Greenwich School of ManagementExecutive MBAModule: Accounting and Financing For ManagersTutor:“A Report Evaluating Financial Information Pertaining to West Kent NHS Health & Social Care Trust’s 2004/5 Accounts”Student Name: Graham BlackmanStudent No: HSK008PESubmission date: 9th March 2006Word Count: 4,83962%ContentsPage No.
1.Introduction32.Background Information on Trust and Author33.Purpose of Accounting Standards44.Statement of the Chief Executives and Directors65.Statement of Internal Control 86.Independent Auditors report97.Income and Expenditure Account 78.The Balance Sheet 169.Cash Flow Statement2110.Who Will Be Reading the Accounts?25AppendicesA.Pro Forma Statement on Internal Control27B.Notes 3 and 4, Income from Activities29C.Note 5.1, Operating Expenses 30D.Notes 8 and 9, Disposal of Fixed Assets & Interest Payable 31E.Note 10, Intangible Fixed Assets32F.Note 11.1, Tangible Fixed Assets33G.Notes 12 & 13, Current Assets34H.Note 15, Creditors35I.Note 22, Public Capital Dividend36J.Note 17, Reserves37K.Note 18.1, Operating Activities Cash Supplies38Tables1.Income and Expenditure Statement122.Balance Sheet173.Cash Flow Statement22Boxes1.Deprecation Rates For Tangible Assets12References391.IntroductionThe following report is an evaluation of financial information produced at the end of the 2004/5 financial year for West Kent NHS and Social Care Trust. The author shall initially give brief background information on himself and his organisation followed by an overview of the purpose of accounts and the bodies and panels affecting accounting. A review of the information submitted in the reports by the chief executive and directors, together with a review of the statement of internal control and the independent auditors report will then be presented. After which the report will discuss the three main areas of the accounts. Firstly the income and expenditure accounts, secondly, the balance sheet for the organisation, and thirdly, the cash flow statement, analysing each element in turn. Finally the author will then discuss 3 stakeholders who may wish to gain information from the accounts.
2.Background2.1I currently practice as a ward manager within an Assessment and Intervention Service for individuals who have a learning disability and a concomitant mental health or forensic need.
2.2The service is part of West Kent NHS Health and Social Care Trust, (West Kent), which is an integrated health and social care trust that specialises in the provision of mental health services to the people of West Kent. The Trust operates through four clinical areas and from approximately 150 sites.
3.Purpose of Accounting Standards3.1Inconsistency between company accounts prompted the accountancy profession to introduce standardised procedures known as Accounting Standards (Black 2002). Today, Accounting Standards are known as Financial Reporting Standards or (FRSs). Standards issued by previous bodies were known as Statements of Standard Accounting Practice or (SSAPs). These are still in use and are in constant review by the Accounting Standards Board (ASB), some have been withdrawn and others superseded by FRSs.
3.2According to (Black 2002) it is a legal requirement that the financial reports provide a ‘true and fair view’ of the transactions made by the company during the course of a year. Accounting Standards outline the specific procedures required to produce consistent and functional reports. Their purpose is also to improve the quality and the usefulness of the financial statements. The following bodies were set up in response to the Dearing Report (Blake 1987) and replace the original Accounting Standards Committee (ASC).
3.3The Financial Reporting Council (FRC),The FRC provides a general policy function and oversees the accounting standard setting, giving guidance and support to the Accounting Standards Board in developing financial information in the correct manner and advising on broad policy issues. The FRC has two operational bodies-the Accounting Standards Board (ASB) and the Financial Reporting Review Panel (FRRP).
3.4The Accounting Standards Board (ASB), From its outset in 1990, the ASB has been responsible for issuing accounting standards, recognised under the Companies Act 1985. The aims of the ASB are to provide a lawful framework for financial accounts through the setting of standards, the focus being to work on the concept of principles rather than detailed rules. The ASB have developed a “Statement of Principals for Financial Reporting” in order to define specific and consistent accounting standards.
3.5The Financial Reporting Review Panel (FRRP), The FRRP is an independent body which investigates discrepancies or deviations from the accounting requirements of the Companies Act 1985, which requires the company to give an explanation of a deviation and the reason why. If a failure is identified, (Blake 1987), the panel try to come to an agreement to revise the documentation. This pertains only to large Companies, where the panel will ask the Company concerned to explain and give the reasons why. If the panel does not accept its explanation, (Black 2002) then it has the power to apply for a court order and the company must then issue amended reports which must then reflect a true and fair view. This is all at the personal expense of the director(s) of the company and could potentially be quite harmful.
3.6The Urgent Issues Task Force (UITF), a sub- committee of the ASB who bring issues to light that may not be covered by an Accounting Standard, eg. It may be a new issue or may not be relevant or applicable. Its role is also to identify where a contentious issue has arisen over an accounting standard. Its aim is to assist the ASB, (Black 2002) in the formulation and continuity of appropriate standards and correct reporting procedures. The ASB gives the UITF, (Black 2002) ultimate responsibility to reach an agreement on a particular issue and will generally not challenge the outcome.
3.7ASB Recognised Bodies, These are committees who work with specific industries and sectors, reviewing Statements of Recommended Practices (SORPs). SORPs are guidelines that are relevant to a particular industry and although are not accounting standards in their own right, they work on the basis of best practice.
3.8International Accounting Standards Committee (IASC), Set up in 1973 the IASC’s purpose was to give unanimity to Accounting procedures worldwide. There are 70 member countries. One problem that has been encountered is that due to differing economic systems, (Black 2002) there is no generally agreed framework in which to concur the objectives of financial reporting.
4.Statement of the Chief Executives and Directors Responsibilities4.1The Secretary of State has directed that the Chief Executive should be the Accountable Officer to the Trust. The relevant responsibilities of Accountable Officers, including their responsibility for the propriety and regularity of the public finances for which they are answerable, and for the keeping of proper records, are set out in the Accountable Officers’ Memorandum issued by the Department of Health (2003a).
4.2The National Health Service (NHS) Act of 1977 requires the Directors to prepare accounts for each financial year that gives a true and fair view of the state of affairs of the Trust and of the profit or loss for that period. In preparing those accounts, the Directors are required to:•select suitable accounting policies and apply them consistently;•make judgements and estimates that are reasonable and prudent;•state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and•prepare the accounts on the going concern basis unless it is inappropriate to presume that the group will continue in business.
4.3The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Trust and to enable them to ensure that the accounts comply with the direction from the secretary of state as set put in the NHS Act 1977. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
5.Statement of Internal Control5.1Accounting Officers are required to make an annual statement – the “Statement on Internal Control” (SIC) – this should be in accordance with the guidance given by the Department of Health (DoH) (2003, 2005) using the pro forma suggested by Her Majesties Treasury (2005) (see appendix A). The pro forma requires a high-level summary of the ways in which staff are trained to manage risk and of how risk has been identified, evaluated and controlled. It also requires a confirmation that the effectiveness of the system of internal control has been reviewed and that the results of the effectiveness review have been discussed by the Accounting Officer with the board, the Audit Committee (and the risk committee if one exists in the body) (DoH 2003). In addition, disclosure is required in relation to any “significant internal control issues”. West Kent in their statement on internal control set out the main areas in accordance with the above guidance which include;5.2Scope of responsibility, The Chief Executive (CE) of the trust identifies that he is personably responsible for maintaining a sound system of internal control5.3The purpose of the system of internal control, In the statement the CE discusses risk, and states that his purpose is to minimize but not eradicate risk. He goes on to state that these risks would be evaluated so they may be managed efficiently, effectively and economically.
5.4Capacity to handle risk, A very short statement stating that the CE has responsibility for risk management within the trust. Although he also mentions where information pertaining to guidance and local policy is available there is no statement regarding the trusts actual capacity to handle risk5.5The Risk and control framework, In this statement the CE discusses how risk is managed within this trust and identifies that there are several gaps within some clinical areas. He also highlights the fact that the trust have a counter fraud policy and counter fraud specialists employed within the organisation that seek out and investigate fraudulent activity5.6Review of effectiveness, Here the CE explains that the trust has improved the risk management structure, although does not mention if this has been effective. Indeed he mentions that further steps have been taken to address weaknesses, the CE does not give any information concerning the actual weaknesses or how they will be addressed. The trust has achieved level 1 of the clinical negligence scheme for trusts (CNST), although doesn’t mention that this is the lowest level.
6.Independent Auditors report6.1An auditor’s report states that the financial statements that were audited for a specific period of time are the responsibility of the company’s management. It will also state that the responsibility of the chartered accountant is to express an opinion on those financial statements based upon his or her audit (Dyson 2004)6.2Her Majesty’s revenues and Customs (no date) inform us that, an independent audit is conducted in accordance with generally accepted auditing standards (UKGAAP). Those standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation (Atrill & Mclaney, 2001)6.3The auditor must include a statement that he or she believes that the audit provides a reasonable basis for his opinion. If the audit cannot provide a reasonable basis for an unqualified opinion, the auditor must explain the reasons and qualify his or her opinion (Dyson 2004)6.4The Auditor does not comment on the effectiveness of the organisation’s corporate governance, risk management or internal control procedures (Davis & Pain, 2002).
6.5The independent auditors for the trust (PricewaterhouseCoopers) concluded that the financial statements gave a true and fair account to the state of affairs, it did remark on the fact they it could not comment on risk management within the trust and made reference to the 1998 audit commission act and the SIC (2003), issued by the Department of Health. It did not, however mention the updated 2005 SIC or the Auditing Practices Board (2006) International Standards on Auditing.
7.Income and Expenditure Account7.1An income and expenditure account is an official annual financial document published by a public company, or in this case West Kent, showing income (earnings), expenses, and retained surplus or deficit (net profit). Retained surplus or deficit is determined from this financial report by subtracting total expenses from total income (revenue). The Income (profit) and Expense (loss) statement and the balance sheet are the two major financial reports that every public company publishes (Dyson 2004). The difference between this statement and the balance sheet deals with the periods of time that each one represents. The income (profit) and expenditure (loss) statement shows transactions over a given period of time (usually quarterly or annually), whereas the balance sheet gives a snapshot of holdings on a specific date. (Davis and Pain 2002).
7.2West Kent’s Income and expenditure accounts have seven elements to then (see Table 1) 5 of which have notes. Although one could argue that NHS Trusts “sell” their services to Primary Care Trusts (PCT), and Strategic health Authorities (SHA) etc, the first line of the statement is still referred to as income from activities, as opposed to earnings.
INCOME AND EXPENDITURE ACCOUNT FOR THE YEAR ENDED31 March 20052004/052003/04NOTE£000£000Income from activities3100,70290,563Other operating income47,5819,312Operating expenses5-7(104,379)(96,681)OPERATING SURPLUS (DEFICIT)3,9043,194Cost of fundamental reorganisation/restructuring00Profit (loss) on disposal of fixed assets85(20)SURPLUS (DEFICIT) BEFORE INTEREST3,9093,174Interest receivable 114109Interest payable9(13)(15)Other finance costs - unwinding of discount(111)0Other finance costs - change in discount rate on provisions00SURPLUS (DEFICIT) FOR THE FINANCIAL YEAR3,8993,268Public Dividend Capital dividends payable(3,871)(3,244)RETAINED SURPLUS (DEFICIT) FOR THE YEAR2824The notes on pages 6 to 42 form part of these accounts.All income and expenditure is derived from continuing operations.
Table 17.3Notes 3 and 4 (see appendix B) gives the reader an indication as to where income has been generated. Income from the PCT is by far the greater contribution with 2004/5 income exceeding the previous years by more than 10%.
7.4The Department of Health’s contribution has increased nearly 7 fold, possibly due to the agenda for change intiative.
7.5Within other operating income it should be noted the monies allocated for education training and research, £2,187,000. The only recorded expense identified with the accounts is £600,000 for training (see note 5, operating expenses, appendix C). There is no explanation to where or if the other, substantial, monies have been spent.
7.6Operating expense reflects the increase in income (approx. 10%) with the greater increase in staffing costs, again probably the cost of agenda for change. Staffing costs are considered a semi-variable cost which consists of both fixed and variable elements (Atrill & Mclaney 2001). One of the reasons for this is could be that, although the labour costs remain the same, occasionally staff may be get paid for doing overtime.
7.7There are two other types of costs that appear on the operating expenses. Fixed costs are costs that constantly remain the same. An example of a fixed cost is rent; even if the premise isn’t being used the rent would still have to be paid. West Kent identifies this as premises (see note 5.1 appendix C). Variable costs are costs that change depending on how much of the resource is being used. An example of this would be electricity bills, telephone bills as well as raw materials; each of these costs will change depending on the usage (Atrill & Mclaney 2001). West Kent entitles these supplies and services.
7.8Operating surplus or deficit is made up from the difference between the income (£100,702,000) and the operating expenses (104,379,000) namely £3,904,000.
7.9It interesting to see a zero value attached to the cost of fundamental reorganization/restructuring, should costs for agenda for change fit under this heading?7.10The profit or loss from the disposal of fixed or fixed tangible assets is noted next. These could be the sale of buildings (surplus), this is demonstrated in this years accounts. Or the early depreciation of a piece or machinery etc, which is indicated in last years accounts (see note 8 appendix D).
7.11The aforementioned items in 7.8 & 7.9 are then added to the operating surplus to achieve the surplus or deficit before interest.
7.12Before we achieve a balance for the financial year intereste is added/subtracted. Because West Kent had a surplus of £3,909,000 the interest receivable amounts to £114,000 in interest for the year 2004/5 a similar amount to the year before. The interest payable again is comparable to last year and is for the leasing of goods. It should be highlighted that the mount indicated in the notes (see note 9 appendix D) has been given in black and not bracketed I.E. indicating a surplus, but the amount indicated in the account statement is in red and bracketed I.E. rightfully a deficit. The accounts department within West Kent explained that this was because that this was “interest payable” only in note 9 so it may appear in black.
7.13A major difference between the 2004/5 accounts and the 2003/4 accounts is the unwinding discount payment. Unwinding discount refers to the future provision of pensions. This takes into consideration the net present value, which Langley & Harden (1994), Atrill & Mclaney (2001) & Davis & Pain (2002) describe as the future stream of benefits and costs converted into equivalent values today. This is done by assigning monetary values to benefits and costs, discounting future benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits. In other words West Kent needs to predict the value of the pound in the future and put this amount aside now. Previously (2003/4) the percentage of growth was estimated at 3.5% in 2004/5 this percentage has decreased to 2.2% requiring West Kent to allocate £111,000 more than in previous years. This may be reflected in the increased income from the Department of Health (see note 3 appendix B).
7.14Before the final figure (retained surplus) on the income and expenditure account is reached the trust have to deduct the Public Dividend Capital Payable dividend (PDCD). PDCD is calculated by the Government in the form of a percentage (currently 3.5%) applied to the monies received in income by the trust (DoH 2005a). The Public Dividend Capital (PDC) is likened to an equity stake rather than a loan that has to be compensated by dividend rather than fixed or variable interest (Her Majesties Treasury 2005).
7.15West Kent has shown a retained surplus (or profit) of £28,000 for the year 2004/5. Although this was £4000 more than the previous year it did have approximately an £8000 increase in its income and raised £5000 from the sale of properties as opposed to the £20,000 loss made in this area in the previous year. However West Kent did have to finance the increased pension cost of £111,000 this year and not last.
8.The Balance Sheet8.1Dyson (2004) suggests that a balance sheet is a quantitative summary of a company’s financial condition at a specific point in time, including assets, liabilities and net worth. West Kent’s balance sheet (see table 2) consists of the following;8.2Fixed assets refer to intangible and tangible assets as well as investments (Dyson 2004). West Kent has no current investments.
BALANCE SHEET AS AT31 March 200531 March 200531 March 2004NOTE£000£000FIXED ASSETSIntangible assets1014985Tangible assets11128,935103,120Investments14.100129,084103,205CURRENT ASSETSStocks and work in progress12304219Debtors1311,55011,669Cash at bank and in hand18.330529612,15912,184CREDITORS: Amounts falling due within one year15(12,217)(12,256) NET CURRENT (LIABILITIES)(58)(72) TOTAL ASSETS LESS CURRENT LIABILITIES129,026103,133CREDITORS: Amounts falling due after more than one year15(100)(114)PROVISIONS FOR LIABILITIES AND CHARGES16(2,653)(3,401) TOTAL ASSETS EMPLOYED126,27399,618FINANCED BY:TAXPAYERS’ EQUITYPublic dividend capital2286,99078,803Revaluation reserve1738,05419,293Donated asset reserve171,1551,153Government grant reserve1700Other reserves178181Income and expenditure reserve17(7)288TOTAL TAXPAYERS EQUITY126,27399,618Table 28.3Intangible Assets are non-physical assets such as copyrights, franchises and patents (Dyson 2004). To estimate their value is very difficult because they are intangible. Often there is no ready market for them. All of West Kent’s intangible assets software licenses (see note 10 appendix e). The trust has amoritsed the cost of this licenses, at a cost of £14000 per year8.4Atrill & Mclaney (2001), tell us that tangible assets are divided into three categories. Property, plant, and equipment include furniture, computers, and so on. In order to keep track of all the assets from this category each company usually uses subcategories for a particular item or items of similar nature. Land is classified as a separate category for one major reason: land is not a subject to depreciation or depletion. Land is considered to have an infinite life. Although land can suffer impairment, as in West Kent’s note on tangible land assets (see note 11.1 appendix f) showing a £9000 impairment. An Impairment loss results from a short term change in price that is considered to be recoverable in the longer term (Blake 2002)Box 1 – Deprecation Rates For Tangible AssetsPlant and Machinery5- 15 yearsTransport Equipment7 yearsInformation Technology5-8 YearsFurniture and fitting7 – 10 Years8.5 The process of expense recognition for property, plant, and equipment is called depreciation (Dyson 2004). Depreciation is the process of allocating the original purchase price of a fixed asset over the course of its useful life. It appears in the balance sheet as a deduction from the original value of the fixed assets (Atrill & Mclaney 2001).
8.6West Kent depreciates its equipment etc at a standard rate set by NHS guidelines (see box 1). Two issues that may be highlighted from these rates 1. West Kent is predominantly a mental health and learning disabilities servicing trust and as such tends to have patients and clients that display aggressive and violent behaviors, which, in turn will inevitably lead to more that the average use of furniture and fittings. 2. Is 5 – 8 years is too long a period in an ever-changing IT world?8.7Fixed assets are very important to a company because they represent long-term liquid investments that a company expects will help it generate profits Davis & Pain 2002).
8.8Current assets (see notes 12 & 13, appendix G) are assets that a company has at its disposal that can be easily converted into cash within one operating cycle. An operating cycle is the time that it takes to sell a product and collect cash from the sale (Langley & Harden 1994). West Kent’s current assets are made from Stocks and work in progress, which are raw materials and consumables, and Debtors, with an allowance of £156,000 for unpaid debt and cash8.9West Kent’s creditors are separated into two categories the first, falling before the total assets less current liabilities, are the amounts that are owed that fall due within one year .These are liabilities that are owed in the short-term (Dyson 2004), and consist of loans, overdrafts, tax and social security costs and other creditors (see note 15 appendix H). The second category, falling after the total assets less current liabilities, are the creditors that are due to be paid after one year. These liabilities are owed in the long term (Dyson 2004), West Kent only currently has £100,000 owed to long term creditors. It is interesting to note that a loan of £608,000 was taken for the implementation for agenda for change although this is only half as much as the previous year.
8.10Provisions for liabilities and charges are amounts levied against the surplus so to provide for any expected liability or loss or claim (Davis & Pain 2002). West Kent predicts £2,653,000 of expense in this area, mainly made up from pensions and legal claims. This also includes the unwinding discount highlighted in paragraph 7.13.
8.11Taxpayer’s Equity is a misleading title according to Her Majesties Treasury (2005a), who would like the title change as it implies that these are funds that are available for the taxpayer to distribute. Taxpayer’s equity, also called capital, is any debt owed to the Trust. In West Kent’s case their annual PDC is considered a debt which has had more than a 50% increase on last years increase (see note 22, appendix I). Other reserves contribute to the financing of the balance sheet, (see note 17 appendix J) including the £28,000 retained surplus for 2004/5 as mentioned in paragraph 7.15.
8.12The total taxpayer’s equity should always, as in West Kent’s sheet equal the total assets employed I.E. a “balanced sheet” (Tracy & Barrow 2001).
9.Cash Flow Statement9.1Davis & Pain (2002) inform us that a cash flow statement (see table 3) is a financial report that shows incoming and outgoing money during a particular period. The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills (Dyson 2004).
9.2Two different ways exist to present information on a statement of cash flow. The predominant way of presenting information is the indirect method (Atrill & Mclaney 2001). The indirect method provides information about the company’s cash flow by focusing on changes in the non-cash operating accounts on a balance sheet. This type of presentation takes the net income and then adjusts changes from non-cash accounts to derive the cash flow statement. The direct method of cash flow presentation uses the direct change in cash accounts to determine the flow of the cash (Atrill & Mclaney 2001).
9.3Direct method presentation starts with cash received from customers and then takes expenses from that amount to determine the net cash provided by operational activities (Marshall et al, 2004). In addition to these differences, the presentation of operational activities on the statements is different. When a company uses a direct method, a separate section for reconciling net income along with net cash from operational activities is necessary. In the indirect form of the cash flow statement, the reconciliation is part of the operational activities section (Marshall et al, 2004).
9.4The separate reconciliation section in the direct method creates another area to the cash flow statement and essentially creates more information that the user must analyze to determine the net cash from operational activities. The reconciliation is a replica of the non-cash operating account activities used in the indirect form.
9.5The indirect form of the cash flow statement, while not directly focusing on cash transactions, presents a clear and accurate representation of the cash transactions of the company (Marshall eat al 2004).
9.6The indirect method is preferable over the direct method because of its simplicity and straightforwardness. Instead of having two separate sections devoted to operational activities, the indirect method has the one section and provides the same answer for net cash from operational activities as the direct method would (Dyson 2004). West Kent uses the indirect method in their cash flow statement.
Table 3CASH FLOW STATEMENT FOR THE YEAR ENDED 31 March 20052004/052003/04NOTE£000£000OPERATING ACTIVITIESNet cash inflow/(outflow) from operating activities18.14,6054,694RETURNS ON INVESTMENTS AND SERVICING OF FINANCE:Interest received114109Interest paid0(2)Interest element of finance leases(13)(13)Net cash inflow/(outflow) from returns on investments and servicing of finance10194CAPITAL EXPENDITURE(Payments) to acquire tangible fixed assets(10,984)(6,449)Receipts from sale of tangible fixed assets2,0501,187(Payments) to acquire intangible assets(65)(9)Receipts from sale of intangible assets00(Payments to acquire)/receipts from sale of fixed asset investments00Net cash inflow/(outflow) from capital expenditure(8,999)(5,271)DIVIDENDS PAID(3,871)(3,244) Net cash inflow/(outflow) before management of liquid resources and financing(8,164)(3,727)MANAGEMENT OF LIQUID RESOURCES(Purchase) of current asset investments00Sale of current asset investments00Net cash inflow/(outflow) from management of liquid resources00 Net cash inflow/(outflow) before financing(8,164)(3,727)FINANCINGPublic dividend capital received8,1873,349Public dividend capital repaid (not previously accrued)00Public dividend capital repaid (accrued in prior period)00Loans received00Loans repaid00Other capital receipts00Capital element of finance lease rental payments(14)(14)Cash transferred (to)/from other NHS bodies00Net cash inflow/(outflow) from financing8,1733,335Increase/(decrease) in cash9(392)9.7Cash provided by operating activities (see note 18.1 appendix K) equals net income (or in West Kent’s figures the operating surplus, see paragraph 7.15) plus depreciation, amortization (£2,210,000), and the write-down of intangible assets (£31,000), minus the gain on sale of a subsidiary and deferred taxes (£859,000) and decreased creditors (£ 689,000) minus the change in current assets (£85,000), and plus the change in current liabilities (£112,000) (Davis & Pain 2002).
9.8Returns on investments and servicing of finance relates to interest received on the operating surplus for 2004/5, (see table 1 income and expenditure), the monies paid for leasing equipment (see note 9 appendix D).
9.9Capital expenditure relates to the amount used during a particular period to acquire or improve long term assets such as property, plant, equipment or long term licenses (Langley & harden 1994). It appears West Kent has paid £10,984,000 for tangible assets I.E. land and dwelling and recoup £2,050,000 on the sale of the same. They have also paid £65,000 for intangible assets mainly software licenses (which will amortise over a 5-8 year period).
9.10Dividends paid concerns the PDC for 2004/5 (see paragraph 7.14 & 8.11). Liquid resources are resources that can be readily turned into cash (Dyson 2004), West Kent has no such assets9.11The financing of the cash flow statement comes from the increased PDC (see note 22 appendix I) for 2004/5 minus the capital element of finance lease rental payments, which, in West Kent’s case relates to software licenses (see note 10 appendix E).
10.Who Will Be Looking at the Accounts?The general term used for these people are stakeholders, but who exactly are these people? The people who read these accounts depend upon which accounts are being read. For example people who read the accounts of a health service, like West Kent, will be looking for different indicators of success as compared with people who would read Vodafone’s accounts. Three stakeholders that may be interested in these accounts might be:Managers, the Board of Directors and Employees Managers and the board of directors of West Kent will read the accounts to make judgements on how well they and their staff have performed. This is why employees, managers and directors are stakeholders because if the organisation has performed worse than expected then changes are likely to take place in the effort to improve and this could involve, restructuring, job losses, promotions, demotions, pay cuts or rises. Employees may require information on the ability of theTrust to meet wage demands and avoid redundancies, especially in the current enviroment (Jones & Hall, 2006)The Inland Revenue and the government will be keen to judge their performance to ensure that they are paying all dues owed e.g. taxes etc. The government itself would take an active interest in the financial reports of West Kent and would be keen to monitor their business actions. West Kent is a major source of employment and should it perform poorly and make staff cuts, this would leave the government with unemployment problems. The Department of Health obviously has an invested interested to ensure financial policies and the “bigger” budget are adhered toClient, patients and society, Clients and patients may require information relating to the financial position, capabilities of the trust in terms of its position in regard to, technology, supply chain management and other capabilities so that they can be reassured that the Trust will support them with uninterrupted supply of services. Society or the community in which the Trust operates, would require information regarding the trust’s ability to manage capicity of services whilst be prudent with monies e.g ensuring that the community is not effected by “post code lotteries” and that it’s business and processes to comply with environmental requirements in terms of waste disposal etc. as well as its contribution or potential contribution to the community.
Appendix A - Pro forma Statement on Internal ControlThe wording which is not in italic script in this pro forma Statement of Internal Control (SIC) should be replicated in every SIC, the words in italic script being amended as appropriate to the body in question. Bold script indicates a rubric which should be fulfilled in a way appropriate to the actual processes in place in the body to which the SIC relates.
Scope of responsibility1. As Accounting Officer, I have responsibility for maintaining a sound system of internal control that supports the achievement of [Department Yellow's] policies, aims and objectives, whilst safeguarding the public funds and departmental assets for which I am personally responsible, in accordance with the responsibilities assigned to me in Government Accounting .
(Accounting Officers should add to this paragraph to provide an explanation of the accountability arrangements surrounding their role. In particular, they should comment on:a.processes in place by which they work with/involve ministers on managing risk;b.inter-relationship of department/executive agency/NDPB ).
The purpose of the system of internal control2. The system of internal control is designed to manage risk to a reasonable level rather than to eliminate all risk of failure to achieve policies, aims and objectives; it can therefore only provide reasonable and not absolute assurance of effectiveness. The system of internal control is based on an ongoing process designed to identify and prioritise the risks to the achievement of departmental policies, aims and objectives, to evaluate the likelihood of those risks being realised and the impact should they be realised, and to manage them efficiently, effectively and economically. The system of internal control has been in place in [Department Yellow] for the year ended 31 March [200X] and up to the date of approval of the annual report and accounts, and accords with Treasury guidance.
Capacity to handle risk3. [Describe the key ways in which:a.leadership is given to the risk management process;b.staff are trained or equipped to manage risk in a way appropriate to their authority and duties. Include comment on guidance provided to them and ways in which you seek to learn from good practice.]The risk and control frameworkAppendix A Continued4. [Describe the key elements of the risk management strategy, including the way in which risk (or change in risk) is identified, evaluated, and controlled. Include mention of how risk appetites are determined.3][Describe key ways in which risk management is embedded in the activity of the organisation.](This section should only be inserted by those bodies to which it is relevant:[Describe the key elements of the way in which public stakeholders are involved in managing risks which impact on them.])Review of effectiveness5.As Accounting Officer, I have responsibility for reviewing the effectiveness of the system of internal control. My review of the effectiveness of the system of internal control is informed by the work of the internal auditors and the executive managers within the department who have responsibility for the development and maintenance of the internal control framework, and comments made by the external auditors in their management letter and other reports. I have been advised on the implications of the result of my review of the effectiveness of the system of internal control by the board, the Audit Committee [and risk committee, if appropriate] and a plan to address weaknesses and ensure continuous improvement of the system is in place.
6.[Describe the process that has been applied in maintaining and reviewing the effectiveness of the system of internal control, including some comment on the role of:a.the boardb.the Audit Committeec.if relevant, the risk committee/risk managers/risk improvement managerd.internal audite.other explicit review/assurance mechanisms.
Include an outline of the actions taken, or proposed to deal with any significant internal control issues, if applicable.]Appendix B – Notes 3 and 4 – Income from Activities3. Income from Activities2004/052003/04£000£000Strategic Health Authorities4264NHS Trusts23266Primary Care Trusts91,08785,061Foundation Trusts0Local Authorities8,5294,963Department of Health66291NHS Other0Non NHS:- Private Patients00- Overseas patients (non-reciprocal)00- Road Traffic Act00- Other150318 100,70290,5634. Other Operating Income2004/052003/04£000£000Patient transport services00Education, training and research2,1871,921Charitable and other contributions to expenditure00Transfers from donated asset reserve 1919Transfers from government grant reserve00Non-patient care services to other bodies3,7435,027Other income*1,6322,345 7,5819,312The main areas of other income are: Rent £267kLease car contributions £177kSale of non -capital; equipment £110kStaff secondments £187kFee income £137 kAppendix C - Note 5.1 – Operating Expenses5. Operating Expenses5.1 Operating expenses comprise:2004/052003/04£000£000Services from other NHS Trusts3,3803,475Services from other NHS bodies840Services from Foundation Trusts0Purchase of healthcare from non NHS bodies2,2443,154Directors’ costs1,059932Staff costs75,76768,048Supplies and services - clinical5,4945,239Supplies and services - general1,3441,587Establishment3,1393,540Transport823720Premises5,9786,319Bad debts100Depreciation and amortisation2,2101,955Fixed asset impairments and reversals310Audit fees174143Other auditor’s remuneration120Clinical negligence12664Other2,5041,505 104,37996,681The main areas of other operating expenses are :Training courses £600kRecharges for home support £384kProfessional fees £348kSubstance misuse £293kPrivate placements £120kClients’ expenses and allowances £95kPatients travel and expenses £79kAppendix D - Notes 8 & 9 - Disposal of Fixed Assets & Interest Payable8. Profit/(Loss) on Disposal of Fixed AssetsProfit/loss on the disposal of fixed assets is made up as follows:2004/052003/04£000£000Profit on disposal of fixed asset investments00Loss on disposal of fixed asset investments00Profit on disposal of intangible fixed assets00Loss on disposal of intangible fixed assets00Profit on disposal of land and buildings90Loss on disposal of land and buildings0(10)Profits on disposal of plant and equipment00Loss on disposal of plant and equipment(4)(10) 5(20)The most significant disposal relates to Woodside which was sold for £1.555 million9. Interest Payable2003/04£000£000Finance leases1313Other02 1315 Appendix E – Note 10 – Intangible Fixed Assets10. Intangible Fixed AssetsSoftware TotalLicences £000£000Gross cost at 1 April 2004294294Indexation 00Impairments 00Reclassifications7878Other revaluation 00Additions purchased 6363Additions donated00Additions government granted 00Disposals (14) (14)Gross cost at 31 March 2005 421421Amortisation at 1 April 2004209209Indexation 00Impairments 00Reversal of impairments00Reclassifications00Other revaluation 00Provided during the year 7777Disposals (14) (14)Amortisation at 31 March 2004 272272Net book value- Purchased at 1 April 2004 8585- Donated at 1 April 200400- Government granted at 1 April 200400- Total at 1 April 20048585- Purchased at 31 March 2005149149- Donated at 31 March 200500- Government granted at 31 March 200500- Total at 31 March 200514914911.1 Tangible fixed assets at the balance sheet date comprise the following elements:Land Buildings excluding dwellingsDwellings Assets under construction and payments on account* Plant and Machinery Transport Equipment Information Technology Furniture & fittings Total£000 £000 £000 £000 £000 £000 £000 £000 £000Cost or valuation at 1 April 200439,18859,6611262,6015231,4262,3801,593107,498Additions purchased 1001,31909,788101472452511,634Additions donated 000000000Additions government granted 000000000Impairments 000000000Reclassifications402,4290(2,571) 00024*(78)Indexation 2,8354,706101931131347,820Other in year revaluation 173391600000228Disposals (1,392) (569) (60) 00(150) 00(2,171)National Revaluation Exercise8,2372,145840000010,466At 31 March 2005 49,18169,73017610,0115441,4542,6251,676135,397Depreciation at 1 April 2004 0004139711,8231,1714,378Provided during the year 01,694334972041012,133Impairments 92200000031Reversal of Impairments 000000000Reclassifications00000000Indexation 0008212655Other in year revaluation 00000Disposals 0000(135) 00(135)Depreciation at 31 March 200591,716304559542,0271,2986,462Net book value - Purchased at 1 April 200438,67059,0351262,601110446557422101,967- Donated at 1 April 20045186260009001,153- Government Granted at 1 April 2004000000000Total at 31 March 2004 39,18859,6611262,601110455557422103,120- Purchased at 31 March 200548,70267,33517310,01189494598378127,780- Donated at 31 March 20054706790006001,155- Government Granted at 31 March 2005000000000Total at 31 March 200549,17268,01417310,01189500598378128,935*The reclassification of £78K from AUC to Intangible Assets relates to the EROS supply system which came into use in 2004/05.
Appendix F – Note 11.1 - Tangible Fixed AssetAppendix G – Notes 12 & 13 - Current Assets12. Stocks and Work in Progress31 March 200531 March 2004£000£000Raw materials and consumables304219Work-in-progress00Finished goods00TOTAL 30421913. Debtors31 March 200531 March 2004£000£000Amounts falling due within one year:NHS debtors3,4501,811Provision for irrecoverable debts(156)(147)Other prepayments and accrued income1,351785Other debtors3,1765,216Sub Total7,8217,665Amounts falling due after more than one year:NHS debtors1,9302,118Provision for irrecoverable debts00Other prepayments and accrued income1,7921,882Other debtors74Sub Total3,7294,004TOTAL11,55011,669Appendix H – Note 15 - Creditors15. Creditors15.1 Creditors at the balance sheet date are made up of:31 March 200531 March 2004£000£000Amounts falling due within one year:Bank overdrafts00NHS creditors3,6482,330Non - NHS trade creditors - revenue - other2672,706Non - NHS trade creditors - capital00Tax and social security costs1,6751,457Obligations under finance leases and hire purchase contracts1414Other creditors1,079649Capital Accruals1,690Accruals and deferred income3,8445,100Sub Total12,21712,256Amounts falling due after more than one year:Long - term loans00Obligations under finance leases and hire purchase contracts100114NHS creditors00Other00Sub Total100114 TOTAL12,31712,370 Other creditors include;-£900k outstanding pensions contributions at 31 March 2005 (31 March 2004 £525k).
NHS creditors include;-£39k to Pension Agency re early retirements(31 March 2004 £56k).
Other Creditors:- £608k for Agenda for Change (31 March 2004 £1132K)Appendix I – Note 22 - PDC22. Movement in Public Dividend Capital2004/052003/04£000£000Public Dividend Capital as at 1 April 200478,80375,454New Public Dividend Capital received (including transfers from dissolved NHS Trusts)8,1873,349Public Dividend Capital repaid in year 00Public Dividend Capital repayable (creditor)00Public Dividend Capital written off00Public Dividend Capital transferred to Foundation Trust0Other movements in Public Dividend Capital in year00Public Dividend Capital as at 31 March 200586,99078,803Appendix J – Note 17 - Reserves17. Movements on ReservesMovements on reserves in the year comprised the following:Revaluation ReserveDonated Asset ReserveGovernment Grant ReserveOther ReservesIncome and Expenditure ReserveTotal£000£000£000£000£000£000At 1 April 2004 as previously stated19,2931,153081288288Prior Period Adjustments000000At 1 April 2004 as restated19,2931,15308128820,815Transfer from the income and expenditure account2828Fixed asset impairments0000Surplus on other revaluations/indexation of fixed assets18,43821018,459Transfer of realised profits (losses) to the Income and Expenditure reserve73800(738)0Receipt of donated/government granted assets000Transfers to the Income and Expenditure Account for depreciation, impairment, and disposal of donated/government granted assets(19)0(19)Other transfers between reserves(415)0004150Other movements on reserves [specify]00Reserves eliminated on dissolution000000 At 31 March 200538,0541,155081(7)39,283Appendix K – Mote 18.1 – Operating Activities Cash Supply18. 1 Reconciliation of operating surplus to net cash flow from operating activities:2004/052003/04£000£000Total operating surplus (deficit)3,9043,194Depreciation and amortisation charge2,2101,955Fixed asset impairments and reversals310Transfer from donated asset reserve(19)(19)Transfer from the government grant reserve00(Increase)/decrease in stocks(85)(19)(Increase)/decrease in debtors1122,942Increase/(decrease) in creditors (689)(3,315)Increase/(decrease) in provisions (859)(44) Net cash inflow/(outflow) from operating activities before restructuring costs4,6054,694Payments in respect of fundamental reorganisation/restructuring00Net cash inflow from operating activities4,6054,69418.2 Reconciliation of net cash flow to movement in net debt2004/052003/04£000£000Increase/(decrease) in cash in the period9(392)Cash inflow from new debt00Cash outflow from debt repaid and finance lease capital payments1414Cash (inflow)/outflow from (decrease)/increase in liquid resources00Change in net debt resulting from cashflows23(378)Non - cash changes in debt00Net debt at 1 April 2004168546Net debt at 31 March 2005191168ReferencesAtrill P & Mclaney E, (2001) Accounting and Finance for non specialists Prentice Hall LondonBlack.J. (1997) Accounting Standards 6th ed Pitman, LondonBlake,G (2002)Accounting and Financial Reporting Standards. 8th ed. Pearson Education Ltd, EssexDavis T & Pain B, (2002) Business Accounting and Financing McGraw Hill publishing LondonDepartment of Health (2003) Statement of Internal Control 2002/2003 HMSO, LondonDepartment of Health (2003a) Corporate Governance Framework Manual for Primary Care Trusts Hmso London http://www.dh.gov.uk/assetRoot/04/08/27/23/04082723.PDF accessed on 27/02/06Department of Health (2005) Statement of Internal Control 2004/2005: Disclosures HMSO, LondonDepartment of Health (2005a) PDC financing for NHS foundation Trusts HMSO London http://www.dh.gov.uk/assetRoot/04/11/51/30/04115130.pdf access on 22/02/06Dyson J R (2004) Accounting for Non-Accounting Students 6th ed Prentice hall LondonHer Majesties Treasury (2005) The Government Accounting 2000 manual The Stationary Office http://www.government-accounting.gov.uk/current/frames.htm accessed on 16/02/06Her Majesties Treasury (2005a) Financial Reporting Advisory Board Paper Exposure Draft: Statement of Principles for Financial Reporting – Proposed interpretation for Public Benefit Entities. General Consultation HMSO London http://www.hm-treasury.gov.uk/media/53B/ED/FRAB_(76)_06A_Exposure_Draft_Statement_of_Principles_for_Financial_Reporting_-Proposed_Interpretation_for_Public_Benefit_Entities_-_General_Consultation.pdf accessed on 01/03/06Her majesty’s Revenues and Customs (no date) International Accounting Standards – The UK tax implications Crown copyrighthttp://www.hmrc.gov.uk/practitioners/int_accounting.htm#1 accessed on 28/02/06References ContinuedJones G & Hall C (2006) “Wards closed and staff cut as NHS cash crisis bites” The Telegraph 9th March http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/03/09/nhs09.xml&sSheet=/news/2006/03/09/ixnewstop.html accessed on 09/03/06Langley F P & Harden G S (1994) Introduction to Accounting for Business Studies (sixth ED) Butterworth LondonMarshall, D., McManus, W., and Viele, D. (2004). Accounting: What the numbers mean 6th ed. New York: McGraw-Hill.
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Software maintenance:
