2The current format of Government Accounts
The current format of Government Accounts
7.Over the last twenty years, there have been many efforts to reform Government Accounts.
a)“Resource Accounting” was introduced by the Treasury in the late 1990s It required all Departments to produce commercial style accruals based Accounts from 1999–2000.1 Until this point, the UK had used cash accounting. This change meant that, rather than solely measuring cash movements, Departments began to measure and record expenditure incurred and income generated, as well as assessing the levels of assets and liabilities - often built up over many years past. Resource accounting means that instead of examining only the national debt (the amount of money borrowed cumulatively by the end of each year) which in 2015–16 was £1.6 trillion, we can also examine the accounting debt (which includes items the Government has not yet paid for but is obliged to pay for such as public sector pensions) which stood in 2015–16 at £3.6 trillion.2
b)International Financial Reporting Standards (IFRS) were implemented for the public sector in the UK from 2009–10.3 IFRS had consequences for the way that the Government reported the value of assets, encouraging Government to value assets at ‘fair value’ and to adopt the concept of ‘substance over form’. This had impacts upon which assets were included and how they were valued within Government including financial assets, obligations under the Private Finance Initiative, assets held for sale, infrastructure assets and intangible assets.4
c)“Clear Line of Sight” was announced in 2007 and implemented from 2011–12. It aimed to align the way spending was reported in Budgets, Estimates and Accounts. The Director General of Public Spending at the Treasury, Julian Kelly, told us that “the clear line of sight arrangements we brought in [ … ] are precisely supposed to be able to show the budget that is agreed at the Spending Review, the money that is voted by Parliament and then the report on that money being spent at the end of the year in the Accounts”.5
8.As part of the Clear Line of Sight reforms, Departmental Annual Reports were combined with the previously separate statutory Accounts to form a single document for each Department, known as the Annual Report and Accounts. Departments were required for the first time to consolidate spending of their own with that of all of their arm’s length bodies, in order to give a clearer picture of all of the spending and activities for which they have ultimate responsibility.
9.The general impact of the various changes, our witnesses agreed, has been to make Government Accounts ‘quite comparable’ to private sector Accounts.6 But it is widely recognised that Government Accounts perform a somewhat different function to those of private sector companies. People using Government Accounts have different requirements to the investors who use corporate Accounts: while investors will often want to analyse the profitability of a company, readers of Departmental Annual Reports and Accounts are more likely to be interested in what services have been provided at what cost and how effective the services provided have been. We cover the needs of Government users in Chapter 3 and 4 of the report.
Simplifying and Streamlining the Accounts
10.In 2014, the Treasury published a command paper, Simplifying and Streamlining the Statutory Annual Report and Accounts, which set out proposals for a new format for Annual Reports and Accounts, to be initially implemented in 2015–16.7 In drawing up its proposals, the Treasury informally consulted the National Audit Office (NAO) and the House of Commons Scrutiny Unit before putting proposals to the Liaison Committee and Public Accounts Committee, who responded, indicating broad support.8
11.The changes set out in Simplifying and Streamlining the Statutory Annual Report and Accounts involved Departments reorganising their Annual Reports and Accounts into three sections, focussing on performance, accountability and the core financial statements.9 The Treasury explained the new sections in their evidence to us.
The performance reporting requirement includes a clear statement of the purpose and activities of the organisation, high level financial information with cross references to the audited Accounts and trend information with commentary against trends and performance against policy. The accountability requirement contains a Governance Statement and information on strategic risks to the entity, the Remuneration Report and information on parliamentary accountability, including the Statement of Parliamentary Supply. The final requirement shows the set of financial statements and disclosure notes.10
Additionally, the Treasury told Departments to remove “non-material balances” from the Accounts.11 The Treasury argued that this would make the document shorter and therefore easier to use.
12.These reforms were introduced with effect from 2015–16. Dr John Pugh MP, a member of the Public Accounts Committee and author of a previous report on financial scrutiny in the House of Commons, in his evidence to us confirmed that in 2015–16, “everybody [all Departments] has complied in kind, but not in precisely the same way or with the same degree of clarity”.12 We return to analyse the effect of these reforms in Chapter 3.
2 The National debt figure for 2015–16 is given in House of Commons Library Government borrowing, debt and debt interest: historical statistics and forecasts, January 2017, p.6. The accounting liabilities for the same year are included in HM Treasury Whole of Government Accounts 2015–16 p.5.
3 International Financial Reporting Standards have been adopted for corporate Accounts across over 100 jurisdictions including the European Union and two thirds of the G20. The IFRS Foundation What are IFRS Standards
4 More detail is provided in House of Commons Scrutiny Unit Adoption of IFRS by central government: briefing note by the House of Commons Scrutiny Unit, July 2009.
5 Q335; A fuller description is included in House of Commons Library Standard Note SN/EP/5617, The Clear Line of Sight Project, July 2010.
7 HM Treasury, Simplifying and streamlining statutory annual report and Accounts, Cm 8905, June 2014.
8 HM Treasury, Simplifying and streamlining statutory annual report and Accounts, Cm 8905, June 2014, p.3.
9 HM Treasury, Simplifying and streamlining statutory annual report and Accounts, Cm 8905, June 2014, p.7.
11 Materiality is defined later in this report in Paragraph 128. Broadly a “non-material balance” would not affect someone’s view of the organisation the Accounts describe. For example, a Department might previously have had a note concerning financial instruments even in cases where it had no such instruments.HM Treasury, Simplifying and streamlining statutory annual report and Accounts, Cm 8905, June 2014, p.4.
26 April 2017