NETWORK RAIL NAO ONS JOINT STATEMENT
24 Oct 2002 02:45 PM
Sir John Bourn, head of the National Audit Office, and Len Cook, the
National Statistician, today issued a joint statement giving their
respective views on the accounting treatment and statistical
treatment of Network Rail.
The text of the joint statement is attached.
BACKGROUND NOTES
1. The Comptroller & Auditor General, Sir John Bourn, is head of the
National Audit Office (NAO). He and the NAO are totally independent
of Government. He certifies the accounts of all Government
departments and a wide range of other public sector bodies. He has
statutory authority to report to Parliament on the economy,
efficiency and effectiveness with which departments and other bodies
have used their resources.
2. Central Government has for some time been moving towards UK
Generally Accepted Accounting Practice (UK GAAP) as the basis for
financial accounting and the preparation of annual financial
statements for reporting, primarily to Parliament. Non-Departmental
Public Bodies (NDPBs), such as the Strategic Rail Authority, have
used this basis of financial accounting since they were created.
Government Departments have adopted a UK GAAP based system more
recently and now produce Resource accounts in accordance with the
Government Resources and Accounts Act 2000. They are prepared in
accordance with accounting standards prescribed by HM Treasury as set
out in the Resource Accounting Manual. These standards are based on
UK GAAP to the extent that it is meaningful and appropriate in the
public sector context. Further details can be found at
www.hm-treasury.gov.uk or www.resource-accounting.gov.uk
3. The National Statistician, Len Cook, is head of the Office for
National Statistics (ONS) and Registrar General for England and
Wales. The ONS is the government agency responsible for compiling,
analysing and disseminating many of the United Kingdom's economic,
social and demographic statistics. The National Statistician has
overall responsibility for the integrity of National Statistics.
4. The ONS produces the UK National Accounts in accordance with
international standards defined in international statistical
accounting manuals: the European System of Accounts 1995 (ESA95) and
the System of National Accounts 1993 (SNA93). The National Accounts
classification decisions on Network Rail have been supported by
Eurostat, the statistical office of the European Commission.
5. The ONS produces statistics on the Government's public sector
fiscal measures. These are derived from National Accounts.
6. More details about ONS classification decisions and the process
used for them are available at www.statistics.gov.uk/psa. Details of
the support facilities available to Network Rail are also provided.
Joint Statement on Network Rail
1. Sir John Bourn, the Comptroller and Auditor General, and Len Cook,
the National Statistician, have recently issued their respective
views on the accounting treatment and the statistical treatment of
Network Rail.
2. Sir John Bourn has concluded that, under UK Generally Accepted
Accounting Practice (GAAP), Network Rail should be accounted for as a
subsidiary of the Strategic Rail Authority (SRA). Len Cook has
decided that, under the international rules for the compilation of
economic statistics, Network Rail should be classified as a private,
non-financial corporation in the National Accounts from the time that
a vote of its members approved its board of directors.
3. The conclusions reached on the accounting treatment and the
statistical treatment are not, therefore, alternative ways of looking
at the same issue. They are fundamentally different activities
undertaken for distinct purposes and using different criteria. The
role of the Comptroller and Auditor General
4. Sir John Bourn is the external auditor of the annual financial
accounts of central government departments and many other national
public bodies, such as executive agencies e.g the Child Support
Agency and non-departmental public bodies (NDPBs) e.g the Strategic
Rail Authority. All such accounts, together with Sir John's audit
opinion on them are presented formally to Parliament.
5. The accounts of central government bodies are prepared under UK
GAAP and are audited by the Comptroller and Auditor General. They are
intended to give a true and fair view of the income and expenditure
of the relevant government body and of its state of affairs at the
balance sheet date. This is similar to the basis on which the
accounts of commercial or private sector entities are prepared and
audited.
6. Financial accounts focus on the financial affairs of the
individual reporting entity. In line with this, external auditors
examine the individual entity's stewardship of its resources and
reporting of its financial affairs. The role of the National
Statistician
7. Len Cook, as the National Statistician, is head of the Office for
National Statistics. ONS produces most of the UK's official economic
statistics including the National Accounts.
8. In contrast to financial accounts, which focus on individual
reporting entities, economic statistics are based on an aggregate
level view of each entity's economic behaviour. For example, National
Accounts are prepared for the economy as a whole, broken down into
broad sectors such as government, households and corporations. They
are prepared in accordance with internationally agreed statistical
guidelines. They provide a historical record of the performance of
the economy and its sectors. They are used by governments and
monetary authorities, both in UK and overseas, for economic and
fiscal management, policy making, and monitoring. National Account's
definitions are used in the UK to define the Chancellor's fiscal
rules; and, in the EU, to define government debt and deficit in the
Maastricht Treaty and the stability and growth pact. Accounting under
UK GAAP
9. The Strategic Rail Authority's (the SRA) financial accounts are
prepared in accordance with UK GAAP - the financial reporting
framework applicable to private sector entities. UK GAAP requires an
assessment of which entity has the balance of risks and rewards
associated with the transactions or arrangements under consideration.
In making a judgement on the balance of risk and reward both the
formal controls available to the parties to the transaction and the
commercial substance of the transaction have to be considered. In
this context Sir John concluded that for the purposes of the
financial accounts of the Strategic Rail Authority (and in due course
consolidated accounts of all Central Government bodies) the
Government's interest in Network Rail is akin to an equity
shareholder's interest. The Government, through the SRA is
effectively giving security to the providers of debt finance to
Network Rail, and is acting as the lender of last resort in the event
of financial difficulties. The Government is, therefore, the party
bearing the risk that would normally be borne by equity capital if
Network Rail were an equity based company rather than a company
limited by guarantee. Additionally Sir John concluded that the
controls available to the SRA are consistent with a parent/subsidiary
relationship as defined by GAAP, for example, the SRA's right to
appoint a director who cannot be removed by Network Rail's board or
its members. The SRA has accepted that their consolidated financial
accounts will include all the activities, assets and liabilities of
Network Rail statements, including the actual borrowings of Network
Rail. The Secretary of State for Transport welcomed the transparency
and openness of this treatment in responding to Parliamentary
questions on 2 and 19 July 2002.
10. The NAO view is that the guarantees and stand-by loan facilities
being extended to Network Rail will also represent contingent
liabilities in the resource accounts of the Department for Transport
as the SRA's sponsor department and in the SRA's unconsolidated
accounts. Should liabilities crystallise under the guarantees and
stand-by loan facilities the SRA would have to seek funds from
Parliament via the Department for Transport, and hence details of the
arrangements and the amounts drawn down at the relevant accounting
date will be disclosed in a note to the accounts of each body.
Contingent liabilities represent the possible obligation that arises
from past events (the agreement to provide facilities and guarantees
to Network Rail) and whose existence will be confirmed only by the
occurrence of one or more uncertain future events (the drawdown of
the facilities and/or guarantees) not wholly within the entity's
control. Accounting under National Accounts Standards
11. The UK National Accounts are prepared in accordance with
standards defined in international statistical accounting manuals:
the European System of Accounts 1995 (ESA 95) and the System of
National Accounts 1993 (SNA 93). These manuals state that an
institution is classified according to whom exercises control over
ability to determine general corporate policy. In classifying Network
Rail as a private non-financial corporation in the National Accounts,
Len Cook concluded that, once the members voted to approve the board
of directors, control of ongoing corporate policy at Network Rail
does not rest with the Government - the SRA's director being one out
of twelve on the board - but with the members and the board of
directors. He also concluded that, until this vote, the government
exercised control, and that Network Rail was in the public sector.
Further, it would be reclassified as part of the public sector if the
SRA were to use its powers to gain control in the event of Network
Rail's financial failure. SRA's powers to take control are
conditional on financial failure, and are therefore detached from
ongoing corporate policy decisions.
12. For National Accounts purposes, Len Cook has concluded that the
financial support facilities made available to Network Rail via the
SRA should be classified as contingent liabilities. In making this
decision, he received advice from the Head of Accountancy Profession
at the Department for Transport that the support facilities were
contingent liabilities unless and until they were drawn upon. The
international standards state that contingent liabilities should not
be accounted for as financial liabilities in National Accounts. A
liability is recorded in the national accounts only if or when it is
called upon. This follows from the principle that, in providing a
picture of the whole economy, the national accounts requires each and
every transaction to be matched by an equal counterpart transaction.
So, the financial liability of one unit or sector has to be matched
by a financial asset of another unit or sector. Including contingent
liabilities in the national accounts would require the inclusion of
matched "contingent assets", and this would lead to a misleading
assessment of the health of those units or sectors deemed to be
holding these assets.
13. Sir John and Len Cook said today -
"We have recently given our respective views on the accounting
treatment and statistical treatment of Network Rail. The financial
statements of central government and the National Accounts are each
prepared for different purposes and under different sources of
guidance. They are not therefore alternative views on the same issue
but fundamentally different activities undertaken for separate
purposes, and hence can lead to different conclusions."
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