7 Accounting standards
7.1.1 The partner authorities will continue to use the existing guidance for the preparation of their financial statements. However, depending whether the lead authority is the Local Authority or the Health Board certain accounting treatments may lead to issues under the integration arrangements. The main areas where this is an issue is the in availability of certain budgets for transfer as result of the statutory mitigation available to Local Authorities. Guidance has been prepared to address these issues.
What is a statutory mitigation?
7.1.2 A statutory mitigation will determine the accounting treatment for specified transactions or types of transactions undertaken by Local Authority and is issued as statutory guidance by Scottish Ministers. Such guidance is issued where the accounting practice under the Code of Practice has been determined to result in an improper charge against the general fund in the Local Authority financial statements and thus has a consequential impact on the funding available for the provision of local services. The statutory mitigation reverses the financial impact on the general fund. E.g. the impact of IAS19.
What is the impact on the Integration Authority?
7.1.3 The statutory mitigation affects the budget which is available to the Local Authority to transfer to the Health Board under the integration arrangements. Therefore, there is a risk that an asset or liability which is planned to be transferred does not have full budget cover.
What other differences may have an impact on the Integration Authority?
7.1.4 The treatment and funding of the respective public sector pension schemes and the budget arrangements for capital and depreciation.
Which areas are affected?
7.1.5 The areas where this may be an issue for the Integration Authority are capital and depreciation, and employee benefits including pensions, holiday and flexi leave.
7.2 IAS 19 - Employee benefits including holiday pay and flexi leave
7.2.1 IAS19 requires employee benefits, including untaken annual and flexi leave, to be valued and accrued at the year end. Health Boards and Local Authorities apply this policy, but Local Authorities have a statutory mitigation. This directs the Local Authority to reverse the accrual included in the in Comprehensive Income and Expenditure Statement through the unusable reserves, which means that there is no requirement to fund the accrual by the Local Authority.
Why is this an issue?
7.2.2 Under the provisions of the legislation the employee liability for untaken annual and flexi leave will transfer with staff under the integration arrangement (Section 21). Staff transferring from the Health Board to the Local Authority may have accrued annual and flexi leave which is accrued in the Local Authority accounts but subsequently reversed under the statutory mitigation for funding purposes. The statutory mitigation for Local Authority means that the funding for the liability is not required under the integration arrangements.
7.2.3 Where staff transfer from the Local Authority to the Health Board the reverse position arises and there is a one-off budget requirement to meet the accrued employee benefit costs which is unfunded in the Local Authority.
When staff transfer from the Local Authority to the Health Board will there be additional funding made available to meet the liability in the first year?
7.2.4 There is no specific provision in the financial memorandum to provide additional funding for the cost of the employee benefits. The cost of the accrual should be considered as part of the implementation budget of the Integration Authority, noting that there is no material recurring impact.
Who will benefit from the additional funding when staff transfer from the Health Board to the Local Authority?
7.2.5 The funding made available from the accounting treatment should be considered as part of the overall budget requirements for the Integration Authority, noting that there is no material recurring impact.
Is there any action which should be undertaken now?
7.2.6 The budget implications for transferred staff should be part of the wider planning for integration. This should include consideration of how to make effective use within the Integration Authority of the one-off funding available by the integration arrangements and mitigation of potential additional costs. Therefore, it is recommended that there is an early assessment of the potential budget commitment/gain and its constituent parts. This may include:
- Impact of the timing of different leave years;
- Levels of outstanding holiday pay; and
- Levels of outstanding flexi leave
and a review of specific actions which may be taken to reduce the liability including:
- Potential to align leave years to 31 March; and
- Management of annual and flexi leave levels within existing polices and guidelines.
7.3 IAS 19 - Pension accounting
7.3.1 IAS19 specifies the reporting requirements of defined benefit and defined contribution pension schemes. Local Authorities and Health Boards both apply this standard but are subject to public sector adaptations which are different for each authority. The relevant adaptions for Health Boards  are:
- NHS Superannuation Scheme - a defined benefit scheme (final salary, multi-employer, unfunded scheme) is to be treated as a defined contribution scheme;
- The period between actuarial valuations is four years with estimations made in the intervening period for the calculation of defined benefit obligations and the fair value of the assets;
- Funded schemes should use a discount rated in accordance with IAS19 advised by the scheme actuary; and
- Where the Health Board has a share of a local government (or other) pension scheme liability on its statement of financial position, that that entity will use a discount rate determined by the appropriate authority in valuing its share and not the rate advised annually by HM Treasury.
7.3.2 Local Authority apply IAS19 in full but have a statutory mitigation which directs the Local Authority to reverse the IAS19 pension charges against the general fund through the unusable reserves. The actual cost of the pension contributions is charged against the balance required to be funded by the Local Authority. Similarly there is a statutory adjustment for the share of the scheme historic funding deficit.
What are the IAS19 implications for pension accounting when staff transfer?
7.3.3 The accounting treatment and associated financial implications of the pension arrangements of staff transferring under integration is dependent on the transfer terms and conditions agreed e.g. TUPE. Three possible options for the pension arrangements on staff transfer have been considered. These are:
- Staff remain in their existing pension scheme (A);
- Staff transfer to the host partner scheme (B); and
- Staff freeze their pension rights in their existing scheme to the date of transfer and then join the new employee partner scheme (C)
7.3.4 However, options (B) and (C) may not meet the requirements for TUPE and/or be approved by Government Actuaries Department (GAD). Current advice from Scottish Public Pensions Agency is that options (B) and (C) are unlikely to meet the comparability test without additional budget to protect existing accrued pension rights and may require legislative change to implement.
7.3.5 It is not recommended that options (B) and (C) are used for staff transfers under the integration arrangements.
7.3.6 Option (A) would meet the TUPE requirements and any budgetary impact may be mitigated using the accounting arrangements described below. This is the recommended option.
What is required to adopt option (A)?
7.3.7 Where NHS staff transfer to the Local Authority but remain in the NHS pension scheme, partners need to apply for a direction to allow Local Authority staff to be members of the NHS superannuation scheme. General information may be found at here and where such arrangement is being considered early discussions should be held with the authority's main contact for NHS Superannuation Scheme (Scotland) at the Scottish Public Pensions Agency.
7.3.8 Where Local Authority staff transfer to the Health Board, but wish to remain with the Local Government Pension Scheme, the Health Board should apply to be an Admitted Member of the relevant Local Authority pension scheme under the new regulations. Each scheme publishes guidance how to apply and it is recommended that early discussions are held with the pension scheme manager where this arrangement is being considered.
Are there any accounting issues when the Local Authority is the host partner?
7.3.9 No. The Local Authority will need to disclose its membership of the NHS superannuation scheme as a defined benefit scheme in its financial statements as permitted under the application of IAS19 for the public sector.
Are there any accounting issues when the Health Board is the host partner?
7.3.10 Yes. The Health Board will be required to recognise in its accounts the share of any deficit/surplus on the Local Authority pension fund that is attributable to the transferred staff and that arises after the date of transfer (Section 21(4)). This will be a non-recurrent provision in the first year with subsequent annual adjustments based on actuarial estimates.
7.3.11 The Local Authority statutory mitigation directs that the IAS19 pension charges against the general fund are reversed and charged against unusable reserves. For funding purposes the general fund is charged with the cost of the pension contributions. Consequentially there is no budget available in the Local Authority to transfer to the health board to meet the cost of the share of any deficit for the transferred staff.
What is the accounting treatment for the Health Board share of the annual valuation changes of the pension scheme?
7.3.12 The valuation changes from the point of transfer are accounted for by the Health Board as required under IAS19. This requires that the relevant proportion of the assets and liabilities of the scheme are included in the financial statements. The resultant asset or liability should be charged against the AME budget. This requires:
- Health Boards to bid for AME budget in November each year to cover the estimated annual year end valuation.
- Estimates of the IAS19 valuations of the pension scheme in November each year to inform the AME bid
- Valuations to be rolled forward to the year-end date by the actuaries to provide the figures for the Health Board accounts by 30 April each year
- Discussion with Scottish Government health finance regarding the potential new budget requirement.
- Disclosure in the Health Board financial statements of the pension scheme under IAS19.
What are the accounting arrangements for the historic pension deficit for transferred staff?
7.3.13 The historic pension scheme deficit liability to the date of transfer has accrued during service prior to the transfer and is a liability of the Local Authority. The Local Authority should continue to recognise the liability and related scheme assets within its financial statements on the basis that it will be met by the future actuarial approved pension contributions. This requires:
- Pension scheme actuarial valuation at the date of transfer for the relevant values at the point of transfer.
- Local Authority to pay the proportion of the pension scheme contributions for transferred staff which is attributable to the historic deficit to the point of transfer. There is no budget impact as the integration budget will only include the proportion of the pension contributions due to be paid by the Health Board.
- Actuarial advice and relevant figures for the proportion of the contributions which are related to the historic deficit.
What are the risks?
7.3.14 The main risks are:
- Insufficient budget is available to meet the liability of the historic scheme deficit relating to the pension liabilities of the transferred staff.
- Insufficient AME budget to meet the cost of the annual pension scheme valuations allocated to the Health Board.
- Scottish Government has insufficient total AME budget to meet the annual pension provision due to UK budgetary constraints.
Does IAS19 affect the arrangements for voluntary staff transfer?
7.3.15 The issue discussed above relates to the bulk transfer of staff under the integration arrangements in the legislation. The current arrangements and any associated issues for individual/voluntary staff transfers are unchanged. However, there are may be further changes to the operation of the Public Service Pension Schemes following the Public Sector Pension Act including possible changes to the "fair deal" policy, operation of the public transfer club and "wider access" polices. Further specific guidance will be issued where changes will uniquely affect the integration arrangements.
7.4 Capital and depreciation
7.4.1 The integration arrangements will lead to changes in the occupation of and use of assets by the partner authorities. Guidance on asset management and the associated accounting treatment issues are in section 6.2.
7.5 Draft IFRS
7.5.1 Although guidance has been prepared based on the accounting standards and treatments which apply for accounting periods beginning after 1 January 2012, the potential implications of the adoption of new and amended accounting standards has been considered.
What new or revised financial reporting standards are expected to impact on the accounting treatment for the Integration Authority?
7.5.2 In the longer term ED/2013/6 leasing.
What will be the impact?
7.5.3 The consultation on ED/2013/6 leasing ended 13 September 2013 and until the standard is agreed the full impact cannot be assessed for the integration authorities and the public sector as a whole and as such is outwith the scope of this guidance. However, it is noted that the following matters within the proposals may impact on the future treatment of the leasing arrangements in the Integration Authority:
- The treatment of property leases (Type B leases) and their inclusion in the balance sheet as "right of use assets"; and
- The agreed treatment to be applied retrospectively.
Will new guidance be issued the following adoption of the reporting standards?
7.5.4 Additional guidance will be issued if there are specific issues to be addressed unique to the Integration Authority in the initial transitional stage. It is envisaged that guidance relating to other and future changes to the reporting standards will be through the existing arrangements.
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