Select Committee on Public Accounts Minutes of Evidence


FINANCIAL REPORTING ADVISORY BOARD: REPORT ON THE RESOURCE ACCOUNTING MANUAL (PAC 97-98/54)

Memorandum by the Comptroller and Auditor General

INTRODUCTION

  1. The Financial Reporting Advisory Board to the Treasury was set up following the recommendations of your predecessor Committee that there should be an independent body to oversee and approve accounting standards for central government [PAC 15th Report 1994-95, paragraph 22]. The Treasury presented the Board's report and their response to the Committee on 29 July 1997.

  2. The Treasury decided that the reporting requirements for resource accounting should be based on the Generally Accepted Accounting Practice (GAAP), which are applied in the private sector, adapted as necessary for the public sector context. The Treasury set out the reporting standards for departments in the Resource Accounting Manual. The Board was established to:

    (ii)  help to ensure that departmental resource accounts were governed by GAAP and that any departures, or modifications were fully explained;

    (iii)  to examine the Manual and then to keep it under review; and consider any proposals for material change.

  3. Ellwyn Eilledge, Chairman of BTR plc and former senior partner at Ernst and Young chairs the Board. It is made up of representatives from the accountancy profession in the private and public sectors, academia and government bodies including an Assistant Auditor General from the National Audit Office and a Member of your predecessor Committee.

  4. In its report the Board says that its task has been immense. It met twice a month for some nine months to review the Resource Accounting Manual which covers all aspects of accrual accounting, including such specific issues as:

    —  the basis for valuing and including donated, heritage and infrastructure assets and nuclear decommissioning liabilities;

    —  the basis of accounting for grants paid by departments and income from fees and charges; and

    —  the creation and use of reserves.

The Conclusions of the Board

  5. As a demonstration of the Board's independence and effectiveness [PAC 15th Report 1994-95, paragraph 22] its report has been submitted in full to the Committee, also the Treasury have accepted its advice with only a very few exceptions. The Board endorsed the Resource Accounting Manual as the basis on which Resource Accounts should be prepared and accepted the changes from GAAP which Treasury considered necessary.

  6. The Board's work has ensured that the main concerns of the Committee of Public Accounts in their 15th Report 1994-95 have been addressed, namely:

    —  the Resource Accounting Manual adheres very closely to GAAP. For those few departures or modifications that are not wholly acceptable to the Board, such as the treatment of heritage assets and the proposals for inflation adjusted accounting (paragraphs 9-11 below), the Board will review further in the light of experience or the additional information they have sought;

    —  the Manual requires the results of the "core" department to be separately disclosed in resource accounts;

    —  the accounts are to be prepared in accordance with the Manual so as to give a "true and fair view", and the audit opinion on all resource accounts is to be expressed in those terms.

  7. More generally, the Board intends to review the implementation of the Manual after the first year of operation and to have a continuing role in assessing proposed changes. The Treasury accept this continuing role of the Board. The Treasury plan to report to Parliament if and when significant revisions are required.

  8. Your predecessor Committee were also concerned about the boundary for determining those bodies sponsored by a department which should have their accounts consolidated into the departments' resource accounts [PAC 9th Report, 1996-97, paragraph 30]. They concluded that if the purpose in setting the boundary was to provide "comprehensive and meaningful information to Parliament" and to accord properly with GAAP, then the boundary would be drawn more widely than is proposed.

  9. The Manual, [paragraph 1.5.1], requires the departmental boundary to include those entities over which the department has in-year budgetary control rather than, as would be the case under GAAP, those entities where the department controls their financial and operating policies. Therefore bodies such as Non-Departmental Public Bodies are unlikely to be consolidated into the departmental resource accounts even though departments may exercise influence over them through their funding. This approach is designed to be consistent with the Government's public expenditure control requirements. The Committee noted that should there be any conflict between the financial reporting objectives of Parliament and Government, those designed to provide Parliament with information should take precedence.

  10. In the interests of the timely introduction of resource accounting, the Board has accepted the present Manual definition of "the boundary". However the Board expects to re-examine it in the light of emerging experience. Wider consolidation at present could delay the introduction of resource accounts and so the Board's proposal is a practical way forward.

Outstanding Issues

  11. The Board intends to return to two particularly significant issues:

    —  the Manual requires values to be placed on "heritage" assets, including those that have no "operational" role for departments; such values are to be included in resource account balance sheets; and

    —  the Treasury intend to undertake a pilot study with departments into ways of applying inflation accounting to the value of departmental assets and liabilities.

  12. On heritage assets, the Board has expressed reservations about the cost effectiveness of obtaining valuations for some heritage assets and their reliability. I consider that there are sound arguments for the accounts to show the existence of such assets in the notes to the account but it is more questionable whether the costs of valuation are justified and whether reliable values can be obtained. The Treasury also note that departments with significant heritage assets retain doubts about the potential implications of this policy. The Board will examine this further once it has received the additional information on valuation costs, which it required, and as part of their dry run audit work the National Audit Office will examine the practicability and economics of valuing all heritage assets.

  13. On inflation accounting the Board, whilst recognising the Treasury's rationale for wishing to introduce such a form of accounting, notes that for some approaches the costs of implementing inflation accounting might not be worthwhile. There might also be difficulties for budgeting and Parliamentary control because of the uncertainty surrounding the inflation assumptions which would need to be built into Supply Estimates. The Board will review this issue further in the light of the pilot study. I will provide further advice to the Committee if necessary.

Form of Resource Accounts

  14. The Manual includes a specimen set of Resource Accounts, complete with notes, which the Board has examined and commented on in its report. The Board concludes that the financial statements proposed are acceptable and capable of presenting a true and fair view. It acknowledges, however, that Parliament has a key interest in these statements and that Parliament's views will need to be taken into account. This will probably be best achieved once departments have produced their first resource accounts.

  15. Parliament's interest extends further than the form of account and will include consideration of whether, as the Treasury plan, the accounts can also satisfactorily replace the present cash-based Appropriation Account as the means of accounting to Parliament for Supply Grants. The Treasury have separately provided the Committee with a memorandum on their more detailed proposals for resource-based Supply, which includes further examples of resource accounts and the links with Estimates. I have provided the Committee with a separate memorandum commenting on these proposals, including the adequacy of accountability for Supply.

Summary

  16. In summary, the Board has endorsed the Resource Accounting Manual presented with the Treasury's memorandum as an acceptable basis for the preparation of resource accounts. Three of the Committee's four main concerns on accounting issues have been met and the fourth, on the departmental boundary, will be reviewed once resource accounting has been implemented. The Board has highlighted the valuation of heritage assets and inflation accounting which need further examination and the National Audit Office will monitor the outcome of this. I recommend that the Committee should give their endorsement to the Manual, subject to the outstanding items being reviewed by the Board.

National Audit Office

31 October 1997


 
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