Assets under construction
2.73 Assets under construction should not be indexed from 2001-02, and should not be revalued, so being carried at cost. The carrying amount of an asset under construction must be reduced if it becomes apparent that fruitless payments (which are reported in the losses register) have been incurred or other costs have been inappropriately capitalised.
2.74 FRS 15 requires that where a tangible fixed asset is revalued, all the assets in the same class must be revalued (para 61). The ad hoc revaluation of individual assets on a good-housekeeping principle is not therefore permissible. Clearly individual assets will still be valued singly in the event of their being impaired or their valuation bases being changed (e.g. from cost to DRC or DRC to OMV on commissioning or disposal respectively).
Valuers and Disclosures
2.75 The 5-yearly national revaluation exercises for the NHS have been carried out by the District Valuation Service, which thus maintains records and has built up experience and established a consistent approach to the valuation of NHS properties. The assumption in this Manual then is that District Valuers (DV) will also carry out any interim valuations required, although PCTs have the freedom to commission such work from other suitably qualified valuers. The standard disclosure of accounting policies (Note 1) in the Manual for Accounts covers the 5-yearly DV revaluations. In the event of revaluations of a class of assets outside the course of the 5-yearly cycle the full disclosure provisions of FRS 15 (para 74) must be followed.
Non-specialised land and buildings
2.76 Where it is possible to value a property in the context of an active market in that type of property in the locality, the District Valuer will attach an open-market value for existing use (OMVEU), as defined in annex A below, to the property. In effect, this should be the default valuation policy as it gives a clear understandable valuation figure. The existence of a vast specialised estate in the NHS, however, confines the use of OMVEU to such properties as residential accommodation, office buildings and car parks.
2.77 All assets valued at OMV (whether operational or non-operational) are indexed on April 1 each year, using the indices provided by the Valuation Office Service (see below) to maintain their current cost carrying value.
Specialised land and buildings
2.78 FRS 15 and the Resource Accounting Manual produced by HM Treasury require specialised assets to be valued on a depreciated replacement cost basis (DRC), as defined in annex A below. It is accepted that this valuation base is something of a proxy for a more clear-cut (e.g. OMV) basis of valuation.
2.79 Certain assumptions inherent in the DRC valuation methodology lead to DRC valuations invariably being lower than the initial cost of new buildings. Inefficiencies and cost over-runs (abnormal costs, above) cannot be capitalised, even as part of initial costs. Certain other costs associated with capital projects are legitimately capitalised initially, yet are not taken into account in arriving at DRC. Examples of these might be the cost implications of contractors having to work in an occupied site, or the necessity to put in access roads; the cost of having multiple contracts and phases to construct one building; and the additional cost of inclement weather. These assumptions are currently under review.
2.80 It is to be expected then that the very action of revaluing from cost to DRC will produce an impairment loss which must be recognised in the OCS (see paragraphs 2.97-2.123 - Impairments).
2.81 The DRC valuation methodology employed by the Valuation Office Service analyses property by approximately 25 separate elements, based on the Building Cost Information Service (BCIS) definitions. Certain elements (e.g. substructure, roof, stairs, windows and external doors) relate to the buildings themselves, while others (water, electrical, heating, lift installations) relate to plant or engineering.
2.82 While PCTs may wish to track various elements in their registers separately, it is suggested that for the purposes of impairment reviews and tracking revaluation reserve balances associated with discrete assets, the asset unit should be the building as a whole. Clearly, separate wings or blocks of a building might have been added at different times, and capable of being treated as separate assets, or indeed major elements of plant may have depreciation lives so different from the structure as to merit treatments as separate assets under FRS 15. Some judgement in defining an asset will therefore need to be exercised. It is suggested that any block or asset capable of separate valuation, or disposal or demolition, is treated as a discrete asset (so the elements of a block would not be assets in FRS 11 terms, whereas the block itself would be).
2.83 An exception to this general rule is land included in property. Because land and buildings asset movements are reported separately in Notes to the Balance Sheet, impairments and revaluations need to be apportioned between land and buildings, rather than being assigned to the property asset as a whole.
2.84 Equipment is carried at depreciated replacement cost. In practice, it is sufficient to apply indexation and depreciation to the historic cost of the equipment asset. The modern equivalent asset calculation may come into play in exceptional cases where technological advances mean that a replacement asset of similar productive capacity would be materially different in cost, such that indexed historic cost exceeds the recoverable amount.
2.85 Indexation is intended to maintain assets at current cost values without the expense of frequent revaluations. Separate national indices are issued for land, buildings and equipment. Consideration is being given to the re-introduction of region-specific indices for land to minimise the drift between indexed values and real values established in 5-yearly revaluations, and it is likely that land indices issued for use in the 2001-02 capital charges estimates exercise will be more detailed and geographically-based.
2.86 Indices are provided by the Valuation Office Service and are based on data available from the Building Cost Information Service (BCIS) and the Valuation Office Property Market Report.
2.87 Indices for a given financial year are published in allocations working papers (AWPs) issued to Regional Offices as part of the capital charge estimate (CCE) exercise in the preceding July. Indices are intended to reflect price movements anticipated over the course of the following financial year. Thus, although they are applied to opening asset values as at 1 April, they are intended to provide acceptable values for the year-end balance sheet. The national valuation exercise was undertaken specifically to provide values at 1 April 2000, and there is thus no inconsistency in applying indices on 1 April to those values.
2.88 All tangible fixed assets, operational and non-operational (including assets held under finance leases), should be indexed on 1 April each year. Assets under construction should be indexed on 1 April 2000 but not in future years (see para 2.73 above). The situation sometimes arises where an asset is to be disposed of, and is valued for that purpose in one year while the transaction does not actually take place until the next. This can result in a loss on disposal if the contract sale price is set at the valuation amount and indexation is then applied on the following 1 April - the carrying amount will exceed the sale proceeds.
2.89 The NHS should always ensure that assets are not sold to third parties at undervalue, and so will obtain a valuation to establish a fair price on the date of sale. If this is done, and it can be demonstrated to auditors that the most recent valuation does indeed represent a fair value on the date of sale, it is acceptable for that particular asset not to be indexed at 1 April. The best course of action will be to instruct the valuers to make the best estimate of value at the anticipated date of sale. Clearly it would not be acceptable to rely on an out-of-date valuation to set a contract price, and indexation may only be set aside in this way if the dates of valuation and sale are close (say, within 6 months) and fall either side of the year-end.
2.90 Where assets are brought onto PCT opening balance sheets from the NHS Trust sector on 1 April, the transactions should take place before the NHS Trust has indexed the assets. A full years indexation should then be applied in the PCT. Further information is provided in the PCT Manual for Accounts Information Sheet 1 Establishing opening balances which can be found on the Finance Manual website.
2.91 The series of indices applied in the NHS to date is shown below:
1. The Valuation Office has rebased the index figure for land for 1999/2000 to 100. The index the VO has given for 2000/2001 is also 100 (i.e. no general land inflation is predicted). For 1 April 2000 therefore no indexation uplift should be applied to land values. The values of 141 have been shown here to avoid confusion about the index base to be used. For 2001/02 a land index will be provided which should be applied to the 100 rebased value and not the 141 value.
2. For land and buildings, detailed regional figures were used in the early years (1992/93 and 1993/94). Rather than reproduce a complex table of indices by geographical areas, a national index has been estimated using an average for these two years.
3. As an example: the national revaluation for 1 April 2000 notwithstanding, the uplift to be applied to building values on 1 April 2000 is:
2.92 Where equipment is taken out of productive use its value should be written down to its recoverable amount, which in turn (as the asset is not in use) will be its net realisable value. The valuation fall is analogous to the recognition that the asset has been under-depreciated during its period of use, and so the fall should be accounted for as an impairment (see paragraphs 2.97-2.123 below).
2.93 Surplus land and buildings not in operational use should be revalued to open market value for alternative use (District Valuers attach valuations based on the prevailing use concept, having regard to the likely use to which property sold in the locality could be put).
2.94 Property may be considered as surplus when a management decision has been taken to dispose of it. The decision is best evidenced by PCT Board minutes recording a decision, but auditors may accept other written evidence or representations about the status of property.
2.95 Property thus classed as surplus, but still in operational use, must not be written down to OMV for alternative use. It should remain in the balance sheet at its normal operational valuation (DRC, or OMVEU as appropriate). The depreciation charge should however be adjusted such that the asset is fully depreciated to its disposal OMV (equal to its expected net realisable value) over its remaining life in the PCT (see Chapter 3 - Depreciation). This accelerated depreciation is similar in nature to an impairment loss.
2.96 Where accelerated depreciation is to be calculated in this way, the OMV to be used is that of an asset of the same age at the present time, and no attempt should be made to predict the OMV at the time of planned disposal. In times of inflation then, it is to be expected that the OMV thus established will be lower than the OMV ruling at the actual date of disposal, and this may then give rise to a profit on disposal. PCTs will need to take care that an OMV set in the past is not assumed to be a fair market price for setting contract terms.