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Lord McIntosh of Haringey: Before I turn to the amendment, I should like to comment on some extraneous matters relating to the Sharman report which were raised first by the noble Lord, Lord Higgins, and then by the noble Lord, Lord Naseby, and the noble Viscount, Lord Bridgeman. These are the matters relating to the Sharman report. The Sharman group will report to a committee which consists not only of the Chief Secretary and the chairman of the PAC, but also other members. Those other members are now being approached and, as soon as we have agreement as to who they will be, we will publish all the details.
The noble Lord, Lord Higgins, asked also about the terms of reference for the group. It has only been in being for a short time, but the noble Lord, Lord Sharman, is working on it. Terms of reference are being agreed and will be made public as soon as possible.
As to when the group will report, we are working on it being towards the end of the year. The noble Baroness, Lady Sharp, will appreciate that, if we were to delay the Bill even by the six months between now and the end of the year, we would in effect lose a whole year of moving towards resource accounting. Not only that, but we would also lose a whole year in which nothing could happen, and we might possibly even have to go backwards because these are cumulative, incremental steps towards the changeover. We cannot simply take a year out and say, "Hold your breath for a year", and hope that it will all work out afterwards. It is important that we go ahead with this Bill, even though the Sharman committee has not yet reported.
As to what action we should take afterwards and whether or not there would have to be separate legislation, that depends of course on what the noble Lord, Lord Sharman, says. We simply do not know what he will recommend. He may say that his report is about government audit and not about resource accounting; he may say that everything is wonderful and that there is no reason for any change. In that case it would be rather foolish of us to indicate now what legislative or other action we would take as a result.
I turn now to the amendments. The Government already have a robust and professional framework for determining the accounting requirements for resource accounts. This Government also believe that we have put in place important improvements in the amount of available information on departmental performance. These amendments seek to replace general and unchanging referencesI know that the noble Baroness, Lady Sharp, does not like them but they are perfectly clearto,
We assume that this legislation, once passed, will last for a long time. The amendments would mean that it could become outdated as accounting standards change and the accounting statements mentioned may not be appropriate to all resource accounts in the future. The Government are committed to following best accounting practice, but they do not have a great deal of freedom to manoeuvre. The financial statements prepared under resource accounting will, as far as is possible taking account of the specific circumstances of departmental accounts, follow the requirements of generally accepted accounting principles. Those can change over time, as shown by the Accounting Standards Board's recent consultation on reporting financial performance. It has been consulting on the proposal to combine the profit and loss accounts with a statement of total recognised gains and losses. If that were to be adopted, the amendment would immediately be out of date and refer to a standard which was no longer generally accepted accounting practice. We never want to find ourselves in a position where we are unable to follow generally accepted accounting practice in order to comply with the requirements of this code.
Having said that, the Government were sympathetic to a number of the proposals contained in Amendment No. 4 when it was originally proposed in Committee in another place. The Government brought forward amendments at Report stage in another place to make the necessary changes to the Bill.
Paragraph (d) of Amendment No. 4 would require differences between the amounts authorised in the estimates and those actually used to be shown and explanations of the variances given. That is, in effect, a restatement of the current requirements as set out in Section 26 of the Exchequer and Audit Departments Act 1866. The Government brought forward an amendment at Report stage to reintroduce it as a legal requirement in Clause 5(3)(c). The amendment would also require the income and expenditure account and the balance sheet under resource accounts to show a true and fair view. The Government have always accepted that they should and indeed we go further in believing that the accounts as a whole should show a true and fair view.
We have not proposed making this a statutory requirement as we believe that it was implicit in the requirement in Clause 5(3) that resource accounts should comply with GAAP. However, following the discussion on the matter in Committee in another place, the Government brought forward further amendments at Report stage requiring the resource accounts to show a true and fair view. This is now Clause 5(3)(a) of the Bill.
The Government believe that the existing provisions of Clause 5(3), which require resource accounts to show a true and fair view, comply with GAAPsubject to the adaptations necessary in the context of departmental accountsand explain variances between estimated and actual amounts, will ensure compliance with best accounting practice while retaining sufficient flexibility to enable resource accounts to adapt as the requirements of GAAP change over time.
I am not at all sure what Amendment No. 5 is intended to achieve. The requirements in Clause 5(3) that resource accounts show a true and fair view and follow generally accepted accounting practicemodified only as necessaryensure that best accounting practice will be followed. I can assure the Committee that the Government will determine their accounting policies with regard to accounting for liabilities in accordance with relevant accounting standardsin particular Financial Reporting Standard 12. The accounting policies will have to pass the scrutiny of the Financial Reporting Advisory Board and the accounts prepared following the policies will be subject to audit scrutiny by the National Audit Office.
Amendment No. 7 is even more puzzling. I have explained how the requirements of Amendment No. 4 have been achieved by government amendments that introduce Clause 5(3). Amendment No. 7 would take out Clause 5(3). It is this subsection which, for the first time, will place a statutory duty on departments to follow best accounting practice in preparing their accounts. Leaving it out would have the effect of giving the Treasury almost unfettered discretionwhich is what the noble Viscount, Lord Bridgeman, thought we hadto determine the form and contents of the resource accounts; precisely what I thought concerned Opposition Peers.
Ultimately the accounting policies adopted by departments must be consistent with the Resource Accounting Manual and will have to stand up to audit by the Comptroller and Auditor General who will, of course, be free to report to Parliamentand, if necessary, to qualify accountswhere he does not consider a particular accounting policy to be appropriate.
The noble Lord, Lord Higgins, asked me about cash control. He is, of course, right that cash will remain a key control. Parliament will continue to vote on an overall cash requirement because it has to raise revenue for that purpose. The initial out-turn against that overall requirement is reported in schedule 1 of the accounts, the statement of out-turn. In addition, the accounts will include a cash flow statement.
The noble Viscount, Lord Bridgeman, asked me about Ministry of Defence assets. Accounting policies for these have been agreed by the National Audit Office. They must be in accordance with generally accepted accounting practice and they ensure that the accounts show a true and fair view. I appreciate the difficulty of valuing physical assets owned by the Ministry of Defence, but we have taken the right approach in ensuring that we are compliant with accounting standards. I hope that will help noble Lords in considering what to do in future on these amendments.
Lord Higgins: We are grateful to the Minister for that reply. He referred rather pejoratively to extraneous matters. As I understand it, one cannot be out of order in your Lordships' House, as one might have been in another place had they truly been extraneous, but it seemed that, given what was said on Second Reading, it would not be inconvenient for us to ask where we had reached.
Lord McIntosh of Haringey: Extraneous was not in any way a term of abuse, apart from the subject matter of the amendments themselves. It is entirely proper for noble Lords to raise these matters, as they have done. I hope that I have given a suitable answer.
Lord Higgins: We are grateful for that explanation of the particular expression which the noble Lord used. In that context, therefore, perhaps I may ask whether we are likely to get the terms of reference before Report stage. I think there is no reason why we should not, and it would certainly be helpful if we were to do so.
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