1. Meeting the requirements of IAS 16 - Componentisation
NHS Scotland
Meeting the requirements of IAS 16 - Componentisation

2. Agenda for the Session Brief background to the issue
The revised methodology
Practical implications of implementing the methodology
Dealing with the audit process
Engagement with the SGHD
The way forward – capital budgets in 2011/12 and beyond
PwC engagement
Questions and discussion
Meeting the requirements of IAS 16 - Componentisation
January 2011

3. Background to the issue - IFRS
The introduction of IFRS accounting into the NHS, particularly International Accounting Standard (IAS) 16, prompted a fundamental examination of existing accounting policies and accounting interpretations
IAS 16 advocates the separate identification and depreciation of asset (building) components that have different expected lives e.g roof, lifts, electrics etc.
A number of Health bodies in England were already analysing the method and measurement of asset lives, particularly buildings
Meeting the requirements of IAS 16 - Componentisation
March 2011

4. Background to the issue – NHS Scotland
The issue was picked up by NHSGG&C and PwC was engaged to perform a review of the issue
It became clear that improvement was required in the current methodology as assets (buildings) were being depreciated over lives (e.g 30 years) that did not reflect the period to which the Board derived benefit from it (e.g 70 years)
As such alternative methodologies were identified with the remit of;
more accurately reflecting the period over which the Board derives economic benefit from a building;
providing the Board with a more meaningful asset register and depreciation calculation;
assisting the Board in the future when it is considering the capital or revenue treatment of any monies spent on upgrading parts of buildings
Meeting the requirements of IAS 16 - Componentisation
March 2011

5. The most suitable alternative Methodology
Four alternative methods were identified. The most suitable method (“Method 4”) takes better account of the period the organisation actually uses a building (e.g 70 or 80 years)
Method 4 is an adaptation of the current methodology (i.e not a new method per se). It takes account of the fact that regular maintenance/preservation (revenue) expenditure is made on the “shorter-life” components e.g internal doors, floor coverings, wall finishings
Due to this maintenance/preservation expenditure, these “shorter life” components can be assumed to last as long as the building itself – assumed by the professional valuers to be 70 or 80 years, and can also be depreciated over this period
Meeting the requirements of IAS 16 - Componentisation
March 2011

6. Benefits of alternative Method 4
As a result, the annual depreciation charge is smoother and more consistent in terms of annual charge, thereby more “faithfully reflecting the most accurate pattern of consumption” (IAS 16 Para 46)
And the overall life of the building is now better defined in terms of the period to which the Board will derive economic benefit from the asset
Annual depreciation charges are likely to reduce by 8-12%
Meeting the requirements of IAS 16 - Componentisation
March 2011

7. Practical implications of implementation
Ensuring early engaging with your valuers and the identification of assets and components
Engaging early with your valuers and completing assessments of useful lives based on revised methodology (not values) at 1 April 2010
Determining the capital/revenue split for expenditure recorded in- year 2010/11
Reversing out in-year 2010/11 depreciation and posting numbers based on revised methodology
PFI assets – no impact on PFI models, no change until decision to buy
Determining the detail for the asset register and or supporting schedules - and updating
Meeting the requirements of IAS 16 - Componentisation
March 2011

8. Dealing with the audit process
Early engagement and discussion on the methodology – ensure no local issues on interpretation
Ensure appropriate level of information from the valuers – including the basis of assumptions
Comprehensive working papers and supporting information
Reconciliation of asset register to general ledger and accounts
Appropriate disclosure in the accounts – financial commentary and notes
Meeting the requirements of IAS 16 - Componentisation
March 2011

9. Engagement with the SGHD
Funding cover is currently provided in non-core revenue for depreciation. Where there is a revision to the depreciation charge, the difference will be transferred from non-core revenue to core revenue. Boards will need to budget accordingly in and future years for any transfer to core revenue.
The exception to this is for PFI schemes, where depreciation is currently included within the IFRS revenue PFI allocation. As funding for this is provided outside the department expenditure limit, any potential variance on current estimates provided to the SGHD will be managed centrally.
Meeting the requirements of IAS 16 - Componentisation
March 2011

10. Way forward – capital budgets
Patterns of future maintenance/preservation spend will remain the same as the current method – replacing the “shorter life” components will be expensed to revenue, and the “medium/longer” life components will be charged to capital
Due to the undertaking to maintain/preserve the “shorter life” components, auditors may seek assurances from the Board that this expenditure will take place (although they should stop short of any need for specific provisions / reserves)
Meeting the requirements of IAS 16 - Componentisation
March 2011

11. Engagement with PwC
PwC now engaged by SGHD to oversee the implementation across NHS Scotland
Working with each Board (site visits) to aid an understanding of the methodology, to collate all the relevant information, to work through the practical implications (asset registers etc.) liaise with relevant external auditors and prepare a tailored report for each Board’s Audit Committee
Also includes workshops on the application of the methodology to PFI assets
Engagement through March/April to ensure implementation
Meeting the requirements of IAS 16 - Componentisation
March 2011

12. Questions and Discussion?
Meeting the requirements of IAS 16 - Componentisation
March 2011

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