The NHS is potentially facing a fundamental change in its ability to review the value of its asset base under new proposals being considered by HM Treasury (HMT) under a wide-ranging Thematic Review of public sector valuations.
This Review is being undertaken against a background of increasing audit pressures in the public sector, particularly for local authorities, with a focus on seeking to reduce the cost of valuation (and audit) by streamlining the application of different valuation methodologies and reducing valuation scope.
However, the likely impacts on healthcare may be less attractive, with the proposed changes potentially increasing costs during the transition period and affecting Trusts in the process of transforming their estate.
DRC METHODOLOGY CONSISTENCY
For several years, the approach to the valuation of NHS property assets has been broadly consistent following guidance under IFRS, DHSC’s General Accounting Manual (based on HM Treasury’s Financial Reporting Manual (FReM)) and the RICS Red Book.
This regulatory background has encouraged the valuation of NHS operational property to be assessed as either specialised assets (representing the bulk of the NHS Estate) using the depreciated replacement cost (DRC) methodology or non-specialised assets using an existing use value basis.
There are, of course, different ways to interpret or apply the respective valuation methodologies, but all appropriately qualified valuers should derive fairly consistent outputs once the classification of assets is agreed and valuation definitions and assumptions are carefully applied.
Unlike other parts of the UK public sector, the valuation of NHS assets may have a direct impact on any public dividend capital (PDC) paid by a Trust to the Secretary of State, which is calculated at 3.5% of net relevant assets. Therefore, accurate and regular revaluations are important to the fiscal management of a Trust and enable a regular ‘health check’ on the asset base being used for PDC purposes.
CHALLENGES OF A DUAL APPROACH
One aim of the Review is to replace the DRC method of valuation with a historic cost model as a more simplified approach. Where historic costs cannot be established, the latest asset valuation is to be adopted as being a fair representation of historic costs.
In our experience, however, this dual approach to establishing a historic cost is incongruous. There is a risk that those NHS Trusts relying on actual historic costs are likely to have a higher base cost than those that utilise an independent DRC valuation in line with current guidance.
We believe this will also raise issues when assets are refurbished, adapted, extended, or declared surplus, as the cost profiles may have a different impact on historic costs when compared to a revaluation.
It is also prudent to note that once established, historic costs will show a disparity compared to current values with a risk that reporting information over time will become less relevant and, as a pure accountancy exercise, may require a different approach to the way PDC is calculated.
IMPACT ON HEALTH ESTATES
Against this background, the Review is unhelpful to the NHS as the historic cost model has a number of defects highlighted by HMT in the Review, such as its limited data points that may hinder transparency, while assets acquired at different times will be reported at different values in the financial statements. It may also limit the ability to assess, corroborate or challenge management’s stewardship of resources. In our view, whilst inexpensive to implement (once the initial base valuation is agreed), the historic cost model does not give Trusts the levels of flexibility, transparency and control offered by the current valuation model.
In addition, the current long-established approach to valuation forms a reliable basis for discussions between Trusts where assets are transferred as well as being pertinent to other projects, such as within the envelope of PFI or LIFT schemes. Should the Review be implemented, this may result in different valuation requirements for ongoing property-related projects when compared to asset valuations, which in our view, runs a risk of creating confusion and inconsistencies in approach.
HMT anticipates the consultation review between HMT and FRAB (Financial Reporting Advisory Board) will conclude in October this year, with a consultation review of proposed amendments to FReM proposed for November, which should be closely monitored by Trusts and other NHS stakeholders.
Thereafter, it is anticipated the amendments will be published in the 2025-26 FReM and Application Guidance in December 2024, with the first year of application taking place from April 2025.
The asset valuation effective on 31 March 2026 will be the first under the new guidance, which is likely to create significant pressure on the NHS and their Valuers should the bases of valuation change and assessments be made, which could have long-term implications on the financial well-being of NHS bodies and PDC liabilities.
We would encourage Trusts and partner organisations to monitor the Review’s progress carefully and seek to engage with both their external Valuers and Auditors to assess how to mitigate any adverse impacts or unintended consequences arising from this Review, which has not been predicated on the needs of the healthcare sector.