APPENDIX B
THE REGULATORY FRAMEWORK FOR NHS FOUNDATION
TRUSTS
1. Monitor's first task after its establishment
was to develop a method to assess applicants for NHS foundation
trust status. The process which has been developed tests whether
the applicant is able to operate as an autonomous organisation.
The key questions which are asked at assessment are whether the
applicant NHS trust will be legally constituted, financially viable
and well governed. These are essential conditions to be met for
an NHS foundationt trust to be able to survive and prosper.
2. The assessment of financial viability
involves a review of the applicant trust's historic financial
position and future projections. In its assessment process Monitor
removes brokerage and one-off items, such as capital to revenue
transfers, from the analysis of past years' performance. This
is done to show the true underlying position of the organisation's
past performance.
3. The applicant NHS trust must submit a
financial plan forecasting its financial position for the next
five years. Monitor scrutinises the plan closely, for example
by testing the assumptions about future income against the expectations
of PCTs, cross-checking assumptions on cost inflation against
the data from other applicants, and examining the applicant's
track record in achieving cost savings. The review of the key
assumptions underlying the projections will include sensitivity
and scenario analysis to evaluate the key risks faced by the applicants.
Our experience suggests that this is a greater level of scrutiny
of financial planning than the trust will ever have experienced
before. It ensures that only trusts which meet the demanding criteria
are authorised. It also serves as an effective preparation for
Boards who must operate in a more commercial and demanding environment
post-authorisation.
4. Monitor continues its rigorous approach
in the regulatory framework for NHS foundation trusts when authorised.
The emphasis is on ensuring thorough financial planning and then
transparency in monitoring financial performance.
5. NHS foundation trusts are required to
submit annual plans to Monitor. These are reviewed and a risk
rating assigned to each NHS foundation trust to indicate the risk
of it breaching its terms of authorisation in three areas: finance,
governance and mandatory services. The financial risk rating is
ranked from 5 to 1, with 5 representing the lowest financial risk.
The rating assesses a trust's financial position against four
criteria: achievement against plan, underlying performance, financial
efficency and liquidity. Each NHS foundation trust then submits
a quarterly report on performance against plan. The information
in the report is based on what the Board of Directors would usually
receive on a monthly basis, to minimise the information burden
on the organisation. The plan allows Monitor to track performance
on a quarterly basis and to take appropriate action where performance
starts to differ adversely from plan.
6. Transparency is also applied to the public
reporting of NHS foundation trusts. Monitor has set out an accounting
regime for NHS foundation trusts which is akin to that used in
the private sector, reflecting UK GAAP (generally accepted accounting
practice), rather than the resource accounting approach used elsewhere
in the NHS. This results in greater transparency and allows greater
comparability with the commercial sector.
7. One effect of this is that NHS trusts
are required to include impairments in the profit and loss account.
Impairments occur where an asset, such as a building, is revalued
and the revised valuation differs from that currently shown on
the balance sheet. Under the accounting rules for NHS foundation
trusts the impairment is shown as an exceptional item and is included
in the profit and loss account; it therefore hits the "bottom
line" of the accounts. For an NHS trust an impairment appears
on the balance sheet but not in the profit and loss account. It
is for this reason that Monitor quotes the performance of NHS
foundation trusts before exceptional items, as this provides a
better basis for comparison with the rest of the NHS.
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