Guidance removes doubt over asset life used to calculate depreciation

Every year, there seems to be one issue that dominates the preparation and audit of the annual accounts, writes Debbie Paterson.  This year, it is a clarification issued by RICS to its guidance for valuers, which was published in November and applied from mid-January. 

IAS 16 requires that the residual value and the useful life of assets are reviewed at least at each financial year‑end and, as most NHS bodies use the asset lives provided by their valuer, the impact of this clarification needs to be considered by all NHS bodies.

Where the useful asset lives are revised, they are accounted for as a change in estimate in accordance with IAS 8.

The revised guidance relates to paragraphs 11 and 12 of the RICS UK valuation practice guidance application (VPGA) 1.10. These paragraphs discuss whether, and under what circumstances, the useful life of an asset for the purpose of calculating depreciation can be longer than the physical or economic life for valuation purposes. The guidance, published in November, clarifies that this can only be the case when the impact on the overall levels of depreciation and the remaining useful life will be relatively small. 

The guidance also discusses the impact of splitting assets into their component parts where different components have significantly different asset lives, which would have an impact on the asset life or valuation of the overall asset.

Some NHS bodies have been using different asset lives for the purposes of depreciation and valuations, resulting in a lower depreciation charge. While we do not know how many NHS bodies are affected by this, and to what extent, the impact of the clarification to the guidance has been raised at several HFMA committee meetings. 

The Conceptual framework for financial reporting discusses the fact that accounts are prepared using estimates and judgements. It identifies the two key characteristics of qualitative information as ‘relevance’ and ‘faithful representation’. In relation to estimates such as valuations, in practical terms, this means that accountants should review assumptions, including for valuations and depreciation, against these characteristics. 

One of the issues identified by the change in the valuation guidance is that the asset lives used for accounting and valuation purposes are not internally consistent, which makes it difficult to argue that they give a faithful representation of the asset base of the NHS body.

The role of management in relation to asset valuations is discussed in the association’s draft briefing on the valuation and accounting issues relating to property, plant and equipment.

NHS bodies need to discuss the clarified guidance with their valuers to understand the basis on which the asset lives for depreciation purposes have been calculated and whether it still meets the requirements of the RICS guidance. Even bodies that are unaffected should expect to discuss this issue with their auditors. And they should review their valuation reports for internal consistency in respect of asset lives, but also in respect of the other assumptions that have been made.

For affected NHS bodies, it is likely that the reduction in asset lives will be made in-year either as a change in estimate or as the correction of an error. Where the impact is not material, the decision may be made to not make the adjustment and leave it on the schedule of unadjusted errors. Where there has been a valuation in the year, the impact needs to be worked through the accounts.

There is unlikely to be an impact on the closing valuation of property, plant and equipment in the statement of financial position and the impact on the net surplus/deficit may also be immaterial. The impact on reporting against the control total also needs to be considered.

Debbie Paterson is the HFMA’s policy and technical manager