Select Committee on Treasury Minutes of Evidence



Notes to the Departmental Resource Account for the year ended 31 March 1999


(a)  Basis of Accounts

  The financial statements have been prepared in accordance with the Resource Accounting Manual issued by HM Treasury which applies Generally Accepted Accounting Practice in the United Kingdom (UK GAAP) to central government bodies. The particular accounting policies adopted by the Department are described below. They have been applied consistently in dealing with items considered material in relation to the accounts.

(b)  Accounting Convention

  The financial statements have been prepared under the historic cost convention modified by the inclusion of fixed assets at the value to the business by reference to their current cost.

(c)  Basis of Consolidation

  These accounts comprise a consolidation of the core Department, its On Vote Executive Agencies, certain independent Statutory Bodies and also include payments to the following bodies: Motability, Independent Living Fund (ILF), British Limbless Ex-Servicemen's Association (BLESMA), London Organised Fraud Investigation Team (LOFIT), the Occupational Pensions Regulatory Authority (OPRA) and the Pensions Compensation Board (PCB).

  The On-Vote Executive Agencies of the Department are the Benefits Agency, the Child Support Agency, the War Pensions Agency and the Information Technology Services Agency.

  Independent Statutory Bodies are the Office of the Pensions Ombudsman (PO), Independent Tribunal Service (ITS), Independent Review Service (IRS) and Central Adjudication Service (CAS).

  On 1 April 1999 the Contributions Agency transferred to the Inland Revenue. The Agency has not, therefore, been included in the Department's dry-run Resource Accounts for 1998-99.

  The Social Fund is consolidated within Schedules 2 to 5 but is excluded from the Summary of Resource Outturn, Schedule 1.

  Receipts of the National Insurance Fund are excluded from the consolidation. However, certain elements of the National Insurance Fund are included in Schedules 2 to 5. These are contributory benefits funded from the National Insurance Fund, costs to the Department of administering the Fund and amounts repaid by the Department to the Fund for Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) payments deducted by employers from National Insurance Contributions. These are excluded from Schedule 1.

  This consolidation boundary ensures that all items which fall within total social security expenditure are reflected in the Operating Cost Statement whereas the Summary of Resource Outturn reflects those items which fall within the Parliamentary Supply process.

  Supply Estimates are a request by the Executive to Parliament for funds to meet most expenditure by Government departments and certain related bodies. When approved by the House of Commons, they form the basis of the statutory authority for the appropriation of funds and for the Treasury to make issues from the Consolidated Fund. Statutory authority is provided annually by means of Consolidated Fund Acts and by an Appropriation Act. These arrangements are known as the "Supply Procedure" of the House of Commons.

  Certain expenditure may be outside the Supply procedure and, where Parliament gives statutory authority, will be charged directly to the Consolidated Fund.

  Alternatively, a statutory fund will be set up to finance the service, as in the case of the National Insurance Fund.

  Each Executive Agency also produces its own annual report and accounts. Both OPRA and the PCB publish their own annual report and accounts. Similarly, separate White Paper accounts are also produced for the Social Fund, National Insurance Fund, OPRA and PCB.

(d)  Tangible Fixed Assets

  All computers and any assets costing more than the prescribed capitalisation limit of £2,000 are normally treated as capital assets. Where an item costs less than the capitalisation limit but forms an integral part of a package whose total value is greater than the capitalisation limit, then the item is treated as a capital asset.

  For furniture and fittings, the total cost of maintaining a record of relatively low value individual items is considered to be prohibitive and therefore these items are normally recorded on a pooled basis.

  All fixed assets are revalued monthly by reference to appropriate Treasury approved indices.

  Increases in value are credited to the revaluation reserve whilst decreases in value are debited to the revaluation reserve up to the level of depreciated historical cost for any asset previously revalued. Any excess devaluation is charged to the Operating Cost Statement along with devaluation on assets (such as computers) not previously revalued.

(e)  Land and Buildings

  The Department does not include in its Balance Sheet capital values for the freehold and long leasehold land and buildings, which it occupies under the Private Sector Resource Initiative for Management of the Estate (PRIME) and Newcastle Estates Development (NED) contracts.

  The Department has accounted for the deferred benefit which will result from reduced accommodation charges from the NED contract by establishing a prepayment which will be released annually over the 30 year period of the contract, to the Operating Cost Statement on a straight line basis.

(f)  Depreciation

  Depreciation is provided on all tangible fixed assets, using the straight line method, at rates calculated to write off, in equal instalments, the current replacement cost (less any residual value) of each asset over its expected useful life. Fixed assets are depreciated from the month following acquisition. No depreciation is charged in the month of disposal.

  The tangible fixed assets are depreciated over the following estimated useful lives:
Office equipment and computers 5 to 10 years
Furniture, fixtures and fittings10 to 20 years
Vehicles4 to 7 years

  An additional charge is made for any backlog depreciation arising from applying the Treasury requirement to value fixed assets by reference to current costs on revaluation.

  Backlog depreciation is an additional charge debited to the revaluation reserve which ensures that assets which are revalued are fully written off within their estimated useful lives.

(g)  Stocks

  The Department holds stocks of stationery, computer spares and similar consumable materials. Due to the nature of these items the Department does not consider it appropriate to reflect their value in the Balance Sheet. Accordingly the Department charges all purchases of consumable items to the Operating Cost Statement when purchased.

(h)  Research and Development

  Expenditure on research and development is treated as an operating cost in the year in which it is incurred.

(i)  Operating Income

  Operating Income is income which relates directly to the operating activities of the Department and is recognised in the accounting period in which goods and services are performed or received. It principally comprises fees and charges for services provided on a full-cost basis to external customers as well as public repayment work. It includes both income appropriated-in-aid of the Vote and income to be surrendered to the Consolidated Fund.

(j)  Administration Costs and Programme Costs

  The Operating Cost Statement is analysed between administration costs and programme costs which are recognised in the account period in which goods and services are performed or received.

  Administration costs reflect the direct cost of running the Department as defined under the administration cost control regime, together with associated operating income.

  Programme costs are analysed between programme expenditure and programme overheads.

  Programme expenditure is statutory payments including contributory benefit expenditure which is funded from the National Insurance Fund and expenditure which is borne by the Social Fund in addition to the programme expenditure which is within the Supply process.

  Programme overheads comprise provisions for bad and doubtful programme debts, programme bad debts written off and capital charges on programme related net assets.

(k)  Capital Charges

  A charge, reflecting the cost of capital utilised by the Department, is included in operating costs. The charge is calculated at the government's standard rates of 6 per cent qualifying assets and liabilities. It is split between administration costs and programme overheads in accordance with the relative proportion of net assets.

(l)  Pensions

  The majority of present and past employees are covered by the provisions of the Principal Civil Service Pension Scheme (PCSPS) which is non-contributory and unfunded. The PCSPS is a defined benefit Scheme which, in the main, provides benefits based upon length of service and final salary. Departments, Agencies and other bodies covered by the PCSPS meet the cost of pension cover provided for the staff they employ by payment of charges calculated on an accruing basis. Employer contributions to this scheme are charged to the Operating Cost Statement. There is a separate scheme statement for the PCSPS as a whole.

(m)  Early Departure Costs

  For 1998-99, as in earlier years, the Department continued to operate an early departure scheme giving serverance/retirement benefits to certain qualifying employees. These benefits conform to the rules of the PCSPS.

  The Civil Service White Paper published in July 1994 announced a time limited scheme for central funding of early departure costs such that 80 per cent of the relevant costs would be met from the Civil Superannuation Vote with the Department funding the other 20 per cent from their running cost provision. The scheme covers staff who ceased employment between 1 October 1994 and 31 March 1997. For employees who retired after 21 May 1996 the Treasury imposed a cap on the amount of funding to be received from the Civil Service Superannuation Vote. This means that the Department is required to fund any excess early departure costs from their running cost provision.

  The Treasury has issued a direction that the element of early departure costs borne by the Department should be charged to the Operating Cost Statement immediately and a provision set up on the Balance Sheet for future payments. In accordance with Financial Reporting Standard (FRS) 12, the provision is calculated at current year price levels and discounted at the standard public sector real rate, currently 6 per cent.

  From 1 April 1998 the Department has reflected the full cost of the early departure costs borne by the Civil Superannuation Vote in the Operating Cost Statement.

  The Department can prepay part or all of its liability in advance by making a payment to the Paymaster General's account for the credit of the Civil Superannuation Vote. This prepayment is offset against the early departure provision in accordance with guidance from HM Treasury.

(n)  National Insurance Fund

  As stated in Note 1.c. above, the National Insurance Fund is excluded from the consolidation. However, contributory benefits funded from the National Insurance Fund are included in the Operating Cost Statement. The NIF provides financing to the Department to cover this contributory benefit expenditure and the administration costs incurred by the Department. The Department provides the NIF with a grant to recompense the Fund for its loss of revenue due to the NIC holiday scheme and, if required, a separate grant to maintain a reasonable working balance on the Fund. The financing from the National Insurance Fund shown in the Cash Flow Statement is the net financing due to the Department. Any difference between the net financing due to the Department and the net financing received from the NIF will be reflected in the current account maintained between the Department and the NIF.

(o)  Operating Leases

  Rentals under operating leases are charged to the Operating Cost Statement on a straight line basis over the period of the lease term.

Note 7



Net Operating Cost
Remove non-Supply expenditure
Remove AinA not treated as income
Net Resource Outturn
Include non-Supply expenditure
Include AinA not treated as income
Less grants in Aid payable to NDPB
Add cost of capital charges in respect of assets held by NDPB
Add net resource consumption by NDPB including depreciation
Less Welfare to Work expenditure and income
Resource Budget Outturn
Of which:

Deparmental Expenditure Limit (DEL)
Annually Managed Expenditure (AME)

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