Accounting for PFI and NHS LIFT Guidance Under IFRS

Accounting for PFI and NHS LIFT guidance under IFRS

This note is to inform NHS bodies of an amendment that the Department has made to the above manuals. The change is to the approach used to determine the initial fair value of the PFI asset and liability.The revised manuals (including universal model and user manual) will be published shortly.

The existing PFI guidance directs NHS bodies to determine the initial fair value of the PFI asset for new schemes by obtaining a formal valuation of the asset as at the time it is made available for use by the operator (paragraph 120). For existing schemes, NHS bodies are directed to obtain a retrospective valuation, or exceptionally if this cannot be obtained, to use the cost of the asset from the operator’s financial model (paragraph 121).

The NHS LIFT guidance does not repeat this guidance but instead paragraph 63 simply cross-refers to the PFI guidance on determining the initial fair value of the underlying asset.

The changes:

1) Paragraphs 120 and 121 of the NHS PFI guidance are replaced by the following requirement:

“For existing and new schemes, NHS bodies should determine at the inception of the arrangement (which in most cases is likely to be the point of ‘financial close’ of the scheme) the initial fair value of the PFI asset. The Fair value so determined may be based on the capital cost of the asset in the operator’s financial model where this can be justified to reflect the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”

2)At the same time, the Department has decided to amend the guidance on which costs should be capitalised so as not to be prescriptive. Consequently paragraphs 122 to 127of the NHS PFI guidance are now replaced by the following:

“Where cost is used to determine the fair value of the assets NHS bodies will need to determine which cost elements in the financial model should be included in the measurement of the fair value of the asset. In doing so, NHS bodies may wish to consider the costs that the NHS body itself would capitalise if it were procuring the asset directly instead of the operator.

Where either of the guidance documents contain other requirements that are inconsistent with the changes above, the changes take precedence. For the avoidance of doubt, the changes do not affect the requirement in paragraph 99 of the NHS LIFT guidance to obtain a formal valuation of the expected fair value of the asset at the end of the contract.

Reason for the change

The guidance applies the requirements of Chapter 6 of the HM Treasury FReM in respect of accounting for PFI schemes. It seeks to provide practical guidance that will promote consistent application of the requirements of accounting standards across the NHS.

The existing approach to determining the initial fair value of the asset was included on this basis.

Following the publication of the guidance and its application by NHS bodies, it has recently been brought to the Department’s attention that the fair values obtained from formal valuations of PFI assets at the time they are brought into use can, in a few cases, be substantially lower than the fair values determined at the inception of arrangements. The applicable accounting standard referred to in Chapter 6 of the HM Treasury FReM, requires the fair value at which the assets are recognised to reflect that which would be determined at the inception of the arrangement. It has therefore become apparent that the existing approach in the guidance could in some cases produce a materially different outcome from that intended by the standard.

Following deliberations, the Department has therefore decided to amend the guidance to require NHS bodies to measure the initial fair value at the inception of the arrangement. The Department is satisfied that this is consistent with the requirements of the HM Treasury FReM.

NHS bodies are reminded that IAS 36 requires them to consider whether there are any indicators that their assets may be impaired. Where, for example, the NHS body has a formal valuation of the PFI asset at the date it is brought into use that is lower than the initial fair value recognised, then this is likely to require the recognition of an impairment. In accordance with the NHS Manuals for Accounts and IAS 36, such an initial impairment would need to be recognised in operating expenses. If the valuation amount as at the date the asset comes into use is substantially different to the fair value of the asset as determined from the operator’s model, then NHS bodies may wish to explore the reasons to satisfy themselves that both values are reliable.