Technical / Be prepared: it’s not too soon to think about new accounting standards

Given the extreme financial pressure on finance departments at the moment, it is probably good news that the next couple of years will be quiet from the perspective of new accounting standards, writes Debbie Paterson.  However, it’s not too early to be thinking about the new accounting standards that will be applicable in 2018/19.

In particular, the new revenue recognition standard is likely to require some work, as well as discussions with colleagues outside of the finance department. 

IFRS 15 – Revenue from contracts with customers will replace the current standard,
IAS 18. The Treasury is proposing that the standard will apply to all public sector bodies from 2018/19 without amendment or interpretation. 

At first glance, the new standard seems fairly straightforward. It sets out a logical five-step approach to recognising income. However, the general consensus in the accountancy world is that it will take time and effort to implement, even if it does not change the eventual timing or amount of revenue recognised. 

In the commercial sector, the focus is on industries such as telecommunications, where contracts involve the provision of goods and services for a single payment and it is difficult to match one to the other. 

It would be easy to say that NHS contracts are annual contracts for the provision of services, where the services to be provided and the prices to be paid for them are well defined, so this standard won’t make a difference. 

That may well be the case for the contracts that are currently in place. However, by 2018/19, some of the new models of care currently being tested by vanguards may well be on stream. 

Some of these will involve long-term contracts and include payments for pathways of care or capitated payments. Ideally, the accounting issues should be considered while contracts are drafted and developed. The five step approach is as follows:

• Identify the contract(s) with a customer - This will include all NHS contracts as well as other contracts with third parties.
• Identify the performance obligations in the contract - This is what has to be done to earn the income. It could be the provision of a good or a service and it may take place at a point in time or over time.  Each performance obligation needs to be distinct, which means that it could be delivered separately. One way to think about this is whether it would have to be re-done if the service provider was changed.  So, would a pre-operative assessment be a separate performance obligation to the operation? If the assessment would need to be re-done if the provider was changed then it is not a separate obligation. There could be several performance obligations in a single contract so they all have to be identified.
• Determine the price of the transaction - This is likely to be the price set out in the contract, but it could be different if the contract includes a variable element or delivery of the contract takes place over time.  For NHS bodies, sometimes the full price is contingent on the patient being discharged and not being re-admitted to hospital.
• Allocate the transaction price to the obligations in the contract - This could be complex where a price has to be allocated to different performance obligations. NHS tariffs may not necessarily map to separate performance obligations, particularly in tariffs for a pathway such as with maternity.
• Recognise revenue when (or as) performance obligations are satisfied.

The new standard requires qualitative and quantitative information to be disclosed in the annual report and accounts – improving understanding of the nature, amount, timing and uncertainties of revenues and cashflows.

The standard requires revenue to be disaggregated and the Department of Health, in an August consultation, set out an example of likely requirements. This could involve a matrix with customers (clinical commissioning groups, local authorities, other) across the top and the types of services down the side (for example, elective, non-elective, A&E, mental health, community, private patient). 

It is possible that the Department will mandate this disclosure. Although the information may fall out of current ledger analysis, in some cases new systems/ arrangements may be needed.

Information about performance obligations, transaction prices and any significant judgements in relation to revenue recognition will also have to be disclosed.
Debbie Paterson is a technical editor with the HFMA


Technical review
The HFMA’s Provider Faculty has produced a briefing to summarise the roles and responsibilities of NHS bodies and their auditors in assessing and reporting an organisation’s ability to continue as a going concern. While it is unlikely that an NHS body will be determined not to be a going concern, this interpretation does not exempt management from undertaking a review. The briefing underlines that the review should be scheduled into audit committee meetings in the final half of the financial year, with the assessment also on the agenda of at least the final full board meeting. Members of the Provider Faculty can download a copy of the briefing from www.hfma.org.uk within the faculty resources section.

The HFMA has called for phased implementation of proposed changes to salary sacrifice schemes that would make certain benefits-in-kind subject to income tax and class 1A employer national insurance. The association said it was concerned that changes could make some existing arrangements unaffordable for the individuals involved, while leaving schemes could incur a charge. ‘Our members would strongly support phased implementation of any changes so that agreements that are already in place are not affected,’ it said in a response to the consultation, which closed during October. The association said the proposed changes would have varying impacts depending on the scheme types. However, the biggest costs would arise for car parking and IT equipment/white goods and mobile phone schemes. (See Healthcare Finance, October 2016, page 25)

The Department of Health issued further information on the agreement of balances during October. This includes an update on the month six exercise, including information for providers on sustainability and transformation fund payments. The high-level annual report and accounts plan timetable has been issued, together with the agreement of balances timetables for quarters three and four.

NHS Improvement has issued guidance on the options for structuring foundation groups, including the implications for finance. Foundation groups go further than informal agreements, such as buddying, but stop short of merger or acquisition. They are currently being piloted as part of the acute care collaboration across 13 vanguards. The guidance looks at risk sharing and roles under three structures – corporate joint ventures, contractual joint ventures and the committee in common model. The corporate joint venture model is currently limited to foundation groups that only involve foundation trusts. Foundation trusts and NHS trusts have no powers to set up legally binding joint committees, but they can both delegate to committees in common. Both types of provider can enter into contractual joint ventures that are legally binding – with current examples including pathology service joint ventures.

The HFMA has published a briefing reminding NHS charities in England and Wales that they must meet the ‘public benefit requirement’ at all times. If this is not the case, the organisation is not a charity, it says. The briefing also looks at key issues that apply to NHS charities in particular – covered in the Charity Commission’s NHS charities guidance. For example, it examines the conditions that need to apply for charitable funds to be used on services that are usually funded by the public sector. The briefing also includes an example of how one charitable fund approaches decision making in each of these areas. For example, where an NHS charity is funding a capital item, it should check the trust can fund running costs.