• Dozens of trusts face additional financial pressure following “clarification” around contentious accounting adjustment
  • At least 50 trusts are thought to have adopted a practice “long-lifing” their building assets 
  • HSJ understands dozens of trusts which have used a large valuation firm, Cushman & Wakefield, are affected

Dozens of NHS providers face additional financial pressures of up to £4m next year, after an official body provided “clarification” around a contentious accounting adjustment.

At least 50 trusts are thought to have adopted a practice of extending the expected life of their building assets, which effectively required less money to be set aside for repairs or replacement.

The “long-lifing” practice (see box below) is thought to have produced annual non-cash savings of around £100m for the sector, which are now set to be reversed by increased depreciation charges from 2019-20.

Meanwhile, sources in the trust sector pointed to instructions from regulators in 2016 that appear to have encouraged trusts to extend asset lives with the intention of minimising the sector’s deficit.

There have been differing opinions among trusts, and within the industry that advises on such adjustments, as to whether the practice was in line with the relevant guidance and accounting standards.

But updated guidance issued by the Royal Institute of Chartered Surveyors has now clarified the adjustment cannot be made.

HSJ understands dozens of trusts which have used a large valuation firm, Cushman & Wakefield, are affected.

Leeds Teaching Hospitals Trust, which has a large estate, faces an additional £4m cost pressure next year, while smaller trusts such as Chesterfield Royal Hospital Foundation Trust face an additional £1m pressure. In many cases, the adjustment resulted in a doubling of assumed asset lives.

Other foundation trusts believed to be expecting to take a financial hit because of the measure include: Blackpool Teaching Hospitals, Bolton, Mersey Care, Northumberland, Tyne and Wear, Royal United Hospitals Bath, and Tees, Esk and Wear Valleys.

In a statement, Cushman & Wakefield said the practice adopted by its clients was in line with the previous RICS guidance, and had consistently been signed off by trusts’ external auditors. It said the guidance has now “materially changed”, which requires changes in assessment methodologies.

However, a RICS spokeswoman said the guidance offered clarification: “While nothing has changed regarding the overall guidance of the valuation approach, there is some further clarity given which was issued to provide best practice for RICS members in this area.”

One industry expert, who asked not to be named, told HSJ the new guidance was intended to address a practice of “artificially extending asset lives”.

Another said: “Most firms adopted the correct means of assessing asset lives, but some took this maverick approach of long-lifing assets. This was a major trigger for RICS to look at the guidance again.”

The other market leaders in the valuation industry, Montagu Evans, Gerald Eve and the Valuation Office Agency, were all involved in drafting the new guidance, and told HSJ they had always advised clients not to adopt the long-lifing approach.

Gary Howes, of Montagu Evans, added: “This guidance from the RICS is important to ensure the whole industry works to the same high standard, which is why we’ve been pleased to be involved with it.”

In 2016, after the provider sector deficit had ballooned to almost £2.5bn, NHS Improvement instructed trusts to deploy various accounting adjustments to help improve the position. This included an instruction to “review all equipment and buildings asset lives given that less capital will be available for replacement in future… the resulting adjustment will reduce depreciation charges”.

Several sources in the trust sector told HSJ they felt this had encouraged some trusts to take a more liberal approach to asset lives.

HSJ has previously flagged concerns about the use of accountancy adjustments that reduce depreciation charges, which are crucial for generating cash for capital investment.

Sally Gainsbury, senior analyst at the Nuffield Trust think tank, has frequently raised concerns about the accountancy adjustments which have provided “window dressing” for trust sector finances.

She said: “This is coming back to haunt providers because they are going to have to increase their depreciation charge, which they won’t have planned for.

“This £100m is probably the tip of the iceberg as well, because there’s been around £1bn of benefit from all the accounting adjustments. I’m sure there are more that will have to be reversed as trusts look to strengthen their balance sheets.

“This is where an artificial suppressing of the deficit is not going to help the NHS, because it means politicians have been painted a false picture of how much resource is needed. An element of the £20bn is going to be swallowed straight away by people having to do more prudent methods of financial management.”

NHSI said in a statement: “The Valuation Office Agency does not expect these updates to have a significant impact on the NHS, but we understand some providers may have increased depreciation charges in the future where their useful lives assumptions in the past have differed from standard practice, which has since been clarified by RICS.”

A Cushman & Wakefield spokesman said there were other firms which had adopted the practice, and added: “Throughout our relationship (with clients), we have fully complied with Royal Institution of Chartered Surveyors (RICS) standards in preparing these assessments, which have also been signed off by our clients’ external auditors as compliant with the RICS Valuation – Global Standards and International Financial Reporting Standards.

“In January 2019, we informed our clients that the RICS guidance on remaining useful life assessments had changed and we are working closely with them to ensure that all future assessments comply with the revised RICS guidance.”

According to published annual reports, at least 50 NHS trusts have used Cushman & Wakefield over the last three years. HSJ understands trusts have been told their depreciation charge on buildings is likely to increase by 50 per cent. Estimating based on these figures, the change would represent an additional cost pressure of at least £100m on the provider sector next year.

Contentious adjustment

The practice of “long-lifing” assets assumed that short-life components within a building will be routinely replaced or refurbished.

This effectively results in the components being treated as insignificant, and the whole building being ascribed an asset life matching the longest lasting element.

This, in turn, enables a reduced “depreciation” charge, which is an accounting mechanism that effectively sets money aside for the future repair or replacement of assets.

However, updated RICS guidance that was published in November 2018 sought to clarify that this is not compliant with the relevant standards.

The key sections of the guidance state: “Physical deterioration is frequently measured by reference to the anticipated physical life of the asset, having regard to the differing rates at which its constituent parts will wear out…

“Although an assumption of routine repair and maintenance into the future is allowed, an assumption cannot be made that components or elements of the asset will be replaced or refurbished in the future.”

This means affected trusts will have to review their asset lives, and will have an increased depreciation charge as a result. This will adversely impact on their financial position.