Auditor Guidance Note 5 (AGN 05) NHS Audit Planning
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AGN 05
NHS Audit Planning
Issued on 5 March 2021
Auditor Guidance Note 5 (AGN 05)
NHS Audit Planning
Version issued on: 5 March 2021
About Auditor Guidance Notes
Auditor Guidance Notes (AGNs) are prepared and published by the National Audit Office
(NAO) on behalf of the Comptroller and Auditor General (C&AG) who has power to issue
guidance to auditors under Schedule 6 paragraph 9 of the Local Audit and Accountability Act
2014 (the Act).
AGNs set out guidance to which local auditors must have regard under Section 20(6) of the
Act. The guidance in AGNs supports auditors in meeting their requirements under the Act
and the Code of Audit Practice published by the NAO on behalf of the C&AG.
The NAO also issues Weekly Auditor Communications (WACs) to local auditors to bring to
their attention relevant information to support them in carrying out audit work. The firms
that are local auditors under the Act may use WACs to update their own internal
communications and reference tools.
AGNs are numbered sequentially and published on the NAO’s website. Any new or revised
AGNs are brought to the attention of local auditors through the WACs.
The NAO prepares Auditor Guidance Notes (AGNs) solely to provide guidance to local auditors in interpreting the Code
of Audit Practice made under the Local Audit and Accountability Act 2014. The contents of AGNs cannot be reproduced,
copied or re-published by parties other than local auditors without permission from the NAO.
The AGNs are designed to assist local auditors in forming their own understanding of the requirements of the Code.
Auditors are required to have regard to AGNs, which means that they must take into account the guidance issued by the
NAO, and, if they decide not to follow it, they must give clear (in the sense of objective, proper, and legitimate) reasons
within audit documentation as to why they have not followed the guidance. AGNs are in no way intended as a substitute
for the exercise of the independent professional skill and judgement of a local auditor in deciding how to apply the
NAO’s guidance or when providing explanations as to why guidance has not been followed.
Local auditors should not assume that AGNs are comprehensive or that they will provide a definitive answer in every
case.
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AGN 05 is relevant to all local auditors of health bodies covered by the Local Audit and
Accountability Act 2014 and the Code of Audit Practice including auditors of NHS
foundation trusts. Guidance on auditors’ work on value for money arrangements and on
reporting is published in AGN 03 and AGN 07 respectively.
Introduction and context
The guidance within this document is prepared to assist auditors in meeting their
responsibilities as the statutory auditor of local health bodies, under the Code of Audit
Practice (the Code). This AGN sets out guidance for auditors to support planning work on
audits of financial statements of local health bodies.
As part of their planning process, audit teams identify changes to accounting requirements
drawing on any relevant technical briefings prepared by their firms. This guidance is not
intended to replace auditors’ own procedures.
Local auditors are also component auditors. The NAO group audit teams issue group
instructions which local auditors need to follow. The group instructions set out
requirements for local auditors to assist the NAO group audit teams in meeting their
responsibilities supporting the C&AG as the statutory auditor of the bodies of which local
health bodies are components.
The continuing financial pressures within the NHS provider and commissioning sectors have
been widely publicised, including in our 2020 report NHS financial management and
sustainability. This report is the NAO’s eighth report on the financial sustainability of the
NHS. The report concludes that the NHS is treating more patients but has not yet achieved
the fundamental transformation in services and finance regime needed to meet rising
demand. The short-term fixes that the Department of Health & Social Care (DHSC), NHS
England and NHS Improvement (NHSE&I) put in place to manage resources in a constrained
financial environment are not sustainable. The extra money brought in to stabilise the
finances of NHS bodies has continued to drive volatility and variability among trusts, while
patient waiting times continue to deteriorate and the number of people waiting for
treatment continues to increase.
During March 2020, the UK government began its response to the coronavirus pandemic
(COVID-19). Government intervention to COVID-19 will have occurred through a variety of
mechanisms within DHSC and NHSE&I and other Arms’ Length Bodies working together to
generate the response required. There may be some areas where the budgeting, accounting
and guidance is still being determined. COVID-19 has and is continuing to significantly
impact on markets, client operations, business plans, government policy and interventions.
Many COVID-19 support schemes were set up at pace with a view to getting immediate
support to the people, entities and areas of the economy where it was most needed. This
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means the rigour with which controls were implemented and processes set up or followed
may not reach previous standards, there is a risk that fraud and error rates may be higher in
grant and other scheme claims than have been seen previously.
The NAO’s programme of work to support Parliament in its scrutiny of the UK government’s
response to COVID-19 includes government preparedness for the pandemic, the spending
on the direct health response and the wider emergency response. Further information and
reports can be found on the NAO’s website here.
The C&AG included a Report on Accounts on the 2019-20 DHSC accounts (page 123). This
highlighted a number of issues across the DHSC group which pre-date COVID-19, some of
which particularly relate to the provider sector. In addition, the response to the COVID-19
pandemic will have a significant impact on 2020-21 accounts with a new funding regime
implemented, the supply of centrally-procured items such as personal, protective
equipment and ventilators, the establishment of Nightingale hospitals, and the
implementation of the vaccine rollout.
When considering the planning issues highlighted in this AGN, auditors should be mindful
that audits under the Code of Audit Practice are integrated. Auditors should therefore
consider the extent to which any issues highlighting risks to the opinion on the financial
statements, or which suggest that non-standard reporting may be necessary and, any work
required to inform their commentary on arrangements to secure value for money under
AGN 03.
Auditors should also consider whether it is appropriate to draw particular attention to any
issues arising from their work under AGN 03 or AGN 05 by exercising their additional public
reporting powers, such as making statutory recommendations or issuing public interest
reports. Further guidance on relevant considerations when exercising additional powers
can be found in AGN 04.
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Contents
This AGN is structured as follows:
Section 1: Accounting Manuals and Financial Reporting .................................................... 5
Accounts Directions................................................................................................................ 5
Group Accounting Manual 2020-21 ....................................................................................... 6
Future Accounting Standards ................................................................................................. 7
Annual Report ........................................................................................................................ 9
NHS Foundation Trust Annual Reporting Manual 2020-21 ................................................. 10
Agreement of Balances ........................................................................................................ 11
Summarisation Schedules / Consolidation Template .......................................................... 12
Section 2: Other Matters 2020-21 ................................................................................... 15
Revised Funding Regime in Response to COVID-19 ............................................................. 15
Procurement Policy Note (PPN 02/20)................................................................................. 20
Inventories and Equipment .................................................................................................. 22
Use of Management’s Expert – Valuations of Property, Plant and Equipment .................. 24
Subsidiaries........................................................................................................................... 29
Co-commissioning ................................................................................................................ 31
Other Support and Raising Technical Issues or Queries on this AGN ................................ 33
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Section 1: Accounting Manuals and Financial Reporting
Accounts Directions
What are the issues?
The Department of Health and Social Care (DHSC) is required to issue accounts
directions to NHS trusts. The accounts directions are included in Chapter 2, Annex 4 of
the 2020-21 Group Accounting Manual (GAM).
NHS England is required to issue directions to clinical commissioning groups (CCGs) in
respect of their annual report and accounts. The accounts directions will be published
on NHS England's SharePoint site. Each of the audit firms has access to this site.
Additionally, the NAO will highlight relevant guidance published on SharePoint via
weekly communications.
NHS Improvement issues the directions to foundation trusts, which will be issued with
the Annual Reporting Manual for foundation trusts (FT ARM).
Why is this important?
The accounts directions set out instructions, in accordance with legislation, that health
service bodies must comply with. The directions cover:
• the method and principles for the preparation of accounts including
compliance with HM Treasury's Financial Reporting Manual (FReM) and the
GAM;
• submission of the draft accounts; and
• submission of the audited accounts.
What should auditors do?
Auditors should be aware of the accounts directions for the audited body, to support
their audit planning work under ISA (UK) 300 (Revised June 2016) Planning an Audit of
Financial Statements, and ISA (UK) 250 (Revised November 2019) Section A –
Consideration of Laws and Regulations in an Audit of Financial Statements.
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Group Accounting Manual 2020-21
What are the issues?
DHSC issued the 2020-21 Group Accounting Manual (GAM) on 30 April 2020, following
a consultation exercise. The GAM provides a single mandatory accounting document
for the whole of the departmental group. The main areas of change and the responses
received in response to DHSC’s consultation on the GAM are set out here.
The GAM includes guidance on the completion of annual reports for NHS trusts and
CCGs. The Annual Reporting Manual for foundation trusts provides guidance for the
completion of foundation trusts’ annual reports only.
Additional appendices are included within the GAM where there are additional sector
specific reporting requirements. Additional appendices provide supplementary
guidance for CCGs, NHS trusts and foundation trusts in the relevant chapters of the
GAM.
The GAM will be supplemented as necessary by additional guidance over the course of
the year. Updates will be posted to the DHSC GAM area of ‘gov.uk’. All content issued
in this way should be treated as having the same status as the manual.
Guidance relevant to CCG accounts completion in the NHS England Group ‘Integrated
Single Financial Environment’ (ISFE) will be issued on the NHS England SharePoint.
Each of the audit firms has access to this site. Additionally, the NAO will highlight
relevant guidance published on SharePoint via weekly communications.
A detailed accounts submission process, showing deadlines and procedures for
handling statutory accounts and summarisation schedules is available on DHSC’s
website.
Why is this important?
NHS trusts, foundation trusts and CCGs are required to produce their annual accounts
in line with the GAM issued by DHSC and in accordance with the submissions
timetable. NHS trusts and NHS foundation trusts (NHS providers) have been given the
option to apply for an extension to the timetable for the submission of draft and
audited accounts where, for example, there is:
• a significant change to the operations of the trust and associated workload
for accounts preparation, for example hosting a Nightingale facility; or
• a material merger/acquisition transaction in the final three months of the
financial year.
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Trusts were encouraged by NHSE&I to discuss with their auditors in determining
the appropriate year end timetable for them.
The delivery of the NHS timetable is also dependent on additional guidance and
information being provided by DHSC that is yet to be issued. Therefore, the
preparation and audit of NHS provider and CCG accounts is contingent on the
adequacy and timely provision of guidance and information.
What should auditors do?
Auditors should familiarise themselves with the content of, and changes to, the
2020-21 GAM to support their audit planning work under ISA (UK) 300 (Revised June
2016) Planning an Audit of Financial Statements, and ISA (UK) 315 (Revised June 2016)
Identifying and Assessing the Risks of Material Misstatement Through Understanding
of the Entity and Its Environment.
Auditors should note the submission dates within the DHSC timetable for audited NHS
trust, foundation trust and CCG accounts and consider the impact on their resource
planning for the audit of the financial statements. Auditors should liaise with their
NHS provider clients early to understand any of those wishing to apply for an
extension to the timetable and the implications on resourcing.
Auditors of CCGs, NHS trusts and foundation trusts do not make submissions but are
required to ensure that all relevant documents and signed statements are provided to
bodies in reasonable time to enable them to meet submission deadlines.
Although the NAO will bring auditors’ attention to other relevant guidance and the
submissions timetable when it is received, auditors may also wish to establish
arrangements to obtain copies locally.
Future Accounting Standards
What is the issue?
IFRS 16 Leases will replace IAS 17 Leases. Implementation has now been deferred and
will be effective from 1 April 2022 for entities that follow HM Treasury’s FReM and the
GAM. The transitional reporting requirements for IFRS 16 have been adopted such
that the preceding year is not restated.
The new standard eliminates the distinction between operating and finance leases for
lessees and brings in a single approach under which all but low-value or short term
(less than 12 months) leases are recognised. The distinction between operating and
finance leases for lessors is maintained.
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Successful implementation of the new standard will depend on organisations collating
and reviewing relevant information about their new and existing leases. This will
require a significant exercise to collect and analyse relevant information and
organisations will need to have an effective project plan and timetable to prepare for
implementation on a timely basis.
Organisations will need to take steps including having arrangements for capturing
information on leases and contracts.
Why is this important?
The standard is likely to lead to significant changes to lessees with all major leases
coming onto the Statement of Financial Position as well as additional disclosures. This
includes a disclosure objective which gives a basis for users of financial statements to
assess the effect that leases have on the financial position, financial performance and
cash flows of the lessee and lessor. There are additional disclosures for the right-of-
use asset, depreciation charges and interest expense on the lease liabilities and
disclosures on the exemptions for recognition (i.e. low value and short-term leases).
NHS bodies will need to consider the implications for their own financial reporting and
supporting arrangements as they prepare for the standard to be adopted.
Paragraph 30 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
states:
‘When an entity has not applied a new IFRS that has been issued but is not yet
effective, the entity shall disclose:
(a) this fact; and
(b) known or reasonably estimable information relevant to assessing the possible
impact that application of the new IFRS will have on the entity's financial
statements in the period of initial application.’
What should auditors do?
Auditors should discuss with their bodies the implications of the introduction of IFRS
16 for their financial reporting and consider the requirement for early planning and
reviewing of balances and disclosures and any required adjustments.
Auditors will need to consider the accuracy and completeness of the disclosures
required under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
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Annual Report
What is the issue?
NHS bodies are required to publish a single document containing the annual report
and accounts.
Guidance for the preparation of the annual report for CCGs and NHS trusts is included
in Chapter 3 of the DHSC GAM. Guidance for foundation trusts is included in the 2020-
21 FT ARM.
Why is this important?
Certain elements of the annual report are subject to audit as set out in paragraph 3.27
of the GAM and corresponding paragraphs of the FT ARM. These comprise:
• single total figure of remuneration for each director;
• CETV disclosures for each director;
• payments to past directors, if relevant;
• payments for loss of office, if relevant;
• ‘fair pay’ (pay multiples) disclosures;
• exit packages, if relevant; and
• analysis of staff numbers and costs.
Auditors are also required to review the information within the annual report for
consistency with other information in the financial statements. Paragraph 3.16 of the
DHSC GAM requires that auditors are required to read the information in the annual
report and refer to this in their audit report. NHS bodies should submit the draft
annual report to auditors to allow them sufficient time to undertake their review.
Paragraph 3.5 of the DHSC GAM requires that NHS bodies include the audit report
within the Accountability Report.
Paragraph 3.80 of the GAM sets out a number of disclosures that are required to be
included in the Parliamentary Accountability Report. NHS providers and CCGs are not
required to produce a Parliamentary Accountability Report, but have the option to
include these disclosures in the Annual Report. Where the NHS body elects not to do
this, it must include the disclosures on remote contingent liabilities, losses and special
payments, gifts, and fees and charges as notes within its financial statements.
In light of pressures caused by the public sector response to COVID-19, some annual
report requirements were changed for 2019-20. These revisions were made in April
2020, mirroring changes made to the FReM by HM Treasury. In December 2020 HM
Treasury confirmed that these relaxations will continue to be available in 2020-21
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annual reports. By order of FAQ 4: 2020 to 2021 year end reduced reporting
requirements in the GAM, minor revisions have been made to chapter 3 and chapter 3
annex 1, to reflect the optional nature of the disclosures below:
• the performance analysis;
• sickness absence data; and
• staff turnover disclosure.
What should auditors do?
Auditors should familiarise themselves with the guidance for the annual report in the
DHSC GAM.
Auditors should engage in early discussions with their NHS bodies to ensure the body
includes and publishes the required information in accordance with relevant guidance.
NHS Foundation Trust Annual Reporting Manual 2020-21
What is the issue?
NHS Improvement1 issued the FT ARM 2020-21 on 9 February 2021. The FT ARM
provides guidance to foundation trusts on the completion of the annual report.
Foundation trusts are required to complete their accounts in accordance with the
GAM.
As per paragraph 34 above, the following relaxations to NHS foundation trust annual
reports will continue to be available in 2020-21:
• the annual report is no longer required to include a performance analysis
section within the performance report. This is optional;
• the annual report is no longer required to include a quality report. This is
optional;
• the staff sickness disclosure in the staff report can be replaced with a link to
where the information will be available online; and
• the model annual governance statement is updated to reflect the change to
preparation of quality reports.
1
From 1 April 2016, NHS Improvement is the operational name for an organisation that brings together several
NHS organisations including Monitor and the NHS Trust Development Authority. However, both organisations
continue to exist as legal entities. NHS Improvement now carries out the statutory functions of both
organisations and NHS Improvement continues to refer to Monitor when issuing accounts directions to
foundation trusts. From 1 April 2019, NHS England and NHS Improvement have been working together as a
new single organisation (NHSE&I), aligning the way they work to support system working although both
remain separate legal entities.
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The FT ARM also notes electronic signatures in documents will continue to be
accepted for signed documents relating to the annual report and accounts which are
required to be submitted to NHS Improvement.
Why is this important?
The FT ARM outlines the process foundation trusts should follow when producing and
submitting their annual report.
What should auditors do?
Auditors should familiarise themselves with the content of, and any changes to, the
2020-21 FT ARM to support their audit planning work under ISA (UK) 300 (Revised
June 2016) Planning an Audit of Financial Statements, and ISA (UK) 250 (Revised
November 2019) Section A – Consideration of Laws and Regulations in an Audit of
Financial Statements.
Agreement of Balances
What is the issue?
DHSC is required to consolidate the accounts of all organisations falling within the
accounting boundary. The agreement of balances process aims to identify all income
and expenditure transactions, and payable and receivable balances that arise from the
provision of goods and services between component bodies in order to eliminate
these transactions and balances on consolidation.
NHS Improvement and NHS England also eliminate transactions and balances between
their component bodies in preparing their sector-specific consolidated accounts.
DHSC and NHSE&I published its 2020-21 Agreement of Balances guidance in
December 2020 which is designed to provide practical guidance to all NHS bodies
within the resource accounting boundary.
Why is this important?
The exercise completed at the year-end (month 12) contributes directly to the year-
end production of the NHS provider sector, NHS England and DHSC consolidated final
accounts.
There are a number of arrangements between bodies that can cause complications for
this process, including lead commissioning arrangements and the treatment of
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disputed balances. Joint working arrangements, including those arising from
Sustainability and Transformation Partnership (STP) arrangements and integrated care
systems (ICS) may also give rise to different accounting treatments between
participating bodies.
Auditors may also complete work on agreement of balances as part of their work on
the financial statements audit and as part of the work under the NAO group
instructions.
What should auditors do?
Auditors should work with health bodies to help ensure that bodies engage with the
process and understand its purpose. Auditors should discuss at an early stage the level
of evidence required to substantiate balances.
The increasing use of pooled budgets and lead commissioning arrangements, including
with local government bodies, can provide additional complexity to the agreement of
balances process. Auditors should be aware of the guidance on pooled budgets and
joint arrangements, including the Better Care Fund, within Chapter 4 Annex 8 of the
GAM – Accounting for Pooled Budgets and Joint Arrangements and discuss the
accounting treatment of such arrangements to ensure they are satisfied with the
accounting treatment for the body in which they are auditing.
Summarisation Schedules / Consolidation Template
What is the issue?
In addition to the statutory annual report and accounts produced by each entity, NHS
bodies need to communicate the same data, with further analysis to permit
consolidation, to NHS England or NHS Improvement in a standard format that can be
automatically processed.
The Code of Audit Practice requires auditors to report on the consistency of the
schedules or returns with the audited body’s financial statements for the relevant
reporting period. This should be done using the final audited accounts and final
schedules, making sure that all audit adjustments are appropriately reflected, and
where relevant, disclosure notes are consistent. Auditors should note that this is a
requirement for all local NHS bodies and is in addition and separate to any work
required of component auditors by the NAO group audit teams.
Auditors are also required to submit the final summarisation schedules to the NAO
group audit teams as required by the group audit instructions.
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NHS England group accounts (NHS Commissioning Board) consolidates the accounts of
both CCGs and NHS England as a parent of the group. These are required to be
consolidated into the DHSC Group Accounts. The C&AG is responsible for examining,
certifying and reporting on the NHS Commissioning Board’s accounts under the Health
and Social Care Act 2012.
The Consolidated NHS Provider Accounts (CPA) consolidates the accounts of both
foundation trusts and NHS trusts which together make up the NHS provider sector.
The CPA is required to be consolidated into the DHSC Group Accounts.
In accordance with directions issued by the Secretary of State for Health and Social
Care dated 29 June 2018, under the National Health Service Act 2006, NHS
Improvement prepares the CPA on a basis consistent with the individual NHS
providers’ accounts. These are consolidated in accordance with International
Financial Reporting Standards, as amended for NHS providers by the FReM, the FT
ARM and the GAM.
The Secretary of State’s directions require NHS Improvement to prepare consolidated
NHS provider accounts so as to:
• give a true and fair view of the state of affairs of NHS trusts and foundation
trusts collectively as at the end of the financial year and the comprehensive
income and expenditure, changes in taxpayers’ equity and cash flows for the
financial year then ended; and
• disclose any material expenditure or income that has not been applied for
the purposes intended by Parliament or material transactions that have not
conformed to the authorities that govern them.
The C&AG is responsible for examining, certifying and reporting on the CPA pursuant
to powers under section 16 of the Budget Responsibility and National Audit Act 2011
(“the 2011 Act”).
Why is this important?
The consolidation templates and summarisation schedules form the basis of the group
consolidation process. Differences are time-consuming to resolve and delay
consolidation at the group level. It is important that differences between the accounts
and consolidation schedules are highlighted to the audited body on a timely basis.
What should auditors do?
The Code of Audit Practice requires auditors to report on the consistency of the
schedules or returns with the audited body’s financial statements for the relevant
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reporting period. This should be done using the final audited accounts and final
schedules, making sure that all audit adjustments are appropriately reflected, and
where relevant, disclosure notes are consistent.
It is important that auditors ensure that the summarisation schedules submitted to
the NAO group audit teams are the final version and consistent with those submitted
to the national bodies.
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Section 2: Other Matters 2020-21
Revised Funding Regime in Response to COVID-19
Funding, cash and capital regime 2020-21
What are the issues?
The original NHS Planning Guidance 2020-21 - January was suspended as the NHS
prepared for its response to COVID-19. A new financial regime for the NHS was
implemented. This was announced through a series of letters and guidance
documents, broadly splitting 2020-21 into two halves.
2020-21 financial regime – first half of the year 1 April to 30 September 2020 (H1)
The initial NHS response was set out in a letter dated 17 March 2020 from Sir Simon
Stevens, NHS Chief Executive, and Amanda Pritchard, NHS Chief Operating Officer, to
NHS providers, NHS commissioners, GP practices and local authority chief executives
and directors of adult social care. The letter set out actions for every part of the NHS
to put in place to redirect staff and resources. Section 6 of this letter highlights that all
NHS trusts and NHS foundation trusts were moved to block contract payments ‘on
account’ for an initial period of 1 April to 31 July 2020 (subsequently extended to 30
September 2020), with the suspension of the usual Payment by Results national tariff
payment process.
The letter’s Annex: Coronavirus Cost Reimbursement set out the following:
• The suspension of the operational planning process for 2020-21.
• The suspension of the Financial Recovery Fund during the period of 1 April to
31 July 2020.
• NHS providers should claim for additional costs where the block payments do
not equal actual costs to reflect genuine and reasonable additional marginal
costs due to COVID-19.
• Commissioner allocations for 2020-21 have already been notified as part of
operational planning and will not be changed. However, individual
commissioner financial positions and affordability will be kept under review.
NHSE&I will calculate central support top-up payments for CCGs to cover the
difference between allocations set out above and expected costs.
A subsequent letter dated 29 April 2020 from Sir Simon Stevens and Amanda Pritchard
to the NHS set out the approach to the second phase of the NHS response to COVID-
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19. A corresponding guidance document Changes to COVID-19 finance reporting and
approval processes as we move into the second phase of the NHS response was issued
by NHSE&I which outlines changes to the processes for reporting revenue expenditure
and claiming reimbursement for capital expenditure related to COVID-19. The
guidance is applicable to NHS trusts, NHS foundation trusts, CCGs, and NHS England
direct commissioning:
• For capital expenditure this replaces guidance issued on 27 March 2020 with
effect from 19 May 2020.
• For revenue expenditure the principles within this guidance take effect from
1 May 2020, and for reporting purposes from Month 2.
On 31 July 2020, NHS England published the Third phase of NHS response to COVID-19
which continued the above arrangements for months 5 and 6 (August and September)
and set out new arrangements applicable to the second half of the year.
2020-21 financial regime – second half of the year 1 October 2020 to 31 March 2021 (H2)
On 31 July 2020, NHS England published a series of documents in relation to the Third
phase of NHS response to COVID-19. The letter sets out priorities for the rest of 2020-
21 and outlines financial arrangements heading into autumn as agreed with
government. An important feature of the “H2” arrangements is the move to “system
envelopes” with funding allocations covering most NHS activity made at the system
level for the period from 1 October 2020 to 31 March 2021, including resources to
meet the additional costs of COVID-19 response and recovery.
There will be no further general retrospective payments for COVID-19 costs incurred
from 1 October 2020. All future COVID-19 costs are funded through the fixed COVID-
19 funding allocation except certain exclusions including:
• Personal protective equipment
• Nightingale set up costs
• Nightingale hospital ongoing running costs
• Hospital discharge programmes
• Vaccinations programme
• The majority of testing services (some exclusions apply, for example, funding
for COVID-19 polymerase chain reaction (PCR) testing is based on the tests
processed, tested and reported by the laboratory. Any increase in PCR testing
activity as result of frontline asymptomatic staff testing is also included
within this framework. Any other additional costs such as additional
swabbing costs are outside of the cost per test reimbursement and form part
of the Trust’s COVID 19 system funding envelope).
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In exceptional circumstances, the principles set out in paragraph 67 above may be
subject to change where measures may be triggered at local, regional or national
levels by the NHSE&I National Incident Response Board depending on the
circumstance.
Systems are expected to have set out plans to deliver their Phase 3 recovery and
activity requirements and achieve financial balance within this envelope. Systems are
expected to breakeven but individual organisations can deliver surplus or deficit
positions by mutual agreement within the system. Nevertheless, NHS trusts are still
required to meet statutory break-even duty and CCGs are required to meet their
resource limits.
The components of the system funding envelopes include:
• CCG allocations which have been adjusted to enable CCGs to breakeven
taking into account current blocks.
• Growth funding has been allocated to the system to support underlying
growth in the cost base since the reference period baseline and over the
remainder of the year.
• System top-up funding to support delivery of a system breakeven position
which will be issued by a lead CCG.
• COVID-19 allocation funding to cover COVID-19 related costs for the
remainder of the year.
• Block income from outside the system, including other CCGs, Specialised
Commissioning and Other Direct Commissioning.
Transfer of system level funding (system top-up, growth funding and COVID-19
funding) between the lead CCG and other CCGs must be transacted via the central
“IAT” allocation transfer method rather than by invoice unless there is a direct supply
of services/benefits between the CCGs.
Other funding that sits outside the system envelope includes temporary COVID-19
services where relevant organisations will be funded by government on an actual cost
basis. These costs include, for example, Nightingale hospitals, hospital discharge
programmes, and COVID-19 testing services. This is set out in further detailed
guidance: Contracts and Payment Guidance issued in September 2020.
Cash and capital regime for 2020-21
NHSE&I introduced a new cash and capital regime for 2020-21 as set out in the
following series of guidance and letters:
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• Guidance on NHS system capital envelopes for 2020-21: This provides an
overview of the new approach to capital funding in the NHS from 2020-21
and includes information regarding:
o Overview of NHS operational capital funding
o System-level allocations where every Sustainability Transformation
Partnership (STP)/ Integrated Care System (ICS) will receive a 2020-21
capital spending envelope derived from the system-level allocation.
While NHS providers remain legally responsible for maintaining their
estates and for setting and delivering their organisational level capital
investment plans, every ICS/STP will have to account for ensuring
overall capital spending across their system remains within these
budgets.
o Reporting and monitoring arrangements during and after COVID-19.
o Capital proceeds in respect of disposals and surplus land and how these
will be available to the STP/ICS.
• Reforms to the NHS Cash and Capital Regimes for 2020-21 Financial Year: This
letter to all chief executives of NHS providers outlines the new cash and
capital regimes that will be effective as of 1 April 2020 including:
o New Public Dividend Capital (PDC) issued to repay over £13 billion of
the NHS’ historic debt.
o A move away from interest-bearing loans for future interim capital and
revenue support, which instead will be provided as PDC.
o Providing a capital spending envelope for the year to every local area,
within which each STP/ICS will be expected to work together to manage
their spending.
• Reforms to the NHS Cash Regime effective from 1 April 2020: This provides
further detail on the cash regime including:
o Interim revenue and capital debt arrangements where interim revenue
loans, including working capital facilities and interim capital debt at 31
March 2020 are to be extinguished during 2020-21. Providers will be
issued PDC to effect the repayment of outstanding balances at 31
March 2020. This excludes capital normal course of business (NCB)
loans. Please note that DHSC has published a regional breakdown of
NHS debt that will be written off from 1 April 2020 on its gov.uk website
and available here.
o Future revenue and capital support arrangements during and after
COVID-19.
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Why is this important?
The NHS finance regime is complex with different funding mechanisms being applied
across different parts of the 2020-21 financial year. The COVID-19 funding schemes
were set up at pace with a view to getting immediate support to NHS bodies and
patients. There is a risk that the rigour with which controls were implemented and
new processes set up or followed may not reach previous standards. For example,
CCGs may have different mechanisms for holding providers to account in the absence
of signed contracts. This may increase the risk of management override of control, or
fraud and error in funding and scheme claims.
The funding mechanism for the reimbursement of COVID-19 expenditure may give rise
to a potential risk of manipulation of the financial position in order to secure
funding. For example, an incentive to code expenditure in the first half of the year to
obtain reimbursable COVID-19 expenditure, although for the second half of the year,
incentives may depend on whether NHS providers are receiving COVID-19 costs as a
fixed sum from their lead CCG or whether they’re being asked to show what’s been
spent.
Individual NHS bodies within a system are still required to maintain the integrity of
their financial accounts. The NHS provider licence includes a duty regarding integrated
care, and that “the licensee shall not do anything that could reasonably be regarded as
detrimental to enabling integrated care.” The licence applies directly to NHS
foundation trusts, and NHSE&I’s oversight of NHS trusts is designed to apply this with
equivalence. However, it is important that where an NHS provider or CCG takes a
decision that is balancing its objectives as an organisation with how ‘integrated care’
(i.e. system working) serves the interests of patients, that it can support the true
substance of its transactions and its accounting with evidence.
There are likely to be new significant transactions streams due to COVID-19 in NHS
bodies. Therefore, management will need to consider the financial reporting
implications for their annual report and accounts preparation.
What should auditors do?
Auditors should be aware of the risks associated with new transaction streams and the
various funding regimes applicable to the different parts of the financial year 2020-21
to support their audit planning work under ISA (UK) 240 (Revised January 2020) The
Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, ISA
(UK) 300 (Revised June 2016) Planning an Audit of Financial Statements, and ISA (UK)
315 (Revised June 2016) Identifying and Assessing the Risks of Material Misstatement
Through Understanding of the Entity and Its Environment.
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This includes understanding the policy decisions impacting the financial statements;
such as new expenditure, investment or grant schemes, commitments, obligations or
losses and special payments. Enquiries on finance processes should explore how
finance processes have changed, particularly focusing on areas where the operation of
a control being relied on for assurance purposes has changed.
Auditors will need to be aware of the risks associated with particular accounting
treatments, for example, any directions regarding whether transactions should be on
a revenue or capital basis, or which are not supported by evidence. The specific
capital funding for COVID-19 related projects may create incentives for NHS providers
to treat expenditure relating to a project as capital when the specific elements of
projects do not meet the criteria for capitalisation, or to recognise capital expenditure
during 2020-21 in order to report positions in line with expectations for this funding.
Whilst this AGN sets out the overall funding flow from DHSC, auditors will need to
consider NHS providers’ assessment of revenue recognition under IFRS 15 Revenue
from contracts with customers and CCGs’ assessment of liabilities. These should reflect
local arrangements in place and the substance of the transaction.
Auditors will also need to be aware that, as the NHS continues to respond to the
pandemic, funding regimes may be subject to revision during the year. Some elements
of the funding regime are yet to be finalised (e.g. the Elective Incentive Scheme which
is intended to reward systems for achieving the activity recovery goals set out in the
Third phase of NHS response to COVID-19). Block payment arrangements will continue
for the first quarter of 2021-22 but quarters 2-4 will be under a new finance regime.
The NHS planning round for 2021-22 has been suspended until Q2 of 2021-22 and the
new finance regime is still being determined.
Procurement Policy Note (PPN 02/20)
What are the issues?
In March 2020 the Cabinet Office issued Procurement Policy Note (PPN 02/20) setting
out information and guidance for public bodies on payment of their suppliers to
ensure service continuity during and after the current COVID-19 outbreak. The actions
suggested in the paper include making payments in advance of need, suspending
payment by results requirements and paying for services as normal despite disrupted
or suspended service delivery. Such actions would normally be prohibited under
Managing Public Money without explicit HM Treasury consent, as being novel,
contentious and repercussive.
In summary, PPN 02/20, when read alongside the supporting letter from Sir Tom
Scholar (Accounting Officer, HM Treasury) to accounting officers, provides HM
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Treasury consent for certain payments in advance of need to suppliers, subject to
certain conditions. HM Treasury are clear in their letter that this consent does not
alleviate Accounting Officers from their usual duties to ensure that spending is regular,
proper and value for money. They expect contracting authorities to conduct
appropriate and proportionate due diligence to ensure such payments are necessary
for continuity of supply of critical service.
The NAO considers that such payments, so long as they comply with these conditions
and other aspects of the relevant framework of authorities, are regular.
NHSE&I published further guidance, Guidance to NHS Organisations on PPN note,
which set out how NHS organisations should interpret the Cabinet Office’s PPN 02/20
in connection with payment of ‘at risk’ suppliers to NHS organisations and how those
aspects should be locally implemented. This guidance does not substitute PPN 02/20
for NHS organisations. The Procurement Policy Note 02/20 is no longer extant,
expiring on 30 June 2020.
Why is this important?
This guidance does not replace any primary or secondary care guidance issued in
relation to 2020-21 contracting and should be read in conjunction with Revised
arrangements for NHS contracting and payment during the COVID-19 pandemic.
The Procurement Policy Note 02/20 is no longer extant, expiring on 30 June 2020, but
would have been valid for 25% of the financial year. Therefore, spend in this window
should be considered against this.
What should auditors do?
Auditors should be aware of the risks associated with changes in procurement
processes as covered by the guidance to support their audit planning work under ISA
(UK) 240 (Revised January 2020) The Auditor's Responsibilities Relating to Fraud in an
Audit of Financial Statements, ISA (UK) 300 (Revised June 2016) Planning an Audit of
Financial Statements, and ISA (UK) 315 (Revised June 2016) Identifying and Assessing
the Risks of Material Misstatement Through Understanding of the Entity and Its
Environment.
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Inventories and Equipment
What are the issues?
In response to the COVID-19 pandemic, significant volumes of goods and services have
been procured by DHSC and NHSE. These include Nightingale hospitals, Test and
Trace, support for increased hospital admissions due to COVID-19 and the vaccination
programme.
Goods and supplies have been and will continue to be issued to individual
organisations including NHS providers, primary care organisations and commissioners.
In 2019-20 auditors issued a number of modified opinions in relation to NHS
providers’ material stock balances where restrictions on movement prevented either
the NHS provider from performing a stocktake and/or the auditor being able to attend
in order to obtain the necessary assurance. NHS providers that were affected by this
will therefore likely receive modified opinions in relation to their 2020-21 opening
stock balances where auditors have not subsequently been able to obtain sufficient
assurance.
Personal protective equipment
Personal protective equipment continues to be purchased centrally by DHSC and
transferred to NHS providers free of charge during 2020-21 (sometimes referred to as
‘push stock’). These items should be recognised by the recipient at a suitable ‘deemed
cost’. DHSC has committed to providing information regarding the quantity and cost of
items provided to each NHS provider during 2020-21 for them to account for these
items within their year-end financial statements. This is included in further detailed
guidance issued by NHSE&I on 12th February 2021: Guidance on accounting for
2020/21 items.
Ventilators and medical equipment
DHSC has established a national pandemic equipment pool (termed the ‘national loan
stock’) of ventilators and other medical equipment. This equipment is made available
to trusts free of charge. The National Ventilator Allocation Panel (NVAP) will contact
NHS providers to confirm which assets they wish to retain, however this exercise will
take place in 2021-22. Items are only taken back to the national equipment pool with
trusts’ agreement. Items held by trusts on 31 March 2021 should therefore be
recorded in trusts’ accounts. Where items are held by trusts at year end, these are in
substance donations to trusts. Further information is included in detailed guidance
issued by NHSE&I: Guidance on accounting for 2020/21 items. This accounting
treatment will be confirmed in the Q4 update to the DHSC 2020-21 GAM.
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Why is this important?
The accounting transactions required in individual NHS providers’ accounts is reliant
on the provision of information and guidance from DHSC which is still being
developed.
The personal protective equipment stock could change an individual NHS providers’
year-end inventory balance from being immaterial to material.
The accounting treatment for other programmes such as Nightingale hospitals and the
vaccine programme on individual NHS entity accounts is yet to be finalised. Guidance
is still being developed by DHSC and NHSE&I but their initial thinking is included within
Guidance on accounting for 2020/21 items. Given the scale of these programmes, they
are likely to lead to significant new transaction streams in some NHS providers and
CCGs.
Auditors are reminded that NHSE&I’s Guidance on accounting for 2020/21 items is
intended to help NHS organisations understand the treatment of items that are new
for 2020-21 but it does not constitute an accounts direction. Any specific guidance on
accounting practices to be followed is contained in the DHSC GAM. As set out in
paragraphs 80 and 81 above, auditors will need to pay particular attention to any
unusual accounting treatments and/or those not supported by evidence.
Government and local restrictions on movement are likely to remain in place close to
year-end 2020-21 which could affect the ability to attend year-end stock-takes or
physically verify the existence of equipment (where required).
What should auditors do?
Auditors should be aware of the risks associated with new transaction streams to
support their audit planning work under ISA (UK) 240 (Revised January 2020) The
Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, ISA
(UK) 300 (Revised June 2016) Planning an Audit of Financial Statements, and ISA (UK)
315 (Revised June 2016) Identifying and Assessing the Risks of Material Misstatement
Through Understanding of the Entity and Its Environment.
Auditors should be aware that, as the NHS continues to respond to the pandemic,
guidance regarding the provision of information from DHSC and NHSE&I on how local
NHS bodies should account for centrally procured programmes is still being
developed. The NAO will communicate such information and guidance to auditors via
supporting information and weekly auditor communications.
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ISA 501 (Revised June 2016) Audit Evidence requires auditors to attend stocktakes to
confirm assertions around material inventory balances. Government and local
restrictions may not make this possible for 2020-21 stocktakes.
The FRC issued guidance to auditors in response to COVID-19 in March 2020 that
stated –“the FRC is concerned that the current situation should not undermine the
delivery of high-quality audits. Audits should continue to comply fully with required
standards.” The FRC issued further guidance in April 2020 that stated “the need for a
modified opinion may arise because certain audit procedures cannot be performed (for
example physical inventory testing because of travel restrictions), and no other
procedures can be undertaken to produce the required volume or quality of reliable
audit evidence”.
Furthermore, the Institute of Chartered Accountants in England and Wales (ICAEW)
issued guidance which states that “each individual engagement will need to be
assessed on a case by case basis to determine what more, if anything, may be
appropriate and to consider whether alternative procedures have fulfilled the
requirements of ISA 501 and in particular whether sufficient appropriate evidence has
been obtained. If, despite using alternative procedures, the requirements of ISA 501
are not met, you will need to modify the audit opinion under ISA 705”.
Auditors should engage at the earliest opportunity with NHS bodies that are likely to
hold material inventory or equipment. Due to access arrangements changing over the
course of the year, attending a stocktake close to year-end or the physical verification
of items of equipment may not be possible. In considering whether alternative
procedures are appropriate to obtain the necessary assurance to meet ISA 500
(January 2020) Audit Evidence for equipment and for inventory ISA 501 (Revised June
2016) Audit Evidence – Specific Considerations for Selected Items, auditors will need to
understand the body’s own controls and how it has gained the assurance it requires to
support the balances and disclosures within its annual report and accounts, for
example, what controls the body has in place to provide confirmation of stock
quantities and equipment, the condition of stock and equipment, and movements in
these items.
Use of Management’s Expert – Valuations of Property, Plant and Equipment
What are the issues?
NHS providers hold a significant quantity of property, plant and equipment. Chapter 4,
Annex 4 of the GAM states that:
‘Assets which are held for their service potential (i.e. operational assets used to
deliver either front line services or back office functions) must be measured at
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their current value in existing use. For “in use” non-specialised property assets
current value in existing use should be interpreted as market value for existing
use. In the Royal Institution of Chartered Surveyors; (RICS) “Red Book” (RICS
Appraisal and Valuation Standards), this is defined as Existing Use Value (EUV).’
‘For specialised properties (i.e. those for which no active market exists),
depreciated replacement cost is considered to be a satisfactory approximation
of current value in existing use. Within that methodology, the MEA [modern
equivalent asset] concept is applied: the “replacement cost” is based on the
cost of a modern replacement asset that has the same productive capacity as
the property being valued.’
‘There is no pre-determined frequency with which assets must be re-valued.
Instead the Standard requires that asset values should be kept up to date and
that the frequency of revaluation will need to reflect the volatility of asset
values. Where assets are subject to significant volatility, then annual
revaluations may be required. Conversely, where changes in asset values are
insignificant then a revaluation may be necessary only every 3 or 5 years.’
Many of the property assets held by NHS providers are of a specialised nature and a
valuer is usually engaged as management’s expert to carry out a valuation of these
assets. The DHSC GAM goes on to say in paragraph 4.250:
‘It is for valuers, using the RICS Red Book, and following discussions with the
entity, to determine the most appropriate methodology for obtaining either a
current value in existing use or a fair value’.
In support of the RICS Red Book, RICS issue the UK National Supplement. This ‘reflects
valuation standards and other authoritative requirements that are specific to the UK
jurisdiction, and provides additional valuation applications guidance accordingly’. This
therefore has the effect of being guidance rather than being a standard. An updated
version of the UK National Supplement was issued in November 2018, effective from
14 January 2019.
In November 2018 RICS also issued UKGN 2 – Depreciated replacement cost method
of valuation for financial reporting, also effective from January 2019. This provides
further guidance on how to apply the UK National Supplement and ‘highlights the
reporting requirements outlined in RICS Valuation – Global Standards 2017 – UK
national supplement (RB UK) that are particularly relevant when the DRC method has
been used’.
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