Auditor Guidance Note 5 (AGN 05) NHS Audit Planning · PDF fileAuditor Guidance Note AGN 05...

AGN 05 NHS Audit Planning

Issued on 17 December 2015

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Auditor Guidance Note AGN 05 – NHS audit planning

Auditor Guidance Note 5 (AGN 05)

NHS Audit Planning Version issued on: 17 December 2015

About Auditor Guidance Notes

Auditor Guidance Notes (AGNs) are prepared and published by the National Audit Office (NAO) on behalf of the Comptroller and Auditor General (C&AG) who has power to issue guidance to auditors under Schedule 6 paragraph 9 of the Local Audit and Accountability Act 2014 (the Act). AGNs set out guidance to which local auditors must have regard under Section 20(6) of the Act. The guidance in AGNs supports auditors in meeting their requirements under the Act and the Code of Audit Practice published by the NAO on behalf of the C&AG. The NAO also issues Weekly Auditor Communications (WACs) to local auditors to bring to their attention relevant information to support them in carrying out audit work. The firms that are local auditors under the Act may use WACs to update their own internal communications and reference tools.

AGNs are numbered sequentially and published on the NAO’s website. Any new or revised AGNs

are brought to the attention of local auditors through the WACs.

The NAO prepares Auditor Guidance Notes (AGNs) solely to provide guidance to local auditors in interpreting the Code of Audit Practice made under the Local Audit and Accountability Act 2014. The contents of AGNs cannot be reproduced, copied or re-published by parties other than local auditors without permission from the NAO. The AGNs are designed to assist local auditors in forming their own understanding of the requirements of the Code. Auditors are required to have regard to AGNs, and the Code explains that this means that auditors are expected to comply with the NAO’s guidance or provide a reasonable explanation as to why not. AGNs are in no way intended as a substitute for the exercise of the independent professional skill and judgement of a local auditor in deciding how to apply the NAO’s guidance or when providing explanations as to why guidance has not been followed. Local auditors should not assume that AGNs are comprehensive or that they will provide a definitive answer in every case.



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AGN 05 is relevant to all local auditors of health bodies covered by the Local Audit and

Accountability Act 2014 and the Code of Audit Practice including auditors of NHS foundation

trusts. Guidance on auditors’ work on value for money arrangements and on reporting is

published in AGN 03 and AGN 07 respectively.

Introduction

The guidance within this document is prepared to assist auditors in meeting their responsibilities as the statutory auditor of local health bodies, under the Code of Audit Practice. This AGN sets out guidance for auditors to support planning work on audits of financial statements of local health bodies.

As part of their planning process, audit teams identify changes to accounting requirements drawing on any relevant technical briefings prepared by their firms. This guidance is not intended to replace auditors’ own procedures.

Local auditors are also component auditors. The NAO group audit teams issue group instructions which local auditors need to follow. The group instructions set out requirements for local auditors to assist the NAO group audit teams in meeting their responsibilities supporting the C&AG as the statutory auditor of the bodies of which local health bodies are components.



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Contents The AGN is structured as follows: Page

Section 1: Accounting Manuals and Timetable 4

Manual for Accounts 2015/16 4

NHS Foundation Trust Annual Reporting Manual 2015/16 5

Accounts Submission Timetable 6

Section 2: Accounting Issues 2015/16 7

Part 1: All Local Health Bodies 7

Agreement of Balances 7

Annual Report 8

Better Care Fund 9

Summarisation Schedules / Consolidation Template 10

Part 2: CCGs 12

Co-commissioning 12

Going Concern – CCGs 14

Part 3: NHS Trusts and Foundation Trusts 15

Fair Value – Adoption of International Financial 15 Reporting Standard (IFRS 13)

Valuation of PPE and Treatment of VAT 16

Going Concern – NHS Foundation Trusts 18

Going Concern – NHS Trusts 19

Other Support and Raising Technical Issues or Queries on this AGN 21



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Section 1: Accounting Manuals and Timetable

Manual for Accounts 2015/16

What are the issues?

1. The Department of Health (DH) issued the Department of Health Group Manual for Accounts 2015/16 (MfA) on 6 August 2015 following its consideration by the Financial Reporting Advisory Board (FRAB).

2. The MfA is a group manual and provides principles-based guidance to NHS bodies on

how to prepare and complete their annual report and accounts. The MfA is not directly applicable to NHS foundation trusts (FTs). FTs follow guidance issued by Monitor (see paragraphs 11-15).

3. NHS England is required to issue directions to clinical commissioning groups (CCGs) in

respect of their annual report and accounts. The directions require compliance with the MfA.

4. The group-level guidance in the core MfA does not fully meet the reporting needs of

NHS trusts and CCGs. Additional appendices provide supplementary guidance for NHS trusts and CCGs in relevant chapters of the MfA.

5. The MfA focusses on DH group accounting instructions. Any further ‘interpretive’

guidance relevant to CCG accounts completion in the NHS England Group ‘Integrated Single Financial Environment’ will be issued on the NHS England Sharepoint platform. Each of the audit firms has been provided with a single log-in access to this site. Additionally, the NAO will share any relevant guidance published on Sharepoint via weekly communications.

6. Additional information relevant to NHS trusts will be issued on the FINMAN website.

7. The MfA uses the term ‘guidance’ in some cases when it appears requirements are

intended. Our understanding is that the expectation is for NHS trusts and CCGs to follow what is set out in the MfA.

Why is this important?

8. NHS trusts and CCGs are required to produce their annual accounts in line with the MfA issued by DH.

http://www.info.doh.gov.uk/doh/finman.nsf/4db79df91d978b6c00256728004f9d6b/aeda7648c62c72c680257e99004acdd6?OpenDocument

http://www.info.doh.gov.uk/doh/finman.nsf/4db79df91d978b6c00256728004f9d6b/aeda7648c62c72c680257e99004acdd6?OpenDocument

http://www.info.doh.gov.uk/doh/finman.nsf/ManualDownload?OpenView&Start=1&Count=30&Expand=1#1



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What should auditors do?

9. Auditors should familiarise themselves with the content of, and changes to, the 2015/16 MfA to support their audit planning work under ISA (UK&I) 300 Planning an audit of financial statements, and ISA (UK&I) 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment.

10. Although the NAO will bring auditors’ attention to the accounts consolidation

templates, annual governance statement and other guidance when it is received, auditors may also wish to establish arrangements to obtain copies locally.

NHS Foundation Trust Annual Reporting Manual 2015/16

What is the issue?

11. Monitor is required to issue directions to FTs in respect of their annual report and accounts. The directions require compliance with the NHS Foundation Trust Annual Reporting Manual (FT ARM).

12. Monitor issued the FT ARM 2015/16 on 30 November 2015 following a consultation

process.

13. Monitor ensures that the FT ARM is consistent with the principles of the MfA. Where this manual allows FTs to account for items differently from the MfA, Monitor takes steps as part of the consolidation of FT accounts to ensure that the consolidated position is consistent with the requirements for the DH group accounts.


14. All FTs must publish annual reports and accounts to allow scrutiny of the year’s operations and outcomes. Monitor’s FT ARM outlines the process FTs should follow when producing and submitting these documents.


15. Auditors should familiarise themselves with the content of, and changes to, the 2015/16 FT ARM to support their audit planning work under ISA (UK&I) 300 Planning an audit of financial statements, and ISA (UK&I) 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment. Changes are listed in the consultation document, the consultation response document, and are also shown in bold italics in the FT ARM itself.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/480820/FTARM_2015-16_FINAL.pdf



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Accounts Submission Timetable


16. NHS trusts, FTs and CCGs are required to submit draft statements to their auditors and to DH, Monitor, and NHS England respectively by 9 am on Friday 22 April 2016.

17. FTs are required to submit audited accounts and the final text of the annual report to

Monitor by noon on Friday 27 May 2016.

18. CCGs are required to submit their audited accounts to NHS England by noon on Friday 27 May 2016.

19. Auditors are required to submit audited NHS trust accounts to DH by 5pm on Thursday

2 June 2016.

20. DH has published the full accounts timetable on its FINMAN website.

21. Monitor has issued its ‘Timetable for Accounts 2015/16’ in a letter to FT directors of finance. This is consistent with the DH timetable, but provides details of additional submissions at the year end for FTs. Any required changes to the process will be published on Monitor’s Financial accounting guidance updates website.


22. It is important that submissions are made in line with the timetable to ensure that the DH and sector sub-consolidations can be completed and support the achievement of the Departmental pre-recess group reporting target.

23. As in previous years, a number of the risks to achievement of the timetable can only be

managed effectively through local engagement. Auditors have an important role in helping to identify local risks to meeting submission dates, communicating these risks to management and those charged with governance, and in agreeing timetables and actions with NHS trusts, FTs and CCGs consistent with meeting relevant target dates.


24. Auditors should note the submission dates for audited NHS trust, FT and CCG accounts and consider the impact on their resource planning for the audit of the financial statements.

http://www.info.doh.gov.uk/doh/finman.nsf/4db79df91d978b6c00256728004f9d6b/baff9547ddb41be580257ecb00579403?OpenDocument

https://www.gov.uk/government/publications/nhs-foundation-trusts-financial-accounting-guidance/financial-accounting-guidance-updates



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Section 2: Accounting Issues 2015/16

Part 1: All Local Health Bodies

Agreement of Balances

What is the issue?

25. DH is required to consolidate the accounts of all organisations falling within the accounting boundary. The agreement of balances process takes place three times a year and aims to identify all income and expenditure transactions, and payable and receivable balances, that arise from the provision of goods and services between component bodies in order to eliminate these transactions and balances on consolidation. Monitor and NHS England also eliminate transactions and balances between their component bodies in preparing their sector specific consolidated accounts.


26. The exercise completed at the year-end (month 12) contributes directly to the year-end production of the FT sector, NHS England and DH consolidated final accounts.

27. There are a number of arrangements between bodies that can cause complications for

this process, including the Better Care Fund, lead commissioning and CCG co-commissioning.

28. Auditors complete work on agreement of balances as part of their work on the

financial statements audit and as part of the work under the NAO group instructions.


29. Auditors should work with health bodies to help ensure that bodies engage with the process and understand its purpose. Auditors should engage at an early stage to discuss the level of evidence required to substantiate balances.

30. Auditors should discuss the accounting treatment of the Better Care Fund, co-

commissioning and lead commissioning arrangements with audited bodies to ensure there is consistency of treatment between participating bodies.



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31. Decisions concerning net and gross accounting treatments, made by NHS bodies,

should be considered against the requirements of IAS 18 Revenue, (see paragraphs 3.25-3.27 of the MfA).

Annual Report

What is the issue?

32. NHS bodies are required to publish a single document containing the annual report and accounts. The Government Financial Reporting Manual (FReM) has made significant changes to the format of the document for 2015/16 which are reflected in the MfA and the FT ARM.


33. There are a number of changes to the format and content of the annual report. The annual report should include a performance report and an accountability report, each of which must include a number of specific elements as set out in the MfA or FT ARM.

34. Certain elements of the annual report are subject to audit. These comprise:

salary single total figure table;

pension benefits table;

payments for loss of office;

payments to past senior managers;

fair pay multiple disclosure;

exit packages; and

analysis of staff numbers.

35. Auditors are also required to review the information within the annual report for consistency with other information in the financial statements.


36. Auditors should familiarise themselves with the revised guidance for the annual report in the MfA or FT ARM as appropriate.

37. Auditors should engage in early discussions with their NHS bodies to ensure the body

is prepared for the changes to the annual report and is aware of the information needed to comply with requirements.



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Better Care Fund

What is the issue?

38. The Better Care Fund (BCF) came into operation on 1 April 2015 for the 2015/16 financial year, with £3.46 billion of NHS England’s funding to CCGs ring-fenced for the establishment of the fund. To administer the fund, CCGs were required to establish joint arrangements with local authorities to operate a pooled budget to deliver more integrated health and social care. Guidance on accounting for the BCF is included within the MfA Chapter 3 – Annex 1 Accounting for the Better Care Fund. The final FT ARM will include a reference to this annex in the MfA.


39. The Care Act 2014 requires a pooled fund to be established between CCGs and local authorities in the form of a section 75 agreement. BCF is likely to be material to most CCGs, and it will also potentially impact on NHS trusts and FTs as providers.

40. The MfA refers to the ‘model’ BCF agreement as a pooled budget with joint control,

following IFRS 11 Joint Arrangements, with each member accounting for its share of income, expenditure, assets and liabilities. However, auditors should be aware that there may be other arrangements in place.

41. The MfA also states that ‘local BCF arrangements may be complex and varied,

involving a number of valid commissioning and accounting arrangements that raise risks of misunderstanding, inconsistencies and confusion between members of a BCF pooled budget internally and between commissioners and providers’.

42. The MfA identifies that the complex and varied nature of arrangements pose a risk to

both NHS England and DH consolidated accounts, particularly where transactions and balances within the groups are not consistently treated and recorded and so cannot be properly eliminated in national consolidations.

43. Pooled budget arrangements do not constitute a delegation of statutory

responsibilities, which are retained by the CCG governing body and the relevant local authorities. Governance arrangements will need to meet the needs of all the parties involved and arrangements will need to be appropriately considered within the annual governance statement.



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44. Auditors should familiarise themselves with the MfA guidance on accounting for BCF transactions and be aware that a number of different arrangements may be in place, which should be reviewed against the requirements of IFRS 11 Joint Arrangements.

45. The nature of the arrangements may present a number of audit risks which auditors

will need to consider as part of their planning process. Auditors will need early discussions with CCGs to determine:

how the funds will operate, including the processes in place to ensure the information requirements of the parties involved are met, particularly financial reporting timing differences between NHS bodies and local authorities;

that the arrangements in place have been considered against the requirements of relevant accounting standards and that the financial reporting implications of the arrangements, including gross or net accounting treatments, are fully agreed and understood;

that planned disclosure of pooled budget arrangements in line with IFRS 12 Disclosure of Interests in Other Entities is appropriate;

that governance issues are appropriately considered and reported in the annual governance statement; and

whether to consider the implications for auditor reporting if a section 75 agreement is not in place.

Summarisation Schedules / Consolidation Template

What is the issue?

46. In addition to the statutory annual report and accounts produced by each entity, NHS bodies need to communicate the same data, with further analysis to permit consolidation, to DH, NHS England or Monitor in a standard format that can be automatically processed.


47. These schedules form the basis of the group consolidation process. Differences are time consuming to resolve and delay consolidation at the group level. It is important that differences between the accounts and consolidation schedules are highlighted to the audited body on a timely basis, and there are risks to auditors arising from not identifying and reporting differences between summarisation / consolidation schedules and the statutory accounts.



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48. In line with the Code of Audit Practice, auditors should, having regard to group audit instructions issued by the NAO, report on the consistency of the schedules or returns with the audited body’s financial statements for the relevant reporting period. This should be done using the final audited accounts and final schedules, making sure that all audit adjustments are appropriately reflected, and where relevant, disclosure notes are consistent.



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Part 2: CCGs

Co-commissioning


49. In May 2014 NHS England invited expressions of interest from CCGs to take an increased role in the commissioning of primary care services. Guidance for CCGs on the operation of co-commissioning was published in November 2014 in Next steps towards primary care co-commissioning. For 2015/16, the scope of primary care co-commissioning is general practice services only.

50. Three models for co-commissioning arrangements have been developed:

Model 1 – CCGs collaborate more closely with area teams and participate in discussions about all areas of primary care. CCGs do not have any responsibility for financial decision making.

Model 2 – CCGs assume joint commissioning responsibilities with the NHS England area team through a joint committee or ‘committee in common’. Within this model CCGs also have the option to pool funding for investment in primary care services. The Legislative Reform (Clinical Commissioning Groups) Order 2014 amends sections 14Z3 and 14Z9 of the NHS Act 2006 (as amended by the Health and Social Care Act 2012), enabling CCGs to form either a joint committee or ‘committees in common’ with the NHS England area team to jointly commission primary medical services.

Model 3 – CCGs assume full responsibly for commissioning general practice services.

51. In response to the invitations to express an interest in co-commissioning over 70

percent of CCGs are taking on an increased role in the commissioning of GP services. The NHS England website includes a list of CCGs participating in co-commissioning and the model selected in each case.


52. Depending on the level of participation, there will be different accounting treatments required:

Model 1 will not result in any changes for CCGs.

Under Model 2, CCGs and area teams may consider forming joint committees or ‘committees in common’ to jointly commission primary medical services.

http://www.england.nhs.uk/commissioning/wp-content/uploads/sites/12/2014/11/nxt-steps-pc-cocomms.pdf

http://www.england.nhs.uk/commissioning/wp-content/uploads/sites/12/2014/11/nxt-steps-pc-cocomms.pdf

http://www.legislation.gov.uk/ukdsi/2014/9780111111789

http://www.england.nhs.uk/commissioning/pc-co-comms/ccgs-arrangements/



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Under Model 3, CCGs are responsible for accounting for the costs of commissioning decisions. These are captured by NHS England and costs will be journaled direct to CCGs.

53. The MfA does not contain any specific guidance on accounting for co-commissioning

and CCGs will need to refer to applicable accounting standards including IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities.

54. There are risks to both the NHS England and DH consolidated accounts if transactions

and balances within the NHS are not consistently treated and recorded and cannot be properly eliminated in national consolidations.

55. There is the potential for real or perceived conflicts of interest. General practioners, as

members of a CCG, could be involved in commissioning services in which they could potentially have a financial interest. NHS England published Managing Conflicts of Interest: Statutory Guidance for CCGs in December 2014. This is a is a national framework for handling conflicts of interest in CCGs, strengthening previous guidance in recognition of the impact of co-commissioning.


56. Auditors should engage in discussions with CCGs to establish what, if any, co-commissioning agreements have been entered into. The nature of the arrangements may present a number of audit risks which auditors will need to consider as part of their planning process. Auditors will wish to engage in early discussions with CCGs to consider:

for Model 2 – the arrangements in place for joint commissioning; and

for Model 3 – the arrangements in place for CCGs to obtain assurance over the co-commissioning expenditure from NHS England. Auditors should note that the systems which support these costs are complex and discussions are currently underway with NHS England in respect of obtaining relevant ISAE 3402 reports.

57. Auditors will need to be mindful of the potential for conflicts of interest and discuss

arrangements with their CCG, including any additional disclosures in respect of related parties.

https://www.england.nhs.uk/wp-content/uploads/2014/12/man-confl-int-guid-1214.pdf

https://www.england.nhs.uk/wp-content/uploads/2014/12/man-confl-int-guid-1214.pdf



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Going Concern – CCGs


58. There are continuing financial pressures within the sector, with some CCGs requiring additional financial support. However, paragraphs 3.28 to 3.32 of the MfA draw attention to the Treasury FReM and the interpretation of going concern for the public sector, which should be considered by management when applying paragraphs 25 to 26 of IAS 1 Presentation of Financial Statements. The Treasury 2015/16 FReM, paragraph 6.2, interprets IAS 1 by emphasising that the continuation of the provision of the service is the important determinant of the basis of preparation of the financial statements.

59. Continuation of the provision of services, as evidenced by inclusion of financial

provision for that service in published documents, is normally sufficient evidence for producing accounts on a going concern basis.

60. Paragraph 2.13 of the MfA requires CCGs to include in the overview section of the

performance report of the annual report ‘an explanation of the adoption of the going concern basis where this might be called into doubt (e.g. by the issue of a report under Section 30 of the Local Audit and Accountability Act 2014)’.


61. While public sector bodies, including CCGs, are generally considered to be going concerns for the purposes of preparing financial statements, CCG management needs to consider the requirements of IAS 1, the FReM and MfA in determining whether additional disclosures are required.


62. Auditors should consider management’s assessment of going concern as part of their work under ISA (UK&I) 570 Going Concern and whether any required disclosures in accordance with paragraph 2.13 of the MfA are included within the annual report.

63. Auditors should consider the adequacy of any disclosures and the impact on their

opinion, should these be inadequate.

64. Auditors should also be aware that CCGs have annual statutory expenditure limits and breaching those limits will result in the qualification of the auditor’s regularity opinion.



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Part 3: NHS Trusts and Foundation Trusts

Fair Value – Adoption of International Financial Reporting Standard (IFRS) 13

What is the issue?

65. The International Accounting Standards Board (IASB) issued IFRS 13 Fair Value Measurement in May 2011. This standard applied to the private sector for accounting periods beginning on or after 1 January 2013. It defines ‘fair value’ and provides details of acceptable valuation methods. From 2015/16 IFRS 13 has been adopted without adaptation into the HMT FReM. However, IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets have been adapted and interpreted for the public sector context which limits the circumstances in which a valuation is prepared under IFRS 13.

66. IFRS 13 also applies to CCGs but is likely to have a greater impact at NHS trusts and FTs.


67. Assets which are held for their service potential (i.e. operational assets) and are in use, continue to be measured at current value in existing use. For non-specialised assets this 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. The valuation approach for these assets is unchanged.

68. Under the FReM assets that are surplus should be valued at fair value using IFRS 13,

unless there are restrictions in place which would prevent access to the market at the reporting date. In such cases current value in existing use valuations will continue to apply.

69. Management will need to assess whether there is a clear plan to bring the asset back

into use as an operational asset at some future time. In this case, the asset is not surplus and the current value in existing use should be maintained. Otherwise, the asset should be assessed as being surplus and valued under IFRS 13.

70. Assets that are not held for their service potential continue to be valued in accordance

with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations or IAS 40 Investment Property depending on whether the asset is actively held for sale. Assets that are considered surplus, with no restrictions on sale, and do not fall within the scope of IFRS 5 or IAS 40, should be valued at fair value under IFRS 13.



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71. For most property, plant and equipment held by NHS bodies there will not be a significant impact. Auditors should be aware of the changes with the introduction of surplus assets detailed above.

72. Auditors should discuss with bodies whether additional valuations are required and

that any changes to disclosures in the financial statements have been considered.

73. Auditors should also be aware of the impact of IFRS 13 on other assets and liabilities valued at fair value.

Valuation of PPE and Treatment of VAT

What is the issue?

74. Auditors have brought to our attention that some NHS trusts and FTs are considering revaluing PFI assets net of VAT on the basis that it is recoverable (HMRC allows VAT to be recovered on PFI schemes). Auditors have also noted that there is a risk that the application of this approach may vary across organisations and that there is the potential for a significant impact on valuations.


75. If PFI assets are revalued net of VAT, this will reduce asset valuations and consequently also reduce depreciation and PDC (Public Dividend Capital) charges.

76. The MfA chapter 4 annex 7 (2015/16 FT ARM Chapter 3 paragraph 5.5-5.6) includes

the relevant guidance on property valuations. This requires the Modern Equivalent Asset valuation approach to be followed for specialised properties, e.g. hospital buildings, when applying depreciated replacement cost (DRC) valuations. These require input from an external valuer in line with the RICS Valuation – Professional Standards (Red Book), and should follow the ‘instant build’ approach.

77. The 2015/16 MfA does not include direct requirements on how VAT should be treated.

However, DH issued FAQ 1 in 2010/11 which referred to this aspect. FAQ 1 of 2010/11 asked trusts to ‘ensure VAT is included in any valuation [for PFI assets] on the same basis as for non PFI assets’. But, auditors will wish to be aware that the DH regards FAQs as being applicable to the year in respect of which they are issued. Therefore, although FAQ 1 provides a starting point for trusts’ consideration, DH may need to



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issue a further FAQ in respect of 2015/16. We will alert auditors to this if DH issues a further FAQ.

78. For NHS trusts, the VAT basis is set out in Note 1.27 of the most recent version of the

NHS trust example accounts (2014/15) which the MfA states must be used (paragraph 4.23 of the MfA). Note 1.27 states ‘where output tax is charged or input VAT is recoverable, the amounts are stated net of VAT’. This suggests, where recoverable, VAT should be excluded.

79. For FTs, the VAT basis is set out in Note 14 of Annex 1 to Chapter 3: Example IFRS

Accounting Policies of the 2015/16 FT ARM. This annex provides example accounting policies, which are not mandated. They should be adapted to fit the circumstances of each organisation. However, FTs are required to confirm in their consolidation returns if they have deviated from the example policies.

80. Note 14 states ‘irrecoverable VAT is charged to the relevant expenditure category or

included in the capitalised purchase cost of fixed assets. Where output tax is charged or input VAT is recoverable, the amounts are stated net of VAT’. This requires that, where recoverable, VAT should be excluded.

81. The Red Book, referenced in Chapter 4 Annex 7 of the MfA (paragraph 5), contains a

chapter on the DRC Method of Valuation for Financial Reporting. Paragraph 8.14 of the Red Book states that in relation to calculating the cost of buildings of a specialised nature ‘allowance for VAT is made only where this is irrecoverable’.

82. Taking the above into account, it may be reasonable to value assets initially provided

under PFI arrangements net of VAT.


83. Auditors will wish to consider, at relevant NHS trusts and FTs, whether it is reasonable to value assets initially provided under PFI arrangements net of VAT. This will include evidence that any VAT charged is recoverable.

84. If existing assets were not funded through PFI, auditors may wish to seek additional

assurance over any assumptions made in reaching this conclusion.

85. A key element of these discussions will be consideration of how the service provision would be reprovided, and how likely it would be that the asset would be reprovided under a PFI scheme. This will include consideration of the terms of existing schemes.



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86. The Red Book highlights the increased level of reliance placed by valuers on their

clients in respect of DRC valuations: ‘with specialised assets the valuer may have to place greater reliance on information provided by the client, or its other advisers, than would be the case with more conventional assets’. Auditors should have regard to this point when seeking such assurances, under ISA (UK&I) 620 Using the work of an auditor’s expert, e.g. by requesting details of any assumptions made by the valuer based on discussions with the audited body.

Going Concern – NHS Foundation Trusts


87. There are continuing financial pressures within the provider sector, with FTs and NHS trusts reporting a year to date deficit of £1.6bn for quarter 2. The FT ARM para 7.15 states ‘there is no presumption of going concern status for NHS foundation trusts. Directors must decide each year whether or not it is appropriate for the NHS foundation trust to prepare its accounts on the going concern basis, taking into account best estimates of future activity and cash flows’.

88. IAS1 Presentation of Financial Statements (paragraphs 25 to 26) requires management

to assess the body’s ability to continue as a going concern when preparing the financial statements. The Treasury 2015/16 FReM, paragraph 6.2, interprets IAS 1 in the public sector context by emphasising that the continuation of the provision of the service is the important determinant of the basis of preparation of the financial statements. The FT ARM requires FTs to be aware of this interpretation in their consideration.

89. Paragraph 3.20 of the FT ARM requires the accounts of an FT to be prepared on a

going concern basis unless ‘management either intends to apply to the Secretary of State for the dissolution of the NHS foundation trust without the transfer of the services to another entity, or has no realistic alternative but to do so’.

90. Paragraph 3.21 of the FT ARM requires ‘where management are aware of material

uncertainties in respect of events or conditions that cast significant doubt upon the going concern ability of the NHS foundation trust, these should be disclosed’.

91. Any material uncertainties should be disclosed in both the annual report and the

accounts.



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92. Going concern considerations should separate the future of the FT itself from the likely continuation of the services it provides. There is a distinction between the going concern position of the FT and the basis for the preparation of its accounts.

93. The NHS Foundation Trust Code of Governance, paragraph C.1.2, requires FTs to

disclose whether or not the financial statements have been prepared on a going concern basis and the reasons for this decision, with supporting assumptions or qualifications as necessary within the performance report.


94. Auditors should consider the requirements of ISA (UK&I) 570 Going Concern and obtain evidence that management has considered going concern in preparing the accounts, that management’s assumptions are appropriate and any material uncertainties have been disclosed.

95. Auditors may wish to consider the implications for their audit report if they are aware

of any material uncertainties. While the accounts may continue to be prepared on a going concern basis by the body if services are to continue, the auditor may decide to include an ‘other matter’ or ‘emphasis of matter’ paragraph to highlight the issue.

96. Auditors should consider the impact of going concern issues in their audit report,

where this has been identified as a significant risk.

Going Concern – NHS Trusts


97. There are continuing financial pressures within the provider sector, with FTs and NHS trusts reporting a year to date deficit of £1.6bn for quarter 2 and many NHS trusts requiring additional financial support. However, paragraphs 3.28 to 3.32 of the MfA draw attention to the Treasury FReM and the interpretation of Going Concern for the public sector, which should be considered in applying paragraphs 25 to 26 of IAS 1 Presentation of Financial Statements. This standard requires management to assess the body’s ability to continue as a going concern when preparing the financial statements. The Treasury 2015/16 FReM, paragraph 6.2 interprets IAS 1 by emphasising that the continuation of the provision of the service is the important determinant of the basis of preparation of the financial statements.



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98. Continuation of the provision of services, as evidenced by inclusion of financial

provision for that service in published documents, is normally sufficient evidence for producing accounts on a going concern basis.

99. Paragraph 2.13 of the MfA requires NHS trusts to include in the overview section of

the performance report of the annual report ‘an explanation of the adoption of the going concern basis where this might be called into doubt (e.g. by the issue of a report under Section 30 of the Local Audit and Accountability Act 2014)’.


100. While public sector bodies, including NHS trusts, are generally considered to be going concerns for the purposes of preparing financial statements, NHS trust management need to consider the requirements of IAS 1, the FReM and MfA in determining whether additional disclosures are required.


101. Auditors should consider management’s assessment of going concern as part of their work under ISA (UK&I) 570 Going Concern and that any required disclosures in accordance with paragraph 2.13 of the MfA are included within the annual report.

102. Auditors should consider the adequacy of any disclosures and the impact on their

opinion, should these be inadequate.



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Other Support and Raising Technical Issues or Queries on this AGN

103. Auditors in firms should raise queries within the firm, in the first instance, so that the relevant technical support service can consider whether to refer queries to the NAO’s Local Audit Code and Guidance (LACG) team by e-mailing [email protected].

104. Information supporting auditors is available on the LAGC extranet. Updates will be

communicated through the Weekly Auditor Communication (WAC). If there is a need for further statutory guidance during the year, the NAO may issue an addendum to this AGN.

105. The NAO also engages with the firms through its Local Auditors’ Advisory Group

(LAAG) and supporting technical networks to consider any emerging regime-wide technical issues on a timely basis. Auditors should follow their in-house arrangements for bringing significant emerging issues to the attention of their supplier’s representative on LAAG or the relevant technical network.

mailto:[email protected]

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