September 2008 Department of Health

Opening Balance Sheet Requirements

This paper sets out the Department of Health’s requirements in relation to the Opening
Balance Sheet exercise for the NHS, and was considered by the NHS IFRS
Implementation Group at its meeting on 9 September 2008.

Background
The requirement to restate an entity’s opening balance sheet on transition to IFRS
comes from IFRS 1 ‘First-time adoption of International Financial Reporting
Standards’. The date of transition for government and the NHS is 1 April 2008, and
this is therefore the point at which an opening balance sheet should be prepared.

In line with HM Treasury requirements, the Department of Health and its family of
organisations (including the NHS) will be carrying out this restatement exercise in
advance of preparing the first IFRS financial statements in 2009/10.

The technical requirements of IFRS 1 relate to the first IFRS financial statements, and
therefore are wider in scope than just the opening balance sheet. However, IFRS 1
should be used as the base reference source when considering the technical aspects
of the restatement exercise. Reference to IFRS 1 will also enable users to plan ahead
to their first IFRS accounts in 2009/10. A summary of relevant IFRS 1 requirements is
attached as Appendix C to this paper.

Requirements
The Department requires that the following be provided as part of the restatement
exercise:
• Restated opening balance sheet as at 1 April 2008
• Supporting notes for all balance sheet items (whether or not an adjustment is
needed for restatement or not) – These will be important to satisfy the audit trail
as well as being necessary for the preparation of the first IFRS accounts in
2009/10
• Supporting details of accounting policy changes
• Details of errors made under UK GAAP identified in transition – This is a
requirement of IFRS 1 and will need to be disclosed in the 2009/10 accounts if
applicable
• IAS 36 disclosures for impairment losses recognised or reversed in transition –
this is a requirement of IFRS 1 para 39(c)1
• Reconciliation from UK GAAP to IFRS for Taxpayers’ Equity – This is an IFRS
1 requirement and would need to be incorporated into the first IFRS accounts in
2009/10
• Sufficient detail to understand adjustments to each line item – This information
will be needed for the 2009/10 accounts as well as to satisfy audit requirements

1
These impairment disclosures are detailed in paragraphs 113 to 119 in IAS 36.

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• Strong audit trail – All information will be subject to audit review and will
therefore need to stand up to audit scrutiny, as well as providing sufficient
records for you to revisit at a later date should you need to.

Satisfying these requirements

In order to satisfy these requirements the template in Appendix A is required to be
completed by all organisations for the restatement exercise.

Collection of data
The data will be collected on FIMS by 31 December 2008. Template forms will be
distributed to the NHS by 31 October 2008. These will be based on the format shown
in Appendix A.

Audit requirements
This paper sets out the Department of Health’s requirements for the opening balance
sheet exercise. These should be discussed with your auditors who will be able to
provide you with more information in the context of their audit working paper needs.

As a minimum, it will be good practice to produce a ‘roadmap’ from UK GAAP to IFRS,

showing adjustments, including new balances brought in, backed up by working
papers. Where no adjustments were made there should be evidence that the issue
was properly considered. It will also be considered good practice to keep a record of
how UK GAAP balance sheet classifications have been mapped on to the IFRS
balance sheet classifications. It is recommended that organisations engage their
auditors in discussion about specific evidence requirements as early as possible

Becoming a Foundation Trust in year

If your trust became a Foundation Trust during 2008/09 and therefore prepared NHS
Trust accounts for part of the year, then the opening balance sheet at 1 April 2008 will
need to be restated for IFRS.

Further guidance
Reference should be made to the IFRS section of the Finman website for further
guidance, particularly the chapters for the IFRS Manuals for Accounts.

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Appendix A - Template for opening IFRS balance sheet

Reconciliation of Taxpayers’ Equity at 1 April 2008 (date of transition to IFRS)
Notes on preparation: A B C D E F
UK GAAP UK GAAP Adjusted Effect of IFRS
31/03/08 Adjustment UK GAAP transition to 01/04/08
01/04/08 IFRS
Notes £m £m £m £m £m
Property, plant and (x) XX.X XX.X XX.X XX.X XX.X
equipment
Intangible assets (x) XX.X XX.X XX.X XX.X XX.X
Financial assets (x) XX.X XX.X XX.X XX.X XX.X
Other assets (x) XX.X XX.X XX.X XX.X XX.X
Total non-current XX.X XX.X XX.X XX.X XX.X
assets
Inventories (x) XX.X XX.X XX.X XX.X XX.X
Trade and other (x) XX.X XX.X XX.X XX.X XX.X
receivables
Financial assets (x) XX.X XX.X XX.X XX.X XX.X
Other current assets (x) XX.X XX.X XX.X XX.X XX.X
Cash and cash (x) XX.X XX.X XX.X XX.X XX.X
equivalents
Total current assets XX.X XX.X XX.X XX.X XX.X
Assets classified as (x) XX.X XX.X XX.X XX.X XX.X
held for sale
Total assets XX.X XX.X XX.X XX.X XX.X
Trade and other (x) XX.X XX.X XX.X XX.X XX.X
payables
Borrowings (x) XX.X XX.X XX.X XX.X XX.X
Financial liabilities (x) XX.X XX.X XX.X XX.X XX.X
Provisions (x) XX.X XX.X XX.X XX.X XX.X
Other liabilities (x) XX.X XX.X XX.X XX.X XX.X
Total current XX.X XX.X XX.X XX.X XX.X
liabilities
Total assets less XX.X XX.X XX.X XX.X XX.X
current liabilities
Borrowings (x) XX.X XX.X XX.X XX.X XX.X
Financial liabilities (x) XX.X XX.X XX.X XX.X XX.X
Provisions (x) XX.X XX.X XX.X XX.X XX.X
Other liabilities (x) XX.X XX.X XX.X XX.X XX.X
Total assets XX.X XX.X XX.X XX.X XX.X
employed

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September 2008 Department of Health

Reconciliation of Taxpayers’ Equity at 1 April 2008 (date of transition to IFRS)

(Continued)
Notes on preparation: A B C D E F
UK GAAP UK GAAP Adjusted Effect of IFRS
31/03/08 Adjustment UK GAAP transition to 01/04/08
01/04/08 IFRS
Notes £m £m £m £m £m
Financed by:
Taxpayer’s equity
Public Dividend Capital (x) XX.X XX.X XX.X XX.X XX.X
General Fund/ (x) XX.X XX.X XX.X XX.X XX.X
Retained Earnings
Revaluation Reserve (x) XX.X XX.X XX.X XX.X XX.X
Donated Asset Reserve (x) XX.X XX.X XX.X XX.X XX.X
Government Grant (x) XX.X XX.X XX.X XX.X XX.X
Reserve
Other reserves (x) XX.X XX.X XX.X XX.X XX.X
Total Taxpayers’ XX.X XX.X XX.X XX.X XX.X
Equity

Notes on preparation

A – Notes
Supporting notes should be prepared for all balance sheet items, regardless of
whether an adjustment is made. The notes should include the following information:
• A narrative description of accounting policies, where revised under IFRS (new
accounting policies are given in the proforma accounts at chapter 8 of the IFRS-
based Manuals for Accounts on the Finman website)
• How the differences between UK GAAP and IFRS have arisen
• Information to support any adjustments to UK GAAP (see below), and
• Analysis of opening balances in a format that will satisfy IFRS disclosure
requirements for opening balances to notes to the accounts.

These notes will need to be supported by robust detailed calculations and evidence,
where appropriate.

B – UK GAAP 31/03/08
This column should present balance sheet items with information drawn directly from
the audited closing UKGAAP balance sheet as at 31 March 2008 (i.e. the information
should be extracted from the 2007/08 accounts). Certain categories will be different
under IFRS and so the classification mapping guidance in Appendix B should be
applied.

C – UK GAAP Adjustments
Adjustments in this column should be made for changes and errors identified under
UK GAAP. The introduction of the financial instruments standards (FRS 25, FRS 26

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September 2008 Department of Health

and FRS29) should be reflected here, as should any UK GAAP errors identified
(whether in the transition to IFRS or otherwise) and any impairments.

D – Adjusted UK GAAP at 01/04/08

The closing UK GAAP balance sheet at 1 April 2008 is after any adjustments for
implementing the Financial Instrument standards, any impairments and reversals first
recognised in the transition, and any adjustments for UK GAAP errors identified in the
transition to IFRS. Notes should therefore also include information supporting these
adjustments to the audited closing UK GAAP balance sheet.

E – Effect of transition to IFRS

This column should be used to show the net adjustments in the transition to IFRS for
each balance sheet line. The supporting notes must give the gross changes that
make up the net adjustments. Guidance on what these adjustments might be is
included in Appendix C to this note.

F – IFRS 01/04/08
This column presents the opening balance sheet under IFRS as at 01/04/08.

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September 2008 Department of Health

Appendix B – Balance Sheet classification mapping

UK GAAP IFRS

Fixed Assets Non-current assets

Intangible Assets Property, plant and equipment
Tangible Assets Intangible assets
Investments Financial assets
Other assets
Current assets Current assets
Stock and work in progress Inventories
Debtors Trade and other receivables
Investments Other financial assets
Cash at bank and in hand Other current assets
Cash and cash equivalents
Non-current assets held for sale
Creditors within one year Current liabilities
Trade and other payables
Borrowings
Other financial liabilities
Provisions
Other liabilities
Creditors over one year Non-current liabilities
Borrowings
Other financial liabilities
Provisions
Provisions Other liabilities

This mapping diagram is intended to illustrate how UK GAAP balance sheet

categories translate into IFRS balance sheet categories. It should be used to inform
the presentation of items in column B in Appendix A.

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September 2008 Department of Health

Appendix C - TECHNICAL NOTE: RESTATEMENT OF 1/4/08

BALANCES TO IFRS BASIS
Introduction
1. The rules for the changeover from accounting under UK to international
financial standards, are given in IFRS 1 ‘First-time Adoption of International
Financial Reporting Standards’, as adapted by the Government Financial
Reporting Manual (i-FReM).

2. The first process is to restate the opening balance sheet at the ‘date of
transition’. For NHS bodies this is 1 April 2008. The balances to restate are
the same as the closing balances for 2007/08 after adjustment for the
introduction of accounting for financial instruments under FRS 25 and 26 in
2008/09.

3. Restatement of the balances at 1 April 2008 provides the basis for reworking
the 2008/09 results on an IFRS basis. These reworked 2008/09 results will be
included as comparators in the first set of IFRS financial statements for
2009/10.

IFRS 1 requirements
4. IFRS 1 requires the opening IFRS balance sheet to:
• Recognise all assets and liabilities whose recognition is required by IFRSs
• Not recognise items as assets or liabilities if IFRSs do not permit their
recognition
• Reclassify items recognised differently under UK GAAP and IFRS
• Measure the assets and liabilities under IFRS measurement rules, that is, as
if those rules had always been in place

5. IFRS 1 makes some specific exemptions from these requirements on the basis
that costs will outweigh benefits (IFRS 1.13-25H and 36A-37). Most of the
circumstances will not apply to NHS bodies. However, the exemption regarding
leases could arise (IFRS 1.25F). This states that, in applying IFRIC 4
‘Determining whether an Arrangement contains a Lease’, the determination
can be based on the facts and circumstances at the date of transition (1/4/08).

6. IFRS 1 also bars retrospective application of IFRSs in some areas, particularly

if this would require judgements about past conditions after the outcome is
already known (IFRS 1.26-34B). Again, most of the circumstances are not
expected to apply to NHS bodies. However, paragraphs 31 and 32 expand on
the issue of estimates. These require estimates under IFRSs at 1 April 2008 to
be consistent with estimates made for that date under UK GAAP (after
adjustments to reflect any differences in accounting policies). This is the case
unless there is objective evidence that the UK GAAP estimates reflected errors
as defined in IAS 8.5.

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i-FReM interpretations of IFRS 1

7. The i-FReM states that balances must be restated where the move to IFRS has
a material impact. It should be borne in mind that determining the materiality of
an adjustment will often require substantial work to be undertaken in the first
instance. Where adjustments are identified, the Department’s expectation is
that these should be applied. Non-application of adjustments due to
considerations such as materiality should be the exception, rather than the rule.
Having identified the need for an adjustment, sufficient work should be
undertaken to ensure that the adjustment is materially correct. The i-FReM
makes clear that any adjustments to balances should be taken to the General
Fund (bodies with the resource accounting boundary) or Retained Earnings
(NHS trusts).

Practical issues for the NHS

8. The following are practical points for NHS bodies when restating balances:
• restatement should be undertaken as part of a detailed project plan for
the move to IFRS
• the restatement is not an exercise solely for finance staff. For example,
the need to identify arrangements that are, in effect, leases under IFRIC
4 requires the involvement of managers throughout the organisation
• clear working papers must be kept for audit purposes
• where restatement includes an element of judgement, NHS bodies
should develop a case to support their viewpoint and agree the
treatment with their external auditors as soon as possible, for example
whether there needs to be an accrual for the value of untaken leave, and
• changed information requirements resulting from IFRS should be
embedded into the NHS body’s systems as soon as possible to avoid
the need for separate exercises at each monitoring and reporting date.

9. The following table identifies and discusses common restatement issues in the
NHS. This should be read together with the chapters of the IFRS-based
Manuals for Accounts, which can be found on the download section of the
finman website under the heading International Financial Reporting Standards.

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Common restatement issues in the NHS

Please note that this is not a complete list of all issues that will need to be addressed.

Issue/standards Discussion

Compensated Gathering basic information may help decide whether an accrual

absences would be immaterial or whether the cost of valuing the accrual
(holiday pay) would outweigh the benefit of the information. Basic information
IAS 19 could include: maximum allowable carry forward of leave;
whether the leave year coincides with the financial year; the
number of different leave years; whether the system is IT- or
paper-based; whether records are held centrally, by departments
of by individuals; the number of staff on non-standard work
arrangements (whose calculations may be more complex).

If the above does not provide sufficient information to decide

whether an accrual is necessary, results form a small sample
representative may help in making the decision. It may be
relevant to find out how much leave individuals in the sample
carried forward at 1/4/07 as well as 1/4/08, to determine the likely
materiality of the change in value between years if an accrual
was made.

If you decide an accrual is not necessary, you should agree the

decision with your external auditors as soon as possible.

If an accrual has to be made – whether using information from

the whole workforce or through extrapolation of a sample, it will
be easier to obtain leave figures for 1/4/08 sooner rather than
later.

Leases IAS 17 IAS 17 gives a broader, criteria-based, definition of finance

leases than the 90% of fair value test of SSAP 21. All material
operating leases must therefore be reviewed to determine
whether their classification should change. Note: DH will not
provide national definitions for the NHS for ‘substantially all of the
fair value’ or ‘major part of the economic life’ (IAS 17.10). These
are matters of judgement. Your lease classifications should,
therefore, be agreed with your external auditors.

Unless the land element is immaterial, you must also separate

property leases into leases of land and leases of buildings. The
requirement is to split them in proportion to their fair values at the
inception of the lease. However, it is likely that you will need to
find a reasonable basis to act as a proxy for this. Unless title is
expected to pass at the end of the lease term, the land element is
treated as an operating lease. The building element may be an
operating or a finance lease, according to the IAS 17 definitions.

Where a lease is reclassified as a finance lease, the 1/4/08 asset

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Issue/standards Discussion

and liability balances are found (or estimated) from calculations

that assume it always was a finance lease.

Lease-type The determination of whether an arrangement is, in effect, a

arrangements lease can be based on the facts and circumstances at 1/4/08.
IFRIC 4
Managers throughout the organisation need to be involved in
determining arrangements that may, in effect, be leases.

Property, plant The change in accounting to modern equivalent asset basis (and
and equipment possible valuation of an alternate site) can be carried out any
IAS 16 time between 1/4/08 and 1/4/10. This is not an IFRS issue and
so is not discussed further in this guidance.

IAS 16 requires components of assets that have significant cost

relative to the total cost of the asset to be depreciated separately.
NHS bodies may wish to negotiate with their auditors as to
whether this can be introduced at the same time as the move to
valuations using the modern equivalent asset basis.

Intangible It is possible that new intangible assets will have to be recognised

assets IAS 38 under IFRS for internally generated software. However, unless
income generating, this is only required if the software provides a
direct contribution to the delivery of services to the public. Also,
a new intangible asset only has to be recognised at 1/4/08 if it is
probable that the expected future economic benefits from the
asset will flow to the NHS body (which will be the case if it
provides a direct contribution to delivery of services to the public)
and the NHS body holds reliable original cost information for the
asset. If this is not the case, the asset will be recognised
prospectively.

PFI Information about the accounting treatment to apply to PFI and

NHS LIFT schemes is available in the i-FReM published by HM
Treasury (http://www.financial-
reporting.gov.uk/IFRS%20Based%20FReM.htm) and on the
Department of Health Finman website
(http://www.info.doh.gov.uk/doh/finman.nsf). The Department of
Health continues to monitor a number of detailed assessments of
PFI and NHS LIFT contracts under IFRS and will look to further
develop the Q&A guidance as findings emerge.

Provisions In an IFRS balance sheet, provisions have to be split into current

and non-current elements.

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