ANNEX F
COMMENTARY ON SPECIFIC CONCERNS RAISED ABOUT
RAB
F1. Will the principles and procedures of
Supply be maintained under RAB?
These have been characterised by the PAC as:
— no expenditure without legislation
— Supplementary Estimates when overspends
foreseen
— an absolute limit to spending
— annuality of voted sums
— separate authority for overspends
— emergency spending subject to Parliament's
authority.
The Government has accepted that these principles
will continue to apply to a resource-based system of supply (Treasury
Minute on the Ninth Report from the Committee of Public Accounts
1996-97).
F2. Since an accruals basis of accounting
requires more judgements and estimates than the certainty offered
by the existing cash basis, will Parliamentary control be diminished?
There will be more judgements but mainly in
respect of areas previously not featured in the accounts and only
partially visible to Parliament - assets and liabilities being
the obvious example. The set of statements proposed at Estimate
and Accounts stages offers far greater information than now and,
because of the output and performance dimension, even more than
large private sector organisations. In constructing Estimates,
departments will have to provide more of the underlying assumptions
and workings behind the headline figures. Generally, there will
be more limits voted for a department, which will tend to increase
the framework for Parliamentary control. It is unclear whether
there might be more requests for Supplementary provision as there
would be two types of limit which could be breached - cash and
resource. At accounts stage, there will be far more material to
explain a department's results and to form the basis of any subsequent
investigations by the NAO or Select Committees.
F3. If, in cash terms, only net expenditure
is being controlled, rather than net expenditure and appropriations
in aid, will there not be a reduction in control?
If net expenditure and appropriations in aid
were controlled on both cash and accruals bases, departments would
effectively be running both an income and expenditure and
a payments and receipts system. This would be over-specified,
costly and inefficient for departments. The Government proposes
to place reliance on accruals measures of income and expenditure
to do the brunt of the detailed work in terms of control. Thus,
departments would have to recognise expenditure at an earlier
point than in a cash system, for example when an invoice is received.
If a department was pressing against its resource expenditure
limit, recognising the receipt of an invoice might in itself trigger
a breach of a Parliamentary limit. The same considerations apply
to recognition of income, which would also be controlled in accrual
terms. Compared with now, Parliament would not have limits set
on gross cash payments. But departments would not be able to accrue
expenditure, in advance of paying out cash, without increasing
their resource expenditure and moving closer to, or even beyond,
their Parliamentary resource limit. The same considerations would
apply to income. Thus, there would be control over gross expenditure
in accrual terms, since there would be Parliamentary limits on
net expenditure and income. There would also be Parliamentary
control over the net cash (payments less receipts) required to
support the voted level of gross accruals expenditure. Taken together,
this is designed to provide Parliament with control over accruals
measures of gross and net expenditure which are sufficient to
deliver a set limit for net cash outlays.
In relation to capital expenditure, the reconciliation
in the Estimates between resources and cash required would specify
the forecast cash expenditure on capital purchases. Departments
would have flexibility to manage their working capital to meet
both the cash and accruals targets. With a regime for efficient
cash management (Annex A paragraph 6) there will be very powerful
incentives for departments to manage both cash and resources.
This is a discipline that other well-managed parts of the economy
take for granted.
F4. Under resource-based Estimates would
cash and/or resources be voted and how would dual voting be reconciled?
The items which it is envisaged would be voted
in a resource-based Estimate are:
— the accruals-based figures for net
resources and for appropriations in aid for each of the department's
requests for resources;
— a single appropriations in aid figure
for capital receipts; and
— the total cash requirement for the
department which would be calculated by reconciling the net resource
total to the cash figure by means of removing non-cash items;
adding capital expenditure and cash generated from the disposal
of fixed assets; and by taking account of changes in working capital
and in long-term liabilities.
A forecast operating cost statement and cash
flow statement (see Annex B) would give more detail in support
of the Estimates. The dual basis of voting would set a "model"
of multiple resource limits and a single cash limit, with full
requirements shown.
F5. At what level of detail will Parliamentary
voting and authority apply in the resource-based Estimates?
As shown in the model Estimates in Annex B,
the working assumption is that Parliament would be asked to vote
net resources and appropriations in aid for each request for resource
whilst cash would be voted as a single figure for each department.
In addition, Parliament would be asked to vote a single figure
for each department for non-operating cost appropriations in aid.
F6. Will capital be presented and voted gross
or net in the resource-based Estimates?
The intention is that capital purchases and
disposals will be shown separately, with a separate limit on non-resource
budget appropriations in aid. Details of significant long term
capital projects will continue to be shown in the departmental
report.
F7. How will PFI assets be handled in the
resource-based Estimates and Accounts?
At present the Resource Accounting Manual contains
only a broad indication of the accounting treatment of Private
Finance Initiatives. The lack of detail in this area was due to
the fact that the latest version of the Manual was prepared whilst
awaiting guidance from the Public Sector and Not-for-Profit Committee
of the Accounting Standards Board who had been tasked with preparing
an accounting treatment for the Private Finance Initiative. In
the meantime, the Government commissioned Malcolm Bates (Chairman
of Pearl Assurance plc and Pierter Farnell plc) to review the
PFI. That report has now been completed and the Paymaster General
issued a Press Notice on 23 June launching a programme of action
to reinvigorate the PFI initiative.
Section 15 of the report recommended that:
"The Treasury, consulting the ONS and the
NAO, should draw up necessary accounting guidance by30 September
1997 and promulgate it widely"
and noted that:
"The accounting treatment of PFI transactions
is of serious concern to the private sector, but there is no immediate
prospect of agreement in the accounting profession. The Treasury
therefore should issue guidance pending the deliberations of the
Accounting Standards Board."
Work on preparing interim guidance on this is
being taken forward.
In addition, Section 17 of the report noted
that:
"The Treasury should request Departments
to give appropriate assurance to funders that the money necessary
to honour contractual commitments under PFI deals with Non-Departmental
Public Bodies represent obligations that will be met for the duration
of the contract. This step is necessary to address concern with
private sector regarding the issue of covenant."
This has implications for the treatment of PFI
transactions under RAB and will be addressed shortly. The resulting
policies will be considered carefully and decisions about the
Estimates will be taken as necessary.
F8. Will the resource-based Estimates be
supported by a forecast balance sheet?
There are no plans to do so, because the relevant
data is shown in the supporting statements to the Estimates (and
in the departmental report, eg details of long term capital projects)
therefore the forecast balance sheet would be repeating information
already available.
F9. Are there "creative accounting wheezes"
that departments might be able to use to their benefit?
Concerns have been expressed about the dangers
of "creative accounting" for the public sector. However,
it is worth remembering that there are a number of constraints
on central government which are not present in the private sector
(five of which are listed below). The public sector will be subject
to rules and scrutiny which provide additional safeguards against
massaging the figures in their accounts.
First, the FRAB will advise on revisions to
GAAP and on new accounting standards and these will then be incorporated
into the Resource Accounting Manual. Departments will be required
to prepare their resource accounts in accordance with the RA Manual
which means that they will be required to live within the rules
contained within it.
Second, the PES round and scrutiny of departments'
Estimates and resource accounts by the Treasury will result in
checks being applied to ensure that accounting policies and the
presentation of the accounts are not altered from year to year
without a justifiable reason.
Third, the NAO in auditing the department's
accounts will need to approve the accounting policies used in
the preparation of those accounts. The onus will be on the department
to make the case for any changes to the NAO on the grounds that
if the changes were not made then the accounts would not
present a "true and fair" picture. In addition, the
Comptroller and Auditor General as a single auditor for Government
provides consistency across departments.
Fourth, Government Accounting contains
rules on propriety that a department will need to abide by when
preparing its accounts.
Fifth, the public sector is different to the
private sector and many of the major problem areas in the commercial
world are largely absent in Government. In particular there is
an absence of mergers and acquisitions in the public sector, foreign
currency transactions are limited and the results of trading do
not impact on share prices.
| 
