Pre-accounts briefings: practical impact of new accounting standards
Both the provider and commissioner month 9 submissions included disclosures for the new standards. Feedback from NHS Improvement and NHS England was that there is room for improvement in the quality of the completion of these returns. During the recent HFMA pre-accounts planning conferences, NHS Improvement indicated that around 40% of providers had not yet determined the impact of the new standards. Clearly, there is work to do before the year-end submission.
As income-generating organisations, the implementation of IFRS 15 – Revenue from contracts with customers – is expected to affect provider bodies more than commissioners. The pre-accounts planning conferences focused on what the implementation of the standard will mean in practical terms. The key messages were:
Auditors will expect providers to have analysed all their income streams against the five-step process set out in the new standard.
The Department of Health and Social Care and NHS Improvement have reviewed the standard NHS contract against the accounting standard. The resulting paper should be reviewed by each NHS body to ensure that any local amendments to the standard contract have been taken into account.
It was suggested that this review also sets out a sensible approach for NHS providers to take to all of their other income streams.
Research income is a particular concern as there are a number of different arrangements in the NHS and it is not yet clear whether any of these will affect the amount of income recognised each year.
Unsurprisingly, the work done to date on the new standards has focused on year one adoption and whether there will be an impact on the financial position in 2018/19.
At the conferences, NHS bodies were challenged to consider whether they have done enough work on embedding these new standards into their systems. Any new income streams or contracts need to be considered against the five-stage process – this means early engagement and training for staff who will be negotiating and agreeing those contracts.
The main impact of IFRS 9 – Financial instruments – is likely to be in relation to expected credit losses. In the NHS, the standard will be applied using a simplified model. This considers lifetime expected credit losses, rather than using the three-stage process set out in the accounting standard.
It is suggested that a provision matrix is used to determine whether there should be any provisions for expected credit losses – again, both NHS Improvement and NHS England reported room for improvement in submissions.
The most difficult area in the NHS will be the impact of these two new standards on agreement of balances. There has always been a tension between the amount of income recognised and the amount that has been provided for as a ‘bad debt’.
The new standards provide a much clearer framework for assessing what can be recognised as income and what should be recognised as an expected credit loss. But, as always, there is a grey area between the two. For NHS bodies, the guidance from the DHSC remains clear – it is not expected that there will be impairments of intra-NHS balances as these balances are not expected to be irrecoverable.
This is because it is assumed that as part of the IFRS 15 income recognition assessment, only income to which the entity is expected to be entitled will be reflected in the accounts. Year-end negotiations mean that sometimes the amount to which the entity considers it is entitled and the amount it actually expects to receive may be different amounts. It is expected that this tension will be an area for judgement, which will be of interest to most auditors at the year end.
Debbie Paterson is HFMA policy and technical manager
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