NHS Finance, Performance & Operations

ACCOUNTING FOR NHS LIFT UNDER IFRS

NHS Finance, Performance & Operations Accounting for NHS LIFT under IFRS – October 2009 1

Section Section Heading Page

1.0 Introduction & Background 3

2.0 LIFT and IFRIC 12 ‘Service Concessions’ 7

2.1 LIFT and IFRIC 12 ‘Service Concessions’ 8

3.0 Accounting for an ‘on-balance sheet’ Leaseplus arrangement under IFRIC 12 14

3.1 Overview of the accounting requirements 15

3.2 Allocating the Annual Payment into its component parts 17

3.3 Accounting for the asset 22

3.4 The liability, the implicit interest rate and the finance rate 25

3.5 NHS Land and assets injected into the leaseplus scheme 34

3.6 Accounting for payment deductions 36

3.7 Restating existing schemes 38

3.8 Restatement example 1 - IFRIC 12, purchase option included 41

3.9 Restatement example 1 - IFRIC 12, purchase option excluded 50

4.0 Leaseplus arrangements and IAS 17 59

4.1 Accounting for Leaseplus arrangements as leases 60

4.2 Restatement example – IAS 17 66

5.0 Other features of leaseplus schemes 77

5.1 Other entities are parties to leaseplus schemes 78

5.2 Financial Instruments and leaseplus schemes 81

Appendices 83

Appendix 1 - Useful Sources of Further Relevant Guidance 84

Appendix 2 – Glossary 85


Section 1: Introduction & Background


Section 1: Introduction & Background The section explains why accounting guidance is needed for NHS LIFT under IFRS.

Purpose and Background

What does this guidance cover?

1. This guidance sets out the accounting requirements for NHS bodies in respect of NHS Local Improvement Finance Trust (LIFT) schemes when preparing their accounts under International Financial Reporting Standards (IFRS).

2. It is based on the existing accounting principles set out in the HM Treasury IFRS-based 2009/10 Financial Reporting Manual for central government entities (the ‘I-FReM’). It provides guidance on detailed features of NHS LIFT accounting that are not addressed in the I-FReM.

3. The accounting requirements for NHS LIFT schemes are very similar to those for Private Finance Initiative (PFI) schemes. This document supplements the Department of Health document “Accounting for PFI under IFRS” (the “PFI guidance”) to provide additional guidance on areas specific to NHS LIFT schemes. This document cross-refers to the PFI guidance frequently and therefore practitioners will need to read both documents together.

4. This guidance:

• explains the extent to which NHS LIFT schemes fall within the scope of ‘service concessions’;

• sets out the required accounting for recognising NHS LIFT schemes as ‘on-balance sheet’ under both IFRIC 12 and IAS 17; and

• provides a number of worked examples for the transition from an ‘off-‘ to an ‘on-balance sheet’ treatment.

5. It also identifies the information that NHS bodies need in order to determine the accounting entries, and explains how this information should be analysed and converted into the accounting entries. It also identifies the issues and information requirements which NHS bodies will need to address to manage their accounting entries in the future.

6. This guidance is complemented by a ‘Universal Model’ and a User Manual. The spreadsheet model enables NHS bodies to enter the relevant amounts for their schemes and to generate the required accounting entries for an ‘on-balance sheet’ treatment. The Manual provides guidance on how to use this model and includes a full worked example.

What does the guidance not cover?

7. The guidance does not deal with how NHS bodies should account for their financial investment in the LIFTco i.e. equity shares and, frequently, loans. NHS bodies should refer to the relevant NHS Manual for Accounts for 2009/10.

8. The guidance does not cover the accounting for the refinancing of NHS LIFT contractual arrangements, should these occur. The refinancing guidance in the PFI guidance similarly will not apply to NHS LIFT schemes and therefore NHS bodies will need to seek advice on the accounting requirements of any refinancing.


Section 1: Introduction & Background Who should read this guidance?

9. This guidance is relevant for:

• Finance staff at NHS bodies with NHS LIFT schemes who are responsible for preparing financial statements and budgetary information.

• NHS body Finance Directors and other Board members, to the extent that they need to understand the impact that the changes will make to their financial statements.

• Department of Health staff involved in NHS LIFT or financial reporting matters.

• Advisors to NHS bodies on NHS LIFT.

• Auditors of NHS bodies with NHS LIFT arrangements

What are the key objectives of this guidance?

10. The aims and objectives of this guidance are principally to:

• Assist NHS bodies to identify which of their NHS LIFT arrangements need to be accounted for as service concessions under IFRS.

• Provide details of the accounting requirements for ‘on-balance sheet’ NHS LIFT arrangements.

• Provide methods for calculating and estimating elements of the transactions.

• Aid NHS finance staff in converting an existing off-balance sheet arrangement to an ‘on-balance sheet’ treatment.

• Assist NHS bodies to manage their accounting requirements for the remaining life of their scheme.

Why is the Department issuing guidance?

11. The new accounting standards that apply to NHS LIFT schemes under IFRS are very different to the UK standards that they replace in both their scope and their approach to determining the appropriate accounting treatment. Furthermore, it is likely that these new requirements will result in NHS bodies recognising most existing NHS LIFT schemes ‘on balance sheet’.

12. Whereas in the past the accounting entries for NHS LIFT schemes were relatively straightforward where they were off-balance sheet, the change in treatment requires the NHS body to break down the transaction into a number of component elements and account for each in a different manner.

13. This aim of this guidance is to:

• ensure that NHS bodies take a consistent approach to accounting for ‘on-balance sheet’ NHS LIFT schemes; and

• strike a balance in the accounting requirements between reflecting the substance of the transaction and minimising the complexity.

From when does this guidance apply?

14. This guidance applies to IFRS financial statements prepared by NHS bodies with effect from the 2009/10 financial year. In practice, the requirement to restate comparative amounts in these first IFRS financial statements means that the requirements apply from the Date of Transition to IFRS, which for NHS bodies is 1 April 2008.

15. The new accounting requirements are applied in the IFRS financial statements as a change in accounting policy (but with disclosures under IFRS 1 rather than IAS 1). Therefore, existing NHS LIFT schemes as at 1 April 2008 need to be restated as if the new accounting requirements had been applied to the transaction from the inception of the contract.


Section 1: Introduction & Background

Key Contacts

Who do I need to talk to and when?

16. Whilst this guidance seeks to address key principles relevant to accounting for NHS LIFT under IFRS it is inevitable that it cannot address all project-specific circumstances.

17. Organisations with NHS LIFT projects should discuss the detailed accounting treatment of their scheme with external auditors at an early stage to identify any areas where further work or analysis may be required.

18. Any queries about positions set out in this guidance may be raised with the Department of Health Private Finance Unit who can be contacted on 0113 254 5533


Section 2: NHS LIFT and IFRIC 12 ‘Service concessions’


Section 2.1: LIFT and IFRIC 12 ‘Service concessions’

This section provides guidance to NHS bodies on selecting the relevant accounting standards to apply to their NHS LIFT schemes. Key Points:

• Identifying the types of infrastructure assets that fall within the scope of service concessions.

• How to determine whether the NHS LIFT scheme is a service concession

• Identifying NHS LIFT schemes that are not service concessions

• Identifying which accounting requirements might apply to service concessions.

What are NHS LIFT schemes?

19. NHS LIFT schemes involve NHS bodies procuring the design, build, financing and operation of healthcare facilities from a private sector entity. A dedicated company is established for this purpose (a ‘LIFTco’) in which, typically, a private sector company holds a majority shareholding (normally 60%) with the remaining shareholding split between the NHS body and Community Health Partnerships (an entity which is wholly owned by the Department of Health).

20. Once established the NHS body can then enter into contracts with the LIFTco for the provision of individual schemes.

21. There are two existing contractual approaches to NHS LIFT schemes: Land Retained agreements (LRA) and Leaseplus

agreements. The choice between them is a matter for agreement between the NHS body and the LIFTco.

22. Under LRA, the NHS body contributes the land on which the healthcare facility will be built for a nil or nominal sum. The NHS body retains ownership of the land so that at the end of the contract the land and the facility will revert to the NHS body. These types of arrangements are very similar to conventional Private Finance Initiative (PFI) schemes and indeed the standard PFI contract is used, with some amendments.

23. Under Leaseplus agreements, the LIFTco acquires the site and builds the facility but at the end of the contract the NHS body does not automatically acquire it. Instead, it frequently has an option to purchase the site and facility at a price linked to its fair value (the exact pricing arrangement is described later in the document). In some cases, the land may have been sold to the LIFTco by the NHS body prior to the start of the agreement.

24. A model Leaseplus agreement is published by Community Health Partnerships, and some of the standard terms and clauses are referred to in this accounting guidance.

25. LRAs are, in substance, very similar to PFI schemes, due principally to the following differences from Leaseplus arrangements:

• the land on which the NHS LIFT asset is constructed is leased by the NHS body to the LIFTco for nil consideration;

• at the end of the contract, the land and the NHS LIFT asset reverts automatically to the NHS body, for nil consideration; and

• the form of contract used for such schemes is the standard HM Treasury PFI contract with some modifications, rather than a bespoke contract such as the Leaseplus agreement.

26. The section below considers the extent to which both types of NHS LIFT schemes fall within the scope of IFRIC 12 and deals specifically with how the ‘control of residual interest’ test applies to



LRA schemes. However, the remaining sections of this document then deal with accounting for Leaseplus agreements only. Therefore, in determining the accounting requirements for LRA schemes, practitioners should follow instead sections 3, 4 and 5 of the PFI guidance.

Which accounting requirements apply?

27. Sections 2.1 and 2.2 of the PFI guidance set out the approach for NHS bodies to follow to select the appropriate accounting for their PFI schemes. This guidance is equally applicable to NHS LIFT schemes and is summarised in figure 1.

Figure 1 – Summary of approach to determining the relevant accounting standard

IFRIC 12

Are services of a revenue nature provided to the NHS body, or on its behalf? Apply IAS 16

Apply IAS 17

Is an asset is used to provide the services and which qualifies as 'infrastructure'?

If only services are provided, these should

be expensed as appropriate

The contract is a service concession potentially within the scope of IFRIC 12

Can the NHS body control or regulate:

● the services provided by the asset?● to whom the services are provided?● the price charged for the services?

Is the contract an arrangement containing a

lease under IFRIC 4?

Does the NHS body control the residual interest in the asset at the end of the

concession

Account for the service concession in accordance with IFRIC 12

Will the asset have a significant residual interest

at the end of the concession?

No, contract for construction of an asset

No

No

No

No

NoYes

Yes

Yes

Yes

YesYes

No, contract for the lease of an asset

28. In the first instance, NHS bodies should assess whether their NHS LIFT scheme falls within the scope of IFRIC 12. This is discussed in the remainder of this section.

29. If the scheme is assessed as not falling within the scope of IFRIC 12, then it should also be considered under IFRIC 4. In practice, the nature of NHS LIFT schemes means that, when assessed



under IFRIC 4, they are likely to be considered as containing a lease and therefore NHS bodies can move quickly on from IFRIC 4 to assess the scheme under IAS 17. Section 4.1 deals with schemes assessed under IAS 17.

Do NHS LIFT schemes fall within IFRIC 12?

30. In order for a NHS LIFT scheme to fall within the scope of IFRIC 12, the answer to all of the following questions must be ‘yes’:

• Is the contract, in substance, a service concession?

• Is an asset is used to provide the services and if so, does it qualify as 'infrastructure'?

• Can the NHS body control or regulate:

a) The services provided using the asset?

b) To whom the services are provided?

c) The price charged for the services?

• Does the NHS body control the residual interest in the asset at the end of the concession?

31. The guidance below describes a number of areas where judgement must be exercised, based on the individual facts of the NHS LIFT scheme. There are no ‘bright lines’ or quantitative thresholds which clearly define one treatment or another – it is down to professional judgement, taking all relevant features into account.

Are NHS LIFT schemes, in substance, service concessions?

32. The first stage is to consider whether NHS LIFT schemes are, in substance, service concessions. Guidance on the issues to be considered can be found in paragraphs 25 to 34 of the PFI guidance. NHS LIFT schemes involve the private sector providing healthcare facilities to the NHS for use in treating NHS patients. More specifically:

• Ownership of the NHS LIFT company (‘LIFTco’) is split between the public and private sectors but the majority shareholding (60%) is held by the private sector and therefore the assets and services should be seen as being provided by the private sector to the public sector.

• The contracts comprise both the construction of the facilities and their operation for the life of the contract by the LIFTco.

• The services (i.e. primary healthcare) provided from the facilities are traditionally ones provided by the public sector in the UK (IFRIC 12 includes within its scope services devolved by public bodies to private providers1, such as primary care contractors).

33. It is therefore reasonable to conclude that, in substance, NHS LIFT schemes are service concessions.

Do NHS LIFT assets qualify as ‘infrastructure’?

34. Paragraphs 35 to 40 of the PFI guidance describe the types of assets that would fall within the definition of ‘infrastructure’ under IFRIC12 including the extension to the definition made by the Treasury I-FReM.

35. NHS LIFT schemes provide healthcare facilities that are used to provide services to the public. They therefore clearly fall within the definition of infrastructure assets in the IFRIC itself, which includes hospitals as an example.

36. Where an NHS LIFT scheme also provides of assets for administrative use, e.g. offices, in connection with the healthcare facilities, these too would fall within the definition of infrastructure through the I-FReM extension of ‘non-current assets used for administrative purposes in delivering services to the public’.

1 IFRIC 12, paragraph 3(a)



37. To summarise, assets provided to NHS bodies through NHS LIFT schemes will meet the definition of ‘infrastructure’ in most, if not all, cases.

Can the NHS body control or regulate the services provided?

38. The control test examines whether the NHS body can control:

• what services are provided;

• to whom they are provided; and

• at what price they are provided.

39. The services provided by the LIFTco are specified in the contract (part 1 of schedule 9 of the leaseplus agreement). The exact services specified will vary between individual schemes. It is clear, therefore, that the NHS body can control what services are provided.

40. The NHS body requires the NHS LIFT facility to be constructed in a particular location and to be open during specified hours for access by patients, staff and others. It therefore requires the services to be provided to users who fall under the control of the NHS body and there is limited scope for the LIFTco to provide services to users of its own choice. Therefore, this element of the control test will normally be met.

41. The price charged under the contract is prescribed in the agreed contract price. The payment mechanism provides for the price to be increased annually – in part or in full – by the annual increase in the Retail Prices Index (RPI). For most services, therefore, the NHS body will control the price through the contract.

42. The contract may include some services that are charged on a pass-through basis, e.g. utilities costs, and therefore the price matches that incurred by the LIFTco. However, the LIFTco itself is not free to set its own price, for example by including an on-cost or profit element. Although the NHS body may not control the price for these services, it could be argued that the LIFTco similarly

cannot control the price it charges. If pass-through costs represent the major component of the services, then this element of the control test will need to be examined carefully to determine whether the NHS body controls the price of services provided, or even whether the transaction is in substance a service concession.

43. Taking each of these elements together, it will generally be the case that under leaseplus arrangements, the NHS body will control or regulate the services provided.

44. For LRAs that, as noted, are similar to PFI schemes, one would equally normally expect these control tests to be met.

Can the NHS body control any significant residual interest in the asset at the end of the concession?

45. Paragraphs 62 to 69 of the PFI guidance discuss the concept of a significant residual interest and the NHS body’s control over it.

46. The residual interest will include the land which, by its nature, will have a significant residual value; and so, in most cases, will the buildings. Therefore, the residual interest will normally be significant.

Leaseplus agreements

47. For Leaseplus Agreements, the NHS body frequently has an option to purchase the NHS LIFT assets at the end of the contract. The details of the purchase option are set out in schedule 14 to the standard leaseplus agreement.

48. The option price is set at the fair value of the asset, including the land, at the end of the contract, but this is subject to adjustment where it exceeds significantly the ‘residual value’ assigned to it in the contract and the LIFTco financial model. This residual value will vary by individual scheme. In summary, a discount starts to be applied to the option price once the fair value of the asset exceeds one and half times the residual value.



49. There are differing views as to whether an option to purchase an asset – particularly at fair value - provides the NHS body with control of the residual interest in the asset. NHS bodies should therefore discuss the issue with their auditor. The Audit Commission has issued guidance to its own auditors that sets out its interpretation on this point. A link to that guidance can be found in Appendix 1.

Land retained agreements

50. Under the Land Retained Agreement, the land provided to the LIFTco together with the NHS LIFT assets constructed on it, automatically revert to the NHS body at the end of the NHS LIFT contract. For these contracts, therefore, the NHS body will control the significant residual interest in the NHS LIFT assets and this control test will be met.

Concluding whether IFRIC 12 applies

51. Having considered the nature of the NHS LIFT scheme and

whether the NHS body has control of the asset in accordance with the tests within the IFRIC, the asset will fall within the scope of the standard where:

• The scheme is a service concession involving the provision of

services and an underlying asset which qualifies as ‘infrastructure’; and

• The NHS body controls the services which are provided using

the asset; to whom they are provided; and the price charged; and

• Either:

a) The NHS body controls the significant residual interest in the asset; or

b) The asset will have no significant residual value at the end of the concession.

52. This is summarised in the decision tree in Figure 1 on page 9 of

this section. Where the service concession is to be accounted for under IFRIC 12, the NHS body will have to follow an ‘on-balance sheet’ accounting treatment, recognising the asset and an obligation to pay for it. Section 3 of this manual describes how NHS bodies should do this in practice for leaseplus agreements. For LRAs, NHS bodies should refer to the equivalent sections of the PFI guidance.

What to do when IFRIC 12 does not apply

53. When concluding which accounting standard applies, NHS bodies

should consider the substance of the transaction. IFRIC 12 should be applied where the transaction is a service concession, and this is likely to be the case for most LIFT schemes in existence at the date of issue of this guidance. Future NHS LIFT schemes may have different contractual terms and IFRIC 12 may not necessarily be the appropriate standard for such schemes. Where the substance is clearly a different arrangement e.g. a Landlord-repairing lease, then another standard (in this case IAS 17) should be applied. For schemes in existence at the date of issue of this guidance, such application of alternative standards is likely to be appropriate only in limited situations, but this could alter in the future if schemes have different contractual terms.

54. It is possible that the application of IFRIC 12 will give rise to a

different accounting treatment of an NHS LIFT scheme than IAS 17. This is because whereas IFRIC 12 considers an arrangement from a “control” perspective, IAS 17 considers a “risk and reward” perspective.

55. For this reason, it is important that NHS bodies consider the

substance of their particular NHS LIFT scheme, and whether IFRIC 12 should apply. Where the NHS body considers that IAS



17 should apply, section 4.1 of this document provides guidance on the practical issues to be considered.


Section 3: Accounting for an ‘on-balance sheet’ Leaseplus arrangement under IFRIC 12


Section 3.1: Overview of the accounting requirements

This subsection provides an overview of the accounting requirements and general principles. Key Points:

• A general outline of the need to recognise and measure the NHS LIFT asset and an accompanying liability to pay for it; and

• The requirement to split the Leaseplus payment into its key components: payment for services; payment for the asset and lifecycle replacement.

What features of NHS LIFT schemes make the accounting different to that for PFI?

56. The key differences between accounting for an on-balance sheet PFI scheme and an on-balance sheet Leaseplus scheme under IFRS are:

• The presence of an option for the NHS body to purchase the

asset at the end of the leaseplus agreement.

• In some cases, the requirement to account for the sale of land by the NHS body to the LIFTco prior to the start of the scheme.

57. Section 3 of this guidance sets out the accounting requirements for

Leaseplus schemes that are determined to be within the scope of IFRIC 12 and therefore need to be accounted for as ‘on-balance sheet’. These requirements are broadly the same as described in Section 3 of the PFI guidance. This guidance will therefore refer to that document where the accounting requirements are the same.

58. The accounting treatment of existing Leaseplus schemes needs to

be considered afresh as part of the adoption of IFRS. Where the scheme is determined to be within the scope of IFRIC 12 and the

accounting treatment prior to the introduction of IFRS is ‘off-balance sheet’ then this will need to be amended. The accounting approach set out in the rest of section 3 will need to be applied as if the scheme had always been on-balance sheet. The previous accounting entries will need to be reversed and replaced with the new ‘on-balance sheet’ entries. Section 3.7 describes how these entries should be amended and provides a worked example.

59. This guidance assumes that the NHS body has access to a copy of

the full final contract and the final version of the LIFTco’s financial spreadsheet model. Both of these documents are necessary in order to determine the components of the contract, and to calculate the amounts that need to be recognised in the NHS body’s accounts.

60. If the NHS body does not have copies of the documents and is

unable to obtain copies, then it will need to make estimates of the necessary amounts. In such circumstances, it should consider obtaining specialist assistance and should discuss proposed approaches with its external auditor.

The ‘on-balance sheet’ treatment

61. Where a scheme is inside the scope of IFRIC 12, it is accounted for as ‘on-balance sheet’. However, as noted earlier, the IFRIC specifically excludes from its scope the accounting treatment by the public sector entity and therefore does not provide any detailed accounting guidance.

62. The Treasury I-FReM instead provides the necessary accounting

principles2. It requires that where a scheme is within the scope of IFRIC12, the public sector body should recognise the infrastructure as its own asset together with a corresponding liability to pay for it. The I-FReM then requires the relevant accounting standards to be

2 Chapter 6, 2009/10 HM Treasury Financial Reporting Manual


Section 3.1: Overview of the accounting requirements

followed for recognition and measurement of the transaction, as described below.

How do we recognise the asset?

63. The asset is initially recognised and measured, in accordance with IAS 17 ‘Leases’, at the lower of its fair value or the present value of the minimum lease payments. It is subsequently measured at fair value in accordance with IAS 16 Property, Plant and Equipment (PPE), in the same way as other PPE assets of the NHS body. Section 3.3 provides further guidance on accounting for the asset.

How do we recognise the liability?

64. Where there is an annual Leaseplus payment from the NHS body to the LIFTco, a finance lease liability is recognised for the same amount as the asset. It is subsequently accounted for as a finance lease in accordance with IAS 17 Leases and, as such, revaluations of the asset following the initial recognition at cost do not affect the carrying value of the liability. This is addressed in section 3.4.

Into what components do we need to divide the annual leaseplus payment?

65. The annual leaseplus payment needs to be allocated between a number of elements:

• payment for services – this reflects the fair value of the

services received each year under the concession. In the case of NHS LIFT schemes it may also include identifiable payments for services on a pass-through basis; volume-related services and energy costs;

• payment for the property – this represents the annual lease

rental for the asset. In turn it is split between a repayment of the finance lease liability, an annual finance charge on the outstanding liability, and contingent rental; and

• lifecycle replacement – NHS LIFT schemes require the

LIFTco to maintain the asset in the required condition throughout the life of the contract. This usually requires the LIFTco to replace individual capital assets during the contract. To the extent that this is predicted beforehand, the LIFTco factors the cost of this into the unitary payment, and therefore an element of the unitary payment represents payment for future capital expenditure.

66. The above principles are relatively simple in concept. However, the

complexity of NHS LIFT means that applying them in practice can be difficult. The remainder of Section 3 describes how to apply the principles to most schemes.


Section 3.2: Allocating the Annual Payment into its component parts

This subsection describes how the leaseplus payment can be split into its component parts. Key Points:

• The principles of splitting the leaseplus payment into its component parts;

• determining the fair value of services during the operational period.

67. As noted in the previous section, the leaseplus payment needs to be split into the following elements:

• payment for services (including pass-through and utilities

costs); • payment for the property (comprising repayment of the liability,

finance cost and contingent rental); and • payment for lifecycle replacement.

How do we split the Leaseplus Payment during the operational period between its components?

68. The first stage is to remove those elements that are identified explicitly in the payment formula. The standard Leaseplus payment is set out in part B of Schedule 10 to the model agreement, as follows:

LP = (NAPn/12) + PTC + UC [+TVA] - ΣD + GS - PS

Where:

• LP is the lease payment for the month;

• NAPn is the Net Annual Payment for the contract year;

• PTC is the Pass Through Costs for the month;

• UC is the Utilities Cost for the month;

• TVA is the Total Volume Adjustment of the month in respect of

disposal of clinical and non-clinical waste (where present);

• ΣD is the sum of deductions for unavailability and poor service performance or (where relevant) the costs to the PCT under Self Help provisions; and

• GS and PS are respectively the NHS body’s element of gain- or pain-share arising from energy usage.

69. Pass-Through Costs, Utilities Costs, the Total Volume Adjustment

and the Gain/Pain share adjustments represent payments for these services and should be expensed under the relevant subjective headings within operating expenses as and when they are incurred. This means that these items should be deducted from the total amounts paid to the LIFTco prior to the allocation of the lease plus payment outlined below.

70. The adjustment for deductions is addressed in Section 3.6. 71. The remainder of this section addresses how to split the NAP

element into payment for property, services and lifecycle replacement as shown in figure 2 below.



Figure 2 – Approach to splitting the unitary payment

Identify the Net Annual Payment for each year of the

contract

Determine and deduct the Fair Value of Services in each

year of the contract

Deduct the amount required in respect of lifecycle

replacement

The balancing cashflow is the finance lease rental

72. The rest of this section, together with section 3.4 of this document, and section 3.5 of the PFI guidance, describes the principles to be followed in calculating this split. For more detailed guidance, users should refer to the User Manual and its worked example.

How do we determine the Fair Value of the Services?

73. The accounting principles for determining the fair value of services are described in paragraphs 96 – 98 of the PFI guidance.

74. The LIFTco’s overhead costs incurred during the operational period

of the contract and charged though the leaseplus payment should be included within the fair value of services.

75. The LIFTco’s overhead costs incurred prior to the start of the

operational period will also be recovered through the subsequent leaseplus payment. These costs will mostly be in relation to the NHS LIFT asset and therefore should be included within the finance lease rental. The method of calculating the finance lease rental, described below, means that these costs will automatically be captured in that element.

How do we determine the deduction for lifecycle replacement?

76. For each year of the contract, an amount needs to be deducted in respect of lifecycle replacement. The related costs are generally visible in the model in both real and nominal (i.e. inflation-indexed) terms. Section 3.5 of the PFI guidance set out how these amounts should be derived.

Do the remaining amounts then constitute the finance lease rental? 77. Yes, once the service and lifecycle components have been

deducted from the lease plus payment, the balancing cashflows represent the finance lease rental element. This is split into three further components: repayment of the finance lease principal, a finance cost and contingent rental representing the inflation increases. These elements should be determined and accounted for in the manner described in section 3.4.



What should the overall result look like? 78. The allocation of the lease plus payment should, in most cases,

produce a result similar to that shown in figure 3. Figure 3 – Example analysis of components of the lease plus payment over the contract term, in nominal amounts

Contract period

Am

ount

(£)

Finance cost

Contingent rental - finance cost

Operating costs

Finance lease principal repayment

Lifecycle replacement

79. The operating costs will normally be non-volatile and increase in cash terms over time due to inflation increases. The finance cost, finance lease principal and lifecycle expenditure together should normally be fairly constant in cash terms over the life of the contract, but within this, there are likely to be significant variations between the components due to the treatment of lifecycle costs. The contingent rental is the remaining component after deducting the other four elements from the total lease plus payment.

Subsequent accounting for the services element

80. The accounting principles for subsequent accounting for the services element are described in paragraphs 109 - 113 of the PFI Guidance.

Do the services costs need to be adjusted for indexation?

81. Yes, schedule 10 sets out the basis on which the net annual payment for each subsequent contract year is determined, as follows:

NAPn = NAPo x (1-PSI) + NAPo x (RPIn/RPIo)

Where: • NAPn is the net annual payment for contract year ‘n’; • NAPo is the net annual payment in the first year of the

contract; • PSI is the proportion of the net annual payment that is subject

to indexation (expressed as a decimal); • RPIn is the Retail Prices Index in agreed month immediately

preceding the start of contract year ‘n; and • RPIo is the Retail Prices Index in the month that the first

payment commenced.

82. In simple terms, the above formula means that a proportion of the annual payment is adjusted each year for the increase in the Retail Prices Index, while the remainder of the annual payment remains unchanged from the cash amount in the first operational year of the contract.



83. The reason for this structure is to reflect the underlying cost profile of the LIFTco. In general terms, the LIFTco’s financing costs will be fixed over the contract term, whereas the costs it incurs on services will be subject to inflationary pressures. One might expect therefore that the proportion of the annual payment reflected in the ‘PSI’ factor would be more or less the same as the proportion that the LIFTco’s service costs bears to its total project costs in the first operational year of the project.

84. In practice, most NHS LIFT schemes have the whole of their

annual payment indexed by RPI and therefore the PSI element has a value of zero.

What adjustments do we need to make to the cost of services as a result of periodic market testing?

85. Schedule 22 to the standard leaseplus agreement provides for market testing of ‘soft services’ to be undertaken during contract. The exact services that are subject to market testing, and the intervals at which this must be done, are set out in each individual leaseplus contract.

86. Where market testing is undertaken, then schedule 10 provides for

the Net Annual Payment to be adjusted as follows:

NAPo(new) = NAPo(previous) +/- RVTA Where: • NAPo(new) is the net annual payment revised to reflect any

change in the costs as a result of the market testing exercise. The payment is expressed in the price levels as at the start of the contract;

• NAPo(previous) is the net annual payment prior to market

testing, again expressed in the price levels as at the start of the contract; and

• RVTA is the adjustment to the cost of the market tested

services as re-based to reflect the value of the amount of the adjustment at the start of the contract.

87. RVTA is further defined by the following formula:

RVTA = (NAP – (OPVT x RPIn/RPIo)) x (RPIo/RPIn)

Where: • NAP is the total of the new annual prices for the market tested

services (i.e. expressed in current prices); • RPIo and RPIn are as defined in paragraph 81 above; and • OPVT is the total of the original annual prices for the market-

tested services. These amounts will be agreed in the final version of the LIFTco’s financial model and should be set out in Appendix C to schedule 10 of the contract.

88. RVTA therefore represents the difference between the new prices

for all market tested services (NAP) and their original prices (OPVT) (as indexed to current prices) and then deflated back to the prices applying at the start of the contract.

89. This RVTA then adjusts the original net annual payment as set out

in the formula in paragraph 86, and this in turn adjusts the indexed payment for the current contract year as set out in paragraph 81.

90. As and when market testing occurs, the above adjustment to the

contract will be made to reflect the price differences arising. NHS bodies should not anticipate these changes at the start of the contract. Instead, they should simply account for the adjustments to the fair value of the services as and when they occur.



Where should the service expenditure be recorded in the Operating Cost Statement?

91. The costs of the individual services should be included within the appropriate expenditure lines in the subjective analysis of operating expenses in the notes to the financial statements.


Section 3.3: Accounting for the asset

This subsection describes how to account for the asset.

Key Points:

• When to recognise the asset, and at what amount;

• subsequent measurement of the asset; and

• depreciation of the asset and splitting it into components.

Initial recognition of the asset

When do we recognise the asset? 92. The NHS LIFT asset should be recognised when it is made

available to the NHS body by the operator. At what amount do we recognise the asset? 93. The Leaseplus asset should be recognised, in accordance with the

Treasury I-FReM at its fair value in accordance with IAS 17. In practice, this means that the asset will be recorded at the lower of:

• the fair value of the asset; or • the present value of the minimum lease payments.

94. In leaseplus schemes, unlike most PFI schemes, the lease rentals

do not necessarily provide the LIFTco with full funding for the asset. Instead, as discussed earlier, the schemes include an option for the NHS body to purchase the asset at the end of the contract.

95. Therefore, in practice, the present value of the minimum lease payments (MLP) will, in any event, match the fair value of the asset (i.e. its freehold value) if the purchase option is considered to form part of the MLP. Conversely, if the purchase option is not considered to form part of the MLP, then the present value of the MLP will be significantly less than the fair value of the asset, and the NHS body should recognise the asset in its accounts at this lower amount. At the start of the contract, the present value of the MLP can never be greater than the initial fair value of the asset because the implicit interest rate in the lease is defined as the rate that discounts the MLP and any unguaranteed residual value to the fair value of the asset.

96. The decision as to whether the purchase option should form part of

the MLP is dealt with in section 3.4 below. Once NHS bodies have determined whether or not it should be included, then they should recognise the asset at the appropriate amount, as summarised in figure 4.



Figure 4: How the purchase option affects the value at which the asset is recognised

Is the purchase option reasonably certain to be

exercised?

Yes No

Minimum lease payments include purchase option

Minimum lease payments

exclude purchase option

Asset recognised at its fair value

Asset recognised at the present value of the

minimum lease payments

97. The fair value of the asset should be determined in accordance

with section 3.3. of the PFI guidance. This is needed even if the asset is to be recognised at the present value of the MLP, because it is used in determining the implicit interest rate in the lease. This is described in more detail in section 3.4.

98. A valuation is needed of the anticipated fair value of the asset

(reflecting possible alternative uses) at the end of the contract. This is so that the anticipated price for the purchase option can be calculated. This would also then permit a judgement to be formed on the likelihood of the NHS body exercising the option. This is discussed further in section 3.4.

99. The valuation should be obtained in good time so that the NHS

body can identify the impact that the accounting entries for the scheme will have on its financial statements

Subsequent measurement

How do we measure the asset subsequently? 100. Following initial recognition, the asset should be measured

subsequently at its fair value as described in paragraphs 124 to 126 of the PFI guidance.

101. Where the asset is recognised initially at the present value of the

MLP, the NHS body will need to obtain subsequent valuations based on the lease value rather than the freehold. NHS bodies should discuss this carefully with their valuer to ensure that the correct valuation approach is used and is accordance with RICS Valuation Standards (6th edition), known colloquially as “the Red Book”.

102. NHS bodies should ask their valuer to provide a valuation of the

leased asset, which will normally be determined by discounting the minimum lease payments at an appropriate rate derived from similar leased assets.

103. The NHS body should instruct its valuer to provide a valuation of

the leased asset rather than the “market value of the leasehold interest” because, in valuation terminology, this would lead to a valuation of the difference between the rent payable for the asset and the market rent which would be charged for a similar property. In many leaseplus schemes, such an approach will likely lead the valuer to conclude that the leaseplus rental is the same as the market rent and therefore provide a valuation of nil.



How do we depreciate the asset?

104. In accordance with IAS 163, the asset should be depreciated over its estimated useful economic life in a manner that reflects the pattern of economic consumption. The fact that the asset is being maintained to a specified contractual requirement does not negate the need to depreciate it.

105. The NHS body will depreciate the asset in accordance with the

estimated useful economic life of the asset to the NHS body. This will be different depending on whether or not the NHS body has included the purchase option within the MLP and therefore assumes continued use of the asset after the end of the contract.

106. Where the purchase option is included in the finance lease liability,

then this presumes that the asset will continue to be used beyond contract period. Consequently, the useful economic life of the assets (excluding land) should be set to the expected life of the asset itself. The land should not be depreciated.

107. Conversely, where the purchase option is not included in the

finance lease liability, then the useful economic life should be the shorter of the expected life of the asset and the term of the leaseplus agreement. The asset will therefore be depreciated to zero by the end of the lease term (and possibly before). This applies to both the land and the buildings.

3 IAS 16, paragraph 50

Figure 5: Summary of approach to depreciation of the assets

Purchase option included in MLP

Purchase option excludes MLP

Land Not depreciated Depreciated to zero over the lease term

Buildings and Equipment

Depreciated over the asset’s expected life

Depreciated over the shorter of the lease term or the asset’s expected life

108. Component depreciation may need to be applied to elements

within an overall asset. Where this is done, the estimated economic lives of these components may be less than the term of the leaseplus contract. The accounting principles for component depreciation are described in paragraphs 129 to 134 of the PFI Guidance.

109. Where the purchase option is included in the MLP, but ultimately is

not exercised, then the asset lives and depreciation profile will need to be changed at some point before the end of the contract is reached. This is discussed in paragraphs 147 to 153 of section 3.4 below.


Section 3.4: The liability, the implicit interest rate and the finance rate

This subsection describes how to account for the finance lease liability and how to determine the interest rate implicit in the NHS LIFT scheme and the finance rate for determining the annual finance cost. Key Points:

• When to recognise the finance lease liability and at what amount;

• Determining the finance lease rental and splitting it down into its component parts;

• Dealing with the purchase option at the end of the scheme; and

• The accounting entries required during the contract.

The general principles

110. From a cashflow perspective, the general approach is to separate out part of the annual unitary payment and treat it as a finance lease rental. The initial finance lease liability is recognised, and then the annual rental is apportioned between repayment of the liability and a finance charge. The annual finance charge is calculated so as to produce a constant finance rate on the outstanding liability over the course of the contract. This rate is known as the implicit interest rate.

Recognising the finance lease liability

111. The finance lease liability, in accordance with IAS 17, should be recognised at the present value of the minimum lease payments, discounted using the implicit interest rate in the lease. In PFI schemes, this is normally set to the fair value of the asset.

However, in Leaseplus schemes a practical difficulty arises due to the presence of the purchase option at the end of the contract, and whether this should be included. Where it is not included then the minimum lease payments cannot simply be set to the fair value of the asset and instead will need to be determined in another manner.

112. Whether or not the purchase option is included in the liability

depends on the likelihood of it being exercised. This is discussed later in this section.

113. The minimum lease payments therefore comprise:

• the finance lease rentals allocated from the overall leaseplus

payments; and • possibly, the option to purchase the asset at the end of the

contract.

Determining the finance lease rental

114. The accounting principles for determining the finance lease rental are described in paragraphs 146 to 160 of the PFI guidance. In essence, they are the amounts remaining after the service payments (including pass-through, volume related services etc) together with any lifecycle replacement cashflows have been deducted from the annual leaseplus payment for each year of the contract.

115. As with the PFI guidance, the lease rentals should be derived on a

real (i.e. un-indexed) rather than nominal (i.e. indexed) basis so as to exclude the effect of contingent rentals. The difference between these two bases represents contingent rentals, which will simply be expensed as incurred.



The option to acquire the asset at the end of the scheme

What are the terms of the purchase option in the standard leaseplus contract?

116. Schedule 14a of the standard Leaseplus Agreement specifies that the NHS body has an option to purchase the asset at the end of the NHS LIFT scheme at an ‘adjusted’ market price, which recognises the difference between the actual open market value at the end of the contract and the residual value of the asset.

Figure 6: Model agreement definition of the purchase option The price payable by the NHS body, should it choose to exercise the option, is the “Actual Market Price” less the “Adjustment”. The definitions are as follows:

“Actual Market Value” is the price at which the Site could be sold in the open market at the Pricing Date by a willing seller to a willing buyer assuming: (a) a reasonable period in which to negotiate the sale taking into

account the nature of the Site and the state of the property market; (b) that values will remain stable throughout the period; (c) that the Site will be freely exposed to the open market; and (d) that no account is to be taken of any bid by a special buyer;

The “Adjustment” is the amount that is the total of: (a) 25% of the amount by which the Actual Market Value exceeds one

and a half times the Residual Value; and (b) 25% of the amount by which the Actual Market Value exceeds two

times the Residual Value; and (c) 25% of the amount by which the Actual Market Value exceeds three

times the Residual value

117. The model agreement also includes an example, shown in figure

7. Figure 7: Example option price calculation

If the Actual Market Value is £3,500,000 and the Residual Value is £1,000,000 the Adjustment =

£500,000 (i.e. 25% x (£3,500,000 - £1,500,000)

+ £375,000 (i.e. 25% x (£3,500,000 - £2,000,000) + £125,000 (i.e. 25% x (£3,500,000 - £3,000,000) = £1,000,000

The option price is therefore £2,500,000.

118. The effect of the adjustment is that a deduction from fair value will start to be applied where the fair value is one and half times or greater than the residual value stated in the contract.

Do we need to treat the option to acquire the asset at the end of the scheme as part of the minimum lease rentals? 119. IAS 17 requires that an option to purchase a leased asset at the

end of the contract should be included in the minimum lease payments where it is reasonably certain that the option will be exercised. It further notes that such exercise is considered to be likely where the option price is sufficiently below the fair value of the asset at that time (because even if the lessee did not need the asset itself, it is assumed to act rationally and purchase the asset for subsequent resale and recognition of a profit).



120. As noted in paragraph 98 above, the NHS body should commission a formal valuation of the estimated residual value of the asset. It should then apply this valuation amount to the purchase option formula in the contract to determine whether the option price is likely to be sufficiently below the estimated fair value of the asset.

121. Where the option price is expected, at the outset, to be sufficiently

below the expected fair value of the asset at the end of the contract then it is presumed that the option would be exercised and therefore should be included in the minimum lease payments. Where the difference is small then this presumption might be capable of being overturned, but other factors, such as those listed below should also be taken into account.

122. If the option price is not below the anticipated fair value then no

presumption of the option being exercised would arise. However, other factors should then be taken into consideration when concluding whether the option is otherwise reasonably certain to be exercised, for example:

• any anticipated disruption to services should an alternative

location have to be sought at the end of the contract; • whether the asset is expected to be key to the NHS body’s

activities; and • whether the asset is in a key location from which the NHS

body would not realistically withdraw services.

Measuring the initial liability

How do we measure the liability when the purchase option is not included as part of the minimum lease payments?

123. Where the option is not considered reasonably certain to be exercised and therefore is not included in the MLP, the liability is

measured as the present value of the minimum lease payments (i.e. the finance lease rentals), discounted using the implicit interest rate calculated in the manner described below.

124. This liability also represents the amount at which the Leaseplus

asset is recognised, instead of the fair value of the asset itself, as described in section 3.3.

How do we determine the implicit interest rate?

125. The implicit interest rate is defined in IAS 17 as:

“the discount rate that, at the inception of the lease, causes the aggregate of the minimum lease payments and the unguaranteed residual value to be equal to the sum of (i) the fair value of the asset and (ii) any initial direct costs of the lessor.”

126. In normal PFI schemes, the implicit interest rate is backwards-

calculated from the fair value of the asset and the lease rental cashflows remaining once the service costs and lifecycle elements have been deducted from the total unitary payment. In such scenarios this approach is appropriate because the unguaranteed residual value is zero and the lease payments cover the full asset cost.

127. For Leaseplus schemes, this approach does not work because

there is an unguaranteed residual value as reflected in the purchase option. Therefore, in order to calculate the implicit interest rate, three amounts need to be known:

• the initial fair value of the asset; • the finance lease rentals; and • the unguaranteed residual value.

128. The initial fair value of the asset here is the freehold value as

described in paragraph 97. The NHS body therefore needs this



valuation even if it will not be recognising the asset at this amount in its financial statements.

129. The lease rentals are calculated using the method described

above. The residual value can be determined in the manner set out below.

How do we determine the unguaranteed residual value of the asset? 130. The leaseplus contract and financial model will include a stated

residual value. This could be used as the appropriate amount, but it may not necessarily be a true reflection of the residual value of the asset. This is because it may instead reflect the amount of the initial asset cost that the LIFTco has not recovered through the annual payments.

131. A more appropriate approach, therefore, is for the NHS body to

use the option price calculated from the formal valuation of the estimated residual value of the asset, as described in paragraph 120 above.

132. Having derived the residual value in this way, this amount needs to

be treated as a cash outflow in the final year of the contract for the purposes of the implicit interest rate calculation.

133. The implicit interest rate is derived as the discount rate that results

in the present value of the rentals and the residual value matching the fair value of the asset (initial direct costs can in practice be ignored). A key point to note is that it is the present value as at the inception of the lease, and not at the commencement of the lease. Thus the discounting calculation must include the period between these two dates in the contract (i.e. effectively the construction period) even though no finance lease rentals are likely to occur during this period.

134. The liability recognised in the financial statements is then the

present value of the minimum lease payments discounted using

the implicit interest rate. The asset is then recognised at the same amount.

Do we subsequently split this finance lease liability between a finance cost and repayment of the liability using the implicit interest rate? 135. No. Having recognised the liability, it is then necessary to calculate

the split of the annual lease rentals between a finance cost and repayment of the liability so as to achieve a constant finance rate over the term of the contract, in accordance with paragraph 25 of IAS 17. This is a new rate to be calculated and will be different to the implicit interest rate already determined, The implicit interest rate cannot be used here because it has been calculated under different assumptions (the construction period has been included) and therefore will not result in the liability reaching zero by the end of the contract.

Figure 8: Example liability calculation where option is excluded An NHS LIFT asset is provided through a leaseplus contract. The lease rental determined through separation of the annual leaseplus payment is determined as £1,500,000 per annum The residual value stated in the contract is £6,000,000. The contract comprises a two year construction period and a 25 year operational period. Fair values: The NHS body determines the fair value of the asset and its expected residual value at the end of the contract. to be £20,000,000 and £7,000,000 respectively. Option price: The expected fair value of the residual (£7m) is less than 1.5 times the residual value stated in the contract and therefore no deduction is likely to be applied.



The expected option price is therefore £7m and this is used as the unguaranteed residual value in the lease. Implicit interest rate: The amounts to be discounted are therefore £0 in years 1 and 2 plus the £1.5m rental in years 3 to 27 of the contract and the £7m unguaranteed residual value in year 27. The discounting is applied to reach the initial fair value of the asset (£20m) at the start of year 1, and this results in an implicit interest rate of 5.39%. Finance lease liability and asset The finance lease liability is recognised at the present value of the minimum lease payments i.e. £0 in years 1 and 2 and the £1.5m annual lease rentals in years 3 to 27 using the 5.39% IIR. This results in a liability of £18,304,980, which is recognised in the financial statements, together with a corresponding asset for the same amount. Subsequently, the annual minimum lease payments need to be allocated between the finance cost and repayment of the liability in such a way as to produce a constant finance rate. This can be done by discounting the lease payments in year 3 to 27 to the initial liability of £18,304,980 as at the commencement of the lease i.e. the start of year 3, The finance rate thus produced is 6.50%, which is then applied to the opening lease liability in each year to produce the annual finance cost. The balance in each year of the minimum lease payment is applied to reduce the lease liability. How do we measure the liability when the purchase option is included as part of the minimum lease payments?

136. If the option is considered reasonably certain to be exercised, it is included in the MLP as a payment in the final year of the contract at the expected option price. This is the same amount as the residual value used above for calculating the implicit interest rate.

137. The finance lease liability will then be the present value of these minimum lease payments. In practice, this should be the same value as the initial fair value of the property itself, and therefore where the option is to be included, the NHS body could simply set the liability to match the fair value of the asset and avoid the need to calculate the implicit interest rate in the lease.

138. It will however, be necessary to split the annual lease rentals

between a finance cost and repayment of the liability so as to achieve a constant finance rate over the term of the contract, in accordance with paragraph 25 of the standard. This separate finance rate will not be the same as the implicit interest rate, although it will be calculated in a similar manner by discounting the minimum lease payments to the fair value of the asset as at the commencement of the lease.

139. The impact on the lease liability of including and excluding the

purchase option is illustrated in figure 9.



Figure 9 – Profiling the finance lease repayment to include a final bullet payment

Duration of contract

Finance lease liability excluding purchase

option

Finance lease liability including purchase

option in MLP

Option price closing balance settled by final payment

Out

stan

ding

fina

nce

leas

e lia

bilit

y

D ifference represents present value of purchase

option

Figure 10: Example liability calculation where option is included An NHS LIFT asset is provided through a leaseplus contract. The lease rental determined through separation of the annual leaseplus payment is determined as £1,500,000 per annum The residual value stated in the contract is £4,000,000. Fair values: The NHS body determines the fair value of the asset and its expected residual value at the end of the contract to be £20,000,000 and £7,000,000 respectively. Option price: The expected fair value of the residual (£7m) is more than 1.5 times the

residual value stated in the contract and therefore a deduction is likely to be applied. It is not more than twice the residual value and therefore the deduction is limited to the first part of the formula: 25% of the excess of the fair value over 1.5 times the residual value. i.e. (£7,000,000 minus (£4,000,000 x 1.5)) x 0.25 = £250,000 The expected option price is therefore £6.75m and this is used as the unguaranteed residual value in the lease. Implicit interest rate: The inclusion of the option in the minimum lease payments means that their present value when discounted using the implicit interest rate will match the fair value of the asset. In this instance, therefore the asset and liability will both be recognised at the fair value of the asset and it is not necessary to calculate the implicit interest rate. Subsequently, the annual minimum lease payments need to be allocated between the finance cost and repayment of the liability in such a way as to produce a constant finance rate. This can be done by discounting the lease payments in year 3 to 27 to the initial liability of £20,000,000 as at the commencement of the lease i.e. the start of year 3, The finance rate thus produced is 6.35%, which is then applied to the opening lease liability in each year to produce the annual finance cost. The balance in each year of the minimum lease payment is applied to reduce the lease liability. Subsequent accounting for the finance lease transactions What accounting entries do we need to make each year where we have not recognised the option in the liability?

140. Once the finance lease rental, finance cost and liability have been calculated, the entries in subsequent years are relatively simple,



and are as described in paragraphs 181 – 184 of the PFI guidance.

141. If, at the end of the contract the NHS body does in fact exercise

the option and purchases the asset, then it should simply treat it as capital expenditure at the time i.e.:

• Dr Capital Expenditure – initial cost x • Cr Cash – option price x

142. In practice, an immediate revaluation may need to be carried out if

the actual option price is significantly less than the fair value of the asset.

What accounting entries do we need to make as the contract progresses where we have recognised the option in the liability?

143. Under the leaseplus contract, the NHS body has a six-month

window of time during which it can exercise the purchase option beginning 1 year before the end of the contract. In practice, however, some time before this – perhaps several years – the NHS bodies will need to take a view on whether it will exercise the FV option or not. This has implications for the asset and the liability.

The option is exercised

144. If, towards the end of the contract, the NHS body expects to exercise the option, then no accounting adjustments are needed until the end of the contract when the payment occurs. At that point, the cash payment is set against the carrying amount of the liability at the end of the contract (which will be the option exercise price anticipated at the outset).

• Dr Finance lease liability x • Cr Cash x

145. If the option price is greater than the carrying amount of the liability, then the excess represents additional contingent rental. This excess should therefore be expensed as incurred. The transaction will therefore be:

• Dr Finance lease liability x • Dr Statement of Comp. Expenditure y • Cr Cash (x+y)

146. If the option price is lower than the carrying amount of the liability,

then the remaining liability is written-back to income when the option is exercised and represents a gain. The transaction will be:

• Dr Finance lease liability x+y • Cr Statement of Comp. Expenditure y • Cr Cash x The option is not exercised

147. The asset will be subject to periodic revaluations which would

generally be expected to track its fair value over time, although there may be differences depending on how the fair value is determined i.e. assuming existing use as a healthcare facility or reflecting alternative other possible uses.

148. Towards the end of the contract, if it becomes clear that the NHS

body will not exercise the fair value option, then the depreciation profile of the asset will need to be altered so that the carrying value of the asset reaches its expected residual value at the end of the contract.

149. Should the option not be exercised, then the NHS body will benefit

from the write-back of the finance lease liability to the extent of the undiscounted value of the purchase option incorporated originally within the liability (i.e. the amount remaining once all leaseplus payments have been made throughout the contract). It therefore



seems reasonable to view this accounting gain as the residual value (for depreciation purposes) when the NHS body de-recognises the NHS LIFT asset at the end of the contract

150. The asset depreciation would therefore be adjusted so that it

meets this residual value (i.e. the undiscounted value of the purchase option included in the liability) by the end of the contract. This means that a financial impact starts to occur once the NHS body has a reasonable expectation that it will not exercise the option. The residual value itself will then be written-out of fixed assets when the contract ends, with the charge taken to the ‘Profit/Loss on Disposal’ account.

151. The liability itself would not, however, be altered until the end of

the contract. This is because IAS 17 does not permit lease liabilities to be altered unless the contract is renegotiated, which is not the case here. Therefore, the removal of the residual lease liability occurs at the end of the lease term, effectively as a full negative contingent rental adjustment, and is accounted for as sale proceeds on disposal of the asset. The ‘sale proceeds’ would thus offset the residual value of the asset written-out.

152. In practice, the adjustment to the liability could occur earlier i.e.

between six and twelve months before the end of the contract once the NHS body has contractually committed to not exercising the option. For example, if the NHS body has made a contractually binding decision eight months before the contract end not to exercise the option and has communicated that the to LIFTco, then the adjustment to the liability could occur once the decision is final and binding.

153. The above approach is illustrated in the following example:

Figure 11: Example accounting where option ultimately is not exercised At the start of the contract, the NHS body expects to exercise the purchase option (expected value £5m) and therefore includes it in the minimum lease payments and the finance lease liability. The asset, value £30m will be depreciated over its expected useful economic life, which has been assessed to be 40 years (rather than the contract period of 25 years, because the assumption is that the purchase option will be exercised). In year 20 of the 25-year contract, the NHS body concludes that it does not expect to exercise the option to purchase the asset. The asset At year 20, the asset’s carrying value is £12m. The depreciation profile therefore needs to be changed so that the asset reaches its residual value of £5m (represented by the amount of liability to be written-back). The annual depreciation charge for years 21 to 25 therefore become: (12m – 5m) / 5 = 1.4m per annum (in practice, subsequent revaluations will alter the actual amounts, but the asset still needs to reach £5m by the end of year 25). In year 25, the asset is then written-out as follows: Cr Property, Plant and Equipment £5m Dr Operating Cost Statement (Profit/loss on sale) £5m The liability The liability remains unchanged until year 25 of the contract when, after the



final rentals have been paid, the remaining balance represents the original estimated option price of £5m. This balance is written back to in full to income: Dr Finance lease liability £5m Cr Operating Cost Statement (Profit/loss on sale) £5m


Section 3.5: NHS Land and assets injected into the leaseplus scheme

NHS LIFT schemes often have land, and occasionally other assets, injected into them by an NHS body. This section sets out the accounting issues which need to be considered where this occurs. Key Points:

• Whether the sale of land represents a sale and leaseback arrangement.

• recognition of any profit or loss on sale of the land to the LIFTco.

• Implications where other NHS bodies contribute assets to the scheme.

Initial contributions by the NHS body to the operator

154. Initial contributions of assets – for no consideration - by NHS bodies to the LIFTco in respect of individual Leaseplus schemes do not generally occur. However, if they are present then the accounting treatment is described in paragraphs 164 to 180 of the PFI guidance.

Sale of land by the NHS body to the LIFTco for use in the Leaseplus agreement

155. More commonly, land may be sold by the NHS body to the LIFTco on which the NHS LIFT asset is then constructed.

156. Where this occurs, and the scheme itself is treated as ‘on-balance

sheet’, the land element of the scheme is effectively a sale and finance leaseback and should be treated as such in accordance with IAS 17.

157. This means that where the NHS body recognises a profit on the sale, this profit cannot be recognised immediately and instead needs to be deferred and released to income over the life of the contract. Any loss on sale should, similarly be deferred and amortised to expenditure.

158. Furthermore, any accumulated surplus balance in the revaluation

reserve in respect of the land cannot be transferred to the general fund reserve when the land is sold. Instead the revaluation reserve balance should remain in place because, in substance, the land has not been de-recognised. The balance will only be released if the land is de-recognised e.g. if the purchase option is not exercised at the end of the leaseplus contract.

If we only acquired the land a short time before and only did so for subsequent resale to the LIFTco does this represent a sale and leaseback, and do we have to defer any profit? 159. One thing to consider is whether the sale by the NHS body really

represents a sale and leaseback arrangement. 160. It is not uncommon for NHS bodies to purchase a parcel of land

solely for subsequent sale to the LIFTco for use in the scheme. Where this occurs, it is usually because the NHS body has identified a particular site which it considers suitable for the NHS LIFT facility and wishes to secure it. Such purchases typically take place between a few months and a year before the onward sale to the LIFTco.

161. It is appropriate therefore to consider whether any sale of land to

the LIFTco is, in substance, a sale and leaseback.

162. Where the NHS body has held the land for a considerable period of time and has previously used it as an operational asset, the subsequent sale to the LIFTco would seem to be, in substance, a sale and leaseback.


Section 3.5: NHS Land and assets injected into the leaseplus scheme

163. In contrast, where the following factors apply, then it may be appropriate to treat the transaction not as a sale and leaseback but simply as the lease of the land by the NHS body:

• The NHS body only acquired the site for the purposes of

onward sale to the LIFTco; • It acquired the site only a few months before the onward sale; • The NHS body sold the site to the LIFTco for same amount as

it purchased the site; and

• the site was not used as an operational asset of the NHS body (or any operational use was incidental);

164. In this situation, the transaction does not, in substance, seem to be

a sale and leaseback. Any profit on disposal can be recognised as at the date of sale (any loss continues to be recognised immediately).

What accounting requirements apply to a sale and leaseback?

165. If, however, the sale transaction is considered to be in substance a

sale and leaseback arrangement, then IAS 17 imposes some accounting requirements.

166. The on-balance sheet recognition of the land through IFRIC 12

means that the transaction should be seen as a sale and finance leaseback.

167. Consequently, IAS 174 requires that any excess of the sales

proceeds over the carrying amount prior to sale cannot be recognised by the NHS body immediately. Instead, it must be deferred and released to income over the term of the leaseback. IAS 17 is silent on the treatment of any loss on disposal, but by

analogy this should similarly be deferred and amortised over the lease term.

4 IAS 17 paragraph 59

168. Prior to disposal, the land should not be reclassified into IFRS 5

‘Non-current Assets Held for Sale and Discontinued Operations’ because the requirements of that standard do not apply where the transaction is to be accounted for as a sale and finance leaseback5.

169. As noted above, any revaluation reserve balance in respect of the

land should not be transferred to the general fund balance but should be retained in the revaluation reserve.

Land sold to the LIFTco by another NHS body What happens where the land was sold to the LIFTco by another NHS body? 170. Where the land is sold to the LIFTco by another NHS body then

this would not normally represent a sale and leaseback. For example, where an NHS Trust has sold a parcel of land to the LIFTco, this should not result in the PCT needing to recognise a sale and leaseback.

171. If, however, the NHS body was involved in the sale transaction e.g.

the land passed from the NHS Trust to the LIFTco via the NHS body’s accounts, or the NHS body had disposed of the land to the NHS Trust shortly before the sale to the LIFTco occurred, then closer scrutiny will be required to determine whether a sale and leaseback exists in practice.

172. Where two NHS bodies are involved in the same NHS LIFT

arrangement, but only one of them has sold land to the LIFTco, then the sale and leaseback would normally be recognised by that NHS body.

5 Example 4 (item b) of the Implementation Guidance to IFRS 5.


Section 3.6: Accounting for payment deductions

NHS LIFT schemes contain incentive mechanisms that can result in deductions to the annual lease plus payment for poor service performance by the operator or where the asset is unavailable. Key Points:

• Identifying the types of deduction regimes that typically are found in service concessions.

• How to account for deductions for poor service performance.

• Accounting for deductions for unavailability of the property.

How do we tell which deductions are for poor services and which for unavailability?

173. Leaseplus schemes operate two separate deduction mechanisms. The reason for a deduction should be clear. These schemes operate on a monthly basis, with deductions being applied in the following period. The details of the deduction mechanisms are set out in Part C of Schedule 10 to the model leaseplus contract. The main features are described below.

What deductions are applied in the contract for service performance failures? 174. Incidences of poor service performance are called ‘Performance

Failures’. 175. For schemes, with a capital value of less than £10 million,

performance failures do not result in deductions to the annual payment unless the scheme includes an operating theatre or similar clinical facilities. Instead, PCTs may rectify these failures at

their own cost then apply ‘Self Help’ deductions equal to those costs to the Leaseplus payment.

176. For schemes with a capital value of £10million or more, deductions

for performance failures are made, and the amount applied depends on the seriousness of the failure. In schedule 10 of the model agreement, the following deductions apply:

• Minor Performance Failure - £5 (index-linked) • Medium Performance Failure – £15 (index-linked) • Major Performance Failure – £30 (index-linked)

177. In practice, deductions are not applied in respect of minor or

medium failures unless for a particular service the total deductions for that month exceed 0.5% of the monthly cost of that service.

What deductions are applied in the contract for non-availability of the property? 178. If, for some reason, a part of the property is not available when it

should be, an unavailability event occurs. 179. The deduction applied to the annual payment is the higher of:

• The Minimum Unavailability Deduction (£30, index-linked); or • The amount derived in the following formula:

D = (NAPn/(Ny x 6) x AW x UW x DP

Where:

• NAPn is the net annual payment for the year in which the

unavailability event occurs; • Ny is the number of days in the relevant contract year;


Section 3.6: Accounting for payment deductions

• AW is the area weighting percentage for each functional area in which the unavailability event occurs (as described elsewhere in the contract);

• UW is the Unit Weighting percentage for each functional area

in which the event occurs (as described elsewhere in the contract); and

• DP is 50% and only applies where the area is deemed

unavailable but the tenant continues to use it.

180. Where an area is subject to an unavailability deduction, a performance failure deduction cannot be applied at the same time.

How do we account for these deductions?

181. Paragraphs 243 to 254 of the PFI guidance describe how NHS bodies should account for these types of deductions.

182. The PFI guidance does not, however, refer to ‘Self Help’

deductions because these are not part of standard PFI contracts. Since these deductions are incurred for the same reasons as performance failure deductions, NHS bodies should account for them as a reduction in the fair value of services recognised for the period concerned.


Section 3.7: Restating existing schemes

This section sets out the principles of bringing a scheme that is in its operational phase at 1 April 2008 with an ‘off-balance sheet’ treatment, on to the NHS body’s Statement of Financial Position as at that date. Key Points:

• Adjusting the opening 1 April 2008 assets, liabilities and reserves to the cumulative amounts that would have been recorded had an ‘on-balance sheet’ treatment always been followed; and

• illustration of the required changes through two worked examples

How do we approach the restatement of our scheme to an ‘on-balance sheet’ treatment?

183. Where an NHS body has an existing Leaseplus scheme in its operational phase at 1 April 2008 that it has accounted for under UK GAAP – probably with an ‘off-balance sheet’ treatment – it needs to reassess the scheme under IFRS in accordance with this manual. This may well lead to a change in accounting treatment to ‘on-balance sheet’. As with most accounting adjustments on the transition to IFRS, a change to an ‘on-balance sheet’ treatment is applied as a change in accounting policy. This requires that all past transactions for the service concessions are reviewed and where necessary replaced with the entries which would have been made had the scheme always been ‘on-balance sheet’.

184. NHS bodies will need to follow the guidance described in this

document to determine the appropriate amounts and accounting entries for an ‘on-balance sheet’ treatment for their Leaseplus scheme. The rest of this appendix summarises the mechanics of reversing-out the previous UK GAAP accounting entries and replacing them with the new IFRS accounting entries.

How do we recognise the initial asset and liability?

185. The initial fair value of the Leaseplus asset needs to be established at the inception of the lease in accordance with section 3.3 of the PFI guidance. This value is necessary because it is used in determining the implicit interest rate and the initial amount of the finance lease obligation.

186. An equal and opposite asset and liability are therefore recognised

at the date when the asset is made available to the NHS body The amount will be set at the fair value of the asset or at the present value of the minimum lease payments, depending on the nature of the scheme. The accounting entries simply being:

• Dr Property Plant and Equipment • Cr Finance lease obligation.

187. Depreciation and revaluations then need to be applied to the asset

as if it had always been treated ‘on-balance sheet’. The cumulative depreciation and revaluations up to 1 April 2008 are taken to the General Fund reserve and revaluation reserve as appropriate. Up to and including 2007/08, annual indexation was applied to NHS tangible fixed assets. Indexation could thus be applied retrospectively to the asset values as a complete or partial estimate of price changes that would have been applied during the period had the asset been on-balance sheet. The indexation factors for each year are shown in the following table:



Figure 12: NHS Fixed Asset Indexation factors Land Buildings Equipment2001/02 115 161 1322002/03 140 184 1362003/04 148 202 1392004/05 100* 218 1422005/06 105 222 1452006/07 111 240 1492007/08 117 260 153

*in these years, the index was rebased to 100.

188. A full NHS estate revaluation was undertaken as at 1 April 2005, and it is unlikely that any off-balance sheet Leaseplus assets were revalued on that occasion. NHS bodies should discuss with their auditors and valuers a suitable approach to determining the impact that such a revaluation may have had. One approach might be to consider the average proportionate movement to asset carrying values which occurred as a result of those valuations to assets held by the NHS body that are similar to the Leaseplus assets.

189. The finance lease obligation needs to be written-down as

described below so that the appropriate carrying amount is reached as at 1 April 2008. Consequently as at that date, the values for the asset and the liability are likely to be different.

What cumulative adjustments do we need to make in respect of the leaseplus payment during the operational period to date?

190. Under the off balance sheet treatment, the full annual payment under the Leaseplus scheme has been expensed to operating expenses.

191. In switching to an on-balance sheet treatment, the following

adjustments need to be made:

• The cumulative element of the annual payment attributable to the finance lease for the asset needs to be removed from operating expenses and allocated to a finance charge and repayment of the finance lease principal using a finance rate calculated for that purpose: Dr General Fund: finance charge Dr General Fund: finance charge – contingent rent Dr Leaseplus Finance lease obligation Cr General Fund: operating expenses

• The amount, if any, of the annual payment attributable to

lifecycle replacement needs to be removed from operating expenses. These amounts then need to be compared to the actual lifecycle components received to 1 April 2008 and recognised as one or more of the following:

a) Items of PPE, where the lifecycle was received; b) A prepayment where the lifecycle was not received at 1

April 2008 but was still expected to be received after that date;

c) An operating expense to the extent that:

i) the lifecycle was received but its value was less than

that paid for through the unitary payment; or ii) the lifecycle will not be received.



The land on which the NHS LIFT asset is located was previously owned by the NHS body and sold to the LIFTco. Do we need to make any adjustments in respect of these?

192. Where the sale of the land for use in the scheme is considered to be, in substance, a sale and leaseback – as discussed in section 3.5 - an adjustment will be required in respect of any profit or loss on disposal recognised on the sale.

193. In accordance with IAS 17, any profit on sale originally recognised

should be reversed out of the cumulative General Fund reserve and deferred. It is then released to income over the life of the leaseplus scheme.

Cr Deferred Income a Dr General Fund Reserve a (To reflect the amount of profit which is deferred and is to be recognised in periods from 2008/09 onwards)

194. If a loss on disposal was recognised originally, then this should

similarly be deferred and amortised over the lease term. 195. The final carrying amount on which the profit or loss was originally

calculated does not need to be restated in accordance with IFRS 5 because the sale and leaseback transaction falls outside of that standard.

196. Any revaluation reserve balance in respect of the land that was

transferred to the general fund balance when the disposal was recognised originally, will need to be transferred back to the revaluation reserve. This is required regardless of when the original sale occurred.


Section 3.8: Restatement example 1 - IFRIC 12, purchase option included

Restatement as at 1 April 2008 – worked example Description of Scheme: Financial close 1 April 2004 Construction period 1 year Operational period commenced 1 April 2005 Contract Period 27 years (25 years operational) NHS LIFT asset Initial Fair Value £13,000,000 (Building) £2,000,000 (Land) Estimated useful economic life of the building 40 years Annual Payment £6,000,000 from 1 April 2005, uplifted by RPI RPI assumed to have been 2.5% for each year since start of contract Residual Value assigned in the LIFTco financial model £2,500,000 Anticipated fair value of the NHS LIFT asset at the end of the contract £4,083,000 Expected price of the purchase option £4,000,000



Off-Balance Sheet Treatment:

• Unitary Payment expensed • No other transactions recognised

On-Balance Sheet Treatment

• Capital value of asset recognised at £15,000,000 as at 1 April 2005, comprising Land of £2,000,000 and Buildings of £13,000,000. Subject to annual indexation to 1 April 2008 (and thereafter).

• Building asset depreciated over its useful economic life of 40 years. • Land asset not depreciated • Finance lease obligation recognised at £15,000,000 as at 1 April 2005. Subsequently reduced through application of annual finance lease rental.

• Operational period Unitary Payment components determined to be:

o Services £4,300,000 in Year 3, increasing by RPI o Lifecycle replacement As set out in the table below o Finance lease rental (principal and interest) As calculated in the table below, including the option at its expected price of £4m o Contingent Finance cost £0, thereafter, comprising RPI increase of Finance lease rental

• Finance lease rental – as it is known that the fair value of the asset and the present value of the minimum lease payment will be the same, the implicit

interest rate has not been calculated. The finance rate for splitting the rental between finance cost and repayment of the liability (per paragraph 25 of IAS 17) has been determined through calculation to be 10.3%.



Figure 14: Analysis and calculations to derive finance lease components Real Amounts: Finance Lease Calculations: IRR= 10.3%

Contract Year

Financial Year

Unitary Payment:

Real

Services: Real

Planned Lifecycle:

Real

Finance Lease: Real

Opening Liability

Finance Cost

Lease Rental - Real

Closing Liability

Finance lease principal

repaid

A B C D = A-B-C E F = E x IRR D(-ve) H = E+F+D I

3 2005/06 6,000,000 4,300,000 0 1,700,000 15,000,000 1,551,596 -1,700,000 14,851,596 148,4044 2006/07 6,000,000 4,300,000 0 1,700,000 14,851,596 1,536,245 -1,700,000 14,687,841 163,7555 2007/08 6,000,000 4,300,000 0 1,700,000 14,687,841 1,519,306 -1,700,000 14,507,148 180,6946 2008/09 6,000,000 4,300,000 0 1,700,000 14,507,148 1,500,616 -1,700,000 14,307,763 199,3847 2009/10 6,000,000 4,300,000 0 1,700,000 14,307,763 1,479,991 -1,700,000 14,087,755 220,0098 2010/11 6,000,000 4,300,000 0 1,700,000 14,087,755 1,457,234 -1,700,000 13,844,988 242,7669 2011/12 6,000,000 4,300,000 0 1,700,000 13,844,988 1,432,122 -1,700,000 13,577,110 267,878

10 2012/13 6,000,000 4,300,000 0 1,700,000 13,577,110 1,404,413 -1,700,000 13,281,523 295,58711 2013/14 6,000,000 4,300,000 0 1,700,000 13,281,523 1,373,837 -1,700,000 12,955,361 326,16312 2014/15 6,000,000 4,300,000 0 1,700,000 12,955,361 1,340,099 -1,700,000 12,595,460 359,90113 2015/16 6,000,000 4,300,000 90,341 1,609,659 12,595,460 1,302,871 -1,609,659 12,288,672 306,78814 2016/17 6,000,000 4,300,000 74,098 1,625,902 12,288,672 1,271,137 -1,625,902 11,933,907 354,76515 2017/18 6,000,000 4,300,000 242,110 1,457,890 11,933,907 1,234,440 -1,457,890 11,710,457 223,45016 2018/19 6,000,000 4,300,000 115,600 1,584,400 11,710,457 1,211,327 -1,584,400 11,337,383 373,07317 2019/20 6,000,000 4,300,000 131,795 1,568,205 11,337,383 1,172,736 -1,568,205 10,941,914 395,46918 2020/21 6,000,000 4,300,000 269,364 1,430,636 10,941,914 1,131,829 -1,430,636 10,643,108 298,80719 2021/22 6,000,000 4,300,000 155,011 1,544,989 10,643,108 1,100,920 -1,544,989 10,199,039 444,06920 2022/23 6,000,000 4,300,000 216,880 1,483,120 10,199,039 1,054,986 -1,483,120 9,770,905 428,13421 2023/24 6,000,000 4,300,000 245,633 1,454,367 9,770,905 1,010,700 -1,454,367 9,327,238 443,66722 2024/25 6,000,000 4,300,000 138,298 1,561,702 9,327,238 964,807 -1,561,702 8,730,343 596,89523 2025/26 6,000,000 4,300,000 87,500 1,612,500 8,730,343 903,064 -1,612,500 8,020,907 709,43624 2026/27 6,000,000 4,300,000 3,221 1,696,779 8,020,907 829,681 -1,696,779 7,153,808 867,09825 2027/28 6,000,000 4,300,000 15,654 1,684,346 7,153,808 739,988 -1,684,346 6,209,451 944,35826 2028/29 6,000,000 4,300,000 9,884 1,690,116 6,209,451 642,304 -1,690,116 5,161,638 1,047,81227 2029/30 10,000,000 4,300,000 4,443 5,695,557 5,161,638 533,919 -5,695,557 0 5,161,638

Total 154,000,000 107,500,000 1,799,832 44,700,168 29,700,168 -44,700,168 15,000,000



Nominal Amounts:

Contract Year

Financial Year

Unitary Payment: Nominal

Services: Nominal

Planned Lifecycle: Nominal

Nominal rental

Contingent rental

J K L M = J-K-L N = M-D

3 2005/06 6,000,000 4,300,000 0 1,700,000 04 2006/07 6,150,000 4,407,500 0 1,742,500 42,5005 2007/08 6,303,750 4,517,688 0 1,786,063 86,0626 2008/09 6,461,344 4,630,630 0 1,830,714 130,7147 2009/10 6,622,877 4,746,395 0 1,876,482 176,4828 2010/11 6,788,449 4,865,055 0 1,923,394 223,3949 2011/12 6,958,161 4,986,682 0 1,971,479 271,479

10 2012/13 7,132,115 5,111,349 0 2,020,766 320,76611 2013/14 7,310,417 5,239,132 0 2,071,285 371,28512 2014/15 7,493,178 5,370,111 0 2,123,067 423,06713 2015/16 7,680,507 5,504,364 115,644 2,060,500 450,84114 2016/17 7,872,520 5,641,973 97,223 2,133,324 507,42215 2017/18 8,069,333 5,783,022 325,611 1,960,700 502,81016 2018/19 8,271,066 5,927,597 159,356 2,184,113 599,71317 2019/20 8,477,843 6,075,787 186,223 2,215,832 647,62818 2020/21 8,689,789 6,227,682 390,120 2,071,987 641,35119 2021/22 8,907,034 6,383,374 230,115 2,293,545 748,55620 2022/23 9,129,710 6,542,959 330,008 2,256,743 773,62321 2023/24 9,357,952 6,706,532 383,104 2,268,316 813,94922 2024/25 9,591,901 6,874,196 221,090 2,496,615 934,91323 2025/26 9,831,699 7,046,051 143,379 2,642,269 1,029,76924 2026/27 10,077,491 7,222,202 5,410 2,849,879 1,153,10025 2027/28 10,329,428 7,402,757 26,949 2,899,722 1,215,37626 2028/29 10,587,664 7,587,826 17,441 2,982,397 1,292,28127 2029/30 14,852,356 7,777,522 8,036 7,066,798 1,371,241

Total 208,946,584 146,878,385 2,639,709 59,428,489 14,728,321



Figure 15: Annual payment components

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27Contract year

Am

ount

(£)

Services: Nominal

Contingent rental


Finance Cost




Figure 16: Existing Off-Balance Sheet transactions

YEAR ENDED Cumulative as at

31/03/2006 31/03/2007 31/03/2008 01/04/2008

INCOME AND EXPENDITURE ACCOUNT

Operating Expenses: Unitary Payment 6,000,000 6,150,000 6,303,750 18,453,750

Total Operating Expenditure 6,000,000 6,150,000 6,303,750 18,453,750 No Balance Sheet entries are recognised



Figure 17: New On-Balance Sheet transactions to be recognised


31/03/2006 31/03/2007 31/03/2008 01/04/2008 OPERATING COST STATEMENT

Operating Expenses: Gross Annual NHS LIFT Payment 6,000,000 6,150,000 6,303,750 18,453,750Less: Finance lease -1,700,000 -1,742,500 -1,786,063 -5,228,563 Lifecycle replacement 0 0 0 0Services Charge 4,300,000 4,407,500 4,517,688 13,225,188Depreciation - NHS LIFT Building Asset 325,000 351,351 380,631 1,056,982

Finance Costs PFI asset lease liability finance charge 1,551,596 1,536,245 1,519,306 4,607,148PFI asset contingent rent finance charge 0 42,500 86,062 128,562

Total Expenses 6,176,596 6,337,596 6,503,687 19,017,880 STATEMENT OF CHANGES IN TAXPAYERS’ EQUITY: Revaluation of NHS LIFT asset Land Building

0 0

114,286

1,027,703114,286

1,112,613228,572

2,140,316



YEAR ENDED

As at 01/04/2005 31/03/2006 31/03/2007 31/03/2008

STATEMENT OF FINANCIAL POSITION Assets: Property, Plant and Equipment NHS LIFT asset: Land Building

2,000,00013,000,000

2,000,000

12,675,000

2,114,286

13,351,3522,228,572

14,083,334Additions - Lifecycle Replacement 0 0 0Total - PFI Asset 15,000,000 14,675,000 15,465,638 16,311,906

Liabilities: NHS LIFT Finance lease liability -15,000,000 -14,851,596 -14,687,841 -14,507,148

Revaluation Reserve NHS LIFT asset 0 0 1,141,989 2,368,888



Figure 18: Restatement journals as at 1 April 2008 Recognition of the asset and liability Debit Credit

Removal of existing off-balance sheet entries: Removal of cumulative finance lease rental element of Annual Payment from retained earnings/General Fund balance -5,228,563 New on-balance sheet entries: PPE: NHS LIFT Asset – fair value Land Building

2,228,572

14,083,334

Finance lease liability: written down as at 1 April 2008 -14,507,148

Revaluation Reserve: cumulative amount for NHS LIFT asset as if it had always been on-balance sheet -2,368,888

Retained earnings/General Fund balance Cumulative depreciation on NHS LIFT asset

1,056,982

Cumulative Finance cost (lease) 4,607,148Cumulative finance cost (contingent rent) 128,562

5,792,692

22,104,598 -22,104,598

Figure 19: Summary of adjustments to balances as at 1 April 2008 Debit Credit

Property, Plant and Equipment Recognition of NHS LIFT Asset 16,311,906

Liabilities Recognition of NHS LIFT Finance lease liability

14,507,148

Capital and Reserves Revaluation Reserve 2,368,888 Retained earnings/General Fund balance 564,130

16,876,036 16,876,036


Section 3.9: Restatement example 2 – IFRIC 12, purchase option excluded

Example restatement – IFRIC 12 where purchase option not included This restatement is identical to the previous one, with the following exceptions:

• The residual value stated in the contract is £3,500,000. The expected residual fair value of the NHS LIFT asset is £4,000,000 and therefore the purchase option price is not expected to be discounted below this fair value. There are no other factors that indicate that the option is likely to be exercised and, consequently, it is not reasonably certain at the outset that the purchase option will be exercised at the end of the contract. Therefore the purchase option is not included in the minimum lease payments.

• In Figure 20, the lease payments and the purchase option are discounted over the life of the contract (years 1 to 27) so that their present value at

inception matches the fair value of the asset (£15m). The resulting discount rate of 8.38% is the implicit interest rate in the lease. • The minimum lease payments, discounted using this IRR is £14,544,228, which being less than the fair value of the asset is the amount at which the

asset and liability is recognised at the commencement of the lease in year 3. • In Figure 21, the annual minimum lease rentals are allocated between the finance cost and repayment of the liability so as to achieve a constant finance

rate over the lease term which is determined by calculation to be 10.45%. • The asset is depreciated over the contract term of 25 years. • The asset is not indexed, but is subject to periodic professional revaluations. The first of these valuations occurred as at 31 March 2008.



Figure 20: Calculation of the implicit interest rate

Finance Lease Calculations: Contract

Year Financial

Year Fair Value of

Asset: Lease Rental -

Real Present Value

IIR = 8.38% 1 2003/04 15,000,000 0 02 2004/05 0 03 2005/06 1,700,000 1,335,4774 2006/07 1,700,000 1,232,2505 2007/08 1,700,000 1,137,0036 2008/09 1,700,000 1,049,1177 2009/10 1,700,000 968,0258 2010/11 1,700,000 893,2019 2011/12 1,700,000 824,160

10 2012/13 1,700,000 760,45611 2013/14 1,700,000 701,67612 2014/15 1,700,000 647,43913 2015/16 1,609,659 565,64814 2016/17 1,625,902 527,19315 2017/18 1,457,890 436,17716 2018/19 1,584,400 437,38617 2019/20 1,568,205 399,45318 2020/21 1,430,636 336,24419 2021/22 1,544,989 335,05320 2022/23 1,483,120 296,77521 2023/24 1,454,367 268,52622 2024/25 1,561,702 266,05623 2025/26 1,612,500 253,47624 2026/27 1,696,779 246,10825 2027/28 1,684,346 225,42126 2028/29 1,690,116 208,70927 2029/30 5,695,557 648,969

Total: 15,000,000



Figure 21: Restatement calculations Real Amounts: Finance Lease Calculations: Finance Rate = 10.45%

Contract Year

Financial Year

Unitary Payment:

Real

Services: Real

Planned Lifecycle:

Real

Finance Lease: Real

Opening Liability

Finance Cost Lease Rental - Real

Closing Liability

Finance lease

principal repaid

A B C D = A-B-C E F = E x IRR D(-ve) H = E+F+D I

3 2005/06 6,000,000 4,300,000 0 1,700,000 14,544,228 1,519,910 -1,700,000 14,364,138 180,0904 2006/07 6,000,000 4,300,000 0 1,700,000 14,364,138 1,501,090 -1,700,000 14,165,228 198,9105 2007/08 6,000,000 4,300,000 0 1,700,000 14,165,228 1,480,303 -1,700,000 13,945,531 219,6976 13,702,876 2008/09 6,000,000 4,300,000 0 1,700,000 13,945,531 1,457,345 -1,700,000 242,6557 2009/10 6,000,000 4,300,000 0 1,700,000 13,702,876 1,431,986 -1,700,000 13,434,862 268,0148 2010/11 6,000,000 4,300,000 0 1,700,000 13,434,862 1,403,978 -1,700,000 13,138,840 296,0229 2011/12 6,000,000 4,300,000 0 1,700,000 13,138,840 1,373,043 -1,700,000 12,811,884 326,957

10 2012/13 6,000,000 4,300,000 0 1,700,000 12,811,884 1,338,875 -1,700,000 12,450,759 361,12511 2013/14 6,000,000 4,300,000 0 1,700,000 12,450,759 1,301,137 -1,700,000 12,051,896 398,86312 2014/15 6,000,000 4,300,000 0 1,700,000 12,051,896 1,259,455 -1,700,000 11,611,351 440,54513 2015/16 6,000,000 4,300,000 90,341 1,609,659 11,611,351 1,213,417 -1,609,659 11,215,108 396,24314 2016/17 6,000,000 4,300,000 74,098 1,625,902 11,215,108 1,172,008 -1,625,902 10,761,214 453,89415 2017/18 6,000,000 4,300,000 242,110 1,457,890 10,761,214 1,124,575 -1,457,890 10,427,899 333,31516 2018/19 6,000,000 4,300,000 115,600 1,584,400 10,427,899 1,089,743 -1,584,400 9,933,242 494,65717 2019/20 6,000,000 4,300,000 131,795 1,568,205 9,933,242 1,038,050 -1,568,205 9,403,087 530,15518 2020/21 6,000,000 4,300,000 269,364 1,430,636 9,403,087 982,647 -1,430,636 8,955,099 447,98819 2021/22 6,000,000 4,300,000 155,011 1,544,989 8,955,099 935,831 -1,544,989 8,345,941 609,15820 2022/23 6,000,000 4,300,000 216,880 1,483,120 8,345,941 872,173 -1,483,120 7,734,994 610,94821 2023/24 6,000,000 4,300,000 245,633 1,454,367 7,734,994 808,327 -1,454,367 7,088,954 646,04022 2024/25 6,000,000 4,300,000 138,298 1,561,702 7,088,954 740,814 -1,561,702 6,268,066 820,88823 2025/26 6,000,000 4,300,000 87,500 1,612,500 6,268,066 655,029 -1,612,500 5,310,595 957,47124 2026/27 6,000,000 4,300,000 3,221 1,696,779 5,310,595 554,971 -1,696,779 4,168,787 1,141,80825 2027/28 6,000,000 4,300,000 15,654 1,684,346 4,168,787 435,649 -1,684,346 2,920,091 1,248,69726 2028/29 6,000,000 4,300,000 9,884 1,690,116 2,920,091 305,157 -1,690,116 1,535,132 1,384,95927 2029/30 6,000,000 4,300,000 4,443 1,695,557 1,535,132 160,425 -1,695,557 0 1,535,132

Total 150,000,000 107,500,000 1,799,832 40,700,168 26,155,940 -40,700,168 14,544,228



Nominal Amounts:

Contract Year

Financial Year

UnitaryPayment: Nominal

Services: Nominal


Nominal rental Contingent rental

J K L M = J-K-L N = M-D

3 2005/06 6,000,000 4,300,000 0 1,700,000 04 2006/07 6,150,000 4,407,500 0 1,742,500 42,5005 2007/08 6,303,750 4,517,688 0 1,786,063 86,0626 2008/09 6,461,344 4,630,630 0 1,830,714 130,7147 2009/10 6,622,877 4,746,395 0 1,876,482 176,4828 2010/11 6,788,449 4,865,055 0 1,923,394 223,3949 2011/12 6,958,161 4,986,682 0 1,971,479 271,479

10 2012/13 7,132,115 5,111,349 0 2,020,766 320,76611 2013/14 7,310,417 5,239,132 0 2,071,285 371,28512 2014/15 7,493,178 5,370,111 0 2,123,067 423,06713 2015/16 7,680,507 5,504,364 115,644 2,060,500 450,84114 2016/17 7,872,520 5,641,973 97,223 2,133,324 507,42215 2017/18 8,069,333 5,783,022 325,611 1,960,700 502,81016 2018/19 8,271,066 5,927,597 159,356 2,184,113 599,71317 2019/20 8,477,843 6,075,787 186,223 2,215,832 647,62818 2020/21 8,689,789 6,227,682 390,120 2,071,987 641,35119 2021/22 8,907,034 6,383,374 230,115 2,293,545 748,55620 2022/23 9,129,710 6,542,959 330,008 2,256,743 773,62321 2023/24 9,357,952 6,706,532 383,104 2,268,316 813,94922 2024/25 9,591,901 6,874,196 221,090 2,496,615 934,91323 2025/26 9,831,699 7,046,051 143,379 2,642,269 1,029,76924 2026/27 10,077,491 7,222,202 5,410 2,849,879 1,153,10025 2027/28 10,329,428 7,402,757 26,949 2,899,722 1,215,37626 2028/29 10,587,664 7,587,826 17,441 2,982,397 1,292,28127 2029/30 10,852,356 7,777,522 8,036 3,066,798 1,371,241

Total 204,946,584 146,878,385 2,639,709 55,428,489 14,728,321




Figure 22: Analysis of Annual Payment into its components

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27Contract year

Am

ount

(£)

Services: Nominal

Contingent rental


Finance CostFinance lease principal


Figure 23: Existing UK GAAP off-balance sheet treatment


31/03/2006 31/03/2007 31/03/2008 01/04/2008



Total Operating Expenditure 6,000,000 6,150,000 6,303,750 18,453,750



Figure 24: New on-balance sheet transactions to be recognised YEAR ENDED Cumulative

as at 31/03/2006 31/03/2007 31/03/2008 01/04/2008

OPERATING COST STATEMENT

Operating Expenses: Gross Annual NHS LIFT Payment 6,000,000 6,150,000 6,303,750 18,453,750Less: Finance lease -1,700,000 -1,742,500 -1,786,063 -5,228,563 Lifecycle replacement 0 0 0 0Services Charge 4,300,000 4,407,500 4,517,688 13,225,188Depreciation - NHS LIFT Asset 581,769 581,769 581,769 1,745,307


Total Expenses 6,401,679 6,532,859 6,665,822 19,600,360 STATEMENT OF CHANGES IN TAXPAYERS’ EQUITY Revaluation of NHS LIFT asset 0 0 1,346,524 1,346,524



YEAR ENDED

As at 01/04/2005 31/03/2006 31/03/2007 31/03/2008

STATEMENT OF FINANCIAL POSITION Assets: Property, Plant and Equipment NHS LIFT asset - original 14,544,228 13,962,459 13,380,690 14,145,445Additions - Lifecycle Replacement 0 0 0Total - PFI Asset 14,544,228 13,962,459 13,380,690 14,145,445

Liabilities: NHS LIFT Finance lease liability -14,544,228 -14,364,138 -14,165,228 -13,945,531

Revaluation Reserve NHS LIFT asset 0 0 0 1,346,524



Figure 25: Restatement journals as at 1 April 2008 Recognition of the asset and liability Debit Credit

Removal of existing off-balance sheet entries: Removal of cumulative finance lease rental element of Annual Payment from retained earnings/General Fund balance -5,228,563 New on-balance sheet entries: PPE: NHS LIFT Asset – fair value 14,145,445


Revaluation Reserve: cumulative amount for NHS LIFT asset as if it had always been on-balance sheet -1,346,524


1,745,307

Cumulative Finance cost (lease) 4,501,303Cumulative finance cost (contingent rent) 128,562

6,375,173

20,520,618 -20,520,618


Property, Plant and Equipment Recognition of NHS LIFT Asset 14,145,445

Liabilities Recognition of NHS LIFT Finance lease liability

13,945,531

Capital and Reserves Revaluation Reserve 1,346,524 Retained earnings/General Fund balance 1,146,610

15,292, 055 15,292,055


Section 4: Leaseplus arrangements and IAS 17


Section 4.1: Accounting for Leaseplus arrangements as leases

This section sets out the key considerations when applying IAS 17 to Leaseplus agreements and highlights the differences to the accounting treatment compared with IFRIC 12. Key Points:

• Identifying the key considerations when classifying the Leaseplus elements under IAS 17.

• The accounting principles to apply.

Why might we have to account for the Leaseplus scheme as a lease?

197. As noted earlier, most existing Leaseplus schemes are likely to lie within the scope of IFRIC 12. However, in limited circumstances it may be concluded that IFRIC 12 is not appropriate. Furthermore, in future, if the standard contract terms change then IFRIC 12 may not be appropriate because, for example, the control tests are not met. If the scheme has been assessed to fall outside the scope of IFRIC 12, it will nevertheless have to be considered under IFRIC 4 to determine whether, in substance, it is an arrangement containing a lease. In practice, it is highly likely that an IFRIC 4 assessment will lead to the conclusion that the scheme contains a lease and therefore the accounting requirements of IAS 17 will apply.

198. In some circumstances, the level of services provided under the

leaseplus scheme may be considered to be insignificant. In such cases, the scheme may be seen as, in substance, a landlord-repairing lease and therefore should be considered directly under IAS 17. (This approach is acknowledged by the Audit Commission in the NHS LIFT IFRS accounting guidance it has issued to its own auditors).

199. Once IAS 17 is applied, then it is necessary to consider whether

the lease is a finance lease or an operating lease. The land and buildings components must be considered separately under the standard, and the same conclusion need not be reached for both elements.

Lease classification How do we distinguish between a finance and operating lease classification?

200. IAS 17 includes five situations that would normally lead to a lease being classified as a finance lease where they apply to an arrangement. These are:

Indicator of a finance lease Relevance to Leaseplus Schemes 1. The lease transfers ownership of

the leased asset to the lessee by the end of the lease term.

The Leaseplus agreement does not provide for the NHS body to receive automatically ownership at the end of the contract. This therefore is not an indicator of a finance lease.

2. The lessee has an option to purchase the asset at a price expected to be sufficiently lower than the fair value at the date the option is exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised.

The Leaseplus agreement gives the NHS body an option to purchase the asset at the end of the contract. The option price will not be more than the fair value of the asset, but could in certain circumstances be significantly less than the fair value. An assessment will need to be made on a case-by-case basis of the likely option price. Where this is sufficiently below the fair value this



will be an indicator of a finance lease.

3. The lease term is for the major part of the economic life of the asset, even if title is not transferred.

This will depend on the assets for each scheme.

4. At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

If the purchase option is excluded from the minimum lease payments, this may lead to an apparent conclusion that the present value is not substantially all of the fair value. However, consideration also needs to be given to the resulting implicit interest rate and whether this is realistic for similar assets. If the implicit interest rate is considered to be excessive and is substituted instead with a more realistic rate which results in the present value being substantially all of the fair value, this could be an indicator of a finance lease. Where the purchase option is included in the minimum lease payments (because it is expected to be sufficiently less than the fair value) then the present value of the payments will be substantially all of the fair value of the asset and therefore an indicator of a finance lease. Paragraphs 119 to 122 provide guidance on assessing the likelihood of the option being exercised.

5. The leased assets are of a This will depend on the exact nature

specialised nature such that only the lessee can use them without major modifications being made.

of the assets for each scheme.

201. If the analysis is still not clear, IAS 17 has three further indicators

that individually or in combination could also lead to a lease being classified as a finance lease:

Indicator of a finance lease Relevance to Leaseplus Schemes 6. If the lessee can cancel the

lease, the lessor’s losses from the cancellation are borne by the lessee.

The contract can only be terminated for LIFTco default. In such circumstances, the agreement gives the NHS body an option to purchase the assets at the price paid to acquire the land and the value of any construction completed at the time of default. There is also an option to buy out the lease for its fair value should the LIFTco seek to assign the lease interest to another entity. Neither of these requires the NHS body to compensate the LIFTco for its losses or its outstanding debt obligations.

7. Fluctuations in the fair value of the leased assets’ residual interest are passed back to the lessee, for example as a rebate equalling most of the sales proceeds.

This occurs in part, at least in respect of substantial increases in the fair value of the asset through the application of the discount.

8. The lessee may if it wishes extend the lease period for a

The contract does not provide for the extension of the contract. However,



rent substantially lower than market rent levels.

in the absence of this, one would draw the conclusion that should any further period be negotiated between the parties, then, that it would be at market rental, and therefore an indicator of an operating lease.

202. In reaching a judgement, it is necessary to consider all of the

above factors together. In most leases, the indicator will usually all point in one direction or another. Therefore, where one indicator is in isolation, more enquiries may be needed to understand the reasons for this.

Do we have to consider the land and buildings separately? 203. Yes, IAS 17 requires that land and buildings are considered

separately. This can however be short-cut if it is clear that the land and buildings are both finance leases or both operating leases.

204. With three exceptions, IAS 17 requires that land is treated as an

operating lease because the lessor retains the residual value risk in the land and therefore substantially all risks and rewards cannot pass to the lessee.

Circumstance Relevance to NHS LIFT schemes 1. Title is expected to pass to the

lessee at the end of the lease For NHS LIFT schemes, this will depend on the likelihood of the purchase option being exercised. If it is likely to be exercised, then the land should be treated as finance lease, and the purchase option included in the measurement of the minimum lease payment. Paragraphs 119 to 122 provide guidance on assessing the likelihood

of the option being exercised. Where the option is not considered likely to be exercised, then the land should be treated as an operating lease.

2. Where the lease payments cannot be reliably allocated between the land and buildings, both elements should be treated as a finance lease, unless they are clearly both an operating lease.

This will depend on the extent to which a reliable allocation can be made. In practice, this should be possible in all but rare cases.

3. The land forms part of an investment property, in which case the lessee has the option to treat as a finance lease.

This is not relevant to NHS LIFT schemes.

How do we split the lease payments between the land and buildings?

205. There are a number of ways in which this split may be achieved. One possible option is to allocate them based on the relative fair values of the two assets.

206. IAS 17 does require that, when splitting the rental, consideration is

given to the extent to which the building is specialised in nature. Where this is the case, then the lessor may be seeking to recover its entire cost through the rentals and therefore the split should reflect this.

207. In the case of Leaseplus schemes, the LIFTco’s financial model

may be of help in determining the extent to which the lease rentals and/or the residual value are being applied to the land or buildings elements.



208. Similarly, comparing the Residual Value with the project debt

repayment profile in the financial model may yield information as to the assumptions the LIFTco is making on the relative asset values at the end of the contract.

Why might the building be assessed as a finance lease? 209. There are two main reasons why a finance lease conclusion might

be reached for a Leaseplus scheme. 210. First, the option to purchase the property at the end of the scheme

may be expected, at the outset, to be sufficiently below the fair value of the property so as to conclude that it is likely to be exercised by the NHS body. This indicator, together with the consequential inclusion of the option in the minimum lease payments could lead to a finance lease conclusion.

211. Second, the present value of the minimum lease payment

(excluding the purchase option) may be sufficiently close to the fair value of the property so as to conclude that the LIFTco is achieving a lender’s return through the lease payments alone and that this indicates a finance lease.

212. While either of these factors may be very persuasive, it is

nonetheless necessary to consider all relevant factors together before reaching a conclusion,

Figure27: Summary of the possible lease classifications and measurements Purchase option

considered reasonably certain to be exercised

Purchase option not considered reasonably certain to be exercised

Land Treat as finance lease, and include option in minimum lease payments.

Treat as operating lease

Treat as operating lease

Buildings (and Equipment)

Other indicators lead to a finance lease conclusion:

Other indicators do not lead to a finance lease conclusion:

Treat as finance lease, and include option in minimum lease payments.

Treat as finance lease but exclude purchase option from minimum lease payments.

Treat as operating lease.

Examples included in this Guidance:

Same treatment as IFRIC 12 with purchase option Example in Section 3.7

Example in Section 4.2 Land: Operating Lease Building: Finance lease excluding option

Identical to existing off-balance sheet treatment No example provided in this guidance.



Sale and Leaseback of the land

213. If the land was previously owned by the NHS body and was sold to the LIFTco for use in the scheme, then the land element of the transaction may also be a sale and leaseback. NHS bodies should refer to section 3.5 of this guidance to determine whether the sale of the land is in substance a sale and leaseback.

214. Where a sale and leaseback transaction is concluded, and is

considered to be a finance leaseback, then the accounting requirements set out in section 3.5 in respect of deferral of profit should be applied. As noted in that section, any revaluation reserve balance in respect of the land should not be transferred to the general fund balance but should be retained in the revaluation reserve.

215. Where however, it is concluded to be a sale and operating

leaseback for the land, then following requirements of IAS 17 should be applied.

216. In the case of an operating leaseback, the profit can be recognised

immediately but only if it is clear that the transaction was at fair value. A loss on disposal would similarly be recognised immediately.

217. If, however, the sale price was set at an amount that was clearly in

excess of the fair value and so created an artificial profit for the NHS body then the excess above fair value should be deferred and released to income over the life of the leaseback, in the same manner as for a finance leaseback above. Any ‘normal’ profit i.e. the excess of the fair value over the carrying amount can be recognised immediately.

218. In contrast, if the sale price was below fair value then any profit or

loss is recognised immediately unless the loss is compensated by lower lease rentals. In such circumstances, the loss is deferred

and amortised to operating expenses over the life of the leaseback.

219. Since the transaction is considered to be a genuine sale then any

balance in the revaluation reserve in respect of the land can be realised as a transfer to the general fund balance.

Does the land element fall within the scope of SIC 27?

220. Where the land lease is considered to be a sale and leaseback – as opposed to simply a lease - then the NHS body should also consider whether SIC 27 ‘Evaluating the Substance of Transactions involving the Legal Form of a Lease’ applies to the transaction (this SIC does not apply where IFRIC 12 applies to the scheme because the latter is the more specific standard and its provisions therefore override SIC 27).

221. SIC 27 seeks to identify situations where a transaction has been

constructed as a sale and leaseback, but in substance, is simply the raising of finance against the asset.

222. SIC 27 notes the following indicators that, individually demonstrate

that an arrangement may not, in substance, be a lease:

• The entity retains all the risks and rewards incidental to ownership of an underlying asset and enjoys substantially the same rights to use it as before;

• The primary reason for the arrangement is to achieve a

particular tax result, and not to convey the right to use an asset; and

• An option is included on terms that make its exercise almost

certain.



223. SIC 27 requires a consideration of why the parties have agreed to such terms and to assess the commercial effect of the option, including whether the NHS body has a commercial need to repurchase. Where such analysis indicates that it is almost certain that the option will be exercised, then SIC 27 considers that no right of use is conveyed by the leaseback to the NHS body because the seller/lessee never parts with its right of use. Therefore, the transaction is considered not to be a lease and falls outside the scope of IAS 17.

224. If the purchase option is not almost certain to be exercised, then

the arrangement should be accounted for as a sale and leaseback in accordance with IAS 17.

225. The ‘almost certain’ criteria applied to the exercise of the purchase

option under the SIC is a more stringent test than the ‘reasonably certain’ judgement required under IAS 17. A reasonable interpretation of ‘almost certain’ might be that if, at the outset, there is at least a reasonable possibility that the NHS body will not exercise the option, then this criteria is unlikely to be met. Therefore, the transaction would not fall within the scope of the SIC. In many leaseplus schemes, therefore, there may be sufficient doubt about the option’s exercise that the scheme does not need to be accounted for under SIC 27.

How does this affect the accounting?

226. If the sale and leaseback of the land does not fall within the scope of SIC 27, then it is accounted for as a sale and leaseback in accordance with IAS 17.

227. If, however, the land transaction is considered to fall within the

scope of SIC 27, then the following accounting applies.

228. The land asset should be continue to be recognised in the NHS body’s Statement of Financial Position. In substance, no sale is considered to have occurred and therefore the revaluation reserve

balance in respect of the land should not be transferred to the general fund reserve.

229. The ‘lease rentals’ payable in respect of the land element should

be recognised as a financial liability and measured at amortised cost in accordance with IAS 39 ‘Financial Instruments: Recognition and Measurement’.

230. A summary of the considerations are set out in figure 28.

Figure 28: Summary of accounting considerations for the land element

W as the land sold by the NHS body to the

LIFTco?

Account as a lease under IAS 17

W as the asset, in substance, owned by the NHS body only for resale to the LIFTco?

Arrangement is, in substance, a lease

rather than a sale and leaseback

Should the arrangement, in substance, be

considered to be a raising of finance?

Account as a sale and leaseback under

IAS 17

Account for the land as PPE, and recognise a financial liability under

IAS 39

No

Yes

No

Yes

No

Yes


Section 4.2: Restatement example – IAS 17

The restatement issues for an IAS 17 treatment are the same as those for IFRIC 12 as covered in section 3.7 Restatement as at 1 April 2008 – worked example: IAS 17 Treatment Description of Scheme: Financial close 1 April 2004 Construction period 1 year Operational period commenced 1 April 2005 Contract Period 27 years (25 years operational) NHS LIFT asset Initial Fair Value £13,000,000 (Building) £2,000,000 (Land) Estimated useful economic life of the building 40 years Annual Payment £6,000,000 from 1 April 2005, uplifted by RPI RPI assumed to have been 2.5% for each year since start of contract Residual Value assigned in the LIFTco financial model £3,500,000 Anticipated fair value of the NHS LIFT asset at the end of the contract £4,000,000 Expected price of the purchase option 4,000,000 (assumed £2m for land and £2m for buildings)



Off-Balance Sheet Treatment:

• Unitary Payment expensed • No other transactions recognised

On-Balance Sheet Treatment

• Purchase option is not considered likely to be exercised: o Land element assessed as an operating lease o Building element assessed as a finance lease due to other factors, but purchase option is not included in minimum lease payments.

• Real-terms lease rentals split between Land and Buildings in proportion to relative capital cost (£13m Buildings, £2m land) • As noted above, purchase option of £4m considered to be £2m for land and £2m for buildings • In Figure 20, the lease payments and the purchase option (£2m) are discounted over the life of the contract (years 1 to 27) so that their present value at

inception matches the fair value of the building (£13m). The resulting discount rate of 8.25% is the implicit interest rate in the lease. • The minimum lease payments, discounted using this IRR is £12,764,891, which being less than the fair value of the asset is the amount at which the

asset and liability is recognised at the commencement of the lease in year 3. • Depreciated over the contract term of 25 years. The asset is not indexed, but is subject to periodic professional revaluations. The first of these valuations

occurred as at 31 March 2008. • Operational period Unitary Payment components determined to be:

o Services £4,300,000 in Year 3, increasing by RPI o Lifecycle replacement As set out in the table below o Operating lease rental for the land As calculated in table below. o Finance lease rental (principal and interest) As calculated in the Figure 30 below, (excluding the purchase option), split

between the two elements so as to generate a constant finance rate of 10.28% o Contingent Finance cost £0, thereafter, comprising RPI increase of Finance lease rental



Figure 29: Calculation of Implicit Interest Rate for the Building Finance Lease Calculations:

Contract Year

Financial Year

Fair Value of Building

Finance Lease Rental – Real = Unitary Payment less Services and

Operating lease rental for land

Present Value

IRR = 10.28% 1 2003/04 13,000,000 0 02 2004/05 0 03 2005/06 1,473,333 1,161,4334 2006/07 1,473,333 1,072,8995 2007/08 1,473,333 991,1136 2008/09 1,473,333 915,5627 2009/10 1,473,333 845,7708 2010/11 1,473,333 781,2989 2011/12 1,473,333 721,740

10 2012/13 1,473,333 666,72311 2013/14 1,473,333 615,89912 2014/15 1,473,333 568,95013 2015/16 1,395,038 497,65014 2016/17 1,409,115 464,35315 2017/18 1,263,505 384,63016 2018/19 1,373,147 386,14317 2019/20 1,359,111 353,06118 2020/21 1,239,884 297,53719 2021/22 1,338,990 296,82620 2022/23 1,285,371 263,21921 2023/24 1,260,451 238,44022 2024/25 1,353,475 236,52023 2025/26 1,397,500 225,59724 2026/27 1,470,542 219,29225 2027/28 1,459,767 201,09226 2028/29 1,464,767 186,39927 2029/30 (including £2m option) 3,469,483 407,854

Total: 13,000,000



Figure 30: Analysis of Annual Payment into components Real Amounts:

Contract Year

Financial Year

Unitary Payment:

Real

Services: Real

Planned Lifecycle:

Real

Finance Lease: Real

Operating Lease rentals

A B C D = A-B-C X = 2m/15*D

3 2005/06 6,000,000 4,300,000 0 1,700,000 226,6674 2006/07 6,000,000 4,300,000 0 1,700,000 226,6675 2007/08 6,000,000 4,300,000 0 1,700,000 226,6676 2008/09 6,000,000 4,300,000 0 1,700,000 226,6677 2009/10 6,000,000 4,300,000 0 1,700,000 226,6678 2010/11 6,000,000 4,300,000 0 1,700,000 226,6679 2011/12 6,000,000 4,300,000 0 1,700,000 226,667

10 2012/13 6,000,000 4,300,000 0 1,700,000 226,66711 2013/14 6,000,000 4,300,000 0 1,700,000 226,66712 2014/15 6,000,000 4,300,000 0 1,700,000 226,66713 2015/16 6,000,000 4,300,000 90,341 1,609,659 214,62114 2016/17 6,000,000 4,300,000 74,098 1,625,902 216,78715 2017/18 6,000,000 4,300,000 242,110 1,457,890 194,38516 2018/19 6,000,000 4,300,000 115,600 1,584,400 211,25317 2019/20 6,000,000 4,300,000 131,795 1,568,205 209,09418 2020/21 6,000,000 4,300,000 269,364 1,430,636 190,75119 2021/22 6,000,000 4,300,000 155,011 1,544,989 205,99920 2022/23 6,000,000 4,300,000 216,880 1,483,120 197,74921 2023/24 6,000,000 4,300,000 245,633 1,454,367 193,91622 2024/25 6,000,000 4,300,000 138,298 1,561,702 208,22723 2025/26 6,000,000 4,300,000 87,500 1,612,500 215,00024 2026/27 6,000,000 4,300,000 3,221 1,696,779 226,23725 2027/28 6,000,000 4,300,000 15,654 1,684,346 224,57926 2028/29 6,000,000 4,300,000 9,884 1,690,116 225,34927 2029/30 6,000,000 4,300,000 4,443 1,695,557 226,074

Total 150,000,000 107,500,000 1,799,832 40,700,168 5,426,689



Finance Lease Calculations: IRR= 10.28%

Contract Year

Financial Year

OpeningLiability

Finance Cost

Lease Rental - Real

Closing Liability


repaid

E F = E x IRR G = - (D-H) H = E+F+D I

3 2005/06 12,764,891 1,312,156 -1,473,333 12,603,713 161,1784 2006/07 12,603,713 1,295,588 -1,473,333 12,425,968 177,7465 2007/08 12,425,968 1,277,317 -1,473,333 12,229,951 196,0176 2008/09 12,229,951 1,257,167 -1,473,333 12,013,785 216,1667 2009/10 12,013,785 1,234,947 -1,473,333 11,775,398 238,3878 2010/11 11,775,398 1,210,442 -1,473,333 11,512,506 262,8929 2011/12 11,512,506 1,183,418 -1,473,333 11,222,591 289,915

10 2012/13 11,222,591 1,153,616 -1,473,333 10,902,874 319,71711 2013/14 10,902,874 1,120,751 -1,473,333 10,550,292 352,58212 2014/15 10,550,292 1,084,508 -1,473,333 10,161,467 388,82513 2015/16 10,161,467 1,044,539 -1,395,038 9,810,968 350,49914 2016/17 9,810,968 1,008,510 -1,409,115 9,410,363 400,60515 2017/18 9,410,363 967,330 -1,263,505 9,114,189 296,17516 2018/19 9,114,189 936,885 -1,373,147 8,677,927 436,26217 2019/20 8,677,927 892,040 -1,359,111 8,210,856 467,07118 2020/21 8,210,856 844,028 -1,239,884 7,815,000 395,85619 2021/22 7,815,000 803,336 -1,338,990 7,279,346 535,65420 2022/23 7,279,346 748,274 -1,285,371 6,742,249 537,09721 2023/24 6,742,249 693,064 -1,260,451 6,174,861 567,38822 2024/25 6,174,861 634,739 -1,353,475 5,456,125 718,73623 2025/26 5,456,125 560,858 -1,397,500 4,619,483 836,64224 2026/27 4,619,483 474,856 -1,470,542 3,623,796 995,68625 2027/28 3,623,796 372,505 -1,459,767 2,536,535 1,087,26226 2028/29 2,536,535 260,741 -1,464,767 1,332,509 1,204,02627 2029/30 1,332,509 136,974 -1,469,483 0 1,332,509

Total 22,508,588 -35,273,479 12,764,891



Nominal Amounts: Contract

Year Financial

Year Unitary

Payment: Nominal

Services: Nominal


Operating Lease rental - Land Nominal

Nominal finance lease

rental

Contingent rental -

finance cost

J K L M N = J-K-L-M O = N+G

3 2005/06 6,000,000 4,300,000 0 226,667 1,473,333 04 2006/07 6,150,000 4,407,500 0 232,333 1,510,167 36,8335 2007/08 6,303,750 4,517,688 0 238,142 1,547,921 74,5876 2008/09 6,461,344 4,630,630 0 244,095 1,586,619 113,2867 2009/10 6,622,877 4,746,395 0 250,198 1,626,284 152,9518 2010/11 6,788,449 4,865,055 0 256,453 1,666,941 193,6089 2011/12 6,958,161 4,986,682 0 262,864 1,708,615 235,282

10 2012/13 7,132,115 5,111,349 0 269,435 1,751,330 277,99711 2013/14 7,310,417 5,239,132 0 276,171 1,795,114 321,78012 2014/15 7,493,178 5,370,111 0 283,076 1,839,991 366,65813 2015/16 7,680,507 5,504,364 115,644 274,733 1,785,766 390,72914 2016/17 7,872,520 5,641,973 97,223 284,443 1,848,881 439,76615 2017/18 8,069,333 5,783,022 325,611 261,427 1,699,273 435,76916 2018/19 8,271,066 5,927,597 159,356 291,215 1,892,898 519,75117 2019/20 8,477,843 6,075,787 186,223 295,444 1,920,388 561,27718 2020/21 8,689,789 6,227,682 390,120 276,265 1,795,722 555,83819 2021/22 8,907,034 6,383,374 230,115 305,806 1,987,739 648,74820 2022/23 9,129,710 6,542,959 330,008 300,899 1,955,844 670,47321 2023/24 9,357,952 6,706,532 383,104 302,442 1,965,874 705,42322 2024/25 9,591,901 6,874,196 221,090 332,882 2,163,733 810,25823 2025/26 9,831,699 7,046,051 143,379 352,303 2,289,966 892,46624 2026/27 10,077,491 7,222,202 5,410 379,984 2,469,895 999,35425 2027/28 10,329,428 7,402,757 26,949 386,630 2,513,092 1,053,32626 2028/29 10,587,664 7,587,826 17,441 397,653 2,584,744 1,119,97727 2029/30 10,852,356 7,777,522 8,036 408,906 2,657,892 1,188,409

Total 204,946,584 146,878,385 2,639,709 7,390,465 48,038,024 12,764,545



Figure 31: Analysis of Annual Payment components

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27Contract year

Am

ount

(£)

Services: Nominal

Contingent rental


Finance CostFinance lease principal

Operating lease: Nominal



Figure 32: Existing UK GAAP off-balance sheet transactions


31/03/2006 31/03/2007 31/03/2008 01/04/2008



Total Operating Expenditure 6,000,000 6,150,000 6,303,750 18,453,750



Figure 33: New IFRS on-balance sheet transactions to be recognised

YEAR E Cumulative as at

/200 /03 31/03/2008 01/04/2008

NDED

31/03 6 31

/2007

OPERATING COST STATEMENT

Operating Expenses: Gross Annual NHS LIFT Payment ,000 15 6,303,750 18,453,7506,000 6, 0,000Less: Finance lease -1,473,333 -1,510,167 -1,547,921 -4,531,421 Operating lease rental - land -226,667 -232,333 -238,142 -697,142 Lifecycle replacement 0 0 0 0Services Charge 4,300,000 4,407,500 4,517,688 13,225,188Operating lease rental - land 226,667 232,333 238,142 697,142Depreciation - NHS LIFT Asset 510,596 510,596 510,596 1,531,788


Total Expenses 6,349,418 6,482,850 6,618,329 19,450,598

STATEMENT OF CHANGES IN TAXPAYERS’ EQUITY Revaluation of NHS LIFT asset 0 0 976,433 976,433



YEAR ENDED

As at 01/04/2005 31/03/2006 31/03/2007 31/03/2008

STATEMENT OF FINANCIAL POSITION Assets: Property, Plant and Equipment NHS LIFT asset - original 12,764,891 11, 12,20912,254,295 743,699 ,536Additions - Lifecycle Replacement 0 0 0Total - PFI Asset 12,764,891 11 12,209,512,254,295 ,743,699 36

Liabilities: NHS LIFT Finance lease liability -12,764,891 -12 -12,4 -12,229,9,603,713 25,968 51

Revaluation Reserve NHS LIFT asset 0 0 976,43 0 3



F

igure 34: - Restatement journals as at 1 April 2008

Recognition of the asset and liability Debit Credit

Removal of existing off-balance sheet entries: Removal of cumulative finance lease

-5,228,563rental element of Annual Payment from

earnings/General Fund balance retained New on-balance sheet entries: PPE: NHS LIFT Asset – fair value 12,209,536


Revaluation Reserve: cumulativefor NHS LIFT asset as if it had al

amount ways

been on-balance sheet -976,433


1,531,788

Cumulative Finance cost (lease) 3,885,060Cumulative finance cost (contingent rent) 111,421Cumulative operating lease rental - land 697,142

6,225,411

18,434,946 -18,434,946


Property, Plant and Equipment Re nition of NHS LIFT Asset 12,209,536 cog

Liabilities Re nition of NHS LIFT Finance lease liab ty

12,229,951 cogili

Ca al and Reserve pit sRevaluati 976,433 on Reserve Retained earnings/General Fund balance 996,848

13,206,384 13,206,384


Section 5: Other features of leaseplus schem es


Section 5.1: Other entities are parties to the leaseplus scheme


This section sets out the key issues to consider where other entities are parties to leaseplus schemes. Key Points:

• How other entities might be involved jointly in leaseplus schemes; and

• how the different combinations of control of services and residual interest in the assets affect the required accounting.

In what ways might other entities be parties to leaseplus schemes?

231. One of the features of NHS LIFT is that it is designed to serve as a mechanism for co-ordinating the procurement of primary care facilities aone NHS local authcontract with the LIFTco for facilities under leaseplus schemes.

232. When entering into leaseplus schemes, one or more bodies may

contract jointly as part of the same scheme. In such circumstances, the provision of services and control over the assets may be split between the bodies concerned. For example, the NHS body may receive services from the asset but the purchase option may only be available to the local authority – or vice versa.

233. Where an NHS body enters into a leaseplus scheme jointly with

one or more other bodies e.g. other NHS bodies or local authority, then the possible combinations of control are as follows. The NHS body controls:

• both the services and the residual interest in the asset.

• the services but does not control the residual interest in the asset

• the residual interest in the asset but not the services provided

by the LIFTco using the asset

• neither the residual interest in the asset or the services provided by the LIFTco using the asset.

234. Each of these scenarios is discussed below.

Where we control both the services and the residual interest in the asset, do we treat this in the same way as a normal scheme?

235. Yes, this situation is straightforward and the NHS body should treat it in the same way as a standalone leaseplus scheme, as described in section 3 of this guidance.

ent across the

236. The situation described in paragraph 235 applies where the NHS body controls the services and the residual value for: • The whole of the NHS LIFT property – in which case the NHS

body recognises an asset and liability for the whole property; or

• A distinct property within the scheme – in which case the NHS

body recognises an asset and liability for the distinct property; or

• A distinct element of a property within a scheme e.g. one floor

of a building – in which case the NHS body recognises an asset and liability for the distinct element, using estimation techniques if necessary to identify the fair value of its element.

cross service providers. Thus, in many cases, more than body has a shareholding in the LIFTco. In addition, a ority responsible for social care provision may also

What happens where the level of our control is differproperties in the scheme?


237. Where there are different properties, or elements of properties

within schemes, over which the NHS body exercises,

different levels of control over the services or residual interests then the

ysis of control and the subsequent accounting will need to be carried out for each distinct property or element.

238.

erty it occupies, but controls the residual interest on all ll

recognise an asset and liability for this property. For the remaining properties, it controls only the residual interest. The implications of

below.

What haresidual

239. C 12

circumstances, if the services are controlled by the NHS body then

se

240.

definition is generally widely drawn to encompass all

bodies which fall within the scope of the Whole of Government

241. dual interest is controlled by a related party, then

the scheme would generally also fall within the scope of IFRIC 12. in the

ur

nts because it is not exercisable by the NHS body but by another party.

242. In t al interest is not controlled by a

related party, then the NHS body will need to consider the a ce it

con ase accounting, as described in section 4 of this guidance.

t

2 if

ion will be exercised. This

e made at

245.

si g the implicit interest rate in the scheme). The corresponding

e resi

n t. 246. ac

acc r

anal

For example, an NHS body controls only the services to the propproperties in the scheme. In this case, the property it occupies wifall within the scope of IFRIC 12 because the NHS body controls both the services and the residual interest. It will therefore

these different levels of control are discussed in the sections

ppens where we control the services provided but not the interest in the asset itself?

First, if the residual interest is not significant, then under IFRIthe residual interest control test is not relevant. In such

IFRIC 12 will apply. The asset and liability should therefore be recognised in the accounts of the NHS body, and the purchaoption is likely be to be insignificant.

Where the residual interest is significant, then the NHS body needs to determine whether that is controlled by one of its relatedparties. This

Accounts. Other NHS bodies and local authorities would therefore be considered to be related parties to the NHS body.

Where the resi

The NHS body should recognise the asset and liability in the

us al way as described in section 3 of this guidance. The pu chase option would not generally be included in the minimum lease payme

he unlikely event that the residu

le seplus scheme under IFRIC 4 to see whether, in substantains a lease. It may then have to apply le

What do we do when we control the residual interest in the asset bunot the services provided?

243. In this situation, the scheme will fall within the scope of IFRIC 1the party controlling the services is a related party to the NHS body.

244. However, if this is the case, then the NHS body would generally

only recognise the purchase option at the end of the contract if it is reasonably certain that the optjudgement may be driven as much by local policy decisions and requirements from strategic commissioners as by the entity itself.

pplying the IAS 17 approach, this judgement would bAthe outset.

The liability will be recognised at its present value (discounted nu

asset will be an item of Property, Plant and Equipment included at th equivalent amount, and representing the present value of the

dual interest in the property to be acquired at the end of the tracco

E h case will need to be considered on its own merits, taking into ount the local facts and circumstances in deciding whether o



not to recognise the option as a liability in the NHS body’s

247. e.g.

, in care

S

248.

se the asset and finance lease liability as for other IFRIC

body reimburses the primary care

ould, ment falls within the scope

Do we nresidual

250. vertheless

accounts.

A variation on this scenario is where a primary care contractor, a general practitioner, is the main party to the leaseplus scheme and the NHS body has the purchase option on the residual asset. In these cases, it might be argued that the NHS bodysubstance, also controls the services provided - if the primarycontractor is using the facilities substantially or wholly for NHservices under the primary care contract and is being reimbursed directly by the NHS body for the rentals it is paying under the leaseplus scheme.

In such cases, a local judgment needs to be made as to whether the NHS body in reality controls both the services and the residual interest in the asset. If it is considered to do so, then it should ecognir

12 schemes, as described in section 3. 249. In the event that the NHS

contractor for the accommodation costs but does not control the services and does not have an option to purchase the asset, then the transaction is unlikely to fall within IFRIC 12 (unless the contractor is considered to be a related party of the NHS body, for example as might be the case if they are a member of the NHS body’s Professional Executive Committee). The NHS body shhowever, consider whether the arrangeof IFRIC 4.

eed to recognise anything where we control neither the interest in the asset nor the services provided?

In this situation, it is likely that no assets, liabilities or expenses need to be recognised, but the NHS body should neconsider whether the arrangement falls within the scope of any other accounting standards.


Section 5.2: Financial instruments and leaseplus schemes

This section provides brief guidance on the financial instruments implications of the purchase option.

Point:

• a

Key

Examining whether the purchase option needs to be recognised as financial instrument in its own right

251.

use for complicated contracts such as leaseplus

252.

53. easeplus schemes: the

Does th financia

254.

this guidance.

be exercised, e liability.

256. IAS 39 does, however, include within its scope embedded derivatives contained within lease contracts. Embedded derivatives are discussed in section 4.3 of the PFI guidance and that commentary is not repeated here.

257. Commonly, options within contracts can be embedded derivatives,

particularly where those options are potentially exercisable at less than fair value, so this raises a question about whether the purchase option is therefore an embedded derivative.

258. The answer to this is that the purchase option is not an embedded

derivative for two reasons. 259. First, the bespoke nature of the leased asset means that the value

of the option varies in relation to a non-financial variable that is specific to a party to the contract. It thus does not meet the current definition of a derivative and consequently of an embedded derivative.

260. Second, paragraph 5 of IAS 39 removes from the scope of the

standard any contract (including options) to purchase a non-financial item if either:

• it is for the purpose of the entity’s normal usage requirements;

or • the contract cannot be settled ‘net’.

261. The first of these criteria would apply where the NHS body expects

to purchase the NHS LIFT asset for its own subsequent use. It might not apply where the NHS body anticipates purchasing the asset not for its own use but to sell-on immediately for a profit.

262. However, the second of these applies regardless of the NHS

body’s motive. Settling ‘net’ in this context means that instead of the NHS body delivering the full option price in cash to the LIFTco and receiving the property asset in return, the contract would

The financial instruments standards, and in particular IAS 39 ‘Financial instruments – Recognition and measurement’ can caa number of issuesschemes.

Most of the general issues are covered in section 4.3 of the PFI guidance.

This section covers an issue specific to l2option to purchase the asset at the end of the contract.

e option to purchase the asset have any implications under thel instruments standards?

IAS 39 deliberately omits from its scope most elements of lease contracts. Therefore, to the extent that the purchase option may need to be recognised in the NHS body’s accounts, this is covered by the measurement requirements of IAS 17, as discussed in section 3.4 of

255. Where the option is considered reasonably certain to

then it will be recognised as part of the finance leasWhere the option is not considered reasonably certain to be exercised, then it does not need to be recognised in the NHS body’s financial statements under IAS 17.


Section 5.2: Financial instruments and leaseplus schemes

provide for the LIFTco to give the NHS body the cash differebetween the fair value of the asset and the option price. Thireimburse the NHS body for the gain it could make fro

nce s would

m purchasing the asset at less than fair value and the LIFTco would

ain the asset. 26

still fall outside the scope of IAS 39 because it is for the purchase of a non-financial asset and the

264.

ret

3. The leaseplus agreement does not include any such ‘net settlement’ provisions. Therefore, even if the purchase option were an embedded derivative, it would

contract cannot be settled net.

The purchase option does not, therefore, need to be recognised in the financial statements of the NHS body under IAS 39.


Appendices


Appendix 1: Useful Sources of Further Relevant Guidance This appendix provides details of some useful sources of additional valuable guidance. 1. DH: Accounting for PFI under IFRS

http://www.info.doh.gov.uk/doh/finman.nsf/4db79df91d978b6c00256728004f9d6b/3c53b38af3b7a80c8025758d004b75aa?OpenDocument

2. HM Treasury Financial Reporting Manual 2009/10.

http://www.financial-reporting.gov.uk/IFRS_Based_FReM.htm 3. NHS Financial Management website

http://www.info.doh.gov.uk/doh/finman.nsf 4. Audit Commission guidance on IFRIC 12 and NHS LIFT

http://www.audit-commission.gov.uk/reports/NATIONAL-REPORT.asp?CategoryID=ENGLISH%5E574&ProdID=AD4F8CB1-4654-463A-91D9-6A7FE16C2AD8


Appendix 2: Glossary


g

contingent rentals. Examples include inflation-

under the lease.

inan all of the risks and The

d an asset and taken out a loan to fund the purchase.

Finance rate In accordance with paragraph 25 of IAS 17, the annual lease rentals are split between finance cost and repayment of principal so as to generate a constant rate of finance over the lease term. This is referred to in this guidance as the ‘finance rate’. This will usually be a different rate to the implicit interest rate in the lease.

Grantor The term used by IFRIC 12 to denote the party procuring the services under a service concession. The grantor is usually a public sector body.

IAS 16 The international accounting standard covering most aspects of accounting for property, plant and

equipment.

IAS 17 The international accounting standard for Leases.

IAS 39 The international accounting standard which covers recognition and measurement of financial instruments

IASB International Accounting Standards Board. The body that issues International Financial Reporting Standards.

I-FReM HM Treasury’s IFRS-based Financial Reporting Manual for central government bodies for 2009/10. The requirements in the 2009/10 NHS Manuals for Accounts are derived from the I–FReM.

IFRIC International Financial Reporting Interpretations Committee. A body that considers specific topics on which consensus needs to be achieved quickly. It serves a similar function to the ASB’s Urgent Issues Task Force in the UK. IFRIC issues Interpretations which form part of IFRS.

IFRIC 12 An Interpretation covering service concessions.

IFRS International Financial Reporting Standards – they include IASs, IFRS, IFRIC and SIC Interpretations

Implicit Interest Rate In a finance lease, the implicit rate is the one that, at the inception of the lease, discounts the minimum lease payments and any unguaranteed residual value in the asset to the fair value of the

Glossary of terms

Contin ent rent Under IAS 17, any amounts payable under a lease that are not certain to be paid as they depend on future events are considered to be

linked rentals.

They are excluded from the minimum lease payments determined

ce lease A lease where substantiallyFrewards of ownership lie with the lessee. lessor will normally achieve its return on investment solely from the lease payments. For the lessee, a finance lease is accounted for as if it had purchase



asset. Where the asset and liability are recognised initially at the present value of the minimum lease payments, this is derived using

Junior Debt nior e

ies that sit behind the operator and tion

ment

respect

Lifecycle replacement

ent of a component of an asset that has reached the end of its useful economic life.

LIFTco

Minimum lease payments

T company ny

Operating lease r than a finance lease. The lessor

Operator oviding the services to the grantor in a service concession. The operator is normally a

specifically for the project. Parent companies

.

these companies.

s Financial Model

overall return are visible. This

itary t into its key components. The operator’s

financial model provides much of the information

PFI

Project finance ce the

construction of the asset and its initial reserves

comprises ‘Senior Debt’, Junior Debt and Equity

Refinancing The renegotiation by the operator of its project

the implicit interest rate.

The smaller element of project finance after sedebt. The junior debt is normally provided by thparent companrepresents a tax-efficient form of equity injecto the operator by these companies.

Leaseplus pay The payment that the NHS body makes to the operator in each year of the NHS LIFT scheme.

The payment reflects all amounts due inof services, lifecycle replacement and payments for the asset (lease rentals).

The replacem

A shorthand term for a NHS LIFT company

Under IAS 17, these are the contractual minimum payments that the lessee must make to the lessor.They exclude contingent rents.

NHS LIF NHS Local Investment Finance Trust – a compaset up to enter into contracts to construct and make available primary care facilities.

A lease otheretains significant risks in the asset.

The party pr

private sector company, and is usually established

usually sit behind the operator and provide anelement of project finance (junior debt and equity)The operator normally subcontracts its contractual obligations to

LIFTco’ NHS LIFT schemes are usually transparent insofar as the operator’s cash inflows and outflows and information is set out in the operator’s financial model which is usually a spreadsheet.

An on-balance sheet treatment for the project requires the NHS body to disaggregate the unpaymen

that is needed to do to this disaggregation.

Private Finance Initiative.

This normally refers to the amount of borrowing which the operator has secured to finan

and working capital. Project Capital usually

contributions.

debt in order to lower the overall cost of the project finance. Construction of the NHS LIFT asset represents the riskiest phase of the


contract, and therefore refinancing may after construction has been completed to take advantage of better credit terms that may then bavailable.

occur

e

Senior Debt bt is ks

t of ition

SIC Standing Interpretations Committee. The predecessor body to IFRIC. Many of its Interpretations are still extant in IFRS.

The main element of project finance, typically between 85% and 95% of the total. Senior Deobtained from external financiers – usually ban– and the debt is normally secured e.g. on the NHS LIFT asset.

On some occasions, bond finance may be used instead of senior debt.

StatemenFinancial Pos

The IFRS terminology for the Balance Sheet.


NHS Finance, Performance & Operations

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