Select Committee on Treasury Minutes of Evidence


Annex E

FORMAT OF RESOURCE-BASED SUPPLY ESTIMATES AND ACCOUNTS

This Annex contains, at Appendices I and II, further illustrations of resource-based Main Estimates, Supplementary Estimates and outturn schedules and selected notes, based on data from the Department of Social Security (DSS) and the Ministry of Agriculture, Fisheries and Food (MAFF) from the 1998-99 live test of in-year monitoring and control under RAB.

  2.  A detailed commentary on the information shown in the departmental illustrations, and the lessons learned from producing them, is also provided at Appendices I and II. The remainder of the introductory section of this Annex provides further clarification and explanation of various matters related to the structure and operation of resource-based Estimates, including a number of issues raised by the National Audit Office (NAO).

FORMAT OF RESOURCE-BASED MAIN ESTIMATES

  3.  The basic format and operation of Resource Estimates was set out in the Treasury's January 1999 and July 1999 RAB Memoranda. To recap on some key points which may require clarification:

    —  Part II of the Estimate is split between resource (ie current) expenditure and capital expenditure sections. Voted limits apply to the net total resources column and to the appropriations in aid (AinA) column at the level of the Request for Resource (RfR), as well as to total non-operating AinA and the net cash requirement at the departmental level. In the illustrations at Appendices I and II, for example, DSS has four RfRs and MAFF has a single RfR, in each case demonstrating the level of Parliamentary control that will apply for these departments under RAB. Movement between a department's RfRs would require Parliamentary approval through a Supplementary Estimate.

    —  All figures contained in the Part II matrix are shown on an accruals basis. A reconciliation from the accruals-based totals is then provided, taking account of non-cash items and working capital movements, to determine the net cash requirement of the department.

  4.  The Estimate formats used in the illustrations at Appendices I and II are broadly consistent with the examples contained in the earlier Memoranda, with just one substantive change. To meet a specific concern mentioned in the PAC's Sixty-seventh Report, Session 1997-98: Resource Accounting and Resource-based Supply (HC 731), a gross column has been included, for information, as column 4 in the Part II matrix of the Estimate to denote the sum of the gross amount of each line in the RfR contained in columns 1 to 3. Gross columns along these lines are shown in the examples at Appendices I and II and will be included in the "shadow" resource based Estimates for 2000-01 produced for Trigger Point 4.

  5.  It should also be noted that the inclusion of the new non-cash elements of resource budgets in AME rather than DEL for a transitional period, discussed earlier in this Memorandum, will in some cases mean an increase in the number of functional lines in the AME section of departments' RfRs, and some departments will need to include AME sections in their RfRs for the first time. However, following SR2002, when it is intended, in the light of experience, that these items will be included in DEL, there will no longer be a need for such transitional AME lines.

RESOURCE-BASED AMBITS

  6.  The Treasury's July 1999 Memorandum set out the criteria governing the Ambits of resource-based Estimates. These criteria will be used by departments in the "shadow" resource based Estimates for 2000-01 produced for Trigger Point 4. The following paragraphs clarify certain aspects of the operation of resource based Ambits in the light of various points raised by the NAO. These issues are reflected in the illustrations at Appendices I and II.

    —  The Ambit of Resource Estimates covers capital expenditure associated with individual RfRs, as well as current expenditure. This is the case whether a department has a single RfR or more than one RfR in its Estimate.

    —  Taken together, the Ambit of the Estimate also covers the voted net cash requirement of the department, which represents the cash consequences of current and capital provision contained in the Estimate for the year in question, as well as for other years, where appropriate. This includes circumstances where a department's net cash requirement for a particular year contains cash payments for which no related resource consumption occurs in the same year. In these circumstances, the service to which the cash payments relate would be reflected in the Ambit of the relevant RfR even though there would be no corresponding functional line in the Part II matrix of the Estimate (thereby preventing any unauthorised resource consumption being incurred). This would be the case in relation both to cash associated with current resource items and with capital items which had accrued in a different financial year. In this way, legitimacy for the cash expenditure would be conveyed through the inclusion of an appropriate reference in the Ambit.

    —  These arrangements mean that there is no need for a separate Ambit to cover cash or capital expenditure, as the terms of the Ambit will ensure that statutory authority is in place to allow all necessary payments to be made from the Estimate.

    —  Ambits of Resource Estimates will be on a functional basis, thereby providing a direct read-across to the functional lines contained in the Estimate beneath the level of the RfR. This ensures that there will be no loss of clarity in Ambits or in the functional lines in the Part II matrix as a result of the move to RAB, and therefore no relaxation on the virement rules.

    —  The headings of individual RfRs (which are broadly equivalent to Votes under cash-based Supply) will, however, be objective-based where possible, to denote the broad purpose of the expenditure covered by the RfR and to provide a link between Schedule 1 of the accounts and the analysis by aim and objective in Schedule 5. The wording of individual RfRs has no implications for the Ambit of the Estimate or for the virement rules under RAB which, as under cash-based Supply, relate to the functional lines of the Estimate.

APPROPRIATIONS IN AID IN RESOURCE ESTIMATES

  7.  As noted above and in previous Treasury Memoranda, all columns in the Part II matrix of resource-based Estimates are on an accruals basis. Appropriations in Aid (AinA) will thus be scored on an income basis under RAB, so that the AinA figures voted by Parliament will relate to the accrual of income rather than to the receipt of cash by the department. The resulting cash flows will be tracked by departments in such a way that, regardless of the year in which they arise and are applied to meet cash requirements, they equal, over time, the amounts authorised and reported on an accruals basis.

  8.  The AinA figures will be accounted for as a full amount of revenues due, with any loss due to bad debts being charged as expenditure against the current expenditure section of the Resource Estimate. This treatment follows commercial practice, and, as the NAO has noted, aids transparency and accountability. It is also likely to provide appropriate incentives for departments to ensure the recovery of any debts arising in relation to accrued AinA income.

CASH AND ANNUALITY

  9.  Under RAB, the fundamental principles of Supply in relation to cash remain unchanged. While cash and resource expenditure will not necessarily match each other precisely in a given year, there will be a full reconciliation between the two, and voted limits will apply to both in Resource Estimates.

  10.  Departments will be expected to manage their cash flow under RAB in a way that is consistent with the limits voted by Parliament. Only cash receipts which relate to income that is accrued as AinA, either in the same year or in a different year, can be used by the department to meet cash expenditure in the year in which the cash is received.

  11.  If a department were to require additional cash during a particular financial year, either to fund new expenditure or to take account of changes to working capital which had not been forecast at the start of the year, it would need to seek Parliamentary approval through a Supplementary Estimate. Any unexpended cash held by a department at the end of the financial year will be treated as though it had been returned to the Consolidated Fund and will be deducted from the amount available to be drawn down from the Consolidated Fund in the following year. This will ensure that the net cash requirement for any given year is not exceeded. If, however, a department were to overspend in cash terms during a financial year, an Excess Vote would be required, as now. Thus the fundamental principle of annuality in relation to cash is preserved under RAB.

  12.  It is conceivable that a self-financing department which charges fees at a level which allows it to net off income against expenditure (including any non-cash costs) over a run of years, so that gross expenditure and AinA amounts usually result in a token net amount, could—in certain years, depending on working capital movements—be in a position to surrender extra cash receipts to the Consolidated Fund. As explained in the Treasury's January 1999 Memorandum, in order to avoid what could otherwise, in those years, be a negative cash requirement for the department, the excess cash amount would be surrendered by the department to the Consolidated Fund as "Excess cash to be CFER'd", shown in the accruals to cash reconciliation box of the Estimate, thus bringing the net cash requirement to a token £1,000.

  13.  While, as noted earlier, AinA will be scored on an income basis under RAB, the Treasury's July 1999 Memorandum noted that Parliament might wish to be aware of the total amount of cash which may be retained by a department in a particular year to offset expenditure in the year due to its relationship with income that has been or will be appropriated in aid. That is why it is intended that a note to this effect should be included in Resource Estimates. The ability of a department to use this cash to finance expenditure applies in-year only, however, and the cash may not be carried forward to be spent in a future year and does not therefore affect the principle of annuality.

INFORMATION TO SUPPORT THE ESTIMATES

  14.  As noted in earlier Treasury Memoranda, resource-based Main and Supplementary Estimates will contain forecast operating cost and cashflow statements. Examples are shown in the illustrative Estimates at Appendices I and II.

  15.  The core sections of Estimates, both under cash and under RAB, show the voted element of a department's business only, and do not take into account non-voted expenditure and funding from sources outside the annual Supply process. By including a forecast operating cost statement and cashflow Statement within the Estimate, departments will be providing Parliament for the first time with a more complete picture of forecast departmental expenditure:

    —  the forecast operating cost statement will show all income and expenditure forecast by the department for the year that falls within the departmental boundary; and

    —  the forecast cashflow statement will show all cash inflows and outflows for the department for the year, even where the financing is from a source other than Supply.

  16.  Whenever a department presents a Supplementary Estimate for approval, it will provide an updated forecast operating cost statement and cashflow statement to ensure that the full, department-wide, picture is presented alongside the implications for the voted element of income and expenditure.

  17.  Inclusion of these forecast statements is also valuable since they can be compared with the corresponding outturn statements included in resource accounts. This will allow departmental planning and forecasting to be better assessed both in relation to voted expenditure and AinA and departmental expenditure and income more widely, and in relation to cash payments, receipts and working capital movements.

  18.  It is not intended, however, to include a forecast balance sheet in the Estimate. The balance sheet is not a record of flows in the way the other statements are, but a snapshot of the assets held by a department at a particular point in time. If a forecast balance sheet were included with the Estimate, it would not add additional information that is not more readily available elsewhere:

    —  forecasts of new capital acquisitions can be seen in the capital column in Part II of the Estimate;

    —  forecasts for changes in stocks, debtors and creditors are shown in the resource to cash reconciliation box in Part II of the Estimate;

    —  disposals of capital items are shown in the non-operating AinA column of the Estimate and are subject to an aggregate voted limit which will be controlled by Parliament;

    —  information about existing capital employed can be obtained by looking at outturn balance sheets in departments' resource accounts that will already have been presented to Parliament;

    —  departments provide more detailed information about their future capital plans, utilisation of their current asset base and the systems in place to ensure value for money in their Departmental Investment Strategy; and

    —  for departments with significant asset holdings where further information of a particular and distinct type might be of value (perhaps to show projected changes in relation to military stocks or hospital building programmes) this information will be shown in a more accessible form in the relevant departments' planning documents.

FORMAT OF SUPPLEMENTARY ESTIMATES

  19.  The detailed format of, and procedures for handling. Supplementary Estimates under RAB were set out in the Treasury's January 1999 Memorandum. The format of the illustrative Supplementary Estimates for DSS and MAFF shown at Appendices I and II remains largely unchanged from the January 1999 Memorandum, which included at Annex A Supplementary Estimate formats based on Home Office data.

  20.  There are however some minor changes to the headings used in the Part II tables of Supplementary Estimates since the previous illustrations shown to the Committees, following discussions with the NAO. In addition, as with resource-based Main Estimates, a gross column has been included in the Part II matrix to show the total expenditure against each functional line prior to the subtraction of amounts to be appropriated in aid, and a new line has been added to the "changes proposed" table in Part II to show changes to capital expenditure. As with the Home Office examples provided to the Committees in January 1999, the "changes proposed" table shows previous provision, gross expenditure changes, AinA changes, net changes and the new provision.

RELATIONSHIP BETWEEN ACCOUNTS AND ESTIMATES

  21.  In Appropriation Accounts, Estimate figures are shown alongside outturn to reveal under and overspends both at the whole Vote and more disaggregated levels, thereby demonstrating how the composition of expenditure has varied in relation to the Estimate. In previous resource account illustrations, and in the existing version of the RA Manual, there is no such detailed variance data provided in the relevant note to the accounts, since it is possible to establish detailed variances between Estimate and outturn by comparing the final Estimate Part II table with the relevant notes to the accounts.

  22.  However, to ease comparison between Estimate and outturn, the Treasury proposes, following discussions with the NAO, to include in the relevant note to the accounts two additional columns to show Estimate and variance figures alongside the detailed net outturn data. An illustration of this revised presentation is shown in the DSS example at Appendix I. The revised presentation should help Parliament to see readily how the composition of expenditure varies in relation to the Estimate.

  23.  As indicated in the illustrative examples attached, the intention that variances between Estimate and outturn should be shown at the RfR level on the face of Schedule I, along with explanations of reasons for variances both to RfR totals and to the net cash requirement, is unchanged.


 
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