Note 1 to the Departmental Resource Accounts: Statement of Accounting Policies
The financial statements have been prepared in accordance with the 2009-10 Government Financial Reporting Manual (FReM) issued by HM Treasury. The accounting policies contained in the FReM follow International Financial Reporting Standards (IFRS) to the extent that they are meaningful and appropriate to the public sector. These statements have been prepared to show the effect of the first-time adoption of IFRS.
Where the FReM permits a choice of accounting policy, the accounting policy which has been judged to be the most appropriate to the particular circumstances of the Department for the purpose of giving a true and fair view has been selected. The Department's accounting policies have been applied consistently in dealing with items considered material in relation to the accounts.
1.1 Accounting Convention
These accounts have been prepared under the historical cost convention modified to account for the revaluation of fixed assets at their value to the business by reference to their current costs.
1.2 Adoption of IFRS in 2008-09
The accounting policies were changed on 1 April 2008 to comply with IFRS. The transition to IFRS is accounted for in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, with 1 April 2008 as the date of transition. The changes in accounting policies as a consequence of the transition to IFRS are described below, and the reconciliations of the effects of the transition to IFRS are presented in the notes to the first IFRS financial statements.
In line with HM Treasury advice, Prior Period Adjustments (PPAs) arising from the adoption of IFRS were not included in Spring Supplementary Estimates for 2009-10. The PPA numbers could have been misleading, particularly where transactions may well have pre-dated the 2001-02 cut-off point for reporting PPAs, as only part of an obligation would have been included. PPAs arising from a change in accounting policy related to matters other than IFRS were included in the Estimates in line with conventional arrangements.
The transition to IFRS resulted in the following changes in accounting policies:
Holiday Pay that has been earned up to the date of these accounts is accrued for on the basis of average salary costs in the year.
PFI contracts for the provision of telecommunications and information technology to the Department (including the provision of hardware, standard operating software and specialised case management software), which under previous GAAP had been treated in their entirety as 'off-balance sheet', with payments being accounted for as expenses in the year in which they fell due, are now considered under IFRS to include certain finance leases. Elements of the contracts that are considered to represent finance leases are now recognised as non-current assets (hardware and standard operating software, as tangible assets, and the case management system as intangible assets). These elements have been capitalised at their fair value, and are being depreciated (or, in the case of intangible assets, amortised) over their useful economic lives at rates consistent with similar assets that are owned by the Department. Further details of these assets appear under note 1.3, 1.4, 1.5, and 1.13 below.
1.3 Non-current Assets
Property, plant and equipment
Property, plant and equipment which are capable of being used for a period which exceeds one year and individually have a cost equal to or greater than £500 are capitalised, including leasehold improvements. Assets are stated at the lower of replacement cost and recoverable amount. On initial recognition they are measured at cost (for leased assets, fair value) including any costs such as installation directly attributable to bringing them into working condition.
Property, plant and equipment is restated at fair value in existing use each year by indexation up to the year-end using Price Index Numbers for Current Cost Accounting, published by the Office for National Statistics. The carrying values of property, plant and equipment are reviewed for impairment in periods if events or changes in circumstances indicate the carrying value may not be recoverable.
Land and buildings are restated at fair value using professional valuations, in accordance with guidance set out in the FReM, every five years. The most recent professional valuation was carried out at 31 December 2009. Land and buildings were valued by DTZ Debenham Tie Leung Limited, who are chartered surveyors. The registered office is 125 Old Broad Street, London, EC2N 2BQ. The company are required to value properties in compliance with the Royal Institute of Chartered Surveyors Valuation Standards. In the intervening years land and buildings are restated at fair value by the use of published indices appropriate to the type of land or building. The Investment Property Databank supplies the indices used.
Title to the freehold land and buildings shown in the accounts is held as follows:
a) property on the departmental estate, title to which is held by the CPS; and
b) property held by the Department of Environment, Food and Rural Affairs in the name of the Secretary of State.
Costs of bought-in services incurred in preparation for the implementation of IT projects are capitalised. Internal costs incurred on the same projects are not capitalised where the work can only be carried out by in-house staff.
Intangible non-current assets
On initial recognition intangible non-current assets are measured at cost including any costs such as installation directly attributable to bringing them into working condition. Intangible non-current assets are stated at the lower of replacement cost and recoverable amount. All expenditure on intangible non-current assets which are capable of being used for a period which exceeds one year and individually have a cost equal to or greater than £500 is capitalised.
All intangible non-current assets, other than the case management software (see 1.13), are restated to fair value in existing use each year by indexation up to the year-end using Price Index Numbers for Current Cost Accounting, published by the Office for National Statistics.
1.4 Depreciation, Amortisation and Impairment
Property, plant and equipment
Property, plant and equipment are depreciated at rates calculated to write them down to estimated residual value on a straight-line basis over their estimated useful lives. No depreciation is provided on freehold land since it has an unlimited useful life. Asset lives are normally in the following ranges:
Freehold buildings: 20 to 50 years
Furniture and fittings: 3 to 10 years
Information technology: 4 years
Assets under PFI contracts: life of the contract.
During the year, the Department's PFI contracts have been extended. The original contracts were for 10 years in the case of the IT infrastructure, 9 years for the Case Management System (CMS) and 6 years for the telecommunications system. Following extension the contracts remain coterminous and are due to expire on 31 March 2015.
Leasehold improvements are written off over the shorter of:
a) the remaining life of the property lease;
b) 10 years; or
c) where it has been established that a break clause in the lease is likely to be exercised by the Department, the period to the first possible date of exercise of the relevant break clause.
Impairment losses are charged initially to the relevant reserve to the extent that such a reserve exists in relation to the asset concerned. Thereafter, impairment losses are charged to the Operating Cost Statement.
Intangible non-current assets
Intangible non-current assets are amortised at rates calculated to write them down to estimated residual value on a straight-line basis over their estimated useful lives, which are considered to be co-terminous with the Department's ICT managed service contract.
Software licences are amortised in a range between 3 to 5 years.
Impairment losses are charged in the same way as those arising on property, plant and equipment.
1.5 Leases
Where substantially all risks and rewards of ownership of leased assets are borne by the Department, the assets are recorded as non-current assets (either property, plant and equipment or intangible assets, depending upon the nature of the underlying assets). The assets are valued at the minimum lease rentals payable to the lessor over the life of the lease less the estimated service element inherent in the lease, discounted at HM Treasury's standard interest rate adjusted for inflation, and a debt of corresponding value is recorded to the lessor. The interest element of the lease payment is charged to the Operating Cost Statement over the period of the lease at a constant rate in relation to the balance outstanding.
Rentals due under operating leases are charged to the Operating Cost Statement over the lease term on a straight-line basis, or on the basis of actual rentals payable where this fairly reflects the usage. Future payments, disclosed at Note 21, "Commitments under Leases", are not discounted.
1.6 Cash
Cash is cash in hand and deposits with any financial institution repayable without penalty on notice of not more than 24 hours.
1.7 Financial Assets
Financial assets consist of trade receivables and other current assets such as cash at bank and in hand. They are initially recognised at fair value, which is determined by reference to the underlying contract giving rise to the debt.
1.8 Financial Liabilities
Financial liabilities consist of trade payables and other current liabilities. They are initially recognised at fair value, which is determined by reference to the underlying contract giving rise to the liability.
1.9 Operating Income
Operating income is income which relates directly to the operating activities of the Department, and consists of administration and programme income. It includes income appropriated in aid and income due to the Consolidated Fund which HM Treasury has agreed should be treated as operating income. Operating income is stated net of VAT.
Administration income
Administration income is primarily rental income from the sub-letting of buildings occupied in part by the CPS. Rental income invoices are raised quarterly in advance and income is recognised monthly. Staff salary income is collected in respect of CPS staff on secondment to Local Criminal Justice Boards and other government departments and is recognised quarterly in arrears.
Programme income
The majority of programme income is costs awarded to the CPS. The CPS receives awards of costs made against convicted defendants at the discretion of the judge or magistrates.
In order to account for cost awards, the CPS uses returns submitted quarterly by the magistrates' courts, who are responsible for the collection of these costs. The CPS recognises income immediately these returns are received. In interim months, when no returns are received, income is accrued on the basis of historical data.
Programme income also includes rental income from other government departments and commercial sub-tenants who occupy space in buildings leased by the CPS. Rental income invoices are raised quarterly in advance and income is recognised on a monthly basis.
Under the Proceeds of Crime Act's 'Asset Incentivisation Scheme', the Department is allowed to retain a proportion of the total value of assets recovered in the year. The scheme is managed by the Home Office. Income generated from this scheme is recognised in the CPS accounts when the Home Office recognises it in their accounts with estimated accruals in the intervening months.
1.10 Administration and Programme Expenditure
The Operating Cost Statement is analysed between administration and programme income and expenditure. The classification of expenditure and income as administration or as programme follows the definition of administration costs set out in the Consolidated Budgeting guidance issued by HM Treasury. Costs are stated inclusive of VAT.
Administration costs
Administration costs reflect the costs of running the Department. These include both administrative costs and associated operating income.
Programme costs
Programme costs reflect non-administration costs being the direct cost and associated overheads of prosecution. These costs include the employment of counsel and reimbursements paid to witnesses for costs incurred through their attendance at court.
Very High Cost Cases (VHCC) are expected to last in excess of 40 days (or have three or more trial counsel instructed). Counsel are required to submit invoices covering work done as pre-determined stages in the case are reached and expenditure is recognised on their receipt.
Counsel fees in cases which are expected to last for less than 40 days are paid through the CPS 'Graduated Fee Scheme' agreed between the Bar Council and the Department. Payment is made on completion of all work on a case. The scheme includes a tariff of charges calculated using a range of set cost factors including the number of defendants, the complexity and volume of evidence, preparation, 'refresher' and appearance time. For practical purposes, since on average most trials are started and completed within the same day (save for the sentence hearing which may occur a short time later) it is considered prudent to recognise expenditure on counsel fees only as trials are completed. It is not possible to ascertain the full value owed on all such cases at year-end until some considerable time later. Where actual counsel fees can be ascertained they have been accrued for; in all other cases the Department estimates such counsel fees outstanding for inclusion in these accounts.
1.11 Cost of Capital
A charge or credit, reflecting the cost of capital utilised by the Department, is included in operating costs. The amount is calculated at the real rate set by HM Treasury (currently 3.5%) on the average carrying amount of all assets less liabilities, except for:
a) cash balances with the Office of the Paymaster General and donated assets where the cost is nil; and
b) liabilities for amounts to be surrendered to the Consolidated Fund for which no credit against the cost is allowed.
The cost of capital is a now a credit due to a negative liabilities position.
1.12 Pensions
Past and present employees are covered by the provisions of the Principal Civil Service Pension Scheme (PCSPS). This is a defined benefit scheme and is unfunded and non-contributory except in respect of dependants' benefits. The CPS recognises the expected cost of providing pensions on a systematic and rational basis over the period during which it benefits from employees' services by payment to the PCSPS of amounts calculated on an accruing basis. Liability for payment of future benefits is a charge on the PCSPS. With effect from 1 October 2002 new employees have the option to join either the PCSPS scheme or a Partnership Pension Account. The latter is a defined contribution scheme where the Department recognises the contributions payable for the year.
1.13 Private Finance Initiative (PFI) Transactions
IT Infrastructure Managed Service and CMS Software
The CPS signed a contract entering into a PFI transaction with Logica plc on 31 December 2001 for a 10 year period commencing 1 April 2002 with an option to extend. During 2009-10 the Department exercised its option and the contract now runs until 31 March 2015. The extension has included some renegotiation of terms, but none that materially affect the service concession arrangements. These accounts reflect the extension.
Under IFRS it has been determined that the contract contains two service concession arrangements: one covering the supply of an ICT infrastructure (including standard operating software), and one covering the design, creation and operation of a case management system. The infrastructure assets provided for use by the Department, and the CMS software designed by the contractor and provided for use by the CPS have been treated as non-current assets.
The infrastructure asset has been recognised as property, plant and equipment, and has been capitalised at the minimum lease payments less the best estimate of the supplier's service charges within those payments, The valuation of the asset has been informed by data provided by the supplier including the estimated costs of technological refreshment or updating which is a condition of the contract and the asset is being depreciated over the life of the contract on a straight line basis.
The CMS software has been recognised as an intangible non-current asset and as there is no active market, it has been valued at cost less accumulated amortization less any impairments. The asset is amortised from the date of the initial software release, over the remaining life of the contract on a straight line basis. The remaining costs incurred under the contract (that is, costs in excess of the minimum lease payments) are charged to the Operating Cost Statement in the period in which they arise.
The assets are not considered to have any residual value at the end of the lease period.
Additional rentals arising because of increased users of the systems, together with charges for additional facilities which have been introduced during the currency of the contract, are charged directly to the Operating Cost Statement in the period to which they relate.
Communications Managed Service
The CPS signed a contract on 1 April 2006 with Global Crossing plc for the provision of a managed telecommunications system for a 6 year period, with an option to extend. During 2009-10 the Department exercised its option and the contract now runs until 31 March 2015. The extension has included some renegotiation of terms but none that materially affect the service concession arrangements, these accounts reflect the extension.
This has been accounted for in accordance with IFRIC 12, Service Concession Arrangements, as required by the FReM. The infrastructure asset provided for use by the Department has been treated as property, plant and equipment, and has been capitalised at the minimum lease payments less the best estimate of the supplier's service charges within those payments, and the asset is being depreciated over the life of the contract on a straight line basis. The assets are not considered to have any residual value at the end of the primary lease period.
As with the contract with Logica, additional rentals arising because of increased users of the systems, together with charges for additional facilities which have been introduced during the currency of the contract, are charged directly to the Operating Cost Statement in the period to which they relate.
During 2009-10 successful negotiations with the relevant suppliers led to both contracts being extended, and they are now due to expire on 31 March 2015. As a result the capitalised values of the underlying assets have been recalculated, and those assets are now depreciated (and, in the case of the CMS software, amortised) over their new remaining lives on a straight line basis.
The depreciation, amortisation, impairment and restatement to current value in existing use by indexation up to the year end of the assets arising out of these contracts all follow the principles governing the treatment of similar, owned assets.
1.14 Provisions
The Department provides for legal or constructive obligations, which are of uncertain timing or amount, at the date of the Statement of Financial Position on the basis of the best estimate of the expenditure required to settle the obligation. Where the effect of the time value of money is significant, the estimated risk-adjusted cash flows are discounted using the real rate set by HM Treasury (currently 1.8%).
1.15 Bad Debt Provision
The department receives the bulk of its income from costs awarded against convicted defendants. HMCS is responsible for the collection of costs awarded to the CPS. The Department writes off specific costs awards when HMCS considers the debts will not be collected. A proportion of the remaining income will not be collected and the Department fully provides against the risk of default on payment. The CPS uses trend analysis to compare the rate of collection over time to the annual value of costs awarded to estimate the appropriate bad debt provision.
1.16 Contingent Liabilities
In addition to contingent liabilities disclosed in accordance with IAS 37, the Department discloses for parliamentary reporting and accountability purposes certain 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 Managing Public Money. Where the time value of money is material, contingent liabilities which 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. These comprise:
- items over £250,000 (or lower, where required by specific statute) that do not arise in the normal course of business and which are reported to Parliament by departmental Minute prior to the Department entering into the arrangement; and
- all items (whether or not they arise in the normal course of business) over £250,000 (or lower, where required by specific statute or where material in the context of resource accounts), which are required by the FReM to be noted in the resource accounts.
1.17 Employee Benefits
The Department provides for holiday entitlements that have been earned but not taken at the date of the Statement of Financial Position. No central records of holiday entitlements exist within the Department, so it has been necessary to estimate the cost based on a sample of employees' personal records. Their average entitlements have then been multiplied by average pay data to arrive at a liability for the Department as a whole.
1.18 Foreign Currency
Transactions in foreign currencies are translated into sterling at the rate of exchange current at the date of the transaction. Resulting exchange gains and losses are taken to the Operating Cost Statement.
1.19 Value Added Tax
Most of the activities of the Department 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 assets. Where output tax is charged, the amounts are stated net of VAT.
1.20 Machinery of Government Changes
Machinery of Government changes which involve the transfer of functions or responsibilities between two or more government departments are accounted for in accordance with the FReM. The prior year comparatives have been restated to reflect these Machinery of Government changes. By doing so it appears that the entity always existed in its present form. This enables the user of the accounts to make useful comparisons between the data from the prior year and the current year. During 2009-10 the Crown Prosecution Service and the Revenue and Customs Prosecutions Office combined, Prior year comparative figures have been restated to reflect the merger. Details are given in Note 29.
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