Technical / Is it all change for valuation of property, plant and equipment?

Originally, valuations were undertaken every five years by the Valuation Office, which was engaged centrally to undertake the exercise. Indexation was applied in the years between valuations and the whole exercise was largely arithmetical.

Over time, as a result of NHS restructuring and the move to international financial reporting standards – as well as changes to auditing standards and regulation of audit work – the process of engaging valuers, undertaking the valuation and auditing that valuation has changed.

In England, NHS bodies now engage their own valuers and, together, finance teams and valuers make the judgements that underpin the valuation. Due to the materiality of the valuations, auditors also engage valuers to meet the requirements of auditing standards. The whole process has become burdensome, both in terms of time and money.

As a result, last year the Treasury undertook a thematic review of non-investment asset valuations. As part of that review, a detailed survey was undertaken across central government, including the NHS and local government. The review found there was a case for changing the way that property, plant and equipment, and intangible assets, are valued in the public sector.

In March 2023, the Treasury published a consultation paper on changes that will affect the adaptations and interpretations for the public sector of international accounting standard IAS16 Property, plant and equipment and IAS 38 Intangibles.

The consultation sets out four options, but proposes that option three is adopted:

• Option 1 is to transition to the historical cost model
• Option 2 is to continue with the revaluation model, but hold all assets at fair value
• Option 3 is to refine the valuation method based on the asset category (see table).

Option 4 is to be more prescriptive about the frequency of revaluation:

• Either a periodic reset of deemed cost to current valuation
• Or to continue on the current valuation basis, or the basis proposed in option three, but prescribe that the valuation should take place every five years.

The Treasury is now reviewing the consultation responses from preparers of accounts, auditors and valuers as well as representative bodies such as the HFMA.

It is discussing the practical application of the proposed changes as well.

If these proposals are adopted, then the consultation suggests that they would be implemented from 1 April 2025.

However, additional guidance will be required, both for the preparers of accounts and their auditors. It is likely that judgements will still need to be made and the numbers involved will still be material.

Part of the consultation process is understanding what the valuations are used for and what the impact of changing the process will be on entities’ financial position and the funding regime going forward.

It is also clear that understanding the audit regime is critical – auditors will still need to audit the valuation and the audit regulators will need to be content that the work that the auditors undertake meets the requirements of the auditing standards.

The next step in this process is another consultation on transition and implementation guidance later this year.

NHS bodies should engage with that consultation and highlight any unintended consequences of the proposals as well as practical implementation issues.

Debbie Paterson is the HFMA’s senior technical manager