Capital Accounting Manual

8/3/2019 Capital Accounting Manual

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DRAFTNHS Foundation Trust

Capital Accounting Manual

5 January 2005

IRCP 01/05

05/01/05 1 NHS FT Capital Accounting Manual


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CONTENTS

1 Introduction..................................................................................4Purpose of the Manual .................................................................................................4 Accounting standards and guidance referred to in the Manual ..............................4 Queries and contacts ....................................................................................................5

2 The Capitalisation and Valuation of Fixed Assets....................6

Introduction .....................................................................................................................6 General principles and definitions ...............................................................................6 Categories ......................................................................................................................6 Tangible fixed assets ....................................................................................................7

Tangible fixed assets - expenditure to be capitalised ..............................................8

Intangible fixed assets - capitalisation ......................................................................14 Deferred assets in PFI schemes ...............................................................................16 Fixed asset investments .............................................................................................16 Measurement and valuation ......................................................................................16 Valuations, review and impairments .........................................................................19 Indexation .....................................................................................................................22 Surplus assets and disposals ....................................................................................24 Impairments ..................................................................................................................25 Annex 1 - Definitions ...................................................................................................32 Annex 2 - Presentation and disclosure examples ...............................................34

3 Depreciation and asset lives ....................................................36

Introduction ...................................................................................................................36 Chargeable period .......................................................................................................38 Other considerations ...................................................................................................39 Calculation of Depreciation ........................................................................................41

4 Leases ........................................................................................43

Introduction ...................................................................................................................43 Definitions .....................................................................................................................44 Determining the lease type - the 90% test ...............................................................44 Determining the Lease Type Other Factors .........................................................45

Accounting for finance leases lessees ..................................................................47 Operating Leases ........................................................................................................50 Accounting for leases lessors ................................................................................51 Hire purchase contracts .............................................................................................51 Future developments ..................................................................................................52 Accounting entries .......................................................................................................53

5 Public Dividend Capital Interest ............................................... 56

Introduction ...................................................................................................................56 PDC dividend calculation of relevant net assets .................................................56



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6 Prudential Borrowing Limit (PBR)............................................ 58

Introduction ...................................................................................................................58 Protected assets ..........................................................................................................58

7 Donated assets ..........................................................................59

Introduction ...................................................................................................................59 Accounting for donated assets ..................................................................................59 Accounting entries for donated assets .....................................................................61

8 Private Finance Initiative ..........................................................64

Introduction ...................................................................................................................64 FRS 5 and SSAP21 ....................................................................................................64 PFI Accounting ............................................................................................................64 Land and buildings in PFI schemes ..........................................................................66

9 Asset registers...........................................................................85



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1 Introduction

Purpose of the Manual

1.1 The Foundation Trust Capital Accounting Manual (CAM) is intended tocomplement the Foundation Trust Manual for Accounts (MFA). It focuses onfixed asset transactions in greater detail than is possible in the Manual forAccounts.

1.2 The CAM interprets standard accounting practice for its application in the NHScontext, and defines NHS Foundation Trust accounting policy as defined byMonitor with Treasury's agreement. In the rare event that NHS FoundationTrusts propose to set aside guidance in the CAM in order to present a trueand fair view of their transactions, organisations must inform Monitor so thatany further implications can be followed through with Treasury. Any suchdeviation from guidance in the CAM would need to be agreed with the NHSFoundation Trusts external auditor.

1.3 Private Finance Initiative (PFI) transactions should also be accounted for in amanner consistent with the CAM and MFA. Chapter 8 outlines the key issuesand accounting treatments around PFI.

Accounting standards and guidance referred to in the Manual

1.4 The Foundation Trust Manual for Accounts, HM Treasurys Resource

Accounting Manual (the RAM) and the CAM follow UK Generally AcceptedAccounting Practice (UK GAAP) to the extent that it is meaningful andappropriate in the NHS context. NHS Foundation Trusts will therefore prepareUK GAAP compliant accounts, and merit a "true and fair" audit opinion, if theManuals for Accounts and CAM are followed.

1.5 The NHS Foundation Trust Manual for Accounts outlines the application ofStandards in the NHS context. Specific reference to the following Standardsin the Capital Accounting Manual:

FRS 5: Reporting the Substance of Transactions

FRS 10: Goodwill and Intangible Assets

FRS 11: Impairment of Fixed Assets and Goodwill

FRS 12: Provisions, Contingent Liabilities and Contingent Assets

FRS 15: Tangible Fixed Assets

SSAP 4: Accounting for Government Grants

SSAP 13: Accounting for Research and Development

SSAP 21: Accounting for Leases

UITF Abstract 24 Accounting for Start Up Costs

UITF Abstract 28: Operating lease Incentives



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Queries and contacts

1.6 NHS Foundation Trusts may also find it useful to refer to up-to-date guidancein the NHS Finance Manual on the "finman" website -www.doh.gov.uk/finman.htm . While this guidance is not intended or written for

NHS Foundation Trust use, it addresses NHS accounting developments thatmight be of interest to NHS Foundation Trusts.

http://www.doh.gov.uk/finman.htmhttp://www.doh.gov.uk/finman.htm


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2 The Capitalisation and Valuation of FixedAssets

Introduction

2.1 FRS 15, Tangible Fixed Assets, has been applied in the NHS from 1 April 1999.In the NHS, particular issues around the application of FRS 15 include:

The fact that much of the NHS estate consists of specialised healthcareassets for which no true market exists;

The use of a a capital charging system, which UK Generally AcceptedAccounting Practice (UK GAAP) does not comprehensively address;

The existence of assets in the form of streams of future income or costreduction, generated in the course of PFI schemes; and

The importance of the distinction between finance and operating leases

2.2 A separate chapter, Chapter 4 , deals with leases specifically.

General principles and definitions

2.3 FRS 5, Reporting the Substance of Transactions, defines assets as rights orother access to future economic benefits controlled by an entity as a result ofpast transactions or events. For NHS Foundation Trusts future economicbenefits relate to the contribution of assets in some way to the provision ofservices or other outputs.

2.4 Ownership of assets tends to confer access to the economic benefits, butcircumstances exist where access to benefits is obtained without legalownership (as in finance leases) and so in any consideration of therecognition of an asset the concept of substance over form must be adopted.Both FRS 5 and SSAP 21, Accounting for Leases and Hire PurchaseContracts, are therefore relevant.

Categories2.5 The RAM requires that fixed assets are reported, analysed at the following

minimum level of detail:



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Tangible fixed assets

Land

Buildings (excluding dwellings)

Dwellings

Assets under construction and payments on account

Plant and machinery

Transport equipment

Information technology

Furniture and fittings

Intangible fixed assets

Software licences

Licences and trademarks

Patents

Development expenditure

Fixed asset investments

Equity

Loans

Tangible fixed assets

2.6 FRS 15 defines these as:

assets that have physical substance and are held for use in the production or supply of goods or services, for rental to others, or for

administrative purpose on a continuing basis in the reporting entitys activities

2.7 A tangible fixed asset will generally have a life in excess of one year.

Capitalisation threshold of fixed assets - de minimus limits

2.8 The RAM leaves discretion for individual government Departments to set theirown capitalisation thresholds, having regard to practicality, flexibility,consistency and asset grouping considerations. The Department of Healthhas adopted a 5,000 capitalisation threshold for individual assets, althoughassets of lesser value should be capitalised if they form part of a group, with agroup value in excess of 5,000, as defined below. This threshold applies to



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NHS Foundation Trusts, as consistency with other NHS bodies is required. The 5,000 figure includes VAT where this is not recoverable.

Grouped assets

2.9 "Grouped assets" are a collection of assets which individually may be valuedat less than 5,000 but which together form a single collective asset becausethe items fulfil all the following criteria:

the items are functionally interdependent

the items are acquired at about the same date and are planned fordisposal at about the same date

the items are under single managerial control, and

each individual asset thus grouped has a value of over 250.

2.10 Assets acquired in the course of the initial setting up of a new building or on

refurbishment are also to be treated as "grouped" for capitalisation purposes(see below, para 2.18 ).

IT assets

2.11 It is expected that IT hardware will be considered interdependent if it isattached to a network, the fact that it may be capable of stand-alone usenotwithstanding. The effect of this will be that all IT equipment purchases ,where the final three criteria above apply , will be capitalised. Where an NHSFoundation Trust adopts this firmer interpretation of interdependency withregard to IT assets, and has not capitalised such purchases before, auditorsmay consider that the change constitutes a Prior Period Adjustment. The

effect of such a change may well not be material, given the rate ofdepreciation that would have been applied to prior-period purchases.

Interdependency

2.12 The distinction between assets that are in some way dependent on each otherfor their effective and efficient operation and those that are "stand-alone"items can be a fine one. Foundation Trusts will need to apply judgement andconsult with their auditors where cases are not clear-cut.

Tangible fixed assets - expenditure to be capitalised

2.13 FRS 15 clarifies which costs can and cannot be capitalised on acquiring orconstructing an asset. It says:

A tangible fixed asset should initially be measured at its cost. Costs, but only those costs, that are directly attributable to bringing the asset into working condition for its intended use should be included in its measurement.



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Attributable costs

2.14 Under FRS 15 directly attributable costs include:

labour costs of own employees (e.g. site workers, in-house architectsand surveyors) arising directly from the construction or acquisition of the

specific asset. The costs of a Foundation Trusts capital projectsdepartment may only be allocated to individual capital schemes where itcan be demonstrated that these costs relate to the production of a capitalasset (and not its management or maintenance), and that the basis ofapportionment is reasonable, and

the incremental costs to the entity that would have been avoided only ifthe tangible fixed asset had not been constructed or acquired. Theseinclude:

acquisition costs such as stamp duty, import duty and non-refundablepurchase tax

the cost of site preparation and clearanceinitial delivery and handling costs

installation costs, and

professional fees (such as legal, architects and engineers fees).

Non-attributable costs

2.15 The standard specifically says that the following are not directly attributablecosts and so should be charged directly to the revenue, rather thancapitalised:

administration and other general overhead costs

employee costs not related to the specific asset (such as site selectionactivities)

operating losses that occur because a revenue activity has beensuspended during the construction of a tangible fixed asset

any costs relating to an off-balance sheet PFI scheme

abnormal costs e.g. costs relating to:

design errors

industrial disputesidle capacity

wasted materials, labour or other resources, and

production delays.

Interest

2.16 FRS 15 permits capitalisation of finance costs at the entitys option. However,as a matter of Treasury policy, interest or finance costs may not be capitalisedin the NHS and this policy also applies to NHS Foundation Trusts.



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Initial equipping and setting-up costs of new building

2.17 Assets which are capital in nature but which are individually valued at lessthan 5,000 may be capitalised (at the NHS Foundation Trust's discretion) ascollective, or grouped, assets where they are acquired as part of the setting-up of a new building. In this context, the enhancement or refurbishment of award or unit should be treated in the same way as "new build", provided thatthe work would be considered as subsequent expenditure in FRS 15 terms.It is therefore appropriate to capitalise the purchase of new furniture in a newbuild or refurbishment exercise, provided that assets thus capitalised can besubsequently identified for audit purposes.

2.18 UITF Abstract 24 addresses a different issue. It deals with the capitalisationof start-up costs associated with a start-up or commissioning period. It ismainly concerned with items that would be revenue expenses in normal circumstances (as opposed to those items that are capital in nature buttreated as revenue because of their value). The UITF consensus is that costs

that would be revenue expenditure in normal operations must be continued tobe treated as such, and that any abnormal costs incurred simply by virtue ofthe start-up process also do not give rise to any asset.

2.19 The UITF abstract then does not affect the practice of capitalising setting upcosts in NHS Foundation Trusts because the items so capitalised are capitalin nature, but usually are taken to the I&E account only by virtue of their lowvalue. The UITF Abstract refers to expenditure that is revenue in allcircumstances, no matter what the value (e.g. training expenses, losses intrading, advertising and so on). UITF Abstract 24 is fully applicable to theNHS in those circumstances.

Demolition costs2.20 Costs incurred in demolishing or rearranging existing assets should be

capitalised where this is necessary to allow a new asset to be built. Where nonew asset is to be created, these costs must be taken as revenueexpenditure.

Staff training costs

2.21 The question of capitalisation of staff training costs associated with theintroduction of new systems is occasionally raised. As the nature of theinvestment is in staff rather then fixed assets directly, such expenditure shouldalways be treated as a revenue expense.

Subsequent expenditure

Subsequent expenditure to ensure that the tangible fixed asset maintains its previously assessed standard of performance should be recognised in the profit and loss account as it is incurred. FRS 15

2.22 In other words, repairs and maintenance expenditure cannot be capitalisedand should be charged to the I&E account.

2.23 FRS 15 permits capitalisation of subsequent expenditure when:



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That expenditure provides an enhancement of the economic benefits ofthe tangible fixed asset in excess of its previously assessed standard ofperformance

A component of an asset that has been treated separately fordepreciation purposes is replaced or restored, or

Subsequent expenditure relates to a major inspection or overhaul thatrestores the economic benefits that have already been consumed andreflected in depreciation.

2.24 The last two circumstances seem at first to conflict with the prohibition oncapitalising repair and maintenance an overhaul does not differ much inconcept from routine maintenance. The essential differences however arethat for such expenditure to be capitalised a separately identifiable componentof an asset has to exist, having a substantially different economic life from theremainder of the asset. Alternatively the asset as a whole must have beendepreciated in the light of the need for a periodic overhaul. In either case, the

expenditure must have the effect of reversing the consumption of economicvalue previously recognised in depreciation. A consequence of this of courseis that a review of the assets expected economic life is triggered.

2.25 The FRS gives an example of an aircraft that must be completely overhauledaccording to a set timetable, and without that overhaul it has no economic lifeat all, as it would not be permitted to fly. The expenditure incurred in theoverhaul thus extends its life, and can be considered as re-setting thedepreciation clock. Such major overhauls tend to be in the nature of re-building, so are analogous to the creation of a new asset.

2.26 Capitalisation of maintenance expenditure would result in the carrying amount

of the asset exceeding its recoverable amount (RA). On an impairmentreview or revaluation (see below) the normal consequence of this would bethe recognition of impairment in the I&E account. Maintenance expenditurewould thus fall to be treated as revenue expenditure even if initially, anderroneously, treated as capital.

Equipment

2.27 Equipment (new and second-hand) is initially capitalised at its purchase price.This arrangement will apply when equipment assets are initially brought ontoa NHS Foundation Trust balance sheet whether or not the acquisition wasfrom a commercial 3 rd party or from a NHS body.

2.28 When a new or second-hand item is acquired, an assessment of its remainingeconomic life must be made to calculate the depreciation chargeable (seeChapter 3 , Depreciation and Asset Lives).



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Leases

2.29 Finance lease assets (where the NHS Foundation Trust is the lessee) will bebrought on to the balance sheet and accounted for as if that body owns theunderlying asset. Chapter 4 below deals with leases.

Donated assets

2.30 Donated assets are brought to account in the same way as purchased assets,at cost if newly purchased or constructed, then revalued to a current costvaluation. They are valued, depreciated and subject to impairment in thesame way as other assets. The donated asset reserve is used however insuch a way as to remove donated assets from the calculation of PDC dividendcharges while a release from the reserve neutralises the revenue impact ofthe depreciation charge. (See Chapter 3 below on depreciation and Chapter 5 on PDC dividends).

2.31 Where a donor has contributed to part of an asset, only that proportion falls tobe treated as a donated asset. It is possible therefore for an individual assetto be partly donated and partly purchased, with separate accounting entriesassociated with each.

2.32 For an asset to be treated as donated, the following condition must apply:

There should be no consideration given in return (thus the donor, orindividuals or organisations nominated by the donor, may not be offeredpreferential treatment or other advantages or benefits).

2.33 The following examples do not qualify as donated:

An asset transferred between public bodies as a result of a transfer offunctions (unless the asset was legitimately a donated asset in thetransferors books).

Assets financed by Government grants (see below)

Subsequent capitalised expenditure on a donated asset

The provision by a developer of an access road or transport scheme thatwill benefit the developers business. Any asset provided as part of a PFIscheme by the developer cannot be considered as donated 1.

2.34 Any restrictions imposed by the donor on the use of an asset must be

disclosed in the annual accounts.

1

Generally all the assets provided in a PFI scheme are privately financed. Occasionally an element (often equipment / enabling works) is funded by charitable donations or publicly funded but are still part of the PFI scheme. If thesecome on balance sheet then theses elements would be classed as donated. Assets which are privately financed arenot donated.



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Assets movements between NHS Foundation Trusts and other NHSbodies

2.35 The term transfer is loosely used in the NHS, and care must be taken thatthe umbrella term "transfer" does not obscure the need for a purchase/saletransaction in most cases to effect the transfer of assets or liabilities.

2.36 It is envisaged that assets or liabilities will transfer between NHS FoundationTrusts and other NHS bodies only by means of cash purchase/saletransactions (other than on establishment or on dissolution). There is norequirement to revalue assets to a market value and the the purchase priceshould be set to equal the carrying amount of the asset in the vendor's books.This ensures that (a) there is no need to undertake an expensive re-valuationand that (b) no profits/losses can be generated within the NHS simply byvirtue of intra-NHS transactions.

2.37 A NHS Foundation Trust will only transfer assets without a cash transaction in

two circumstances: On initial establishment, the complete balance sheet of the NHS

Foundation Trusts predecessor transfers intact to the FoundationTrust.

On the dissolution of a NHS Foundation Trust, its assets andliabilities will pass to a successor organisation (unless, and this ispreferable, those net assets have previously been purchased by thesuccessor organisation, and the sale proceeds used to repay PublicDividend Capital).

2.38 Assets acquired from other Government Departments, Local Authorities,Housing Associations and other non-NHS bodies, should be purchased at fair(market) value.

2.39 Where transactions are between NHS Foundation Trusts and non-NHSbodies, NHS Foundation Trusts are not required to revalue assets scheduledfor disposal to market value (see definition ), but should recognise any profitsor losses on the disposal of these assets based on the net book value of theasset at the time of sale.

Assets funded from National lottery funds

2.40 Assets provided from National lottery funds (via the Big Lottery Fund) shouldbe treated as donated assets.

Government grants

2.41 Government grants are defined in SSAP 4, "Accounting for GovernmentGrants" as assistance by government in the form of cash or transfers ofassets to an entity in return for past or future compliance with certainconditions relating to the operating activities of the enterprise.

2.42 Assets provided by grant will be accounted for as any other asset, in terms of

valuation, depreciation and so on. The asset will be carried at its current cost,and the value of the grant must not be netted off its carrying amount.



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2.43 The amount of the capital grant should be credited to a government grantreserve (GGR) on the balance sheet. Assets financed in whole or in part by agrant should be revalued and depreciated in the same way as other fixedassets. To the extent that a proportion of a fixed asset has been financed bya grant, that proportion of the amount of the revaluation should be credited ordebited to the government grant reserve instead of the revaluation reserve.The same proportion of the assets depreciation charge will be debited to thegovernment grant reserve and credited to the I&E account (any depreciationarising from capital expenditure in excess of the grant will thus, rightly, gounrelieved). There will be no PDC dividend charged in respect of theproportion of the asset financed by grant. The net effect is analogous totreating the grant-aided portion of the asset as donated.

2.44 Details of the depreciation and capital cost absorption treatments can befound in Chapters 3 and 5 below.

Intangible fixed assets - capitalisationResearch and development

2.45 Capitalisation of research and development (R&D) expenditure is appropriateonly in the following circumstances:

There is a clearly defined project

The related expenditure is separately identifiable

The outcome of the project has been assessed with reasonable certaintyas to:

its technical feasibility, and

its resulting in a service or product that will eventually be broughtinto use

Adequate resources exist, or are reasonably expected to be available, toenable the project to be completed.

2.46 In most cases R&D expenditure will be charged to the I&E account in the yearin which it is incurred. If capitalised, the asset must be amortised over theperiod in which the product or service will be sold or provided for use.Capitalised development expenditure must be indexed (as is the practice setout in the RAM. The index figure to be applied is that for equipment.

2.47 A review of the asset and the justification for maintaining it as an asset mustbe undertaken each year. Where the SSAP 13 criteria are no longer met, thebalance of the expenditure should be written off to the I&E accountimmediately.



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Software - purchase of licence

2.48 A purchase of software is generally the purchase of a licence to use softwarecode developed by, and which remains the property of, a third party.

2.49 FRS 10 "Goodwill and Intangible Assets" requires that software that remainsthe property of, for example, Microsoft should be capitalised as an intangible fixed asset . This is in recognition of the fact that the user has bought the rightto enjoy the economic benefits of the use of the software for more than oneyear.

2.50 The provisions of this Manual on the capitalisation threshold and grouping ofassets apply to the capitalisation of expenditure on software. As with IThardware, it is expected that software used on a network will meet theinterdependence criterion for the grouping of fixed assets.

2.51 The Accounting Policies note to the Annual Accounts discloses that intangibleassets are amortised over estimated lives.. It is believed that software assetswill tend to have relatively short lives, but this is a matter for an individualbodys judgement. A further complication affecting amortisation might be thepractice of upgrading software rather than scrapping it completely. It will bedifficult to assess a residual value in this case, so the treatment must dependon individual circumstances, taking into account contractual arrangementsand the NHS Foundation Trusts IT strategy.

Software - created in-house

2.52 NHS-developed software has always been capitalised (and should still becapitalised) as a tangible fixed asset if the NHS body owns the code such that

it could copy, licence or sell the application at its discretion. This applieswhether the software is produced "in-house", or is developed by contractorson behalf of the NHS Foundation Trust.

2.53 FRS 10 considers that such software is integral to hardware systems on whichthe owned software will run, and says that its development cost should beincluded with the cost of the IT hardware. However, the software itself isclearly a valuable and productive asset in its own right, even where it isrunning on leased IT hardware for example (i.e. there is no hardware asset towhich the cost of software can be added.).

2.54 Software code owned by a NHS Foundation Trust should therefore be carried

as a tangible fixed asset, within the category "IT hardware", indexed at therate appropriate to IT hardware (currently nil), and depreciated over theexpected economic life of the software.

Goodwill

2.55 Goodwill may arise if a NHS Foundation Trust purchases a subsidiaryundertaking or business. Please refer to the Manual for Accounts and FRS 10Goodwill and Intangible Assets.



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Deferred assets in PFI schemes

2.56 Some PFI transactions involve the disposal of assets to private partners (bylease, sale or otherwise as part of the deal). Unless a NHS Foundation Trust

has in substance disposed of the asset at an undervalue or for noconsideration (in which case a loss on disposal must be recorded in the I&Eaccount) it is to be expected that some benefit will accrue to the FoundationTrust in return. This implies that an asset of some kind must have beencreated in return for the exchange of the original asset. Chapter 8 gives moredetail on PFI accounting with reference to Department of Health guidanceLand and Buildings in PFI Schemes (Version 2) issued in January 2003.

2.57 Where land is "transferred" to the private sector partner for subsequent sale,this will usually be in exchange for a reduction in rental payments. Cash maysimilarly be injected in exchange for a reduction in payments where the landbecomes available later in the contract period. The value of the reduction in

future payments should be recorded as a prepayment within debtors. This iswritten off to the I&E account over the period of the service paymentreductions (normally the contract period, i.e. not necessarily the life of thelease). Where buildings are leased to the private sector which are integral tothe PFI scheme and the private sector take the risks and rewards, thedeferred asset is equivalent to the existing use value of the buildings (i.e. netpresent value of a reduction in payments) and the write-off to the I&E accountin this case will be over the life of the lease.

2.58 For the purposes of this Manual however, it should be noted that thesedeferred assets are not fixed assets, and should be accounted for asprepayments within current assets. As current assets, they fall to be included

within net relevant assets for the purposes of calculating the cost of capitalcharge.

Fixed asset investments

2.59 Where a NHS Foundation Trust owns equity in another entity, includingassociates and subsidiaries, the investment (analysed between equity andloan stock) must be disclosed. Fixed asset investments should be valued atcost, less any amounts written off, or at valuation (See Manual for Accounts).

Measurement and valuation

General Principles

2.60 As noted above, whether acquired or self-constructed, a tangible fixed assetshould be measured initially at cost. Government accounting policy is torevalue tangible fixed assets systematically (see below) to ensure that assetsare carried on a current cost basis.

2.61 Tangible fixed assets should be valued at the lower of replacement cost andrecoverable amount.



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Net currentreplacement cost

(RC)

Net realisableValue(NRV)

Value in use

Valuation of Tangible Fixed Assets

lower of:

higher of:

Recoverableamount (RA)

2.62 Replacement cost (or net current replacement cost) for land and buildings is

existing use value. For specialised properties, depreciated replacement cost(DRC) should be used. A specialised property is of a type that is rarely sold onthe open market for continuation of their existing use. FRS 15 mentionshospitals and other specialised health care premises as examples ofproperties that may be considered specialised.

2.63 For equipment assets, depreciated replacement cost is the appropriatemeasure. A modern equivalent asset calculation may be used in the

circumstances described below.2.64 Recoverable amount is defined as the higher of net realisable value (NRV)

and value in use, where value in use is the cost of replacing the assetsservice potential. For specialised property this can be taken to be thedepreciated replacement cost (DRC) of the asset. Net realisable value (NRV)is the actual or expected sale proceeds realisable on the open market, net ofselling expenses etc.

2.65 Other (non-property) tangible fixed assets value in use will be DRC.

Surplus assets

2.66 Surplus non-operational property should be valued at market value (MV), lessdirectly attributable selling costs, where material. District Valuers now providevaluations based on MV for prevailing use, i.e. having regard to the likelyuse to which the asset would be put in the locality, bearing in mind theplanning regime ruling in the area.

2.67 For an asset to be treated as "surplus" two conditions must apply:

there is an explicit intention to dispose, and

the asset is not in operational use.

2.68 Where the former alone applies and the asset remains in use until thedisposal date, accelerated depreciation is applied to the asset that remains on



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the balance sheet at a DRC valuation (if specialised). The asset will then bedepreciated to its expected realisable value at the date of disposal. Assetstemporarily out-of-use continue to be valued and depreciated as normal.

Modern equivalent asset

2.69 The normal basis of valuation may not be appropriate if a modern substitute ismarkedly different in cost, or where technological advances have resulted inlikely replacements having significantly improved quality or quantity of outputs.Under such circumstances, it is necessary to undertake a modern equivalentasset calculation to arrive at a satisfactory replacement cost.

2.70 The following considerations apply:

the cost of the modern equivalent asset is at least 100,000

the difference between the replacement cost of the existing asset andthat of the modern equivalent asset is at least 25%.

2.71 Use of this adjustment is expected to be exceptional. The assumptions usedmust be recorded and agreed with external auditors, particularly where thoseassumptions relate to differences in quality rather than quantity.

2.72 Where these circumstances apply, the replacement cost of the existing assetshould be taken as a proportion of the cost of the modern equivalent assetand not the cost of replacing the existing asset. The modern equivalent assetadjustment reduces the cost of the modern equivalent asset to what it wouldbe if it had an output comparable to the existing asset. The reduction in theNBV should be charged to the I&E account as an impairment and not to theRevaluation Reserve. This is because the reduction is a permanent

diminution in the value of the asset (see section on impairments).2.73 The accounting entries are as follows:

Dr I&E account (impairment)Cr Fixed assets

With the reduction in the replacement cost of theexisting asset

Dr Provision for depreciation accountCr I&E account

With the amount of the reduction in the accumulateddepreciation on the existing asset

The net amount charged to the I&E account will, therefore, be the reduction in NBV of the existingasset



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Example: modern equivalent asset (MEA) calculation

Assuming no operating cost or economic life differences between the existing and MEA, in s:

Output of existing asset p.a. - 20,000 unitsOutput of MEA p.a. - 40,000 units

Replacement cost of existing asset 150,000Accumulated depreciation, existing asset 60,000NBV existing asset 90,000 Cost of MEA 220,000 Calculation of MEA cost (for same output as the existing asset):

220,000*(20,000/40,000) 110,000The replacement cost of the existing asset thus becomes 110,000 a reduction of40,000 from its present RC of 150,000. The accumulated depreciation thereforeneeds to be reduced in the same proportion (110/150)* 60,000 = 44,000. Hence:Revised RC of existing asset 110,000Revised accumulated depreciation on existing asset 44,000Revised NBV of existing asset 66,000

2.74 The reduction in the gross replacement cost of 40,000 is debited to the I&Eaccount, while the written-back depreciation of 16,000 is credited to the I&Eaccount, giving a net charge of 24,000 (being the net fall in the asset valueas an impairment).

Valuations, review and impairments

2.75 Initial valuation of tangible fixed assets is at cost. The NHS adopts a policy ofrevaluation within the meaning of FRS 15, and must consistently applyrevaluation policies to each asset within a given class of assets. A tangiblefixed assets carrying amount at the balance sheet date should be its currentvalue, as calculated below. For land and buildings, the revaluation from costshould take place as soon after the date of acquisition or commissioning newbuild as possible, and at any event before the end of the financial year inwhich the asset is acquired or created.

2.76 The Government's policy on the revaluation of land and buildings in the NHSis to fully revalue every five years, and thereafter to revalue by means ofapplying indices in each of the intervening years. FRS 15 allows a good dealof freedom for public sector bodies to set their own revaluation policies,having regard to the costs involved.

2.77 Equipment assets are also indexed to maintain a current cost (at depreciatedreplacement cost).

2.78 Intangible fixed assets are generally not revalued or indexed but maintained atcost less depreciation or amortisation unless they have a readily ascertainable

market value, in which case the market valuation is used. (It should be noted,



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Non-specialised land and buildings

2.84 Where it is possible to value a property in the context of an active market inthat type of property in the locality, the District Valuer will attach an open-market value for existing use (OMVEU), as defined in Annex 1 below, to theproperty. In effect, this should be the default valuation policy as it gives aclear understandable valuation figure. The existence of a vast specialisedestate in the NHS, however, confines the use of OMVEU to such properties asresidential accommodation, office buildings and car parks.

2.85 All assets valued at OMV (whether operational or non-operational) areindexed on April 1 each year, using the indices provided by the ValuationOffice Service (see below) to maintain their current cost carrying value.

Specialised land and buildings valuation at DRC

2.86 FRS 15 and the RAM require specialised assets to be valued on a

depreciated replacement cost basis (DRC), as defined in Annex 1 below. It isaccepted that this valuation base is something of a proxy for a more clear-cut(e.g. OMV) basis of valuation.

2.87 Certain assumptions inherent in the DRC valuation methodology may lead toDRC valuations being lower than the initial cost of new buildings. Althoughinefficiencies and cost over-runs (abnormal costs, under FRS15) cannot becapitalised, even as part of initial costs, certain other costs associated withcapital projects are legitimately capitalised initially, yet are not taken intoaccount in arriving at DRC. Examples of these might be the cost implicationsof contractors having to work in an occupied site, or the necessity to put inaccess roads; the cost of having multiple contracts and phases to construct

one building; and the additional cost of inclement weather.

2.88 It is to be expected then that the very action of revaluing from cost to DRC willproduce a fall in value (see the section on impairments re the treatment of thisfall. Essentially, such a fall is deemed to be a by-product of valuationmethodologies and not a true loss of economic value. The debit entry istherefore to the revaluation reserve and is not charged to the I&E account).

2.89 The DRC valuation methodology employed by the DV analyses property byapproximately 25 separate elements, based on the Building Cost InformationService (BCIS) definitions. Certain elements (e.g. substructure, roof, stairs,windows and external doors) relate to the buildings themselves, while others

(water, electrical, heating, lift installations) relate to plant or engineering.

2.90 While NHS Foundation Trusts may wish to track various elements in theirregisters separately, it is suggested that for the purposes of impairmentreviews and tracking revaluation reserve balances associated with discreteassets, the asset unit should be the building as a whole. Clearly, separatewings or blocks of a building might have been added at different times, and becapable of being treated as separate assets, or indeed major elements ofplant may have depreciation lives so different from the structure as to merittreatments as separate assets under FRS 15. Some judgement in definingan asset will therefore need to be exercised. It is suggested that any blockor asset capable of separate valuation, or disposal or demolition, is treated asa discrete asset (so the elements of a block would not be assets in FRS 11terms, whereas the block itself would be).



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2.91 An exception to this general rule is land included in property. Because landand buildings asset movements are reported separately in Notes to theBalance Sheet, impairments and revaluations need to be apportionedbetween land and buildings, rather than being assigned to the property assetas a whole.

Equipment

2.92 Equipment is carried at depreciated replacement cost. In practice, it issufficient to apply indexation and depreciation to the historic cost of theequipment asset. The modern equivalent asset (para 2.74 et seq)calculation may come into play in exceptional cases where technologicaladvances mean that a replacement asset of similar productive capacity wouldbe materially different in cost, such that indexed historic cost exceeds therecoverable amount.

Indexation2.93 Indexation is intended to maintain assets at current cost values without the

expense of frequent revaluations. Indexation is a form of revaluation, andalthough identified separately in asset registers and reported in a separateline in the Notes to the accounts, it is treated in accounting terms as such. Separate national indices are issued for land, buildings and equipment.Indices for the years 1992/93 to 2004/05 are shown below .

2.94 Indices are provided by the Valuation Office Service and are based on dataavailable from the Building Cost Information Service (BCIS) and the ValuationOffice Property Market Report.

2.95 Indices are intended to reflect price movements anticipated over the course ofthe following financial year. Thus, although they are applied to opening assetvalues as at 1 April, they are intended to provide acceptable values for theyear-end balance sheet. When a national revaluation exercise returns 1 Aprilvaluations it is, consequently, appropriate to immediately index those newvalues.

2.96 All tangible fixed assets, operational and non-operational (including assetsheld under finance leases and assets under construction), should be indexedon 1 April each year. The situation sometimes arises where an asset is to bedisposed of, and is valued for that purpose in one year while the transactiondoes not actually take place until the next. This can result in a loss on disposal if the contract sale price is set at the valuation amount and indexationis then applied on the following 1 April - the carrying amount will exceed thesale proceeds.

2.97 NHS Foundation Trusts should always ensure that assets are not sold to thirdparties at an undervalue, and so will obtain a valuation to establish a fair priceon the date of sale. If this is done, and it can be demonstrated to auditors thatthe most recent market valuation does indeed represent a fair value on thedate of sale, it is acceptable for that particular asset not to be indexed at 1April. The best course of action will be to instruct the valuers to make the bestestimate of value at the anticipated date of sale. Clearly it would not beacceptable to rely on an out-of-date valuation to set a contract price, and



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indexation may only be set aside in this way if the dates of valuation and saleare close (say, within 6 months) and fall either side of the year-end.

2.98 When assets transfer by sale or on dissolution/establishment between NHSbodies on 1 April, the transfers should take place before indexation (for thesake of consistency). The principle is that indexation must be applied to theasset, and having it applied by the vendor reduces the opportunity forconfusion. There is no net effect in accounting/funding terms whether theindexation is applied by the vendor or purchaser.

Applying indexation

2.99 The series of indices applied in the NHS to date is shown below:

1 9 9 2 / 9 3

1 9 9 3 / 9 4

1 9 9 4 / 9 5

1 9 9 5 / 9 6

1 9 9 6 / 9 7

1 9 9 7 / 9 8

1 9 9 8 / 9 9

1 9 9 9 / 0 0

2 0 0 0 / 0 1

2 0 0 1 / 0 2

2 0 0 2 / 0 3

2 0 0 3 / 0 4

2 0 0 4 / 0 5

Land 100(2)101

(2) 102 102 104 108 131 100100

(1) 115 140 148 159

Buildings 113(2)105

(2) 109 128 133 137 147 158 160161

(3)184 202 218

Equipment 100 107 111 115 118 120 123 126 129 132 136 139 142

Notes to table:

1. The Valuation Office rebased the index figure for land for 1999/2000 to 100. Theindex the VO gave for 2000/2001 is also 100 (i.e. no general land inflation ispredicted). For 1 April 2000 therefore no indexation uplift should have beenapplied to land values. The land indices for 1999/2000 and 2000/01 are thereforeshown here as 100, whereas in earlier publications they were given as 141.

2. For land and buildings, detailed regional figures were used in the early years(1992/93 and 1993/94). Rather than reproduce a complex table of indices bygeographical areas, a national index has been estimated using an average forthese two years.

3. As an example, the uplift to be applied to building values on 1 April 2002 is:(184/161)*100 or 14.286%



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Surplus assets and disposals

General

2.100 Where an asset is disposed of, the following transactions should be treated asseparate and distinct events:

revaluation to the appropriate carrying amount

recognition of impairment

re-profiling of depreciation

recognition of profit/loss on disposal.

2.101 The demolition or scrapping of a building or a piece of equipment is a disposalfor no consideration. Similarly, the transfer of an asset to a non-NHS body isalso a disposal, and if no valuable consideration is received in return, a loss

on disposal arises (equal to the final carrying amount of the asset).

2.102 Profit/loss on disposal is always calculated as the difference between the finalcarrying amount and the disposal proceeds (i.e. calculated after any impairment has been recognised ).

2.103 Note: the final carrying amount of a building is its market valuation asassessed by the DV. The DV will have regard to the building's type andcondition, property market and planning conditions prevailing locally. Thisvalue should not be set to NIL simply because it is intended to demolish thebuilding, or because a deal has been struck to transfer the property for noconsideration. Revaluation to NIL should not be used to avoid losses ondisposal where an asset has a value, but a management decision results in itsdestruction or transfer.

2.104 Land and buildings sold together as "property" will attract separate valuationsand impairment reviews. Revaluations and profit/loss on disposal calculationswill therefore give rise to separate sets of figures for both land and buildings.

2.105 Where equipment is taken out of productive use its value should be writtendown to its recoverable amount, which in turn (as the asset is not in use) willbe its net realisable value. The valuation fall is analogous to the recognitionthat the asset has been under-depreciated during its period of use, and so thefall should be accounted for as an economic impairment (see impairments below).

2.106 Surplus land and buildings not in operational use should be revalued tomarket value (DVs attach valuations based on the prevailing use concept,having regard to the likely use to which property sold in the locality could beput).

2.107 Property may be considered as surplus when a management decision hasbeen taken to dispose of it. The decision is best evidenced by Board minutesrecording a decision, but auditors may accept other written evidence orrepresentations about the status of property.

2.108 Property thus classed as surplus, but still in operational use, must not bewritten down to MV. It should remain in the balance sheet at its normal



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operational valuation (DRC, or OMVEU as appropriate). The depreciationcharge should however be adjusted such that the asset is fully depreciated toits disposal OMV (equal to its expected net realisable value) over itsremaining life in the NHS body (see Chapter 3 - Depreciation ).

2.109 The matrix below summarises the transactions:

In operational use Not in operational use

Not surplusCarry at DRC (if specialised)

orcarry at MV for existing use(if market value available)

If temporarily not in operational usetreat as in operational use

Surplus

carry at DRC or OMVEU as aboveand

revise depreciation profile to reachOMV for alternative use by disposal

date

Revalue to MV for alternative useand consider economic impairment.

Cease to depreciate

Impairments

Requirements of FRS 11

2.110 The main objective of FRS 11 is to ensure that all impairment losses (lossesof value of fixed assets below their carrying amounts) are recognisedimmediately in the financial statements, whether an impairment is expected tobe temporary or permanent.

2.111 Much of the detail of FRS 11 is concerned with the identification of "income-generating units" (as defined by FRS 11) and the measurement of value inuse (the present value of cash flows from the use of an asset). None of thatdetail is repeated here because it is lengthy and, in the NHS, will apply only toimpairment losses of fixed assets dedicated to income generation activities.

2.112 The full text of FRS 11 should be consulted where there is an indication ofimpairment concerning an asset dedicated to income-generation activities.

Indications of impairment

2.113 Impairment occurs because something has happened to a fixed asset itself orto the economic environment in which it is used. A review for impairment of afixed asset should be carried out if, and only if, events or changes incircumstances indicate that there has been an impairment.

2.114 Indications of possible impairment include:

the asset is to be sold

the asset cannot be used for any reason

the asset is surplus to requirements

a newly constructed asset is brought into use

the asset is over specified for its current use there is a fall in value on indexation or on 5-yearly revaluation



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there is evidence of obsolescence or physical damage to the asset

there is a commitment by management to undertake a significantreorganisation and fixed assets are involved.

2.115 An indication of impairment does not necessarily mean there has been an

impairment, but it should prompt a review of the value of the asset, its usefullife and its residual value (if any). A review of the useful life and residual valueis appropriate even if the review of the asset value shows that it has not beenimpaired.

2.116 A fall in value of an asset when it is initially re-valued from cost to DepreciatedReplacement Cost could be due at least in part to the assumption of idealconditions underlying the present method of depreciated replacement costvaluations. A fall in value on revaluation of a new asset from cost to DRC willnot be treated as an economic impairment, as the DRC valuationmethodology itself gives rise to the fall in value. The correct treatment is totake the revaluation fall to the revaluation reserve, even though that inevitablycreates a negative reserve in respect of the particular asset.

2.117 Related to this, it should be noted that construction inefficiencies are not validcosts of building an asset and hence should not be capitalised at all. Insteadthey should be written off directly to the I&E account (see para 2.15 ). Further,care needs to be taken that only legitimate capital expenditure is capitalised inthe first place: the incorrect capitalisation of revenue costs would (onrevaluation to DRC) then result in revenue expenditure being taken straight toreserves.

2.118 Planned disposal of an asset does not necessarily indicate impairment.Where there is the intention of disposing of an asset on a planned date, thedepreciation charge must be adjusted so that the asset is written down to itsexpected realisable value on the planned sale date. The revised depreciationshould be included in capital charge estimates at the first opportunity.

Impairment reviews

2.119 An impairment review compares the carrying amount of an asset with itsrecoverable amount, where recoverable amount is the higher of net realisablevalue and value in use (see diagram above).

2.120 Net realisable value is the amount for which an asset can be disposed of, lessany direct selling costs. Direct selling costs include legal costs and the costsof removing a sitting tenant but they do not include reorganisation costs e.g.redundancy costs linked to the sale of a property.

2.121 FRS 11 defines value in use as the present value of the future cash flows fromthe asset's continued use. However, it adds that, where a fixed asset is notheld for the purpose of generating cash flows, an alternative measure of itsservice potential may be more relevant. HM Treasury have interpreted this forthe public sector, stating that, other than for commercial profit-making services(which should follow FRS 11 in full) value in use will be assumed to be at leastequal to the cost of replacing the service potential provided by the asset. Thecost of replacing the service potential of operational assets in the NHS is

existing use value or, if such a value is not available (as is the case forspecialised property) depreciated replacement cost.



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2.122 An impairment review of a NHS Foundation Trust asset therefore usuallycompares the carrying amount of the asset with the higher of existing usevalue/depreciated replacement cost and net realisable value. However, if anasset cannot be used or is surplus to requirements, the impairment reviewcompares the carrying amount of the asset with net realisable value only,since there is no value in use. Where an asset is over-specified for its currentuse, the impairment review compares the carrying amount of the asset withthe higher of net realisable value and the existing use value/depreciatedreplacement cost of an asset of the lower specification.

Future disposals

2.123 When there are firm plans to dispose of a currently operational building asset,an impairment review should be carried out to determine the assets openmarket value for alternative use (OMV) (effectively, its net realisable value).This value should be set, in compliance with FRS 15 principles, on the basisof current prices. In other words, no attempt should be made to predict its

realisable value at the future date of sale.2.124 Where there is uncertainty about the date an asset will be taken out of

operational use, NHS Foundation Trusts may wish to maintain an assets lifeand depreciation profile unchanged, recognising an economic impairment inthe year in which the uncertainty is resolved and firm plans for disposal areagreed.

2.125 The OMV to be used is that of an asset of the same age at the present time,and no attempt should be made to predict the OMV at the time of planneddisposal. In times of inflation it is to be expected that the OMV will be lowerthan the OMV at the actual date of disposal, and this may then give rise to a

profit on disposal. NHS Foundation Trusts will need to take care that an OMVset in the past is not assumed to be a fair market price for setting contractterms.

2.126 In the unlikely event that the actual disposal value exceeds the currentcarrying amount, it should continue to be carried at depreciated replacementcost (this being lower than the recoverable amount) with depreciation chargesas normal, calculated on its assessed life. The revaluation to OMV on takingthe asset out of use, and prior to disposal will then result in a revaluation gain.

Recognition of impairment losses

2.127 As in the application of all Financial Reporting Standards, impairment lossesneed only be recognised (i.e. accounted for) when they are material. What ismaterial in a particular set of circumstances is a matter to be agreed withauditors. The following paragraphs relate to material impairment losses.

2.128 If an impaired asset has not previously been indexed or revalued whilst held(even if previously held and indexed/revalued by another NHS body) theimpairment loss should be recognised in the I&E account. The exception tothis principle relates to newly constructed buildings that attract a first DRVvaluation that is invariably lower than cost.

2.129 If the asset has been previously indexed or revalued whilst held, the place torecognise the loss depends on its cause. In principle, impairments ofrevalued fixed assets fall into two general groups:



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those that are clearly caused by a consumption of economicbenefits, and

those caused by a general fall in prices.

2.130 The first type is similar to depreciation and is treated in the same way i.e.

recognised in the I&E account. The second type is a valuation adjustment,which falls to be recognised in the Statement of Recognised Gains andLosses (SRGL) until the credit balance in respect of that asset on theRevaluation Reserve is used up, after which it should be recognised in theI&E account.

2.131 However, FRS 15 says that if it can be demonstrated that the recoverableamount of the asset remains higher than the revalued amount, the whole ofthe fall can be charged to the SRGL.

2.132 In practice, it can be difficult to allocate an impairment to one of the twogroups with certainty. FRS 11 states that where there is doubt it should betreated as one caused by a general fall in price i.e. the impairment loss shouldbe recognised in the SRGL until the balance in respect of that asset on therevaluation reserve us used up, after which it should be recognised in the I&Eaccount.

2.133 Having dealt with the effects of price changes annually, as above, it willusually be appropriate to treat any other type of impairment as a clearconsumption of economic benefits, with a consequent charge to the I&Eaccount.

Losses of economic benefit

2.134 Impairment losses resulting from the indications listed above ( para 2.122 ) arelosses of economic benefits and should be recognised in the I&E account. Ifin such cases there is a credit balance for the asset on the revaluationreserve, a transfer from the revaluation reserve to the I&E should be madeequal to:

The amount of the impairment, or

The credit balance on the revaluation reserve for the asset, if lower.

Price falls

2.135 Fixed assets are indexed annually and property assets are professionallyrevalued every five years. Indexations purely reflect price changes and the 5-yearly revaluations check the accuracy of the national indices applied in thecircumstances of an individual asset, as well as picking up any other changesin the asset.

2.136 If a fall in value on a 5-yearly revaluation is found to be due to a consumptionof economic benefits, it should be charged to the I&E account. This should berare, as an indication of an impairment should prompt an immediateimpairment review rather than being left until the 5-year point to be identified .

2.137 If a fall on routine revaluation is not due to a clear consumption of economic

benefits, or there is a fall in value on indexation, the general rule is that itshould be charged to the STRGL until the balance in respect of that asset inthe Revaluation Reserve is used up, after which it should be recognised in the



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I&E account. However, FRS 15 says that, if it can be demonstrated that therecoverable amount of an asset remains higher than its revalued amount, thewhole of the fall in value can be charged to the SRGL. It is acceptable forsome temporary negative revaluation reserve balances to be created in thesecircumstances.

2.138 HM Treasury has stated that, for not-for-profit activities, recoverable amountwill be taken as being greater than the revalued amount if it can bedemonstrated that:

The fall in value has not been caused by a consumption of economicbenefits

For assets valued at a market based valuation (e.g. EUV) thereduction is short-term and informed opinion is that it will bereversed in the medium term

For assets held at DRC changes in technology in the sector aresmall so that any falls are likely to be short-term.

2.139 If, subsequently, it is decided that any part of the downward price movementis in fact permanent, an adjustment between the I&E account and therevaluation reserve should be made in the current accounting period.

Newly constructed assets

2.140 On bringing a newly constructed (building) asset into use there is often asignificant fall in value. If this is due to a loss of economic benefits it shouldbe charged to the I&E account. However, it is more likely that the fall is due tothe present approach to depreciated cost valuations which assumes idealconstruction conditions (with, for example, the costs of site works andcontingencies not being reflected in present DRC valuations). Recentchanges in the valuation methodology have narrowed the gap between costand DRC valuations, so such price falls in the 2005 national revaluation, forexample, should not be as marked as in previous years.

2.141 If the fall in value is due to the application of the DRC valuation methodologyalone, and costs had been legitimately capitalised as under FRS 15, it shouldbe recognised in the SRGL (i.e. not charged to the I&E account as animpairment). Negative revaluation reserve balances will inevitably arise -these are acceptable.

2.142 Related to this, it should be noted that inefficiencies in construction are notvalid costs of construction and so should not be capitalised at all . Theyshould be written-off to the I&E account when recognised. FRS 15 lists asexamples of "abnormal costs" not to be capitalised: design errors; industrialdisputes; idle capacity; wasted materials, labour or other resources; andproduction delays.

Enhancement expenditure

2.143 Expenditure legitimately capitalised in enhancing an owned or leased asset istreated in the same way as that incurred in constructing a new asset. Itfollows that revaluation to DRC on completion of the work may produce

valuation falls (impairments) just as revaluation of new-build generally resultsin a fall. The accounting treatments of impairments are the same in bothcases.



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Revaluation reserve balances

2.144 It is important to be able to link balances taken to the Revaluation Reservewith their associated assets. NHS Foundation Trusts will therefore need toensure that they have systems in place to enable Revaluation Reservebalances to be analysed to the level of individual assets. Para 2.96 abovedefines, as far as possible, an "asset" in the context of revaluation reserveapportionment and impairment calculations.

2.145 When an asset is disposed of, the balance on the Revaluation Reserve inrespect of it should be transferred to the I&E Reserve. Since "price falls" andnewly constructed asset "impairments" are taken to the revaluation reserve,debit entries for individual balances are allowed on this reserve.

2.146 Further, UK GAAP requires a transfer to be made from the revaluation reserveto the I&E Reserve where an asset, although carrying a positive revaluationhistory, suffers a loss of economic value.

FRS 11 says that a revaluation loss is to be recognised wholly in the profit and loss account if it is caused by a clear consumption of economic benefits this is equated to an impairment, and accordingly the whole deficit should be charged to the profit and loss account as an operating charge analogous to depreciation. This applies even if the asset was previously valued upwards and is still worth more than its depreciated historical cost. If the deficit against carrying value is charged to the profit and loss account any corresponding credit balance in the revaluation reserve relating to that asset will be transferred to the profit and loss account as a reserve

movement.Donated assets, Big Lottery fund and Government Grants

2.147 Similar approaches to those above should be adopted for donated assets andassets provided by a grant from the Big Lottery fund, using the Donated AssetReserve or Government Grant Reserve (GGR) instead of the RevaluationReserve, except that:

where an impairment loss can be recognised in the STRGL in thefirst instance the balance of the loss should be recognised in the I&Eaccount when the Donated Asset Reserve has been reduced to thevalue at which the asset was first taken on

where an impairment loss is recognised in the I&E account, anoffsetting transfer should be made to it from the Donated AssetReserve or GGR.

2.148 As price movements impact on the donated asset reserve, and economiclosses taken to the I&E account result in the transfer noted above, thedonated asset reserve in respect of a particular asset will continue to equal itscarrying amount.

2.149 Similar treatment is required for assets financed by Government Grants,where the transfers will be from the Government Grant Reserve.

Reversal of past impairments



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2.150 A debit to the I&E account, as shown above, can be reversed (afteradjustment for subsequent depreciation) for any reversal of a past impairment.This means that the reversal of an impairment loss is recognised in the I&Eaccount to the extent that it increases the carrying amount of the asset to whatit would have been had the impairment not occurred.

2.151 It is expected that reversals of impairments will be rare, as neither indexationnor 5-yearly revaluations are considered as reversals of earlier impairmentstaken to the I&E account as consumption of economic benefits. Reversals willhappen in cases where an economic loss has been recognised on an assetwritten down to OMV (disposal value) prior to disposal, which subsequently istaken back into operational use on a change of plan.

Presentation and disclosure

2.152 Impairment losses recognised in the I&E account should be included inoperating costs. Impairment losses recognised in the STRGL must be

disclosed separately on the face of the statement.2.153 In the fixed asset note to the annual accounts the impairment loss should be

treated as follows:

Impairments charged to the SRGL should be shown in thecost/valuation (top half) part of the note

Impairments charged to the I&E account should be shown in thedepreciation (bottom half) part of the note.

Where (exceptionally) an impairment loss recognised in an earlier period is reversed,the financial statements should disclose the reason for the reversal.



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Annex 1 - Definitions

Existing use value

An opinion of the best price at which the sale of an interest in property would

have been completed unconditionally for cash consideration on the date ofvaluation, assuming:

(a) a willing seller;

(b) that, prior to the date of valuation there had been a reasonableperiod. for the proper marketing of the interest, for theagreement of price and terms and for the completion of thesale;

(c) that the state of the market, level of values and othercircumstances were, on any assumed date of exchange ofcontracts, the same as on the date of valuation;

(d) that no account is taken of any additional bid by a prospectivepurchaser with a special interest;

(e) that both parties to the transaction had acted knowledgeably,prudently and without compulsion;

(f) that the property can be used for the foreseeable future only forthe existing use; and,

(g) that vacant possession is provided on completion of the sale ofall parts of the property occupied by the business.

Depreciated replacement cost (property)

The aggregate amount of the value of the land for the existing use or anotional replacement site in the same locality, and the gross replacement costof the buildings and other site works, from which appropriate deductions maythen be made to allow for the age, condition, economic and functionalobsolescence, environmental and other relevant factors; all of these mightresult in the existing property being worth less to the undertaking inoccupation than would a new replacement.

Value of plant and machinery

An opinion of the price at which an interest in the plant and machinery utilised

in the business would have been transferred at the date of the valuationassuming:

(a) that the plant and machinery will continue in its present uses inthe business

(b) adequate potential profitability of the business, or continuingviability of the undertaking, both having due regard to the valueof the total assets employed and the nature of the operation,and

(c) that the transfer is part of an arms length sale of the businesswherein both parties acted knowledgeably, prudently andwithout compulsion.

Market value



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"The estimated amount for which a property should exchange on the date ofvaluation between a willing buyer and a willing seller in an arm's-lengthtransaction after proper marketing wherein the parties had each actedknowledgeably, prudently and without compulsion".

Extracts from the Appraisal and Valuation Manual (Royal Institution of CharteredSurveyors).



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Annex 2 - Presentation and disclosure examples

Examples below illustrate the recognition, and reversal, of impairments inaccounts.

The examples below are intended only to illustrate the principles.

1. Impairment price change

In the example the impairment is 100 and the revaluation reserve stands at 20.Where: the recoverable amount exceeds carrying amount (the normal treatment for assetsheld at DRC and showing a price movement on 5-yearly revaluation)

Dr 100 Revaluation reserveCr 100 Tangible fixed assets

The loss is taken to the STRGL in full, and a negative revaluation reserve iro the assetarises (-80)

Where: the price movement is likely to be long-term

Dr 20 Revaluation reserve80 Income and expenditure account

Cr 100 Tangible fixed assetsThe loss can be offset first against the revaluation reserve associated with the asset.

2. Impairment loss of economic benefitsImpairment 100, revaluation reserve 20.Dr 100 I&E accountCr 100 Tangible fixed assets

With the total impairment, as an economic lossDr 20 Revaluation reserveCr 20 I&E reserve

To eliminate the balance on the revaluation reserve (up to a maximum of 100)

3. Impairment - price change (donated asset)

The example shows the treatment of an upwards revaluation from 170 to 250 followed by animpairment (price change) of 100Where: the recoverable amount exceeds carrying amount (the normal treatment for assetsheld at DRC and showing a price movement on 5-yearly revaluation)

Dr 80 Tangible fixed assetsCr 80 Donation reserve

With the increase in valueDr 100 Donation reserveCr 100 Tangible fixed assets

To reflect the impairmentWhere: the price movement is likely to be long-term

Dr 80 Tangible fixed assets



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Cr 80 Donation reserveWith the increase in value

Dr 80 Donation reserve20 I&E account

Cr 100 Tangible fixed assetsTo reflect the impairment

Dr 20 Donation reserveCr 20 I&E account

To neutralise the impact of the impairment on the I&E account

4. Impairment - loss of economic benefits (donated asset)

As above, but the loss is a loss of economic benefits rather than a price changeDr 100 I&E accountCr 100 Tangible fixed assets

With the impairmentDr 100 Donation reserve

Cr 100 I&E accountTo neutralise the impact of the impairment on the I&E account



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3 Depreciation and asset lives

Introduction3.1 Depreciation is defined by FRS 15 as the measure of the cost or revalued

amount of benefits of the tangible fixed asset that have been consumedduring the period. Depreciation is the term normally applied to tangiblefixed assets, while amortisation is used in respect of intangibles the twoterms are equivalent, and in this Manual depreciation should be taken also toembrace amortisation.

3.2 Depreciation is not a measure of loss of value and so the argument that itshould not be applied to some categories of assets that have indefinite life,perhaps by virtue of routine maintenance and refurbishment, is not valid.Depreciation must be charged whether or not there has been a loss in valueover the period. UK GAAP points out that the concept of depreciation is oneof profit and loss rather than balance sheet it matches the consumption ofan asset with the benefits arising from its use in a given period.

3.3 Depreciation is not intended to provide a fund for replacement, as FRS 15makes clear. However, as depreciation is a non-cash item that will generallybe met by cash-income, the application of depreciation will tend to generatecash surpluses in NHS Foundation Trusts books.

Depreciation policy

3.4 The NHS adopts a policy of straight-line depreciation. FRS 15 suggests thatthis method is usually adopted as a default where the pattern of consumptionof economic benefits is uncertain (as it generally is in the NHS specialisedestate). As this policy is consistent with the RAM, other methods (e.g.reducing balance, sum of digits methods) are not permissible.

Land

3.5 Land is not depreciated, because it is considered to have an infinite life.

Buildings

3.6 Building assets are depreciated over the period of their assessed lives, asdetermined by an independent valuer. Property consists of land and buildingelements, and valuers will apportion the cost of the property between(depreciable) buildings and (non-depreciable) land elements.

3.7 Surplus buildings with a known disposal date (but still in operational use)continue to be carried at their DRC or OMVEU valuations, but are depreciatedat a rate such that they reach their MV for disposal value on the disposal date(see below re accelerated depreciation ).



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Equipment

3.8 Equipment is depreciated over its useful economic life. The expected life ofequipment assets and residual values should be reviewed at the end of eachaccounting period. This may lead to a departure from standard lives whereexpectations of useful economic life are "significantly different".

3.9 FRS 15 states that:

The useful economic life of a tangible fixed asset should be reviewed at the end of each reporting period and revised if expectations are significantly different from previous estimates. If the useful economic life is revised, the carrying amount of the tangible fixed asset at the date of the revision should be depreciated over the revised remaining useful economic life

and on residual value:

Where the residual value is material it should be reviewed at the end of each reporting period to take account of reasonably expected technological changes based on prices prevailing at the date of acquisition (or revaluation). A change in its expected residual value should be accounted for prospectively over the assets remaining useful economic life, except to the extent that it has been impaired at the balance sheet date.

3.10 FRS 15 however only requires a change in the depreciation profile of an assetto be made where the review suggests that a significant adjustment to livesor residual value is appropriate. It is suggested that NHS Foundation Trustsadhere to the standard lives of equipment assets as laid down in previousManuals, and repeated below, adopting individual lives only where it is clear

that the standard lives are materially inappropriate: Short life engineering plant and equipment - 5 years

Medium life engineering plant and equipment 10 years

Long life engineering plant and equipment 15 years

Vehicles 7 years

Furniture 10 years

Office and IT equipment 5 years

Soft furnishings 7 years

Short life medical and other equipment 5 years Medium life medical equipment 10 years

Long life medical equipment 15 years

Mainframe-type IT installations 8 years

Residual value

3.11 As noted above the residual value is based on the prices prevailing at thetime of purchase or revaluation. It is not an estimate of how much the assetcould be sold for at the end of its useful economic life. Thus, if an asset has a6 year estimated useful life, the residual value is the net realisable value of a 6year old asset at the date of purchase or revaluation. This means, for



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example, that holding gains cannot be anticipated. All other things beingequal, in times of inflation an organisation will (if it reviews residual value inline with FRS 15 for assets other than those carried at OMV) over-providedepreciation in the assets life such that a valuation to OMV prior to disposalmay well generate a profit on disposal.

Assets under construction

3.12 Assets under construction are not depreciated, because depreciation isappropriate only when assets are in operational use.

Intangible fixed assets

3.13 Intangible fixed assets are amortised over the period of the assets' expectedeconomic lives.

Finance leases

3.14 Assets leased under finance leases should be depreciated over the shorter ofthe primary lease term and the assessed remaining life of the asset. If theleased asset continues to be used by the lessee after the end of the primarylease term it should be revalued by a Valuer to its MV or DRC value. Theresidual value should then be depreciated over the remaining useful economiclife of the asset.

Chargeable period

Availability for use

3.15 Depreciation is payable on assets from the start of the quarter following thequarter in which the asset first became available for use.

3.16 The date at which an asset becomes available for use will not always be clearand a realistic approach must be adopted in deciding the appropriate date.

3.17 Buildings are deemed to become available for use at the earlier of:

first use

the date Unified Business Rate first becomes payable (whether at full orhalf rate).

Disposals and surplus assets

3.18 Depreciation ceases to be chargeable when an asset is disposed of. Adisposal is deemed to arise when the asset is no longer available for use andis removed from the asset register. This will occur because the asset is:

sold (or ownership is transferred, e.g. in PFI transactions)

recorded in the asset register and losses register as being lost ordestroyed. An asset that is totally lost or destroyed will be accounted for asbeing disposed of. If a partial loss occurs, e.g. when an asset is damaged,this is treated as an impairment and the net book value of the asset will bereduced as appropriate. This will result in a reduced depreciation charge;or



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scrapped.

3.19 Depreciation also ceases to be payable when an asset is formally declared assurplus, is taken out of operational use, and is revalued to open market valuefor alternative use, but has not yet been disposed of.

Other considerations

Transfer of an asset under construction to use

3.20 Assets under construction are not subject to depreciation, but when theybecome available for use they must be reclassified as buildings or equipment.Depreciation is chargeable from the beginning of the quarter following theasset becoming available for use.

Disposal of a surplus asset

3.21 Depreciation is chargeable in the quarter in which disposal of an asset takesplace. Depreciation is also chargeable in the quarter in which a building assetis formally declared surplus and revalued to open market value for alternativeuse, but has not yet been disposed of. No further depreciation is charged ona surplus building asset after this point provided that it is not in operationaluse.

Collective assets

3.22 Collective or grouped assets should be treated as single assets for thecalculation of depreciation.

Fully depreciated assets

3.23 When an asset reaches the end of its useful economic life it is fullydepreciated, giving a nil net book value. If it continues to be used, noadjustment is made in the books and its cost and full depreciation continue tobe carried (though the net of these two is nil), until it is no longer available foruse. Fully depreciated assets should continue to be recorded in the assetregister. The replacement cost and accumulated depreciation continue to beindexed, but as the same index is applied to both cost and depreciation thenet book value remains nil.

3.24 The necessity to adopt this treatment should be rare in future, if estimates ofuseful economic life are made regularly. If the amount of fully depreciatedassets still in use is significant enough to distort the financial stateme

Documents

Capital Accounting Manual