Feature / Finance explained: Merger accounting

Perhaps the biggest issue relating to the closure of 2010/11 accounts relates to the Transforming community services programme and the accounting treatment that should apply when a primary care trust provider arm transfers to another NHS body.

While provider arms may be set up as social enterprises, the most common model will involve the transfer of a provider arm, or aspects of those services, to acute or mental health NHS providers.

In the case of a social enterprise model, the accounting treatment is clear. International financial reporting standard IFRS 3 applies (Business combinations). The treatment is less clear where the transfer is within the NHS, for example to an acute trust or FT.

According to the Treasury’s Financial reporting manual, combining two or more public bodies or transferring functions from one part of the public sector to another, will be accounted for using merger accounting. There is no IFRS that specifically covers the requirements. Instead they are set out in the financial reporting standard FRS6 (under UK GAAP).

Different approaches

The key difference between the two approaches is that under merger accounting, financial statements for the ‘new’ body should show the combined results and financial positions as if they had always been combined. This would mean reflecting a full year’s worth of transactions regardless of when the transfer took place and involving a restatement of comparatives. The transferring PCT would similarly show its accounts as though it had never had the provider in its books.

Transferring assets would also be treated differently. Under merger accounting, assets would transfer across at the closing book value. While under IFRS, revaluation would take place before transfer, requiring any impairment to be reflected in the PCT’s books, before the new value is included in the trust’s balance sheet.

Some NHS finance managers may see merger accounting requirements as more onerous – adding to an already significant workload as the NHS pushes ahead with major reform. For trusts, starting accounts from the point at which the service is taken over may make sense. Following acquisition accounting is not, however, a straightforward option as the divesting body must revalue its assets prior to transfer and they may need help from expert valuers to do this.

What is clear is that is that a consistent approach is needed, especially as lack of consistency could lead to double counting across PCT and trust/FT accounts. Auditors have flagged the issue and the Department of Health is in talks with Treasury to allow it to sidestep the merger accounting requirements for these specific intra-NHS transfers on the basis that the costs may well exceed the benefits. A decision was expected as Healthcare Finance went to press.

Pension benefit taxes update: A number of readers contacted Healthcare Finance following last month’s ‘Finance explained’ article on pension benefit taxes asking for further details on the calculation of earned pension values. A more detailed table has been produced to explain the calculation and this is available in an updated article available on the Healthcare Finance website.