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:
(i) introduce an independent element into
the process of setting these financial reporting standards;
(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
