- DHSC has repeatedly spent less than planned on “depreciation”, with the underspend increasing to more than £500m in 2016-17
- Underspends have helped the department avoid breaching its spending limit
- Several NHS accountants have raised concerns that declining depreciation is leading to a shortage of cash to pay for asset repairs and replacements
The Department of Health and Social Care has repeatedly reported underspends against an accounting mechanism intended to cover the costs of assets over their lifetime.
Since 2012, the department has spent less than was planned on “depreciation”, with the underspend swelling to more than £500m in 2016-17.
The underspends, which help boost the reported financial position, have come during a period when the DHSC has struggled to keep within its departmental spending limit.
Depreciation is a standard accounting method that does not involve a cash transaction, but effectively helps organisations generate cash surpluses to replace assets such as buildings and equipment as they expire (see box).
Several accountants working in the NHS have raised concerns with HSJ that depreciation charges are being pushed too low and this will lead to cash shortfalls.
However, others suggested the decline could reflect legitimate adjustments to asset valuations and expected asset lives, and said many trusts are currently unable to generate a surplus regardless.
The DHSC has declined to explain the reason for the underspends.
There were depreciation overspends in 2010-11 and 2011-12, but these were followed by underspends in the subsequent years of £50m, £154m, £107m, £272m and £508m. These figures relate largely to the department itself, but also incorporate arm’s length bodies such as NHS England, Public Health England and NHS Property Services.
Over this period, depreciation dropped by 16 per cent, while the overall revenue budget in which it scores has risen by 18 per cent.
The figures do not include depreciation charges for NHS trusts. These are stated separately in the accounts, but figures revealing their overspend or underspend against plan are not routinely published.
The trust figures show their depreciation spending has been declining slightly since 2012-13, as the overall revenue budget has increased.
Sally Gainsbury, senior policy analyst at the Nuffield Trust, said there has been pressure on NHS trusts to reduce depreciation to improve their reported revenue position.
She said: “In general terms, depreciation is in effect cash generating, because you stop yourself from spending that money each year. In a healthy organisation this builds up the cash surplus, which is what you need to replace or repair the physical assets.
“But in an unhealthy organisation – where income isn’t covering day to day costs, let alone allowing cash to be set aside for future needs – it is very tempting to slow down the pace at which that fund is built up, especially if that can be justified through a relatively small change in accounting policy.”
She said the implications of this are already being felt in terms of trusts’ inability to invest in backlog maintenance.
What is depreciation?
Depreciation is a standard accounting method in which there is no cash transaction.
Instead of charging the full cost of a new asset to the income and expenditure account in the year it is purchased (and when the actual cash transaction takes place), organisations use depreciation to spread the accounting impact over the asset’s lifetime.
For example, if an MRI scanner is purchased for £10m and has an expected lifetime of 10 years, an organisation would typically charge £1m per year to the income and expenditure account, even though the full cash payment may have been made in year one.