Comment / Impairments flagged up as threat to control totals

Impairments of fixed assets, partly as a result of the downturn in the economy, are a growing concern for health economies around England, with one strategic health authority  identifying the issue as the ‘most significant risk’ to its control total.

A change in funding rules for 2008/09 means that trusts no longer receive impairment funding (bringing them in line with foundation trusts). Any impairments will have a negative impact on a trust’s income and expenditure position, potentially moving it into deficit.

However, this is effectively a technical problem. Impairment-driven deficits reflect accounting adjustments rather than cash expenditure and do not reflect the underlying financial position of

an organisation. Yet they can cause problems for the organisations concerned and their health economies.

First, an impairment could put a trust in breach of its statutory duty to break even. For foundation trusts, impairments are ignored – treated as exceptional items – in assessing their key financial risk rating. A similar work-around is expected for trusts. The Department of Health confirmed to Healthcare Finance that it was in discussions with auditors ‘to consider the necessary changes required to the break-even duty’.

Second, impairments could lead health economies to breach their Department-set control totals, which effectively set the surplus range expected from the economy.

A spokesman from the Department said officials were ‘working closely with the NHS regarding the impact of impairments’. He said it had already been clarified that impairments were ‘not part of the operating position of an organisation and therefore not part of the financial performance management’.

However, Healthcare Finance understands that health economies will be expected to accommodate impairments arising in 2008/09 within their control total ranges.

The North West Strategic Health Authority flagged up impairments as a growing concern in its January finance board report. Two organisations were reported as having significant deficits caused by impairments (St Helens and Knowsley, £20.5m impairment; and Wrightington, Wigan and Leigh, £9.5m). Both organisations would be in surplus without these impairments.

The report projected a reduction in the economy’s surplus at the year end compared with planned levels, although this was still within its set range. However, it said that impairments were the ‘most significant risk to the North West economy control total’. And it added that a number of trusts and PCTs had identified ‘potential impairments’ in recent revaluations.

The North West is not alone. NHS London has also identified a handful of impairments, albeit smaller,  across its economy.

The North West report also raised concerns about the wider economy. ‘Given the current economic conditions, in particular the value of land, there is a risk that asset values are significantly lower than being currently held in accounts and further impairments could therefore emerge’ it said.

It added that the risk had been raised by the Department of Health as a national issue.

‘The change in impairment funding rules mean that impairments are a growing issue for NHS bodies,’ said HFMA spokesman Chris Calkin. ‘While impairments may always present local communication challenges, this is largely a technical issue that requires a national solution.’