................................................................................................. 13

1.3 Whole of Government Accounts................................................................................. 13

1.4 Key users of the financial statements......................................................................... 14

1.5 International accounting standards ............................................................................ 14

FINANCIAL REPORTING MANUAL CHAPTER 2: ACCOUNTING PRINCIPLES

2 Accounting principles

Chapter 2 Contents

2.1 Application of GAAP ..................................................................................................... 1

General 1 Accounting convention ................................................................................................. 1 No exemptions for smaller entities ............................................................................... 1 Practical application of guidance.................................................................................. 2

2.2 Statement of Principles................................................................................................. 2 2.3 FRS18: Accounting policies.......................................................................................... 3

Applicability................................................................................................................... 3 Objectives of FRS18..................................................................................................... 3 Interpretation of FRS18 for the public sector context ................................................... 3 Other requirements....................................................................................................... 3

2.4 Accounting boundaries: FRS2 (subsidiary undertakings), FRS9 (associates and joint ventures) and FRS5 (Substance of Transactions) ....................................................... 4 Applicability................................................................................................................... 4 Objectives of FRS2....................................................................................................... 4 Objectives of FRS9....................................................................................................... 4 Objectives of FRS5....................................................................................................... 4 Adaptations in respect of the departmental accounting boundary ............................... 5 Uniform accounting policies in preparing consolidated financial statements ............... 6

FINANCIAL REPORTING MANUAL CHAPTER 3: ACCOUNTING FOR PARLIAMENTARY SUPPLY

3 Statement of Parliamentary Supply

Chapter 3 Contents

3.1 Introduction................................................................................................................. 28

3.2 The Statement of Parliamentary Supply..................................................................... 28 Introduction................................................................................................................. 28 The Statement of Parliamentary Supply..................................................................... 28 The Notes to the Statement of Parliamentary Supply ................................................ 29

Note 2: Analysis of net resource outturn by section .............................................. 29 Note 3: Reconciliation of Estimates and accounts................................................. 29 Note 4: Reconciliation of resources to cash requirement ...................................... 29 Note 5: Analysis of income payable to the Consolidated Fund ............................. 29 Note 6: Reconciliation of income recorded within the Operating Cost Statement to operating income payable to the Consolidated Fund ............................................ 29

3.3 Supply......................................................................................................................... 30 Definitions ................................................................................................................... 30 Accounting for Supply................................................................................................. 30

3.4 The budgeting system ................................................................................................ 31 The fiscal framework .................................................................................................. 31 Resource and capital budgets, departmental expenditure limits and annually managed expenditure................................................................................................. 31 Reporting performance against budgeting rules ........................................................ 32

Page 27 of 1

FINANCIAL REPORTING MANUAL CHAPTER 4: OPERATING COST STATEMENT

4 Operating Cost Statement

Chapter 4 Contents

4.1 Introduction................................................................................................................... 1

4.2 Income.......................................................................................................................... 1 Introduction................................................................................................................... 1 Definitions ..................................................................................................................... 1

Whole of United Kingdom, England and Northern Ireland.................................... 2 EU income............................................................................................................. 2 Items authorised to be netted off gross expenditure............................................. 3 Scotland ................................................................................................................ 3 Grants and grants-in-aid ....................................................................................... 4

FRS5 Reporting the substance of transactions Application Note G Revenue Recognition................................................................................................................... 4

Applicability ........................................................................................................... 4 Objectives of FRS5 Application Note G................................................................ 4

UITF Abstract 40 Revenue Recognition and Service Contracts .................................. 4 Applicability ........................................................................................................... 4 UITF consensus .................................................................................................... 4

4.3 Expenditure................................................................................................................... 5 Introduction................................................................................................................... 5

Administration and Programme Expenditure ........................................................ 6 Student loans ........................................................................................................ 6 EU expenditure ..................................................................................................... 6

SSAP 20 Foreign currency translation ......................................................................... 7 Applicability ........................................................................................................... 7 Objectives of SSAP20........................................................................................... 7

UITF Abstract 21 Proposed introduction of the Euro ................................................... 7 Applicability ........................................................................................................... 7 UITF consensus .................................................................................................... 7

UITF Abstract 26 Barter transactions for advertising ................................................... 7 Applicability ........................................................................................................... 7 UITF consensus .................................................................................................... 7

UITF Abstract 34 Pre-contract costs ............................................................................ 8 Applicability ........................................................................................................... 8 UITF consensus .................................................................................................... 8

4.4 Tax................................................................................................................................ 8 Introduction................................................................................................................... 8 FRS16 Current tax........................................................................................................ 8

Applicability ........................................................................................................... 8 Objective of FRS16............................................................................................... 8

FRS19 Deferred tax...................................................................................................... 8 Applicability ........................................................................................................... 8 Objectives of FRS19 ............................................................................................. 8

SSAP5 Accounting for Value Added Tax (VAT)........................................................... 9 Applicability ........................................................................................................... 9 Objectives of SSAP5............................................................................................. 9


Interpretation of SSAP5 for the public sector context ........................................... 9

4.5 Notional expenditure..................................................................................................... 9 Introduction................................................................................................................... 9 Notional premiums........................................................................................................ 9 Charging for the cost of capital................................................................................... 10

Investments comprising public dividend capital or other forms of equity investment, either with or without voted loans .................................................... 10 Investments, other than trading funds, comprising public dividend capital or other forms of equity investment, either with or without loans from the National Loans Fund. ................................................................................................................... 10 Investments in trading funds comprising public dividend capital either with or without loans from the National Loans Fund ...................................................... 10 Investments comprising only loans (either voted or from the National Loans Fund) with no public dividend capital or other form of equity investment ........... 11 Other Exceptions................................................................................................. 11

Calculating the cost of capital..................................................................................... 11

FINANCIAL REPORTING MANUAL CHAPTER 5: BALANCE SHEET ASSETS – TANGIBLE, INTANGIBLE AND INVESTMENTS

5

Balance sheet:

tangible and intangible fixed assets Chapter 5 Contents

5.1 Introduction................................................................................................................... 1

5.2 Tangible fixed assets.................................................................................................... 1

FRS 15 Tangible fixed assets....................................................................................... 1 Applicability ........................................................................................................... 1 Objectives of FRS15 ............................................................................................. 2 Adaptation of FRS15 for the public sector context ............................................... 2 Interpretations of FRS15 for the public sector context.......................................... 2 Other requirements ............................................................................................... 3

Infrastructure assets ..................................................................................................... 3 Adaptation of FRS15 in respect of accounting for roads ...................................... 3

Donated assets............................................................................................................. 4

Asset transfers.............................................................................................................. 4

Heritage assets............................................................................................................. 4 Interpretation of FRS15 in respect of accounting for heritage assets................... 5

SSAP 19 Investment properties ................................................................................... 6 Applicability ........................................................................................................... 6 Objectives of SSAP19........................................................................................... 6

FRS 5 Reporting the substance of transactions Application Note F ............................ 7 Applicability ........................................................................................................... 7 Objectives of FRS5 Application Note F................................................................. 7 Interpretation of FRS5 Application Note F for the public sector context............... 7

SSAP 21 Accounting for leases and hire purchase contracts...................................... 7 Applicability ........................................................................................................... 7 Objectives of SSAP21........................................................................................... 7

FRS 11 Impairment of fixed assets and goodwill ......................................................... 7 Applicability ........................................................................................................... 7 Objectives of FRS11 ............................................................................................. 8 Adaptation of FRS11 for the public sector context ............................................... 8 Interpretation of FRS11 for the public sector context ........................................... 8

SSAP 4 Accounting for government grants.................................................................. 9 Applicability ........................................................................................................... 9 Objectives of SSAP4............................................................................................. 9 Adaptation of SSAP4 for the public sector context ............................................... 9


Interpretation of SSAP4 for the public sector context ......................................... 10 Other requirements ............................................................................................. 10

UITF Abstract 24 Accounting for start-up costs.......................................................... 10 Applicability ......................................................................................................... 10 UITF consensus .................................................................................................. 11

UITF Abstract 28 Operating lease incentives............................................................ 11 Applicability ......................................................................................................... 11 UITF consensus .................................................................................................. 11

UITF Abstract 29 Website development costs ........................................................... 11 Applicability ......................................................................................................... 11 UITF consensus .................................................................................................. 11 Interpretation of UITF29 for the public sector context......................................... 11

UITF Abstract 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate...................................................... 12

Applicability ......................................................................................................... 12 UITF consensus .................................................................................................. 12 Adaptation of UITF31 for the public sector context............................................. 12

5.3 Intangible assets......................................................................................................... 12

FRS10 Goodwill and intangible assets....................................................................... 13 Applicability ......................................................................................................... 13 Objectives of FRS10 ........................................................................................... 13 Other requirements ............................................................................................. 13

SSAP13 Accounting for research and development .................................................. 13 Applicability ......................................................................................................... 13 Objectives of SSAP13......................................................................................... 13 Adaptation of SSAP13 for the public sector context ........................................... 13

UITF Abstract 27 Revisions to estimates of the useful economic life of goodwill and intangible assets......................................................................................................... 14

Applicability ......................................................................................................... 14 UITF consensus .................................................................................................. 14

EU Greenhouse Gas Emmission Allowance Trading Directive.................................. 14

5.4 Acquisitions and mergers ........................................................................................... 15

FRS6 Acquisitions and mergers................................................................................. 15 Applicability ......................................................................................................... 15 Objectives of FRS6 ............................................................................................. 15 Interpretation of FRS6 for the public sector context ........................................... 15

FRS7 Fair values in acquisition accounting ............................................................... 15 Applicability ......................................................................................................... 15 Objectives of FRS7 ............................................................................................. 16 Interpretation of FRS7 for the public sector context ........................................... 16

FINANCIAL REPORTING MANUAL CHAPTER 6: BALANCE SHEET: OTHER ASSETS AND LIABILITIES

6

Balance sheet:

other assets and liabilities Chapter 6 Contents

6.1 Introduction................................................................................................................. 69

6.2 Investments ................................................................................................................ 69 Loans, public dividend capital and other interests in public bodies............................ 69 Other investments ...................................................................................................... 69

6.3 Stocks and long-term contracts.................................................................................. 69 SSAP9 Stocks and long-term contracts ..................................................................... 69

Applicability ............................................................................................................ 69 Objectives of SSAP9.............................................................................................. 69 Interpretation of SSAP9 for the public sector context ............................................ 70

Stockpile goods .......................................................................................................... 70 Confiscated, seized, forfeited and foreclosed property .............................................. 70 Goods held under price support and stabilisation programmes (intervention stocks) 70

6.4 Debtors ....................................................................................................................... 71 UITF Abstract 4 Presentation of long-term debtors in current assets ........................ 71

Applicability ............................................................................................................ 71 UITF consensus ..................................................................................................... 71

UITF Abstract 5 Transfers from current assets to fixed assets .................................. 71 Applicability ............................................................................................................ 71 UITF consensus ..................................................................................................... 71

Loans .......................................................................................................................... 72 FRS 4 Capital Instruments ......................................................................................... 72

Applicability ............................................................................................................ 72 Objective of FRS 4 ................................................................................................. 72

6.5 Retirement Benefits .................................................................................................... 72 FRS17 Retirement benefits ........................................................................................ 72

Applicability ............................................................................................................ 72 Objectives of FRS17 .............................................................................................. 72

UITF Abstract 35 Death-in-service and incapacity benefits ....................................... 73 Applicability ............................................................................................................ 73 UITF consensus ..................................................................................................... 73

6.6 Provisions and Contingencies .................................................................................... 73 FRS12 Provisions, contingent liabilities and contingent assets ................................. 73

Applicability ............................................................................................................ 73 Objectives of FRS 12 ............................................................................................. 73 Interpretation of FRS12 for the public sector context ............................................ 74 Other requirements ................................................................................................ 74

Provision of information to Parliament........................................................................ 74

Page 68 of 1

FINANCIAL REPORTING MANUAL CHAPTER 7: ANNUAL REPORTS AND ACCOUNTS – DISCLOSURE AND PRESENTATION

7

Annual reports and accounts: disclosure and presentation

Chapter 7 Contents

7.1 Introduction...................................................................................................... 1 Summary financial information ........................................................................ 1

7.2 The annual report ............................................................................................ 1 Introduction...................................................................................................... 1 Scope of the annual report .............................................................................. 2

Interpretation of the Companies Act requirements for the public sector context......................................................................................................... 2

Management Commentary.............................................................................. 4 Applicability ................................................................................................. 4

Objectives of the RS........................................................................................ 4 Interpretations of the RS for the public sector context ................................ 4

Remuneration report ....................................................................................... 5 Objective of section 234B and Schedule 7A of the Companies Act............ 5 Interpretation of the Companies Act’s requirements for the public sector context......................................................................................................... 5

7.3 Statements by the Accounting Officer................................................................... 7 Statement of Accounting Officer’s responsibilities .......................................... 7 Statement on internal control .......................................................................... 8 Accounting Officer signature ........................................................................... 8

7.4 Formats and disclosures ................................................................................. 8 Introduction...................................................................................................... 8 Companies Act requirements .......................................................................... 8 Operating cost statement ................................................................................ 9

Companies Act requirements for departments and executive agencies under the Government Resources and Accounts Act 2000 and the Government Resources and Accounts Act (Northern Ireland) 2001 ........... 9 Companies Act requirements for non-departmental public bodies and trading funds.............................................................................................. 10

FRS 28 Corresponding amounts................................................................... 10 Applicability ............................................................................................... 10 Objective of FRS28 ................................................................................... 10 Interpretation of FRS 28 for the public sector context ............................... 10

FRS 3 Reporting financial performance ........................................................ 11 Applicability ............................................................................................... 11 Objective of FRS3 ..................................................................................... 11 Interpretation of FRS3 for the public sector context .................................. 11 Other requirements ................................................................................... 11


Balance sheet................................................................................................ 11

Companies Act requirements .................................................................... 11 SSAP 17 Accounting for post balance sheet events ..................................... 11

Applicability ............................................................................................... 11 Objectives of SSAP17 ............................................................................... 12 Interpretation of SSAP17 for the public sector context.............................. 12

Cash flow statement: FRS1........................................................................... 12 Applicability ............................................................................................... 12 Objectives of FRS1 ................................................................................... 13 Adaptation of FRS1 for the public sector context ...................................... 13 Other requirements ................................................................................... 14

Statement of Resources by Departmental Aim and Objectives .................... 14 Segmental reporting: SSAP 25 ..................................................................... 15

Applicability ............................................................................................... 15 Objectives of SSAP25 ............................................................................... 15 Fees and charges Information to be provided by departments, executive agencies and non-departmental public bodies.......................................... 15

Notes to the accounts.................................................................................... 16 Staff numbers and related costs................................................................ 16 Other administration costs and programme costs..................................... 16 Income....................................................................................................... 16 Analysis of net operating cost by spending body ...................................... 16 Tangible fixed assets................................................................................. 17 Intangible fixed assets............................................................................... 17

Investments – FRS13 Derivatives and other financial instruments ............... 18 Applicability ............................................................................................... 18 Objectives of FRS13 ................................................................................. 18 Interpretation of FRS13 for the public sector context ................................ 18 Debtors...................................................................................................... 19 Cash .......................................................................................................... 20 Creditors.................................................................................................... 20 Provisions for liabilities and charges ......................................................... 21 General Fund ............................................................................................ 21 Transactions financed directly by the Consolidated Fund......................... 21

Reserves ....................................................................................................... 22 Income and expenditure reserve .......................................................... 22 Revaluation reserve.............................................................................. 22 Donated assets reserve........................................................................ 22 Government grant reserve.................................................................... 22 Other reserves ...................................................................................... 22

Commitments under PFI contracts................................................................ 22 Disclosures required by the guidance on handling public funds ................... 22 Related party transactions............................................................................. 23 FRS8 Related party disclosures.................................................................... 23

Applicability ............................................................................................... 23 Objective of FRS8 ..................................................................................... 23 Interpretation of FRS8 for the public sector context .................................. 23

Third party assets.......................................................................................... 23 Entities within the departmental boundary .................................................... 24

7.5 Audit and publication........................................................................................... 24 Audit .............................................................................................................. 24

The auditor ................................................................................................ 24 The audit opinion....................................................................................... 24


The audit report ......................................................................................... 24

Presentation to Parliament and publication................................................... 24 Departments and agencies under the Government Resources and Accounts Act 2000 .................................................................................... 24 Departments and agencies under the Government of Wales Act 1998 .... 25 Departments and agencies under the Government Resources and Accounts Act (Northern Ireland) 2001 ....................................................... 25 Accounts prepared under the Public Finance and Accountability (Scotland) Act 2000 .................................................................................................... 25 Non-departmental public bodies................................................................ 25 Trading funds ............................................................................................ 25

FINANCIAL REPORTING MANUAL CHAPTER 8: RETIREMENT BENEFITS AND EARLY DEPARTURE COSTS

8 Retirement benefits and early departure costs

Chapter 8 Contents

8.1 Introduction.................................................................................................................. 1

8.2 Retirement benefits ...................................................................................................... 1 FRS 17 Retirement Benefits........................................................................................ 1

Applicability .............................................................................................................. 1 Objectives of FRS 17 ............................................................................................... 1 Adaptation of FRS 17 for the public sector context ................................................. 1

UITF Abstract 35 Death-in-service and incapacity benefits ......................................... 2 Applicability .............................................................................................................. 2 UITF consensus ....................................................................................................... 2 Other requirements .................................................................................................. 2

8.3 Early departure costs (also known as early retirement costs or compensation payments) ..................................................................................................................... 3 Introduction................................................................................................................... 3

Schemes which act as a principal ............................................................................ 4 Schemes which act as an agent .............................................................................. 4

Settling the liability........................................................................................................ 4 Schemes which act as a principal ............................................................................ 4 Schemes which act as an agent .............................................................................. 5

The “80:20” scheme ..................................................................................................... 5

Page 102 of 1


1 Introduction

Chapter 1 Contents

1.1 Objectives of the Manual .............................................................................................. 1

1.2 Compliance with the Manual ........................................................................................ 1 Financial statements must give a true and fair view..................................................... 1

Objectives of section 226 of the Companies Act ..................................................... 2 Interpretation of section 226 of the Companies Act for the public sector context.... 2

Non-departmental public bodies................................................................................... 2 Trading funds................................................................................................................ 3

1.3 Whole of Government Accounts................................................................................... 3

1.4 Key users of the financial statements........................................................................... 4

1.5 International accounting standards .............................................................................. 4


1.1 Objectives of the Manual

1.1.1 The Financial Reporting Manual is the technical accounting guide that complements guidance on the handling of public funds published separately by the relevant authorities. The Manual is prepared following consultation with the Financial Reporting Advisory Board and is issued by the relevant authorities in England and Wales, Scotland and Northern Ireland.

1.1.2 This Manual sets out the accounting and disclosure requirements for the annual report and accounts (as defined in chapter 7) of the following entities:

departments preparing resource accounts under the relevant legislation;

executive agencies;

executive non-departmental public bodies; and

trading funds

in England and Wales, Scotland and Northern Ireland.

1.1.3 In addition, the Department of Health, the Foundation Trust Monitor, the National Assembly for Wales and the Department of Health, Social Services and Public Safety in Northern Ireland will apply the principles outlined in this Manual to maintain the accounting guidance they issue in respect of Strategic Health Authorities, Primary Care Trusts, Special Health Authorities, NHS Trusts, Foundation Trusts, Local Health Boards in Wales, and Health and Social Services Trusts.

1.1.4 The Manual is kept under constant review. It is updated regularly to reflect developments in accounting standards and company law in the United Kingdom and, where appropriate, comments received from users. The authoritative version of the Manual for any given financial year will be available by the start of the financial year to which it relates. In the event that late changes are required (for example, because of a new accounting standard or UITF Abstract), amendments to the Manual will be issued by the relevant authorities after following due process. The Manual is available on a dedicated website www.financial-reporting.gov.uk.

1.1.5 The principles underlying the application of accounting standards set out in this Manual might also be applied to funds and accounts within central government (such as the National Insurance Fund, and accounts of the collection of taxes and duties). The Manual does not, however, consider the accounting requirements of these funds and accounts any further (see Annex 1 for a list of excluded funds and accounts).

1.1.6 The Manual does not replicate the text of accounting standards or company law. Accounts preparers will need to familiarise themselves with the requirements of individual standards and the Companies Act, together with the adaptations, interpretations and other requirements set out herein, in order to comply with this Manual.

1.2 Compliance with the Manual

Financial statements must give a true and fair view

1.2.1 With the exception of sub-section (1), section 226 of the Companies Act applies to all entities covered by the requirements of this Manual, as interpreted in paragraph 1.2.3.

Page 1 of 6

http://www.financial-reporting.gov.uk/


Objectives of section 226 of the Companies Act

1.2.2 The objectives of section 226 of the Companies act are to ensure that directors of every company prepare accounts that comprise a balance sheet and profit and loss account and that the accounts should give a true and fair view of the state of the company at the end of the financial year and of the profit or loss for the year.

Interpretation of section 226 of the Companies Act for the public sector context

1.2.3 In applying section 226 of the Companies Act, entities should be aware of the following interpretations for the public sector context: a) the requirement in section 226(1) that directors of every company prepare a

balance sheet and profit and loss account does not apply since the requirement for entities covered by the requirements of this Manual to prepare accounts is covered by other legislation;

b) any references to ‘directors’ and ‘company’ should be read to mean the ‘Accounting Officer’ and the ‘reporting entity’;

c) any references to a profit and loss account should be read to mean an operating cost statement or income and expenditure account or other form of statement of financial performance as necessary in the context of the reporting entity; and

d) any references to Schedule 4 of the Companies Act should be read to mean the guidance contained in this Manual (see Chapter 7).

1.2.4 When an entity considers it necessary to apply a ‘true and fair override’ in accordance with section 226(5), the entity should use informed and unbiased judgement to devise an appropriate alternative treatment, which should be consistent with both the circumstances of the entity and the spirit of this Manual. Any material departure from the Manual should be discussed in the first place with the relevant authority (through sponsoring bodies where appropriate). Particulars of any departure, the reasons for it and its effects should be disclosed in the financial statements.

1.2.5 Entities that comply with this Manual also prepare budgets on a resource (accruals) basis and are subject to control by the relevant authorities through various arrangements1. Accounting policies are generally common to both accounting and budgeting. In selecting relevant accounting policies (see chapter 2), entities should have regard to budgetary and control requirements, but should give paramount importance to the need for financial statements to give a true and fair view.

1.2.6 Entities need to consult with the relevant authority (through sponsoring bodies where appropriate) before changing significant accounting policies and estimation techniques. This requirement is due to the potential impact of the change on the entities’ budgets and on the National Accounts.

Non-departmental public bodies

1.2.7 Non-departmental public bodies (NDPBs) that are incorporated as companies, or that have charitable status, should comply with, respectively, the Companies Act or regulations issued under charities legislation and, where applicable, the Statement of Recommended Practice (SORP) Accounting by Charities issued by the Charity Commission (and, if they are both registered companies and charities, with both the

1 These arrangements are set out in the guidance on the handling of public funds published separately by the relevant authorities and in other guidance issued by them from time to time.

Page 2 of 6


Companies Act and the Charities SORP). They should also follow the principles in this Manual and provide the additional disclosures required by the Manual (for example, notional costs and disclosure on salary and pension entitlements) where these go beyond the Companies Act or the SORP.

1.2.8 There is a strong presumption that compliance with the SORP is necessary for charities’ accounts to give a true and fair view. Exempt charities (that is, exempt from the requirements of the Charities Act) should, therefore, comply with the recommendations of the SORP wherever possible, unless they or their sponsor department feel that the resulting financial statements will not provide the information needed for monitoring purposes. Any departure from the SORP should be disclosed.

1.2.9 Where a sponsoring department considers that the Statement of Financial Activities (SOFA) prepared by its charitable non-departmental public bodies does not provide sufficient information to allow appropriate comparison with its non-departmental public bodies that are not charities or to monitor and control its charitable non-departmental public bodies, it may direct the non-departmental public body to supplement the SOFA with a summarised income and expenditure account.

Trading funds

1.2.10 Trading funds are established under government trading legislation. They might also be executive agencies or departments in their own right. In preparing their financial statements, trading funds should follow the requirements of UK GAAP, but should also follow the principles set out in this Manual and provide the additional disclosures required by the Manual where these go beyond the requirements of the Companies Act.

1.3 Whole of Government Accounts

1.3.1 HM Treasury is responsible under the Government Resources and Accounts Act 2000 for preparing Whole of Government Accounts for a group of bodies each of which appears to the Treasury to exercise functions of a public nature or to be entirely or substantially funded from public money. HM Treasury has determined that entities in England and Wales covered by the requirements of this Manual, and the NHS Trusts and Foundation Trusts in England and Wales whose accounting guidance follows the principles of this Manual, shall be consolidated into Whole of Government Accounts. Other entities, including local authorities, the development of whose accounting guidance is not covered by the Financial Reporting Advisory Board, will also be consolidated into Whole of Government Accounts.

1.3.2 The devolved administrations of Scotland and Northern Ireland have agreed to provide relevant information to HM Treasury to allow the consolidation of entities within their jurisdictions into Whole of Government Accounts. These entities are covered by the requirements of this Manual or by the separate requirements for the Health and Social Services Trusts in Northern Ireland.

1.3.3 Uniform accounting policies should generally be used in preparing consolidated financial statements (see paragraph 2.4.11). Compliance with the requirements of this Manual should provide sufficient convergence of accounting policies for the purposes of Whole of Government Accounts.

Page 3 of 6


1.4 Key users of the financial statements

1.4.1 The information presented in the financial statements should be adequate for the needs of the key users of the financial statements. Users include, but are not limited to:

Parliament, including relevant Select Committees;

the relevant authority;

the entity’s management board;

the entity’s audit committee; and

the taxpayer.

1.4.2 In addition, HM Treasury uses the more detailed information underpinning the published financial statements, as supplied by relevant entities, for purposes that include:

setting budgets for controlling public expenditure;

monitoring and controlling income and expenditure both for individual entities and for the public sector as a whole;

laying Supply Estimates before Parliament;

preparing Central Government Accounts and Whole of Government Accounts; and

publishing and supplying statistical information.

1.4.3 The Office for National Statistics also uses the information (as supplied by relevant entities via HM Treasury) for purposes that include:

preparation of National Accounts (for example, the measurement of Gross Domestic Product); and

measurement of public sector output and productivity.

1.4.4 Entities drawing up financial statements should ensure that they consider the interests of all users in determining, or considering changes to, accounts formats (within the parameters set out in chapter 7) or accounting policies (within the constraints set out in this Manual).

1.5 International accounting standards

1.5.1 The relevant legislation in respect of government departments whose activities cover the whole of the United Kingdom, or that are responsible for activities in England, Wales or Northern Ireland, requires the relevant authorities, and Scottish Ministers have elected, to direct that accounts prepared under the legislation and other relevant legislation should conform to generally accepted accounting practice subject to such adaptations that are necessary in the public sector context. This Manual provides technical guidance on the adaptations and additional requirements to existing UK generally accepted accounting practice.

1.5.2 EU listed companies must follow international accounting standards adopted by the European Commission for accounting periods beginning on or after 1 January 20052. Generally accepted accounting practice for the entities covered by this Manual is normally held to mean compliance with UK accounting standards. The relevant

2 Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards.

Page 4 of 6


authorities have determined that they will follow the convergence strategy proposed by the Accounting Standards Board in aligning UK accounting standards with international accounting standards but will keep the convergence strategy under review and bring forward proposals for a swifter implementation of international accounting standards (IAS) if that is appropriate. This Manual will continue to be updated in line with those developments.

1.5.3 More detail about the alignment of UK accounting standards with IAS is given in Annex 2.

1.5.4 The International Federation of Accountants’ International Public Sector Accounting Standards Board has as one of its aims the development of International Public Sector Accounting Standards (IPSAS) for application by all levels of government internationally. IPSAS are based on IAS. The UK does not apply IPSAS directly, although the requirements of IPSAS are considered as part of the review of the applicability of UK accounting standards in the public sector context. Further information about IPSAS is also contained in Annex 2.

Page 5 of 6


GLOSSARY Relevant Authority: HM Treasury,

DFP Northern Ireland, Scottish Executive Accountancy Service Team. National Assembly for Wales

Parliamentary or Parliament:

Westminster Parliament Northern Ireland Assembly Scottish Parliament National Assembly for Wales

the Auditors or C&AG:

Comptroller and Auditor General Comptroller and Auditor General Northern Ireland Auditor General for Scotland Auditor General for Wales

Guidance on Handling Public Funds: Government Accounting produced by HM Treasury Government Accounting Northern Ireland, produced by DFPNI Scottish Public Finance Manual issued by Scottish Ministers

Relevant Parliamentary Committees: In England and Wales the Committee of Public Accounts and parliamentary select committees In Northern Ireland, the relevant Northern Ireland Assembly Committees, In Scotland, the Audit Committee of the Scottish Parliament

Resource Accounting Acts: The Government Resources and Accounts Act 2000 for England and Wales, The Government Resources and Accounts Act (NI) 2001 for Northern Ireland and The Public Finance and Accountability (Scotland) Act 2000 for Scotland

Statutory Bank Account provider:

Office of Paymaster General (OPG) in England and Wales Northern Ireland Consolidated Fund in Northern Ireland Scottish Consolidated Fund in Scotland for internal matters – OPG for initial block funding

Consolidated Fund: The Consolidated Fund for England and Wales The Northern Ireland Consolidated Fund The Scotland Consolidated Fund

Contingencies Fund:

The Contingencies Fund for England, Scotland and Wales The Northern Ireland Consolidated Fund for Northern Ireland

Appraisal and Evaluation Guidance: Treasury issued Appraisal and Evaluation in Central Government (the Green Book) Northern Ireland Preface and ‘Green Book.’Scottish Public Finance Manual

Page 6 of 6


2 Accounting principles

Chapter 2 Contents

2.1 Application of GAAP ..................................................................................................... 1

General 1 Accounting convention ................................................................................................. 1 No exemptions for smaller entities ............................................................................... 1 Practical application of guidance.................................................................................. 2

2.2 Statement of Principles................................................................................................. 2 2.3 FRS18: Accounting policies.......................................................................................... 3

Applicability................................................................................................................... 3 Objectives of FRS18..................................................................................................... 3 Interpretation of FRS18 for the public sector context ................................................... 3 Other requirements....................................................................................................... 3

2.4 Accounting boundaries: FRS2 (subsidiary undertakings), FRS9 (associates and joint ventures) and FRS5 (Substance of Transactions) ....................................................... 4 Applicability................................................................................................................... 4 Objectives of FRS2....................................................................................................... 4 Objectives of FRS9....................................................................................................... 4 Objectives of FRS5....................................................................................................... 4 Adaptations in respect of the departmental accounting boundary ............................... 5 Uniform accounting policies in preparing consolidated financial statements ............... 6


2.1 Application of GAAP

General

2.1.1 The accounting policies contained in this Manual follow generally accepted accounting practice (GAAP) in the UK, to the extent that it is meaningful and appropriate in the public sector context. Although the term ‘GAAP’ has no statutory or regulatory authority, there is a general consensus that it is founded on:

a) the accounting and disclosure requirements of the Companies Act 1985 (as amended by the Companies Act 1989 – subsequently referred to as the Companies Act);

b) pronouncements by or endorsed by the Accounting Standards Board, including the Statement of Principles for Financial Reporting, the accounting standards – statements of standard accounting practice (SSAP) and financial reporting standards (FRS) – and Urgent Issue Task Force (UITF) Abstracts and Statements of Recommended Practice (SORP); and

c) the body of accumulated knowledge built up over time and promulgated in (for example) textbooks, technical journals and research papers.

2.1.2 For the purposes of accounting by the entities covered by this Manual, GAAP is taken to mean primarily those items listed under (a) and (b) above, interpreted as necessary in the light of the body of accumulated knowledge under (c).

2.1.3 Where the public sector context is such that application of GAAP would not produce financial statements relevant to its needs, GAAP is adapted. The main adaptation of GAAP’s accounting conventions is set out below. Adaptations to accounting standards are set out in the sections on individual standards and abstracts. Adaptations to the Companies Act requirements are set out in Chapter 7.

2.1.4 In addition to the general principles underlying GAAP, entities covered by the requirements of this Manual need apply two additional principles – parliamentary accountability and regularity. These principles are explained in the context of the relevant authorities in the separate guidance on handling public funds.

Accounting convention

2.1.5 Financial statements should be prepared under the historical cost convention, modified by the revaluation of fixed assets, current asset investments and stocks.

No exemptions for smaller entities

2.1.6 The Financial Reporting Standard for Smaller Entities (FRSSE) brings together those accounting standards and requirements that are applicable to smaller entities. Under UK GAAP, adoption of the FRSSE is not compulsory. Adoption is not available to any entity covered by the requirements of this Manual. Subject to the provisions of the Manual, the disclosure exemptions permitted by the Companies Act will not apply unless specifically approved by the relevant authority.

Page 1 of 7


Practical application of guidance

2.1.7 The following chapters also provide web links to practical guidance on the application of GAAP where the relevant authorities, in consultation with the preparers of financial statements, feel that such guidance will assist in preparing the financial statements. The guidance can also be obtained in hard copy from the relevant authorities. This is practical guidance and it is for the relevant authority to determine whether entities are required to apply it. Relevant authorities might provide additional guidance on request.

2.2 Statement of Principles

2.2.1 The Accounting Standards Board’s Statement of Principles for Financial Reporting sets out the principles that the ASB believes should underlie the preparation and presentation of general purpose financial statements. The ASB has issued a draft Interpretation of these principles for public benefit entities, and the entities covered by this Manual should have regard to the Statement and its Interpretation. In particular, accounts preparers should be familiar with the principles of:

relevance, reliability, comparability, understandability and materiality;

the elements of financial statements, including assets, liabilities and ownership interest;

recognition in financial statements, including initial recognition and derecognition;

measurement in financial statements; and

presentation in financial statements.

2.2.2 This Manual refers to these principles in this and subsequent chapters and, where necessary, interprets them for the particular circumstances of the type of entity covered by the Manual.

2.2.3 The Statement categorises financial information into three broad headings: special purpose financial reports, general purpose financial reports, and other financial information. The Statement notes that financial statements do not seek to meet all the information needs of users, and that users will usually need to supplement the information they obtain from the general purpose financial statements (the operating cost statement balance sheet and cash flow statement and supporting notes) with information from other sources. The Interpretation notes that this issue is at least as important for public benefit entities, if not more so. The Interpretation recognises that there is more than one class of user for a public benefit entity’s general purpose financial statements and identifies as the defining class of user its funders and financial supporters.

2.2.4 Some of the entities covered by the requirements of this Manual will prepare general purpose financial statements that are sufficient for the needs of their funders and financial supporters. However, for departments that are required by the relevant legislation to demonstrate accountability to Parliament, the financial statements that conform to generally accepted accounting practice (as adapted in the public sector context) do not provide sufficient information. They are required to prepare a statement on parliamentary accountability, which, within the meaning of the Statement, can be seen as a special purpose financial report.

Page 2 of 7


2.3 FRS18: Accounting policies

Applicability

2.3.1 FRS18 applies, as interpreted in paragraph 2.3.3, to all entities covered by this Manual; the requirements of Statements of Recommended Practice (SORPs) also apply where relevant. Financial statements should be prepared using accounting policies selected for material items1 in accordance with the principles set out in FRS18 Accounting policies as the most appropriate for the purpose of giving a true and fair view. In selecting accounting policies, entities shall apply the adaptations and other requirements required by this Manual.

Objectives of FRS18

2.3.2 The objective of FRS18 is to ensure that for all material items entities select accounting policies that are most appropriate to the circumstances for the purpose of giving a true and fair view, that they review them regularly, change them as appropriate and disclose sufficient information to enable users to understand them.

Interpretation of FRS18 for the public sector context

2.3.3 The following interpretation of FRS18 applies to entities required to prepare their financial statements in accordance with the guidance in this Manual.

Going concern

a) For non-trading entities in the public sector, the anticipated continuation of the provision of a service in the future, as evidenced by inclusion of financial provision for that service in published documents, is normally sufficient evidence of going concern. However, a trading entity needs to consider whether it is appropriate to continue to prepare its financial statements on a going concern basis where it is being, or is likely to be, wound up.

b) Sponsored entities whose balance sheets show total net liabilities should prepare their financial statements on the going concern basis unless, after discussion with their sponsors, the going concern basis is deemed inappropriate.

c) Where an entity ceases to exist, it should consider whether or not its services will continue to be provided (using the same assets, by another public sector entity) in determining whether to use the concept of going concern in its final set of financial statements.

Other requirements

2.3.4 Entities should consult the relevant authorities (through sponsoring bodies where appropriate) about any novel or contentious accounting policies they might propose to adopt to reflect their specific circumstances.

1 The Foreword to accounting standards issued by the Accounting Standards Board notes that accounting standards need not be applied to immaterial items.

Page 3 of 7


2.4 Accounting boundaries: FRS2 (subsidiary undertakings), FRS9 (associates and joint ventures) and FRS5 (Substance of Transactions)

Applicability

2.4.1 Departments shall prepare an annual report and consolidated financial statements (as defined in chapter 7) covering all entities within their consolidation boundary as set out in paragraphs 2.4.2 and 2.4.8 to 2.4.10. Non-departmental public bodies and trading funds shall prepare consolidated financial statements in accordance with the requirements of FRS2, FRS9 and FRS5.

2.4.2 The departmental boundary is different from the concept of a group under generally accepted accounting practice, because it is based on in-year budgetary control and not on strategic control. Entities that satisfy the FRS2, FRS9 and FRS5 criteria for consideration as subsidiary undertakings, associated undertakings or joint ventures will be accounted for in accordance with FRS2 and FRS9 only if:

a) the entity is not one that is determined to be outside the boundary because the adaptations in paragraph 2.4.9 apply; and

b) the entity is regarded as an extension of the parent entity, meaning that the parent entity exercises in-year budgetary and spending controls on the entity.

2.4.3 If either of the criteria in 2.4.2 is not met, then where one entity has a formal investment in a second entity, it should be treated as an investment in the entity’s consolidated financial statements and, as appropriate, in the separate accounts produced by the entity within the boundary that holds the investment.

2.4.4 For the purposes of applying the principles of consolidation, the department will be the parent entity in the departmental consolidations. The financial statements of all entities whose results are to be consolidated will generally have the same accounting reference date. The relevant authority will consider the treatment of non-coterminous accounting reference dates if cases arise.

Objectives of FRS2

2.4.5 The objective of FRS2 is to require parent undertakings to provide financial information about the economic activities of their groups in consolidated financial statements. These consolidated statements should present the financial information of the group as a single economic entity.

Objectives of FRS9

2.4.6 The objective of FRS9 is to reflect the effect of investments in associates and joint ventures on an investor’s financial position, where it is partly accountable for the associate or joint venture’s activities. The FRS also deals with joint arrangements that do not qualify as associates or joint ventures because they are not entities.

Objectives of FRS5

2.4.7 The objective of FRS5 is to ensure that the substance of an entity’s transactions is reported in its financial statements. The effect of the transactions and any resulting

Page 4 of 7


assets, liabilities, gains or losses should be faithfully represented in its financial statement.

Adaptations in respect of the departmental accounting boundary

2.4.8 In addition to the central funds and taxation flows referred to in paragraph 1.1.5, the following entities are outside the departmental resource accounting boundary:

a) any body classified as a public corporation by the Office for National Statistics

(which includes trading funds);

b) trading funds not classified as public corporations;

c) any body classified to the local government sector by the Office for National Statistics;

d) NHS, Foundation and HSS Trusts;

e) executive non-departmental public bodies (NDPBs) (including Advisory and Tribunal NDPBs) that produce their own financial statements, except where there are good grounds for consolidation as determined by the relevant authority;

f) other public bodies where the department exercises only strategic control, except where there are good grounds for consolidation as determined by the relevant authority; and

g) any body classified to the private or rest of world sectors by the Office for National Statistics.

2.4.9 The departmental resource accounting boundary will, therefore, include the following entities: a) Supply-financed agencies;

b) non-agency parts of the department accounted for through the supply process and other bodies whose expenditure is accounted for in separate financial statements, including non-executive non-departmental public bodies (NDPBs), such as Advisory NDPBs and Tribunal NDPBs;

c) exceptionally, executive NDPBs or other public bodies that produce their own financial statements where there are good grounds for consolidation as determined by the relevant authority; and

d) strategic health authorities and primary care trusts in England, Local Health Boards in Wales, Health Boards in Scotland and Health Boards in Northern Ireland.

2.4.10 The criteria set out in paragraph 2.4.9 (c) will apply to very few entities, and should be agreed with the relevant authority on a case-by-case basis. A minimum requirement for consolidation will be that the department has a power to exercise direct in-year budgetary control over expenditure, for example, by amending previously agreed budgets for all or any part of the NDPB's expenditure and to require any further expenditure by the NDPB to comply with the amended budgets. Entities should refer to the relevant authority in cases where any of the requirements cannot be applied or where there is uncertainty as to how they are to be applied.

Page 5 of 7


Uniform accounting policies in preparing consolidated financial statements

2.4.11 FRS 2 states that uniform group accounting policies should generally be used in preparing the consolidated financial statements, but that in exceptional cases different policies may be used with appropriate disclosure. Entities within the departmental boundary will be expected to observe the broad principles and policies set out in this Manual. Observance of the Manual should therefore result in sufficient uniformity to satisfy the requirements of the standard, but it is for departments to ensure an appropriate degree of consistency within their departmental group. This does not preclude variation in the specific application of certain policies – for example, the selection of appropriate useful economic lives for calculating depreciation – in order to reflect the particular business circumstances of individual entities.

Page 6 of 7














Contingencies Fund:



Page 7 of 7


Page 26 of 8


3 Statement of Parliamentary Supply

Chapter 3 Contents

3.1 Introduction................................................................................................................. 28

3.2 The Statement of Parliamentary Supply..................................................................... 28 Introduction................................................................................................................. 28 The Statement of Parliamentary Supply..................................................................... 28 The Notes to the Statement of Parliamentary Supply ................................................ 29

Note 2: Analysis of net resource outturn by section .............................................. 29 Note 3: Reconciliation of Estimates and accounts................................................. 29 Note 4: Reconciliation of resources to cash requirement ...................................... 29 Note 5: Analysis of income payable to the Consolidated Fund ............................. 29 Note 6: Reconciliation of income recorded within the Operating Cost Statement to operating income payable to the Consolidated Fund ............................................ 29

3.3 Supply......................................................................................................................... 30 Definitions ................................................................................................................... 30 Accounting for Supply................................................................................................. 30

3.4 The budgeting system ................................................................................................ 31 The fiscal framework .................................................................................................. 31 Resource and capital budgets, departmental expenditure limits and annually managed expenditure................................................................................................. 31 Reporting performance against budgeting rules ........................................................ 32

Page 27 of 1


3.1 Introduction 3.1.1 This chapter applies only to departments covering the whole of the United Kingdom

and departments covering England and Northern Ireland. It provides guidance on how departments should account for Supply in the Statement of Parliamentary Supply and for outturn against Estimates in the notes supporting the Statement. The Scottish Parliament and the National Assembly for Wales have their own financing arrangements and their own forms of parliamentary accountability. There is also a section that provides some information about the budgeting framework.

3.1.2 The format of the accounts produced under the Public Finance and Accountability (Scotland) Act 2000 includes comparison of outturn against budget but does not include a separate Statement of Parliamentary Supply as set out in this chapter. However, the reconciliation of parliamentary Supply (parliamentary funding) for a financial year follows the principles set out in this chapter and is disclosed in a note in the annual accounts.

3.1.3 Information about the links between Parliament, the Supply process and departmental accounts and Supply Estimates is available in one of HM Treasury’s Managing Resources booklets – Managing the links to Parliamentary Supply. Information on the general principles relating to Supply and to Parliamentary control over income and expenditure are set out in the introductory sections to the Main Supply Estimates, in chapter 11 of Government Accounting (HM Treasury) and in Government Accounting Northern Ireland (the Department of Finance and Personnel Northern Ireland). Further guidance on the day-to-day management of the Consolidated Fund and the links with departments is available from HM Treasury’s Exchequer Funds and Accounts Team.

3.1.4 General information about the Fiscal Framework, the public spending framework and the Public Expenditure Statistical Analyses is available on HM Treasury’s website. Specific guidance on budgeting and on the Public Expenditure System database is available on HM Treasury’s gsi website.

3.1.5 Guidance on the accounting treatment of income payable to the Consolidated Fund (Consolidated Fund Extra Receipts or CFERs) is provided in chapter 4. A worked example of accounting for Supply, including the treatment of balances to be surrendered at the end of the financial year and income payable to the Consolidated Fund, is provided.

3.2 The Statement of Parliamentary Supply

Introduction 3.2.1 This section of the chapter explains the Statement of Parliamentary Supply. Supply is

defined in the next section.

The Statement of Parliamentary Supply 3.2.2 The Statement of Parliamentary Supply is the parliamentary accountability Statement.

It reports the following to Parliament:

a) in the summary of resource outturn, a comparison of outturn against the Supply Estimate voted by Parliament in respect of each Request for Resources4. The Summary will show gross resource expenditure, income Appropriated in Aid and net resource expenditure. It also includes a comparison of non-operating cost Appropriations in Aid with the amount voted by Parliament in the Supply Estimate;

4 ‘Request for Resources’ is defined in Government Accounting 11.3.37.

Page 28 of 6


b) a summary of net cash requirement, with a comparison of outturn against the

Supply Estimate voted by Parliament; and

c) a summary of income not Appropriated in Aid and payable to the Consolidated Fund.

3.2.3 Explanations of variances between the Estimates and outturn should be given in the Operating and Financial Review. A brief explanation of any Excess Votes should be given on the face of the Statement of Parliamentary Supply, with a detailed explanation given in the Operating and Financial Review.

The Notes to the Statement of Parliamentary Supply 3.2.4 The Statement of Parliamentary Supply is supported by Notes to the accounts. The

following information must be given in the supporting notes.

Note 2: Analysis of net resource outturn by section 3.2.5 This note follows the format of Part II of the Estimate. It analyses net resource outturn

by section and between administration costs, other current expenditure, grants and appropriations in aid. The note compares the net total outturn for each section within each Request for Resources with the Estimate. The note should give a brief explanation of the reasons for variances between the Estimate and outturn, with more detail being given in the Operating and Financial Review.

Note 3: Reconciliation of Estimates and accounts 3.2.6 This note is in two parts:

a) Note 3(a) reconciles the net resource outturn (the total of Note 2) to the net operating cost shown in the Operating Cost Statement by adjusting for prior period adjustments, non-Supply income (Consolidated Fund Extra Receipts) and Non-Supply expenditure (see 3.3.1). This replicates the first part of the Reconciliation of resource expenditure between Estimates, Accounts and Budgets in the Notes to the Main Estimates;

b) Note 3(b) shows outturn against the Administration Budget.

Note 4: Reconciliation of resources to cash requirement 3.2.7 This note reconciles the net resource outturn to the net cash requirement. It should

briefly state the reasons for any variances between the Estimate and outturn, with the detailed reasons being explained in the Operating and Financial Review.

Note 5: Analysis of income payable to the Consolidated Fund 3.2.8 This note analyses income payable to the Consolidated Fund in two ways. First,

operating income and receipts are disclosed as being excess appropriations-in-aid or as not classified as appropriations-in-aid. Secondly, non-operating income and receipts are disclosed as being excess appropriations-in-aid (with a further analysis in Note 7: Non-operating income – Excess A-in-A), non-operating income and receipts not classified as appropriations-in-aid (with a further analysis in Note 8: Non-operating income not classified as A-in-A). Other amounts collectable on behalf of the Consolidated Fund and excess cash surrenderable to the Consolidated Fund are also disclosed.

Note 6: Reconciliation of income recorded within the Operating Cost Statement to operating income payable to the Consolidated Fund 3.2.9 This note reconciles the income accounted for in the Operating Cost Statement to

appropriations-in-aid recorded in the Statement of Parliamentary Supply by adjusting the income for excess appropriations-in-aid and operating income not classified as appropriations-in-aid.

Page 29 of 6


3.3 Supply

Definitions 3.3.1 Supply is the means by which parliamentary authority is secured for most government

expenditure. This authority is required for all expenditure financed from the Consolidated Fund other than for expenditure covered by standing statutory authority (known as ‘standing services’) such as the UK contributions to the European Union, servicing of government debt and certain salaries (for example, judges’ salaries).

3.3.2 Supply is granted on an annual basis, voted in Estimates and in the Appropriation Acts (Budget Act in Northern Ireland). This Act authorises departments to draw down sums of money from the Consolidated Fund for the service of a specified year. The amount of cash issued from the Consolidated Fund and the amount of cash spent by a department in any year is likely to differ, giving rise to the ‘Consolidated Fund Supply Balance’ – which might be a balance due to or from the Consolidated Fund.

3.3.3 The Consolidated Fund Supply Balance is the difference between the Net Cash Requirement and the sum of Supply Drawn Down and Deemed Supply to the extent that the Net Cash Requirement outturn is within the limit set in the Supply Estimate.

3.3.4 ‘Supply Drawn Down’ is the amount of Supply that a department receives from the Consolidated Fund in respect of the financial year. It does not include any Supply drawn down in respect of a prior financial year (see paragraph 3.2.6). Any Supply Drawn Down not spent is due to the Consolidated Fund at the end of the financial year. In practice, this creditor balance is usually offset against issues in the following year and not surrendered in cash.

3.3.5 ‘Deemed Supply’ refers to the settlement of a prior year creditor to the Consolidated Fund for Supply. The creditor is settled when it is offset against Supply in the current year. (That is, there may be a difference between the cash received from the Consolidated Fund and the amount of Supply issued in any one year.)

3.3.6 Supply might also be drawn down to recompense a department where in the prior year it has spent amounts within its Net Cash Requirement for that year but not drawn down Supply to do so (that is, in settlement of a Consolidated Fund Supply debtor in the prior year – see paragraph 3.3.7(d)). Such Supply drawn down does not represent Supply for the current year and will not be taken into account in the Consolidated Fund Supply balance for the current year.

Accounting for Supply 3.3.7 Departments should account for Supply as follows.

a) Supply Drawn Down and Deemed Supply should not be accounted for as income. Supply should be credited to the General Fund as financing, with amounts in respect of different financial years shown separately.

b) Supply should be shown in the Cash Flow Statement as ‘financing from the Consolidated Fund (Supply)’ and analysed between amounts relating to the current year and the prior year.

c) Amounts issued from the Consolidated Fund but not spent at the year end should be disclosed as year end creditors (debit General Fund, credit Consolidated Fund Supply creditors). This accounting entry should be reversed in the following year where the creditor is settled by means of Deemed Supply.

d) Cash expended in excess of the amounts issued from the Consolidated Fund but within the net cash requirements set by Parliament should be disclosed as a year end debtor (debit Consolidated Fund Supply debtor, credit General Fund). This accounting entry should be reversed in the following year when the cash is issued from the Consolidated Fund.

Page 30 of 6


e) Where the net cash requirement outturn is in excess of the cash requirement

approved by the Parliamentary Estimate, a Consolidated Fund Supply Debtor should only be recognised up to the value of the net cash requirement approved by Parliament. At the year end the Department has not obtained approval to spend this additional cash and no obligation exists on the part of the Consolidated Fund to supply the deficit. As the department has no right to receive this benefit, the recognition of the Supply Debtor within the accounts must be limited to the level set within the Supply Estimate. Should parliamentary approval subsequently be given for the excess cash expenditure (as it generally will be), a Consolidated Fund Supply Debtor should be created, but this will appear in the following year's accounts.

3.2.8 Examples of the entries relating to accounting for Consolidated Fund transactions (both relating to Supply and to Extra Receipts) illustrate the requirements contained in the above paragraph. Those elements of the examples that are not reproduced in the accounts should be retained as part of the audit trail and should, where requested, be passed to the Exchequer Funds and Accounts team in the Treasury for the purposes of confirming the amount of Supply issued and deemed to have been issued and the surrender of Consolidated Fund Extra Receipts.

3.4 The budgeting system

The fiscal framework 3.4.1 The budgeting system is a set of Treasury rules for the control of public spending in

support of the fiscal framework. Under the Code for Fiscal Stability, the fiscal framework comprises two key elements:

a) to borrow only to invest. That is, over the economic cycle the costs of current expenditure will be met by current income (the Golden Rule); and

b) to ensure that public sector net debt will be held over the cycle at a stable and prudent level (the Sustainable Investment Rule).

3.4.2 Performance against the fiscal framework is measured using national accounts aggregates. National accounts are prepared by the Office for National Statistics in line with internationally agreed rules, which are different from GAAP. That is one of the reasons why transactions might score differently in budgets and in accounts.

Resource and capital budgets, departmental expenditure limits and annually managed expenditure 3.4.3 Departments have a Resource Budget and a Capital Budget. These budgets are

divided into Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME). DELs are firm, three-year plans set in biennial spending reviews. AME is expenditure that cannot be made subject to firm, three-year plans, and is subject to review twice a year. All expenditure is in DEL unless HM Treasury has specified otherwise.

3.4.4 The budgeting system applies to the public sector as a whole: central government, local government and public corporations. A department’s budgets will normally include:

the expenditure of the department, its agencies and its non-departmental public bodies on an accruals basis and including cost of capital charges;

certain income of these bodies that is within budgets, for example income from the sale of services;

government grants to local authorities and supported capital expenditure (revenue); and

Page 31 of 6


support to public corporations by way of grants and loans.

Reporting performance against budgeting rules 3.4.5 Departments send reports on a budgeting basis to HM Treasury on a regular basis

through the Combined Online Information System (COINS). HM Treasury publishes high level and detailed information in publications such as Public Expenditure Statistical Analyses. Departments publish budgetary information in Departmental Reports; they publish reconciliations to budgets in their Supply Estimates; and they are required to report in Note 3 to their resource accounts the outturn against Estimate and outturn against the Administration Budget (see paragraph 3.2.6).

Page 32 of 6


GLOSSARY

Relevant Authority: HM Treasury, DFP Northern Ireland, Scottish Executive Accountancy Service Team. National Assembly for Wales











Contingencies Fund:



Page 33 of 6


4 Operating Cost Statement

Chapter 4 Contents

4.1 Introduction................................................................................................................... 1

4.2 Income.......................................................................................................................... 1 Introduction................................................................................................................... 1 Definitions ..................................................................................................................... 1

Whole of United Kingdom, England and Northern Ireland.................................... 2 EU income............................................................................................................. 2 Items authorised to be netted off gross expenditure............................................. 3 Scotland ................................................................................................................ 3 Grants and grants-in-aid ....................................................................................... 4

FRS5 Reporting the substance of transactions Application Note G Revenue Recognition................................................................................................................... 4

Applicability ........................................................................................................... 4 Objectives of FRS5 Application Note G................................................................ 4

UITF Abstract (40) Revenue Recognition and Service Contracts................................ 4 Applicability ........................................................................................................... 4 UITF consensus .................................................................................................... 4

4.3 Expenditure................................................................................................................... 5 Introduction................................................................................................................... 5

Administration and Programme Expenditure ........................................................ 6 Student loans ........................................................................................................ 6 EU expenditure ..................................................................................................... 6

SSAP 20 Foreign currency translation ......................................................................... 7 Applicability ........................................................................................................... 7 Objectives of SSAP20........................................................................................... 7

UITF Abstract 21 Proposed introduction of the Euro ................................................... 7 Applicability ........................................................................................................... 7 UITF consensus .................................................................................................... 7

UITF Abstract 26 Barter transactions for advertising ................................................... 7 Applicability ........................................................................................................... 7 UITF consensus .................................................................................................... 7

UITF Abstract 34 Pre-contract costs ............................................................................ 8 Applicability ........................................................................................................... 8 UITF consensus .................................................................................................... 8

4.4 Tax................................................................................................................................ 8 Introduction................................................................................................................... 8 FRS16 Current tax........................................................................................................ 8

Applicability ........................................................................................................... 8 Objective of FRS16............................................................................................... 8

FRS19 Deferred tax...................................................................................................... 8 Applicability ........................................................................................................... 8 Objectives of FRS19 ............................................................................................. 8

SSAP5 Accounting for Value Added Tax (VAT)........................................................... 9 Applicability ........................................................................................................... 9 Objectives of SSAP5............................................................................................. 9


Interpretation of SSAP5 for the public sector context ........................................... 9

4.5 Notional expenditure..................................................................................................... 9 Introduction................................................................................................................... 9 Notional premiums........................................................................................................ 9 Charging for the cost of capital................................................................................... 10

Investments comprising public dividend capital or other forms of equity investment, either with or without voted loans .................................................... 10 Investments, other than trading funds, comprising public dividend capital or other forms of equity investment, either with or without loans from the National Loans Fund. ................................................................................................................... 10 Investments in trading funds comprising public dividend capital either with or without loans from the National Loans Fund ...................................................... 10 Investments comprising only loans (either voted or from the National Loans Fund) with no public dividend capital or other form of equity investment ........... 11 Other Exceptions................................................................................................. 11

Calculating the cost of capital..................................................................................... 11


4.1 Introduction

4.1.1 This chapter sets out the accounting principles and standards that should be applied in preparing the entity’s operating cost statement, income and expenditure account, departmental outturn or equivalent. It looks at each of the relevant accounting standards and, for Supply and Consolidated Fund Extra Receipts, there is a worked example of how the principles should be applied. Chapter 7 provides more detail on the disclosure requirements.

4.2 Income

Introduction

4.2.1 The following accounting standard deals with accounting for income:

FRS5 Substance of Transactions Application Note G Revenue Recognition (paragraphs 4.2.16 and 4.2.17): and UITF Abstract 40 - Revenue Recognition and Service Contracts.

Definitions

4.2.2 The following paragraphs provide definitions of the various types of income that departments covered by the requirements of this Manual might expect to receive. Funding from the following sources should not, however, be accounted for as income but as financing through the General Fund:

Supply;

grants from the Department for Constitutional Affairs to the National Assembly for Wales;

amounts from the National Insurance Fund in respect of welfare benefits;

the Consolidated Fund in respect of standing services; and

advances from the Contingencies Fund.

4.2.3 The parliamentary process and accounting arrangements determine how income is presented. The following sections look at the arrangements for government departments whose activities cover the whole of the United Kingdom, or that are responsible for activities in England or Northern Ireland and the arrangements in Scotland. There are separate arrangements in Wales, details of which can be obtained from the National Assembly for Wales.

4.2.4 Non-departmental public bodies and trading funds should refer to the following definitions as appropriate to their circumstances. There may be situations where, in consultation with their sponsoring bodies, non-departmental public bodies or trading funds cannot retain some of their earned income, but the norm is likely to be that all income earned by these entities will be retained as operating income. Non-departmental public bodies and trading funds should refer to paragraph 4.2.15 for guidance on accounting for grants and grants-in-aid.

Page 1 of 13


Whole of United Kingdom, England and Northern Ireland

Operating income and operating appropriations-in-aid

4.2.5 Operating income is any income generated by an entity in pursuit of its activities (generally referred to as fees and charges) or as part of managing its affairs (examples include rents, interest and dividends receivable). Departments covering the whole of the United Kingdom, and departments covering England or Northern Ireland must seek the approval of the relevant authority and obtain parliamentary approval to retain income which would otherwise be surrendered to the Consolidated Fund (that is, seek approval to appropriate income in aid of voted expenditure). Government Accounting and Government Accounting Northern Ireland refer to operating income as operating appropriations-in-aid. In most cases, income will be retained in support of expenditure on the same Request for Resources, but it is possible (if unlikely) for a department to retain income against one Request for Resources against related expenditure on another Request for Resource if there is a direct link between the two. Transactions between a department's Requests for Resources in the Statement of Parliamentary Supply will be eliminated in the operating cost statement. National insurance contributions receivable by the National Health Service are also accounted for as operating income.

Excess appropriations in aid

4.2.6 Income (either operating or non-operating) in excess of the level authorised by Parliament to be appropriated-in-aid is not included in the calculation of net resource outturn. This income is treated as Consolidated Fund Extra Receipts for the purposes of parliamentary control within the Statement of Parliamentary Supply, and is paid into the Consolidated Fund.

Non-operating income and non-operating appropriations-in-aid

4.2.7 Proceeds arising from the sale of investments and fixed assets are accounted for as non-operating income. Departments should seek the approval of the relevant authority to appropriate in aid such income. Surpluses on the disposal of assets will be netted off expenditure in the operating cost statement only where they are no more than adjustments to depreciation (or amortisation) or impairment previously charged. The presumption is that this accounting treatment for profits will be more appropriate in respect of depreciable tangible fixed assets which are re-valued, and in respect of other surplus assets originally acquired for an entity’s own use, and which have been written down to net realisable value. Other profits on disposal of assets will be treated as income in the operating cost statement. Profits on disposals are netted off the relevant expenditure section in the Statement of Parliamentary Supply, rather than appropriated in aid.

Other non-retainable income

4.2.8 Other non-retainable income includes any income or recovery of expenditure that cannot be classified as either appropriations in aid (operating or non-operating) or excess appropriations in aid. It should be recorded in the operating cost statement. In England and Northern Ireland this income is treated as Consolidated Fund Extra Receipts.

EU income 4.2.9 EU income from whatever source, other than receipts to be transferred to other

member states or mandated bodies in other member states in respect of EU twinning

Page 2 of 13


projects, should be treated as income and shown separately on a gross basis in the operating cost statement. A distinction should be made on the face of the operating cost statement between receipts where:

a) the entity is acting as an agent for the European Union in making payments to third parties in the United Kingdom; and

b) the receipts are treated as negative public expenditure and reduce the burden on the United Kingdom exchequer.

In the case of EU twinning project receipts, amounts to be transferred to other member states to mandated bodies as EU funding for their part in the project are not income in the United Kingdom and so should be treated as third-party assets as the amounts held represent assets for which the department acts as custodian but in which the government has no beneficial interest.

4.2.10 EU income which is received by an entity in the capacity as an agent passing on the income to a third party may be netted off the relevant expenditure section in the Statement of Parliamentary Supply, rather than appropriated in aid. EU income received by an entity to fund its own expenditure should be appropriated in aid.

4.2.11 Where there is a delay in the receipt of EU funds, either direct from the European Union or via the Rural Payments Agency, the amount due should be treated as accrued income and shown in the balance sheet. The notes to the financial statements should disclose separately accrued income relating to EU funding.

Items authorised to be netted off gross expenditure 4.2.12 Items of income that departments are authorised to net off gross expenditure in the

Statement of Parliamentary Supply for purposes of parliamentary control, which relate to any recovery of expenditure recorded in the operating cost statement or to returns on investments, should appear in the operating cost statement. Other entities will not normally be authorised to net off income against expenditure. With the exception of EU income (see paragraph 4.2.10), no income is recorded in the operating cost statement where an entity is acting as an agent for a principal or on behalf of a third party.

Scotland 4.2.13 Operating income is income that relates directly to the operating activities of the

Scottish Executive, its Executive Agencies, the Crown Office and Procurator Fiscal Service and NHS bodies. It includes fees and charges for services provided, on a full cost basis, to external customers and public repayment work and from investments. Departmental Outturn Statements include both income applied without limit and income applied with limit as outlined by the Scottish Budget documents. For income categorised as being applied with limit, any excess income over that approved is surrendered to the Scottish Consolidated Fund. Operating income is stated net of VAT.

4.2.14 A separate note to the Scottish Executive Consolidated Accounts provides an analysis between income applied and income not applied. Income not applied includes amounts for surrender to the Scottish Consolidated Fund in accordance with the Scotland Act 1998 (Designation of Receipts) Order 2000 and excess receipts not covered by the Budget Act authority, which must by default be surrendered to the Scottish Consolidated Fund. All interest receivable is external to the departmental boundary and is not from other government departments and is included within operating income in respect of Voted Loans and Housing Association Loans.

Page 3 of 13


Grants and grants-in-aid

4.2.15 With the exception of grants for capital purposes (see 5.2.36 to 5.2.40), non-departmental public bodies should account for grants or grants in aid as income.

FRS5 Reporting the substance of transactions Application Note G Revenue Recognition

Applicability 4.2.16 FRS5 Application Note G applies in full to all entities covered by this Manual.

Objectives of FRS5 Application Note G 4.2.17 The objective of the application note is to ensure that entities report turnover in

accordance with the substance of their contractual arrangements. It sets out the basic principles of revenue recognition, and specifically addresses different types of arrangement that give rise to income that had been subject to differing interpretations in practice in the past.

UITF Abstract 40 Revenue Recognition and Service Contracts

Applicability

4.2.18 UITF Abstract 40 applies in full to the entities covered by this Manual.

UITF consensus

4.2.19 The consensus in the UITF is that Application Note G requires all contracts for services to be accounted for in accordance with its general principles. The overriding principle is whether the seller has performed, or partially performed, its contractual obligations.

4.2.20 It may be appropriate to account for the contract as two or more separate transactions provided the value of each phase can be reliably estimated. Contracts for services should not be accounted for as long-term contracts unless they involve the provision of a single service, or a number of services that constitute a single project.

4.2.21 Revenue should be recognised according to the substance of the seller’s obligations under the contract and should reflect the accrual of the right to consideration as contract activity progresses, by reference to the value of the work performed.

Page 4 of 13


4.3 Expenditure

Introduction

4.3.1 The following accounting standards deal with aspects of accounting for expenditure: SSAP20 Foreign currency translation (paragraphs 4.3.10 and 4.3.11);

UITF Abstract 21 and Appendix Proposed introduction of the Euro (paragraphs 4.3.12 to 4.3.14);

UITF Abstract 26 Barter Transactions for Advertising (paragraphs 4.3.15 to 4.3.17); and

UITF Abstract 34 Pre-contract costs (paragraphs 4.3.18 and 4.3.19).

The following accounting standards and UITF Abstracts are not likely to be relevant to any entities covered by this Manual and are not considered further:

FRS20 Share based payments;

FRS22 Earnings per share;

UITF Abstract 9 Accounting for operations in hyperinflationary economies; and

UITF Abstract 32 Employee Benefit Trusts and other Intermediate Payment Arrangements

4.3.2 Specific guidance is given on the treatment of administration and programme expenditure in the operating cost statement in paragraphs 4.3.3 and 4.3.4.

Page 5 of 13


Administration and Programme Expenditure 4.3.3 In Spending Reviews, Administration Budgets are set for most central government

departments (including their agencies) unless specific exemptions have been agreed, At present, the Ministry of Defence, the Export Credit Guarantees Department, the Forestry Commission and trading funds that are departments in their own right are excluded from the regime. The devolved administrations are also not set Administration Budgets in Spending Reviews, but these bodies operate their own arrangements for constraining the .costs of running central government. Details of administration budget regimes can be obtained from the relevant authorities. Expenditure that does not fall within administration budgets is known as programme expenditure. Expenditure and income should therefore be shown separately in the operating cost statement under two headings – administration costs and programme costs. In Scotland, administration costs are those voted to, incurred by, and reported against the Administration Department.

4.3.4 The classification of expenditure and income as administration or as programme in

the department's resource accounts should follow the definition of administration costs provided by the relevant authority. Agencies that are excluded from the administration budget regime should make it clear either in the operating cost statement or in the notes to the accounts that their expenditure is programme.

Student loans

4.3.5 Student loans are subsidised. They carry, in effect, a rate of interest equivalent to the rate of inflation. In order to reflect the full extent of the subsidy, an inflation adjustment should be debited to the operating cost statement and credited to the general fund.

4.3.6 The calculation of the adjustment will be the rate of general inflation applied to the average net balance of loans outstanding and provision for the subsidy. The inflation index to be applied will be the retail price index (RPI(X)), using the index figure for September during the year of account. The average balances should be the same as calculated for the cost of capital charge. The cost of capital charge and the inflation adjustment may be combined.

EU expenditure

4.3.7 Expenditure in respect of grants or subsidy claims, whether European Agriculture Guidance and Guarantee Fund, European Regional Development Fund, Financial Instrument for Fisheries Guidance, etc., should be recognised in financial statements as closely as possible to the time of the underlying event or activity that gives rise to a liability. In practice, entities may find that claims received or authorised may form a suitable approximation for the liability, if applied consistently.

4.3.8 Where material, all expenditure in respect of grants or subsidy claims, whether incurred on the entity’s own behalf or whether the entity is acting as an agent for the European Union (with the exception of expenditure on twinning projects), should be accounted for gross and separately analysed within the notes on programme expenditure.

4.3.9 Where an entity provides services to a candidate country under a twinning project, relevant income and expenditure should be accounted for as EU income (see paragraphs 4.2.9 to 4.2.11) and related expenditure (paragraph 4.3.7).

Page 6 of 13


SSAP 20 Foreign currency translation

Applicability

4.3.10 SSAP20 applies in full to all entities covered by the requirements of this Manual.

Objectives of SSAP20

4.3.11 The objective of SSAP20 is to ensure that the translation of foreign currency transactions and financial statements produce results that are generally compatible with the effects of rate changes on an entity’s cash flows and also to ensure that the financial statements present a true and fair of the results of management actions.

UITF Abstract 21 Proposed introduction of the Euro

Applicability 4.3.12 UITF21 applies in full to all entities covered by this Manual.

UITF consensus 4.3.13 The consensus is that the costs associated with the introduction of the euro should

normally be written off to the profit and loss account. Expenditure incurred in preparing for the changeover to the euro and regarded as exceptional should be disclosed in accordance with FRS 3. Particulars of commitments at the balance sheet date in respect of costs to be incurred should also normally be disclosed.

4.3.14 Following the principle set out in FRS 3, cumulative foreign exchange translation

differences recognised in the statement of total recognised gains and losses in accordance with SSAP 20 should remain in reserves after the introduction of the euro and should not be reported in the profit and loss account.

UITF Abstract 26 Barter transactions for advertising

Applicability 4.3.15 UITF26 applies in full to all entities covered by this Manual

UITF consensus 4.3.16 The consensus is that turnover and costs in respect of barter transactions for

advertising should not be recognised unless there is persuasive evidence of the value at which, if the advertising had not been exchanged, it would have been sold for cash in a similar transaction. In these circumstances, that value should be included in turnover and costs.

4.3.17 Persuasive evidence of the value of advertising exchanged will exist only where it can

be demonstrated that similar advertising has been sold for cash. To provide evidence of the value of advertising exchanged, cash sales of advertising must be similar in all significant respects. Entities should disclose in the notes to the financial statements the total amount of barter transactions for advertising that is included in turnover.

Page 7 of 13


UITF Abstract 34 Pre-contract costs

Applicability 4.3.18 UITF34 applies in full to all entities covered by this Manual.

UITF consensus

4.3.19 The consensus in the UITF is that pre-contract costs should be recognised as expenses as incurred, except that directly attributable costs should be recognised as an asset when it is virtually certain that a contract will be obtained and the contract is expected to result in future net cash inflows. Costs incurred before the contract is virtually certain should not be recognised as an asset at a later date. Directly attributable costs are costs that relate directly to securing a particular contract and can be separately identified and measured reliably.

4.4 Tax

Introduction

4.4.1 The following standards deal with accounting for tax: FRS16 Current Tax (paragraphs 4.4.2 and 4.4.3);

FRS19 Deferred Tax (paragraphs 4.4.4 and 4.4.5); and

SSAP5 Accounting for Value Added Tax (paragraphs 4.4.6 to 4.4.8).

FRS16 Current tax

Applicability

4.4.2 FRS16 applies in full to those entities subject to the tax regime.

Objective of FRS16

4.4.3 The objective of FRS 16 is to ensure that reporting entities recognise current taxes in a consistent and transparent manner.

FRS19 Deferred tax

Applicability

4.4.4 FRS19 applies in full to those entities subject to the tax regime.

Objectives of FRS19

4.4.5 The objectives of FRS19 are to ensure that future tax consequences of past transactions and events are recognised, and that financial statements disclose any special circumstances that may have an effect on future tax charges.

Page 8 of 13


SSAP5 Accounting for Value Added Tax (VAT)

Applicability

4.4.6 SSAP5 applies in full to the entities covered by this manual. Most activities of government departments are not “businesses” for VAT purposes and are therefore outside the scope of the tax.

Objectives of SSAP5

4.4.7 The objectives of SSAP5 are to achieve, by presenting a standard accounting practice, uniformity of accounting treatment of VAT in financial statements.

Interpretation of SSAP5 for the public sector context

4.4.8 To avoid distortion of competition:

a) section 41 of the VAT Act 1994 provides that HM Treasury can direct that supplies of goods and services by government departments should be treated as being within the course of a business if they are in general competition with the private sector. HM Customs and Excise issue the directions covering the supplies and the departments to which they relate. Departments are required to charge VAT whether or not the recipient of the supply is another government entity, provided that the supply is under a separate VAT registration to that of the recipient;

b) section 41 of the VAT Act 1994 provides that HM Treasury can direct that

departments can claim refunds of the VAT they incur on specified services acquired for non-business activities, with the aim of removing any disincentive to contracting out. Directions issued annually identify departments eligible to claim VAT refunds and the services for which refunds can be made; and

c) there are special rules in Northern Ireland that allow departments to

reclaim all their VAT under section 99 of the VAT Act 1994.

4.5 Notional expenditure

Introduction

4.5.1 To disclose the full cost of their activities, entities will sometimes include in their accounts notional costs as well as those actually incurred. For charitable non-departmental public bodies, notional costs may be included in the Statement of Financial Activities after ‘Total resources expended’ followed by a suggested new total of ‘Total resources expended including notional costs’. Any notional costs will, however, also need to be reversed out within the Statement of Financial Activities. A suitable place for an additional heading dealing with the reversal is after the total ‘Gains and losses on revaluation and disposals of investment assets’ and before the total ‘Net movement in funds’. Other NDPBs might reverse the entry below the result for the year or in the General Reserve.

Notional premiums

4.5.2 Notional insurance premiums will not be charged in the operating cost statement. Instead, expenditure in connection with uninsured risks (for example, accident repairs

Page 9 of 13


or asset write-downs) will be charged as incurred. Entities expected to recover full costs in accordance with fees and charges policy may show in a note to the accounts the effect of charging notional premiums.

Charging for the cost of capital

4.5.3 All entities covered by the requirements of this Manual, with the exception of Trading Funds, charge a notional cost of capital. Trading Funds are required to earn and pay over an agreed rate of return to their sponsoring departments or directly to the relevant authority. The cost of capital charge will apply to all assets and liabilities in the balance sheet, with liabilities attracting a negative charge (i.e. a credit). The cost of capital charges ensures an appropriate return on the taxpayers’ equity. The calculation of the cost of capital is considered in paragraphs 4.5.12 to 4.5.15.

4.5.4 The charge will normally be at a real rate set by HM Treasury (currently 3.5 per cent) for all assets and liabilities. There are however exceptions which are detailed below.

Investments comprising public dividend capital or other forms of equity investment, either with or without voted loans

4.5.5 For investments represented by public dividend capital or other forms of equity investment, either with or without voted loans, the charge will be the higher of the Government's standard rate or the rate used for the purposes of calculating the body's target rate of return on capital employed as set out in the Treasury Minute applied to the underlying net assets of the body in question. The definition of the “underlying net assets“ will be that used for the purposes of calculating the body's target rate of return on capital employed. For bodies that are not set a return on capital employed target, the charge will be the return as agreed between the department and the Treasury.

Investments, other than trading funds, comprising public dividend capital or other forms of equity investment, either with or without loans from the National Loans Fund.

4.5.6 For investments, other than trading funds, represented by public dividend capital or other forms of equity investment, either with or without loans from the National Loans Fund, the charge will be the higher of the Government's standard rate or the rate used for the purposes of calculating the body's target rate of return on capital employed applied to the underlying net assets of the body in question less any interest payable to the National Loans Fund. The definition of the “underlying net assets“ will be that used for the purposes of calculating the body's target rate of return on capital employed. For bodies that are not set a return on capital employed target, the charge will simply be the return as agreed between the department and the Treasury less any interest payable to the National Loans Fund.

Investments in trading funds comprising public dividend capital either with or without loans from the National Loans Fund

4.5.7 For investments in trading funds represented by public dividend capital, either with or without loans from the National Loans Fund, the charge will be the higher of the Government's standard rate or the rate used for the purposes of calculating the trading fund's target rate of return on capital employed as set out in the Treasury Minute applied to the underlying net assets of the trading fund in question. The

Page 10 of 13


definition of the “underlying net assets“ will be that used for the purposes of calculating the trading fund's target rate of return on capital employed. For trading funds which are not set a return on capital employed target, the charge will simply be the return as agreed between the department and the Treasury.

4.5.8 The National Loans Fund loan will be shown as a liability in the department's balance sheet, and the interest payable on the loan(s) and repayments of principal will be paid directly to the National Loans Fund the department will account only for the amount of the cost of capital charge abated by the amount of the interest payable by the trading fund to the National Loans Fund. In effect, the interest payable to the National Loans Fund is a proxy for all or part of the cost of capital charge, and the total of the cost of capital charge and the interest payable to the National Loans Fund will equate to the return required.

Investments comprising only loans (either voted or from the National Loans Fund) with no public dividend capital or other form of equity investment

4.5.9 For investments comprising only loans (either voted or from the National Loans Fund) with no public dividend capital or other form of equity investment, the charge will equate to the interest due from the body, calculated using the National Loans Fund rate of interest appropriate to a loan with the same date of issue and same repayment terms. Where there is more than one loan, the method of calculation will apply in respect of each loan separately. National Loans Fund loans, and voted loans which are made at National Loans Fund rates of interest, will therefore be at the correct rate of interest.

Other Exceptions

4.5.10 For donated assets, additions to heritage collections where the existing collection has not been capitalised, and cash balances with the Office of HM Paymaster General (OPG), the charge will be at a nil rate. Balances with the Bank of England will also bear a nil rate provided that the balances are formally included in the “Exchequer pyramid” which allows such monies to be used to reduce government borrowing.

4.5.11 For amounts due from, or due to be surrendered to, the Consolidated Fund, and liabilities in respect of advances outstanding from the Contingencies Fund, the charge will be at a nil rate.

Calculating the cost of capital

4.5.12 The average value of an item over a period should be calculated using daily values, i.e. as the arithmetic mean of the values in each day of the period. However, for items which do not exhibit volatility on a daily basis it will normally be sufficient to use averages over longer intervals (e.g. weekly, monthly, quarterly or annually) as an approximation. Where an item which is normally stable changes by a significant amount within such an interval, the average value should be weighted to take into account the time over which the change occurred.

4.5.13 To facilitate in-year control of cost of capital charges the following alternative calculation may be used in respect of tangible fixed assets and intangible fixed assets where revalued, or where depreciation or amortisation charges are calculated using opening values. The cost of capital charge will be based on opening values, adjusted pro rata for the following changes in-year:

Page 11 of 13


a) plus additional assets and subsequent capital expenditure on existing assets – at cost;

b) less disposals – as value in opening balance sheet (plus any subsequent capital expenditure prior to disposal);

c) less impairments – the amount of the reduction being calculated from the value in the opening balance sheet (plus any subsequent capital expenditure), or the acquisition cost of additional assets as appropriate;

d) less depreciation or impairment charge.

4.5.14 Cost of capital charges for entities other than Trading Funds are notional and will not be transferred in cash. Departments should debit (credit if negative) the aggregate of the non-cash charges the operating cost statement and credit (debit if negative) to the general fund. Non-departmental public bodies will reverse the cost of capital entry from the operating cost statement either on the face of the operating cost statement or through the General Fund where appropriate. Charities will need to reverse out the entry through the Statement of Financial Activities.

4.5.15 The standard rate applied to calculate the cost of capital charge should be disclosed in a note to the accounts. Where the rate for an item differs from the standard rate, the basis of calculation should be disclosed.

Page 12 of 13














Contingencies Fund:



Page 13 of 13


5

Balance sheet:

tangible and intangible fixed assets Chapter 5 Contents

5.1 Introduction................................................................................................................... 1

5.2 Tangible fixed assets.................................................................................................... 1

FRS 15 Tangible fixed assets....................................................................................... 1 Applicability ........................................................................................................... 1 Objectives of FRS15 ............................................................................................. 2 Adaptation of FRS15 for the public sector context ............................................... 2 Interpretations of FRS15 for the public sector context.......................................... 2 Other requirements ............................................................................................... 3

Infrastructure assets ..................................................................................................... 3 Adaptation of FRS15 in respect of accounting for roads ...................................... 3

Donated assets............................................................................................................. 4

Asset transfers.............................................................................................................. 4

Heritage assets............................................................................................................. 4 Interpretation of FRS15 in respect of accounting for heritage assets................... 5

SSAP 19 Investment properties ................................................................................... 6 Applicability ........................................................................................................... 6 Objectives of SSAP19........................................................................................... 6

FRS 5 Reporting the substance of transactions Application Note F ............................ 7 Applicability ........................................................................................................... 7 Objectives of FRS5 Application Note F................................................................. 7 Interpretation of FRS5 Application Note F for the public sector context............... 7

SSAP 21 Accounting for leases and hire purchase contracts...................................... 7 Applicability ........................................................................................................... 7 Objectives of SSAP21........................................................................................... 7

FRS 11 Impairment of fixed assets and goodwill ......................................................... 7 Applicability ........................................................................................................... 7 Objectives of FRS11 ............................................................................................. 8 Adaptation of FRS11 for the public sector context ............................................... 8 Interpretation of FRS11 for the public sector context ........................................... 8

SSAP 4 Accounting for government grants.................................................................. 9 Applicability ........................................................................................................... 9 Objectives of SSAP4............................................................................................. 9 Adaptation of SSAP4 for the public sector context ............................................... 9


Interpretation of SSAP4 for the public sector context ......................................... 10 Other requirements ............................................................................................. 10

UITF Abstract 24 Accounting for start-up costs.......................................................... 10 Applicability ......................................................................................................... 10 UITF consensus .................................................................................................. 11

UITF Abstract 28 Operating lease incentives............................................................ 11 Applicability ......................................................................................................... 11 UITF consensus .................................................................................................. 11

UITF Abstract 29 Website development costs ........................................................... 11 Applicability ......................................................................................................... 11 UITF consensus .................................................................................................. 11 Interpretation of UITF29 for the public sector context......................................... 11

UITF Abstract 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate...................................................... 12

Applicability ......................................................................................................... 12 UITF consensus .................................................................................................. 12 Adaptation of UITF31 for the public sector context............................................. 12

5.3 Intangible assets......................................................................................................... 12

FRS10 Goodwill and intangible assets....................................................................... 13 Applicability ......................................................................................................... 13 Objectives of FRS10 ........................................................................................... 13 Other requirements ............................................................................................. 13

SSAP13 Accounting for research and development .................................................. 13 Applicability ......................................................................................................... 13 Objectives of SSAP13......................................................................................... 13 Adaptation of SSAP13 for the public sector context ........................................... 13

UITF Abstract 27 Revisions to estimates of the useful economic life of goodwill and intangible assets......................................................................................................... 14

Applicability ......................................................................................................... 14 UITF consensus .................................................................................................. 14

EU Greenhouse Gas Emmission Allowance Trading Directive.................................. 14

5.4 Acquisitions and mergers ........................................................................................... 15

FRS6 Acquisitions and mergers................................................................................. 15 Applicability ......................................................................................................... 15 Objectives of FRS6 ............................................................................................. 15 Interpretation of FRS6 for the public sector context ........................................... 15

FRS7 Fair values in acquisition accounting ............................................................... 15 Applicability ......................................................................................................... 15 Objectives of FRS7 ............................................................................................. 16 Interpretation of FRS7 for the public sector context ........................................... 16


5.1 Introduction

5.1.1 This chapter identifies the accounting standards to be applied, their adaptations, interpretation and other requirements and guidance relating to tangible fixed assets, intangible assets and investments that should be applied in preparing the entity’s balance sheet. It looks at each of the relevant accounting standards and, where appropriate, gives a link to a worked example of how the principles should be applied. Chapter 7 provides more detail on the disclosure requirements.

5.2 Tangible fixed assets

5.2.1 The following accounting standards and UITF Abstracts deal with accounting for tangible fixed assets:

FRS15 Tangible fixed assets (paragraphs 5.2.2 to 5.2.22);

SSAP19 Investment properties (paragraphs 5.2.23 and 5.2.24);

FRS5 Reporting the substance of transactions (paragraphs 5.2.25 to 5.2.28);

SSAP21 Accounting for leases and hire purchase contracts (paragraphs 5.2.29 and 5.2.30);

FRS11 Impairment of fixed assets and goodwill (paragraphs 5.2.31 to 5.2.35);

SSAP4 Accounting for government grants (paragraphs 5.2.36 to 5.2.40);

UITF Abstract 5 Transfers from current assets to fixed assets (chapter 6);

UITF Abstract 24 Accounting for start up costs (paragraphs 5.2.41 and 5.2.42);

UITF Abstract 28 Operating lease incentives (paragraphs 5.2.43 and 5.2.44);

UITF Abstract 29 Website development costs (paragraphs 5.2.45 to 5.2.47); and

UITF Abstract 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate (paragraphs 5.2.48 to 5.2.50).

UITF Abstract 23 (Application of the transitional rules in FRS15) is not likely to be relevant and is not discussed further in this Manual. However, if it is applicable, it should be applied in full.

FRS 15 Tangible fixed assets

Applicability

5.2.2 FRS15 applies, as adapted in paragraph 5.2.5, to all entities covered by this Manual. Owing to their importance to the entities covered by the requirements of this Manual, separate guidance is included on:

infrastructure assets (paragraphs 5.2.8 to 5.2.11);

donated assets (paragraphs 5.2.12 to 5.2.16);

asset transfers (paragraph 5.2.17); and

heritage assets (paragraphs 5.2.18 to 5.2.22).

Page 1 of 17


5.2.3 A worked example of accounting for a fixed asset using modified historical cost accounting is provided.

Objectives of FRS15

5.2.4 The objectives of FRS15 are to ensure that consistent principles are applied to the initial measurement of tangible fixed assets, that valuations are performed on a consistent basis, kept up-to-date with gains and losses on revaluation being treated consistently, that depreciation is calculated consistently and recognised over the assets’ useful lives, and that sufficient information is disclosed in the financial statements to enable users to understand the impact of an entity’s accounting policies regarding measurement, valuation and depreciation of tangible fixed assets on the financial position and performance of the entity.

Adaptation of FRS15 for the public sector context

5.2.5 The following general adaptations to FRS15 apply to entities required to prepare their financial statements in accordance with the guidance in this Manual. Recognition and measurement a) Interim valuations by a qualified valuer of land and buildings in the third year of

every five-year valuation cycle are not required.

b) Interim valuations by a qualified valuer of tangible fixed assets other than land and buildings are not required.

c) Gains on revaluation of fixed assets should be credited to the relevant reserve. This will be the donated asset reserve in respect of donated assets or to a government grant reserve in respect of assets financed by government grant.

d) Losses on revaluation (other than impairment losses reflecting losses of economic benefits) should be debited to the relevant reserve to the extent that gains have been recorded previously, and otherwise to the operating cost statement, unless it can be demonstrated that the recoverable amount is greater than the revalued amount in which case the impairment can be taken to the statement of recognised gains and losses.

Interpretations of FRS15 for the public sector context

5.2.6 In applying FRS15, entities should be aware of the following interpretations for the public sector context.

Recognition and measurement a) All tangible fixed assets shall be carried at valuation at balance sheet date –

that is, the option given in FRS15 to measure at cost has been withdrawn, as has the option to value only certain classes of assets.

b) It is not necessary to disclose the historical cost carrying amounts (where available) as required by FRS15.

c) Land and buildings should be subject to valuation by a qualified valuer at intervals of not more than five years and should be adjusted in each intervening year by using appropriate indices or other recognised, appropriate method.

d) Indices or other appropriate information sources should be used to determine the annual gross valuation of tangible fixed assets other than land and buildings where it is not possible or not cost effective to obtain a professional valuation.

Page 2 of 17


e) Tangible fixed assets should be valued at the lower of replacement cost and recoverable amount, which is the higher of net realisable value or value in use. Where an entity cannot measure value in use in terms of income, value in use should be assumed to be at least equal to the cost of replacing the service potential provided by the asset (subject to any impairment of that service potential).

f) Entities shall not capitalise any finance costs that are directly attributable to the construction of tangible fixed assets.

Other requirements

5.2.7 The following requirements should be observed by entities covered by this Manual.

a) Following the annual review of the economic useful lives of assets or asset categories required by FRS15, entities should discuss any significant proposals to change these lives with the relevant authorities (through sponsoring bodies where appropriate) to ensure that the budgeting implications have been properly considered.

b) Entities might from time to time review their capitalisation thresholds or asset measurement methods. Any proposals for significant change to either must be discussed with the relevant authorities (through sponsoring bodies where appropriate) to ensure that the budgeting implications have been properly considered.

Infrastructure assets

5.2.8 Infrastructure assets comprise assets that form part of an integrated network servicing a significant geographical area – for example, road networks.

Adaptation of FRS15 in respect of accounting for roads

5.2.9 Renewals accounting as applied to roads is an adaptation of FRS15. The relevant authorities have determined that renewals accounting as set out in FRS15 shall be used as a method of estimating depreciation for infrastructure assets, even where entities do not calculate the level of annual maintenance expenditure by reference to an asset management plan.

5.2.10 The road network is carried on the balance sheet at current replacement cost, adjusted to reflect the condition of the network. A full valuation of the network shall be undertaken at least every five years, supplemented by annual condition surveys. The condition surveys must be undertaken on a consistent basis and cover a significant and representative proportion of the road network. All renewals expenditure should be charged to the operating cost statement. If a condition survey reveals that the network has been maintained in a steady state since the previous survey, then no depreciation charge is required. However, if the condition of the network has deteriorated/improved between condition surveys, the value of the deterioration/improvement, if material, should be charged/credited to the operating cost statement and the carrying value of the assets adjusted accordingly.

5.2.11 In the years between the full valuations, the value of the network should be adjusted to reflect: a) movements in prices using appropriate published indices;

b) any expenditure on new schemes or enhancements which increase the capacity of the network;

Page 3 of 17


c) detrunkings.

Donated assets

5.2.12 Assets donated by third parties (see also paragraph 5.2.17), either by gift of the asset or by way of funds to acquire assets (including national lottery-funded assets and assets that meet the definition of heritage assets), and which meet the criteria in paragraph 5.2.13, should be capitalised at current value on receipt. Where the value of the services provided by an asset will be less than the current value of the asset because it is over-specified for its intended use, the lower value should be used. The amount capitalised should be credited to a donated asset reserve.

5.2.13 To qualify for treatment as a donated asset:

a) there should be no consideration given in return; and b) capital charges, if imposed, would reasonably be expected to deter

prospective donors from offering such assets in future.

5.2.14 Donated assets do not include:

a) assets financed by grant-in-aid; b) the subsequent capitalised expenditure on a donated asset which is

capitalised; c) assets constructed or contributed to by a developer to benefit the developer's

business; d) assets accepted in lieu of tax. These types of asset should be accounted for in accordance with FRS15 in the same way as other assets of that general type.

5.2.15 Donated assets should be revalued, depreciated and subject to impairment review in the same way as other fixed assets. Revaluations should be taken to the donated asset reserve. Each year, an amount equal to the depreciation charge on the asset and any impairment should be released from the donated asset reserve to the operating cost statement. No cost of capital charge will be imposed.

5.2.16 Details of any restrictions imposed by the donor on the use of the donated asset should be disclosed in a note to the financial statements.

Asset transfers

5.2.17 Entities may receive assets from another part of the public sector (including from parts of the public sector not covered by the requirements of this Manual) for no consideration. Assets might also revert to an entity at the conclusion of a PFI contract for which no residual value had been recognised. Assets acquired under either of these scenarios are not donated assets and should be accounted for in accordance with FRS15 in the same way as other assets of that general type.

Heritage assets

5.2.18 Heritage assets are those assets that are intended to be preserved in trust for future generations because of their cultural, environmental or historical associations. They are held by the entity in pursuit of its overall objectives in relation to the maintenance

Page 4 of 17


of the heritage. Non-operational assets are those that are held primarily for this purpose. Operational heritage assets are those that, in addition to being held for their characteristics as part of the nation’s heritage, are also used by the entity for other activities or to provide other services (the most common example being buildings).

5.2.19 The entity holding the asset should attest annually to the ongoing heritage credentials of its heritage assets. Heritage assets include historical buildings, archaeological sites, military and scientific equipment of historical importance, museum and gallery collections and works of art.

Interpretation of FRS15 in respect of accounting for heritage assets

5.2.20 In principle, heritage assets should be accounted for in the same way as any other asset under FRS15. There are, however, certain characteristics associated with heritage assets that give rise to the need for interpretation of FRS15.

Definition

a) Their value to government and the public in cultural, environmental, educational and historical terms is unlikely to be fully reflected in a financial value derived from a market mechanism or price.

b) Established custom and, in many cases, primary statute and trustee obligations impose prohibitions or severe restrictions on disposal by sale.

c) They are often irreplaceable and their value may increase over time even if their physical condition deteriorates.

d) They may require significant maintenance expenditure so that they can continue to be enjoyed by future generations.

e) Their life might be measured in hundreds of years.

f) Antiques and other works of art held by entities outside the main collections should be classified as heritage assets only when they fulfil the above requirements. Otherwise, antiques and other works of art should be accounted for in the same way as other assets.

Recognition and measurement

g) Operational heritage assets should be valued in the same way as other assets of that general type (buildings, for example).

h) Non-operational heritage assets should be valued (subject to the considerations set out in paragraph 5.2.21) on the following basis:

I. non-operational heritage assets purchased within the accounting period should be valued at cost;

II. existing and newly donated non-operational heritage assets (and newly purchased assets on revaluation) should, where there is a market in assets of that type, be valued at the lower of depreciated replacement cost and net realisable value; or

III. where there is no market in assets of that type, at depreciated replacement cost unless the asset could not or would not be physically reconstructed or

Page 5 of 17


replaced, in which case at nil (except, on revaluation, those non-operational heritage assets already carried at cost shall continue to be carried at cost).

Disclosure i) Information on heritage assets (whether or not they have been capitalised)

should be given in the notes to the financial statements and should contain:

I. sufficient information to enable the user to appreciate the age and scale of these assets, how they were acquired and what use is made of them;

II. details of the cost (or value) of additions and disposals of heritage assets during the year or, where details of cost or valuation are not available, a brief description of the nature of the assets acquired or disposed of; and

III. in the accounting policies note, a note explaining the entity’s capitalisation policy in relation to heritage assets and the measurement bases adopted for their inclusion in the accounts.

5.2.21 There may be instances where valuation of non-operational heritage assets may not be practicable or appropriate – either because reliable valuations (including original cost) cannot be obtained or because the costs associated with obtaining reliable valuations are onerous when compared with the additional benefits obtained by users of the financial statements (the cost/benefit analysis). For example, it might be possible to capitalise (at cost) non-operational heritage assets where the accounting records exist for past accounting periods, but not where the records no longer exist, since the cost of reconstructing them would be prohibitive, nor where the cost information is of such an age as to make it meaningless in terms of a reasonable view of the value of the asset today.

5.2.22 Examples of heritage assets where it might be difficult to obtain a valuation include: a) museum and gallery collections and other collections existing at 31 March

2001 (but where the information is available in relation to additions made in earlier years, those additions should be capitalised subject to the considerations set out in paragraph 5.2.21), including the national archives; and

b) archaeological sites, burial mounds, ruins, monuments and statues.

SSAP 19 Investment properties

Applicability

5.2.23 SSAP19 applies in full to all entities covered by this Manual.


5.2.24 This SSAP addresses the particular circumstances of an entity in which a significant proportion of its fixed assets are held not for consumption in the business operations but as investments, and where it is the current value of those investments, and changes to those values, that is of prime importance rather than the calculation of systematic annual depreciation that would otherwise be required by other accounting standards.

Page 6 of 17


FRS 5 Reporting the substance of transactions Application Note F

Applicability

5.2.25 FRS5 applies in full to all entities covered by this Manual. FRS5 provides guidance on reporting the actual effect of a transaction and any resulting assets, liabilities, gains or losses in the financial statements – not merely the legal form of the transaction. FRS5 contains a series of Application Notes (AN). Paragraphs 5.2.27 and 5.2.28 provide further information about AN F – Private Finance Initiative and similar contracts. All entities covered by the requirements of this Manual and having PFI or similar (including PPP) contracts should follow the requirements of AN F as stated below.

5.2.26 A worked example of accounting for a PFI project is provided.

Objectives of FRS5 Application Note F

5.2.27 The objective of FRS5 Application Note F is to provide additional guidance on applying the accounting treatment in FRS5 to PFI and similar contracts.

Interpretation of FRS5 Application Note F for the public sector context

5.2.28 HM Treasury has issued Technical Note No. 1 (revised): How to account for PFI transactions, which supplements the FRS (it does not supersede it), providing additional guidance to entities on how to determine the applicability of relevant standards. The Technical Note also gives guidance on the disclosure requirements for PFI projects. In the case of capitalisation of residual interests, entities should disclose them as a tangible fixed asset, categorised under “Payments on Account and Assets under Construction”. Where relevant, consideration should be given to impairment of the asset in accordance with the principles of FRS11, and the nature of the residual interest should be disclosed, where material.

SSAP 21 Accounting for leases and hire purchase contracts

Applicability

5.2.29 SSAP21 applies in full to the entities covered by this Manual.


5.2.30 The main objective of SSAP21 is to ensure that entities account for the substance of any leasing agreement or hire purchase contract. SSAP21 requires lessees to capitalise material finance leases, which are defined as leases under which all the risks and rewards of ownership are transferred substantially to the lessee.

FRS 11 Impairment of fixed assets and goodwill

Applicability

5.2.31 FRS11 applies, as adapted in paragraph 5.2.34, to all entities covered by this Manual.

Page 7 of 17


5.2.32 The worked example of accounting for a fixed asset under modified historical cost accounting includes the accounting entries required when the asset is impaired.

Objectives of FRS11

5.2.33 The objectives of FRS11 are to ensure that fixed assets and goodwill are recorded in the financial statements at no more than their recoverable amount and that any resulting impairment loss is measured and recognised on a consistent basis. In addition, sufficient information should be disclosed in the financial statements to enable users to understand the impact of the impairment on the financial position and performance of the reporting entity.

Adaptation of FRS11 for the public sector context

5.2.34 The following adaptations to FRS11 apply to the non-profit making activities of entities required to prepare their financial statements in accordance with the guidance in this Manual and that are not engaged in profit-making activities. Entities should apply FRS11 without adaptation to any income-generating activities.

Recognition and measurement a) References in FRS11 to the statement of total recognised gains and losses

should be read to mean the revaluation (or donated asset or government grant) reserve. Where impairment losses are taken to one of the reserves, it should be to the extent only that there is a credit value in the reserve relating to the impaired asset and only until the carrying value becomes equal to the depreciated historical cost. (For this purpose, ‘historical cost’ means the value at which an asset was taken on to the fixed asset register if no historical cost is otherwise available.)

b) Downward revaluations in excess of the credit in the revaluation or other reserve or leading to a reduction in value to below the depreciated historical cost should be charged to the operating cost statement unless it can be demonstrated that the recoverable amount is greater than the revalued amount in which case the impairment can be taken to the statement of recognised gains and losses. For the recoverable amount to be greater than the revalued amount, entities must demonstrate that:

I. they are not aware of any factors that have caused a substantial fall in usage or decline in the condition of the asset – that is, that the fall in value has not been caused by a consumption of economic benefits;

II. for assets valued on an existing use value or other market-based valuation, the reduction is due to a short-term reduction in market prices, which informed opinion believes will be reversed in the medium term; or

III. for assets valued on a depreciated replacement cost basis, changes in technology in the relevant sector are small, so that any downward movement in prices is likely to be short-term, as there are no noticeable improvements in technology or sustained falls in commodity prices that would cause prices to fall over the medium term.


5.2.35 In applying FRS11, entities should be aware of the following interpretations for the public sector context.

Page 8 of 17


Recognition and measurement a) Where an asset is not held for the purpose of generating cash flows, value in

use should be assumed to be equal to the cost of replacing the service potential provided by the asset, unless there has been a reduction in service potential.

b) A reduction in service potential might arise for various reasons, including:

I. the purpose for which the asset was acquired is no longed carried out and there is no alternative use for the asset;

II. the asset is to be sold;

III. the asset cannot be used;

IV. the asset is otherwise surplus and has no alternative use; or

V. the asset is over-specified for its current use (for example, a hardened aircraft hangar used as a store).

c) Where there is a reduction in service potential, the asset will be written down to its recoverable amount, with the impairment being charged to the operating cost statement. In the case of I to IV above, the recoverable amount will be the asset’s net realisable value – that is, the amount at which the asset could be disposed of, less any disposal costs. In the case of the example in V, the net realisable value will relate to the store – that is, not to the over-specification.

SSAP 4 Accounting for government grants

Applicability

5.2.36 SSAP4 applies, as adapted in paragraph 5.2.38 below, to all entities covered by this Manual.

Objectives of SSAP4

5.2.37 The objectives of SSAP4 are to ensure that government grants are recognised in the operating cost statement so as to match them with the expenditure towards which they are intended to contribute and are recognised only when the conditions for their receipt have been complied with and there is reasonable expectation that they will be received.

Adaptation of SSAP4 for the public sector context

5.2.38 The following adaptations to SSAP4 apply to entities required to prepare their financial statements in accordance with the guidance in this Manual.

Recognition a) Entities other than non-departmental public bodies that are charities (who should

follow the requirements of the Charities SORP) or non-departmental public bodies that are companies (who should follow the requirements of the standard (but see also 5.2.39c)) should credit grants received as a contribution towards the cost of a fixed asset to a government grant reserve (not to deferred income), which is then released to the operating cost statement over the useful economic life of the asset in amounts equal to the depreciation charge on the

Page 9 of 17


asset and any impairment – that is, the option given in SSAP4 to deduct the grant from the cost of the asset has been withdrawn.

Measurement b) On disposal of an asset financed by government grant, the profit or loss is

taken to the operating cost statement and is offset by a transfer from the government grant reserve of the same proportion of the profit or loss that the amount of the grant bears to the original acquisition cost of the asset. The balance on the government grant reserve in respect of that asset should be transferred to the general fund, representing that same proportion of the proceeds.


5.2.39 In applying SSAP4, entities should be aware of the following interpretations for the public sector context.

Recognition a) Parliamentary Supply (the parliamentary grant in Wales) does not fall within the

meaning of government grants.

b) As it is important for monitoring and control purposes, entities that receive a grant that is intended to finance both revenue and capital expenditure should analyse the grant between its constituent parts.

c) Non-departmental public bodies that are companies should credit grants received as a contribution towards the cost of a fixed asset to deferred income. The option given in SSAP4 to deduct the grant from the cost of the asset has been withdrawn.

Other requirements

5.2.40 The following requirements should be observed by entities covered by this Manual.

a) The notes to the financial statements should distinguish between grants from UK government entities and grants from the European Union.

b) Where non-departmental public bodies that are charities prepare a summarised

income and expenditure account in addition to the SOFA, they may account for the capital grant by crediting it to a capital assets fund on the balance sheet. This treatment will involve an adjustment between the SOFA and the income and expenditure account to take the capital grant to the capital assets fund and to credit the income and expenditure account with movements in the capital assets fund to offset depreciation over the life of the asset.

UITF Abstract 24 Accounting for start-up costs

Applicability

5.2.41 UITF24 applies in full to the entities covered by this Manual.

Page 10 of 17


UITF consensus

5.2.42 The consensus in the UITF is that start-up costs should be accounted for on a basis consistent with the accounting treatment of similar costs incurred as part of an entity’s on-going activities and that, in the absence of similar costs, star-up costs that do not meet the definition of an asset under a relevant accounting standard (including FRS15, FRS10 and SSAP13) should be recognised as an expense when they are incurred.

UITF Abstract 28 Operating lease incentives

Applicability


UITF consensus

5.2.44 The consensus of the UITF is that all incentives for the agreement of a new or renewed operating lease should be recognised as an integral part of the payment agreed for the use of the leased asset, irrespective of the nature or form of the incentive or the timing of payments. The benefit (lessee) or cost (lessor) should be allocated over the lease term or a shorter period ending on a date from which it is expected that the prevailing market rent will be payable.

UITF Abstract 29 Website development costs

Applicability

5.2.45 UITF29 applies to all entities covered by this Manual.

UITF consensus

5.2.46 The consensus in the UITF is that website planning costs should be expensed as incurred, but that other website development costs should be capitalised where they meet the criteria for recognition as an asset. The UITF notes that, for not-for-profit entities, an alternative measure of service potential might be more relevant and the UITF should be interpreted as permitting capitalisation only to the extent that the primary purpose of the website is to provide a means of delivery of specific services in furtherance of the entity’s objectives.

Interpretation of UITF29 for the public sector context

5.2.47 Where an entity is considering whether or not website development costs might be capitalised, the entity should have particular regard to its principal objectives. A website that is designed for the purpose of informing stakeholders of the services or other objectives of the entity does not meet the requirement that the website ‘provide a means of delivery of specific services offered by the entity in fulfilment of its principal objectives’ and costs associated with such a website should not be capitalised.

Page 11 of 17


UITF Abstract 31 Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or associate

Applicability

5.2.48 UITF31 applies, as adapted in paragraph 5.2.50, to all entities covered by the requirements of this Manual.

UITF consensus

5.2.49 The consensus in the UITF is that, to the extent that an entity (A) retains an ownership interest in a business or non-monetary assets exchanged for an interest in another entity (B) after such a transaction (whether or not the holding in B is as a subsidiary, joint venture or associate), the retained interest should be carried in A’s consolidated financial statements at the same amount following the transaction as it had been carried prior to the transaction. Any new assets acquired by A as a result of its interest in B should be accounted for at fair value, with the difference between the fair value and the consideration given being treated as goodwill. A should recognise a gain where the fair value of the consideration received by A exceeds the book value of those parts of the business or other non-monetary assets (together with any related goodwill and any cash given up) that A no longer owns, or a loss where the fair value is less than the book value. The loss should be recognised either as an impairment in accordance with FRS11 or in the profit and loss account for any loss remaining after the impairment review.

Adaptation of UITF31 for the public sector context

5.2.50 The following adaptations to UITF31 apply to entities required to prepare their financial statements in accordance with the guidance in this Manual.

a) The adaptations of FRS2, FRS9 and FRS5 in relation to the accounting

boundaries as set out in section 2.4 of this Manual shall be used to determine the accounting treatment of an interest gained in a subsidiary, joint venture or associate as a result of an exchange of business or other non-monetary assets.

b) In the event that the UITF is applicable, entities shall apply the adaptations to, and interpretation of, FRS11 in determining whether there is any impairment loss and in accounting for it.

5.3 Intangible assets

5.3.1 The following accounting standards deal with accounting for intangible assets: FRS10 Goodwill and intangible assets (paragraphs 5.3.2 to 5.3.4);

FRS11 Impairment of fixed assets and goodwill (paragraphs 5.2.31 to 5.2.35); and

SSAP13 Accounting for research and development (paragraphs 5.3.5 to 5.3.7).

In addition, entities should have regard to:

UITF Abstract 27 Revision to estimates of the useful economic life of goodwill and intangibles (paragraphs 5.3.8 and 5.3.9).

Page 12 of 17


5.3.2 Owing to its importance to some of the entities covered by the requirements of this manual separate guidance is included on emission rights. (5.3.11 to 5.3.14)

FRS10 Goodwill and intangible assets

Applicability

5.3.3 FRS10 applies in full to all entities covered by this Manual.

Objectives of FRS10

5.3.4 The objectives of FRS10 are to ensure that capitalised goodwill and intangible assets are charged to the operating cost statement in the periods in which they are depleted and that sufficient information is disclosed in the financial statements to enable users to determine the impact of goodwill and intangible assets on the financial position and performance of the reporting entity.

Other requirements

5.3.5 Following the annual review of the economic useful lives of intangible assets required by FRS10, entities should discuss any significant proposals to change these lives, capitalisation thresholds and measurement methods with the relevant authorities (through sponsoring bodies where appropriate) to ensure that the budgeting implications have been properly considered.

SSAP13 Accounting for research and development

Applicability

5.3.6 SSAP13 applies, as adapted in paragraph 5.3.7, to all entities covered by this Manual.


5.3.7 The objectives of SSAP13 are to ensure that expenditure on pure and applied research is expensed in the period in which it is incurred and that development expenditure is capitalised only where there is a clearly defined project for which expenditure can be separately identified and which an entity expects to complete with the result that the development costs will be exceeded by future revenues.

Adaptation of SSAP13 for the public sector context

5.3.8 The following adaptations to SSAP13 apply to entities required to prepare their financial statements in accordance with the guidance in this Manual.

Recognition and measurement a) Development expenditure should be capitalised where there is a clearly

defined project for which expenditure can be separately identified and which an entity expects to complete with the result that an asset will be brought into use or in the case of entities engaged in profit making activities, where the project is commercially viable.

Page 13 of 17


b) Internal costs, including the charge for the cost of capital, should not be capitalised if they relate to activities that can only be carried out by in-house staff.

UITF Abstract 27 Revisions to estimates of the useful economic life of goodwill and intangible assets

Applicability

5.3.9 UITF27 applies in full to all entities covered by this Manual.

UITF consensus

5.3.10 The consensus in the UITF is that the requirement to amortise the carrying value of goodwill and intangible assets over the revised remaining useful life applies equally where the presumption of a 20-year life has previously been rebutted as it does to other revisions of estimates of the useful economic lives of goodwill and intangible assets.

EU Greenhouse Gas Emission Allowance Trading Directive

5.3.11 A cap and trade scheme gives rise to an asset for allowances held, a government grant and a liability for the obligation to deliver allowances equal to emission that have been made. Allowances, whether allocated by government or purchased, should be recognised as assets. Allowances intended to be held for use on a continuing basis should be classified as intangible assets, if not they should be classified as current assets, within current asset investments. Whether or not the asset is classified as intangible or current the same measurement requirements apply. Allowances that are issued for less than their fair value shall be measured initially at their fair value.

5.3.12 Allowances, whether issued by government or purchased, are intangible assets if they are held for use on a continuing basis. Allowances that are issued for less than their fair value shall be measured initially at their fair value.

5.3.13 When allowances are issued for less than their fair value, the difference between the amount paid and fair value is a government grant. The government grant reserve should be credited with the same proportion of the amount of the revaluation, which the amount of the grant bears to the acquisition cost of the asset. The remainder of the revaluation is credited to the revaluation reserve

5.3.14 As emissions are made a liability is recognised for the obligation to deliver allowances equal to emissions that have been made. This liability is a provision. It shall be measured at the best estimate of the expenditure required to settle the present obligation at the balance sheet date. This will usually be the present market price of the number of allowances required to cover emissions made up to the balance sheet date.

Page 14 of 17


5.4 Acquisitions and mergers

5.4.1 The following accounting standards deal with accounting for acquisitions and mergers:

FRS6 Acquisitions and mergers (paragraphs 5.4.2 to 5.4.4); and

FRS7 Fair values in acquisition accounting (paragraphs 5.4.5 to 5.4.7).

FRS6 Acquisitions and mergers

Applicability

5.4.2 FRS6 applies in full to all entities covered by the requirements of this Manual.

Objectives of FRS6

5.4.3 The objectives of FRS6 are to ensure that merger accounting is used only for those business combinations that are not, in substance, the acquisition of one entity by another but the formation of a new reporting entity and to ensure the use of acquisition accounting for all other business combinations. The FRS also requires financial statements to provide relevant information about the effect of the combination.


5.4.4 In applying FRS6, entities should be aware of the following interpretations for the public sector context. a) The merger of two or more entities into one new entity, or the transfer of

functions from the responsibility of one part of the public sector to another (commonly known as Machinery of Government changes), will be accounted for using merger accounting.

b) Departments covered by HM Treasury should refer to PES (2004) 14 for the revised arrangements for Machinery of Government changes that apply to Estimates and accounts. Departments in Northern Ireland should refer to appropriate contacts in the Department of Finance and Personnel and Scottish Bodies should refer to the appropriate Scottish Executive contacts in the event of any Machinery of Government changes.

c) An entity that receives a transfer of functions should disclose in its financial statements that the transfer has taken place (including a brief description of the transferred function), giving the date of the transfer, the name of the transferring entity and the effect on the financial statements.

d) An entity that transfers functions to another entity should provide the same information about the transfer in its financial statements.

FRS7 Fair values in acquisition accounting

Applicability

5.4.5 FRS7 applies in full to all entities covered by the requirements of this Manual.

Page 15 of 17


Objectives of FRS7

5.4.6 The objectives of FRS7 are to ensure that when one entity acquires another, all the assets and liabilities that existed in the acquired entity at the date of acquisition are accounted for at fair values reflecting their condition at that date, and that all changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after the acquisition are reported as part of the post-acquisition financial performance of the acquiring entity.


5.4.7 Transfers of tangible fixed assets between entities covered by the requirements of this Manual, other than transfers resulting from Machinery of Government changes, should be accounted for as acquisitions and valued in accordance with FRS7.

Page 16 of 17














Contingencies Fund:



Page 17 of 17


6

Balance sheet:

other assets and liabilities Chapter 6 Contents

6.1 Introduction................................................................................................................. 69

6.2 Investments ................................................................................................................ 69 Loans, public dividend capital and other interests in public bodies............................ 69 Other investments ...................................................................................................... 69

6.3 Stocks and long-term contracts.................................................................................. 69 SSAP9 Stocks and long-term contracts ..................................................................... 69

Applicability ............................................................................................................ 69 Objectives of SSAP9.............................................................................................. 69 Interpretation of SSAP9 for the public sector context ............................................ 70

Stockpile goods .......................................................................................................... 70 Confiscated, seized, forfeited and foreclosed property .............................................. 70 Goods held under price support and stabilisation programmes (intervention stocks) 70

6.4 Debtors ....................................................................................................................... 71 UITF Abstract 4 Presentation of long-term debtors in current assets ........................ 71

Applicability ............................................................................................................ 71 UITF consensus ..................................................................................................... 71

UITF Abstract 5 Transfers from current assets to fixed assets .................................. 71 Applicability ............................................................................................................ 71 UITF consensus ..................................................................................................... 71

Loans .......................................................................................................................... 72 FRS 4 Capital Instruments ......................................................................................... 72

Applicability ............................................................................................................ 72 Objective of FRS 4 ................................................................................................. 72

6.5 Retirement Benefits .................................................................................................... 72 FRS17 Retirement benefits ........................................................................................ 72

Applicability ............................................................................................................ 72 Objectives of FRS17 .............................................................................................. 72

UITF Abstract 35 Death-in-service and incapacity benefits ....................................... 73 Applicability ............................................................................................................ 73 UITF consensus ..................................................................................................... 73

6.6 Provisions and Contingencies .................................................................................... 73 FRS12 Provisions, contingent liabilities and contingent assets ................................. 73

Applicability ............................................................................................................ 73 Objectives of FRS 12 ............................................................................................. 73 Interpretation of FRS12 for the public sector context ............................................ 74 Other requirements ................................................................................................ 74

Provision of information to Parliament........................................................................ 74

Page 68 of 1


6.1 Introduction

6.1.1 Chapter 5 of this Manual deals with tangible and intangible fixed assets. This chapter identifies the accounting standards, their adaptations, interpretation and other requirements relating to other assets and liabilities that should be applied in preparing the entity’s balance sheet. It looks at each of the relevant accounting standards.

6.2 Investments

6.2.1 This section deals with accounting requirements other than those in FRSs 2, 5 and 9 for subsidiary undertakings, associates and joint ventures, for which see section 2.4, ‘Accounting boundaries’. In addition, any investments that are not held in order to further departmental objectives but are held instead on behalf of government more generally, should be accounted for in a separate trust statement. Departments should refer such cases to the relevant authority.

Loans, public dividend capital and other interests in public bodies

6.2.2 Loans, public dividend capital and other interests in entities outside the departmental resource accounting boundary (see paragraphs 2.4.8 and 2.4.9) should be reported at historical cost, less any impairment.

Other investments

6.2.3 Other investments should be reported at market value. If a market value cannot be readily ascertained, the investment should be valued on a basis determined by the entity, in agreement with the relevant authority, to be appropriate in the circumstances.

6.3 Stocks and long-term contracts

6.3.1 The following accounting standard deals with accounting for stocks: SSAP9 Stocks and long-term contracts

SSAP9 Stocks and long-term contracts Applicability

6.3.2 SSAP9 applies in full, as interpreted, to the entities covered by this Manual.

Objectives of SSAP9

6.3.3 The objectives of SSAP 9 are to ensure that stocks are valued at the lower of cost and net realisable value and that their sub-classification in the balance sheet or in the notes to the financial statements indicates the amounts held in each of the main categories in the standard balance sheet formats. SSAP 9 also requires income and expenditure relevant to long term contracts to be reflected in the operating cost statement as contract activity progresses.

Page 69 of 8



6.3.4 In applying SSAP9, entities should be aware of the following interpretations for the public sector context.

e) In addition to the types of stock identified in SSAP9, central

government has categories of stock for which the necessary accounting treatment may not adequately be covered by SSAP9. These include:

IV. stockpile goods and military reserve stocks (see paragraph 6.3.5);

V. confiscated, seized, forfeited and foreclosed property (see paragraph 6.3.6) and;

VI. goods held under price support programmes (intervention stocks) (see paragraph 6.3.9).

Stockpile goods

6.3.5 Stockpile goods may be defined as strategic materials held for use in national defence and national emergencies. They can be further categorised as: a) fixed assets, which should be accounted for in the same way as

other assets of the same type; or

b) other non-deteriorable and deteriorable stocks (the latter possibly being turned over from time to time to avoid obsolescence). Minimum capability levels of stocks should be accounted for as fixed assets. Other stocks should be accounted for under SSAP9.

Confiscated, seized, forfeited and foreclosed property

6.3.6 The proceeds of realisations of confiscated, seized and forfeited property go to the Consolidated Fund and are not for the benefit of the collecting entity concerned. Because of this, it would be inappropriate to recognise confiscated, seized and forfeited property in financial statements. Entities should state by way of memorandum note the proceeds derived from these realisations.

6.3.7 The proceeds of items sold to satisfy outstanding tax liabilities, net of sale expenses, should be treated in the same way as other taxation receipts.

6.3.8 Foreclosed property refers to assets received in satisfaction of loans or as a result of a claim under a guaranteed or insured loan. The Exports Credits Guarantee Department from time to time acquires a beneficial interest in underlying assets or other security as a result of pursuing recovery action. To account for these assets, the British Bankers' Association Statement of Recommended Practice (SORP) on advances should be adopted.

Goods held under price support and stabilisation programmes (intervention stocks)

6.3.9 Intervention buying is a method of supporting market prices for certain agricultural commodities. The Rural Payments Agency is required to buy, at prices determined by

Page 70 of 8


the European Commission, produce of defined quality offered to it in accordance with detailed regulations. Purchased stocks are valued at cost, adjusted by any depreciation or revaluation prescribed by the Commission to bring them into line with market values. Costs of depreciation and any losses on sales are borne by, and any profits on sales or revaluations are surrendered to, the Commission.

6.4 Debtors

6.4.1 Entities should have regard to: UITF4 Presentation of long-term debtors in current assets; and

UITF5 Transfers from current assets to fixed assets.

UITF Abstract 4 Presentation of long-term debtors in current assets Applicability


UITF consensus

6.4.3 The consensus in the UITF is that, where the size of debtors due after more than one year is so material in the context of the total net current assets that the absence of disclosure may lead to misinterpretation of the accounts, the amount should be disclosed on the face of the balance sheet.

UITF Abstract 5 Transfers from current assets to fixed assets Applicability


UITF consensus

6.4.5 The consensus in the UITF is that where assets are transferred from current to fixed, the current asset accounting rules should be applied up to the effective date of transfer, which is the date of management’s change of intent. The transfer should be made at the lower of cost [or current replacement cost where entities covered by this Manual carry current assets at a revalued amount] and net realisable value at the date of transfer and if this is less than its previous carrying value the diminution should be charged in the profit and loss account.

6.4.6 Whether the assets are transferred at cost or at net realisable value in accordance with paragraph 6.4.5 above, fixed asset accounting rules will apply to the assets subsequent to the date of transfer. Where the transfer is at net realisable value, the asset should be accounted for as a fixed asset at a valuation (under the alternative accounting rules of the Act) as at the date of the transfer; at subsequent balance sheet dates it may or may not be revalued, but in either event the disclosure requirements appropriate to a valuation should be given.

Page 71 of 8


Loans

6.4.7 The following standard deals with loans and other capital instruments that are treated as liabilities.

FRS 4 Capital Instruments Applicability

6.4.8 FRS 4 applies in full to the entities covered by this Manual.

Objective of FRS 4

6.4.9 The objective of FRS 4 is to ensure that costs associated with capital instruments that are classified as liabilities are allocated to accounting periods on a fair basis over the period the instrument is in use.

6.5 Retirement Benefits

6.5.1 This section of the Manual applies only to those entities whose employees are not members of the schemes to which Chapter 8 of this Manual refers.

6.5.2 Where an employer participates in one of the schemes to which Chapter 8 refers, the employer should account for contributions to the scheme as if it were a defined contribution scheme, but should also disclose: a) the fact that the scheme is a defined benefit scheme which prepares its own

scheme statements;

b) any available information about the existence of the surplus or deficit and the implications of that surplus or deficit for the employer (this should be available from the relevant pension scheme statement).

6.5.3 The following accounting standard deals with accounting for retirement benefits:

FRS17 Retirement benefits Applicability

6.5.4 The following adaptations of FRS 17 apply to the entities in paragraph 6.5.1: a) the period between formal actuarial valuations is to be four years and not three;

b) although the rate to be used when discounting the scheme liabilities is, as required by FRS 17, the AA corporate bond rate, it will be applied for each Spending Review period and not annually. HM Treasury will advise the appropriate rate.

Objectives of FRS17

6.5.5 The objectives of FRS17 are to ensure that: a) financial statements reflect at fair value the assets and liabilities arising from an

employer’s retirement benefit obligations and any related funding;

Page 72 of 8


b) the operating costs of providing retirement benefits to employees are recognised in the accounting periods in which the benefits are earned by the employees, and the related costs and changes in value of the assets and liabilities are recognised in the accounting periods in which they arise; and

c) the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities.

UITF Abstract 35 Death-in-service and incapacity benefits Applicability


UITF consensus

6.5.7 The consensus in the UITF is that the cost of providing death-in-service and incapacity benefits should be recognised in accordance with paragraphs 73 and 74 of FRS 17 except where the benefits are provided through a defined benefit pension scheme and are not wholly insured, in which case the uninsured scheme liability and the cost for the accounting period should be measured by applying the principles in paragraphs 20 and 22 of FRS 17.

6.6 Provisions and Contingencies

6.6.1 The following accounting standard deals with provisions and contingencies: FRS12 Provisions, contingent liabilities and contingent assets

FRS12 Provisions, contingent liabilities and contingent assets Applicability

6.6.2 FRS12 applies in full, as interpreted, to the entities covered by this Manual.

Objectives of FRS 12

6.6.3 The objective of FRS12 is to ensure that provisions, contingent liabilities and contingent assets are appropriately recognised and measured and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing and amount.

6.6.4 A provision should be recognised when an entity has a present obligation (legal or constructive) as a result of a past event, it is probable that a transfer of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision. Unless these conditions are met, no provision should be recognised although it may be necessary to disclose a contingent liability.

6.6.5 The FRS does not apply to executory contracts unless they are onerous. Executory contracts are contracts under which neither party has performed any of its obligations or both parties have partially performed their obligations to an equal extent.

Page 73 of 8



6.6.6 Where the cash flows to be discounted are expressed in current prices, entities should use the real discount rate set by HM Treasury.

6.6.7 Separate disclosure of information about a particular contingency need not be made if that information has a protective marking. Guidance on protective markings is issued from time to time by the Cabinet Office or the relevant authority. If the potential effect of the contingency is required to be disclosed under FRS12, the relevant amount should still be included in the aggregate figure for such contingencies.

6.6.8 Departments may disclose, by way of note, significant liabilities of the non-departmental public body, which will be funded by the department if they crystallise, where they relate to other than the routine business of the body. Departments should not recognise the liabilities of non-departmental public bodies, nor disclose any contingent liabilities of a non-departmental public body that arise in the normal course of business.

Other requirements

6.6.9 In making major changes to the method of calculation of a provision, entities should confer with the relevant authorities (through sponsoring bodies where appropriate) to establish whether there is a significant impact on expenditure control.

Provision of information to Parliament

6.6.10 Where the guidance on the handling of public funds requires certain financial but remote obligations that fall outside the scope of FRS12 to be reported to Parliament, entities should include in their financial statements a note detailing those obligations.

Page 74 of 8














Contingencies Fund:



Page 75 of 8


7

Annual reports and accounts: disclosure and presentation

Chapter 7 Contents

7.1 Introduction...................................................................................................... 1 Summary financial information ........................................................................ 1

7.2 The annual report ............................................................................................ 1 Introduction...................................................................................................... 1 Scope of the annual report .............................................................................. 2

Interpretation of the Companies Act requirements for the public sector context......................................................................................................... 2

Management Commentary.............................................................................. 4 Applicability ................................................................................................. 4

Objectives of the RS........................................................................................ 4 Interpretations of the RS for the public sector context ................................ 4

Remuneration report ....................................................................................... 5 Objective of section 234B and Schedule 7A of the Companies Act............ 5 Interpretation of the Companies Act’s requirements for the public sector context......................................................................................................... 5

7.3 Statements by the Accounting Officer................................................................... 7 Statement of Accounting Officer’s responsibilities .......................................... 7 Statement on internal control .......................................................................... 7 Accounting Officer signature ........................................................................... 8

7.4 Formats and disclosures ................................................................................. 8 Introduction...................................................................................................... 8 Companies Act requirements .......................................................................... 8 Operating cost statement ................................................................................ 9

Companies Act requirements for departments and executive agencies under the Government Resources and Accounts Act 2000 and the Government Resources and Accounts Act (Northern Ireland) 2001 ........... 9 Companies Act requirements for non-departmental public bodies and trading funds.............................................................................................. 10

FRS 28 Corresponding amounts................................................................... 10 Applicability ............................................................................................... 10 Objective of FRS28 ................................................................................... 10 Interpretation of FRS 28 for the public sector context ............................... 10

FRS 3 Reporting financial performance ........................................................ 11 Applicability ............................................................................................... 11 Objective of FRS3 ..................................................................................... 11 Interpretation of FRS3 for the public sector context .................................. 11 Other requirements ................................................................................... 11


Balance sheet................................................................................................ 11

Companies Act requirements .................................................................... 11 SSAP 17 Accounting for post balance sheet events ..................................... 11

Applicability ............................................................................................... 11 Objectives of SSAP17 ............................................................................... 12 Interpretation of SSAP17 for the public sector context.............................. 12

Cash flow statement: FRS1........................................................................... 12 Applicability ............................................................................................... 12 Objectives of FRS1 ................................................................................... 13 Adaptation of FRS1 for the public sector context ...................................... 13 Other requirements ................................................................................... 13

Statement of Resources by Departmental Aim and Objectives .................... 13 Segmental reporting: SSAP 25 ..................................................................... 14

Applicability ............................................................................................... 14 Objectives of SSAP25 ............................................................................... 14 Fees and charges Information to be provided by departments, executive agencies and non-departmental public bodies.......................................... 15

Notes to the accounts.................................................................................... 15 Staff numbers and related costs................................................................ 15 Other administration costs and programme costs..................................... 15 Income....................................................................................................... 16 Analysis of net operating cost by spending body ...................................... 16 Tangible fixed assets................................................................................. 16 Intangible fixed assets............................................................................... 17

Investments – FRS13 Derivatives and other financial instruments ............... 17 Applicability ............................................................................................... 17 Objectives of FRS13 ................................................................................. 17 Interpretation of FRS13 for the public sector context ................................ 17 Debtors...................................................................................................... 19 Cash .......................................................................................................... 19 Creditors.................................................................................................... 19 Provisions for liabilities and charges ......................................................... 20 General Fund ............................................................................................ 20 Transactions financed directly by the Consolidated Fund......................... 20

Reserves ....................................................................................................... 21 Income and expenditure reserve .......................................................... 21 Revaluation reserve.............................................................................. 21 Donated assets reserve........................................................................ 21 Government grant reserve.................................................................... 21 Other reserves ...................................................................................... 21

Commitments under PFI contracts................................................................ 21 Disclosures required by the guidance on handling public funds ................... 21 Related party transactions............................................................................. 22 FRS8 Related party disclosures.................................................................... 22

Applicability ............................................................................................... 22 Objective of FRS8 ..................................................................................... 22 Interpretation of FRS8 for the public sector context .................................. 22

Third party assets.......................................................................................... 22 Entities within the departmental boundary .................................................... 23

7.5 Audit and publication........................................................................................... 23 Audit .............................................................................................................. 23

The auditor ................................................................................................ 23 The audit opinion....................................................................................... 23


The audit report ......................................................................................... 23

Presentation to Parliament and publication................................................... 24 Departments and agencies under the Government Resources and Accounts Act 2000 .................................................................................... 24 Departments and agencies under the Government of Wales Act 1998 .... 24 Departments and agencies under the Government Resources and Accounts Act (Northern Ireland) 2001 ....................................................... 24 Accounts prepared under the Public Finance and Accountability (Scotland) Act 2000 .................................................................................................... 24 Non-departmental public bodies................................................................ 24 Trading funds ............................................................................................ 24


7.1 Introduction 7.1.1 This chapter sets out the requirements for the content and format of the annual

reports and accounts of the entities covered by the requirements of this Manual. The annual report and accounts includes the annual report (section 7.2), a statement of Accounting Officer’s responsibilities (see paragraph 7.3.2), a statement on internal control (see paragraph 7.3.3), the primary financial statements and notes (section 7.4), and the audit opinion and report. Entities must prepare and publish an annual report and accounts as a single document unless the relevant authorities have specifically agreed otherwise.

7.1.2 Departments covering the whole of the United Kingdom and departments covering

England and Northern Ireland should also refer to chapter 3 for guidance on the Statement of Parliamentary Supply. These departments should also refer to the pro-forma Department Yellow. The content of Department Yellow is prescriptive for these departments only to the extent indicated in the pro-forma. For example, they should only prepare notes that are necessary in the context of their own circumstances – as required by generally accepted accounting practice. Not all of the notes shown in Department Yellow will be appropriate to every department.

7.1.3 The formats of the Operating Cost Statement and (to a more limited extent) the Cash

Flow Statement for the departments referred to in paragraph 7.1.2 differ from the formats used by other entities covered by the requirements of this Manual. However, some of the other disclosures referred to in Department Yellow are common to all financial statements, and those other entities might use Department Yellow as a guide for their own disclosures.

7.1.4 The accounts to be published by spending bodies accountable to the Scottish

Parliament will follow the format agreed between the Scottish Ministers and the Audit Committee of the Scottish Parliament. The format of those accounts will be based on the principles, but not the detail, set out in this chapter.

Summary financial information 7.1.5 An entity that wishes to publish a document additional to its annual report and

accounts that contains summary financial information must state in a prominent note that the data is a summary that might not contain sufficient information for a full understanding of the entity’s financial position and performance. The note should state how the user can obtain a copy of the full audited financial statements. The summary data should be followed by an auditors’ statement as to whether, in their opinion, the summary data is consistent with the entity’s full financial statements. The summary data must not be published in advance of the full annual report and accounts being laid before Parliament as to do so would be a breach of Parliamentary privilege.

7.2 The annual report

Introduction 7.2.1 This section of the chapter applies to all entities covered by the requirements of this

Manual except charitable NDPBs which should follow the requirements of the Charities SORP and regulations made under Charities legislation. It provides guidance on the content of the annual report, including the Management Commentary and the remuneration report.

Page 1 of 26


Scope of the annual report 7.2.2 Departments, executive agencies and trading funds shall prepare an annual report

for inclusion as part of the accounts containing the following information:

a) the matters to be dealt with in a Directors’ Report as set out in section 234 and Schedule 7 to the Companies Act 1985 (as amended by the Companies Act 1989; SI 1996 No. 189; the Companies (Audit, Investigations and Community Enterprise Act) 2004; SI 2005 No. 1011; and SI 2005 No. 3442), as interpreted for the public sector context in paragraphs 7.2.6 - 7.2.81. Entities should note that Part IV of Schedule 7 was repealed by SI 1996 No 189;

b) a Management Commentary (paragraphs 7.2.9 to 7.2.19); and

c) a remuneration report (paragraphs 7.2.20 to 7.2.28).

In the case of executive agencies and trading funds, the preparation of an annual report as described above will satisfy the requirement for the preparation of a Foreword (as required hitherto) and a report as required by Cm 914 The Financing and Accountability of Next Steps Agencies (agencies) and section 4(6A) of the Government Trading Funds Act 1973 (trading funds). There is thus no need to produce a separate report in addition to the annual report described above. The document presented to Parliament will be described as “Annual Report and Accounts”.

7.2.3 Non-departmental public bodies (other than those that are limited companies (see 7.2.6 below) or charities (see 7.2.1 above)) shall prepare an annual report as described in 7.2.2 above which will supersede the requirement to prepare a Foreword. In the case of NDPBs which already have a statutory obligation to prepare a separate report, the document described in 7.2.2 above will satisfy the requirement for the production of this separate report. The annual report as described above will be presented to Parliament with the accounts as a combined document described as the “Annual Report and Accounts”.

7.2.4 Where there is currently no statutory requirement for the preparation of a separate report, NDPBs will prepare an annual report as described in 7.2.2 above for inclusion in the accounts which will be described as the “Annual Report and Accounts” and presented to Parliament.

Interpretation of the Companies Act requirements for the public sector context 7.2.5 In disclosing the matters to be dealt with in a Directors’ Report, entities should note

that the information about Directors’ interests required by Part I and the information required by Part II of Schedule 7 is not applicable to the entities covered by the requirements of this Manual.

7.2.6 Companies legislation requires NDPBs which are limited companies to prepare a

Directors’ Report; in addition such NDPBs shall prepare a Management Commentary as described in 7.2.9 to 7.2.19

1 The relevant sections of the Companies Act are: 234A – approving and signing the Directors’ report; 234B – duty to prepare a remuneration report; 234C – signing the remuneration report; Schedule 7 – general requirements for a Directors’ report; Schedule 7A – requirements for the remuneration report.

Page 2 of 26


7.2.7 The requirement in section 234ZZA for the disclosure of the names of the directors

during the financial year is to be interpreted to mean the disclosure of:

a) (departments) the ministerial titles and names of all ministers who had responsibility for the department during the year;

b) (departments) the name of the person occupying the position of the permanent

head of the department;

c) (entities other than departments) the names of the chairman and chief executive;

and d) (all entities) the composition of the management board during the year.

7.2.8 In addition to the matters described in section 234 and Schedule 7 of the Companies Act, entities to which this Manual applies shall disclose the following information:

a) (departments only) a description of the entities within the departmental

accounting boundary;

b) (departments only) the names of any public sector bodies outside the boundary for which the department had lead policy responsibility in the year, together with a description of their status (for example, trading fund or public corporation); and

c) (departments only) a description of the departmental reporting cycle, including an outline of the matters covered in the spring Departmental report, in the Estimates, and in the Autumn Performance Report, and information about how readers can obtain these documents.

d) (executive agencies which are not whole departments, trading funds and NDPBs only) a note that the accounts have been prepared under a direction issued by [relevant authority] under [reference to appropriate legislation];

e) (executive agencies which are not whole departments, trading funds and

NDPBs only) a brief history of the entity and its statutory (or equivalent) background;

f) an indication of how pension liabilities are treated in the accounts and a

reference to the statements of the relevant pension scheme. A cross-reference to the accounting policy note in the accounts and the remuneration report will normally be sufficient;

g) details of company directorships and other significant interests held by Board

members which may conflict with their management responsibilities. Where a Register of Interests that is open to the public is maintained, disclosure may be limited to how access to the information in that Register may be obtained; and

h) information regarding the disclosure of the remuneration paid to the auditors for

any non-audit work undertaken by the auditors as required by SI 1991 No 2128 The Companies Act 1985 (Disclosure of Remuneration for Non-Audit Work) Regulations 1991 as amended by SI 1995 No 1520 The Companies Act 1985 (Disclosure of Remuneration for Non-Audit Work)(Amendment) Regulations 1995.

Page 3 of 26


Management Commentary

Applicability 7.2.9 When preparing the Management Commentary, entities covered by this Manual shall

take into consideration the recommendations outlined in the ASB’s Reporting Statement Operating and Financial Review (“the RS”) (www.frc.org.uk/asb/press/pub1029.html).

Objectives of the RS 7.2.10 The objective of the RS is to specify the requirements for a management commentary,

which shall be a balanced and comprehensive analysis of:

a) the development and performance of the business of the entity during the financial year;

b) the position of the entity at the end of the year;

c) the main trends and factors underlying the development, performance and position of the business of the entity during the financial year; and

d) the main trends and factors that are likely to affect the entity’s future development, performance and position.

Interpretations of the RS for the public sector context 7.2.11 Although the RS refers to an Operating and Financial Review, its recommendations

should be read as applying to the Management Commentary required by paragraph 7.2.2(b) above. Following the spirit of paragraph 6 of the RS, the Management Commentary shall focus on matters that are relevant to the interests of members. In the context of the public sector, “members” shall be interpreted to be all users of the accounts.

7.2.12 The Management Commentary should be self-standing and be as comprehensive as possible. However, there may be cases where information is also given in other documents in the cycle of accountability to Parliament and the public such as the Autumn Performance Statement or Departmental Report. In such cases, the Management Commentary should provide summarised information with adequate cross-references to the other documents.

7.2.13 For departments, the Consolidated Statement of Operating Costs by Departmental

Aim and Objectives and supporting notes will replace the requirement in the RS to disclose performance against key performance indicators.

7.2.14 Other central government entities are required to report progress against those targets agreed with the Minister and normally promulgated by means of a Parliamentary question.

7.2.15 Paragraphs 28(a) and (c) of the RS require the inclusion of information on, respectively, environmental matters and social and community issues. The preparation of Sustainability Reports to complement the Annual Report and Accounts is encouraged and where such a Report is already produced, the Management Commentary should cross-refer to it. Further information on the kinds of information to be provided in the Management Commentary in respect of environmental and social and community issues can be found in the Practical Examples and Proformas section of the FreM website (www.financial-reporting.gov.uk).

7.2.16 (Primarily for NDPBs) The Management Commentary should explain the adoption of the going concern basis of accounting where this might be called into doubt, for example where there are significant net liabilities that will be financed from resources voted by Parliament (eg grant in aid) in the future.

Page 4 of 26


7.2.17 As noted in the Introduction to the Implementation Guidance in the RS, the examples

are illustrative and should not be taken to be a template.

7.2.18 In disclosing information relating to the achievement of financial targets based on a return on capital employed, relevant bodies should use the definitions of “return” and “capital employed” as agreed in their Treasury Minute or other document rather than those given in IG example 1 in the RS.

7.2.19 In addition to the requirements of the RS, the departments to which paragraph 7.1.2 refers should include the following information:

a) a comparison of outturn against Estimate, with detailed explanations of the causes of significant variances where applicable;

b) progress in relation to Public Service Agreement targets;

c) where applicable, the financing implications of significant changes in the department’s objectives and activities, its investment strategy and its long-term liabilities (including significant provisions and PFI and other leasing contracts) in the light of the department’s spending review settlement; and

d) commentary on the department’s significant remote contingent liabilities (that is, those that are disclosed under Parliamentary reporting requirements and not under FRS12) to enable the reader to understand their nature and what steps the department is taking to minimise the risk of their crystallising.

Remuneration report 7.2.20 Section 234B and Schedule 7A of the Companies Act (see also Statutory Instrument

SI 2002 No 1986) apply, as interpreted for the public sector context, to all entities covered by the requirements of this Manual.

Objective of section 234B and Schedule 7A of the Companies Act 7.2.21 Section 234B requires the preparation of a Remuneration Report containing certain

information about the directors’ remuneration in accordance with the requirements of Schedule 7A. Certain of the information is subject to audit and will be referred to in the audit opinion; the audit report will also note that the other information will be read by the auditor who will consider whether it is consistent with the financial statements.

7.2.22 The Remuneration Report shall be signed by the Accounting Officer or Chief Executive.

Interpretation of the Companies Act’s requirements for the public sector context 7.2.23 References in the Act to “Directors” shall be interpreted to mean persons in senior

positions having authority or responsibility for directing or controlling the major activities of the entity. This means those who influence the decisions of the entity as a whole rather than the decisions of individual directorates or sections within the entity. Such persons will include advisory and non-executive Board members and, in the case of departments, Ministers. In the following paragraphs, such persons are described as “senior managers”.

7.2.24 Details of salary and allowances shall be analysed between (a) salary and allowances (see 7.2.24) and (b) benefits in kind, notwithstanding the requirements of paragraph 6(1) to Schedule 7A for the separate disclosure of the various elements of the remuneration package.

7.2.25 The Remuneration Report shall include information under the following headings to the extent that they are relevant. Where the information relates to named individuals, their prior consent to disclosure is required but, subject to this being obtained, there is a presumption that the information will be given in all circumstances except on

Page 5 of 26


grounds of national security or where it conflicts with existing legislation. In the latter case, the fact that certain disclosures have been omitted should be disclosed. In addition to the headings listed below, Schedule 7A requires information to be given about long- term incentive schemes (as defined in paragraph 10(5) of Schedule 7A). It seems unlikely that entities to which this Manual applies will have such schemes and they are not considered further. The aspects of the Remuneration Report which are subject to audit are indicated as such.

a) Details of the membership of the Remuneration Committee.

b) Statement of the policy on the remuneration of senior managers for current and future financial years. In most cases, it will be sufficient to refer to the work and recommendations of the Senior Salaries Review Body.

c) Explanation of methods used to assess whether performance conditions were met and why those methods were chosen. If relevant, why the methods involved comparison with outside organisations.

d) Explanation of relative importance of the relevant proportions of remuneration which are, and which are not, subject to performance conditions.

e) Summary and explanation of policy on duration of contracts, and notice periods and termination payments.

f) Details of the service contract for each senior manager who has served during the year:

date of the contract, the unexpired term, and details of the notice period;

provision for compensation for early termination; and

other details sufficient to determine the entity’s liability in the event of early termination.

g) Explanation of any significant awards made to past senior managers.

h) For each senior manager who served during the year show, in tabular form [this information is subject to audit]:

salary and allowances, (see 7.2.24 below) (in bands of £5,000 for officials and actual amounts for ministers);

if a payment for compensation for loss of office paid or receivable has been made under the terms of an approved Compensation Scheme, the fact that such a payment has been made (but no details of the amounts paid);

estimated value of non-cash benefits (benefits in kind) (to the nearest £100),

together with the total of the above for both this and the previous year.

i) Details of any element of the remuneration package which is not cash [this information is subject to audit].

j) For each senior manager who has served during the year [this information is subject to audit]:

the real increase during the reporting year in the pension and (if applicable) related lump sum at age 60 (ministers age 65) in bands of £2,500;

the value at the end of the reporting year of the accrued pension and (if applicable) related lump sum at age 60 (ministers, age 65) in bands of £5,000;

the value of the cash equivalent transfer value at the beginning of the reporting year to the nearest £1,000;

Page 6 of 26


the real increase in the cash equivalent transfer value during the

reporting year, to the nearest £1,000;

where the senior manager has a partnership pension account, the employer’s contribution to the partnership pension account. (In these circumstances, the disclosures in the first four bullets will not apply.)

k) Details of compensation payable to former senior managers [this information is subject to audit].

l) Details of amounts payable to third parties for services of a senior manager [this information is subject to audit].

7.2.26 Salary and allowances covers both pensionable and non-pensionable amounts and includes, but may not necessarily be confined to: gross salaries; performance pay or bonuses payable; overtime; reserved rights to London Weighting or London allowances, recruitment and retention allowances; private-office allowances or other allowances to the extent that they are subject to UK taxation and any ex-gratia payments. It does not include amounts which are a reimbursement of expenses directly incurred in the performance of an individual’s duties. For ministers, only the salary payable in respect of their role as minister of the department should be shown.

7.2.27 Subject to the need to obtain their prior consent, there is a presumption that information about named individuals will be given in all circumstances, except on grounds of national security or where it conflicts with existing legislation. In the latter case, the fact that certain disclosures have been omitted should be disclosed in respect of their role as minister of the department should be shown.

7.2.28 Further guidance on salary and pension disclosures is given in Employer Pension Notices (EPNs) and formerly Pension Circulars issued by the Cabinet Office.

7.3 Statements by the Accounting Officer 7.3.1 This section of the chapter applies to all entities covered by the requirements of this

Manual.

Statement of Accounting Officer’s responsibilities 7.3.2 The Accounting Officer or Chief Executive of all entities covered by the requirements

of this Manual should explain his/her responsibility for preparing the financial statements in a statement that should be positioned after the Annual Report and before the Statement on internal control. Entities should refer to Statement of Auditing Standard 600 and to Practice Note 10 (Audit of financial statements of public sector entities in the United Kingdom). A model statement of Accounting Officer’s responsibilities is provided in Annex 3.

Statement on internal control 7.3.3 All entities covered by the requirements of this Manual shall prepare a statement on

internal control. Entities should refer to the guidance in the handling of public funds published separately by the relevant authorities for proforma statements on internal control. (A proforma is reproduced in Annex 4, although it does not apply to Scottish entities, which should refer to the Scottish Public Finance Manual.) In preparing the statement, the Accounting Officer should reflect the particular circumstances in which the entity operates, and adapt the proforma accordingly.

Page 7 of 26


Accounting Officer signature 7.3.4 The Accounting Officer shall sign and date the Annual Report, the statement on

internal control and the Balance Sheet. The Accounting Officer should also sign and date the Remuneration Report (see paragraph 7.2.20).

7.4 Formats and disclosures

Introduction

7.4.1 This section of the chapter provides guidance on the format and content of the operating cost statement, the balance sheet and the cash flow statement, together with the relevant notes. The following paragraphs make it clear how different types of entities should present financial statements. The order of the paragraphs follows the order of the primary financial statements.

7.4.2 In addition to the requirements of the Companies Act (see paragraphs 7.4.4 to 7.4.7), this section considers the following accounting standards that include material dealing with formats of, and disclosures in, financial statements:

FRS 28 Corresponding amounts (paragraphs 7.4.12 to 7.4.14)

FRS3 Reporting financial performance (paragraphs 7.4.15 to 7.4.18);

SSAP17 Accounting for post balance sheet events (paragraphs 7.4.21 to 7.4.23);

FRS1 Cash flow statements (paragraphs 7.4.24 to 7.4.27);

SSAP25 Segmental reporting (paragraphs 7.4..30 to 7.4.32);

FRS13 Derivatives and other financial instruments (paragraphs 7.4.43 to 7.4.46); and

FRS8 Related party disclosures (paragraphs 7.4.65 to 7.4.67).

UITF Abstract 9 Accounting for operations in hyper-inflationary economies is not likely to be relevant and is not discussed further in this Manual. However, should it become applicable, it should be applied in full.

7.4.3 Other accounting standards, which are dealt with in other chapters of this Manual, might include disclosure requirements. Unless indicated otherwise, those disclosure requirements apply in full.

Companies Act requirements 7.4.4 Schedules 4, 4A and 5 of the Companies Act deal with the form and content of

company accounts, the form and content of group accounts and the disclosure of information about related undertakings respectively. Non-departmental public bodies that are companies and trading funds should apply in full the requirements of these Schedules. The following paragraphs in this section adapt and interpret the requirements of these Schedules as necessary for the context of other entities covered by the requirements of this Manual.

7.4.5 Section 232(1) of the Companies Act requires the disclosure by way of note of information about directors' (see 7.2.9 above) emoluments as described in Schedule 6 of the Companies Act. For the purposes of applying this section, bodies to which the FReM applies shall be deemed to be quoted companies (and hence are required to prepare a Remuneration Report - see 7.2.8 above). The application of paragraph 1(6)(a) of Schedule 6 means that certain information need not be given in the notes if it is readily ascertainable from other information given in the financial statements, and

Page 8 of 26


it is likely that the information given in the Remuneration Report will be sufficient to satisfy the requirements of Schedule 6.

7.4.6 Section 227(1) requires a company that is a parent company to prepare group accounts as well as individual accounts. Departments that are covered by paragraph 7.1.2 that prepare consolidated accounts (chapter 2.4.9 refers to the departmental resource accounting boundary) shall prepare accounts that present the transactions and flows for the financial year and the balances at the year end between the core department and the consolidated group in respect of the following primary statements:

a. the operating cost statement (see also paragraph 7.4.8) and supporting notes; and

b. the balance sheet and supporting notes.

7.4.7 Departments need not present such information where it is not material to the core department. For instance this would be where a core department is much larger than the other elements consolidated within the department's boundary such that the results of the core department do not give a significantly different view from the results of the consolidated department. Similarly, where the core department is much smaller than the other elements, information about the core department would not be needed. Where departments do not disclose this information, the reasons should be disclosed in the Accounting Policies Note.

Operating cost statement 7.4.8 Paragraphs 7.4.9 to 7.4.11 set out the application of the Companies Act requirements

for the operating cost statement or equivalent to the entities covered by this Manual. Paragraphs 7.4.15 to 7.4.18 deal with FRS3 Reporting financial performance.

Companies Act requirements for departments and executive agencies under the Government Resources and Accounts Act 2000 and the Government Resources and Accounts Act (Northern Ireland) 2001 7.4.9 Departments preparing resource accounts and executive agencies preparing financial

statements under the Government Resources and Accounts Act 2000 or under the Government Resources and Accounts Act (Northern Ireland) 2001 shall prepare an operating cost statement in accordance with the format shown below, which is an adaptation of the requirements of Schedule 4 of the Companies Act. Agencies that are not whole departments may opt to follow a Companies Act format or appropriate alternative. Where an agency opts to follow an alternative format, the agency should seek the approval of the relevant authority through the parent department. (Programme expenditure will be shown only where appropriate: see also chapter 4.3.3 and 4.3.4.)

Current Year £000

Prior Year £000

Core department Consolidated Core

department Consolidated

Note Staff

costs Other costs Income

Staff costs

Other costs Income

Administration costs:

Staff costs X X X X Other admin. costs

X X X X

Operating income

(X) (X) (X) (X)

Programme costs:

Request for Resources 1 Staff costs X X X X

Page 9 of 26


Expenditure X X X X Income (X) (X) (X) (X) etc. Totals A B C D E F Net operating cost

Net total of A to C

Net total of D to F

Companies Act requirements for non-departmental public bodies and trading funds

7.4.10 Non-departmental public bodies and trading funds shall prepare their income and expenditure accounts (or profit and loss account or operating account as appropriate) in accordance with either format 1 or format 2 of the profit and loss formats prescribed in Schedule 4 of the Companies Act. Format 1 classifies expenses by function (functional classification) and is more suited to non-departmental public bodies and trading funds for which gross profit is a useful performance measure; format 2 classifies expenses by type (natural classification). Charitable non-departmental public bodies should follow the requirements of the Charities SORP.

7.4.11 The overriding requirement is for the financial statements to give a true and fair view. If following one of the profit and loss formats prescribed by Schedule 4 of the Companies Act does not result in such a view being given, Non-departmental public bodies and trading funds should modify or supplement the formats to the extent necessary to give a true and fair view. Any such adaptations should be discussed with the relevant authorities through their sponsoring bodies.

FRS 28 Corresponding amounts

Applicability

7.4.12 FRS 28 applies in full to all entities covered by this Manual.

Objective of FRS28

7.4.13 The objective of FRS 28 is to require appropriate disclosures of corresponding amounts or items shown in an entity’s primary financial statements and notes to the financial statements.

Interpretation of FRS 28 for the public sector context

7.4.14 In applying FRS 28, entities should note the interpretation of ‘directors’ in paragraph 7.2.21. Entities should also note that a decision on whether to include corresponding amounts in disclosures specific to government departments and agencies (for example, in relation to information on the Statement of Parliamentary Supply) will be taken on a case by case basis and will be shown in the pro-forma Department Yellow.

Page 10 of 26


FRS 3 Reporting financial performance

Applicability 7.4.15 RS3 applies in full to all entities covered by this Manual.

Objective of FRS3 7.4.16 he objective of FRS3 is to require entities to highlight a range of important

components of financial performance to aid users in understanding the performance achieved by a reporting entity during the period and to assist them in forming a basis for their assessment of future results and cash flows.

Interpretation of FRS3 for the public sector context 7.4.17 n applying FRS3, entities should be aware of the following interpretations for the

public sector context:

a) profit on disposal of an asset can be accounted for as negative expenditure to the extent that the profit represents a final adjustment of depreciation. Where this is not the case, profits should be accounted for as income;

b) entities that do not have a financial objective of full cost recovery should not include the “net operating cost” as part of a statement of total recognised gains and losses because it would present a misleading impression, given that this is financed either from voted expenditure or from other sources, and should entitle the statement ‘Statement of recognised gains and losses’; and

c) entities should also include any movements in the donated asset or government grant reserves in the statement of recognised gains and losses (or statement of total recognised gains and losses).

Other requirements 7.4.18 In the exceptional event that entities need to adjust opening balances as a result of

changes in accounting policies or the correction of fundamental errors, entities should discuss any significant proposals for prior period adjustments with the relevant authorities (through sponsoring bodies where appropriate) to ensure that the budgeting implications have been properly considered.

Balance sheet 7.4.19 Paragraph 7.4.20 sets out the the application of the Companies Act requirements for

the balance sheet to the entities covered by this Manual. Paragraphs 7.4.21 to 7.4.23 deal with SSAP17 Accounting for post balance sheet events.

Companies Act requirements 7.4.20 ll entities covered by the requirements of this Manual shall prepare a balance sheet in

accordance with format 1 of the balance sheet formats in Schedule 4 of the Companies Act., except that the sub-headings under capital and reserves should reflect the circumstances of the individual entity (see also paragraphs 7.4.53 and 7.4.56 to 7.4.61)

SSAP 17 Accounting for post balance sheet events

Applicability 7.4.21 SAP17 applies in full to all entities covered by this Manual.

Page 11 of 26



7.4.22 The objectives of SSAP17 are to ensure that events arising after the balance sheet date are reflected in the financial statements if they provide additional evidence of conditions that existed at the balance sheet date and materially affect the amounts to be included. To prevent financial statements from being misleading, disclosure is also required by way of note of other material events arising after the balance sheet date that provide evidence of conditions not existing at the balance sheet date. Such disclosure is required where the information is necessary for a proper understanding of the entity’s financial position.

Interpretation of SSAP17 for the public sector context 7.4.23 In performing their tests for events subsequent to the balance sheet date, auditors

have regard to the date of issue of the financial statements. The dates of issue of the financial statements of the entities covered by this Manual have been interpreted in Practice Note 10 (Audit of financial statements of public sector entities in the United Kingdom). The dates are set out in the table below.

Type of entity Date of issue of financial statements

Entities where the statutory auditors are responsible for the printing of the document containing the audited financial statements.

Date of despatch by the auditors to the Clerk of the House of Commons or House of Lords for laying before Parliament.

Entities where the financial statements are laid before the Houses of Parliament by the Secretary of State of the sponsoring departments or by HM Treasury, and where the statements are considered by an intermediate body before being laid before Parliament.

Date of despatch by the entity’s management to the Secretary of State of the sponsoring department or to HM Treasury, or to the members of the intermediate body, whichever is the earlier.

National Assembly for Wales and its sponsored public bodies.

Date of despatch by the Auditor General or the body or other persons specified by legislation (where applicable) to the Table Office of the National Assembly.

Entities in Scotland. Date of despatch by the Auditor General to Scottish Ministers for laying before Parliament.

Entities in Northern Ireland. Date of despatch by the department, body or persons specified by legislation for laying before the Northern Ireland Assembly.

An intermediate body is interpreted as being a Board of Trustees or other Board the members of which are not permanent officials of the entity.

Cash flow statement: FRS1

Applicability 7.4.24 FRS1 applies, as adapted in paragraph 7.4.26, to the departments referred to in

paragraph 7.1.2 (and, where appropriate, their executive agencies). FRS1 applies in full to all other entities covered by the requirements of this Manual.

Page 12 of 26


Objectives of FRS1 7.4.25 The objective of FRS1 is to ensure that entities report their cash generation and cash

absorption for the period by highlighting the significant components of cash flow in a way that facilitates comparison of the cash flow performance of different businesses and that provides information to assist in the assessment of entities’ liquidity, solvency and financial adaptability.

Adaptation of FRS1 for the public sector context 7.4.26 The following adaptations apply to the departments referred to in paragraph 7.1.2

(and, where appropriate, their executive agencies).

a) departments should prepare their cash flow statements in the format shown below;

200X-0Y

£000

200W-0X

£000

Note Net cash outflow from operating activities

Capital expenditure and financial investment

Receipts due to the Consolidated Fund which are outside the scope of the Department’s activities

Cash received during the year in relation to CFER income that does not pass through the OCS.

Payments of amounts due to the Consolidated Fund

Cash paid over to the Consolidated Fund under any category.

Financing

Increase/(decrease) in cash in the period

b) in reconciling operating cost to operating cash flows, departments should exclude movements in debtors and creditors relating to items that do not pass through the operating cost statement (balances with the Consolidated Fund; and debtors and creditors linked to loans from the National Loans Fund, capital expenditure, finance leases and PFI contracts);

c) in analysing capital expenditure and financial investment, departments should adjust for debtors and creditors relating to capital expenditure and those relating to loans issued to or repaid by other bodies;

d) in analysing financing, departments should adjust for debtors and creditors relating to the capital expenditure in respect of finance leases and on-balance sheet PFI contracts; and

e) departments do not need to provide a reconciliation of the net cash flow to net debt.

Other requirements 7.4.27 The notes to the cash flow statement should be placed after the notes relating to

reserves.

Statement of Resources by Departmental Aim and Objectives 7.4.28 The Statement of Resources by Departmental Aim and Objectives shall be produced

by all government departments and executive agencies that are whole departments and SSAP 25 Segmental Reporting does not apply to them.

7.4.29 The aim and objectives for the year will have been set by ministers in advance and should form the basis of reporting in this Statement. Any

Page 13 of 26


changes to the aim or objectives during the year should be disclosed in a note to the financial statements. Where expenditure has been incurred in relation to an activity that does not contribute to the current objectives, a further objective should be ascribed to those costs (for example, ‘to meet the liabilities arising from former [name of programme]. In reporting against objectives, resources should be attributed to objectives according to the following principles: a) the net operating cost as shown in the operating cost statement should be

attributed across the department’s objectives, except that where income and/or the resource cost associated with capital employed are significant and vary markedly in proportion between objectives, the gross income and expenditure and/or cost of capital employed should be disclosed across objectives;

b) departments should ensure that the information in the Statement is supported by more detailed information in notes to the financial statements where this additional information will assist the user of the accounts in assessing a department’s performance against its objectives;

c) where the aim and/or objectives have changed and prior year comparators cannot be restated (or could be restated but at disproportionate cost), the notes to the financial statements should state this and disclose current and prior year figures on the basis of the previous aim and objectives;

d) where intra-group transactions have been eliminated on consolidation, the unconsolidated figures may be disclosed in a note to the financial statements if that improves clarity;

e) all costs should normally be allocated to, or apportioned between, objectives on a consistent basis. Exceptionally, departments might show indirect costs separately where apportionment might be misleading. Where apportioned indirect costs are substantial, departments might show them separately from the allocated direct costs for each objective if that improves clarity. The basis of apportionment should be disclosed in the notes to the financial statements; and

f) in preparing the Statement, departments should consider whether items that are not material in the context of the operating cost statement are material in the context of individual objectives and should be disclosed in the Statement or in notes to the Statement. Examples might include gains or losses on the disposal of assets, major insurance losses where the risk is self-insured, or costs relating to former objectives such as early departure costs.

Segmental reporting: SSAP 25

Applicability 7.4.30 SSAP25 – and paragraph 55 of Part III of Schedule 4 of the Companies Act – apply in

full only to trading funds. They do not apply to departments, executive agencies that are not whole departments and non-departmental public bodies. Instead, those entities shall provide the information set out in paragraph 7.4.32.

Objectives of SSAP25 7.4.31 The objective of SSAP25 is to ensure that entities provide segmental analysis so as

to assist users of the financial statements to

a) appreciate more thoroughly the results and financial position of the entity by permitting a better understanding the entity’s past performance and thus a better assessment of its future prospects; and

b) be aware of the impact that changes in significant components of a business may have on the business as a whole.

Page 14 of 26


Fees and charges Information to be provided by departments, executive agencies and non-departmental public bodies 7.4.32 Departments, executive agencies that are not whole departments and non-

departmental public bodies should provide in their financial statements an analysis of the services for which a fee is charged, with a statement that the information is provided for fees and charges purposes, not for SSAP25 purposes. Where they do not produce separate accounts (for example, advisory or tribunal non-departmental public bodies), entities should arrange for the analysis to be published in the accounts of the responsible department, with a note stating the name of the entity to which the analysis applies. The analysis should include the following information for each service where the full cost is over £1 million or more or (if lower) where the amount of the income and full cost of the service are material to the financial statements:

a) the financial objective;

b) full cost;

c) income;

d) surplus or deficit; and

e) performance against the financial objective.

Notes to the accounts 7.4.33 Part III of Schedule 4 of the Companies Act applies as appropriate to all entities

covered by this Manual. The following paragraphs interprets disclosure requirements for the public sector context (but see also paragraph 7.4.3).

Staff numbers and related costs 7.4.34 The information required by section 231A (introduced by SI 2004 No. 2947) of the

Companies Act shall be presented as the average full time equivalent staff under the following headings (and, in the case of departments only, against departmental objectives):

a) staff with a permanent (UK) employment contract with the entity;

b) other staff engaged on the objectives of the entity (for example, short term contract staff, agency/temporary staff, locally engaged staff overseas and inward secondments where the entity is paying the whole or the majority of their costs). Where the number of staff under any one category of ‘other staff’ is significant, that category should be separately disclosed;

c) Ministers; and

d) Special advisers.

7.4.35 Entities should use the quarterly statistics prepared for the purposes of the Office for National Statistics. The basis for determining the full time equivalent should generally be the conditioned hours for a permanent official (for example, 36 hours per week). Staff with a permanent employment contract include those on maternity, sick, special or paternal leave and those on career break, but only where they are being paid by the entity.

7.4.36 The total of wages and salaries, social security costs and other pension costs should be reduced by the amount of recoveries of staff costs in respect of outward loans and secondments where the recoveries have been shown as income. If staff costs have been capitalised, the amount should be disclosed as a footnote to the analysis of staff costs.

Other administration costs and programme costs 7.4.37 Entities shall analyse the total of other administration costs and programme costs, as

recorded in the operating cost statement, in separate notes to the financial statements. In addition to the information required by paragraphs 53 and 54 of Part

Page 15 of 26


III of Schedule 4 of the Companies Act, by sections 390A and 390B of the Companies Act and the disclosures required by SSAP13, entities shall also disclose expenditure in respect of the service charges under PFI contracts, the individual components of non-cash items, and an analysis of other significant expenditure items.

Income 7.4.38 All entities should provide an analysis of operating income, together with commentary

where appropriate, that enables users of the financial statements to understand the sources from which the entity obtains its operating income.

Analysis of net operating cost by spending body 7.4.39 Departments should disclose in a note to the financial statements an analysis of net

operating costs by spending body against departmental budget as follows:

a) the core department;

b) entities within the departmental boundary, individually listed;

c) non-departmental public bodies, individually listed;

d) other central government entities not covered by the above categories, individually listed;

e) total grants to local authorities; and

f) total grants to other bodies.

Other entities making grants or grants-in-aid should provide an analysis of amounts paid between public and private sector recipients.

Tangible fixed assets 7.4.40 Paragraphs 42 to 44 of Part III of Schedule 4 of the Companies Act applies to all

entities covered by this Manual. As a minimum, entities should analyse their tangible fixed assets under the following headings, distinguishing between owned and leased assets.

land and buildings excluding dwellings – offices, warehouses, hospitals, barracks, hangers, runways, farms and multi-storey car parks, etc. Any underlying and associated land should be included as well as other land holdings;

dwellings – buildings used entirely or primarily as residences, including any associated structures such as garages and parking areas. Any underlying and associated land, such as gardens and yards, should be included;

infrastructure assets – see 5.2.8. Underlying and associated land should be included;

transport equipment – equipment for moving people and/or objects, for example cars, lorries, trains, ambulances and aircraft;

single-use military equipment (for MoD use only) – military equipment for which there is no equivalent civilian role (for example tanks and fighter aircraft);

plant and machinery – plant and machinery not covered by other categories, including scientific aids and surveillance equipment;

information technology – hardware used for processing data and communications. Includes software developed in-house or by third parties (but not software licences);

furniture and fittings – office fittings, furniture, showcases, shelving etc.;

antiques and works of art – assets acquired for future generations, for example paintings, sculptures, recognised works of art, and antiques;

Page 16 of 26


payments on account and assets under construction – assets currently being built and not yet in use; and

cultivated assets – livestock for breeding, orchards and other plantations of trees yielding repeat products.

7.4.41 Operational heritage assets, and non-operational heritage assets that are capitalised, should be included under the appropriate heading.

Intangible fixed assets 7.4.42 Entities should analyse their intangible fixed assets under the following headings:

software licences – the right to use software developed by third parties

development expenditure;

licences, trademarks and artistic originals – original films, sound recordings, etc. on which performances are recorded or embodied;

patents – inventions that are afforded patent protection; and

goodwill.

Investments – FRS13 Derivatives and other financial instruments

Applicability 7.4.43 FRS13 applies, as interpreted in paragraph 7.4.45 to all entities covered by this

Manual.

Objectives of FRS13 7.4.44 The objective of FRS13 is to ensure that financial statements provide disclosures that

enable users to assess the entity’s objectives, policies and strategies for holding or issuing financial instruments, including the risk profile for each of the main financial risks and the significance to the entity’s reported financial position, performance and cash flows regardless of whether the instruments are recognised on balance sheet or not.

Interpretation of FRS13 for the public sector context 7.4.45 The following interpretations to FRS13 apply to entities required to prepare financial

statements in accordance with the guidance in this Manual.

Definition a) Equity and non-equity shares shall mean any shares, including special or ‘golden’

shares, in private sector limited companies held in the name of the Secretary of State of the sponsoring department and Public Dividend Capital and other interests in public bodies falling outside the accounting boundary.

b) Special or ‘golden’ shares are those shares retained in businesses that have been privatised but in which the department wishes to retain a regulatory interest of reserve power.

c) A financial instrument shall in addition to the definition in FRS13 also include Voted loans and loans from the National Loans Fund.

Recognition d) Any financial instrument that is not held in furtherance of the entity’s objectives

but is held on behalf of government more generally should be accounted for in a separate Trust Statement. Entities should discuss such cases with the relevant authorities.

e) Special or ‘golden’ shares should not be recognised on the balance sheet.

Page 17 of 26


Measurement

f) Public Dividend Capital and other interests in public bodies falling outside the accounting boundary shall be measured at historic cost.

g) Other equity and non-equity shares should be reported at market value unless this cannot be readily ascertained, in which case the investment should be valued on a basis determined by the entity, in consultation with any sponsoring department and with the relevant authorities, to be appropriate in the circumstances.

h) Each special and ‘golden’ share should be valued at £1 nominal.

i) Voted loans and loans from the National Loans Fund should be reported at historic cost.

j) Other loans or groups of loans should be stated at fair value, based on the discounted value of the future cash flows expected to be received from the loan. Entities should use the current National Loans Fund loan rate applicable to the loan repayment terms.

Disclosure k) The relevant authorities have determined that all entities covered by the

requirements of this Manual should exclude from all disclosures all of their short-term debtors and creditors as defined in FRS13.

Additional requirements 7.4.46 The following additional requirements should be observed by all entities covered by

this Manual.

a) Entities should disclose for equity and non-equity shares and all loans unless carried at cost:

I. the opening and closing valuations;

II. any revision arising from a revaluation made during the year;

III. acquisitions and disposals during the year;

IV. transfers of assets to or from fixed asset investments;

V. opening and closing balances of any provisions for diminution in value;

VI. details of movements in provisions for diminution in value in the year, including new provisions, adjustments arising from disposals and any other adjustments.

b) Entities should disclose for Public Dividend Capital and equity and loans carried at cost:

I. the opening and closing balances;

II. acquisitions and disposals during the year;

III. transfers of assets to or from fixed asset investments;

c) Entities should disclose the following in respect of special or ‘golden’ shares:

I. the name, in full, of the entity in which the share is held;

II. a brief description of the terms of the shareholding, including the nominal value of the holding; and

III. an indication of where further detailed information can be obtained (the entity’s annual report and accounts).

Page 18 of 26


Debtors 7.4.47 Entities shall analyse debtors by type (as appropriate) as set out below. For amounts

falling due within one year:

a) trade debtors;

b) deposits and advances;

c) other debtors;

d) prepayments and accrued income;

e) current part of PFI prepayment;

f) current part of NLF loan;

g) amounts due from the Consolidated Fund in respect of Supply; and,

for amounts falling due after more than one year:

h) trade debtors;

i) deposits and advances;

j) other debtors; and

k) prepayments and accrued income.

7.4.48 Entities shall also give an analysis of debtor balances between:

a) other central government bodies;

b) local authorities;

c) NHS bodies;

d) public corporations and trading funds;

e) bodies external to government.

Cash 7.4.49 Entities shall disclose the opening cash position, the net change in cash balances

and the closing cash position. Where applicable, the closing cash position should be further analysed between balances held at the Office of HM Paymaster General and balances held in commercial banks.

Creditors 7.4.50 In addition to the requirements of paragraph 47 of Part III of Schedule 4 of the

Companies Act, entities shall analyse creditors by type (as appropriate) as set out below. For amounts falling due within one year:

a) overdraft;

b) VAT;

c) other taxation and social security;

d) trade creditors

e) other creditors;

f) accruals and deferred income;

g) current part of finance leases

h) current part of imputed finance lease element of on-balance sheet PFI contracts;

i) current part of NLF and voted loans;

j) amounts issued from the Consolidated Fund for Supply, but not spent at the year end;

Page 19 of 26


k) Consolidated Fund extra receipts due to be paid to the Consolidated Fund –

received;

l) Consolidated Fund extra receipts due to be paid to the Consolidated Fund – receivable; and,

for amounts falling due after more than one year:

m) finance leases;

n) imputed finance lease element of on-balance sheet PFI contracts;

o) NLF loans; and

p) other headings as appropriate.

7.4.51 Entities shall also give an analysis of creditor balances between:

a) other central government bodies;

b) local authorities;

c) NHS bodies;

d) public corporations and trading funds;

e) bodies external to government.

Provisions for liabilities and charges 7.4.52 In providing particulars of each provision in accordance with the requirements of

paragraph 46 (and paragraph 47 for those entities subject to tax) of Part III of Schedule 4 of the Companies Act, entities shall state:

a) the nature of the provision;

b) how the provision is calculated;

c) the period over which expenditure is likely to be incurred; and

d) the discount rate where the time value of money is significant. In the case of provisions for early departure costs, that rate is set by HM Treasury.

General Fund 7.4.53 This paragraph applies to departments and executive agencies. The General Fund

represents the total assets less liabilities of the department or agency, to the extent that the total is not represented by other reserves and financing items. Supply financing is credited to the General Fund, as is financing from the National Insurance Fund (relating to benefits expenditure) and from the Contingencies Fund. An amount equal to any expenditure on standing services (see also paragraphs 7.4.54 and 7.4.55) is credited to the General Fund.

Transactions financed directly by the Consolidated Fund 7.4.54 Where expenditure is funded directly by the Consolidated Fund, departments should

account appropriately for the transaction where it satisfies both of the following criteria:

a) the entity has the ability to deploy the economic resources involved;

b) the entity has the ability to benefit (or to suffer) from the deployment of those resources.

7.4.55 In applying the two criteria in 7.4.51, departments should have regard to the following terminology used

a) ‘deploy’: the entity has the ability to determine the level of resources consumed or the nature of the associated economic benefits within the constraint that all expenditure is subject to the overriding requirements, permissions and constraints of statute or other parliamentary approval;

Page 20 of 26


b) ‘economic resources’: these are the resources which include expenditure and

the costs of holding assets;

c) ‘benefit or suffer’: the consumption of the economic resources is intended to support the achievement of the entity’s services or functions; the entity also bears the risks of inefficiencies or performance shortfalls. Two examples can be given. First, in relation to the operating cost statement, judges’ salaries are paid out of the Consolidated Fund as standing services. The Department for Constitutional Affairs is responsible for allocating judges to courts, and for otherwise regulating their behaviour. The work of the judges facilitates the achievement of the department’s services and functions. Second, in relation to the balance sheet, where the payments from the Consolidated Fund result in the recognition of assets, the entity should have regard to the guidance on accounting for investments – for example, in relation to public dividend capital issued form the Consolidated Fund to a trading fund within a wider departmental group.

Reserves 7.4.56 This section applies to all entities covered by this Manual, except where indicated.

Income and expenditure reserve 7.4.57 Non-departmental public bodies (with the exception of those that are charities) and

trading funds should account for accumulated surpluses in an appropriately named reserve. Suitable descriptions include Income and Expenditure account, Accumulated Surpluses or General Reserve. Non-departmental public bodies that are charities should follow the requirements of the Charities SORP. The note should give a detailed analysis of movements in the reserve.

Revaluation reserve 7.4.58 The revaluation reserve should reflect the unrealised balance of the cumulative

balance of indexation and revaluation adjustments to assets other than donated assets. The note should give a detailed analysis of movements in the reserve.

Donated assets reserve 7.4.59 The donated asset reserve represents the net book value of assets donated to the

entity – that is, the opening valuation of an asset adjusted by its revaluation and depreciation. The note should give a detailed analysis of movements in the reserve.

Government grant reserve 7.4.60 The government grant reserve reflects that proportion of the net book value of an

asset financed by a government grant, including any from the EU. The notes to the accounts should give a detailed analysis of the movements in the reserve and should distinguish between UK grants and EU grants.

Other reserves 7.4.61 Entities should provide a detailed analysis of the movements in any other reserves.

Commitments under PFI contracts 7.4.62 Commitments under Private Finance Initiative (PFI) contracts will generally need to

be disclosed. The general disclosure requirements for PFI contracts are set out in paragraphs 5.19–23 of Technical Note No. 1 (Revised): How to Account for PFI Transactions.

Disclosures required by the guidance on handling public funds 7.4.63 In addition to the requirements for note supporting the Statement of Parliamentary

Supply, the relevant authorities may set out in their guidance on the handling of public

Page 21 of 26


funds a requirement for entities to provide disclosures additional to those required by UK GAAP. These might include, but are not limited to:

a) information about contingent liabilities not required to be disclosed under FRS12 because the likelihood of a transfer of economic benefits is considered too remote, but included for parliamentary reporting and accountability purposes. For quantifiable remote contingent liabilities, the note should disclose the opening balance, any increase in the year, any amounts that crystallised in the year (that is, the liabilities have become reportable under FRS12), any obligations that have expired during the year and the closing balance. The note should also state the amount that has been reported to Parliament by departmental Minute and provide a reconciliation between that and the disclosed amount where different. Entities should list unquantifiable remote contingent liabilities, explaining why they are unquantifiable;

b) a statement of losses, special and other payments;

c) notation of gifts made over a prescribed limit; and

d) details of loans made over a prescribed limit.

Related party transactions 7.4.64 Disclosures of transactions with directors and persons connected with directors are

required by Schedule 6 of the Companies Act, and FRS8 deals with the disclosure of related party transactions. In applying the Companies Act requirements, entities should interpret ‘directors’ as set out in paragraph 7.2.21.

FRS8 Related party disclosures

Applicability 7.4.65 FRS8 applies in full to all entities covered by this Manual.

Objective of FRS8 7.4.66 The objective of FRS8 is to ensure that financial statements contain the disclosures

necessary to draw attention to the possibility that the reported financial position and results may have been affected by the existence of related parties and by material transactions with them.

Interpretation of FRS8 for the public sector context 7.4.67 In applying FRS8, entities (other than entities that are companies) should be aware of

the following interpretations for the public sector context:

a) charitable non-departmental public bodies may apply the general principle of exemption from related party disclosure in respect of trustees acting as agents of the charity, in accordance with the parameters contained within the Charities SORP; and

b) central government entities should give the name of the parent department (if any), a note on the main entities within government with which the entity has had dealings (no information needs to be given about these transactions), and details of material transactions between the entity and individuals who are regarded as related parties. A suggested wording is in Annex 5.

Third party assets 7.4.68 Third party assets are assets for which an entity acts as custodian or trustee but in

which neither the entity nor government more generally has a direct beneficial interest. Third party assets are not public assets, and should not be recorded in the primary financial statements. Nor should third-party monies be held in public bank accounts.

Page 22 of 26


7.4.69 In the interests of general disclosure and transparency, any third party assets should

be reported by way of note. The note should differentiate between:

a) third party monies and listed securities: the minimum level of numerical disclosure required is a statement of closing balances at financial year-end. For listed securities, this will be the total market value. Optionally, when considered significant by the entity and at its discretion, further disclosures may be made, including gross inflows and outflows in the year and the number and types of securities held;

b) third party physical assets and unlisted securities: disclosure may be by way of narrative note. For physical assets, the note should provide information on the asset categories involved. Such disclosure should be sufficient to give users of the financial statements an understanding of the extent to which third-party physical assets and unlisted securities are held by the entity; and

c) in the event that third party monies are found to have been in a public bank account at the end of an accounting year, commentary should be included in the note on cash at bank and in hand and in the disclosures above on the amount of third party monies held in the bank account.

Entities within the departmental boundary 7.4.70 Departments to which paragraph 7.1.2 applies should disclose in a note to the

accounts a list of entities within the accounting boundary, analysed between Supply financed executive agencies, non-departmental public bodies (executive (rarely) and non-executive being listed under separate headings) and other entities.

7.5 Audit and publication 7.5.1 This section of the chapter deals with audit and publication of entities’ annual

accounts.

Audit

The auditor 7.5.2 All entities are required to have their financial statements audited by the auditor

named in the relevant legislation or other legislation or governing statute. With the exception of entities that are incorporated as companies, the general presumption is that the auditor will be the Comptroller and Auditor General, the Auditor General for Wales, the Auditor General for Scotland or the Comptroller and Auditor General for Northern Ireland. Those entities that are incorporated as companies should appoint their auditors in accordance with the requirements of the Companies Act.

7.5.3 Entities should refer to the guidance on the handling of public funds and to the individual websites of the audit offices for information about the role of the auditor.

The audit opinion 7.5.4 The audit opinion will be in the form required by Statement of Auditing Standard 600

and Practice Note 10 Audit of central government financial statements in the United Kingdom. The precise form of the audit opinion will depend on the results of the audit and is the responsibility of the auditor.

The audit report 7.5.5 Where the relevant legislation requires the auditor to report on the examination of the

financial statements, the auditor will provide such a report. The form and content of the report is the responsibility of the auditor. Where the auditor has no substantive comment to make, the report will generally be in the form of a single sentence appended to the audit opinion in the form: ‘I have no observations to make on these

Page 23 of 26


financial statements’. Where there is a substantive report, it will be referred to in the audit opinion, but will be quite separate from it.

Presentation to Parliament and publication

Departments and agencies under the Government Resources and Accounts Act 2000 7.5.6 HM Treasury will lay before the House of Commons the resource accounts of

departments (including agencies that are whole departments) under section 6(4) of the Government Resources and Accounts Act 2000. They will then be published.

7.5.7 Agencies that are not whole departments will lay their annual reports and before the House of Commons under section 7(3)(c) of the Government Resources and Accounts Act 2000. They will then be published.

Departments and agencies under the Government of Wales Act 1998 7.5.8 The Auditor General for Wales will lay before the Assembly the resource accounts of

the National Assembly for Wales (including agencies) and Estyn (Her Majesty's Chief Inspector of Schools in Wales) under respectively, section 97 (5)(b) and Schedule 6 section 6(2)(b) of the Government of Wales Act 1998. They will then be published.

Departments and agencies under the Government Resources and Accounts Act (Northern Ireland) 2001 7.5.9 The Department of Finance and Personnel will lay before the Assembly the resource

accounts of departments (including agencies which are whole departments), as well as the report and accounts of agencies which are not whole departments, under, respectively, section 10(4) and section 11(3)(c) of the Government Resources and Accounts Act (Northern Ireland) 2001. They will then be published.

Accounts prepared under the Public Finance and Accountability (Scotland) Act 2000 7.5.10 Scottish Ministers will lay before Parliament accounts prepared under the Public

Finance and Accountability (Scotland) Act 2000 under section 22(5) of that Act. They will then be published.

Non-departmental public bodies 7.5.11 The procedure for publishing and laying the accounts varies according to the

provisions of the governing statute. Where the legislation requires the accounts to be laid before Parliament or where accounts are placed in the library of the House of Commons (and perhaps also the House of Lords), the accounts should be published thereafter.

Trading funds 7.5.12 The Comptroller and Auditor General will lay before Parliament the annual reports

and accounts of trading funds under section 4(6)(b) of the Government Trading Funds Act 1973. Trading funds may then publish them.

Page 24 of 26














Contingencies Fund:



Page 25 of 26


Page 26 of 26


8 Retirement benefits and early departure costs

Chapter 8 Contents

8.1 Introduction.................................................................................................................. 1

8.2 Retirement benefits ...................................................................................................... 1 FRS 17 Retirement Benefits........................................................................................ 1

Applicability ...................................................................................................... 1 Objectives of FRS 17....................................................................................... 1 Adaptation of FRS 17 for the public sector context ......................................... 1

UITF Abstract 35 Death-in-service and incapacity benefits ......................................... 2 Applicability ...................................................................................................... 2 UITF consensus............................................................................................... 2 Other requirements .......................................................................................... 2

8.3 Early departure costs (also known as early retirement costs or compensation payments) ..................................................................................................................... 3 Introduction................................................................................................................... 3

Schemes which act as a principal.................................................................... 4 Schemes which act as an agent ...................................................................... 4

Settling the liability........................................................................................................ 4 Schemes which act as a principal.................................................................... 4 Schemes which act as an agent ...................................................................... 5

The “80:20” scheme ..................................................................................................... 5


8.1 Introduction

8.1.1 This chapter applies only to the following pension schemes in the public sector:

Principal Civil Service Pension Scheme (PCSPS) Armed Forces Pension Scheme (AFPS) NHS Superannuation Scheme Teachers’ Superannuation Scheme United Kingdom Atomic Energy Authorities Superannuation Schemes Judicial Pension Scheme Department for International Development – Overseas Superannuation Scheme Research Councils’ Pension Scheme.

8.1.2 It identifies the accounting standard (FRS 17) and UITF Abstract 35 that apply to the financial statements prepared by these schemes, and how FRS 17 should be adapted for the public sector context.

8.1.3 This chapter also considers the accounting treatment of early departure costs (also known as compensation payments) for which there is no applicable accounting standard.

8.2 Retirement benefits

8.2.1 The following accounting standard deals with accounting for retirement benefits: FRS17 Retirement benefits (paragraphs 8.2.2 to 8.2.13).

FRS 17 Retirement Benefits

Applicability

8.2.2 FRS17 applies, as adapted in paragraph 8.2.4 below, to the schemes listed in paragraph 8.1.1.

Objectives of FRS 17

8.2.3 The objectives of FRS 17 are to ensure that: (a) financial statements reflect at fair values the assets and liabilities arising from

an employer’s retirement benefit obligations and any related funding;

(b) the operating costs of providing retirement benefits to employees are recognised in the accounting period(s) in which the benefits are earned by the employees, and the related finance costs and any other changes in value of the assets and liabilities are recognised in the accounting period in which they arise; and

(c) the financial statements contain adequate disclosure of the cost of providing retirement benefits and the related gains, losses, assets and liabilities.

Adaptation of FRS 17 for the public sector context

8.2.4 The following adaptations of FRS 17 apply to the pension schemes listed in paragraph 8.1.1 above:

Page 1 of 6


a) the requirements of FRS17 are to apply to the accounts of the pension

schemes themselves rather than to the accounts of the employers;

b) the period between formal actuarial valuations is to be four years and not three;

c) although the rate to be used when discounting the scheme liabilities is, as required by FRS 17, the AA corporate bond rate, it will be applied for each Spending Review period and not annually. HM Treasury will advise the appropriate rate;

d) the employees contributions are to be shown as income in the Revenue account rather than as a deduction from current service costs;

e) the contributions from employers are to be shown as income in the Revenue account rather than as a credit to the pension provision; and

f) in consequence, the pension provision does not reflect contributions.

UITF Abstract 35 Death-in-service and incapacity benefits

Applicability


UITF consensus

8.2.6 The consensus in the UITF is that the cost of providing death-in-service and incapacity benefits should be recognised in accordance with paragraphs 73 and 74 of FRS 17 except where the benefits are provided through a defined benefit pension scheme and are not wholly insured, in which case the uninsured scheme liability and the cost for the accounting period shold be measured by applying the principles in paragraphs 20 and 22 of FRS 17.

Other requirements

8.2.7 Pension schemes listed in paragraph 8.1.1 above should observe the requirements set out in paragraphs 8.2.6 to 8.2.13 below.

Format of the accounts

8.2.8 A model pension scheme account is shown at Appendix 00 [to follow].

8.2.9 The account shall consist of:

A Report of the Scheme’s Managers; A Report of the Scheme’s Actuary; A Statement of the Accounting Officer’s responsibilities; A Statement of Internal Control; A Report of the Auditor; A Statement of Parliamentary Supply; A [Combined] Revenue Account1; A [Combined] Balance Sheet; A [Combined] Cash Flow Statement; Notes

1 These statements are described as “Combined” if the statement reflects transactions relating to both pensions and early departure costs (see 8.3.2 below).

Page 2 of 6


Additional voluntary contributions (AVCs)

8.2.10 AVCs are amounts deducted from employees’ salaries and paid over directly by employers to approved AVC providers. They do not include employees’ normal contributions in respect of the purchase of added years.

8.2.11 AVC transactions should be included in the financial statements of the pension schemes by way of note showing:

The value of the AVC investments at the beginning of the year; Amounts paid to the AVC providers during the year; The investments purchased by the AVC providers; The value of sales of investments to provide pension benefits; The changes in the market value of investments; The value of the AVC investments at the end of the year; The existence (if any) of any guarantee given by the scheme.

8.2.12 If the AVC arrangements include life assurance cover, the note should also show the contributions received to provide life cover, and the benefits paid on death.

Administration costs

8.2.13 Where the arrangements so provide, the costs of administering the scheme should be borne by the scheme. However, the more normal arrangement is for the costs to fall on the principal operating department or agency and hence will not be included in the scheme statements.

8.3 Early departure costs (also known as early retirement costs or compensation payments)

Introduction

8.3.1 Employees whose employment is terminated through redundancy, severance or early retirement may be entitled to compensation payments determined in accordance with a Compensation Scheme (but see 8.3.2 below). NB not all of the schemes noted in 8.1.1 have compensation arrangements. Employers meet the costs although, for convenience, payments to individuals are commonly made using the arrangements for paying pensions with the amounts being recharged to employers.

8.3.2 Until relatively recently, there were no separate Compensation Schemes, and early departure costs were not distinguished from pension payments. Following the introduction of Compensation Schemes, it should be possible to make the distinction and, in time, it should be possible to prepare separate financial statements for pension schemes and compensation schemes. But, so long as it remains impossible to identify separately all compensation payments, combined pension scheme and compensation scheme accounts should be prepared, disclosing early departure costs as described below.

8.3.3 Although FRS 12 applies to the compensation payments in the accounts of employers, there are no accounting standards relating to the accounting treatment of early departure costs by compensation schemes.

8.3.4 In some cases, the pension/compensation schemes act purely as an agent with individuals having recourse to their former employers in the case of default; in others,

Page 3 of 6


the schemes act as a principal. It is important, therefore, for schemes to establish their status by reference to their governing statutes and regulations.

Schemes which act as a principal

8.3.5 The pension scheme/compensation scheme balance sheet should recognise and measure:

a) a provision representing the total future liability to former employees; and b) a debtor, being amounts due from employers (see also paragraph 8.3.10 which

considers the situation where employers pre-fund their liability). NB in the notes, the gross amounts for debtors and pre-funded amounts should be shown.

8.3.6 The revenue account should recognise:

a) The cost of setting up the initial provision b) Any increases or decreases in the provision.

Schemes which act as an agent

8.3.7 The pension scheme/compensation scheme balance sheet should recognise and measure only a current asset or liability being timing differences between amounts due to former employees and their recovery from employers (see also paragraph 8.3.13 which considers the situation where employers pre-fund their liability)

8.3.8 The scheme balance sheet will not recognise the total liability to former employees or the total amount recoverable from employers.

8.3.9 As amounts due to and from individuals and employers are accounted for as balance sheet items, the revenue account will show only any costs falling to the scheme such as differences between the pre-funded amounts and the offsetting liability (see 8.3.13 below).

Settling the liability

8.3.10 Although employers may settle their liability through recharging arrangements, some of the schemes allow employers to settle their liability either by paying a single lump sum or paying instalments over a short number of years. As arrangements differ between schemes, the Manual gives only general advice.

Schemes which act as a principal

8.3.11 The instalments or lump sums should be offset against the debtor for the amounts due from employers (see 8.3.5.b above) although the notes to the accounts should show the two elements separately.

8.3.12 For the “pay-as-you-go” arrangements, amounts paid to individuals should be offset against the provision, with amounts recovered from employers serving to reduce the amount for debtors. As the debtor will already have been set up, billing employers will be on a pro-forma basis to avoid double counting.

Page 4 of 6


Schemes which act as an agent

8.3.13 The instalments or lump sums should be shown separately as a long-term liability which is reduced as the amounts are paid to the employees. However, the instalments or lump sums may often offset a greater value of liabilities and there is thus a cost to the scheme that should be recognised in the Revenue Account. Ideally, the cost should be allocated to individual years on an actuarially determined basis, but in most cases it will be sufficient to take the actual loss in the year – ie the difference between the amounts pre-funded in respect of a given year and the payments made in respect of the respective individuals during the year.

8.3.14 Conversely, schemes will benefit if payments to individuals are lower than amounts pre-funded by employers and will record this as a gain (again on an actual basis) if the amounts are not refundable to employers or capable of offset against other individuals.

8.3.15 For the “pay-as-you-go” arrangements, amounts paid to individuals should be recovered from employers by setting up a debtor; no amounts will be recorded in the Revenue account.

The “80:20” scheme

8.3.16 The “80:20” scheme (now discontinued) applied only to the PCSPS and provided central funding to meet some of the early departure costs incurred by departments. A residual liability under the scheme still exists – it is likely to be extinguished by about 2007 – and will be shown in the balance sheet of the PCSPS as a liability.

Page 5 of 6














Contingencies Fund:



Page 6 of 6

FINANCIAL REPORTING MANUAL CHAPTER 1:...

Documents

Transcript of FINANCIAL REPORTING MANUAL CHAPTER 1:...