Feature / Finance explained

THE AUDIT COMMISSION’S report on NHS financial performance in 2010/11 identified ‘at least 16’ NHS bodies receiving ‘additional contractual payments’ that were recorded as income and improved the financial position in those organisations.

The commission said this type of support to both NHS trusts and PCTs – often to cover strategic change or provide financial support and provided by strategic health authorities or other primary care trusts – was not required to be reported separately in the financial statements. It therefore had the impact of obscuring the underlying financial health of an organisation.

Before NHS trusts were moved outside the resource accounting and budgeting (RAB) system, brokerage – whereby one trust lent money to another – was relatively commonplace at year end. Although the money was repayable, it was actually recorded as income, and had the tendency to hide the real financial position of the trust.

Current system

A new system of working capital loans was introduced to improve transparency. Analysis of the Audit Commission’s report suggests that financial support can now be delivered in a number of ways, some of which are more transparent than others.

For a start, a trust could overspend and report a deficit. It could then take out a working capital loan to deal with the consequences of this overspend (ensuring it can still pay its bills). The financial difficulties are plain to see on the statement of comprehensive income and the loan is clearly identified on the statement of financial position. Some £34m of new loans were issued in 2010/11 to four trusts.

In exceptional cases , public dividend capital is still issued to provide cash support, where trusts are unlikely to be able to generate surpluses to repay a loan. As with capital PDC, this would attract a dividend payment.

However, the Audit Commission has also highlighted the additional contractual payments. These payments are non-repayable, are recorded solely in the statement of comprehensive income and are not separately identified.

The commission did, however, reveal that such support to NHS trusts amounted to £90m last year – drawing on information released by the Department of Health in May, following a freedom of information request.

There are no details about sums that were distributed to overspending PCTs from underspending PCTs – often being funded out of funds lodged with strategic health authorities.

One final source of support could come in the form of grant funding. Such funding would also be reported in the statement of comprehensive income (along with any associated expenditure) and have an impact on the reported bottom line. This would be identifiable by an adjustment to the government grant reserve on the statement of financial position.