Scottish Government

The Scottish Executive
Notes to the Accounts
For the year ended 31 March 2006

1. Statement of Accounting Policies

In accordance with the accounts direction issued by Scottish Ministers under section 19(4) of the Public Finance and Accountability (Scotland) Act 2000 (reproduced at page 94) these accounts have been prepared in compliance with the principles and disclosure requirements of the Government Financial Reporting Manual, which follows generally accepted accounting practice in the UK to the extent that it is meaningful and appropriate in the public sector context. The particular accounting policies adopted by the Scottish Executive are described below. They have been applied consistently in dealing with items considered material in relation to the accounts.

The accounts are prepared using accounting policies, and, where necessary, estimation techniques, which are selected as the most appropriate for the purpose of giving a true and fair view in accordance with the principles set out in Financial Reporting Standard 18: Accounting Policies. Changes in accounting policies which do not give rise to a prior year adjustment are reported in the relevant note.

1.1 Accounting Convention

These accounts have been prepared under the historical cost convention modified to account for the revaluation of fixed assets, and stocks where material, at their value to the organisation by reference to their current costs.

1.2 Basis of Consolidation

These accounts reflect the consolidated assets and liabilities and the results for the year of all the entities within the Scottish Executive resource accounting departmental boundary as defined by the Government Financial Reporting Manual (Section 1.5). Transactions between entities included in the consolidation are eliminated. A list of all those entities within the departmental boundary is given at Section 2 of the Annual Report.

The Executive Agencies detailed at Section 2 of the Annual Report are reported within the Outturn statements of their sponsoring department.

The Social Work Inspection Agency ( SWIA) and the Mental Health Tribunal ( MHT) are formally consolidated for the first time in these accounts. Both bodies were established as Executive Agencies in April 2005 under the terms of the Scotland Act 1998. SWIA is part of the Scottish Executive Education Department and was created in order to provide an independent evaluation of social work services in Scotland. The MHT is part of the Scottish Executive Health Department and was created in order to provide administrative support for the Mental Health Tribunal Scotland, an NDPB that is responsible for the judicial functioning of mental health tribunals.

The Transport Agency (Transport Scotland) was established as an Executive Agency in January 2006. Results for the period to 31 March 2006 are included within Core SEETLLD schedules. The agency will prepare their own accounts for the year to 31 March 2007.

The 2005-06 Outturn statements reflect changes in departmental programmes made during 2005-06; related changes have been made between lines in the SEDD and SEJD Outturn statements to allow comparison with the prior year.

The Strategic Rail Authority previously carried out a range of functions across the GB rail system. In October 2005 most functions which relate to the Scottish Rail system were transferred to Scottish Ministers and to the Enterprise, Transport and Lifelong Learning Department. This transfer has been accounted for using the principles of merger accounting and details of the financial effect of the merger are given in note 26. The 2004-05 outturn for SEETLLD has also been changed to reflect the functions transferred.

1.3 Change of Accounting Policy - Prior Year Adjustments

Comparative figures in the primary statements and notes have been restated for the following prior year adjustments and the opening balance of reserves adjusted for the cumulative effect which is also noted at the foot of the statement of recognised gains and losses.

NHS Boards

A number of prior year adjustments were made in the accounts of individual health boards and these adjustments have been reflected in the consolidated comparative figures. The main financial effects of these changes are disclosed at Note 26 and full details of the adjustments are disclosed in the individual accounts of the body concerned.

1.4 Tangible Fixed Assets

Recognition

Scottish Ministers hold the legal title or enjoy the risks and rewards of all land and buildings shown in the accounts.

Historic Scotland holds a number of non-operational assets that are held primarily for the maintenance of the nation's heritage. Non-operational assets are not valued and are therefore not included in these accounts.

Assets classified as under construction are recognised in the balance sheet to the extent that money has been paid or a liability has been incurred.

Capitalisation

The minimum levels for capitalisation of a tangible fixed asset are land and buildings £10,000 and equipment and vehicles £5,000. Information and Communications Technology ( ICT) systems are capitalised where the pooled value exceeds £1,000. Substantial improvements to leasehold properties are also capitalised.

All NHS assets costing over £5,000 are capitalised and pooled assets individually costing less than £5,000 but with a combined value of £20,000 are capitalised.

Furniture, fixtures and fittings within the Core Scottish Executive Departments are treated as current expenditure and are not capitalised. Exceptionally some smaller bodies have capitalised furniture, fixtures and fittings where the amounts are material to them.

The differences in capitalisation policy have no material effect on the financial statements.

Valuation

Land and buildings have been stated at open market value for existing use or depreciated replacement cost for specialised buildings under a rolling 5-year programme of professional valuations and appropriate indices in intervening years. Surplus land and buildings are stated at open market value for their alternative use. Other tangible assets have been stated at depreciated current cost using indices where appropriate.

Losses in value reflected in valuations are accounted for in accordance with Financial Reporting Standard 11. The consumption of economic benefits is charged to the Outturn Statement. Decreases in asset value that relate to fluctuations in market prices are first charged to the element of the revaluation reserve relating to the asset and that amount is recognised in the Statement of Recognised Gains and Losses. Further losses, beyond the level of the revaluation reserve relating to that asset, are charged to the Outturn Statement, except where it is anticipated that the reduction in value will reverse in the foreseeable future.

The road network is valued on the basis of current replacement cost, adjusted to reflect the current condition of the road component and the depreciation of structures and communications components of the network. It is recognised that the network is to be maintained in perpetuity and the related cost is charged each year to the Consolidated Enterprise, Transport and Lifelong Learning Departmental Outturn Statement. Roads or structures detrunked ( i.e. where the road or structure is taken out of the trunk road network and responsibility for its maintenance passed to another body) are dealt with as disposals for nil consideration and are reflected in the General Fund.

Within Scottish Courts Service, all owner occupied courthouses are considered to be specialised operational properties and valuations are therefore on the basis of Depreciated Replacement Cost ( DRC). The open market value of these properties is substantially lower. Properties regarded by the Prisons Service as operational were valued on the basis of Existing Use Value or, where this could not be assessed because there was no market for the subject asset, the DRC, subject to the prospect and viability of the occupation and use.

1.5 Depreciation

Freehold land is not depreciated.

Depreciation is provided at rates calculated to write off the valuation of buildings and other tangible fixed assets by equal instalments over their estimated useful lives which are normally in the following ranges:

The road network is depreciated at rates calculated to write off the valuation of structures and communications components by equal instalments over their estimated useful lives, which are normally between 20 and 120 years. Changes in value due to variations in the condition of the road element of the network are reflected in the Consolidated Departmental Outturn Statement. Assets under construction are not depreciated.

1.6 Donated assets

Donated tangible fixed assets are capitalised at their valuation on receipt and this value is credited to the donated assets reserve. Subsequent revaluations are also accounted for in this reserve. Each year an amount equal to the depreciation charge on the asset is released from the donated asset reserve to the relevant Consolidated Departmental Outturn Statement.

1.7 Intangible Assets

Purchased software licenses are valued on a historic cost basis. Amortisation is applied at rates calculated to write off the valuation of purchased software licenses by equal instalments over the shorter of the term of the licence and their estimated useful life. Internally developed software is valued at cost.

EU greenhouse gas emissions allowances are intended for use on an ongoing basis and are held as intangible assets at their fair value.

1.8 Investments

Investments include shares in nationalised industries and limited companies, loans issued to public bodies not consolidated in departmental resource accounts, loans made under the terms of the student loans scheme, and repayment and deferred loans relating to housing associations. Such investments are generally reported as fixed assets. If an investment is held on a short-term basis, or a loan is granted for an original term of less than one year, it will be treated as a current asset.

All investments in the form of shares are carried at their nominal value. All loans are included at the capital sum outstanding as at the balance sheet date and, with the exception of loans made under the terms of the student loans scheme, adjusted if necessary to reflect any amounts where recovery is considered to be doubtful. The estimated future write-offs in respect of the non-recovery of student loans are dealt with via a provision - see Note 1.19 below.

1.9 Stocks

Items that cannot or will not be used are written down to their net realisable value. Taking into account the high turnover of NHS stocks, the use of average purchase price is deemed to represent the lower of cost and net realisable value. Work in progress is valued at the cost of the direct materials plus the conversion costs incurred to bring the goods up to their present degree of completion.

1.10 Private Finance Initiatives ( PFI)/Public Private Partnerships ( PPP)

PFI/ PPP transactions are accounted for in accordance with HM Treasury's Technical Note No 1 (Revised) ' How to account for PFI transactions', which sets out additional guidance on how the Accounting Standards Board's Application Note, Amendment to FRS5 - Private Finance Initiative and Similar Contracts, is to be followed in the public sector. All set up costs in relation to PPP schemes are written off as incurred. The annual commitment in respect of such contracts is included within Note 18 ' PFI/ PPP Contracts' while any reversionary interests in fixed assets within such schemes are included under the relevant fixed asset heading dependant on the nature of the underlying asset.

1.11 Income

Operating income is income that relates directly to the operating activities of the Scottish Executive, its Executive Agencies, the Crown Office and Procurator Fiscal Service and NHS Bodies. It includes fees and charges for services provided, on a full cost basis, to external customers, public repayment work and income from investments. It includes both income applied without limit and income applied with limit as outlined by the Scottish Budget documents. For income categorised as being applied with limit, any excess income over that approved is surrendered to the Scottish Consolidated Fund. Operating income is stated net of VAT.

1.12 Administration and Programme Expenditure

The Summary Consolidated Departmental Outturn Statement is analysed between administration and programme expenditure:

• Administration expenditure reflects the costs of running the Core Departments as defined under the administration cost control regime, together with associated operating income. This does not include the costs of running other bodies within the departmental boundary: such costs are included within the appropriate category of programme expenditure in the relevant Departmental Outturn Statements. The relevant staff numbers and staff costs information is collected together in a note to the accounts (Note 2).
• Income is analysed in the notes between that which, under the regime, is allowed to be offset against gross administrative costs in determining the outturn against the administration cost limit, and that operating income which is not.
• Programme expenditure reflects non-administration costs, including payments of grants and other disbursements, including the administration costs of those bodies within the departmental boundary. Programme expenditure also takes account of income applied. A note to the accounts provides an analysis of total programme income between income applied and income not applied (Note 4).

1.13 Grants

Grants payable or paid are recorded as expenditure in the period that the underlying event or activity giving entitlement to the grant occurs. Where necessary obligations in respect of grant schemes are recognised as liabilities.

1.14 European Union Funds

Funds received from the European Union ( EU), whatever the source, are treated as income and shown in the relevant Consolidated Departmental Outturn Statement. In budgeting terms expenditure funded by the EU is approved gross and 'income applied' as approved in the Budget Act excludes EU funding. Expenditure in respect of grants or subsidy claims is recorded in the period that the underlying event or activity giving entitlement to the grant or subsidy claim occurs. Any related debtor or creditor balances are reflected in the Consolidated Balance Sheet.

1.15 Cost of Capital Charge

A charge, reflecting the cost of capital utilised by the Scottish Executive and consolidated entities, is included in outturn expenditure. The charge for each item in the balance sheet is calculated on the basis of the average net book value of that item over the year. For 2005-06 the charge is calculated at the Government's standard rate of 3.5% (2004-05: 3.5%) in real terms on all assets less liabilities, except for:

• Student Loan balances where the applicable rate is 2.2%;
• fixed assets which are investments in a public sector body outside the departmental boundary, where the amount of the charge represents the appropriate rate, as determined by the Treasury, applied to the underlying net assets of the body in question; and
• donated assets, cash balances with the Office of HM Paymaster General and amounts to be paid to and from the Scottish Consolidated Fund where the charge will be at a nil rate.

In 2005-06 capital charges, with the exception of cost of capital incurred in relation to the roads network and Scottish Water, score against Departmental Expenditure Limits and are reflected in Consolidated Departmental Outturn Statements accordingly.

1.16 Foreign Exchange

Transactions which are denominated in a foreign currency are translated into sterling at the exchange rate ruling on the date of each transaction, except where rates do not fluctuate significantly, in which case an average rate for a period is used.

1.17 Pensions

The Scottish Executive as an employer

Present and past employees are covered by the provisions of the Principal Civil Service Pension Scheme ( PCSPS) which is a defined benefit scheme and is unfunded and non-contributory. Departments, agencies and other bodies covered by the PCSPS recognise the expected cost of providing pensions for their employees on a systematic and rational basis over the period during which they benefit from their services by payment to the PCSPS of amounts calculated on an accruing basis. (Relevant disclosures are reported in Note 2.) Liability for the payment of future benefits is a charge to the PCSPS. Separate scheme statements for the PCSPS as a whole are published.

The Scottish Executive as a scheme administrator

The expenditure of the Scottish Executive Finance and Central Services Department ( SEFCSD) includes within Annually Managed Expenditure the funding provided to the Scottish Public Pensions Agency ( SPPA) for the Scottish Teachers' Pension Scheme and the National Health Service Pension Scheme Scotland. These schemes are administered by the SPPA and full pension scheme statements are published.

The Departmental Expenditure of the Scottish Executive Environment and Rural Affairs Department ( SEERAD) and of the Scottish Executive Justice Department ( SEJD) include grant in aid to bodies sponsored by the departments, covering their pension-related expenditure in respect of pension schemes operated by relevant bodies for the eligible employees. These are unfunded defined benefit schemes (in the case of SEERAD the scheme is analogous to the PCSPS; the scheme of the Scottish Legal Aid Board sponsored by the SEJD is analogous to the NHS Pensions Scheme Scotland) with the pension obligations for each financial year being met out of grant in aid resources provided by the department. These arrangements are reported and explained in the annual accounts of the relevant bodies.

NHS Bodies

The NHS Bodies in Scotland participate in the National Health Service Superannuation Scheme for Scotland which is a notional defined benefit scheme where contributions are credited to the Exchequer and the balance in the account is deemed to be invested in a portfolio of Government securities. The pension cost is assessed every five years by the Government Actuary. The most recent actuarial valuation took place in the year to 31 March 2004 and details can be found in the separate statement of the Scottish Public Pensions Agency.

1.18 Leases

Where substantially all risks and rewards of ownership of a leased asset are borne by the entity, the asset is recorded as a tangible fixed asset and a debt recorded to the lessor, with the interest element of the finance lease payment charged to the Outturn Statement. Rentals from operating leases are charged to the Consolidated Outturn Statements on a straight line basis over the term of the lease.

1.19 Provisions

Provisions are made for legal or constructive obligations which are of uncertain timing or amount at the balance sheet date on the basis of the best estimate of the expenditure required to settle the obligation.

Student Loans

Loans made under the terms of the student loans scheme are subsidised loans. Provisions are established to reflect:

i) estimated future write-offs for non-recovery;
ii) over the whole life of the loan, the difference between the cost of capital charge and the interest earned; and
iii) debt sale subsidy.

Early Departure Costs

The Scottish Executive and its consolidated bodies are required to meet the additional cost of benefits beyond the normal PCSPS benefits in respect of employees who retire early. The Scottish Executive and its consolidated bodies provide in full for this cost when the early retirement programme has been announced and is binding on the department/consolidated entity.

Prisoner Compensation

The Scottish Prison Service has provided for potential prisoner compensation claims.

NHS

NHS bodies must provide for all claims assessed by the Central Legal Office as 'category 3' and for those deemed likely in 'Category 2'. The provision should be the amount considered to be the liability in respect of any claims outstanding and which will be recoverable from the centrally administered fund by the Clinical Negligence and Other Risks Indemnity Scheme in the event of payment by an individual health body.

1.20 Contingent Liabilities

Contingent liabilities include those required to be disclosed under FRS12 and other liabilities arising from indemnities and guarantees which are included for parliamentary reporting and accountability. Departments must seek the prior approval of Parliament, via the Finance Committee, before entering into any specific guarantee, indemnity or letter or statement of comfort unless it arises in the normal course of business or the sum of the risk is £1m or less.

1.21 Value Added Tax ( VAT)

Most of the activities of the Scottish Executive and its consolidated bodies are outside the scope of VAT, and in general output tax does not apply and input tax on purchases is not recoverable. Irrecoverable VAT is charged to the relevant expenditure category or included in the capitalised purchase cost of fixed assets. Where output tax is charged or input VAT is recoverable, the amounts are stated net of VAT.