IFRS NHS WALES MANUAL FOR ACCOUNTS. Chapter 7 Capital Accounting

Transcription

1 Chapter 7 Capital Accounting 1

2 1. Capitalisation and value of fixed assets... 5 Introduction... 5 General Principles per IAS 16 and HMT Financial Reporting Manual... 5 Objectives of IAS Adaptation of IAS 16 for the public sector context... 6 Interpretations of IAS 16 for the public sector context... 6 Capitalisation of Salaries... 7 Grouped Assets... 8 IT Assets... 8 Interdependency... 8 Elements of cost... 9 Directly attributable costs... 9 Non-attributable costs... 9 Decommissioning costs... 9 IAS 23 Borrowing Costs...10 Capitalisation of assets held off site...11 Evidence of an asset addition...11 Derecognition of assets...13 Current Approach...13 Frequency and process for revaluation of the NHS Wales Estate...14 Good housekeeping...14 Indexation...14 IFRS 13 Fair Value Measurement Asset lives, depreciation and impairments...17 Depreciation and amortisation policy...17 Componentisation...17 Useful life...19 Residual value...19 Land and Building Assets...20 Plant and Equipment...20 Assets under construction...21 Start and end dates for depreciation...22 Impairments...23 Impairments that score as DEL...23 Impairments that score as AME...23 Impairment indicators...24 FREM deviation from IAS 16 with regard to economic impairments...25 Budgetary impacts...26 Reversal of Impairments...26 Sales and demolition of Non-current assets...29 Introduction...29 Conditions for classification as held for sale...29 Measurement of non-current assets held for sale and disposal groups...31 Fair value less costs to sell...31 Measurement prior to classification as held for sale...32 Impairment...32 Measurement on classification as held for sale...32 Re-measurement of non-current assets held for sale...32 Depreciation, amortisation

3 Changes to a plan to sell...33 Measurement on declassification as held for sale...33 Presentation and disclosure...33 Recognition of gains and losses on disposal...34 Accounting for disposals...34 Timing of Disposal...34 Transfer of Ownership...34 Calculation of Profit or Loss on Disposal of Fixed Assets...35 Treatment of property identified for sale...35 Treatment of property identified for Demolition...36 Treatment of Revaluation Reserves...39 Impairment charges to revaluation reserves...39 ANNEX Guidance on accounting for Indexation and revaluation of Property, Plant and Equipment and Intangible Assets Determining lease type as per IAS Accounting for leases...44 Introduction...44 Leasing arrangements between NHS Wales bodies...44 Lease...44 Finance lease...44 Operating lease...45 The lease term...45 Determining the Lease Type...45 Determining the Lease Type Other Factors...48 Determining whether an arrangement contains a lease...48 The substance of transactions with the legal form of a lease...50 Property leases...51 Accounting for finance leases lessees...51 Capitalisation...52 Revaluation...52 Indexation...52 Depreciation...52 Finance lease creditor...53 Finance charges...54 Asset and lease creditor...54 Improvements to leased assets...54 Termination of lease...55 Accounting for Operating Leases lessees...55 Operating lease incentives...55 RRL/CRL Treatment for Leases...56 Accounting for leases lessors...56 Hire purchase contracts...57 Accounting entries for finance leases Public Private Partnerships (PPP) / Private Finance Initiative (PFI) Contracts...59 Service Concession or Lease...60 Service Concession Agreements Key Questions...60 The substance of a service concession...60 Infrastructure assets...61 Control or regulation of the services during the concession

4 Regulating to whom the services must be provided...62 Controlling or regulating the price...62 Control of any significant residual interest in the asset at the end of the concession...63 Concluding whether the arrangement should be assessed under the Application 63 On Statement of Financial Position: Purchaser has an asset of the property...64 Recognising the asset...64 Recognising the liability...64 Identifying the elements of the unitary charge...65 Off Statement of Financial Position: Operator (PPP/PFI Partner) has an asset of the property...66 Contributions of existing assets...67 Disclosure requirements...68 Reduction in the annual unitary payment...68 Cash lump sum received...69 Revenue consequences of bringing PFI schemes onto the Statement of Financial Position Capital Resource Limit Management...70 How to calculate the charge against the Capital Resource Limit (CRL)...70 Capital Resource Performance...70 External Finacing Limit (EFL)...71 Retention of sales proceeds and costs Accounting for Donated / Government Granted Assets...72 Treatment of Government Grants and Donated Assets Accounting for Intangible Non-current Assets...73 Recognition and Initial Measurement of Intangible assets...73 General principles and definitions...73 Intangible fixed assets - recognition...74 Internally generated intangible assets...74 Internally generated intangible assets Development Expenditure...75 Purchased intangible assets (separate acquisition...75 Software...75 Website costs...75 Internally generated intangible assets initial measurement...76 Purchased intangible assets (separate acquisition) initial measurement...77 Subsequent expenditure...78 Capitalisation Threshold - de minimis limits...78 Grouped assets...78 Interest (Borrowing costs)...78 Staff training costs...79 Leases

5 1. Capitalisation and value of fixed assets Introduction 7.1 The guidance in this chapter interprets the accounting guidance contained in the Government FReM and is intended as general guidance on the application of accounting standards and practice to capital accounting transactions in NHS Wales for Local Health Boards (LHBs) and NHS Trusts. It replaces the last Capital Accounting Manual (issued September 2006) and reflects the new International Financial Reporting Standards accounting environment and the new organisational structure of NHS Wales introduced in It supplements any accounting guidance in Chapter 1 of the LHB Manual for Accounts and NHS Trust Manual for Accounts, so that all bodies are working to the same guidance. Where relevant it also reflects elements of HM Treasury Consolidated Budgeting Guidance that relate to how expenditure is charged in the accounts. It should be recognised that where, this chapter provides general guidance, it is the responsibility of NHS Wales bodies to ensure that the accounting treatment is appropriate for all reported transactions and consistent with current International Financial Reporting Standards and the Government FReM. General Principles per IAS 16 and HMT Financial Reporting Manual 7.3 The following international accounting standards and and Urgent Issue Task Force (UITF) Abstracts deal with accounting for tangible and intangible fixed assets and are the basis on which capital accounting in NHS Wales should be applied : IAS 16, Property, Plant and Equipment ; IAS 17, Leases ; SIC 15, Operating Leases Incentives ; SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease ; IFRIC 4, Determining whether an arrangement contains a lease ; IFRIC 12, Service Concession Arrangements ; IAS 20, Accounting for Government Grants and Disclosure of Government Assistance ; SIC 10, Government Assistance No Specific Relation to Operating Activities ; IAS 23, Borrowing Costs ; IAS 36, Impairment of Assets ; IAS 38, Intangible Assets ; IAS 40, Investment Properties ; 5

6 IFRS 5, Non-current Assets Held for Sale and Discontinued Operations ; IFRS 13 Fair Value Measurement. 7.4 NHS bodies should ensure that they are familiar with the contents of these standards. Objectives of IAS A key standard is IAS 16. The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment so that users of financial statements can discern information about an entity s investment in its property, plant and equipment and the changes in such investment. The principal issues in accounting for property, plant and equipment are the recognition of assets, the determination of their carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them. Adaptation of IAS 16 for the public sector context 7.6 For in-use non-specialised property assets fair value should be interpreted as market value for existing use. In the RICS Red Book, this is defined as market value on the assumption that property is sold as part of the continuing enterprise in occupation. Interpretations of IAS 16 for the public sector context 7.7 In applying IAS 16, NHS Bodies should be aware of the following interpretations for the public sector context. 7.8 Recognition and measurement : All tangible non-current assets shall be carried at valuation at the reporting period that is, the option given in IAS 16 to measure at cost has been withdrawn, as has the option to value only certain classes. It is not necessary to disclose the historical carrying amounts (where available) as required by IAS 16. The value in use of a non-cash-generating asset is the present value of the asset s remaining service potential, which can be assumed to be at last equal to the cost of replacing that service potential. 6

7 Capitalisation of Salaries 7.9 IAS 16 is clear that only those directly attributable labour costs (employee benefits) that relate to the time spent by employees on constructing or acquiring the specific asset should be capitalised. Where an entity s own staff are involved in the acquisition, construction or development of a piece of property, plant and equipment, the relevant proportion of the internal costs relating to those staff should, if material and if the other criteria for capitalisation referred to in this section are met, be included in the cost of the asset Such internal costs will include own employees (e.g. site workers, in-house architects and surveyors) salaries and expenses arising directly from the construction and acquisition of the specific tangible fixed asset. Administration and other general overhead costs should be excluded from the cost. Employee costs not related to the specific asset (such as site selection activities) are not directly attributable costs Therefore, time spent on other potential acquisitions or developments cannot be included. For example, an internal surveyor may carry out surveys on different properties as part of the process to determine which one of those properties the body will buy. The cost of these surveys should not be capitalised as part of the cost of the property which is subsequently bought. However, the cost of a survey of a property after the decision to purchase it (for example, to confirm that decision) would be capitalised Furthermore, if a employee spends 30 per cent of his time on a particular development project, then only 30 per cent of his employee costs should be capitalised as part of the asset's cost. As a general rule in such situations only incremental costs that would have been avoided had the asset not been constructed can really be directly and conclusively attributed to bringing the asset to its working condition. For example, the cost of a temporary office on the site of the development, that would not have been incurred but for the project, should be capitalised because it is both an incremental and a direct cost that is attributable to bringing the asset to the condition necessary for it to operate in the manner intended by management. 7

8 Grouped Assets 7.13 Grouped Assets are a collection of assets which individually may be valued at less than 5,000 but which together form a single collective asset with a group value of 5,000 or more (including VATwhere this is not recoverable) because the items fulfil all the following criteria. This is applicable to both tangible and intangible assets. the items are functionally interdependent; the items are acquired at about the same date and are planned for disposal at about the same date; the items are under single managerial control; and each individual asset thus grouped has a value of at least 250, however this deminimus value does not apply in dealing with the initial equipping of hospitals. IT Assets 7.14 IT hardware may be considered interdependent if it is attached to a network, the fact that it may be capable of stand-alone use nothwithstanding. The effect of this will be that effectively all IT equipment purchases, where the final three criteria above apply, will be capitalised. The effect of such a change may well not be material, given the rate of depreciation that would have been applied to prior perid purchases. Interdependency 7.15 The distinction between assets that are in some way dependent on each other for their effective and efficient operation, and those that are standalone items can be a fine one. Where items are used within a system (eg trays of sterile instruments are designed to be used with a specific sterilisation system), those items are likely to be considered interdependent even though they also have a value in stand alone use. 8

9 Elements of cost 7.16 IAS 16 states that the cost of an item of property, plant and equipment comprises i) its purchase price, ii) any directly attributable costs and iii) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located where there is an obligation to dismantle / remove the asset and / or restore the site. Directly attributable costs include the following : costs of employee benefits arising directly from the construction or acquisition of the item of property, plant and equipment; costs of site preparation; initial delivery and handling costs; installation and assembly costs; costs of testing whether the asset is functioning properly; professional fees 7.17 Included in these definitions would be items forming part of the initial equipping and setting-up cost of a new building, ward or unit, irrespective of their individual or collective cost. In addition, any expenditure incurred relating to costs in relation to safety regulations or statutory legislation should be capitalised. Non-attributable costs 7.18 The standard specifically says that the following are not directly attributable costs and so should be charged directly to the Statement of Comprehensive Net Expenditure rather than capitalised: costs of opening a new facility; costs of introducing a new product or service (including costs of advertising and promotional activities); costs of conducting business in a new location or with a new class of customer (including costs of staff training); administration and other general overhead costs. Training costs 7.19 Where non directly attributable costs form part of the total expenditure of a capital project, the amounts not directly attributable will require to be charged to operating costs. Decommissioning costs 7.20 The cost of an item of property, plant and equipment includes the estimated costs of dismantling and removing the asset and restoring the site on which it is located ( decommissioning costs ). However, this is only allowed when 9

10 there is a corresponding obligation recognised as a provision under IAS 37, Provisions, contingent liabilities and contingent assets Where the entity has an obligation as a direct consequence of acquiring or constructing property, plant and equipment to incur further costs in the future that it cannot avoid, a provision is recognised in accordance with IAS 37. Therefore, the decommissioning costs at the end of the asset's life are just as much a cost of acquiring or constructing the asset as the costs incurred at the start of the asset's life. IAS 23 Borrowing Costs 7.22 IAS 23 applies as interpreted to all reporting entities by the FreM. However, IAS 23 does not apply where a qualifying asset is carried at Fair value The objective of IAS 23 is to prescribe the accounting treatment of borrowing costs. It requires the capitalisation of borrowing costs that are attributable to the acquistion, construction or production of a qualifying asset. All other borrowing costs should be expensed. 10

11 Capitalisation of assets held off site 7.24 Timing issues can arise regarding the capitalisation of assets at financial year end for which delivery has not yet been made. Evidence of an asset addition 7.25 IAS16 Property, Plant and Equipment states that: The cost of an item of PPE shall be recognised as an asset if: a) it is probable that future economic benefits associated with the item will flow to the entity b) the cost of the item can be measured reliably 7.26 Condition b) will ordinarily be met and is not usually an issue in these cases. However, condition a) is more problematic and is linked to the IASB Framework definition of an asset as: a resource controlled by the entity as a result of past events and from which economic benefits are expected to flow to the entity The key issue to consider as to whether an asset which has not yet been delivered to the audited body, should be capitalised, is establishing that ownership and title have passed to the purchasing body by year-end and that the body controls the asset at year-end even if it does not use it Consideration also should be given to IAS39 Financial Instruments Recognition and Measurement which states that: Liabilities to be incurred as a result of a firm commitment to purchase...goods...are generally not recognised until at least one of the parties has performed under the agreement. For example...the entity that places the order does not generally recognise a liability (i.e. the creditor) at the time of commitment but, rather, delays recognition until the ordered goods...have been shipped, delivered or rendered Where the asset has been neither delivered nor paid for at year end the position would seem ordinarily to be that the asset has not been pucrchased and capitalisation should not take place. However, individual contracts may identify activities other than payment and delivery as the key performance point at which title to and control over assets passes to the purchaser Set out below are the likely scenarios with their expected accounting treatment: order, invoice date, delivery and payment are all pre year end. The asset has been purchased by year-end, and may be capitalised. Both parties have performed their side of the contract. order, invoice date and delivery are all pre year end but payment is outstanding. The supplier has performed its side of the contract by delivering the asset, so control over the asset (subject to any contract clauses regards payment) now rests with the purchaser. The asset can be capitalised and a creditor is shown in books for the outstanding amount. 11

12 order, invoice date and payment are by year end, but the asset has not yet been delivered. The purchaser appears to have performed its side of the contract by making the payment required. Where the contract clearly states that title to the asset transfers when the payment is made (and there are no other clauses / caveats in the contract indicating otherwise), then it is likely that the purchaser controls the asset from the point of payment and the asset may be capitalised. However, if the transfer of title does not occur until the performance of another duty, e.g. delivery of the asset, which is yet to be completed, the payment should be treated as a payment in advance and the asset may not be capitalised. order and invoice date are pre year end, but the asset has not yet been delivered or paid for. On the face of it, it would appear that neither party have performed their side of the contract i.e. payment and delivery, so no transaction should be recorded in the financial statements. However, where the contract transfers title to the purchaser before payment and delivery, e.g. the point at which the asset is held separately by the supplier ready for delivery in the condition required (and there are no other clauses / caveats in the contract indicating otherwise), then the purchaser may control the asset from that point and the asset may be able to be capitalised, with a creditor shown for the outstanding payment Where a contract contains a clause that allows the purchasing body to rescind on the contract under any conditions with no penalty up to a certain point, this is a good indicator that title to the asset does not pass until that point In circumstances where control passes to the purchasing body, but delivery of the asset has not taken place, governance considerations should be given to ensuring risks are assessed and managed regarding : damage to assets whilst held by supplier; deterioration & obsolescence of assets whilst held by supplier; and supplier insolvency If an asset is capitalised it should not be depreciated until brought into use, but it should be reviewed for impairment if held by the supplier for a significant amount of time. 12

13 Derecognition of assets 7.34 An entity recognises in the carrying amount of an item of PPE the cost of replacing part of such an item when that cost is incurred, if recognition criteria are met. Carrying amount of replaced parts are derecognised (p.13 IAS16). Current Approach 7.35 The District Valuer reports on three elements of land and property. These are: External works; Structure; Internal Engineering There are clear practical difficulties in derecognising previously capitalised parts of an asset (para 70 IAS 16) In seeking to comply with IAS 16 consideration should be given in the first instance to endeavour to identify the value of replaced asset parts and derecognise them as losses. If this is not possible, the approach set out below should be adopted A pragmatic approach to the adoption of this part of the Standard, which should facilitate compliance but avoid significant and costly work being undertaken, is: Schemes funded via the All Wales Capital Programme will continue to be treated as Assets Under Construction until they are brought into use and a revaluation carried out at this point. This will allow parts of assets to be derecognised via an AME impairment at the point of revaluation. All discretionary schemes containing an element of replacement will be revalued where they are completed in year and the value of the works and fees is greater than 0.5 million. Other schemes (ie those under 0.5 million) will be considered as part of the normal revaluation cycle In relation to major schemes which contain an element of replacement and span more than one financial year, organisations will need to consider whether Assets Under Construction contain elements which need to be derecognised as they have been replaced in year. In this instance, organisations should use suitable estimates to consider any impairment of the Asset Under Construction incorporating derecognition, or to apportion overall impairment when bringing the asset into service incorporating derecognition It has been agreed that the policy in these circumstances, where separable derecognition is not possible, the impairment when the asset is brought into service - or estimated impairment for schemes spanning more than one financial year, including the element of derecognition is chargeable to AME. 13

14 Frequency and process for revaluation of the NHS Wales Estate 7.40 HM Treasury indicates that property valuations could be : A quinquennial valuation exercise supplemented by annual indexation and no interim Professional valuation; Annual valuations; or A rolling programme of valuations of properties (whether specialised or Non-specialised) 7.41 The land and buildings of NHS Wales will be subject to a formal revaluation exercise every five years. The last exercise was undertaken on 1 April The procurement arrangements for awarding the contract to the surveyors will be made by the Welsh Government. Good housekeeping 7.43 In some circumstances it will be appropriate to obtain additional valuations eg discretionary capital build schemes which have been completed during the accounting year where the works cost is greater than 500,000 should be revalued on completion. This will entail the NHS body arranging a survey with their valuers to ascertain a value for the asset. Indexation 7.44 Indexation is intended to maintain assets at current cost values without the expense of frequent revaluation exercises. Indexation is another form of revaluation and although identified separately in asset registers and the annual account formats it is treated in accounting terms in the same way as an increase or decrease to the asset base Indices are provided by the District Valuer and are based on data available from the Building Cost Information Service (BCIS) and the Valuation Office Property Market Report for Land and Property. Assets under construction are not indexed until the project is complete Indices for equipment will be provided from data compiled by NWSSP NHS Wales bodies will be notified of the indices for land and buildings by the Welsh Government All tangible fixed assets operational and non-operational, other than Information Technology and Assets under Construction are to be indexed on the 1 st April each year. 14

15 7.49 Indices should be applied to the asset base annually. It is not restricted to increases in the value of indices; any falls caused by a decrease in indices should also be recorded on the indexation line in the Property, Plant and Equipment note. IFRS 13 Fair Value Measurement 7.50 International Financial Reporting Standard (IFRS) 13 defines fair value and is intended to replace or supplement most other references to fair value in existing standards. IFRS 13 has been adopted without adaptation into the HMT FReM, but in practice its impact is limited by adaptations to other standards which restrict the scenarios where fair value accounting is applied, particularly in relation to non-current assets In continuing with the FReM s adaptation of International Accounting Standard (IAS) 16, assets which are held for their service potential (i.e. operational assets) and are in use should be measured at current value in existing use. For non-specialised assets current value in existing use should be interpreted as market value for existing use. For specialised assets current value in existing use should be interpreted as the present value of the asset s remaining service potential. These valuation approaches are therefore unchanged from the bases previously used The FReM introduces surplus assets as a new concept. Assets that were most recently held for their service potential but are surplus should continue to be valued at current value in existing use if there are restrictions on the health body or the asset which would prevent access to the market at the reporting date Assets that are not held for their service potential should be valued in accordance with IFRS 5 or IAS 40 depending on whether the asset is actively held for sale. Where such assets are surplus and do not fall within the scope of IFRS 5 or IAS 40, they should be valued at fair value under IFRS These changes will have some impact on reporting for NHS bodies. For example, in a scenario where a specialised asset is worth less on the open market than its current carrying value, the carrying value would previously have fallen when categorised as held for sale. Under the new approach, the asset is measured at fair value when it becomes surplus (if there are no restrictions on its sale), so a lower value may be recognised earlier. Alternatively, in a scenario where a non-specialised asset is worth more on the open market than its current valuation on the basis of current value in existing use, when the asset is valued at fair value upon being marked as surplus its carrying value will increase, with this gain being recognised earlier than would previously have been the case. 15

16 Flowchart of valuation for property, plant and equipment (excluding networked assets, donated assets and heritage assets) The flowchart shown above, taken from the FREM, should help to determine the appropriate accounting treatment of PPE excluding networked assets, donated assets and heritage assets. 16

17 2. Asset lives, depreciation and impairments 7.55 In accordance with IAS 16, depreciation should be provided for all property, plant and equipment with a finite useful life by allocating the cost (or revalued amount) less estimated residual value of the assets on a systematic basis over their useful life. The method of depreciation that is used should reflect the pattern in which the asset s future economic benefits are expected to be consumed by the body. Freehold land, properties under construction and assets held for sale are not depreciated Similar principles apply regarding the amortisation of intangible assets in accordance with IAS 38. An intangible asset with an indefinite useful life should not be amortised. Depreciation and amortisation policy 7.57 The FReM does not specify depreciation and amortisation policies but requires entities within each departmental group to have consistent policies. The policies set in accordance with the Accounts Direction to comply with the FReM are outlined below NHS Wales adopts a policy of straight-line depreciation and amortisation and other methods are not permissible Depreciation and amortisation charged in a period are recognised in the Statement of Comprehensive Net Expenditure unless it is permitted to be included in the carrying amount of another asset. This will only occur when depreciation or amortisation is included in inventory or work-in-progress as part of an allocation of overheads, in accordance with IAS 2, Inventories, or IAS 11, Construction contracts, or when it forms part of the cost of another item of property, plant and equipment or intangible asset Accelerated depreciation is the term used to describe the process where the remaining depreciation is being taken over a shorter period i.e. the depreciation is being accelerated. This will normally arise when some evidence exists to show that an asset has a shorter life than that originally envisaged. The main difference between accelerated depreciation and impairment is decided on the economic performance of the asset. If the economic performance has not declined in any way, then it is accelerated depreciation. Componentisation 7.61 IAS 16 requires that each part of an item of property, plant and equipment that has a cost that is significant when compared to the total cost of the item, should be depreciated separately. The amount initially recognised for an item of property, plant and equipment should to be allocated to its significant parts, 17

18 which must then be depreciated separately. (This may be contrasted with land and buildings, which the standard states are separate assets for depreciation purposes rather than separate parts of the same asset). There is, therefore, a need for NHS Wales bodies to review whether or not an asset has significant parts. If it decides it has, then the significant parts should be depreciated individually Where significant parts of an item of property, plant and equipment have been separately identified in accordance with the standard they should normally be depreciated separately. 18

19 Useful life 7.63 As noted above, depreciation and amortisation is calculated by allocating the cost or revalued amount of an asset less its estimated residual value (that is, its depreciable amount ) on a systematic basis over its useful life Useful life is defined in IAS 16 and IAS 38 as either: "(a)... the period over which an asset is expected to be available for use by an entity; or (b) the number of production or similar units expected to be obtained from the asset by an entity." Generally, the former of these two will apply, as in most cases it is more straightforward to assess useful lives by reference to time periods The definition includes the phrase 'expected to be available for use'. Thus, it is clear that the useful life includes any period after acquisition when the asset is capable of operating in the manner intended by management, but has not yet been brought into use. It is also clear from the definition that the end of the asset s useful life is not necessarily the end of its physical life. This is because the useful life is the period when the asset is used by the entity. If the entity buys an asset that has a physical life of ten years, but the entity intends to use the asset for only six years, the useful life that the entity assigns to the asset will be six years and not ten years IAS 16 and IAS 38 requires that the useful lives of property, plant and equipment and intangible assets should be reviewed at least at each year end and, if expectations are different from previous estimates, the change should be accounted for as a change in estimate in accordance with IAS 8, 'Accounting policies, changes in accounting estimates and errors'. IAS 8 requires that the effect of a change in estimated useful life should be accounted for by adjusting the depreciation charge for the current period insofar as the change affects the current period and by adjusting the charge for future periods to the extent that it affects the future periods. If any assets have been fully depreciated and are still being used these should not be depreciated again. Residual value 7.67 Depreciation and amortisation are calculated by allocating the cost or revalued amount of an asset less its estimated residual value (that is, its depreciable amount ) on a systematic basis over its useful life IAS 16 and IAS 38 defined the residual value of an asset as the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life In accordance with IAS 38 the residual value of an intangible asset with a finite useful life should be assumed to be zero, unless: 19

20 a third party has committed to purchase the asset at the end of its useful life; or there is an active market for the intangible asset; and residual value can be determined by reference to that market; and the market is likely to exist at the end of the asset's useful life Residual values should be based on prices current at the Statement of Financial Position date that is the residual value takes account of Price changes up to that date (but not future price changes) IAS 16 and IAS 38 requires that the residual values of property, plant and equipment and intangible assets should be reviewed at least at each year end and, if expectations are different from previous estimates, the change should be accounted for as a change in estimate in accordance with IAS 8, 'Accounting policies, changes in accounting estimates and errors'. IAS 8 requires that the effect of a change in residual estimated useful life should be accounted for by adjusting the depreciation charge for the current period insofar as the change affects the current period and by adjusting the charge for future periods to the extent that it affects the future periods. Land and Building Assets 7.72 Land is not depreciated, because it is considered to have an infinite life., however leased land should be depreciated over its lease term Building assets are depreciated over the period of their estimated useful lives, as determined by the District Valuers valuations. Property consists of land and building elements, and valuers will apportion the cost of the property between (depreciable) buildings and (non-depreciable) land elements. In addition buildings should be considered to determine whether they should be split into component parts Surplus land and buildings which meet the definition of noncurrent assets held for sale in accordance with IFRS 5 and should be reclassified and as such should not be depreciated Properties that are surplus to requirements but which do not meet the definition of non-current assets held for sale in accordance with IFRS 5 should continue to be revalued and depreciated in accordance with the policies above. In practice this will include properties identified as surplus which will not be available for sale until no longer in operational use. Plant and Equipment 7.76 Plant and equipment assets are depreciated over the period of their estimated useful lives. Suggested lives are provided below, which could be used unless there is evidence at an organisational level that a different life applies e.g. it may be the policy to replace vehicles every 10 years and if so 10 years would be used instead of the 7 years shown below: 20

21 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 and Fittings 5 years IT equipment 5 years Short life medical and other equipment 5 years Medium life medical equipment 10 years Long life medical equipment 15 years Assets under construction 7.77 Assets under construction are not depreciated, because depreciation is appropriate only when assets are available for operational use. However, assets that are temporarily taken out of use for refurbishment should continue to be depreciated. 21

22 Start and end dates for depreciation 7.78 A depreciation charge is calculated at the beginning of each quarter for each capital asset in the asset register on the first day of the quarter. Therefore : Depreciation is chargeable, from the beginning of the quarter following an asset s date of acquistion : Depreciation is chargeable in the quarter in which disposal of the asset takes place. 22

23 Impairments Impairments that score as DEL 7.79 Categories of impairment included in the FReM and Consolidated Budgeting Guidance that score as DEL are as follows; Loss or Damage resulting from normal business operations. All losses of, and damage to, tangible fixed assets that reduce the recoverable amount to below the book value other than those caused by a catastrophe (see above). Normal business operations covers all loss and damage to assets that result from management and staff action (or inaction), and the actions of third parties. This category includes theft. Abandonment of assets in the course of construction as a result of a management decision to abandon the construction process, i.e. management decides that it no longer requires the facility under construction and the construction costs to date are completely written off or substantially written off to reflect reduced utility. This category includes the abandonment of software assets in the course of construction. The unnecessary over-specification of assets (gold- plating) at the point at which the asset is first constructed or purchased. This category should be used where the overspecification of assets leads to an impairment either because the asset is valued at its utility value to the business, or because the over-specification cannot be reflected in the recoverable amount. Care should be taken not to impair assets as being gold plated where they are of a hig specification by necessity. For example, the high specification of embassies is in part a result of security and other factors relating to location and the needs of a representational building. The higher specification due to justified security and operational considerations should not lead to an impairment down to the value of ordinary office accommodation. The key is that the higher specification must be justifiable: if it is not an impairment should be taken. Impairments that score as AME 7.80 Annually Managed Expenditure (AME) represents current year expenditure and is largely demand led. AME impairments are similar in that they are in year and result largely through no fault or control of the budget holder (see examples below). The definition of the categories of impairments included in the FReM to score as Annually Managed Expenditure (AME) are shown below. Loss as a result of a catastrophe. Damage to non-current assets as a result of a catastrophe. The System of National Accounts (SNA93) which forms the basis of recording transactions in the National Accounts defines a catastrophe as: Such events as will be generally easy to identify. They include major earthquakes, volcanic eruptions, tidal waves, exceptionally severe hurricanes, droughts and other natural disasters; acts of war, riots and other political events; and technological accidents such as major toxic spills or release of radioactive particles into the air. Such events are very rare in the uk. Where a Department believes an impairment should be scored as a Catastrophic Loss rather than Loss or Damage resulting from 23

24 normal Business Operations it should first contact the relevant authority. For the avoidance of doubt the following are not catastrophes within the meaning of this definition: prison or street riots; loss or damage due, for example, to an ingress of water that could have been avoided by better maintenance or that resulted from relocation to a site where flooding was less likely. These are all examples of losses resulting from management action or inaction. Unforeseen obsolescence, occurring either as the result of the introduction of a completely new technology or a change in legislation rendering the asset illegal. Such events are expected to be exceptionally rare for NHS Wales bodies. All assets are subject too obsolescence. However, the rate of obsolescence tends to be category specific: e.g. IT assets suffer a faster rate of obsolescence than do buildings Other eligible AME include the following: write down to depreciated replacement cost where specialised building assets or enhancements (e.g. the construction of a new wing or capitalised refurbishment) to such assets are written down to depreciated replacement cost (DRC) following the first professional valuation after completion of the work, write downs of developed land where land is purchased for some form of social development and the cost of the land and any clean up is greater than the disposal value, changes in use where specialised assets no longer required for their original purpose are put to a non specialised use (e.g. building constructed for specialised purpose currently used as a store) or where an asset becomes permanently underused. However, impairment can result from the change of use of any asset including non-specialised assets, surplus assets -disposals where assets are identified as surplus to requirement and are planned to be disposed of, uncompensated seizures of assets by governments or institutional units, other than for the settlement of fines or taxes, for which full compensation is not provided Any proposed treatment of impairments will need to be fully supported by forecasts identifying each impairment by the property or asset to which it relates within the relevant categories highlighted above. This will be required as an initial forecast to be submitted to HSSG Finance to provide accurate AME requirements for HM Treasury via the Welsh Governments Finance Department. The timing of the capital charges exercise will be given to bodies each year by HSSG Finance when this has been agreed centrally. Impairment indicators 7.83 In assessing whether there is any indication that an asset may be impaired an entity should consider at least the following external and internal indicators indicators External sources of information, including: 24

25 A decline in the asset's market value that is significantly greater than would be expected as a result of the passage of time or normal use. Changes in market values reflect economic conditions, hence a significant fall in value is worthy of further investigation (at least to consider whether it is relevant) as it could be a symptom of another more pervasive change, for example technological change or a change in demand for the asset s output. Significant adverse changes that have taken place or are expected in the near future in the technological, market, economic or legal environment in which the entity operates or in its markets. Increases in interest rates or other market rates of return that may materially affect the discount rate used in calculating the asset's recoverable amount Internal sources of information, including: Obsolescence or physical damage affecting the asset. Significant adverse changes that have taken place or are expected in the near future in the extent to which, or in the way that, an asset is used or expected to be used. This includes the asset becoming idle, plans to discontinue or restructure the operation to which the asset belongs or the asset's disposal. It also includes reassessing the asset's useful life from indefinite to finite. Deterioration in the expected level of the asset's performance An indication of impairment does not necessarily mean there has been impairment. However, if there is an indication that an asset may be impaired the standard notes that the useful life, the depreciation method or the residual value for the asset need to be reviewed and adjusted if necessary under the appropriate IFRS (for example, IAS 16, 'Property, plant and equipment' or IAS 38, Intangible Assets ). This applies even if no impairment loss is recognised for the asset Post SoFP events may provide indications that an asset was impaired at the year end. However, if the event indicates that the impairment occurred after the year end the indicator is not taken into account. FREM deviation from IAS 16 with regard to economic impairments 7.88 In 2009/10, the FReM and NHS Manuals for Accounts required bodies to apply IAS 36 in full. This is not the case from 2010/11 onwards, where the treatment reverts to one that is closer to the UK GAAP FReM and Manuals Para of the 2010/11 FReM says: References in IAS 36 to the recognition of an impairment loss of a revalued asset being treated as a revaluation decrease to the extent that that impairment does not exceed the amount in the revaluation surplus for the same asset, are adapted such that only those impairment losses that do not result from a loss of economic value or service potential should be taken to the revaluation reserve. Impairment losses that arise from a clear consumption of economic benefit should be taken to the Statement of 25

26 Comprehensive Net Expenditure. However, to ensure that the outcome as reflected in the reserves figure on the Statement of Financial Position is consistent with the requirements of IAS 36 had this adaptation not been applied, the balance on any revaluation reserve (up to the level of the impairment) to which the impairment would have been charged under IAS 36 should be transferred to the general fund To paraphrase: On identification of an impairment loss, decide whether it is an economic loss or not. If not, apply IAS 36 taking the impairment to the revaluation reserve as far as possible, charging any excess to the current year revenue account. If the impairment is an economic loss, 100% of the fall in value is taken to the revenue account, whatever the state of the revaluation reserve. Following step 3, a transfer is made from the revaluation reserve to the General Fund or I&E reserve. An economic loss is defined as one that results from a loss in economic value or service potential The FReM does not define economic value or service potential further, but: Falls in value that result from market movements and routine asset revaluations intended to maintain fair value including the quinquennial valuation are unlikely to be economic losses (FReM refers). Physical damage will cause an economic loss, as will any other event that permanently reduces the productive capacity of an asset. Budgetary impacts 7.92 The budgetary classification of impairments (i.e. to DEL or AME) is unchanged The FReM accounting change may result in certain DEL-impacting impairments being charged to current revenue that otherwise would have been reserve movements and so the FReM change may have DEL impacts It is likely however that the bulk of additional impairments charged to the revenue account will be classified as AME, as these include: write-down to DRC on new-build; changes in use; and impairments when specialised assets are transferred from operational to available for sale prior to disposal. Reversal of Impairments 7.95 IAS 16 requires that any upward revaluation which reverses a previous downward revaluatiojn charged to revenue should be credited to revenue up to the value of the original charge. The NHS Wales organisations accounting policy for upward revaluations is as follows: 26

27 An increase arising on revaluation is taken to the revaluation reserve except when it reverses an impairment for the same asset previously recognised in expenditure, in which case it is credited to expenditure to the extent of the decrease previously charged there When assets are constructed the eligible costs of construction are capitalised in accordance with IAS16, and recorded (provided the recognition criteria in IAS16 are met) as Assets under Construction in the Statement of Financial Position at cost. This is the historic cost for the asset The FReM has withdrawn the option under IAS16 for public sector assets to be held at cost subsequent to initial recognition. Therefore in accordance with the FReM when the assets are commissioned into use, a valuation is undertaken. For specialised assets the valuation methodology is Depreciated Replacement Cost on a Modern Equivalent Asset basis Typically, this valuation results in a downwards valuation of the asset, leading to an impairment loss. The FReM has adapted IAS36 such that certain impairment losses are taken in full to the SOCNE, irrespective of whether there is a revaluation reserve for the asset. If there is a revaluation reserve, a reserve transfer for that element is required, by the FReM adapation, to the general fund The first time valuation of specialised assets is a loss requiring treatment in this manner by the FReM IAS36 is only adapted in the FReM for the recognition of economic impairment losses. It is not further adapted for subsequent movements in value Therefore IAS36 applies as follows: IAS36 (119). A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another IFRS (for example the revaluation model in IAS16). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other IFRS IAS 36(120). A reversal of an impairment loss on a revalued asset is recognised in other comprehensive income and increases the revaluation surplus for that asset. However to the extent that an impairment loss on the same revalued asset was previously recognised in profit or loss, a reversal of that impairment loss is also recognised in profit or loss On this basis, subsequent increases in value after a downward valuation would be treated in accordance with IAS16, specifically IAS16:39 and taken back to the SOCNE to the extent recognised there previously, and thereafter to the revaluation reserve IAS 16 (39). If an asset s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive income 27