1.1 General information
The Health and Social Care Information Centre (NHS Digital) is an executive non-departmental government body established under the Health and Social Care Act 2012. The address of its registered office and principal place of business are disclosed in the introduction to the annual report. The principal activities of NHS Digital are to improve health and care by providing national information, data and IT services for patients, clinicians, commissioners and researchers. It is accountable to the Secretary of State for Health and Social Care for discharging its functions, duties and powers effectively, efficiently and economically. The Department of Health and Social Care actively undertakes this role on his behalf on a day-to-day basis.
1.2 Basis of accounting
The financial statements have been prepared in accordance with the 2018-19 Government Financial Reporting Manual (FReM) issued by HM Treasury as interpreted for the health sector in the Department of Health and Social Care Group Accounting Manual (GAM). The accounting policies contained in the FReM apply International Financial Reporting Standards (IFRS) as adopted and interpreted for the public sector context. Where the FReM permits a choice of accounting policy, the accounting policy which is judged to be most appropriate to the particular circumstances for the purpose of giving a true and fair view has been selected. The particular policies adopted by NHS Digital are described below. They have been applied consistently in dealing with items that are considered material to the accounts.
These accounts have been prepared under the historical cost convention, modified to account for the revaluation of tangible fixed assets. This is in accordance with directions issued by the Secretary of State for Health and Social Care and approved by HM Treasury. The presentational currency is pounds sterling and, unless otherwise stated, the accounts have been prepared to the nearest pounds thousands (£000).
No accounting standard changes were adopted early in 2018-19.
The FReM does not require the following standards and interpretations to be applied in 2018-19:
- IFRS 16 Leases - implementation for those entities that follow the FReM has been deferred for 2019-20. Adoption will take place in 2020-21. NHS Digital currently has total future commitments under operating leases of £113 million, which IFRS 16 would require to be recognised on the statement of financial position as right of use assets with corresponding lease liabilities. NHS Digital is assessing the extent to which services other than those currently identified as containing a lease per IAS 17 and IFRIC 4 may be identified as a right of use asset under the revised recognition criteria. The finalisation of the public sector interpretations and adaptations for IFRS 16 will enable conclusion of the assessment. If IFRS 16 had applied in 2018-19, the impact would have been to bring commitments under operating leases of approximately £16 million on to the statement of financial position as right of use assets, with a corresponding lease liability
- IFRS 17 Insurance Contracts - effective for accounting periods beginning on or after 1 January 2021, but not yet adopted by the 2018-19 FReM. The application of IFRS 17 would not have a material impact on the accounts for 2018-19, had it been applied in the year
Income is recognised to the extent that it is probable that the economic benefits will flow to NHS Digital and the income can be reliably measured.
The main source of funding is a parliamentary grant from the Department of Health and Social Care within an approved cash limit, which is credited to the general reserve. The grant is recognised in the financial period in which it is received.
In line with IFRS 15, contract income is not recognised until a signed agreement is in place; in previous years, income may have been recognised from the point at which work commenced. The impact of this change was that £3.5 million of income was not recognised in the year as the probability of payment was not certain at the balance sheet date. This income may have been recognised had the accounting standards and policies of the prior year still applied, and this would have resulted in higher income reported in the statement of comprehensive net expenditure, and correspondingly higher contract receivables not yet invoiced in the statement of financial position. At the date the accounts were signed by the Accounting Officer, only £0.05 million of this income had been invoiced. Income is recognised in proportion to the fulfillment of the performance obligations set out in the agreement. Some performance obligations may be fulfilled by third parties under contract. Performance obligations are satisfied: as data, reports and analysis are supplied; or by the passage of time as the service is delivered; or as time and material costs are incurred; or by the fulfillment of specific milestones. Where recognition is based on time and materials incurred or achievement of milestones, income is recognised as progress and / or costs incurred are agreed with the customer, either by correspondence or at project and programme board meetings.
The practical expedient in IFRS 15.121 has not been applied. All consideration for contracts is received in the form of cash. Warranties are not offered in relation to services provided, and hence refunds and returns do not apply. There are no assets recognised from the costs incurred to obtain or fulfil a contract with a customer.
Non-contract income is recognised when it has been invoiced, and relates to smaller income streams.
All prices are based on full cost recovery.
Contract liabilities refer to income received in the year for which the related costs have not yet been incurred.
1.4 Administration, programme and annually managed expenditure
The analysis of income and expenditure for non-departmental public bodies between administration and programme is only required to be consistent with returns made for the purposes of the Department of Health and Social Care Group consolidation. The net operating expenditure for the financial year in the consolidation return, submitted to the Department of Health and Social Care, was split between net administration expenditure of £122.6 million and net programme expenditure of £282.1 million.The difference between the total of the administration and programme expenditure and the net operating expenditure for the year reported in the statement of comprehensive net expenditure is attributable to expenditure falling under the annually managed expenditure heading, which relates to the creation and usage of provisions and certain impairments.
NHS Digital is not liable to pay corporation tax. Income is shown net of VAT, and expenditure is shown net of recoverable VAT. Irrecoverable VAT is charged to the most appropriate expenditure heading or capitalised if it relates to a non-current asset.
1.6 Losses and special payments
Losses and special payments are items that Parliament would not have contemplated when it agreed funds for the health service or passed legislation. By their nature they are items that ideally should not arise. They are therefore subject to special control procedures compared with the generality of payments. They are divided into different categories, which govern the way each individual case is handled.
Losses and special payments are charged to the relevant functional headings in the statement of comprehensive net expenditure.
1.7 Employee benefits
Salaries, wages and employment-related payments are recognised in the period in which the service is received from employees. The cost of leave earned but not taken by employees at the end of the period is recognised in the financial statements to the extent that employees are permitted to carry forward leave into the following period.
1.8 Non-current assets
All assets falling into the following categories are capitalised:
1) intangible assets include software development expenditure and the purchase of computer software licences, where they are capable of being used for more than one year and:
- individually have a cost equal to or greater than £5,000; or
- collectively have a cost of at least £5,000 and, the assets are functionally interdependent, they had broadly simultaneous purchase dates, are anticipated to have simultaneous disposal dates and are under single managerial control
Development expenditure is transferred to other categories of non-current assets when the development is sufficiently complete to enable the asset as a whole to be fully deployed and effective for the management’s intended purpose.
2) tangible assets which are capable of being used for more than one year, and:
- individually have a cost equal to or greater than £5,000; or
- collectively have a cost of at least £5,000 and, the assets are functionally interdependent, they had broadly simultaneous purchase dates, are anticipated to have simultaneous disposal dates and are under single managerial control; or
- form part of the initial equipping and setup cost of a new asset irrespective of their individual cost
Internally generated assets are recognised if, and only if, all of the following have been demonstrated:
- the technical feasibility of completing the intangible asset so that it will be available for use
- the intention to complete the intangible asset and use it
- the ability to use the intangible asset
- how the intangible asset will generate probable future economic benefits
- the availability of adequate technical, financial and other resources to complete the intangible asset and use it
- the ability to measure reliably the expenditure attributable to the intangible asset during its development
Expenditure on research activities and project management costs are recognised as an expense in the period in which it is incurred.
B. Carrying gross cost
Non-current assets are initially recognised at cost, including expenditure such as installation directly attributable to bringing them into working condition. Subsequently, non-current assets are held at current value in existing use. Any increase in value is credited to the revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense. In such a case the increase is credited to the statement of comprehensive net expenditure to the extent of the decrease previously expensed. A decrease in carrying amount arising on the restatement in value of the asset is charged as an expense to the extent that it exceeds the balance, if any, held in the revaluation reserve relating to a previous revaluation of that asset.
Assets are assessed either using appropriate indices provided by the Office for National Statistics or, in the case of internal software developments, by considering the inflation rates of staff and other resources and other potential efficiency factors. The current value in existing use at March 2019 was not materially different to the original historic cost and thus no adjustment has been incorporated, except for land and buildings which are subject to a professional valuation. The carrying values of all assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be appropriate.
Development expenditure is not depreciated until such time as the asset is available for use. Otherwise, depreciation and amortisation is charged on a straight-line basis to write off the costs or valuation of tangible and intangible non-current assets, less any residual value, over their estimated useful lives as follows:
1) intangible software development assets are amortised, on a straight-line basis, over the estimated life of the asset or 10 years, whichever is less. The asset lives are reviewed on an annual basis considering the degree of evolution of the asset and what plans, if any, are being made for its replacement
2) purchased computer software licences are amortised over the term of the licence or five years, whichever is less
3) property, plant and equipment is depreciated on a straight-line basis over its expected useful life as follows:
- buildings 27 years
- fixtures and fittings 1 to 12 years
- office, information technology, short life equipment 1 to 5 years
The estimated useful lives and residual values are reviewed annually.
1.9 Research and development
Expenditure incurred on pure and applied research is treated as an operating charge in the year in which it is incurred. Development expenditure is for the development of specific business systems. Expenditure which does not meet the criteria for capitalisation is treated as an operating cost in the year in which it is incurred. Development expenditure meeting the criteria for capitalisation is treated as an intangible asset under construction until such time as the asset is brought into use.
Leases are classified as finance leases when substantially all the risks and rewards of ownership are transferred to the lessee. All other leases are classified as operating leases.
Amounts held under finance leases are initially recognised, at the inception of the lease, at fair value or, if lower, at the present value of the minimum lease payments, with a matching liability for the lease obligation to the lessor. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the statement of comprehensive net expenditure.
Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Lease incentives are recognised initially as a liability and subsequently as a reduction of rentals on a straight-line basis over the lease term.
Contingent rentals are recognised as an expense in the period in which they are incurred.
Provisions are recognised when a present obligation exists as a result of a past event, and it is probable that NHS Digital will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the reporting date, and are discounted to present value where the effect is material.
1.12 Contingent liabilities
In addition to contingent liabilities disclosed in accordance with IAS 37, NHS Digital discloses for parliamentary reporting and accountability purposes certain statutory and non-statutory contingent liabilities where the likelihood of a transfer of economic benefit is remote, but which have been reported to Parliament in accordance with the requirements of the GAM. Where the time value of money is material, contingent liabilities that are required to be disclosed under IAS 37 are stated at discounted amounts and the amount reported to Parliament separately noted. Contingent liabilities that are not required to be disclosed by IAS 37 are stated at the amounts reported to Parliament.
Past and present employees are covered by a number of pension schemes including the NHS Pension Scheme and the Principal Civil Service Pension Scheme. These schemes are unfunded, defined benefit schemes. They are not designed to be run in a way that would enable NHS bodies to identify their share of the underlying scheme’s assets and liabilities. Therefore, the schemes are accounted for as if they were defined contribution schemes, with the cost to the body participating in the scheme taken as equal to the contributions payable to the scheme for the accounting period. Early retirements, other than those due to ill health, are not funded by the schemes. The full amount of the liability for the additional costs is charged to expenditure at the time the retirement agreement is committed, regardless of the method of payment.
1.14 Critical accounting judgements and key sources of estimation uncertainty
In the application of the accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying value of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following are the critical judgements and estimations that the directors have made in the process of applying the accounting policies and that have the most significant effect on the amounts recognised in financial statements:
- revenue recognition - NHS Digital receives income from various sources to cover the cost of expenditure on project related and other activities - expenditure is regularly incurred over several financial years and income is released to the statement of comprehensive net expenditure in order to reflect the completion of performance obligations
- dilapidation provision - NHS Digital has provided £3.3 million in respect of anticipated dilapidation costs of its leased accommodation across its estate where required. Management has used external property advisors to assess likely liabilities at the end of the leases
- termination benefits provision - NHS Digital is undertaking a significant internal restructure to meet the future expectations of the organisation - this restructure is split into three waves and the first wave is nearing completion. Costs of £11.2 million have been accounted for, of which £4.9 million has been accrued, and a further £1.3 million is included in provisions in respect of specific employees who have been notified as at risk but have not received formal notice - these calculations are based on specific individual quotes for assumed departure dates
- employment taxes - Liabilities have been identified for several employment-related taxes, which have been included in accruals - this includes £4.3 million for IR35 and £0.7 million for employees’ home-to-work travel. The calculations follow HMRC methodology, but have yet to be finalised
- developed systems - NHS Digital manages a suite of national infrastructure systems as well as a number of large internal data collection systems and databases - much of the development of such systems is undertaken in-house and a detailed assessment is required to determine the level of capitalisation of such work. In addition, management undertakes an annual review of the likely asset life, over which these systems should be amortised
- valuation of non-current assets - NHS Digital uses a mixture of appropriate Office for National Statistics indices and estimates or other inflation factors to assess the value of non-current assets - the difference in the calculated value to the historical cost is not material, and has therefore not been adjusted
1.15 Business and geographical segments
NHS Digital has adopted IFRS 8 Operating Segments. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the business that are regularly reviewed by the Chief Executive, to allocate resources to the segments and to assess their performance.
1.16 Cash and cash equivalents
Cash is cash-in-hand and deposits with any financial institution repayable without penalty on notice of not more than 24 hours. Cash equivalents are investments that mature in 3 months or less from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value.
1.17 Financial instruments
NHS Digital has adopted IFRS 9 Financial Instruments in line with the FReM. This has not had a material impact. NHS Digital operates largely in a non-trading environment and the majority of its income is from other government or NHS bodies. Consequently NHS Digital is not exposed to the significant degree of financial risk that is faced by most other business entities. NHS Digital has no borrowings and relies largely on grant in aid from the Department of Health and Social Care for its cash requirements. NHS Digital is therefore not exposed to liquidity risks. All cash balances are held within the Government Banking Service and all material assets and liabilities are denominated in sterling, so it is not exposed to interest rate or material currency risks.
Financial assets are recognised on the statement of financial position when NHS Digital becomes party to the financial instrument contract or, in the case of trade receivables, when the goods or services have been delivered. Financial assets are derecognised when the contractual rights have expired or the asset has been transferred. NHS Digital has no financial assets other than trade receivables. Trade receivables do not carry any interest and are stated at their nominal value, less any provision for expected credit losses.
Financial liabilities are recognised on the statement of financial position when NHS Digital becomes party to the contractual provisions of the financial instrument or, in the case of trade payables, when the goods or services have been received. Financial liabilities are derecognised when the liability has been discharged, that is, the liability has been paid or has expired. NHS Digital has no financial liabilities other than trade payables. Trade payables are not interest bearing and are stated at their nominal value.
1.18 Going concern
The NHS Digital financial statements have been produced on a going concern basis. Confirmation has been received of the main grant in aid budget allocation for the 2019-20 financial year in line with the business plan submitted, and funding flows have already commenced.